2. OUTLINE
• Company Background & Expansion Specifications
• Country Basics & Demographics
• Country Structure
• Political, Financial & Economic
• Country Evaluation
• Political, Financial & Economic
• Associated Risks & Associated Benefits
• International Perspective, Current Events & Overall Indicators
• Industry Evaluation
• Regulatory Structures, Competition, Financing & Overall Attractiveness
• Entry Strategy
• Recommendation
3. COMPANYBACKGROUND
• U.S.-based toy company founded in 1988 by Melissa and Doug
Bernstein
• Leading designer and manufacturer of educational toys
• Customer-focused mission statement
• Private company employing approximately 1,200 employees
Home page (n.d.). Melissa & Doug. Retrieved on April 26, 2013 from http://www.melissaanddoug.com/
Cody, T. (2010). Berkshire Cleared to Acquire Melissa & Doug. Mergers & Acquisitions Report, 23(50), 7.
4. COMPANY GROWTH
Berkshire Partners Invests in Melissa & Doug (2010). Berkshire Partners. Retrieved on April 29, 2013 from http://www.berkshirepartners.com/news_press_2010December21.shtml
Fitcher, M. (2012). Bernstein, Melissa & Doug. 2 Paragraphs. Retrieved on April 29, 2013 from http://2paragraphs.com/2012/09/bernstein-melissa-doug/
Macfadyen, K. (2010). Berkshire Partners Completes Toy Deal. Mergers and Acquisitions News. Retrieved on April 29, 2013 from http://www.themiddlemarket.com/news/berkshire-completes-toy-deal-214440-1.html
5. PRODUCT OFFERINGS
Arts & Crafts Stuffed
Animals
Classic Toys Puzzles
Home page (n.d.). Melissa & Doug. Retrieved on April 26, 2013 from http://www.melissaanddoug.com/
7. MANAGING EXPANSION
• Expansion Planning
• Market Demand – Emerging Markets = Israel (1.8% pop. growth
compared to world at 1.1% (Israel Sees Growth as Population Passes 8
Million Mark, 2013).
• E-Commerce: enabled achievement of double-digit returns by
supplying product line to over 80 countries worldwide (Promo 8).
Israel Sees Growth as Population Passes 8 Million Mark. (2013, April 14). Retrieved from The Algemeiner: http://www.algemeiner.com/2013/04/14/israel-sees-growth-as-population-passes-8-million-mark/
Israel: A Resilient Global Economy. (2013, April 29). Retrieved from Invest in Israel: http://www.investinisrael.gov.il/NR/exeres/75A535CF-BCC7-4A06-9E24-88EAC7EC67C0.htm
"Promo 8". (n.d.). Retrieved from Melissa & Doug: http://www.melissaanddoug.com/promo_8
8. GEOGRAPHY
• Located in the Middle East,
bordering the Mediterranean
Sea (CIA, 2013)
• Climate & geologic events:
• Hot & dry
• Sandstorms
• Droughts
• Earthquakes (CIA, 2013)
• Total sq. km. = 20,770 sq. km
• 20,330 sq. km. = land
• 440 sq. km. = water
Central Intelligence Agency. (2013). The World Fact Book. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/is.html
9. 2nd Largest % (0-14 years)
Largest % of population (25-54 years)
Population: 7,707,042 (July 2013 est.)
Age Structure
0-14 years: 27.3 percent
15-24 years: 15.7 percent
25-54 years: 37.7 percent
55-64 years: 8.8 percent
65 years +: 10.5 percent
ISRAEL: COUNTRY BASICS
Race: Jewish 76.4 percent
Non-Jewish 23.6 percent (mostly Arab) (2004)
Language: Hebrew (official)
Arabic (used officially for Arab minority), English (most commonly used foreign language)
Religion: Jewish 75.6 percent, Muslim 16.9 percent, Christian 2 percent, Druze 1.7 percent, other 3.8 percent
(2008)
Central Intelligence Agency. (2013). The World Fact Book. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/is.html
10. DEMOGRAPHICS
• GDP Purchasing power (PPP/USD) - $247.9 billion (2012 est.) Compared to the world: 51 (out of 229)
• Imports - $77.59 billion (2012 est.)
• Average salary - $31,000 USD per year. $45,000 in US (Central Bureau of Statistics, 2013).
