The Israeli Ministry of Finance and the Competition Authority published a public appeal to submit positions with regard to their plan to reduce concentration and increase competition in the food and toiletries market, which they intend to include in the Economic Arrangements Law.

Stakeholders and the general public may submit positions on the proposals until February 11, 2023.

The backdrop to the plan is the Ministry of Finance and Competition Authority’s position regarding the extremely high concentration in the distribution segment of the food and toiletries market (imports and/or wholesale supply), as opposed to the relatively low concentration in the retail segment of the market. According to their position, the market structure is creating an imbalance in the market power of the suppliers’ segment over the retailers’ segment, which is generating high profitability for suppliers of large manufacturers and raising significant entry barriers against small and medium-sized suppliers.

The plan defines three types of manufacturers:

1. “Large manufacturer” – whose total retail sales in Israel in 2021 exceeded ILS 400 million.
2. “Medium-sized manufacturer” – whose total retail sales in Israel in 2021 exceeded ILS 20 million but did not exceed ILS 400 million.
3. “Small manufacturer” – whose total retail sales in Israel in 2021 did not exceed ILS 20 million.

In this regard, there is no distinction between a foreign manufacturer and a domestic manufacturer.

The key measures proposed in the plan to reduce concentration and increase competition in the food and toiletries market are as follows:

Increasing Competition in the Distribution Segment

A supplier that supplies a large manufacturer’s goods will not be able to directly or indirectly supply goods of additional large or medium-sized manufacturers. However, such a supplier will be able to supply goods of additional medium-sized manufacturers if it does not supply more than 50% of the sales in Israel of the large manufacturer and of each of the medium-sized manufacturers.

This restriction will not apply to purely logistic suppliers of goods, i.e., if the supplier is not at all involved in trade with the retailers in connection with these products.

Increasing Competition in the Supplier Segment

1. Large manufacturers, and suppliers supplying products of large manufacturers, may not merge with large and medium-sized manufacturers or suppliers supplying products of large and medium-sized manufacturers. It is unclear if the intention is for this prohibition to also apply to mergers not requiring the approval of the Competition Director General under the current law.
2. A large supplier will not be able to engage in an arrangement with a retailer, under which the retailer is given a discount contingent upon the achievement of monetary or quantitative purchasing targets of more than one type of product out of the large supplier’s product range. Discount arrangements pertaining to a specific type of product and with no linkage of the discount to other products will not be prohibited.
3. Large retailers that maintain selling ratios whereby more than 40% of their sales are not products of large suppliers will receive certain leniencies in the requirements for opening additional stores imposed on them under the Food Law.

Strengthening Parallel Imports

In addition, the plan is proposing actions in order to strengthen parallel imports to Israel.

A supplier in Israel that signs a contract with a foreign manufacturer must include a clause in that agreement whereby the foreign manufacturer covenants to also allow its various distributors outside of Israel to sell to Israel (i.e., the foreign manufacturer must covenant that it will not restrict parallel imports to Israel).

Significance and Implications

The Ministry of Finance and Competition Authority’s plan includes far-reaching restrictions on suppliers and on large and medium-sized manufacturers, both in terms of contractual aspects (restricting suppliers’ engagements with manufacturers and with retailers, interfering in agreements between suppliers and foreign manufacturers) and structural aspects (restricting mergers of large and medium-sized manufacturers and of suppliers supplying products of large and medium-sized manufacturers).

These restrictions are likely to have a dramatic impact on the activities of many players in the Israeli food and toiletries market, including foreign manufacturers. If the Israeli legislature indeed adopts the proposed measures, a question is likely to arise as to whether these measures can stand up under the test of judicial review, especially as part of a swift legislative process within the framework of the Economic Arrangements Law.

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