Israel, Land of Plenty. But at What Price?

We don't pay more for our staples, compared with other countries. Shoes, MP3s and other goodies may cost way more

Amir goes to New York twice a year. He loves to bring home gifts. His changing choices over the last 20 years show how Israeli consumers have changed over the the last two decades.

In the early 1990s, Amir brought the newly-introduced Gillette Sensor razors, Nike running shoes with a pink stripe, jeans (Levis of course ), double-cassette tape players, even telephones with built-in answering machines. Sometimes, he'd throw in cans of tuna, which cost double in Israel.

Moran Barak

Back then, his shopping list was long. Israel back then had only two malls - Dizengoff Center and the Ayalon. McDonald's we only heard about, and there was no Home Center. The international chains hadn't arrived, and famous brands were beyond the reach of the average consumer. There were no brand stores like Ikea and Gap.

Rather fast, barriers came down. Chains of popular specialty shops appeared, and Amir's shopping list started shrinking. Last year, he brought his wife an iPod, but today even that can be bought in Israel.

Does this mean he'll be coming back empty-handed?

Probably not. True, almost everything is available in Israel. Every new gadget finds its way here quickly. Our problem is price. It still pays to fill the suitcase before coming home because most items are much cheaper out there.

We went out to check how expensive it is to live in Israel. Does Shlomi from Rehovot spend the same for Ikea's Klippan sofa as Jacques in Paris? And what about Pantene shampoo, Colgate toothpaste and digital cameras? Why does a night at a bed and breakfast place in Ein Hod cost the same as a good hotel in central Manhattan? Is it worth buying that iPod in the United States? Do we really pay much more for electrical appliances and Nike shoes than Americans and Europeans - or does it just seem that way?

Inevitable overdrafts

We keep hearing that prices have crept up without our noticing. True, skyrocketing gasoline prices brought (some ) drivers into the streets in protest, but they are just one of many expenses Israeli households need to absorb every month. Property prices have soared in the last two years: many can't afford a home in the foreseeable future, unless they are "lucky" enough to swing a mortgage that will weigh them down until retirement.

But rent, too, is becoming more daunting. Monthly water bills are no longer a trifling matter, and it's hard to spend less than NIS 200 in the supermarket. If all that isn't enough, it takes years to save up for a car, and childcare devours half the family budget.

According to data from the Central Bureau of Statistics, the Israeli overdraft is unavoidable. In its last survey in 2009, consumption for the average household - 3.3 people with 1.3 breadwinners - was NIS 13,000 a month. Average household income was just NIS 11,354 a month.

Housing was the largest expense, about NIS 3,200 per month; followed by transportation and communication, NIS 2,485; and food, NIS 2,120. Among large cities, Rishon Letzion had the highest average for household expenses at about NIS 15,000 and Bat Yam had the lowest - NIS 9,800. Tel Aviv was highest in per capita expenses at NIS 6,400. That its 400,000 residents find it expensive is obvious.

The international consulting firm Mercer compares the cost of living in 214 cities around the world, using a basket of more than 200 items, and it ranked Tel Aviv 19th in its 2010 survey, making it the most expensive city in the Middle East. Tel Aviv ranks just behind London and Paris (tied at 17th ), and well ahead of New York (27th in the world and most expensive in the U.S. ), Melbourne (33rd ), Barcelona (49th ), and Frankfurt (50th ).

This, however, tells us nothing about how other Israeli cities compare with cities elsewhere sharing similar standards of living. To see how the cost of living in Israel fares against other countries we carried out an extensive price comparison for a broad range of items like appliances, shoes, housing, cars, education and medical care. Avoiding costly cities like London, Paris, New York and Sidney, we looked at less obvious cities - mainly through the websites of stores offering online shopping at competitive prices. In Great Britain, for example, we used a site that compares prices at supermarket chains.

Living on tomatoes

Our shopping list included universal brands like Colgate toothpaste, Taster's Choice, Barilla pasta, Kellogg's cereals, Toblerone chocolates and Pampers disposable diapers, as well as food staples such as milk, bananas, tomatoes, fresh chicken breast and baby food.

In the U.S. almost everything was cheaper, presumably a reflection of economies of scale: In a huge country merchants can get by on smaller margins.

But lack of competition might be another reason, and we all share some blame by clinging to our favorite brands. Israeli men show such strong loyalty to Gillette razors that the brand has monopolized the market, and the company charges more. A package of four Gillette Mach3 Turbo blades costs NIS 60 in Israel: NIS 15 a blade. In the U.S. a pack of five blades costs the equivalent of just NIS 54, or NIS 11 each.

Colgate Total costs NIS 20 in Israel, more than double the price in the U.S., equivalent to NIS 9.

So where do we come out ahead? That would be with vegetables, like tomatoes. Although produce prices fluctuate daily, a kilogram of tomatoes in the U.S. cost about NIS 14 when we last checked, just over twice the price in Israel. Bananas are actually cheaper there, probably because imports from Latin America are cheap. But for sliced chicken breast we spend almost NIS 30 per kilogram while Americans pay 25% less, in all likelihood because ours is kosher.