• Online Purchases - 5,313,530 Internet users in 2012 = 70.0 percent penetration – a high Internet
adoption rate (Internet World Stats, 2012). 7 percent of Israelis purchased toys online vs. 93 percent
offline; 6 percent of purchasers did research online before purchasing toys online (Google, 2013).
• Industry Leader - Approximately 40 Israeli manufacturers offer educational toys. (Israeli Export and
International Cooperation Institute, 2011)
• Israeli Toy Market - worth approximately NIS 930 million ($260 million USD) per year, with about 55
percent of sales derived from brand-name toys. (Levy, 2012)
Export.gov. (2013). Country Commercial Guide. Retrieved from http://export.gov/israel/marketresearchonisrael/countrycommercialguide/eg_il_026161.asp
Israel: Risk Assessment (2013). Global Edge. Retrieved from globaledge.msu.edu: http://globaledge.msu.edu/countries/israel/risk
11. POLITICAL STRUCTURE
Israel is a parliamentary democracy which consists of four institutions
(“Political Structure”, 2001):
• The Executive Institution (the Presidency)
• The Legislative Institution (the Knesset, parliament)
• The Governmental Institution (cabinet of Ministers)
• The Judiciary Institution (Judges)
Israel Executive Branch (n.d.). Index Mundi. Retrieved on April 29, 2013 from http://www.indexmundi.com/israel/executive_branch.html
Political Structure and Elections (2001). Israel Ministry of Foreign Affairs. Retrieved on April 28 from http://www.mfa.gov.il/MFA/MFAArchive/2000_2009/2001/6/Political%20Structure%20and%20Elections
The Electoral System in Israel. (n.d.) The Knesset in the Governing System. Retrieved on April 26, 2013 from www.knesset.gov.il/description/eng/eng_mimshal_beh.htm
The Judiciary: The Court System (n.d.). Israel Minster of Foreign Affairs. Retrieved on April 28, 2013 from http://www.mfa.gov.il/MFA/Government/Branches+of+Government/Judicial/The+Judiciary-+The+Court+System.htm
12. POLITICAL COMPARISON
RISKS
• New government in Israel, which has
greater ideological diversity then the past
Knesset (Country Risk Summary, 2013).
• Gaza conflict continues to threaten Israeli
security.
• The Palestinian–Israeli Conflict is a
continuing source of uncertainty in the
region.
• Iran's possible nuclear capability
• Civil War in Syria
BENEFITS
• Government is open to foreign investment, and
actively encourages and supports the inflow of
foreign capital.
• Few restrictions on foreign investors.
• There have been no expropriations of U.S.-owned
businesses in Israel in the recent past.
Balmer, C. & Williams, D. (2013). Analysis: Israeli Credibility on Line Over Iran Nuclear Challenge. Reuters. Retrieved on April 27, 2013 from http://news.yahoo.com/analysis-israeli-credibility-line-over-iran-nuclear-challenge-095926903.html
Israeli Lawmaker Urges Intervention in Syria, Claims Chemical Weapons ‘Trickling’ to Hezbollah. (2013). The Washington Post. Retrieved on April 28, 2013 from http://www.washingtonpost.com/world/middle_east/israeli-lawmaker-urges-intervention-in-syria-warns-
chemical-weapons-trickling-to-hezbollah/2013/04/29/69f4b42c-b0bd-11e2-9fb1-62de9581c946_story.html
Tamopolsky, N. & Boghani, P. (2013). Israel, GazaExchange Heaviest Strikes Since Cease-Fire. Global Post. Retrieved on April 26, 2013 from http://www.globalpost.com/dispatch/news/regions/middle-east/israel-and-palestine/130403/israel-gaza-exchange-heaviest-strikes-
13. FINANCIAL STRUCTURE
• Israeli financial system currently appears to be generally robust
• The main financial institutions are banks and insurance companies;
there is a large and active market in shares, corporate bonds, and
government bonds
Viñals, J. (2012). Israel: Financial System Stability Assessment. Retrieved from http://www.imf.org/external/pubs/ft/scr/2012/cr1269.pdf
14. FINANCIAL COMPARISON
RISKS
• The global economy and in particular
some of Israel’s main trading partners
may slip back into recession
• Israel is exposed to geopolitical risk.
