David's Harp / Israel's Poor, Poor Middle Class

Israeli consumers are not just picky, as the boss of Super-Sol moaned this week. They are really scrounging to get through the month.

Itzik Abercohen, CEO of the Super-Sol retail chain, expressed disappointment with his shoppers this week. Speaking at a retailers convention, he bemoaned the fact that consumers are carefully examining prices and buying more of their food at discount chains. The media now routinely examine and compare prices between the chains, pointing readers to the lowest and tipping them off to rip-offs. Merchants and manufacturers have to act with caution if they dare raise prices for fear of setting off the next cottage cheese protest.

Super-Sol saw its same-store sales fall more than 2%. That means that year over year, the same number of outlets generated 2% less income. But it’s not just Israel’s biggest food retailer that’s feeling the pinch: The Israeli consumer is in general is keeping her purse deeply ensconced in her handbag. Retails sales at chain stores have been on the decline since mid-2012 even though the economy was growing fairly briskly and unemployment was more or less stable. TheMarker reported last week that parents are shunning prestige brands of disposable diapers in favor of cheaper, locally made products. The bottom line: People will no longer pay for the prestige of Pampers absorbing their baby’s pee.

Everyone likes to trace the change in consumer attitudes to the social-justice protests in the summer of 2011. Many journalists and activists agree, saying the tent cities and marches of stroller brought about a new class consciousness among the bourgeoisie. They finally realized they were being exploited, not just by their local supermarket, but by the government, organized labor, the Haredim, the tycoons and monopolists.

What can be gleaned from Abercohen's remarks is that the protest did raise consumer consciousness inasmuch as it created a generation of highly suspicious shoppers, who trust nothing and have developed an excessive sense of self-entitlement. Everyone is a thief and prices should always be lower than whatever they are.

But everyone is putting the cart before the horse (or in Abercohen’s case, the cart after the shopper).

Israel’s bourgeoisie didn’t pour out into the streets two years ago to discover they couldn’t get through their month of their salaries. They knew that already. They were protesting out of an inchoate sense that something bigger was wrong and that things could no longer continue as they are.

The Israeli middle class isn’t being quite impoverished, but it is fraying at the edges and there is every reason to believe the process will continue. That’s because the decline is taking place at a time when the economy is growing and unemployment is stable (and for the educated middle class low). Moreover, inflation is moderate and is doing nothing to eat up savings or erode incomes. There are parts of the middle class that are still thriving, diapering their babies in Pampers and shopping at Super-Sol, but they constitute a minority – protected sectors, like workers who belong to public sector labor unions, and those lucky enough to be working for a high-tech firm.

But the core of the middle class – the young families who will be the economy’s workhorses of the next two decades – is in decline, as the Taub Center demonstrated in a report last December. It examined young non-Haredi Israeli-born families over the 15 years through 2010 and found that since 2005 their real income had stagnated and even declined.

Another measure, the income of young families relative to the entire population, exposed an even more distressing decline. In 2005, such families were in the 64th percentile of all Israeli families; by 2010, they had fallen to the 54th. The average young family is worse off that its peers were 15 years ago.

How can this be? Except for a short, barely noticeable downturn in 2008-2009, the last seven years have been an era of steady growth for the economy.

The small answer is that the middle class got big eyes during the good years, coming to expect things that they couldn’t quite afford – home espresso machines, skiing vacations, costly afternoon activities for their children – in expectation that their incomes would keep growing. But Israel never penetrated the upper reaches of the world’s wealthiest economies and the growth in incomes didn’t continue. The Organization for Economic Cooperation and Development puts Israel’s net adjusted household income at $19,672 for 2009 (the latest figure available). In Western Europe, by comparison, households enjoyed incomes of between $23,213 (Denmark) and $30,465 (Norway) that year.

But the big answer is that Israel’s income inequality is among the worst of the OECD nations.

In Israel, the income of the top 20% of the population is $42,338 a year, while the bottom 20% lives on $5,518. In social inequality, the OECD ranks Israel 30th among 35 countries. The percentage of net income Israeli households spend on average on their homes – the biggest thing in a typical family’s budget– is close to the OECD average of 22%, but with home prices rising and a persistent housing shortage, it’s reasonable to assume that figure will grow, eating up other items on the household budget at the expense of a middle-class lifestyle.

For retailers and everyone else serving the middle class, the jig is up. Selling people goods and services at Northern European prices when they are making Southern European incomes and less of those every year is no longer feasible. Consumers aren’t comparing prices because it has become a “national sport,” as Abercohen said, but because they have no choice.

Henry Ford, whose social and political views were generally Neanderthal, had at least one laudable insight: If he was going to mass market his automobiles, there had to be a very big market for them and that could only come from paying salaries high enough for workers to be both producers and consumers.

What has happened in Israel is that the economy was given the medicine of free markets when it came to labor but not when it came to business. The great majority of middle class is now subject to the vicissitudes of the business cycle and to global markets while much of the private sector that serves it is a network of monopolies and near monopolies. Family finances are under pressure but businesses like Super-Sol struggle to respond because they are prisoners of an unfree market. The consumer revolution Ford unleashed with his welfare capitalism is slowly being undone.

Bloomberg