Monopoly nation: How a handful of firms control prices, hold Israelis ransom

If there’s one thing that Israelis hate, it’s being “freiers” — suckers. But it seems many consumers are when it comes to buying items for the house.

Few know that when they clean the kitchen, the price of their Palmolive liquid soap and Ajax window spray is set countrywide by a single Israeli importer and distributor, who also provides them with their Colgate and Elmex toothpaste, Revlon and Neutrogena beauty products, Speed Stick deodorant, Band-Aid bandages and more.

All of these brands are exclusively franchised to a company few have heard of, called Schestowitz. Founded in 1954 by Shimon Schestowitz and run today by Yoni Schestowitz, it also has exclusive import and distribution rights for fashion brands such as Abercrombie and Fitch, Issey Miyake, Burberry, Calvin Klein and Jimmy Choo.

If you use Oral B toothbrushes, Gillette shavers, Wella shampoo or Head and Shoulders for dandruff and enjoy snacking on Cadbury’s chocolate, Toblerone, Oreos or Pringles, the prices you pay at the checkout are fixed by another little-known but major single importer and distributor called Diplomat.

Founded in 1963 as a partnership between an American family called Mendel and an Israeli one called Wyman, Diplomat is currently run by Noam Wyman, who operates under the radar, eschewing media interviews. The business daily The Marker, which has been covering and campaigning against the concentration of economic power in Israel almost daily since 2008, has dubbed him (in Hebrew) “Mr. High Cost of Living.”

Together, Schestowitz and Diplomat have exclusive rights to both import and distribute a staggering array of name-brand products that can be found in most Israeli homes.

This kind of centralized control can be found throughout the Israeli economy. It stifles competition, ensures that prices remain high, and helps to explain why the Jewish state was ranked earlier this month as having the eighth highest cost of living in the world. Nine years after massive social protests against that cost of living, Israel still has more monopolies than the US or any European country.

2011 social protests and the fall of holding group tycoons

After mass demonstrations in 2011 that brought hundreds of thousands of Israelis onto the streets countrywide — it was estimated at the time that the ten biggest business groups controlled 41 percent of the market value of public companies — the Knesset passed the Law for Promotion of Competition and Reduction of Concentration in 2013.

The law defined a monopoly as a business concern controlling more than 50% of the market, and gave business tycoons until December 2019 to reduce the number of layers allowed in pyramid-type holding companies. And it prohibited companies from holding financial concerns such as bank and insurance companies worth over NIS 40 billion ($11.6 billion) as well as non-financial companies with more than NIS 6 billion ($1.8 billion) in revenue. This was because the same owners were using public money to take loans from their own banks to finance their own companies.

The tycoons that survived had until December last year to get rid of excess ownership. According to The Marker, those invested in public, exchange-listed, companies sold shares worth NIS 5.5 billion ($1.6 billion) in 2019 as a result of the 2013 law.

But following scandals, several big names in big business also fell by the wayside.

Nochi Dankner, the former owner of IDB, was sentenced to three years in prison for stock manipulation and other offenses. On February 2, he was released four months early due to unspecified health issues, with the blessing of President Reuven Rivlin.

The authorities are still trying to find some of the assets of disgraced former media and real estate mogul Eliezer Fishman, who declared bankruptcy in June 2017.

Bezeq’s controlling shareholder Shaul Elovitch is implicated in the so-called Case 4000, allegedly having benefited from NIS 1.8 billion — some $500 million — in an illicit quid pro quo agreement in which Prime Minister Benjamin Netanyahu saw to Elovitch’s business needs and in return, Elovitch ensured him positive coverage in his news site, Walla.

Israel’s banks were exposed for having cozied up to tycoons like these by giving them outsize loans, writing off hundreds of millions of shekels’ worth of their debts, and then balancing their own books by charging their regular customers more for everyday financial services, costing the public billions of shekels.

High market concentration

While there is a little less concentration than there was before 2013, the Israeli economy is still highly concentrated. One of the consequences is a massive gap between the wealth of a few families and the rest of the Israeli public, as illustrated by a Haaretz newspaper analysis last year of the 30 richest Israelis.

The most glaring example is the monopoly over natural gas that Netanyahu personally bulldozed through the Knesset in 2015, ensuring windfalls both for Delek Group owned by Yitzhak Tshuva (who is valued at $4.5 billion by Forbes) and for the Texas-based Noble Energy. The motive for the move, which pushed then Antitrust Authority Commissioner David Gilo to resign, has never been clear. Tshuva is also substantially invested in water desalination and is a major shareholder in TV Channel 12, along with Drorit Wertheim, sister of Dudi Wertheim (see below). Channels 12 and 13 broadcast the most popular news programs in the country.

