Wednesday, 21 September 2011

Israel's cottage uprising: consumers unite on Facebook to force inflated food prices back down

Prof Michal Gal, by Shmuel Almani
Professor Michal Gal reveals how consumers in Israel have used Facebook and collective power to successfully force high food prices back down.

There have been some exciting events taking place in Israel for the past three months or so. The first is a revolt by consumers, in what has come to be known as "the Cottage Uprising", which reached one of its climaxes this week when hundreds of thousands of consumers decided to boycott Tnuva products, a major supplier of dairy products. This figure represented a large number of consumers for such a small country. They were connected and informed through social networks, supporting media and volunteers.

It all started when one conscientious consumer posted a call on Facebook to boycott cottage cheese produced by Tnuva, the largest cottage cheese manufacturer in Israel. Cottage cheese is an important part of an Israeli diet and, believe it or not, it is actually tasty! He pointed to the fact that in the past year, ever since the price of cottage cheese was deregulated, it rose by more than 25% percent. Surprisingly, more than 100,000 consumers joined him within days.

Tnuva has caved in to consumer pressure
At first Tnuva, which is now largely owned by the British APAX investment fund, responded that it would not reduce prices, but soon it began to understand that it had a real problem on its hands. Within days it reduced prices and set them closer to their previous levels. The harm to Tnuva was not only the direct loss it suffered: Tnuva uses the picture of a "cottage" (house) which is posted on its cottage cheese as its main image and bases its slogan on it: "Tnuva - the Israeli home".

This was only the first step in this summer's social revolution. Hundreds of thousands of Israeli consumers (450,000 people - out of approximately 7 million people participated in the biggest march ever in Israel) protested against the high prices of many products. These high prices make it difficult for many to live a comfortable life despite many having a good education and working long hours. Indeed, research done for the Israeli parliament indicated that between 2006 and 2011 the average salary in Israel rose by 2.6 percent while the Consumer Price Index rose by 25 percent. Salaries in Israel are the third lowest of all of OECD members, while prices and taxes are among the highest.

This was mainly a protest led by the young and educated, who saw their dreams of buying their own apartment get further away from them due to the extreme rise in housing prices. They have also experienced growing difficulties of paying their bills, not to mention saving for a rainy day. They were joined by many other groups protesting against "social injustice." They pointed to, among other things, the fact that while the country's macro-economic indicators painted a bright picture, the benefits did not trickle down to most groups in society and they were largely enjoyed by a small group of business people who control large parts of the Israeli market. This small group, whose interests are often protected by politicians, enjoys the quiet life by not stepping on each others' turf.

Accordingly, the protest was not necessarily about the capitalistic model that Israel adopted, but mostly about the unnatural causes that enabled huge conglomerates to develop and prosper and the lack of regulatory tools applied to limit their market power.

As part of this social revolution, people built tents in the centres of towns all around Israel, and created "town squares" for public discussions about how to use public funding to create a better life for most citizens. It is a great example of Israeli democracy that these "temporary settlements" were allowed, despite the fact that they criticised the government quite severely (it was a great lesson in democracy for my kids).

Earlier this month, after the largest march, most tents were taken down by the protesters. The hope is that the discussion will continue and will affect governmental policies. Committees were created in order to push forward a more socially oriented policy. As studies began to accumulate that showed the high profits of many major suppliers in Israel, a group of students initiated what they call a "changing boycott," where each week one major food producer would be boycotted, to indicate the consumers' power if prices were not reduced to "fair" levels.

Tnuva reacted to this action not by reducing prices, but by increasing the sizes of its products by 10% and selling them for the previous price. We will have to wait and see what will develop.

I find this collective use of consumer power quite exciting, especially when this power is used to reduce high prices that are a result of governmental failure to perform the regulatory tasks it should have performed (eg reducing entry barriers, placing more emphasis on market power considerations in privatisation decisions, resisting interest-group pressures, and not allowing conglomerate mergers with significant market-power effects that do not create offsetting efficiency benefits). At the same time I hope that such consumer power is not abused and will not reduce incentives for dynamic and efficient production. I hope we will get the right balance.

Professor Michal Gal is a Professor, Vice Dean, and Co-Director of the Forum on Law and Markets at the Faculty of Law, Haifa University, Israel.

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