Three years ago the Israeli public woke up to a nearly wall-to-wall — and coordinated — hike in the prices of food and beverages. After the social-justice protests of the summer of 2011, everyone thought that food manufacturers wouldn’t dare raise prices so quickly and so sharply, but just a year later they told the public they could hold back no longer — the price of commodities had risen so much they could no longer avoid keeping a lid on prices to the consumer.
The pioneer was Unilever, the fifth-largest consumer products company in Israel. Its Israel CEO at the time, Angelo Trocchia, explained that a severe drought in the United States, China and parts of Europe had caused a shortage of grains and raised corn prices by 60% and wheat by 50%. Energy costs also jumped and the dollar was strengthening, he said. One after the other, large food companies — Tnuva, Osem, Sano, Procter & Gamble, Coca-Cola and Strauss — followed suit with price hikes averaging 6%.
Three years later, the prices of most of these commodities have fallen by tens of percent, but TheMarker has found that Israeli food manufacturers have not responded by lowering prices for their products, and they say they do not intend to, either.
The price of sugar has fallen by 51% over the past three years and by 32% over the past 12 months. The price of soybeans is down 43% in three years and by 20% in the past year, while wheat prices are 46% lower, though only 5.7% in the last year. Coffee has dropped over 30% in three years and rice by 36%. Corn prices may have risen by 4% over the past year, but are still down 53% for the past three years.
In fact, the only important food commodity whose price has risen in the past three years is cocoa, which has jumped 36%, although it has levelled off more recently.
But Israeli consumers are actually paying more today for food. The government’s food price index (excluding fresh fruits and vegetables) was 4.8% higher in June 2015 than in June 2012. Last year food prices stagnated, with a small drop of 0.6%, but many people in the food industry attribute that drop to the fierce competition between the supermarket chains, not to a decision by manufacturers and importers to pass on their savings. The big supermarket chains have seen profits come under pressure: Mega, Israel’s second largest food retailer, is on the verge of bankruptcy; Super-Sol, the largest, is losing money; and even Rami Levy, the biggest discount chain, is showing weaker results.
Rami Levy speaks
“The minute the prices of raw materials fell, the manufacturers should have lowered prices. When the prices of commodities rose, everyone raised prices. It was legitimate, since they had a reason. But now, when commodities prices are falling, they should lower prices appropriately,” said Rami Levy, the owner of the eponymous supermarket chain.
“The manufacturers succeeded in getting through the social protest relatively smoothly,” says a senior executive at a midsized supermarket chain. “Not one of the legislative initiatives after the protests dealt with manufacturers. The Food Law, for example, is a law that didn’t really touch the manufacturers — it’s mostly a burden on the supermarket chains, whether by requiring them to post prices on the Internet every hour, the inability to collect bonuses from suppliers and more.”
Meanwhile, food manufacturers have seen their profit margins decline somewhat but they are reporting double-digit profit growth. The only one who is still trying to deal with the manufacturers is Antitrust Commissioner David Gilo, but he has already resigned, adds the executive, who asked not to be identified.
One of the reasons the manufacturers can leave prices high is the lack of competition. The top five food manufacturers controlled 48.7% of the food and beverage market last year, according to data from the market research company Nielsen. And the final version of the new Food Law did not include a requirement to dismantle the big food monopolies, even though it had been discussed.
Strauss, Tnuva and Tara, Israel’s three largest dairies, recently reduced prices on some dairy products, but they only did so after being reprimanded by Agriculture Minister Uri Ariel for not acting after the ministry reduced raw milk prices. The price of milk went down by 6.5% in July, and as a result the Agriculture and Finance Ministries ordered a 4.6% cut in price-controlled dairy products. The big dairies claimed they lowered their prices irrespective of Ariel’s comments.
The food importers and manufacturers TheMarker spoke to claim prices are influenced to a great extent by the shekel-dollar exchange rate as well as higher salary costs and rising prices for other inputs, such as energy and packaging costs, all of which offset part of the drop in commodity prices. Contracts to import basic commodities are often signed as much as a year in advance, adds one of the large food manufacturers.
One large food importer says manufacturers for whom commodities make up a large part of their costs could lower prices. For instance, soft-drink makers use a lot of sugar, as do bakeries.
A senior executive at a major food manufacturer, who spoke on condition of anonymity, says that even though companies have not reduce their list prices, in practice prices paid by consumers have fallen due to sales promotions and the like.
“We haven’t lowered prices for now, but we also haven’t raised them for a number of years,” says the executive, attributing the policy to the social justice protests and continued public pressure.
‘It’s all nonsense’
A senior executive at one of the supermarket chains rejects these explanations out of hand. “It’s all nonsense, the manufacturers have not increased unit sales. Prices have gone down only because of the competition between chains. The fact is our gross profit margin has fallen significantly, and that of the producers has not,” he says.
Oshik Efraim, who controls drinks maker Pri Hagalil, says there is a difference between large and small food manufacturers. “I can’t lower prices. The cost of trucking and electricity has risen, the packaging law costs us money, property taxes and more don’t let us lower prices.”
“Except for the large manufacturers, the food industry is bleeding. The large companies, which can advertise for tens of millions of shekels, can charge a premium for their products. There’s nothing that can be done, those are the rules of the game,” says Efraim.
He sells 800 grams of frozen peas for 13 shekels ($3.44), while Tnuva’s Sunfrost brand sells the same product for 18 shekels — and it still has an 80% market share. “Consumers see Sunfrost’s ads and prefer it,” he explains.
In addition, industry sources say the world commodity prices do not necessarily reflect the actual price paid for importing the products to Israel. For example, the price of rice on U.S. commodities exchanges does not reflect the price of the Asian rice imported to Israel.
The price of products under price supervision has gone down in recent months, but still less than the fall in commodities prices, in particular wheat. The controlled price of basic bread went down 5% in June after a 4% decrease in 2013, while wheat prices have fallen 46% over the past three years.
Osem says in a statement that a company with thousands of products uses hundreds of types of raw materials. “When one category goes down, another rises dramatically. For example, coffee prices have been relatively stable since 2012, but in comparison cocoa, durum wheat and sesame prices rose,” it says. The shmita sabbatical year in Israel also caused prices for such ingredients as tomatoes in ketchup and cucumbers for pickles to rise, but the company has kept prices unchanged for the past three years, it adds.
Strauss says prices of its main ingredients have risen in recent years — not fallen — but that nevertheless the company has not raised its prices. Israel is the only country where coffee prices have not risen in the last year, claims a company source.
Unilever says some of its inputs, such as cocoa, almonds and other nuts, have risen sharply in price. “In addition, the cost of a product is influenced by other factors beyond raw materials, such as exchange rates and the price of kashrut supervision. Unilever continues to absorb the costs and does not pass them on to consumers, and will continue to do so for as long as possible.”
The Central Bottling Company, the local Coca-Cola bottler, and beverage maker Tempo both declined to comment.