Food fight

After 11 months of deliberations, the Kedmi Committee – one of several created in the wake of last summer’s socioeconomic protests – has presented its recommendations.

Tasked with combating exorbitant food prices that jack up the average Israeli’s cost of living, members of the committee – head by Industry, Trade and Labor Ministry director-general Sharon Kedmi – have made an important contribution to the ongoing endeavor of improving the efficiency of our markets. Unfortunately, the chances are slim that the key recommendations – slated to be discussed by the cabinet in two weeks – will be implemented anytime soon.

For seven years, Israeli consumers have been subjected to a steady rise in the price of a wide variety of food products. If in 2005, we paid between 10 percent and 20% less than OECD average for a basket of food products; by 2010 we were paying 10% to 20% more. And the reasons for this sharp rise in prices are well known.

A relatively small number of large food-product suppliers and supermarket chains control the market.

For instance, the two main supermarket chains, Shufersal, controlled by IDB Holdings, and Mega, owned by Alon Holdings Blue Square, corner a 64% market share in the retail food market. “The result is an oligopoly,” noted the Kedmi report. “Little competition, few players.”

The solutions are well known also. Steps need to be taken to prevent collaboration between the big food product suppliers and the big supermarket chains.

Shufersal, Mega and other chains must be forced to stop reserving shelf area for Osem, Elite and other large food producers and suppliers.

Also, the Anti-Trust Authority must encourage competition by preventing larger food producers or supermarket chains from buying out small ones. In hindsight, the authority erred when it permitted Shufersal to acquire Clubmarket back in 2005, though its intention was to prevent massive layoffs and to stop creditors from losing money. And the same holds true for Osem’s purchase of Materna in 2007. In parallel, steps must be taken to make it easier for smaller players to enter the market and compete.

Unfortunately, it will be no easy matter to undertake the necessary reforms. Legislation must be passed to enforce the recommendations against buying shelf space and the prohibition against collaboration between the supplier and the retailer. During the long process of drafting and passing this legislation, our lawmakers will be subjected to a sustained offensive by lobbyists who will attempt to dilute the bill.

And even after a law is approved, it will be nearly impossible to prevent subtle collaboration.

To enable smaller players to enter the market, reforms must be made in the way banks make credit available to small businesses. But banks will be loath to change their lending policies. And the streamlining of the licensing process for new business is another obstacle that cannot be solved overnight.

While the Kedmi Committee recommends that more information be made available to consumers about the price and quality of products – including those produced by smaller firms – there is no substitute for advertising on prime time TV. And only the largest firms can afford to air commercials, which inevitably have a crucial impact on consumer behavior.

There is little that the government can do to prevent large firms from spending on advertising or to lower the advertising costs for smaller firms.

The Kedmi Committee’s recommendation to encourage the large supermarket chains to provide their own generic or store brand of products as a means of lowering prices is impractical under the present circumstances. Due to the high level of collaboration with brand-name food producers, supermarket chains are under pressure not to market their own store brand. As a result, generic brands make up just 5% to 10% of the market, compared to as much as 40% in Britain and Switzerland.

While the Kedmi Committee’s recommendations are good in principle, their implementation will be no easy matter. Perhaps another round of socioeconomic protests this summer will put the necessary pressure on politicians to take Kedmi seriously.