The public has been feeling the last few months very well in their private pockets, with the wave of rising prices crossing sectors – from fuel, through electricity to apartment prices. This is against the background of an inflationary outbreak that characterizes the Israeli economy, as part of a global trend, the reasons for which, among others, are the rising energy prices, delays in the supply chain and the enormous printing of money during the outbreak of the Corona crisis, the results of which are now being felt very well.
However, a review of the financial reports recently published by the major food chains in Israel for the first half of 2022, and even more so, those of their leading suppliers, companies operating in the import and production of food products and toiletries, shows that these absorbed a significant portion of the costs added to them during this period, and avoided So far from rolling them into the consumer’s pocket. This – apparently against the background of fear of a social protest that would accompany a price increase – like the one recently experienced by the importer Diplomat, which asked to raise the prices of its products (and reversed it following that protest).
Revenues increased, gross margins eroded
In the summary of the half-year period, six large suppliers whose shares are traded on the stock exchange showed a 7% increase in their aggregate revenues compared to the first half of last year, and these amounted to NIS 6.7 billion. However, the aggregate gross profit rate eroded and stood at 23.3%, a significant deterioration compared to 28.7% last year. The operating profit rate of the suppliers plunged by more than 50% and constituted only 4.1% of sales in the half, compared to 9.5% in the corresponding period last year.
The closure of the chocolate factory of Strauss and the recall of its products following the salmonella findings that were discovered in it. Excluding Strauss’s results, the aggregate gross profit rate of the suppliers fell between the two periods from 23.9% to 21.3%, while the operating profit rate fell from 8.2% to 6.1% of sales (and eroded by “only” a quarter).
The companies report a number of factors that affected their results, including the increase in the price of raw materials, transportation costs and employee wages. In total, the aggregate operating profit of the six companies amounted to NIS 276 million in January-June 2022 – less than half of the operating profit in the corresponding period (which was approximately NIS 600 million).
Among the food chains themselves, the erosion in profitability was less dramatic. The aggregate revenues of five traded chains (Shufersel, Rami Levy, Yohananoff, Victory and Tiv Taam) increased by 3% and amounted to NIS 14.6 billion. The aggregate gross profit rate decreased from 26.7% in the first half to 25.8%. The rate of operating profit from sales decreased from 5.6% to 4.5% and the combined operating profit of the five totaled NIS 657 million – a 17% decrease. The double-digit decrease was mainly due to increases in the current costs of the chains, both in employee wages and in transportation costs due to the increase in fuel prices.
afraid of public pressure
The suppliers whose results are presented below include the importer of food products and toiletries Diplomat (operation in Israel only); the food importer Wilifod; The manufacturer of Sano toiletries; The manufacturer of Strauss food products (its operations in Israel only), the manufacturer and importer of netto Melinda food; and the Agricultural Produce Marketing Company in Kori Sade. As mentioned, these recorded an increase in aggregate revenues in the first half of the year – but their gross and especially operating profitability rates shrank significantly.
Among the main reasons for this, as mentioned, was the ever-increasing public pressure on the suppliers, every time they signal that they intend to raise prices, while their expenses increase and erode their profitability. In addition, an unusual event unrelated to the wave of price increases – the closing of the chocolate factory of the local food giant Strauss, which brought the company to an operating loss in its local operations, a fact that played a significant role in skewing the aggregate financial results.
As mentioned, Strauss was the negative “story” of the first half of the local food market, and a review of its financial statements shows a shift from an operating profit of NIS 237 million in its local operations in the first half of last year, to a loss of NIS 26 million in the first half of this year, attributed to a recall in the candy division.
Another large supplier that suffered a significant erosion in its profits is Snow , controlled by the Landsberg family, whose operating profit fell by 37% to NIS 93 million in the first half of 2022, with the company pointing to the rising cost of raw materials that hurt its results. The rate of operating profit from Sano’s revenues was 9.8%, compared to 16% in the corresponding period last year.
Another provider, whose name has recently been in the headlines, is diplomat under the management of Noam Weiman, one of the controlling owners of the company, which imports a variety of leading food and pharma brands, including Starkist tuna, Gillette products and Pampers diapers.
Histadrut signs on shelves with Diplomat products / Photo: Courtesy of the Histadrut
As mentioned, Diplomat provoked great public outrage against the background of its intention to raise the price of its products, and a review of its results shows that the company maintained a gross profitability rate (21.6%) similar to that of the corresponding half of last year, while its operating profitability rate from operations in Israel decreased from 5% in the first half of last year to 4.6% this year.
Diplomat cites, among other things, an increase in sales and marketing expenses, which resulted from an increase in storage and transportation costs as a result of an increase in inventory, as well as various price increases, mainly wages and fuel. This is in addition to an increase in administrative and general expenses, which resulted from an increase in depreciation expenses, trips abroad, an increase in office expenses as well as insurance costs.
The food chains, the largest retailers in the economy whose shares are traded on the stock exchange, recorded as mentioned a smaller erosion in their profit rates, but they also have a significant erosion in operating profit, against the background of the fading of the corona crisis, which hurt demand, and an increase in operating expenses.
A 17% decrease in the aggregate operating profit of the marketing chains, to NIS 657 million (in aggregate, is explained, among other things, by the increase in wage costs in the economy, as well as the increase in transportation prices due to the increase in fuel prices.
The largest chain in Israel, Shufersal , which recently experienced a management shake-up, noticeable negatively in its results, after finishing the first half of 2022 with a gross profitability of 26.4%, compared to 27.5% last year. The rate of operating profit from sales was only 3.4% of the chain’s revenues, compared to 5.2%.
stands out among the networks Rami Levi As someone who managed to maintain its operating profit rate in the first half of 2022, which was 4.9% of revenues, compared to 5% in the corresponding half last year. Since the chain’s revenues grew, its operating profit also rose to NIS 178 million, an 11% increase compared to the corresponding half.