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Archive for June, 2011

This is a story of genuine consumer protest over the pricing of cottage cheese that turned into a public roar. On the face of it, it looks rather surprising how discontent with the price of a basic food product like cottage cheese can evoke so much excitation. It seems to be the outcome of multiple factors including public agitation, corporate insensitivity, oversensitive government, and media urge to produce headlines and fill airtime.

In May 2006 the Israeli government lifted its price supervision on most dairy products. A few months later an initial increase of nearly 6% in the price of cottage cheese was witnessed. By early 2008 the price was 22% higher. Three more years have passed until two months ago the price for the same cup (250g) reached 7 NIS or 42% increase since before supervision had been lifted. And this month the price peaked to 8 NIS, reflecting a 63% increase in price over 5 years. At that point the consumer public has lost its patience and protest has started to spread.

  • The price of a cup of cottage cheese 250g (9% fat) before lifting supervision was 4.90 NIS ($1.10 or €0.87 at prevailing exchange rates). The price for the same cup of cottage now stands at 8 NIS ($2.35 or €1.63 at current exchange rates). Note however that the Israeli currency has also appreciated against both the US dollar and the Euro, mostly during the last 3 years, which makes the product  appear even more expensive in these foreign currencies.

Cottage cheese is an elementary food item in Israel, popular in breakfast and light meals in general. It frequently accompanies salads. People have not been used to think too long about much of this cheese they buy and eat. The cottage cheese is common particularly among families with children, the elderly, and consumers of lower socio-economic status who cannot afford specialty and more delicate food products. It is probably because the cottage cheese has become such an essential meal component, kind of symbol typical of the country’s diet, that a potential threat to their usual way of life and their well-being led consumers to cry out loud against the price rise. But the price has been rising gradually for five years. Also, prices of other dairy products like soft spreadable cheese and yoghurt have risen by 30% or more. It seems that the price of cottage cheese as a symbol surpassed a tipping point for consumers that ignited the protest, starting on Facebook.

It appears like the food manufacturers and retailers lost sight of the consumers and their sensitivity to price. For a relatively long time, it should be admitted, Israeli consumers absorbed price increases within a range of acceptable prices they are willing to pay for cottage cheese and possibly other similar dairy products. Consumers may have adapted to inflation and shifted this range a little upwards. Yet, marketers got closer and closer to scratching the maximum price consumers can accept and the marketers just would not see this (what has happened to pricing research?). So finally they have reached a price level that consumers simply could no longer tolerate. The marketers have some justification to argue that consumers did not react in a way that would signal a problem in their pricing, but it is still the marketers’ primary responsibility to monitor relevant pricing-related metrics and initiate appropriate steps proactively.

The cottage cheese market (1.5bn NIS in 2010) is dominated by Tnuva which obtains a market share of approximately 70%, the remaining being equally divided between Strauss and Tara. The cottage cheese of Tnuva indeed has the seniority in the market for many decades and the product category is mainly associated with this brand and its cottage house icon. A major source of the problem is seemingly that these manufacturers would not allow a price gap to open between them. Suppose a major brand increases its price but the competitors do not follow, they can signal that they allow the former to keep a price premium and do not encourage further increases. But the competitors act as if they silently agreed (i.e. without their explicit co-ordination) to match each other prices, and only upwards. It is possible they were afraid of entering a price war. On the other hand, it suggests that any of the three were concentrated in internal (e.g., cost, operations) concerns and were reading market signals wrongly. Nonetheless, the responsibility lies not only with the manufacturers; the large food retail chains were also likely to have a role in this process, and they should not be exempt from scrutiny.

However,  the economic implication of the rise in price of cottage cheese probably did not prompt alone an angry protest. The negative emotional reaction can be mainly attributed to a sense of price unfairness by consumers: Why has the price had to get so high? The consumers look for reasonable explanations and when they fail to find one they feel treated unfairly.

  • Consumers were alerted that the rate of increase in the price of the cheese was much higher than that of inflation (approximately 10% vs. 3%  annually, compounded over 5! years).
  •  Consumers tend to be more forgiving for the price increase if they recognise a cause that is external to the firm and not in its control. For example, for a manufacturer it could be higher cost of raw materials. Consumers perceive as less fair price increases that are due to managerial driven cost (e.g., salaries, inefficiency). However, consumers are not familiar with details of the cost of production. They cannot truly tell either if a cost increase rests initially with the manufacturer or the seller-retailer. Without being explicitly informed of potentially legitimate reasons for the price increase they are likely to believe that the marketer/seller is just increasing his profit.
  • An indication of the difficulty of Israeli consumers to make sense of this price surge can be found in a provocative claim made by the protest organizers: a cup of cottage cheese costs more than a litre of fuel (gasoline) for the car. The logic for striking a comparison between these apparently unrelated goods is that they are both perceived as essentials to our everyday lives. Yet, people may say to themselves, we understand that the fuel price is rising because the price of the barrel of oil is so high and rising, but what can explain the rise in price of our cottage cheese? First, people are probably much more aware of the global oil crisis than the growing global food shortages, that food prices are also on the rise — a crisis in the making. Second, however, even if consumers are aware of the general rise in food prices, they may not be able to directly link it to their dairy products (we are being told for instance that Israeli cows are among the most productive of milk worldwide). Third, the more  observant consumers may note that the maximum fuel price under supervision is dropping occasionally when oil prices drop but food prices in the supermarkets never drop even if it is published that shortages in food ingredients have eased and their prices have dropped.

The public protest was initiated by three young men who opened a petition on Facebook and called for a boycott of cottage cheese. A week later they reported that 70,000 viewers signed in support. The protest has since broadened to include additional dairy products. So far, that is a strongly positive and legitimate move. The festival in the media and the political system that followed and took over the popular protest is far more baffling.

The real test of the protest in my view should be in the retail outlets, when consumers cut on their purchases of cottage cheese and other selected dairy products not under supervision. The boycott is planned for July, but if each family or household participates for just one week it can already have a strong impact. I am much less impressed by a protest in front of the computer — what does it mean that people ‘liked’ the protest post on Facebook? A ‘armchair protest’ is too convenient and does not prove real committment as yet. If as some retail chains reported there has already been a major drop in sales of cottage cheese in their stores then that is a good sign.

What has appeared on our TV screens, on the radio, in newspapers, and on the Internet, since the protest came to life is evident of nothing less but a panic reaction. Minutes of airtime reports, long tiring talks, politicians trying to make gains in the role of knights of social justice, and that is just on TV and radio main news programmes and news magazines. The Treasury Minister suggested allowing import of dairy products, alerting different sectors of the industry. Others proposed returning products to supervision, so the government said it would consider that too. The parliamentary (Knesset) committee for economic affairs entered the scene and opened an enquiry. The state comptroller also declared his own investigation.

One may seriously doubt how this turmoil will help to resolve the price issue in a responsible manner and in benefit of the consumers. The problems start with the market structure and the relations between the current local players. Regulation may be appropriate for a few essential products but it should not be adopted before making effort to resolve the issue by other means in co-operation with manufacturers and retailers. Finally, I do not believe that it would hurt the companies so much if they concede and allow prices to drop somewhat to restore peace with their customers. They may learn that they can achieve more by dialogue with consumers in different channels and avoid trouble in due time.

Ron Ventura, Ph.D. (Marketing)

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