Since acquiring 51% of the Israeli franchise of infant food company Materna from Maabarot Products Ltd. (TASE: MABR) for NIS 259 million in December 2009, Osem Investments Ltd. (TASE: OSEM) sharply raised prices, an examination by "Globes" has found on the basis of retail figures. Materna had not raised prices for most of its products in the two years preceding the acquisition.
Materna is a loss leader for supermarket chains, even though Materna and its rival Similac, are in an inflexible market. According to Storenext, Materna has a 58% share of the infant food market in 2010, and 74% share of the infant porridge market. Nevertheless, Materna was never declared a monopoly, and made a point of noting this in its financial reports.
An examination by "Globes" found that prices for Materna's main product - Stage 3 formula in a 700-gram can - were unchanged in 2008-09. When Osem closed the acquisition of Materna in February 2010, it raised the price of this product by 6.6%, followed by a further 5.5% hike shortly afterwards. Altogether, Osem raised the price for the product by 12.5% from its price at the time of the acquisition.
"Globes" also found that in January-September 2011, supermarkets lost an average of NIS 8.10 per can of Materna sold. Although the retail price of a 700-gram can is recommended at NIS 64.70, the actual price averages NIS 56.60. Retailers also lost an average of NIS 4.80 on each 400-gram can of Materna.
Osem has also hiked prices for other Materna products since acquiring the company: the price for the Gam ve-Gam porridge has been raised by 12.5%, semolina porridge was raised by 7.1%, and the 700-gram Materna Stage 1 Mehadrin formula was raised by 12.4%. The semolina porridge (excluding VAT) costs 16.5% more than the retail price in the US of NIS 10.20.
"When Osem acquired Materna, it twice raised the price: once immediately after closing the deal, and again shortly afterwards. The price was already very, very high. Osem exploited its standing and wanted to profit from both the distribution and the price, even though it should have lowered the price because its distribution is cheaper than everyone else's," a retailer told "Globes".
"They're exploiting the brand, exploiting their exclusivity," Rami Levi Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI) CEO Rami Levi told "Globes", referring to Similac. "They know that mothers have no choice; they're prisoners of the product until their babies grow. I once put one of the products at the main check-out counter, rather than on the shelf. I wanted to lower the price, but there were a lot of complaints from customers. It isn't like ketchup, which you can do without. I've been losing money on Materna for 30 years. I have nothing against Osem, but they're exploiting the brand."
Since Osem acquired the Israeli Materna franchise, there have been no specific figures disclosed about sales. However, according to Maabarot, its operating profit margin rose to 19% in the second quarter of 2008, reflecting a gross profit margin of 50%. The operating profit margin has reportedly been maintained, and possibly increased. This suggests that Materna sales, not including VAT, amount to NIS 300 million a year.
Published by Globes [online], Israel business news - www.globes-online.com - on October 9, 2011
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