The Ministry of Finance is on the verge of dropping a bombshell on Israeli supermarket chains, which will force them to lose out on hundreds of millions of shekels in profits per year.
A new proposal, which was submitted to the Joint Price Committee of the ministries of finance and agriculture, would require retailers to pass on the manufacturers’ discounts they receive - for food products currently under price supervision - to the consumers.
The proposal further suggests a reduction in the retailers’ margin - the gross profit on goods - on a majority of the foods products whose products are price supervised.
A senior source in the dairy sector told “Globes” that the approval of the proposal would be dramatic. “The sales of supervised dairy products reach NIS 3 billion per year. I estimate that the average discount the chains received through today was 8-10%. If they force the chains to roll the savings on to the consumers, it means hundreds of millions of shekels - which currently stay in the chains’ pockets - will be taken away.”
The source explained the claims of the supermarket chains. “The state is essentially saying that a carton of milk is a basic good and that the seller should only earn NIS 0.45 and not a cent more. If it manages to buy it for cheaper, then it should be cheaper for the consumer - but that severely hurts the retailers.”
Institutionalizing legal discounts,/b>
The State of Israel has traditionally supervised the prices of a wide variety of food products, including bagged milk, milk in a carton, sour cream, whipped cream, white cheese, butter, yellow cheese, bread, eggs, and salt. In practice, the Joint Price Committee, which works on behalf of the state, sets the price at every level in the supply chain.
For example, with a dairy product the committee sets the price for the farmer, the price that Tnuva Food Industries Ltd., Strauss Group Ltd. (TASE:STRS), and Tara use to sell to the supermarkets, and the final price for the consumers.
An examination of the market conducted by an independent accounting firm, Abramson Yoram & Co, on behalf of the Ministry of Finance concluded that “the retailers’ margin on the supervised goods is higher than the margin set by the committee. The chains do not pass on the discounts they receive from the manufacturers to the consumers - choosing to keep it to themselves.”
In one example used by the audit, while the Joint Price Committee set the profit margin on whipped cream at NIS 0.93 - a 17.7% margin - the chains actually earned NIS 1.79 - a profit margin of 34%. Since the price to the consumer did not change, the gap can only be explained by a discount given by the dairy producers - essentially bypassing the price supervision by offering chains whipped cream at a price of NIS 4.76 instead of NIS 5.47.
Will the chains accept the cuts?
The auditors’ report details the average discount received by the chains for each and every product. It is important to note that, as long as the consumer’s price did not change, the discounted arrangements between the manufacturers and the retailers remain completely legal.
And that is what the Ministry of Finance intends to change. The recommendations presented to the Joint Price Committee could have wider implications for the market as a whole. Currently, the supermarkets tend to sell the dairy goods under supervision for discounted prices lower than the ones set by the committee. But if the recommendations are approved, it is likely the chains would lose their incentive to offer lowered prices to consumers.
Furthermore, rolling the discounts on to the consumer would entail revealing all the commercial agreements between the supermarket chains and the producers. Then, if Shufersal Ltd. (TASE:SAE) receives a discount from Tnuva on dairy it would be forced to pass them on, immediately revealing to its competitors that it received the discount from Tnuva - and allowing them to demand the same discount from the producer.
Currently, firms can only guess at the discounts received by their competitors by looking at their reports.
Finally, it is difficult to actually assure that the firms are rolling savings on to the consumers. According to a source in the dairy industry, “today there is supervision on the wholesale price and the consumer price, but the proposal aims to supervise on the profit margin. While today the supervision operation is straightforward, because the dairy producers report their prices to the committee and the consumer price is advertised, the ability to supervise on the profit margin is especially complex.”
To put simply, he explained, “the committee proposes that if the chain receives a discount it should be passed on to the consumer, but the consumer doesn’t know that and there is no body to actually supervise it.”
He further warned that the retailers would not be so easily manipulated. “You cannot enforce lowered profits on one sector and expect that the margins in the rest of the market would remain low. The supermarket chains will simply make up the lost income by raising prices on other goods. They might, for example, raise the price of Bamba to make up for the profits lost on whipped cream.”
Senior officials in the dairy industry also believe that the chains will not accept the cuts and that, if it does pass, they will demand the dairy producers increase their discounts on the unsupervised goods. They claimed the move would actually lead to an increase in prices on unsupervised food items.
Published by Globes [online], Israel business news - www.globes-online.com - on August 5, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015