Consumer Purchase and Israel

Introduction of the Study

The number of hypermarkets, supermarkets and department stores has expanded rapidly in recent years. There are more than 200 shopping malls in Israel, and this number is likely to increase once the economy recovers. Large food retail chains with better access to financing have been able to develop large outlets, but small independent retailers remain popular, particularly intercity convenience stores, although there are an increasing number of chains in this sector. Some major foreign retailers are present in the non-food sector although Israeli brands particularly for clothing also have a presence.

Background of the Study

During the 2004-08 economic recovery, and further spurred by purchase tax cuts, Israeli purchases of major consumer durables surged, with demand for more expensive or prestigious brands rising strongly trend that reversed in the downturn. Retail sales (in local-currency terms) began to fall in late 2008 and by as much as 10-15% year on year in early 2009--although they have since recovered. Consumer confidence was affected by the economic downturn and rising unemployment, but credit availability was not as affected as in other developed economies. Over the longer term, the retail sector will become more sophisticated and foreign retailers will begin to expand their networks.

Purchases from open-air markets (which tend to be cheaper than supermarkets) are likely to rise, assuming that the stabilization in the security situation is sustained, but sales from the smaller, specialist chains, such as health-food and organic stores, which expanded strongly in recent years, may stall initially as customers become more price sensitive, before growing more strongly.

Importance of the Study

The unemployment rate in 2008, at around 6%, was low by Israeli standards, but rose to around 8% in 2009 and will fall only slowly. Moreover, many in employment are on low incomes. This suggests that much of the growth in retailing will be at the lower end of the market at least in the medium term. In the longer term, lower taxes and a relatively stable and strong New Israeli shekel will support solid demand for durable goods, such as electrical appliances and electronic goods.

Literature Review

A series of economic reforms has helped to raise private consumption per head markedly in recent years. In 2005 the Ministry of Finance announced a gradual reduction of personal tax rates in 2006-10. Value-added tax (VAT) was reduced from 18% in early 2004 in several steps to 15.5%, in July 2006, although it was raised to 16.5% in mid-2009, before being lowered to 16% at the beginning of 2010. Personal income tax rates were cut (a process that stalled in the downturn but is scheduled to continue), and sharp cuts in the purchase tax on some consumer durables also came into effect from March 2004, particularly on household appliances and electronics.

Major global retailers such as Wal-Mart (US) may consider entering the Israeli market, either by buying up one of the local retail chains or by establishing an independent platform under their global brand name or a local ...