Idan Ofer (see below) owned Channel 13 but agreed last year with the Competition Authority that as a condition for entering the private power station market, the Ofer Group would quit communications for 25 years.

Ofer, together with his two siblings, have divided up the business of their late father Sammy Ofer, controlling another substantial chunk of the economy. Ofer presides over fertilizers and specialty chemicals, controlling the country’s mineral extraction and oil refinery industries via the Israel Chemicals Limited and Oil Refineries Ltd (Bazan) holding companies. Brother Eyal controls the shipping and, with Dudi Wertheim, shares the controlling stake in Bank Mizrahi Tfahot, the third largest bank in the country and a major mortgage lender. Laura Ofer oversees the family’s massive real estate activities.

Factories connected to Ofer were responsible for at least NIS 1.2 billion ($340 million) worth of damage to public health caused by air pollution in 2018, a study published in November found.

Higher prices, less choice

Market concentration not only leads to high prices but also to less choice for Israeli consumers. The Israeli food market, for example, is dominated by just a handful of companies — Tnuva, known for its dairy products, also owns Adom Adom meat, Sanfrost frozen vegetables, Mama Off chicken and Tirat Zvi deli meats.

Unilever Israel presides over salty snacks such as Beigel Beigel, along with Klik chocolate, Dove, Knorr, Lipton’s Tea, Hellman’s Mayonnaise, Telma breakfast cereals and Strauss ice cream.

Osem’s holdings include Nestlé’s breakfast cereals, Bamba, Bissli, pasta, ketchup, soups, soup croutons, Vitaminchik fruit cordials, Taster’s Choice coffee, and vegetarian food producer Tivol.

These products tend to dominate the “eye-level” shelves in the big supermarkets. As smaller producers have testified on Israeli TV in the past, getting into the big supermarkets is Herculean. Being relegated to top or bottom shelves where few people look is then par for the course.

According to the Israeli Institute for Economic Planning (IEP), a nonprofit think tank, the monopolistic markets that most affect the consumer directly include food and drink, baby products, toiletries, paints and lacquers, electricity, water, air travel, recycling, parking lots, postal services, cable media, telephone and internet infrastructure, TV broadcasting, refined oil products and gas exploration.

The IEP examined 317 markets that directly affect consumer bills and found that 111 of them — over a third — were controlled by monopolies. Of the 111 monopolies, 69 had been declared as such by the Competition Authority.

It also found that those hardest hit by the lack of competition were the poor because the high prices ate up a bigger slice of their income.

And just as there is insufficient competition within Israel, competition from overseas — which could bring prices down — is limited by formidable import barriers, particularly in sectors such as agriculture.

VAT on all Amazon, Ali Express orders being considered

The Finance Ministry’s chief economist Shira Greenberg has been talking over recent months about charging VAT (17%) on all items ordered from overseas online retailers, such as Amazon and Ali Express, to help raise cash to pay off the country’s deficit.

To date, purchases totaling less than $75 have been VAT exempt, offering Israelis a way to sidestep inflated prices at home and bringing pressure to bear on Israeli retailers to lower their prices too. The number of packages arriving yearly in Israel from platforms such as these has risen from 8.5 million 10 years ago to around 50 million today. The country’s population is around nine million.

Asked how much the government is expected to make from abolishing the exemption, a Finance Ministry spokesperson would only say, “It will be relevant when there is a government and budget discussions.”

Elections are set for March 2.

High cost of living

It is the extensive market concentration at the Israeli economy’s heart that goes a long way to explaining why a CEOWorld survey published earlier this month found Israel to have the eighth highest cost of living on the planet, above nations known to be expensive such as Singapore and South Korea.

It should be noted that average monthly Israeli salary stood at NIS 11,004 ($3,163) as of July 2019, according to the Central Bureau of Statistics. In Singapore, it is reportedly $5,596.

Lobby99, a nonprofit organization which crowdfunds to lobby the government and the Knesset on the public’s behalf, found that Schestowitz controls around 66% of the toothpaste market while Diplomat commands around 80% of the razor market, 81.5% of the dandruff shampoo market and 57% of the liquid soap market. (Lobby 99’s director of Public Policy and Government Relations is the spouse of a Times of Israel staff writer.)

According to The Marker, Schestowitz also controls nearly 52% of the pasta sauce market, through its exclusive rights to import and distribute Barilla, and 32% of the soy drink market, through its rights to Alpro.

Lobby99 researchers compared Israeli prices for just under 70 products imported by Diplomat, Schestowitz and another company called Leiman Schlussel with those in the US.

(Two additional companies that exclusively import similar products, but were not included in Lobby99’s research, are Unilever Israel and Alpha Cosmetics, the latter owned by the Brand family. Alpha has exclusive rights to import Nivea, Labello, and a host of prestigious fragrances.)

