Israel Food and Drink Report Q1 2012

Household expenditure has grown over recent years, stimulated by the strong domestic food production industry and high per capita incomes, as well as by the expansion of modern retailing. However, as 2011 has proved more challenging on the economic front, high food prices came under scrutiny, having resulted in public protests. In consequence, major food producers and retailers were forced to reduce prices on selected products, although critics point out that the reductions are insufficient and actually mask the real increase in food prices since the start of the year. Nevertheless, the price reductions are expected to have an effect on both final consumer and supplier prices, making for a more difficult operating environment.

Headline Industry Data (local currency) ?? 2011 per capita food consumption sales = +3.35%; forecast compound annual rate growth to 2016 = +3.92% ?? 2011 alcoholic drink sales = +0.88%; forecast compound annual rate growth to 2016 = +1.05% ?? 2011 soft drink sales = +4.12%; forecast compound annual rate growth to 2016 = +7.19% ?? 2011 mass grocery retail sales = -1.72%; forecast compound annual rate growth to 2016 = +4.06%

Key Company Trends High Food Prices Targeted: Food prices have become a contentious issue, leading to protests and consumer boycotts of some products. In fact, in October 2011, three Israeli companies - Strauss Group, Osem and Unilever Israel - were given a time frame of three weeks to cut their prices by boycott leaders.

However, Unilever Israel also stood accused of announcing ostensible price cuts on its food ranges that are a tiny proportion of actual prices increases during 2011. Additionally, Tel-Aviv-based thinktank Business Data Israel has published a report claiming that Israelis could pay US$1.43bn less annually for food if government, importer, producer and retail profits conformed to the European averages.

Broadening Portfolio: Given that the domestic food manufacturing and most other industry sectors are highly consolidated, key players are looking to broaden their portfolio of offerings. For example, Israeli pharmaceutical firm Teva Pharmaceutical Industries Ltd has recently entered the infant formula market, in partnership with French food processor Groupe Danone SA. The infant formula sector will become part of Teva's pharmaceutical operations and its market value is estimated at US$145mn. The firm aims to win a 15% market share within four years.

Key Risks to Outlook Economic Risks - Downside risks to our forecasts are posted by further weaknesses in the economies of the US and eurozone, which could depress external demand and thus constrain economic growth through a fall in exports. Security Risks - The October 2011 agreement between Israel and Hamas to swap prisoners is expected to do little to promote the peace process between Israelis and Palestinians. Therefore, from Israel's perspective, we foresee an uptick in security risks, continuing stability within the coalition government, and the need to reassess its military strategies. This situation will continue to deter foreign investment, while also undermining business confidence in Israel and also trade links with other countries, especially given the elevated regional risks.

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