Even a well-publicized investigation by the Israel Competition Authority couldn’t ruin an excellent year for our food retail chains. They end 2021 with the upper hand, record profitability, and the feeling that supermarkets will keep on being the hottest commodity, even after we get out of lockdown.
In November, the Competition Authority dropped a bombshell, calling in for questioning Rami Levy, owner of retail chain Rami Levy HaShikma Marketing, Shufersal CEO Itzik Abercohen, Victory Supermarket Chain CEO Eyal Ravid, and others. The suspicions were dramatic: cartels and price fixing by the retail chains and the major food producers (Strauss Group, Diplomat, and others). But pretty quickly, with each interview and contrary to expectations, the unfolding investigation lost its edge. No smoking gun turned up. The main assumption was and is that the Authority was angry about media interviews and statements by those executives and owners about expectations of price increases - something probably very hard to file an indictment over or prove in court.
In 2020, Covid-19 inaugurated the golden age of the food retail chains. We couldn’t go out to restaurants, and were also locked inside our homes for quite some time. And so, we loaded up our kitchen shelves and refrigerators. But as Covid became routine in 2021, it became clear that the decline in revenue could be offset by streamlining and price hikes - thus raising profits in the supermarket chains' financial statements to new heights.
This revitalization also revived competition over acquisitions. Following an exhausting battle for control, Electra and Israel Phoenix acquired Yeinot Bitan, which itself had also previously acquired a number of Mega supermarket locations. At the same time, Electra announced it would be bringing 7-Eleven to Israel, which will soon open dozens of small branches here. Israel’s fuel companies, which long ago realized they could offer more than fuel and oil, joined the party: Sonol bought the City Market chain, and Paz, which had previously acquired Super Yuda, reported a huge deal to buy Freshmarket for a whopping NIS 2.1 billion.
The operating profit for food retailers explains the influx in part. Profit currently stands at about 5% of revenue (a small chain like Freshmarket recorded extraordinary profitability of 10%), which compares with 2-3% just five years ago. What has changed since then? Shufersal defeated Mega; this control over the market allowed it, and other players later on, to raise prices. At the same time, the chains discovered local grocery stores (makolet, in the local vernacular), which had far higher profit margins. Economies of scale - Shufersal now has more than 300 locations, Victory and Rami Levy are approaching 60 - allow the chains to continually streamline operations and change the balance of threat vis-à-vis the major suppliers, which must absorb global price increases themselves, and can no longer easily roll those onto the chains, and from there to the consumer.
And while, for the most part, the chains are afraid of raising prices and provoking public wrath (potentially sending customers to the competition), the Israeli government recently came to their aid. The new taxes on disposable products, sugary beverages - even the expansion of the Bottle Deposit Law to include large bottles - engendered price increases "because of the government", and made it possible for the chains to raise prices on dozens of other products as well.
Published by Globes, Israel business news - en.globes.co.il - on December 30, 2021.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.