Israel’s largest supermarket chain Shufersal announced on Thursday that it is backing out of a NIS 28 million partnership deal to set up a chain of Dutch-owned international supermarket SPAR stores and import SPAR-branded products, citing regulatory restrictions and changing market conditions.
Under the terms of the initial agreement signed in March, Shufersal was planning to become a shareholder in a newly created joint corporation controlled by Israeli businessman Amit Zeev. As part of the partnership, the joint company was expected to enter into a franchise agreement to operate stores under the SPAR brand, in which Shufersal would have held a 19.9% stake and Zeev the remaining 80.1%.
“Following changing market conditions and regulatory requirements, and in accordance with the estimates we made during the period from the signing of the agreement until receiving the conditional approval from the competition authority recently, the company decided not to complete the deal,” Shufersal CEO Uri Watermann said in a statement.
Shufersal declined to provide any details on the restrictions imposed by the Israel Competition Authority but reports in the Hebrew press cited a 15% cap on the supermarket’s chain’s holding in the joint corporation and a denial of the right to veto decisions, intended to constrain its involvement in the management of SPAR stores. In addition, the competition watchdog limited the permit for the partnership for a period of five years, after which its renewed approval would be reassessed taking potential changes in market conditions in the food retail market into account.
Furthermore the continued weakness of the Israeli shekel against the US dollar and the euro in recent months is making imports of goods from Europe more expensive.
Shufersal was set to open at least 10 SPAR stores in Israel over the next three years at an investment of NIS 28 million, as well as sell private label SPAR products exclusively in its stores, vowing to boost competition and bring down rising food prices. The Dutch-owned chain has 13,600 stores and operates in 48 countries around the world.
“The deal to launch the SPAR chain in Israel was intended to increase competition by importing discounted products for the benefit of the Israeli consumer,” said Watermann. “Shufersal sees its private label brand as a strategic asset and a high-quality consumer alternative to combat the high cost of living in Israel.
Watermann added that Shufersal will “continue to expand its basket of private label products in a variety of categories and support the local industry and small and medium-sized suppliers.”
Shufersal sought to bring the SPAR chain to Israel as the retail chain is facing increasing competition with the entry of French supermarket chain Carrefour and 7-Eleven in Israel. Carrefour and 7-Eleven are set to open hundreds of stores between them in the next few years, which is intended to fuel competition in Israel’s highly concentrated food retail market.
With Shufersal pulling out of the deal for the launch of the SPAR chain, Zeev will be seeking to tie up with another food retail partner.
In June, Rami Levy Hashikma Marketing, one of Israel’s largest supermarket chains, announced that it is seeking to forge a connection with an international supermarket chain, possibly French retail group Auchan. The Israeli discount supermarket chain said that is also mulling cooperation with international retail chains, including French food retailer Casino, and SPAR.
Food prices in Israel have risen 50% over the past two decades and are 25% to 80% above the OECD average, with dairy products, soft drinks, and grain-based products particularly expensive (as of 2017 data, according to the OECD). Some sectors in the local economy suffer from overconcentration, and in the food retail sector, the top three supermarket chains account for over half of the Israeli market, limiting competition and putting upward pressure on prices.
Meanwhile, Israel’s inflation rate accelerated above 5 percent this year, around the highest level since 2008, while local food retailers have been hiking food prices, drawing consumer outrage and calls for boycotts.
At the same time, import tariffs, regulatory bottlenecks, value-added tax costs and kosher restrictions have been keeping out international retail chains. Earlier this year, Finance Minister Bezalel Smotrich sought to lure US retail chain Costco Wholesale Corp. to make a foray into the Israeli market, wanting to fuel competition in the retail food market — an invitation that has not yet been accepted.
Israel’s cost of living is one of the highest among countries in the OECD, which has been generally attributed to a lack of competition among local importers and manufacturers.