The comparisons were made taking standard retail prices and didn't include sale bargains. It's important to note that, although there is no federal sales tax in the U.S., all but a handful of states impose a sales taxes ranging from less than 1% to over 10%, though rarely on groceries or prescription medicines, while many localities also have their own sales tax. However, large grocery chains invariably offer their own store brands at up to 30% less than the well-known brands, bringing down the average cost of a shopping trip.

Great Britain is also much cheaper than Israel. Most products cost less there, like razor blades, toothpaste, coffee, ketchup, breakfast cereals, pasta, Toblerone chocolate and deodorant. Besides economies of scale, part of the reason is the vast range of brands available in the British marketplace. Whether the supermarket is a posh Waitrose, a deep-discount Lidl or somewhere in between - Tesco, Asda, or Sainsbury's - every store has a line of products under its own label, usually made by the same companies producing competing brands. The selection is enormous and includes pasta, canned food, milk, breakfast cereal, coffee, tea, fresh meat, cheese, pizza and chips. But some items are still costlier than in Israel, like fresh meat. And the British pay NIS 9 for a kilogram of tomatoes, 50% more than we do.

Israel's high prices are partially a consequence of the shekel's strengthening in recent years. Today, the British pound is hovering around NIS 5.60, down from almost NIS 9 in 2007, so the price of anything listed in pounds is now much lower when translated into shekels. The exchange rate for the U.S. dollar, which almost hit NIS 5 in 2002, was around NIS 4.70 in 2005, and has fallen to under NIS 3.50 this month. The euro, reaching almost NIS 6 in 2007, has been trading at less than NIS 5.

The country closest to us in prices is France. While toothpaste, razor blades, Pantene shampoo and Barilla spaghetti are cheaper there, diapers, tomatoes and fresh chicken are no bargain. This partly has to do with the French delight in the culinary arts, with fresh produce bought in small quantities one meal at a time, so food is usually sold in smaller, more expensive, packages. Still, the French pay less than Israelis for wine and cheese.

One country where prices make ours look puny in comparison is Australia, where almost everything we checked costs more, especially tomatoes, chicken breast and shampoo. The exceptions were Barilla spaghetti, breakfast cereals, Toblerone and Nivea deodorant.

Nivea: NIS 30 in Israel, NIS 12 in the U.K.

Nivea is one example of a product sold at wildly varying prices: A 150 ml can of deodorant costs almost NIS 30 in Israel but just NIS 12 in the U.K., while 200 ml can costs NIS 18 in France and NIS 20 in Australia. Nivea is a German company, and Germany has a free trade agreement with Israel. So it's a wonder the price is so much higher here than in a country like Australia. Dove deodorant is another example, about the same NIS 30 in Israel but just NIS 16 in the U.S.

A six-pack of diet cola in cans costs NIS 24 in Israel and France. In the U.S. we can buy it at just NIS 10, while in Britain it costs NIS 18 and in Australia NIS 32. A liter and a half bottle in Israel sells for NIS 8 while in the U.S. the two liter bottle goes for NIS 6. The Central Bottling Company, franchisee for Coca-Cola in Israel, responded: "Consumer prices are set solely by retailers."

Israelis pay almost NIS 12 for two liters of 3% milk, about the same as in France. In the U.S. it costs NIS 9 and in the U.K. only around NIS 7. Except for a few token import quotas, there is an almost total ban on importing dairy imports into Israel, so the sector is considered non-competitive, and its prices are relatively steep. The Agriculture Ministry presented a comparative analysis showing that costs for Israel's milk-producing dairies in 2009 were 28% higher than in the European Union and 46% higher than in the U.S.

Many products are sold in sales promotions like "two for the price of one." But the need for deodorant, toothpaste or shampoo doesn't always coincide with their timing. Britain's Tesco, the U.S. pharmacy chain CVS and Australia supermarket chain Coles also offer products on sale. Uzi Vizinger, marketing manager at Israel's Superpharm chain, says that price promotions are used more aggressively in Israel than elsewhere. "Almost all our products are on sale," he says. "Prices keep getting lower. Each year we sell more items at lower unit prices."

Competition, anyone?

An Israeli couple who went to the United States with their infant daughter several months ago packed a supply of baby formula, but their luggage didn't arrive with them so they hurried to the local supermarket for more. When they looked at the price, they were in for a shock - 30% more than back home, not at all what they expected.

Baby formula and diapers are not necessarily expensive here, but neither are they dirt cheap. In comparing formula prices it turns out that we spend NIS 90 on a 900 gram container of Similac Advance while in the U.S. the equivalent product costs NIS 120. Some chains there, however, like CVS for instance, carry a store brand version at a price close to Israel's.

The Israeli baby formula market is almost completely dominated by two brands, Similac and Materna. Australia and the U.K. offer three to five competing brands, and the difference is felt in the price. A 900 gram container of the SMA brand there costs much less: NIS 44 to NIS 56.

