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Monday, April 2, 2012

Building blocks of high prices

Brand-name toys sell in Israel at tens of percentage points higher than in the U.S. and Europe, but Lego breaks all records, with price gaps that extend to hundreds of percentage points.

At toystogo.co.il, which is apparently the least expensive Lego shop in Israel, the Alien Conquest Earth Defense HQ set sells for NIS 939. Meanwhile, the same exact Lego sells for NIS 325 in Britain and only NIS 269 in the U.S.

Toys R US - Ofer Vaknin - March 2012

Toys R US, Rishon Lezion branch.

Lego joins the long list of items such as fashion accessories, razor blades, baby bottles and shoes, for which the Israeli consumer pays tens of percentage points more than do consumers in Europe and the U.S. Yet Lego - an item that consumers in Israel recently chose as number two in a ranking of high-quality brands in Israel (in a survey of superbrands sold in Israel, conducted by Market Watch ) - is apparently one of the best examples of imprudent consumer purchasing by Israeli parents.

Prices of Lego in Israel are so high that even if you order the item from the U.S., you can still save hundreds of shekels. Personal import of the Alien Conquest Earth Defense HQ Lego set, including the added VAT and the high cost of shipment through the middleman site, would still save the purchaser NIS 570, or 61 percent of the lowest price at which it is sold in Israel. The new regulations that recently came into effect, in keeping with the Trajtenberg Committee's recommendations (according to which an exemption is awarded for customs duties on packages valued up to $325 ) have only widened the already-existing gap and made the purchase from abroad even more worthwhile.

A TheMarker survey of dozens of Lego items sold in shops in Israel reveals that Lego is sold at price levels far higher than any other items in the local toy sector. As part of the survey, we compared Lego kits costing between NIS 90 and NIS 1,350. The findings reveal that any Lego kit that sells at a price above NIS 250 is not worthwhile to purchase in Israel (see table ).

The gap between buying the cheapest Lego set in Israel and buying the same item on Amazon and having it shipped to Israel through an external shipping site is between 16 and 61 percent; the savings to the consumer are NIS 90-NIS 756 for a single Lego item.

Brand-name prices

According to the business information company BDI-Coface, the toy market in Israel is worth approximately NIS 930 million per year, with about 55 percent of sales derived from brand-name toys. It is estimated that income from the Lego brand in Israel is approximately NIS 60 million annually; but more generous estimates declare that 15 percent of the local toy market comprises assembly toys, and over half of that is attributed to Lego.

"We are practically the only country in the OECD that relies on exclusive importers of brands," says Adi Regev, the CEO of Toys R Us. "Our importers - Sakal (Fisher Price, Barbie ), Kodkod (Hasbro ) and Ilanit (Lego ) - were granted the exclusive right to distribute leading brands in the industry. The Israeli retailer must buy through the importer, while the retailer abroad works directly through the manufacturer. This means that there's an intermediary agent who adds several dozen percentage points."

Regev's explanation may help explain the substantial gaps found in every classic children's brand we surveyed. For instance, Fisher Price's popular "Laugh & Learn Puppy" doll, sold in Israel for NIS 200, is 74 percent more costly than its price in Britain (NIS 115 ) and 163 percent more than in the U.S. (NIS 76 ).

Even Hasbro's classic Monopoly game, which is produced at Kodkod's factory in Arad, is sold here for NIS 119 - 70 percent higher than in Britain (NIS 70 ) and 133 percent more than its price in the U.S. (NIS 51 ).

However, a talking doll or board game that has been adapted for Hebrew limits most parents, who will have to purchase the item in Israel. Even the final cost to the consumer (up to NIS 250 ) and the savings of a few dozen shekels (after shipping costs ) will usually not be enough to convince parents to wait for an item to arrive from overseas. The fact that Lego kits do not require translation, and that items commonly cost several hundred shekels, makes the Internet purchase a genuinely economical solution.

Incidentally, an identical survey that we conducted on an arbitrary list of Playmobil products revealed gaps of up to some 60 percent between Israel and abroad, but they were not sufficiently meaningful to make personal import, which includes expensive shipping costs, into a worthwhile transaction (see table ).

