New Law Aims to Put a Brake on Food Prices, but It Probably Won’t

The Food Law doesn’t address some of the key factors that make Israeli food so costly.

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Reducing VAT on food is a slippery slope.
IllustrationCredit: Ofer Vaknin

Israel’s Food Law, which went into effect this week after a long battle with supermarkets and food makers over the terms of the law, aims to create more retail competition.

Its minimum goal is to moderate the increases of food prices that have pinched consumers in recent years, and perhaps even bring an end to increases altogether. But that, in fact, may not happen.

The law is designed to foment a revolution in the relations between food manufacturers and importers and the supermarkets that sell their products and to prevent the supermarkets from pocketing the discount and other financial incentives they receive from food companies instead of passing them on to shoppers.

Until now the practice has been that when a supermarket chain was given a bonus for meeting sales targets, the cost was covered by raising the price to the consumer. Likewise, when a supermarket chain asked its suppliers to help it cover the cost of opening a new store, or even relocating an existing one to a new site, the cost would be covered by the suppliers by raising shelf prices.

The Antitrust Authority already banned such practices about a decade ago between Israel’s two biggest food retailers – Supersol and Mega – and the 10 biggest food companies. The Food Law expands the ban to medium-sized chains as well, whose market share has grown at the expense of the top two chains. It also bars industry practices that have evolved over the last decade to circumvent the rules.

The supermarket chains are not enamored of the law, and not just because they lose the bonuses. The law demands local competition, within a city or shopping area, not just competition on a nationwide scale as is the case today. One way is by requiring the chains to publish online store by store and bars chains from opening additional outlets where they already have a dominant market share to force out weaker competition.

Many of the clauses of the law carry a criminal penalty, not just a financial one, if violated.

The beneficiaries of the law, besides consumers, are supposed to be small and medium-sized businesses, which have been squeezed in the last several years by an industry consolidation. However, last-minute changes in the regulation written by Antitrust Commission David Gilo roll back some of the benefits.

For instance, big food companies can still stock and arrange store shelves – a practice that enabled them to award themselves the best space – so long as half a supermarket’s shelf space is devoted to products made or imported by smaller companies.

But the Food Law is unlikely to work any magic. A lot of factors go into high and rising food prices, including high imports duties, regulations that make it hard to import food and monopolies in the dairy and poultry sectors.

Research has shown that food prices in Israel have risen faster than in other developed economies. The increases therefore can’t be attributed to high commodities prices, as the industry has often claimed. They also point to higher input costs for water and electricity, but those claims have never been independently researched.

The food makers and importers have blamed the supermarkets for high prices, but the food retailers point to the razor-thin profits, which are about the same as a percentage of sales as their counterparts overseas. But foreign supermarkets invest more in price and shopping experience at their stores, which lower their profits.

One important difference between Israel and other countries belonging to the Organization for Economic Cooperation and Development is that Israeli farm-price supports tend to make local food more expensive. That is because Israel relies more on quotas, price controls and import barriers rather than subsidies.

By one estimate they add a collective 3.7 billion shekels ($950 million) to Israel’s collective food bill.

The Finance Ministry last year sought to address these problems by weakening the power of farm boards over prices and production and use subsidies in place of regulations, but the Agriculture Ministry blocked the effort for now.