The Battle Over the Milky

Who’s to Blame for Israel’s High Food Prices?

An old debate has been revived by a Facebook post showing a German version of a popular Israeli pudding — at a third of the price in a Berlin grocery.

Super-Sol
Ilan Asayag

Despite all the media attention lavished on the issue, together with the government committees tasked with solving the problem, it seems the high prices in local supermarkets compared to their overseas counterparts still have the power to shock Israelis who live or travel abroad.

A posting to Olim Leberlin, a Hebrew-language Facebook group targeting Israelis seeking to move to the German capital in order “to escape the impossible, aggressive cost of living in Israel,” that went viral this week raised the issue once again in what may yet be called the “Milky protest.” The posting features a receipt from a grocery store in central Berlin’s Mitte neighborhood showing the cost of a German equivalent of that popular Israeli refrigerated pudding cup with whipped cream — less than a third of the price of a Milky in Israel.

“One of the things we miss the most in Israel is Milky. Notice that the price of the Berlin version of Milky is only 19 euro cents (about 90 agorot). A Milky in Israel at a Rami Levy [supermarket] in an end-of-season sale costs a bit more than 3 shekels,” says the posting. “This isn’t a discount store, but somewhere where you go when you’re missing a few things during the week.”

Rona, who works in high-tech and moved to Berlin three months ago, says it isn’t only Milkys that are cheaper, says she was shocked the first time she went to a Berlin supermarket, a branch of a fairly expensive chain, “and left with milk, [a German equivalent of] Milky and cat litter for under 5 euros, some 20 shekels. In Israel the litter alone would have cost two and a half times that,” she told TheMarker.

Rona, who asked that her last name not be used, says prices in German better reflect manufacturing costs than in Israel. “Products cost exactly what you would expect. Smoked salmon, which comes from the North Sea, costs what a local product should cost. Some fruits and vegetables cost a little more since they’re imported. There are no surprises at the checkout.”

In fact, the price gaps between Israel and other developed economies isn’t as wide as Israelis are wont to believe. A survey covering a range of popular brands sold over the Internet in Israel, Britain and the United States found that Israelis pay much more for beer, spaghetti and canned tuna than their American and British counterparts, but less for brand-name disposable diapers and cola. In addition, Israeli retailers sometimes run good deals, especially before various religious holidays throughout the year.

The problem is the numbers do not take purchasing power into account. A similar survey conducted by TheMarker in 2011 found that when prices were adjusted in relation to hourly wages in each country, even the seemingly cheaper items in Israel were at least as expensive as elsewhere in the world.

While supermarket chains take a lot of the blame for the high cost of living in Israel, the CEO of one large food retailer insisted on Tuesday that the blame lies elsewhere. “The Israeli consumer is being strangled by the high cost of living, but the profitability of the large food manufacturers hasn’t been eroded significantly in the past three years,” said the executive, who asked not to be named.

Dorin Palas, chief analyst for industrials and retailing stocks at the IBI Israel Brokerage & Investments, agrees. Operating profits of Osem remained on average 12.6% of revenues after the 2011 social justice protests, which were sparked in part by the high price of another Israeli dairy dietary staple, cottage cheese. “In its most profitable category — baby foods, snacks and breakfast cereals — profitability rises to about 25%. This is higher than that of other Israeli food manufacturers and even higher than some of the world’s oldest companies,” Palas says.

She presents shows figures from Reuters showing that food companies overseas have lower profit margins. France’s Danone, for example, ended 2013 with an operating profit of 10% of revenues.

Before the wave of social protests three summers ago, Strauss, Israel’s second-largest food manufacturer, averaged operating margins of 11.3%. They subsequently fell to 10.4%, but the company enjoys much higher profits in its key coffee business, where margins are 11.2%. Overseas, Strauss makes do with an 8% margin.

“Commodity prices have been in free fall for the past year, including soy beans, sugar, wheat, corn and more. They fell by an average of 45% from their peak in the middle of 2012, both in terms of the local currency and in dollar terms. Yet, only now are we beginning to see prices crawling downward in the [Israeli] food price index, and that’s because of regulatory pressure and consumer preference. There’s room for lowering prices and it is starting,” says Palas.

“When manufacturers have double-digit operating margins, it means margin are excessive and it needed to be dealt with the same way they dealt with the prices at the end point in the retailers,” said the supermarket CEO.

“We should be asking manufacturers to join the war against the [high] cost of living,” he said. “There are monopolies in Israel that should have been broken up and it hasn’t happened Instead they’re going after the retailers. Why? There aren’t powerful people behind the retailers who stand and fight and block legislation using lobbyists. The [Antitrust] commissioner is employing a double standard: He bans us from opening new branches in areas defined as [noncompetitive] and at the same time fails to deal firmly with the manufacturers.”

Rami Levi, the owner of the eponymous discount supermarket chain, puts part of the responsibility for lower prices on shoppers themselves. “The power is in the hands of the consumer. If the consumer sees a high-priced product she should just say no. If consumers keep buying brands at any price, we will not see lower prices.”

The food manufacturers of course beg to differ. “How will it help if they break up the large [food] groups? If they take Beit Hashita from Osem, will it make pickles cheaper? The opposite, it will only lead to higher prices since they will no longer have the logistics power of Osem behind them. In addition, it is not clear that the ‘parts’ they divest will survive under independent ownership, because that’s what happens to small manufacturers in Israel. We’ll see a lot of people joining the unemployment rolls,” said a senior executive at one of the large food manufacturers, who asked not to be named.

Other factor unrelated to profit margins also factor into high Israeli food prices, such as the 18% value-added tax, kashrut requirements and protections given to farmers.

Another food company executive said food prices have been declining since last November, a trend that has not occurred here for a decade, except for a short period in 2008. Demand is falling and shoppers have become more discerning about price and quality. Many are choosing cheaper products now or cutting back on purchases. He said he doesn’t see prices rising at all over the next year.

Strauss and Tnuva — Israel’s biggest food maker — declined to comment for this report, but Osem maintains that it has preserved operating margins thank to innovation and cost-cutting over the last two years. Meanwhile, the company has refrained from raising prices and or laying off any of its 5,000 employees. A spokesman for the company insisted its profit margins are reasonable by every measure and lower than those acceptable to its overseas peers. Anyone who says otherwise is wrong, he said.

Ruti Levy contributed reporting.