• The nonfinancial, banking, and
insurance sectors are concentrated
BENEFITS
• Little law provides conflict for
international business
Viñals, J. (2012). Israel: Financial System Stability Assessment. Retrieved from http://www.imf.org/external/pubs/ft/scr/2012/cr1269.pdf
15. ECONOMIC STRUCTURE
• Growth of the Israel economy is largely from exports and foreign
investments.
• Unemployment is at 5.9% in 2011 and Gross Public debt as a
percentage to GDP decreased from 102% in 2003 to 75% in
2011 (Israel: A Resilient Global Economy, 2013).
2013 Index of Economic Freedom: Israel. (n.d.). Retrieved from The Heritage Foundation: http://www.heritage.org/index/country/israel
Steinberg, J. (2012, March 25). Does it pay to shop and ship to Israel. Retrieved from Times of Israel: http://www.timesofisrael.com/does-it-pay-to-shop-and-ship-to-israel/
16. ECONOMIC COMPARISON
RISKS
• High public debt
• Ranked number 17 in the world for
risk of terrorism (Maplecroft, 2012)
• Regional stability at risk because of
ongoing issues in the West Bank and
Gaza Strip
• The Arab Spring that affected
surrounding countries has also left
unrest in the region (A.M. Best, 2012).
BENEFITS
• Diversified economy – ranked top 5
emerging markets 2010 (Israel: A
Resilient Global Economy, 2013).
• Strong high-tech sector
• Skilled workforce (Global Edge, 2013)
• Good business climate (Global Edge,
2013)
• Israel has been ranked 9th highest for
durability facing the global financial
crisis.
AMB Country Risk Report: Israel (2012, October 26). A.M. Best. Retrieved from ambest.com: http://www3.ambest.com/ratings/cr/reports/Israel.pdf
Political Risk Map 2012. Maplecroft. Retrieved from ipoliticalrisk.com: http://www.ipoliticalrisk.com/wp-content/uploads/2012/02/maplecroft.bmp
17. INTERNATIONAL PERSPECTIVE
• International Memberships
United
Nations
World
Bank
International
Monetary
Fund
World Trade
Organization
United States Department of State. (2013). U.S. Relations with Israel. Retrieved from http://www.state.gov/r/pa/ei/bgn/3581.htm
18. CURRENT EVENTS
& OVERALL INDICATORS
• U.S. Policy in Middle
East
Commitment
to Security
• 4.5% increase
• $9.7 Billion in 2010
Increase –
U.S. FDI’s
• 26th Largest
Trading Partner
• $37 Billion in
2011
26th Partner
Office of the United States Trade Representative. (2013). Retrieved from http://www.ustr.gov/countries-regions/europe-middle-east/middle-east/north-africa/israel
19. INDUSTRY EVALUATION – REGULATORY STRUCTURE
• Israel and U.S. Free Trade Agreement
• No Tariffs due to Free Trade Agreement
• Import and Export Port Fees
• TAMA uplift rate
• VAT (value added tax)
• International R&D Programs
• Treaties for the Avoidance of Double Taxation
Tariff and Tax Information (n.d.) U.S. Commercial Services. Retrieved on May 29, 2013 from http://export.gov/middleeast/country_information/israel/Tariff%20and%20Tax%20Info-IS.pdf
Israel Free Trade Agreement (n.d.). Trade Compliance Center. Retrieved on May 29, 2013 from http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_005439.asp
BDO Israel. (2013). Doing Business in Israel 2013. Tel Aviv: BDO Ziv Haft.
20. COMPETITION
TOP COMPETITORS
• The leading toy competition will be
from large well-known brands that are
imported to Israel (Levy, 2012).
