Israel's Retail Food Sector Retail Foods Israel
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THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Required Report - public distribution Date: 1/10/11 Israel Retail Foods Israel’s Retail Food Sector Approved By: Julio Maldonado Prepared By: Gilad Shachar Report Highlights: As a net food importer, Israel represents a growth market for U.S. dried and fresh fruits, prepared food products also have potential. The Israeli population reached 7.7 million in 2011. Factors that favor US exports include: the current exchange rate between the U.S. dollar and the Euro, which continues to favor U.S. sales, the expected 4.7 and 3.2 percent GDP growth for Israel in 2011, 2012, respectively, and the Agreement on Trade in Agricultural Products (ATAP) between the U.S. and Israel, all offer opportunities for American agricultural and food product exports to Israel. Israeli agricultural and food imports for the first 10 months of 2011 reached $4.55 billion, up 27 percent from the same period one year ago. Food and beverage products account for nearly 40 percent of imports. Data for the first ten months of CY 2011 shows that food imports from the U.S. increased by 13 percent from the same period one year ago (or from $135 million to $152 million). Post: Tel Aviv Section I: Market Summary Economic and Demographic Situation Israel is a parliamentary democracy of 7.7 million people, of which, 75 percent are Jews (5.8 million) and 20 percent Arab Muslims. Israel hosts 200,000 foreign guest workers from Southeast Asia. The foreign workers mainly work in the agricultural sector and with the elderly, two sectors the Israelis don’t want to work in. Annual population growth is 1.8 percent. Israel’s economy is in better shape today than in 2010, as well as vastly improved compared to 2009. The economy benefitted from the global economic recovery growing by 4.5 percent in 2010. The Bank of Israel is forecasting a 4.7 percent GDP growth in 2011 and a slower GDP growth of 3.2 percent in 2012. During the period of May to August 2011, the growth rate has slowed down in addition to increasing the economic uncertainty. This occurred against the background of the debt crises in Europe, volatility in the financial markets, the fear of a major slowdown in global growth, continuing geopolitical instability in our region and the effects of the social protests in Israel. In addition, the OECD commented that Israel will probably avoid a recession, but the weakening external demand is nevertheless prompting a slowdown in output growth that is unlikely to reverse until the middle of 2012. In its Economic Outlook, the OECD predicts that Israel's GDP growth rate will slow from 4.7 percent in 2011 to 2.9 percent in 2012, and rebound to 3.9 percent in 2013. With a GDP of $200 billion and a GDP per capita of $30,000, Israel is on par with EU member states Greece and Portugal. Prior to the global economic recession (2008-09), Israel grew at an annual rate of 5 percent. Growth almost halted during the crisis, leading to a spike in unemployment. Israel’s unemployment rate declined to 5.5 percent in the second quarter of 2011, the lowest level since 1985 as the economy expanded. Unemployment averaged 6.7 percent (2010), below the Organization for Economic Cooperation and Development (OECD) average of 8.3 percent. Between 1992 and 2010, Israel's unemployment level averaged 8.6 percent. The main economic challenges confronting Israel are: 1) uncertainty regarding the impact of U.S. and European states fiscal deficits on global economic growth and its effect on foreign demand for Israeli Exports 2) inflation’s upward trend pushing up commodity prices. Sociopolitical unrest in the MENA region highlights the importance of Israel as a stable democracy and technologically advanced market economy. Nevertheless, financial markets are increasing Israel’s country risk rating due to continued regional uncertainty. Israel’s economic policy combines responsible budgetary policy with credible and consistent monetary policy. It aims to ensure economic stability through price stability. Chart 1: GDP, Annual Growth Rate, Israel Source: Bank of Israel Israel’s main industrial sectors include electronics, chemicals, machinery, metal, plastics and rubber. Inflation: The Bank of Israel forecasts a 2.6 percent inflation rate in 2011. Inflation may gradually inch upwards to 3.3 percent during the last quarter. Inflation in Israel derives from developments abroad and the valuation of the local housing market. Rising commodity prices will boost inflation worldwide, resulting in higher energy and food costs. Inflation reached 2.7 percent in 2010, remaining well within the price stability target range. Excluding the housing sector, inflation increased by 1.9 percent in 2010. Food Prices: Food prices in Israel