Recently the Israeli Government submitted a new draft for a law that is meant to promote competition in the Israeli food industry. In my opinion, this draft represents a deep crisis the Israeli regulation is experiencing and the sad aftermath of a regulation that is fed by the need to satisfy the public sentiment rather than to regulate on a solid and professional basis.
On the footsteps of social protest
In order to fully understand the draft it is essential to understand the background that led to its introduction. Two years ago social protesters flooded Israel’s streets on an unprecedented scale. Their major claim was to immediately reduce the cost of the living. The presentation of the draft should be understood in this context, and in fact, one might say that this draft signifies the depth of the crisis amongst Israeli regulators that was caused by these protests.
The draft proposes to promote competition in the food industry through a series of obligations ??and prohibitions on food suppliers, chain stores and other retailers. Nevertheless, a careful consideration of the draft’s provisions reveals that the obvious result of this draft is the exact opposite of what it is trying to achieve, as the draft will most likely restrict competition and consumers will pay more for food.
The power of definitions
The draft misses its target because it sets definitions that are too broad and therefore impose prohibitions and obligations without competitive justification. For example this is seen in the way that the draft defines “large retailers” which it sets special obligations and prohibitions for. It defines “large retailers” as any retailer that owns more than 3 stores and that has an annual turnover of over $70 million. The absurdity becomes clear when one considers the structure of the Israeli chain store market. Today there are two dominant firms with a market share of about 30% each and revenue of over $1.5 billion.
The competitive fringe is composed of much smaller firms, each holding only a small percent of the market. Nevertheless these smaller competitors are well within the scope of the broad definition of “large retailers”. It is clear that applying the same regulation to these much smaller competitors is, simply put, a distortion of the competitive picture. In practical terms the result will be the imposition of fixed costs on small firms which in turn will limit their ability to compete.
When the price is right
To demonstrate this point: all “large retailers” will be obligated to provide online, and in real-time all of their prices, in each of their stores. The draft requires that these prices be updated within 2 minutes of the change of any price at any of the large retailer’s stores. Given the fact that the product portfolio of a given retailer may be over 100,000 products and bearing in mind the number of stores each retailer holds, the practical outcome of this obligation is that maintaining and updating such an online database will cost many millions of dollars each year. For the two dominant retailers, this fixed cost will be spread on revenue that exceeds 1.5 billion dollars, but to other, smaller, retailers this new cost represents a significant portion of the revenue and it handicap their ability to compete.
Another limitation is the prohibition on stock arrangers employed by the supplier. It is now customary in Israel that the supplier itself arranges the shelves in the retailer’s store while the retailer dictate the product’s location on the shelf and has the sole discretion regarding the price.
The draft seeks to prohibit the use of stock arrangers employed by the supplier at large retailer’s stores for the reason that small suppliers that can’t afford employing people for arranging the goods in the retailer’s stores are at a competitive disadvantage, but this approach misses the point that once the supplier representative puts the goods on the shelf the supplier is in effect responsible for the quality of the product such as its expiration date and defective products, thus retailers save the lost costs related to defected products.
The effect of stock arrangers is irrelevant when considering small chain stores. The above mentioned concern of foreclosing small suppliers is relevant only in relation to the two dominant retailers that hold a market share of approximately 30% each. Denying from smaller retailers the supplier’s responsibility over defective products, is additional cost they will have to bear, without real justification competition wise.
Indeed this draft reflects the present crisis amongst Israeli regulators. It appears that the draft has been formulated to fill a regulatory populist need and is not based on solid professional grounds. Unfortunately, a more thorough examination of the proposed draft indicates that the likely outcome of this draft will be the restriction of competition and, Israeli consumers will pay the price at the cash register.