VAT Dropped Last Week, but Supermarket Prices Didn't

The country's two largest supermarket chains, Super-Sol and Blue Square, did not lower their prices when the value added tax was lowered by half a percentage point to 16% on January 1, an investigation conducted on Friday by TheMarker has shown. Other businesses, including supermarket chains, also chose not to let their consumers enjoy the VAT reduction.

A check of prices at the two main chains shows that, other than price-controlled products such as milk in plastic bags, eggs and butter - whose prices were indeed reduced - overall, the merchandise is costing the consumer the same as before the VAT change.

The law only stipulates a reduction vis-a-vis price-controlled items, but the failure to lower prices on other goods could damage the chains' image. At a time of fierce competition and economic problems, one would have thought they wouldn't take chances, but Super-Sol and Blue Square apparently made their decision.

In a conversation with TheMarker, one Super-Sol Sheli store manager said: "Why should we lower the prices of all of our merchandise? The law requires us to lower price-controlled products and that's what we did."

Super-Sol, which operates Super-Sol Sheli, Super-Sol Big and Super-Sol Deal, and Blue Square, which runs the Mega, Mega Bool and Mega Ba'ir stores, together constitute about a 57 percent-share of the country's consumer market.

The half-percentage point reduction in VAT, which is effectively a drop of 0.43%, amounts to a few agorot in most cases. For the chains, however, this means tens of millions of shekels that they gain by not lowering prices and paying a lower VAT rate to the state. So, for example, 0.43% of Super-Sol's 2008 sales of almost NIS 11 billion would come to NIS 47.6 million. Blue Square's 2008 revenues were NIS 7.5 billion, so the comparable savings to the chain would be NIS 32.4 million.

It's possible that the chains decided not to lower prices because of the cost involved in doing so. Many businesses complained that the decision was hastily instituted, and noted that the cost of changing price stickers, which primarily means personnel-related expenses, amounts to hundreds of thousands or even millions of shekels.

The stiff competition between the chains in the past year, in addition to the general economic situation, spurred some price reductions. Indeed, according to the Nielsen market research firm, in November 2009, average prices were down 2%, compared to November 2008.

Super-Sol and Blue Square both declined to comment.