• Lego
• Fisher Price
• Hasboro
MINOR COMPETITORS
• Tiny Love (Sarah, 2011)
• Theora Design
• Taf Toys
• Halilit
• Savta’s Toys
Levy, R. (2012). Building Blocks of High Prices. Haaretz. Retrieved on May 30, 2013 from http://www.haaretz.com/business/building-blocks-of-high-prices-1.418984
Melissa and Doug (n.d.) Savta’s Toys. Retrieved on May 30, 2013 from http://www.savtastoys.com/brand.php?brand=8&view=all
Sarah, V. (2011). Israeli Oomph at International Toy Fair. Israel 21c. Retrieved May 28, 2013 from http://israel21c.org/news/israeli-oomph-at-international-toy-fair/
21. MAJOR TOY DISTRIBUTORS (ISRAEL)
• Toys R Us- 28 Branches and 26% of market share (Fiterman, 2011)
• Kfar Ha’Shashuim – 80 stores and 16% of the market share
• Red Pirate – third major chain – 13 stores
Fiterman, A. (2011). Toys They Can’t Hold a Candle To. Haaretz. Retrieved on May 30, 2013 from http://www.haaretz.com/business/toys-they-can-t-hold-a-candle-to-1.400453
22. INVESTMENT
INCENTIVES
Government Created
Incentives
Tax Benefits (20% Grants)
“Priority Area A”
Law for Encouragement of
Capital Investments
- Buildings, Machinery &
Other Equipment
- Land Development
Expenses
- Building Renovation
Expenses
Economic Boost
BDO Israel. (2013). Doing Business in Israel 2013. Tel Aviv: BDO Ziv Haft.
HLB International. (n.d.). Doing Business in Israel. Retrieved from hlbcpa.co.il: http://www.hlbcpa.co.il/businesscont.htm#about
23. FINANCING
OF INVESTMENT
Israeli Financial Market Offers
Loans
Short
Medium
Long-term
Installment
Credit &
Leasing
Venture Capital
Organization
Assistance
Export/Import
Bank of
America &
Small Business
Administration
(SBA)
Embassy of the U.S. - Israel. (n.d.). Israel is Open for Your Business. Retrieved from http://israel.usembassy.gov/: http://israel.usembassy.gov/doing-business/services-for-u.s.-companies
Kriheli, O. P. (2012). Doing Business in Israel 2012. Ramat Gan, Israel: Crowe Horwath.
24. ATTRACTIVENESS
OF INDUSTRY
World
Leader in
Industry
Market Worth
Approx. $260
million
USD/year
30% of
population<14
years old
Liberal Business
Environment =
A2 Climate
Rating
Toys Israeli Export and International Cooperation Institute.
(2011). Israel: Inspired by innovation/ Home and family
products. Tel Aviv: Israeli Export and International
Cooperation Institute.
Levy, R. (2012, March 16). Building blocks of high
prices. Haaretz, pp.
http://www.haaretz.com/business/building-blocks-
of-high-prices-1.418984
israemploy. (2013). Salary and compensation.
Retrieved from israemploy.net:
http://www.israemploy.net/Salaries/
Business Monitor International. (2012). Israel Retail
Report Q1 2012. London: Business Monitor
International.
25. ENTRY STRATEGY
• Possible Modes of Entry for Melissa & Doug into Israel:
• Exporting
• Joint Venture
• Wholly Owned Subsidiary
• Licensing Agreement
• Direct Investment
Investopedia. (2013). Wholly owned subsidiary. Retrieved from http://www.investopedia.com/terms/w/whollyownedsubsidiary.asp
Quick. (2010). Foreign market entry modes. Retrieved from http://www.quickmba.com/strategy/global/marketentry/
Samii, M. (2011). International Business, Thirteenth Edition. Custom Business Resources. Pearson Learning Solutions: Boston, MA.
Schreiner, E. (n.d.). "Differences Between Wholly Owned Subsidiaries & Divisions". Retrieved from Small Business Chron: http://smallbusiness.chron.com/differences-between-wholly-owned-subsidiaries-divisions-32631.html
26. ENTRY STRATEGY – VITAL RELATIONSHIPS
• Customs Agents
• Possibly Business Partners
• Competing Companies
• Government officials/politicians
• US Commercial Service
27. ENTRY STRATEGY - EXPLANATIONS
• Cost and Return on Investment
• Risk
• Speed
• Learning Potential
• Cultural Difference
• Current Foreign Investments
• Goodwill
Quick. (2010). Foreign market entry modes. Retrieved from http://www.quickmba.com/strategy/global/marketentry/
Editor's Notes
Melissa & Doug are one of the leading designers and manufacturers of educational toys and children's products.
The original Melissa & Doug products were wooden manipulative and cognitive toys that fostered a child’s imagination and creativity. This company focuses on well-made products that are designed to foster learning and innovation. All of the products are wooden or plush and none of them requires batteries.
To make each and every customer a happy and permanent member of the Melissa & Doug family while offering products with tremendous value, quality and design.