We asked industry insiders to explain the meaning of the gaps in Lego prices. Lego operates factories in Denmark, the Czech Republic, Mexico and Singapore, and Lego International accordingly divides the world into three - Europe, the U.S. and the Far East. "A discriminatory price policy is already applied by the manufacturer, and it is influenced by the purchasing power of each country. The Israeli importer can purchase goods solely from Europe," says a ranking source.

And what can retailers do to affect the prices of Lego in Israel? Itzik Tayar, the owner and CEO of the Big Toys toy chain, which operates seven shops in shopping malls throughout Israel and will expand this month by two more outlets, feels that not much can be done about the situation. "When the importer, Ilanit, sells me Lego at NIS 65 (including VAT ), I sell it for NIS 115, with a 15 percent discount (NIS 98 ). That leaves me a profit margin of about 35 percent, which is the normal margin in the toy market. Any other pricing would not enable us to survive the ongoing costs," says Tayar.

"Any business that is inclined to focus solely on price, and is scrupulous about maintaining very narrow profit margins, is good for consumers but won't manage to stay around for very long. I have seen toy store chains rise and fall on this concept, including Toy King and Hatzi Hinam. We have to earn a profit in order to continue operating, and the question is if we are earning a profit in order to make a living or if we are being piggish," he adds.

The lowest Lego prices that we found were not at Big Toys or Toys R Us, but at a small shop in Ramat Aviv that operates toystogo, a website. But even with the low profit margins that a private or Internet shop can allow itself, there still remains the disproportionate gap in prices as compared with the rest of the world.

"The importer of Lego has an appealing brand that has no competitors, so he is taking as much as he can get," says a well-placed industry source. "The Internet market is a potential threat to the entire retail toy sector. The fact that a mother can order Lego on Amazon and save NIS 500 is absurd, but how many mothers really do that?"

Ilanit Toy Marketing, the importer of Lego to Israel, responded: "In Israel, as in numerous small countries in which the marketing of brands to children is not conducted directly by the manufacturer but through a local importer, there are higher marketing costs. Ilanit, in conjunction with the marketing chains in Israel, does everything it can to permit the best possible pricing for the customer."

How to buy toys for less

Amazon sells Lego at low prices, but they don't ship toys to Israel. What can we do?

Various Hebrew-language sites on the Internet employ a method by which they offer an American mailing address. These include TNT Worldshop, Mustop and Ushops. The Israeli consumer who registers with these sites receives without cost an address for the company's warehouse, which is located in New Jersey, and a unique post office box for the purposes of identification. When customers wish to purchase an item from an American retail site that does not ship to Israel, they provide the personal American address that they received from the shipping site. The package arrives at the company's warehouse, and it ships it, against payment, to Israel. The shipping company also deals with the Israeli tax authorities.

In preparing this article, we made use of the Ushops site, as it offers the option of shipping by sea, which is considered less expensive than shipping by air, particularly for heavy or especially large items. Nevertheless, it should be noted that our survey unequivocally demonstrated that even air shipping is significantly cheaper than the prices available in Israel.

How are the shipping costs derived?

Shipping costs are derived from the physical weight and volume of the package, something which is not always obvious to the consumer. The cost calculator that appears on the Ushops site enables the user to simply cut and paste the link to the item on Amazon - and automatically calculates the final cost of the package, including taxes and shipping either by sea or by air.

How much tax will I pay for ordering a toy to Israel?

When the receipt in the package shows a sum of up to $74.99, the package is completely exempt from import taxes. When the sum is between $75 and $325, you will pay in Israel only the VAT (16 percent ). If you order toys at a cost of higher than $325, you pay approximately 30 percent more, including VAT and customs.

How does one pay for sites abroad?

One of the most common and secure ways of paying for sites abroad is through a PayPal account. This company is the middle man between the customer and the store, transfers the required amount for payment and does not expose any credit card details. It should be noted, however, that whether you pay by credit card or through PayPal, you will be charged at the foreign exchange rate, with an additional fee of 2.5 percent.


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