2014: The Year Food Industry Suffered Its Worst Indigestion

Sales and prices fell for the first time in a decade as shoppers cut back spending. 2015 may not be much better

Daniel Bar-On

The year 2014 was the worst for Israel’s food industry in at least a decade. Sales have fallen even as manufactures and retailers cut prices, and profits have plunged.

November, the last month for which there are figures, showed little sign that the downtrend is abating. Sales were the lowest in two years, down 5.4% from November 2013. In the first 11 months of the year, they were down 1.7% in shekel terms from the same time in 2013, according to figures from the retail researcher Storenext, which collects data from supermarket checkouts around the country.

The decline came even though the number of mouths to feed – Israel’s population – grew by 2%.

The year 2015 will be filled with new challenges for the industry – the minimum wage is scheduled to rise, the new Food Law goes into effect, new rules requiring supermarkets to post prices online and slower economic growth that will leave less discretionary spending for shoppers.

The slowdown in consumer spending that began at the start of 2014 is likely to continue into next year at roughly the same rate, say industry executives. It is likely to be the first year in 10 – not counting the recession year of 2009 – that supermarkets see no sales growth at all, predicts the market research firm Czamanski Ben Shahar.

Why the sales slump? Retailers have too many outlets with too much floor space. Shoppers simply don’t do enough spending to justify all that retail space, so retailers end up cutting prices to lure them in. Storenext says prices dropped 0.9% in the first 11 months of the year.

For months now, executives at one of the major supermarket chains has insisted that prices will start going up if for no other reason than that retailers will be forced out of business if they remain so low for so long. The day may finally arrive in 2015.

Supermarkets are cutting costs, inter alia by cutting back on branches and floor space. In the industry executives are divided on how this will happen. Some say supermarkets will quietly raise their prices to help lift their profits, while others say the slow economy and slack consumer spending combined with pressure from discounters like Rami Levy and more competition from imports and private labels will keep pressuring prices.

Liat Glazer, an analyst at Excellence Brokerage, says the minimum wage hike slated for 2015 will stop any further erosion in food prices by saddling retailers with higher payroll costs.

“The chains ended 2014 in trouble and they need to prepare for the fact that the problems will grow worse and operating profits will continue to be hurt,” said one supermarket executive, who asked not to be named. “We can’t count on sales and profits to grow. The planned rise in the minimum wage will simply add to the chains’ woes.”

Ben Shahar estimates that between 2004 and 2010, food retailers added 87,000 square meters of floor space while food sales grew at just 1.4 billion shekels on average each year. Sales per square meter dropped from 2,470 shekels a month in 2006 to 2,260 in 2014.

“What that means is they added more square meterage than the market could absorb, so average turnover per square meter fell,” says Meyrav Einstein Siano, a vice president at Czamanski & Ben Shahar. The chains’ newest stores are low-price outlets that generate razor-thin profits. “If this situation continues the chains’ survival is in danger.”

At Excellence, analysts are more optimistic that Supersol, Israel’s biggest food retailer, can gradually lift its operating profitability. Supersol is renegotiating agreements with food manufacturers and importers and building up its private label brands. But it will take time for the retailer to lure back customers who left it for discount chains, and tougher regulation will complicate its recovery, Excellence says.

As Supersol’s strategy signals, the food industry’s troubles encompass manufactures and importers, too. In the first 11 months of 2014, 13 out of the 20 biggest food companies saw sales slip. At Tnuva, the biggest of them all, sales were down 4.2%, at Strauss Group they fell 3% and at Osem 2.9%, according to Storenext.

Nevertheless, food makers are still turning in relatively strong profits, which has caused the supermarkets to insist that food makers aren’t baring the cost of declining retail food prices.

“The impact of the slowdown in the food market is coming relatively late to food suppliers, but we’re sure it won’t pass them over,” said Glazer, citing the appreciation of the dollar, together regulations and the higher minimum wage, all of which will raise the cost of raw materials and production.

Opening the food market to personal imports and so-called parallel imports, where more than one company can import the same product to Israel, will increase competition and force manufacturers to lower prices. “Nevertheless we don’t expect suppliers to be as dramatically hurt at the chains have been today,” she said.