There are roughly 200 employees in the United States and 1,000 working overseas in China.
Melissa & Doug LLC is a private company, headquartered in Wilton, Conn., and does not share company worth or revenue profit information.
Company has grown significantly in the past 25 years
After being founded in 1988 and growing out of Doug’s parents’ basement, Melissa & Doug LLC partnered with MetalMark Partners in 2006 (Macfadyen, K. 2010).
Berkshire Partners bought Melissa & Doug LLC from MetalMark Partners in 2010, the terms undisclosed (“Berkshire Partners”, 2010).
Products are sold primarily in the U.S. with some online overseas sales. The majority of the products are now produced in China.
Melissa and Doug are extremely private and refuse to conduct large business interviews (Fitcher, M., 2012). They do not advertise and rely solely on the high loyalty of their customers who appreciate the high quality and educational value of their toys. Estimated profit for the company is unknown as Melissa & Doug LLC refuses to release this information. Berkshire Partners, the Boston-based, private equity firm, has invested in leading mid-sized companies for more than 25 years through seven investment funds with aggregate capital of $6.5 billion (“Berkshire Partners”, 2010).
Melissa & Doug Toy Company offers a line of over 2,000 innovative toys for children of all ages (“Home page”, n.d.).
Products are categorized by child’s age or product type.
Main toy categories are: Wooden Puzzles, Games, Pretend Play, Food-Play Sets, Educational Toys, Stuffed Animals, Trains and Vehicles, Baby and Toddler, Learning Mats, Arts and Crafts, Nesting/Stacking Blocks, Puppets and Theaters, and Outdoor.
The company mainly sells its products in the United States and Canada, but does have online sales available to overseas. There is no company information to research, so exactly where the company does business is difficult to locate.
Develop sales projections for the next 5 to 10 years including competitor activity.
Solidify supply chain from China and determine if economies of scale can be realized there or if a country outside the BRIC would provide this advantage.
Prepare and acquire a strong local company presence in Israel.
Diversification strategy, concentration strategy, and a hybrid strategy are all different paths to globalization in the 21st century. Melissa and Doug LLC have a proven track record for continued growth and a presence in Israel will support and amplify company revenue.
Similar to the size of New Jersey, Israel is located in the region most commonly known as the Middle East.
Scarcity of fresh water reserves could be a deterrent for any multinational corporation that needs water to produce its product.
Production is to start in 2014 at a large offshore reserve of natural gas discovered in 2010 (Global Edge, 2013). Potential natural gas resources could be a plus for companies that require large amounts of energy.
With the largest percentage of the population in the 25-54 range (parents); and the second largest in the 0-14 range (children), this would be a good toy market.
Necessary awareness of cultural differences in language and religion.
Proper research of cultural etiquette would be required to understand the differences in marketing to such a vast population.
Israeli culture is defined by religion. With a multi-cultural base, toy companies have an advantage in selling their product in that they do not have to get involved in the politics of religion when advertising to children.
U.S. is Israel’s largest trading partner, with China some 4 points behind. It’s beneficial to U.S. GDP to keep exports to Israel up.
Toys prices should be geared to lower incomes. Also, because Israel imports many of the brand-name toys, such toys sell in Israel at higher prices than in the U.S. and Europe – as much as 10 percentage points or more. However, Lego sell for hundreds of percentage points more (Levy, 2012). A Lego-like toy may be a good investment.
Online awareness will need to be promoted to be successful at selling online.
The Executive position of President is a largely ceremonial role and is elected by the Knesset for a seven-year term (“Israel Executive Branch”, n.d.).
The Cabinet members are selected by the prime minister and approved by the Knesset.
Israeli political system is based on the principle of separation of powers, with checks and balances, in which the executive branch (the government) is subject to the confidence of the legislative branch (the Knesset) and the independence of the judiciary is guaranteed by law (“Political Structure”, 2001).
Members of the Knesset are elected based on a nation-wide proportional representation, and the number of seats which every list receives in the Knesset is proportional to the number of voters who voted for it (“The Electoral System”, n.d.). The only limitation is the 2% qualifying threshold. In other words, a party must receive at least 2% of the votes in order to be elected. According to this system, the voters vote for a party list, and not for a particular person on the list. The numbers of Knesset members who are elected for that particular party are based solely on the percentage of the overall vote that the particular party list received. If a list received enough votes for three members then the first three members off of the list would be elected to the Knesset.