increased more than in other countries. The higher increase in Israeli food prices compared to other countries in mainly due to lack in competition in Israel, which increases the intermediate gap. Food prices were the main reason for the social unrest during the summer of 2011. Global agricultural commodity prices increased by an average of 53 percent in 2010 compared to 2009. This suggests that food prices in Israel will again increase. The last time agricultural commodity prices rose this sharply was in May 2008, when they increased by 54 percent. Four months later, food prices in Israel increased by 13.4 percent. Aggressive competition between Israeli retail chains, combined with favorable exchange rates, allowed Israel’s food prices in 2008 to rise slower than the increase in agricultural commodity prices. For example, Shufersal, Israel’s largest retailer, converted some of its stores into discount Deal branches in order to keep prices low. Foreign Exchange Rates: In 2010, the New Israeli Sheckel (NIS) strengthened against the U.S. dollar By 5.3 percent, and by 10.4 percent against the Euro. Compared to the British pound, the NIS rose by 6.4 percent. The 2010 average exchange rate of the U.S. dollar was NIS 3.733 (NIS 3.932 in 2009); while the average exchange rate for the euro was 4.953. In 2010, the U.S. dollar strengthened in comparison to the euro by 4.8 percent and by 1 percent compared to the British pound. Chart 2: U.S. Dollar to Israeli Shekel Exchange Rate Chart 3: Euro to Israeli Shekel Exchange Rate Trajtenberg Committee Report Likely to Enhance Export Opportunities Starting July 2011 through October 2011, hundreds of thousands of Israelis, mainly middle class, protested against the government, demanding improved standards and quality of life. It is common wisdom in Israel that the middle class carries most of the economic, social and security burdens, while other sectors, who gained political power during the last two decades are reaping benefits granted by the state at the expense of the middle class and others. According to the OECD, Israel has the second highest income to poverty rate in the OECD after Mexico, and is well above the OECD average of 11.1%. 39% of Israelis find it difficult or very difficult to live on their current income, well above the OECD average of 24%. The protest started in June 2011 with the “cottage cheese protest”, in which the consumers boycotted cottage cheese after it was found that the price was raised significantly by the dairy companies and the retail chains with no justification. The second sector, that followed the “cottage protest” was the housing renters, who claim that rentals and housing in Israel became unaffordable to most of the young, even those who earn higher than average salaries. The housing protesters established tent camps all over the country – the biggest in Tel Aviv with more than 1,000 tents. The main outcome of the protests was the seating of a committee that has been established as response to the social protests in Israel, the Trajtenberg Committee. The Trajtenberg committee presented its recommendations to Prime Minister Benjamin Netanyahu on September 26, 2011, and on October 9th, the Israeli Government approved the report. The Trajtenberg report is 267-pages long, and outlines a wide array of policy recommendations in 4 main areas: Housing, Lack of Competition, as a result of a few companies that control the Israeli market in almost every sector, including the food sector, combined with high import tariffs. Cost of living (includes local food and agricultural markets) Social services Taxation These recommendations are expected to bring significant change in the economic agenda of Israel in the coming years, including a reduction of the trade barriers in place for imported food and agricultural products. Prime Minister (PM) Netanyahu referred to the Trajtenberg Report as follows: "Approval of the report will allow lowering the cost of living, substantially easing parental education spending and lowering the value of properties. My government is committed to taking the necessary actions for Israeli citizens to lower their cost of living.” Trajtenberg and Custom Tariff Policy According to the government’s decision of Sunday, October 27, 2011, in January 2012 custom tariffs and purchase tax will be removed from a list of imported industrial products that have no competition from local production, i.e. washing machines, air conditioners, electronics and raw materials for the local industry. The progression to a second stage that will involve industrial products that are locally produced depends on the GOI’s success in signing further new Free Trade Agreements (FTA). If the GOI succeeds in signing additional significant FTA’s the custom tariff will be reduced by 15% each year until 2017, when custom tariffs will drop to 0%.