Coffee bean prices have been falling and the shekel has been strengthening, so why are Israelis paying no less for a cup of coffee than they did two years ago?
Strauss Group, whose Elite brand is Israel’s best-selling brand of coffee by far, also sells coffee in a host of other foreign markets. In two of those countries, Brazil and Poland, Strauss lowered its retail prices in 2018; in Ukraine, it raised prices but only because the local currency was devalued.
In Israel, Strauss not only didn’t raise prices, it reduced the discount it gives to retailers.
“Strauss has no real competition in powdered instant and Turkish coffee. There are a few smaller players and private labels, but they have small shares and can’t influence the prices,” said an executive for one of the big retail chains, who asked not to be identified.
“Strauss is the one who dictates prices in the market and controls it. Turkish and instant coffee are categories in which the supermarket chains make almost no profit. They’re loss leaders. Strauss hasn’t lowered the price of coffee in Israel for several years,” he said.
Figures for January-July 2019 from Storenext, which tracks retail sales around Israel, estimates that Elite controls 55.4% of the coffee market. The No. 2 brand by Nestle’s Osem, whose Taster’s Choice line has about 26.5% of the market.
Overseas Strauss is often a big player in foreign markets, but has nowhere near that kind of share. In Poland, for example, the company has a 19.5% market share for roasted coffee. In Romania it’s 20.6%, Ukraine 16.1%, Brazil 27% and in Russia just 3.7% of the market.
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In instant coffee, it has 7% of the Russian market, 10% of Ukraine’s, 28.2% of Serbia’s, 31.4% of Brazil’s and 40.0% of Romania’s. Thus, in Russia, Strauss said in its 2018 financial report, it lowered prices for coffee in response to what it called “challenging market conditions.”
Israeli coffee prices have remained unchanged even though the price of coffee beans on global commodities markets have fallen sharply.
The price of Robusta beans, which account for about half of the beans Strauss buys for its coffee brands, prices plunged 31.8% between the start of 2017 and July 2019 in dollar terms. In shekel terms they fell 31.2%. Arabica beans saw a 16.5% drop in dollar terms and 15.9% decline in shekel terms in the period.
Yet, according to data from the Prices website, prices for Elite coffee have been unchanged since the start of 2017. Earnings before interest and taxes have, meanwhile, show a steady increase relative to revenues – from 13% in 2016, to 16.1% to 2018 and 22.2% in the first half of this year.
Strauss, which confirmed the figures reported by TheMarker, also earned higher profit margins in Israel than in other markets. Compared to the 22.2% margin it earned in its Israel coffee business in the first half of this year, Strauss made only 8.8% from its overseas coffee operations on average.
A source at Strauss, who asked not to be identified, defended the company’s pricing policies. But he framed the company’s market dominance locally not in terms of market power but more in terms of brand strength.
“It’s true that our profitability in Israel is higher than other countries where we operate, but in Israel; we’re the No. 1 player – very strong and loved – everyone wants it [Elite coffee] and buys it. Elsewhere in the world it’s not always like that. We operate according to competitive conditions and the prevailing local dynamic.”
He cited Brazil as an example – a market where the competition is especially tough and prices tend to closely follow the price of raw coffee beans in the commodities markets. In the United States and Western Europe, he said, commodities prices have less of an impact.
“Israel is more like the U.S. in terms of market behavior. Nevertheless, the Israeli situation is unique is that Strauss has not increased coffee prices since 2011, and not just with coffee,” he added. A spokesman for Strauss confirmed the price-freeze policy.
In addition to coffee, Strauss makes a line of dairy products, snacks and prepared salads, and operates a joint venture with Pepsico in the U.S. that makes and markets hummus under the Sabra name.
Food makers and other consumer goods manufacturers have been cautious about price hikes since 2011 when an increase in cottage cheese prices spurred a summer of mass protests that led to pro-consumer regulations.
Although Tnuva, Israel’s biggest dairy maker, bore the brunt of the public’s anger over prices, Strauss has also been targeted.
A year after the social-justice protests, a media firestorm occurred when an Israeli uploaded a picture of the company’s popular Pesek Zman candy bar showing a 69-cent price on it, equal to 2.65 shekels at the time. In Israel, the same bar was selling for 6.29 at Mega supermarkets,
“In recent years we’ve seen prices for some raw materials we use rise, as have other inputs, but we chose not to raise prices, unlike other companies,” he said. “It’s true we are the ones who set the price of coffee in Israel, due to our leading position, but we set for ourselves a policy of not changing prices – not when raw materials and input prices rise and not when they fall.”