The Judiciary System in Israel is a separate and independent unit within the Ministry of Justice (“The Judiciary”, n.d.). The Director of Courts is appointed by the Minister of Justice and is responsible to the Minister for the orderly operations of the courts.
Civil war in Syria is a major concern for Israel and presents significant political risk (“Israeli Lawmaker Urges Intervention”, 2013). If Syria’s chemical arsenal fell into the hands of anti-militants then this would force Israel into action against militant groups in Syria.
In October 2012 current Prime Minister Benjamin Netanyahu called for early elections and dissolved the current Knesset. The new government is extremely diverse with 12 different political parties represented. This Knesset may prove to be unstable as it is faced with numerous decisions regarding war and national security for Israel.
In September 2012 Netanyahu sent Iran a warning at the United Nations. Netanyahu stated (2013) “Iran must not amass enough uranium at 20 percent fissile purity to fuel one bomb if enriched further” (Balmer, C. & Williams, D., paragraph three).
There is continuing rhetoric between Iran and Israel regarding enriched uranium. Tehran, capital of Iran, denies there is any military component to its nuclear activities. Keeping in step with Netanyahu, Israeli defense and military officials issued clear warnings this month that Israel was still prepared to go to war against Iran alone. On April 16, 2013, Armed Forces Chief of Staff Benny Gantz (2013) said "We will do what is necessary when it is necessary” (Balmer, C. & Williams, D., paragraph 14). Israel going to war with Iran either on its own or with the help of the U.S. is a major political risk for the entire region.
The Palestinian- Israeli conflict ignited this past November with numerous bombs being fired by Hamas into Israeli territory and Israel returning fire to the Gaza Strip and the West Bank (Tamopolsky, N. & Boghani, P., 2013). A ceasefire was reached on November 21, 2012. In early April of this year conflict arose again between Hamas and Israel as three mortar shells were fired at Negev. The Israel Air Force launched airstrikes in response to the attack. It is unlikely that a ceasefire will hold between Hamas and Israel for an extended period of time. It is also unlikely that a two-state solution will be reached between Palestine and Israel in the foreseeable future.
Israel has a small exposure to some of the more risky countries. There is a clear risk of a recession in Israel’s main trading partners in Europe and the United States.
Banks in Israel focus on traditional banking business. Because of this the nonbank financial sector has grown rapidly, playing a large role in credit markets. Israel banks tend to have little business overseas and kept their money in the country.
Funding conditions would become more difficult. Capital could flow to Israel in a search for yield and lead to a substantial appreciation. Direct exposures to vulnerable European countries are very small.
Ongoing regional turmoil could have a more severe impact, especially if of long duration and associated with a large increase in energy prices, inflation, and a reaction of much higher real interest rates around the globe.
Failure in a single institution could weaken the group as a whole. (Look at AIG in the United States).
Israel is surrounded by a highly volatile region. Risks to business from terrorism and war could be great.
Israel has maintained a strict conservative economic policy for the last couple decades, which has allowed it to weather the tenacious financial storm many of Israel’s main trading partners. Israel removed barriers to entry and opened capital movements in order to form a strong and robust economy. Foreign direct investment (FDI) in Israel reached $4.4 billion and $5.1 billion in 2009 and 2010 respectively. By 2011, it had reached a high of $11 billion.
Israel remains in the middle of a religious and politically charged region, with military conflicts and engagements as an ongoing threat to economic and political stability. The Eurozone has entered into a double dip recession, creating more drag on Israel’s exports, thus reducing GDP.
Israel is a key member in various treaties and international affairs
Playing a key role in supporting Israel’s founding in 1948, the United States and Israel are closely bound by historic and cultural ties. The two countries continue to have a thriving relationship, culturally, socially and economically.
U.S. foreign direct investment (FDI) in Israel (stock) was $9.7 billion in 2010 (latest data available), a 4.5% increase from 2009
The Israeli/ US free trade agreement was entered into in August of 1985 (“Israel Free Trade”, n.d.). This agreement eliminates all tariffs for goods exported and imported between Israel and the U.S.
There is no tariff charge as long as a product meets the US Israel FTA rule of origin. That is the product must be at least 35% American and or Israeli in origin (“Tariff and Tax”, n.d.).
