Is McDonald’s the hamburger chain that ate Israel?

That’s what Burger Ranch, the local No. 2 chain, was claiming in a lawsuit seeking to block the U.S. fast-food giant from getting the coveted franchise for Ben-Gurion International Airport.

Burger Ranch withdrew its appeal against McDonald’s and the Israel Airports Authority after the court signaled that it stood little chance of success because it was filed after the competitive bidding for the contract was completed.

But an opinion filed by David Gilo, the former antitrust commissioner retained by Burger Ranch to help with its case, paints a picture of a fast-food burger market controlled overwhelmingly by McDonald’s to the detriment of competition and to consumers.

McDonald’s said in its application for the Ben-Gurion franchise that it operated 186 restaurants across Israel and expected the number to grow to about 200 by 2020. It expects to have 920 million shekels ($262 million at current exchange rates) in turnover this year.

A source knowledgeable about McDonald’s operations says its sales grew 60% in the last three years, about half of that from increased sales in existing restaurants.

Even before it lost the Ben-Gurion franchise, which accounted for a quarter of its turnover, Burger Ranch was distant second to McDonald’s, with just 14.5% of the market in terms of sales last year. It had 57 restaurants with combined sales of 140 million shekels.

The other major contender, Burger King, has just 3%. After giving up on the market six years earlier, Burger King returned to Israel in 2015 with plans to open 50 restaurants in five years. Today it has just seven, with 2018 sales of just 30 million shekels.

Gilo said his analysis showed that McDonald’s, whose local franchisee is Omri Padan, has a lock hold not only on the nationwide market for fast-food burgers but also for scores of local markets within Israel.

Nationwide, McDonald’s accounts for 82.5% of fast-food hamburger sales, according to Gilo’s figures. That is up from an Antitrust Authority figure of 51% in 2003.

Open gallery view Big Mac Attack: The Israeli fast food hamburger market Credit: Israel Antitrust Authority/ David Gilo's estimates

In 117 local markets, as measured by Gilo, McDonald’s are the only fast-food burgers available and in another 165 local markets it operates more than half the restaurants. Gilo says 122 McDonald’s restaurants around Israel offer the only fast-food burger in a particular shopping mall.

“McDonald’s market share has been steadily growing, and much of that is directly related to pushing competitors out of enclosed malls and strip malls,” Gilo said in his report. McDonald’s declined to comment for the record to queries from TheMarker.

Gilo’s calculations assume that fast-food burgers are a discrete market. He doesn’t include casual-dining burger restaurants such as Susu & Sons, Agadir and Moses. He argues that their prices are much higher and they offer table service and a wider menu.

However, Tamir Ben-Shahar, CEO of the market research firm Czamanski & Ben Shahar, doesn’t agree.

“McDonald’s is a monopoly in terms of sales points and the quality of its locations,” he said. “However, defining it as a monopoly is a little problematic because the difference between hamburger and fast-food restaurants is shrinking. We’re seeing the phenomenon of well-known chefs opening popular restaurants and the price gap with the fast-food chains is getting smaller.”

McDonald’s made the same claim in the Burger Ranch suit about how to define the market. Its cites a 2014 Czamanski & Ben Shahar study that estimated McDonald’s at just a 31% share of the wider hamburger market, where it competes with scores of other chains, not just Burger Ranch and Burger King.

But Gilo goes further and argues that McDonald’s market dominance is so great that when it opens a new restaurant in competition with existing Burger Ranch stores, sales at the latter drop precipitously and they often end up closing.

That is what happened at the Habeer Mall in Rishon Letzion after McDonald’s opened a restaurant in May 2012. The nearby Burger Ranch saw its sales drop so far that it eventually shuttered and left the McDonald’s as the sole fast-food burger restaurant,

Gilo said the same thing happened in 2013 at Tzemach, near Lake Kinneret, at Ispro Center in Modi’in and at the Negev Mall, in Be’er Sheva.

Gilo contends that McDonald’s exploits its market dominance to raise prices. To show that, he points to the terms of the Ben-Gurion contract, which allowed the winner to raise prices as much as 10% above its street price. Gilo says the airport franchisee can do that because it has a captive market, similar to McDonald’s in so many places where it is the sole fast-food burger restaurant.

Gilo maintains that McDonald’s pricing power is so strong that two weeks before submitting its Ben-Gurion bid in June it raised prices for many of its menu items, thereby enabling it to build into its bid the assumption it would have higher revenue and therefore bid more for the airport rights.

In fact, the McDonald’s bid of 17.25 million shekels annually was 43% higher than Burger Ranch’s.

McDonald’s says otherwise. It says prices at its restaurants are similar to those at Burger Ranch and that it doesn’t have the market power to raise prices at will. It concedes that it has more outlets and that it’s growing but it doesn’t have the market share Gilo claims.

Its success, McDonald’s asserts, “is due exclusively to the public’s preference.”

As far as the airport contract goes, McDonald’s said it based its sales projections of 54 million shekels in year one and 63.5 million shekels in year five on the basis that it typically has turnover of two to three times that of an average Burger Ranch. It attached an auditor’s statement saying the franchise would be profitable for McDonald’s.

In any case, losing the Ben-Gurion franchise is a serious blow to Burger Ranch, which generated more than a quarter of its annual sales from that single location last year. Losing the franchise not only means the loss of major revenues but will lead to other closings, it says.

In fact, Burger Ranch’s management says that McDonald’s was cognizant enough of the damage losing Ben-Gurion would mean that it was prepared to lose money on the seven-year franchise just to deprive Burger Ranch of it. If that is true and if McDonald’s is indeed a monopoly then it is in violation of Israel’s Competition Law, Gilo says.

That said, Burger Ranch concedes that it remains profitable and that it intends to expand in the coming years, mainly through franchising.