McKinsey advised Tnuva to raise prices

The consultancy told Tnuva that raising cheese prices 15% would not affect demand.

Sources inform ''Globes'' that Tnuva Food Industries Ltd. adopted a policy of raising prices to create value quickly for the company, after it received a report by McKinsey & Company advising it that it could raise prices for products without harming demand.

Current sources at Tnuva, as well as former employees, say that after Tnuva was acquired by Apax Partners, Tnuva executives were told to present a "100-days plan" to create value.The plan was nicknamed "quick wins".

"Apax commissioned McKinsey to examine Tnuva's pricing ability. The examination by McKinsey with the assistance of Dr. Shula Pesach found that demand for cottage cheese, yellow cheese, and white cheese was inelastic, which was why Tnuva could raise prices by at least 15% without affecting demand. Even before the increase in the cost of inputs, such as raw milk, it was clear that Tnuva was going to raise prices," said a source at Tnuva. The source added, however, that Dr. Pesach warned the company that raising prices was liable to blow up in their faces.

Apax's policy is to buy companies, increase their value, and sell them within six years. Sources at Tnuva says that its managers were ordered to present a three-year plan for 2009-11 with the objective of using Tnuva's financial report for 2011 as the basis for the sale of the company by Apax.

The current cottage cheese crisis is liable to affect Apax's plans, if the government intervenes and expands price controls on dairy products, which could affect Tnuva's valuation.

The price of the type of Emek yellow cheese that is government controlled, was unchanged in the period 2008-11 (a price that may reflect changes in the cost of raw materials), because the current rise in its price offsets price cuts in 2009. By contrast, the price of cottage cheese and white cheese, which are not controlled, rose even though the price of raw materials fell. In 2008-11, the price of non-regulated Emek yellow cheese rose by 11.5%, the price of cottage cheese rose by 11%, and the price of Tnuva white cheese rose 15.4%.

The prices are taken from retailers nationwide and based on Tnuva's price list.

"After Apax acquired Tnuva, it was explicitly said at meetings that the company's value would be increased by raising prices," a former Tnuva employee said.

A retailer said, "There have never been price bargains for yellow cheese because Tnuva dominates the category. It was obvious that Apax did not come to make a slow profit, but a quick one. Apax's job is to make a profit every minute of every day. That's not a crime. It didn’t buy the company because it cared about the State of Israel. That's why the companies that made the big mistake were Strauss Group Ltd. (TASE:STRS) and Tara Dairies, both of which are Israeli-owned and both of which raised prices."

Published by Globes [online], Israel business news - www.globes-online.com - on June 26, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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