An import port fee of 1.1% and an export port fee of .2% is assessed and added to products imported or exported by ship. In addition a VAT (value added tax) of 18% is calculated to all wholesale shipments.
A protective tariff, also known as Tama, is intended to artificially inflate prices of imports and protect domestic industries from foreign competition. A TAMA tax should not apply to children’s toys as they are not a protected category.
As a wholesaler our company would have to seek a license and wholesale taxes would be calculated based on the calculated amount of the shipment.
Must file proper paperwork and work with a licensed importer.
In the early 1990s Israel created a unilateral trade liberalization program to expose domestic industry to foreign competition. Among Israel’s trade policy goals is expansion of international agreements to promote trade; make it easier to access markets and lower non-tariff barriers; improve export and investment infrastructure; make Israel attractive to potential investors; make Israel industry more competitive in domestic and foreign markets (Invest in Israel, 2011).
Among the features of Israel’s trade program: Free Trade Agreements, International R&D Programs, Treaties for the Avoidance of Double Taxation (Invest in Israel, 2011).
Because of Israel’s liberal trade program and openness to foreign investment, as well as favorable treaties between Israel and the U.S., it would seem to be a good country for expansion. The U.S. is Israel’s #1 import and export partner and the two countries have a free-trade agreement that eliminates all import duties and non-tariff barriers between them (BDO Israel, 2013).
Very few toys are actually manufactured in Israel and if they are they are usually manufactured for export.
According to Adi Regev, CEO for Toys R Us, (Levy, 2012)” Israel is practically the only country in the OECD (The Organization for Economic Co-Operation and Development) that relies exclusively on importers of brands” (paragraph 7) Israeli retailers must buy through the importer which means that there’s an intermediary agent who adds several dozen percentage points to products.
The majority of Melissa and Doug products for Infants and Preschool age are high quality wooden products. Fisher Price, Hasboro, and Lego are top brands in Israel but do not offer the same types of products. This means that while we will be in competition with these three major companies our products are different which should help us gain a niche in the market.
Tiny Love, Theora Designs, Taf Toys, and Halilit are all Israeli toy companies (Sarah, 2011). While they will provide some competition for our company they are small in comparison to Lego, Fisher Price, and Hasboro.
Savta’s toys is an online company that sells high quality American toys to Israel (“Melissa and Doug, n.d.)’. These toys can be ordered online at a fraction of the cost that they can be purchased in Israel at no additional costs to the consumer. Savta’s toys offer a select number of Melissa and Doug toys online to Israeli consumers.
Toy and games sales in Israel rack up NIS 930 billion dollars a year (Fiterman, 2011). 50% of the toys stores in Israel are privately owned however the three major chains account for 70% of total toy sales.
Melissa and Doug would do well partnering with Toys R US, Kfar Ha’ Shashuim, and/or Red Pirate and selling their toys through these major chains. Melissa and Doug products are already sold through Toys R Us here in the U.S.
The Israeli government encourages foreign investment in Israel and has created incentives for foreign companies to do business there. There are almost no limitations on foreign investments – subject to security considerations (HLB International, n.d.).
While the country is especially interested in high-tech companies and R&D activities, it offers several incentives to all kinds of foreign business. The Law for Encouragement of Capital Investments, enacted in the late 1950s, was passed to help attract investment, both local and foreign, in an effort to boost the economy (BDO Israel, 2013).
One incentive specifically addresses areas outside of central Israel in order to strengthen those local economies by granting foreign investors and major investments increased tax benefits.
The area, “Priority Area A,” includes the Galilee, Jordan Valley, the Negev and Jerusalem (for high-tech enterprises). Companies investing in those areas are eligible for grants of 20% of the actual investments of the enterprise on: Buildings, machinery and other equipment; Land development expenses; Building renovation expenses (BDO Israel, 2013).
In addition companies that operate in the priority zone get an exemption of income tax on undistributed profits during the first two profitable years and accelerated depreciation for tax purposes.
However, there are benefits in all areas of Israel for eligible companies including: Tax benefits for “Approved Enterprises” granted over a period of 7 consecutive years; Benefits for Approved Property – investments of foreign investors in real estate in Israel; Approved Trade Companies – foreign companies registered in Israel and engaged international trade outside of Israel (BDO Israel, 2013).