We also compared Pampers Baby Dry in packages of 42 for size 1 diapers. In Israel these cost NIS 50; in the U.S., NIS 43; in Britain the cheapest price found was NIS 38; while in Australia and France they were more expensive, NIS 56 and NIS 60 respectively.

Diapers are often on sale in Israel, and unit prices drop when buying larger packages. In the U.S. the giant packs are especially popular, with featuring 276 Pampers Baby Dry diapers for $49.99 - equivalent to NIS 0.65 each. The official price for a 72-diaper pack of the same brand in Israel is NIS 70, or a shekel each. In Britain a package containing 96 diapers costs 12 pounds, or NIS 0.70 each.

"In recent years the price of diapers has come down, but at the retailers' expense," says Superpharm's Vizinger. To arrive at a competitive consumer price for diapers, I spend over NIS 70 and sell for NIS 50. Each year we lose ten of millions of shekels on these products. Superpharm also loses money on infant formulas. In order not to lose I would need to sell at prices like in the U.S., NIS 120. There is no competition between manufacturers, but among retailers, so we absorb the discounts, but there's a limit to how much we can lose. In any case there are many promotions, and consumers don't pay the official price. If we didn't offer promotions, we wouldn't sell."

Although more competition in the baby formula market might lower consumer prices, market penetration would be a daunting challenge, even putting aside Israelis' strong brand loyalty: Hospitals charge heavily for access to mothers of newborns.

In comparing the total cost of the basket of products, Australia comes out about 8% more expensive than Israel, France is roughly the same and the U.S. is about 10% less. And thanks to cheap baby products, the gap between Britain and Israel is 35%.

Our dear middlemen

In its selection of durable goods Israel has nothing to be ashamed of, but prices are a different story. We compared those through manufacturers' official websites: Apple, Nike and Dyson; through Amazon; or in specialty stores.

A Canon digital single-lens reflex (DSLR ) camera, model EOS 600D with an 18mm to 55mm zoom lens costs NIS 4,400 in Israel, with Americans paying NIS 3,200; Australians, NIS 3,700; and the British and French slightly less than us.

A comparison for the Asus Eee PC 1015PEM netbook reveals an even greater gulf between prices. Its cost in Israel, NIS 2,088, which is 56% higher than in the U.S. - NIS 1,330. The British pay NIS 1,900; the French NIS 1,660; and Australians about NIS 1,640.

"The key to price disparities is competition. When the population is greater, volume is also a deciding factor," says Nissim Hazan, purchasing manager for the Bug computer store chain. "Israel is considered small. Costs are higher when selling smaller quantities, and we work on tighter margins."

A Dyson dc25 vacuum cleaner that costs us NIS 3,000 is priced at NIS 1,800 in the U.S., just NIS 1,740 in Britain, and about NIS 2,800 in France and Australia. A model CS5200XL Chrome Magimix food processor costs 40% more in Israel than in the U.S., 11% more than in France and NIS 700 less than in Australia. At appliance importer NewPan they explain that price differences between countries are in part because the packaging varies with the types of accessories and attachments included, and that in the U.S. there is no importer or distributor for the company's merchandise, sold directly through the Williams-Sonoma housewares store chain. These stores are considered high-end by American standards. But NewPan assures us that Israel has frequent promotions and discounts whereas in the U.S. the quoted price is final.

Moving on to baby strollers, we note that the Maclaren Techno XT costs NIS 1,499 in Israel. Being made in Great Britain, it is cheapest there, just under NIS 1,000. The U.S. price is NIS 1,150 while in France it's similar to here and in Australia costs NIS 1,900.

A pair of Nike Air Pegasus running shoes will set the Israeli athlete back NIS 600, similar to its price in Britain and Australia and NIS 100 less than in France, but almost double its U.S. price. An iPod shuffle costs NIS 290 in Israel, comparable to France, 26% more than in Britain and 60% more than its NIS 176 price in the U.S.

Eli Mizroch, senior partner at the international strategic consulting firm TASC, mentions another reason for high prices in Israel, beyond sorely lacking economies of scale and concentrated supply. "In some countries products get to the consumer without going through an importer or franchisee, with the manufacturer being in effect the wholesaler," he says. "Here, however, there is an importer or franchisee in almost every field, and the importer's share in the margin is traditionally quite large. In appliances parallel importing is becoming established and is starting to affect prices. But this still isn't significant, partly because the Israeli consumer still places importance on buying through the official importer."

Mizroch adds that although taxes on certain items have gone down recently, like for appliances and cameras, often the full reduction hasn't been passed along to consumers.

In summary, for the entire package of products, including the iPod, Nike shoes, Maclaren stroller, Magimix food processor, Dyson vacuum cleaner, Asus netbook computer and the camera, Israelis will pay NIS 14,000, as in Australia, but NIS 1,000 more than in France and NIS 2,900 more than in Britain. The package costs slightly less than NIS 10,000 in the U.S. so the total cost in Israel is 46% higher than in the U.S. and 25% higher than in Britain.