The Unpalatable Cost of Bringing Down Food Prices

Yes, food does cost more here. But the raft of reforms in process may have unintended effects.

Will we ever be able to bring down the high cost of food in Israel?

Whose fault is it that food costs so much? Is the cost of food in Israel really that high?

Boiled down to the 140 characters you could fit into a tweet: "Food prices are outrageous. They should be low like in America and Europe. Big monopolies are ripping off consumers and the government has to do something about it."

What are we prepared to give up for lower-cost cottage cheese or Coca Cola? The answers are more complicated than the press and politicians would have you believe.

Last week we saw more sword-parrying at the food price monster: A joint Knesset committee approved measures to beef up competition. Among other things, the bill limits Big Food manufactures from taking up more than 50% of supermarket shelf space. It requires supermarkets to update their Internet prices hourly, and bans the industry practice of food manufacturers paying supermarkets for shelf space in new or renovated stores. The antitrust commissioner gets have the authority to disallow new supermarket branches or even order a chain to sell them if he deems them anticompetitive.

Other legislation in process aims to end cartel arrangements for fresh produce and to force closely held companies with food monopolies to release annual financial reports. Meanwhile, the government is studying ways to allow so-called "parallel imports," which ends the practice of exclusive importers.

All of these measures are trying in various ways to achieve the same goal — to increase competition in the food industry, either by encouraging more imports or helping smaller local manufacturers, and to make more information available to the consumers.

Too much information

It's a pity that the Hippocratic Oath isn't administered to politicians because "First, do no harm" would be a useful rule of thumb in devising legislation.

The requirement to post prices online is a case of too much information that few consumers will use or benefit from; however, it will save the supermarket chains a lot of time and effort coordinating prices. Unlike the average housewife, the chains have the time, interest and resources to troll the Internet to see how their rivals are pricing goods.

Likewise, the rule barring food makers from buying shelf space will increase the cost of opening new stores, which will then naturally be passed on to the consumer.

The rule limiting big food makers -- defined as those with sales in excess of 1 billion shekels -- from taking more than half the shelf space in a given supermarket is pointless grandstanding. No company occupies 50% of a supermarket's shelf space. According to a survey taken by TheMarker last week, Tnuva products took up 64% of the dairy case at the Super-Sol Deal branch on Tel Aviv's Yigal Alon Street, but there are long aisles in the supermarket that have no Tnuva products at all, since the company only makes meat and dairy items. Where it counts for the company, Tnuva will still rule the roost.

Even if the antitrust commissioner decides toughen the terms of the law and apply it to 50% of the shelf space in any category, it's not at all clear it would change shoppers' buying habits. One likely scenario is that supermarkets will spend extra time and money constantly re-stocking Tnuva products because there is less space for them while other, less popular brands sit gathering dust.

Monster fish in a small pond

The legislation on food may have its desired effect, but it's unlikely. When you start micro-legislating that you can never be sure how businesses and consumers will respond. Moreover, the problem of food prices is so deeply rooted that the patchwork of reforms being offered almost certainly won't have much of an impact.

Indeed, in many cases – the causes behind high food prices may not have a solution, or a solution worth the cost, which is something no one want to hear.

Israel is a small, relatively isolated economy. Strauss, Central Bottling, Tnuva and Super-Sol seem like giants from up close but by American and European standards they are midgets. Break them up, and we will be trading whatever economies of scale they have for smaller, less efficient producers. Open the market to imports and you risk putting people out of jobs. Crack down on the high price of farm products and you will put those small farmers everyone admires out of business. Allow parallel imports, and you complicate health and safety issues.

Are we prepared to lower the value-added tax on food? It is, after all, a major contributor to high prices, but lower VAT would mean reducing government services or raising taxes elsewhere. How many Israelis are prepared to see non-kosher products imported from abroad given space on supermarket shelves?

While food prices are high in Israel relative to the United States and much of Europe, the gap is probably not as outrageous as the 25% that the Knesset Research and Information Center estimated a few weeks back (its methodology has come under attack by statisticians from Central Bureau of Statistics). In any case, comparing Israel to, say, America using a single parameter like food prices is misleading. Americans may pay a lot less for their soft drinks and steaks, but they get saddled with a lifetime of debt for a college education and healthcare costs eat up far more of their income.

Nevertheless, the cost of living, food included, is indeed high enough in Israel that policymakers, and for that matter business itself, are playing a dangerous game by ignoring it. By most parameters Israelis should be doing well these days: the economy is growing more strongly than most in the developed world, unemployment is at its lowest in decades, the stock market is close to a record high and no one has been left trapped with huge mortgage debt and worthless homes.

Yet Israelis are not consuming like people should be in good times. Take the statistic showing that the value of the average credit card purchase dropped in the last 12 months by 8% to 326 shekels. Or another that found that retail sales were 10% lower in January compared with a year earlier, and 7.5% lower in the first half of February.

American and European consumers are also spending less, but they are coping with economies that suffered a severe recession and since then with sluggish recovery and high unemployment. If Israelis are struggling to make ends meet, it can only be because the cost of maintaining a middle class lifestyle is becoming beyond their reach.

David Bachar
Dan Peretz