"High food prices not retailers' fault"


Senior Meitav Dash analyst Eran Yunger explains why food costs so much more in Israel than overseas.

As in past years, this holiday season has seen several articles and grocery bills of former Israelis who went shopping where they now live, and reported their smaller bills to the public through the media.

As usual, the articles created a public storm, with severe criticism of retailers and manufacturers. The Minister of Finance appeared on television to promise price controls and lower prices, and things settled down - or perhaps not.

The 2011 social protest began when the price of cottage cheese crossed the NIS 6 barrier, and became part of the housing prices protest. At that time, the food companies responded immediately. The price of cottage cheese fell, as did many other food prices; the Trajtenberg Committee convened; and a socioeconomic cabinet was established. The manufacturers saw their profits drop by 0.5-1% in the short term, advertising was slashed, several companies cut executive salaries, and bonuses were distributed to employees.

All these changes, however, were temporary. Six months later, food prices reverted to their previous level; advertising resumed, albeit less intensively; and press reports waned. On the positive side, the socioeconomic cabinet was created and it was decided that the social consequences of all cabinet resolutions would be assessed. At the same time, consumers noticed no difference in their pockets, and once a year expatriate Israelis proudly present the bills for their supermarket purchases. It has to be said that they are onto something.

Why, then, are food prices lower overseas than in Israel?

Start with the usual punching bag, the food manufacturers and retailers. Five years ago, the operating profits of the supermarket chains were 4-6%. Competition has since become more intense, with new chains appearing on the scene and new branches being built in every available space. The companies' profit margin fell as a result, and currently stands at only 3% in the profitable companies. Some of the companies have even reported losses on stores.

The profits and profit margins of the food manufacturers, on the other hand, have not declined, and are currently at 10.5-13% for the major manufacturers, the global average operating profit margin. Even if we cut the food manufacturers' profits in half, it will not lower food prices by more than 10%.

What makes food prices so high? These are the explanations.

1. VAT. Israel has a uniform VAT rate, 18% at present, for all products other than fruits and vegetables. In many countries, including Europe and the US, there is no VAT on food products, or VAT on food products is especially low, or there is a differential VAT. In the UK, for example, there is no VAT on most basic food products, while basic VAT is levied on products like ice cream, sweets, alcohol, snacks, etc.

2. Customs duties. On the positive side, we note that customs duties on many food products have been reduced in recent years. On the other hand, there are still high tax rates on other products, such as fruits and vegetables, fish, and dairy products. For example, the import tax on dairy products is 55%, and even as high as 60% plus NIS 6.50 per kilo on some products. The import tax on fish is 15%, with a surcharge of several shekels per kilo on some kinds. The import tax on honey is either NIS 17.30 per kilo or 255%.

3. Subsidies. Most countries around the world subsidize growers and farmers, and so does Israel. In contrast to Israel, however, subsidies elsewhere are paid directly to the growers. In Switzerland, for example, the growers are entitled to direct government support, both according to the amount produced and for agricultural equipment, such as tractors. In Israel, on the other hand, the subsidy is rolled over onto the consumer. The price of milk in Israel is composed of a "target price" - the price at which milk is sold from the dairy to the manufacturer. This price includes profit protection for the dairy farmer, and is eventually rolled over onto the supermarket product price.

4. Kashrut. Requirements for kosher certification in Israel mean the loss of over 20% of workdays. A factory that does not work on the Sabbath and holidays, as well as several hours both before and after the Sabbath, has higher operating and per-unit costs. Outside of Israel, this is obviously not the case.

When the steep rise in property tax rates, rent, and real estate prices, and high electricity and water rates are added to all this, it is easy to understand why food prices in Israel are so high.

The real problem is that we have a closed circle before us - a zero-sum game. Customs duties and subsidies are basically designed to maintain domestic product capacity. Furthermore, if we deduct customs duties, VAT, and subsidies from food prices, Israelis will have to make up for the loss of government revenue by paying more for other things. It is a matter of priorities, and some will say, "Let us eat, at least. We'll pay elsewhere, perhaps in health services, perhaps in education, perhaps in defense, perhaps in…"

And maybe, just maybe, the government will find other sources of revenue.

The author is a senior analyst at the Meitav Dash brokerage.

Published by Globes [online], Israel business news - www.globes-online.com - on October 14, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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