Israeli banks offer short- medium- and long-term loans, as well other financing options through bank subsidiaries or affiliates, including installment credit and leasing. Venture capital companies are also a potential source of financing (Kriheli, 2012). In addition, organizations such as the Export-Import Bank of America, the Small Business Administration provide assistance (Embassy of the U.S. - Israel, n.d.).
This is an attractive industry for Melissa & Doug toys as in Israel parents favor children’s products that stimulate their children. There are currently approximately 40 Israeli manufacturers that offer educational toys. Israel is a world leader in this industry. (Israeli Export and International Cooperation Institute, 2011)
The toy market in Israel is worth approximately NIS 930 million ($260 million USD) per year, with about 55 percent of sales derived from brand-name toys. (Levy, 2012)
A Jewish tradition of gift-giving during the holidays spurs demand for selected products. There is a strong market for games and toys as, 30 percent of the Israeli population is under 14.
The average salary in Israel is NIS 7,900 per month or NIS 95,000 per year ($26,000 USD) (israemploy, 2013). Israeli consumers are described as “relatively price-conscious” (Business Monitor International, 2012), so emphasis on value is important to sell to the Israeli market.
GlobalEdge gives Israel’s business climate a rating of A2, which indicates a generally good business environment where corporate financial information is reliable, institutions are generally efficient and the environment is relatively stable.
Israel has a strong infrastructure, facilitating expansion within the country. A “relatively liberal” business environment makes it attractive to foreign investors (Business Monitor International, 2012).
Quick (2010) states "The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms: Exporting, Licensing, Joint Venture, & Direct Investment". Along with these four mechanisms for entry there is also the possibility of a Wholly owned subsidiary.
Exporting for Melissa & Doug would allow them to keep their business as it is right now, but start to bring toys into Israel without actually starting up in the country. Although exporting doesn’t utilize a local presence in the target market, a demand for the products can be generated and further extrapolation is possible with the exported sales.
A Joint Venture would have Melissa & Doug team up with a company(s) a split the ownership between them. This could allow them to team up with a company that is already in Israel and has a footing in the market.
A Wholly Owned Subsidiary would mean that Melissa & Doug would have to purchase 100% of the common stock of an existing company to become the parent company of that company. This could be a very costly way for Melissa & Doug to enter the new market, unless a financially distressed or a new entry firm was available for purchase. Such organizations can be acquired at a substantial savings.
Melissa & Doug could have a Licensing Agreement with a toy company that is already in Israel. This could get the products of Melissa & Doug into the Israel market, but it would be with another company's name on it. Melissa & Doug could make money from the fee that they would charge the other company. This entry provides a reduced risk, but the return and revenue will also be reduced, demonstrating brand name recognition prior to a more heavily vested move into Israel.
A Direct Investment would just allow Melissa & Doug to investing into a company that is already in the market. This could be a great way to make money based off of other companies in Israel, but again wouldn't really help themselves get into the market.
If Melissa & Doug were to start in the market through exporting, one relationship that will build is with custom agents. These are the people that can either help or hinder their business and in which the speed their products can get into the country.
With a possible Joint Venture the relationships that would need to be built is with other toy companies in the country already. They will need to do their research on these companies to see who they would want to work with and make sure they are getting into a smart business partnership.
The other relationships will be with competing companies that are already in the Israel market. Now these relationships might not be positive ones, because Melissa & Doug will be competing with them.
United States politicians, as well as, Israeli politicians are valuable contacts for Melissa and Doug to develop and cultivate. They can provide guidance and support when navigating obstacles in any foreign investment. The US Commercial Service provides similar guidance and assistance that politicians and officials offer, but may be able to develop a supplementary channel of support.
Through exporting, Melissa & Doug can limit the cost of bringing products into Israel because they will be able to use their existing facilities. Also, it would limit the risk of fully entering the market in Israel. This is also a great way for Melissa & Doug to get into the market at a quick pace.
If Melissa & Doug went the route of a Joint Venture with a company that is already in business in Israel, there would be less of a cultural difference or divide between the company and its client. The Joint Venture combines the resources of the two companies, while allowing Melissa & Doug to be viewed as an insider or a company that has been there then it actually has. This could also lead to learning potential for Melissa & Doug from their partnered company.