The most glaring gaps related to sales of Procter & Gamble’s Gillette by Diplomat and of Colgate toothpaste by Schestowitz. A pack of 16 Gillette Fusion razor blades were found to cost NIS 159.90 ($46.60) in Israel and NIS 54.36 ($15.85) in the US, while a Skinguard shaver cost NIS 64 ($18.65) in Israel compared with NIS 29.36 ($8.56) in the US.

A 100 milliliter (3.4 ounce) tube of Colgate Optic White toothpaste cost NIS 23 ($6.70) in Israel, compared with ust NIS 8.23 ($2.40) in the US.

Of 69 items, just 16 were cheaper in Israel, including (from Diplomat) Jacobs coffee (imported from the Russian Federation), Pampers (from Germany and Mexico), Tide laundry gel from France, Milka products from Germany and Baci  bonbons produced in Italy.

Alongside the high prices are recurring allegations of bullying behavior by the big importers and distributors to stop what are known as parallel imports. Large international companies set different prices for different countries. Importers who buy stock overseas where a particular product is cheaper and then offer to sell it in Israel for less are called parallel importers.

Fox Group, owned and directed by Harel Wiesel, has the franchise for Nike and Foot Locker (through its subsidiary Retailers), as well as for other leading brands such as American Eagle, Billabong, Mango, Children’s Place, Urban Outfitters, Fox (fashion) and Fox Home. It owns the online fashion and homeware site TerminalX and partners with the baby clothes and toys retailer Shilav and with Laline, which sells bath and beauty products.

Fox Group sells Nike products at its Nike and Foot Locker stores, as well as to other smaller, privately owned sports outlets. At present, it is also creating a new chain called Just Sport.

Last week, eight sports store owners submitted a NIS 230 ($67) million class action suite at the Tel Aviv District Court against Nike Israel and Retailers, accusing them of discriminating and taking punitive action against them (for example, by halting supplies, delaying deliveries of models featured in other stores), blocking cheaper parallel imports and coordinating prices at stores.

Schestowitz, meanwhile, has been in the dock at the Jerusalem District Court, which acts as the country’s competition tribunal, for colluding with Colgate-Palmolive to try to limit parallel imports and ward off competition. The Competition Authority brought the case in 2018 after discovering more than 2,000 email communications between Schestowitz and Colgate Palmolive sent over several years and containing detailed reports by the former about parallel imports of Colgate products in Israel.

The Marker reported Wednesday that the court had suggested a compromise and gave the Competition Authority and Schestowitz until March 9 to reach a deal. In the interim, it imposed a temporary order allowing Schestowitz to continue reporting details to Colgate-Palmolive such as the name of the store where parallel imports are being sold, but without details such as bar codes and photographs. The communication has to be in writing only and in a format that the Competition Authority can monitor.

Earlier this month, Channel 13’s “It’s worth money” interviewed Yossi Kagan, CEO of Lindo, a major parallel importer of perfumes into Israel. Kagan said that around two months ago, he began to supply Shufersal’s Be branch, which sells beauty and home products, in what he described as the first move by a large chain to sell parallel imports. Lindo, and in turn the Be chain, sold for lower prices than those determined by Schestowitz.

Suddenly, Kagan claimed, weird things started happening. He had a surprise visit from four Health Ministry officials who questioned him about his sales to the Be chain. There were attempts to stop some of his clients from buying his products. “Even if I buy at higher prices, I still sell for less than Schestowitz, ” he told the program. As an example, he said that the Be chain was able to drop the price of a 100 milliliter bottle of Narciso Rodriguez from more than NIS 400 ($117) to NIS 299 ($87) after signing with him. Last week, it  was still selling at the drugstore chain Superpharm for NIS 424.50 ($124).

Coca Cola fined NIS 39 million

In March 2017, Dudi Wertheim’s Central Bottling Co. (Coca Cola Israel) was handed a NIS 62.7 million ($17.85) million fine for exploiting its monopoly status and trying to stave off competition. The fine was dropped in December to NIS 39 million ($10.36) million.

Among the policies the company was said to have adopted was refusing to allow competing products to be displayed in refrigerators it provided to retailers, as well as trying to force retailers to remove competitors’ refrigerators.

The Central Bottling Company exclusively markets Coca Cola and soft drink brands such as Kinley, Fanta, Sprite and Fuze Tea. It also owns the Tara dairy (and its subsidiary Meshek Zuriel Dairy), Neviot mineral water, Prigat fresh juices and the license to brew the Tuborg, Carlsberg, Stella Artois, Guinness and other beer brands in Israel.

Colgate: Only fighting cavities?

Lobby99 was created in response to the presence and power of the 215 commercial lobbyists employed by businesses to influence the 120 Knesset parliamentarians.

