Israeli supermarkets were a battleground last year. Discounting was deep and widespread. Consumer distrust, which dates back to the 2011 social-justice protests, remained strong and grocery chains’ pricing and competition policies were monitored carefully by the media. Food prices declined as did sales, even as consumers were otherwise on a spending spree.
A series of health warnings and product recalls spooked the industry. Meanwhile, Mega, once the second-largest chain went bankrupt and was eventually sold off to Yeinot Bitan. And if that wasn’t enough, the government has been introducing reforms to make it easier for imported food to enter the Israeli market, with the hope it will lower prices for the consumer.
Yet in spite of all this, most of Israel’s food retailers somehow managed to boost profitability in 2016 — and they hope to do even better this year. That's the picture that emerged from a panel of some of Israel’s leading industry executives hosted by TheMarker this week.
The days of price wars and blood-letting are over, they said. “The truce that has recently begun to prevail between the chains is bringing improved profitability. Everyone’s agreed not to fight, otherwise we’re all going to die,” said Shmulik Antzel, CEO of Delek Israel, which operates the Menta chain of gas station convenience stores.
Even hinting at tacit understandings in the industry is unwelcome. Eyal Ravid, who heads the Victory supermarket chain, was quick to offer another point of view, suggesting it was the market dominance of Super-Sol Limited that was bringing some order back to the industry. Israel’s biggest grocery chain, Super-Sol has a 17% market share.
“You’re wrong. There’s no agreement about anything, except that there’s one master of the house in this country and that’s Super-Sol,” Ravid responded.
Nevertheless, the supermarket executives said they expected that the era to of steep discounting was coming to a close and expressed the view that the average Israeli consumer is growing less sensitive about prices.
“There’s no need to raise prices but to lower the flame. No shopper will feel a thing,” said Ravid. “Does anyone know how much a product costs except for the retailers themselves? It’s all a matter of psychology, the consumer’s feeling that ‘this is cheap’ or ‘this is expensive.’”
One reason that competition may cool is that Mega was sold more or less intact to one chain rather than its stores being split up among different chains. As a result, competition in particular shopping areas will be less intense that it could have been.
Ravid blamed the government for giving in to labor unions that were concerned that breaking up Mega would come at the expense of its employees.
Reforms approved by the government are supposed to bring down wholesale costs and in many cases grocery chains stock their shelves with low-cost imported goods and private-label products instead of high-priced brands. Does that mean supermarkets aren’t passing on the savings?
“That’s not a relevant question. What do you care how much I profit?” answered Ravid. “We were the first to bring down the price of Listerine in the country. Do you care that we make a 42% profit on it? What interests you is that we sell it at 20 shekels for a half liter.”
Ravid said that if the government’s latest reforms are put into effect, opening the way for freer imports of toiletries, the price of Listerine could go down to 14.90 shekels, but that he could still earn a 42% profit on each sale because the wholesale cost was lower. “Super-Pharm sells it for 44.90 shekels — that should be what you’re comparing it to,” he added.
Aryeh Baum, one of the principles of the Osher Ad chain of discount supermarkets, blamed high prices for food and other consumer goods in Israel on other factors. He had a chance to witness the difference upfront in the past year as he managed the launch of Osher Ad in the United States.
“I spent the last year learning about the U.S. market and I saw that consumer prices are much lower than in Israel,” he said. “Really, there’s a big difference, but gross profit margins for both manufacturers and retailers are about the same in Israel and overseas. I’m not an economist, but I’m guessing that most of the difference is from direct and indirect taxes.”
Baum said he expected that if the government’s marketing-opening measures continue, prices would decline in 2017 even if the food retailing industry abandons its policy of deep discounting.
Ravid said that lower prices would spread to Israeli-made name brands because food industry leaders like Osem, Unilever Israel and Strauss Group would have less shelf space in the supermarkets for their products and would have to cut prices aggressively to preserve their market share.
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