Sano toiletries outstrip rivals in profitability

Eli Tsipori

The government is criticizing the high prices charged by toiletries importers while the industry profit margins leader is local manufacturer Sano.

Like the imported food market, the toiletries market is a very hard nut to crack. Most of the importers of the leading brands are private companies, and prefer to remain so, and there is therefore no reliable information about their profit margins. The Ministry of Finance stepped in to fill this gap, with a study published in April 2016 of the profit margins of toiletries manufacturers and importers in 2003-2013, based on the Israel Tax Authority database, which includes reports on profit margins and the employers' salaries. The profit margin is calculated as the ratio of pretax profit (actually, operating profit margin, which excludes expenses and financing income) after "returning" the salaries of executives (who are shareholders) to the company, to sales turnover. In other words, the Ministry of Finance takes the management fees withdrawn from the private companies for the benefit of their shareholders, and adds the figure to their pre-tax profit margin. Including management fees and salary obviously increases the profit margin, which varies greatly from one company to another.

Because the companies are private, the Ministry of Finance did not publish their names, but the following importers are believed to be involved: Hogla-Kimberly, Unilever, Schestowitz, Diplomat, L'Oreal Israel, and one prominent Israeli manufacturer – Sano-Bruno Enterprises Ltd. (TASE: SANO1). In the study, the Ministry of Finance found that the aggregate profit of the toiletries manufacturers and importers amounted to NIS 500 million in 2012, reflected a 6.8% pre-tax profit margin. The Ministry of Finance noted that this profit margin was significantly higher than the profit margins in the wholesale sector, and almost double the toiletries companies' profit margins in 2003. Another interesting figure is that since 2009, when the profit margin in the sector reached a peak of 9%, it has been falling, main as a result of parallel imports in one leading category.

Given the widely reported dispute between Ministry of Economy and Industry Eli Cohen and several toiletries importers, I asked the Ministry of Finance for updated figures for the profit margins of the players in the market. The results show that following a drop in the companies' profit margin in 2009-2012, it again rose in 2013-2014 to 9%. The profit margin declined somewhat in 2015, but is still substantially higher than 2012. In response to my query, the Ministry of Finance said that most of the decrease in 2015 was in a specific category that had been intermittently exposed to competition from parallel imports. The Ministry of Finance also attached the profit margins of the three largest companies in the sector, clearly showing the spurt in the profit margins of those companies to 15-16%. Which companies are these? In my opinion, they are three of the following four: Unilever, Diplomat, Schestowitz, and Sano.

Sano is a public company, and it is therefore very easy to calculate its profit margins. Note what is taking place beyond the reach of our radar screens: the company's profit margins on toiletries and cosmetics products rose from 15.4% in 2015 to 16.5% in 2016. Sano's cleaning and home maintenance products, recognized in almost every household, reached a higher profit margin than toiletries and cosmetics in 2016 - 18.4%, compared with 13.8% in 2015. These figures are simply stunning, because the Ministry of Economy and Industry and the Antitrust Authority are directing their fire at the importers, while the industry profit margins leader is none other than a local manufacturer - Sano, whose products are present in almost every household, and whose numbers are available to everyone. Sano will certainly say, "We want to be among the best, for example Procter and Gamble, whose operating profit margin last year was 21%." There is, however, one small difference: Procter and Gamble has dominant brands like Gillette, with large market shares. Sano has a strong brand, but also many cheaper competitors, and nevertheless generates very fine profit margins.

The conclusion is that the power is in the hands of the consumers. The consumers can "punish" companies that charge prices that appear too high, whether they are local manufacturers or exclusive importers. The consumers have the option of choosing cheaper products on the shelves, or ordering them from overseas and taking advantage of the $75 VAT exemption (there are those who split their purchase into several packages in order to avoid reaching the threshold). If you want to pay more, go ahead and do so, but don't complain about the cost of living when you are voluntarily playing the sucker.

There is another and far more important conclusion. The Ministry of Finance's studies of food and toiletries importers show that the profit margins of the companies in the sector have risen amazingly in recent years, but their employees' wages have not changed, and have even eroded in real terms in some cases (in toiletries, for example). This is exactly one of the main problems in the Israeli economy: employees' wages are standing still, despite the fairly dramatic improvement in companies' profit margins. This is the story of the social gaps.

Published by Globes [online], Israel Business News - www.globes-online.com - on September 25, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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