Members of the public who donate to Lobby99 get to vote on the issues that the organization should focus on. In a September vote, fighting the high prices of imported goods won the most support.

Lobby99 wrote to Competition Authority head Michal Halperin earlier this year: “The case of Schestowitz [and its alleged reporting to Colgate-Palmolive on parallel imports of the company’s toothpaste] provides a representative case study of the lack of competitiveness in the market for imported consumer goods.”

It asked the Competition Authority to review such exclusive arrangements and to impose sanctions on restrictive practices, which are prohibited by law.

Dror Strum, a former head of what was then called the Antitrust Authority, who  now heads the Israeli Institute for Economic Planning, asked Halperin to declare Schestowitz and Diplomat monopolies, citing both the 2013 law’s definition of a monopoly as controlling more than 50% of the market in a particular sector, and the broader definition contained within an amendment to that law passed in summer 2019. The amendment extended the definition of a monopoly to companies which do not necessarily control more than half the  market, but which charge prices much higher than they could do in a more competitive economy.

Halperin has not yet replied to Strum. But she did inform Lobby99 earlier this month that she would not be declaring the two behemoths monopolies — despite the fact that Schestowitz and Diplomat control more than 50% of the market in certain sectors, and that their products have been shown to cost more than they do overseas.

Halperin argued that the Authority did “not, essentially, prohibit exclusive arrangements,” adding that, “exclusive arrangements, being vertical arrangements, may impose consumer efficiencies.”

She claimed that any ruling that the companies were monopolies would be solely declaratory, and stepped back from defining the exclusive arrangements of these monopolies as restrictive practices.

Declaring a monopoly can have serious consequences. First, it makes it considerably easier for members of the public to take legal action against monopolies because they do not have to prove monopolistic practices, which is notoriously difficult. They just have to prove that the monopoly abused its position. Second, it forces the company to put its house in order — to review its pricing and its behavior toward rivals and to ensure that it does not leverage its power over one product to sell another by bundling both together. (An example would be only selling a Gillette razor together with a deodorant.) Failing to adhere to the law would then open that company not only to class action suits in the courts, but to action by the Competition Authority.

Last week, Economy Minister Eli Cohen weighed in, threatening to bring legislation unless Halperin tagged companies such as Schestowitz and Diplomat as monopolies. Halperin hit back, saying the authority was not subject to political interference.

Appearing on “It’s worth the money,” Halperin insisted that parallel imports had grown in recent years and that the Competition Authority was standing up to “tens of large companies,” among them Coca Cola, Tnuva, Bezeq (handed a NIS 30 million fine), the Ashdod Port and Schestowitz.

But she has refrained from using her power to criminally prosecute monopolies. In fact, there hasn’t been a criminal prosecution in Israel for many years.

And the fines that have been imposed are petty cash for giants such as Coca Cola.

Tree-trimming and laundry cartels

The authority’s report on its activities during 2018, issued in Hebrew late last year, detailed fines “agreed on” with some large companies such as the Shufersal supermarket chain (NIS 290,000) and the Delek Group (NIS 257,000).

But a Haaretz editorial earlier this month charged the organization with focusing on smaller and medium-size businesses such as tree-trimming and laundry cartels and a bid by the taxi drivers’ union to stop drivers giving discounts to people driving to Ben-Gurion International Airport, rather than standing up to the big monopolies. (Incidentally, it’s no coincidence that Uber cannot be found in Israel — the country’s taxi lobby is far too powerful.)

It mirrored claims by critics that the authority has failed to tackle the principal areas of economic concentration that really impact people’s lives, such as the banks and the natural gas monopoly. And it pointed out that other public bodies such as the Israel Securities Authority, the Israel Tax Authority, the Bank of Israel’s banking supervision department, the Standards Institute of Israel and the Environmental Protection Ministry similarly treat the big players with kid gloves. Why? “Because big corporations have batteries of lawyers and economists that undermine the authorities’ confidence in their ability to file charges and make them stick.”

In a statement to The Times of Israel, the Economy Ministry listed various measures it said had been taken to reduce market concentration and bring the cost of living down. These included the so-called cornflakes law, passed in 2015 — which allowed parallel imports and sought to cut the time in which goods are released from the ports — along with regulatory reform and steps to allow bringing into the country up to five items, or up to $1,000 of goods (whichever is higher), per month, without an import permit, as detailed on the government website (in Hebrew).

But the critics say there is no real political will to stand up to the monopolies and there is also no concerted consumer effort to force the prices down.

For as long as public debate is dominated by security, and elections are fought on personalities and spin rather than on the real issues of the day, organizations such as Lobby99 and the Israeli Institute for Economic Planning will continue to face an uphill battle for change.