By Steven Scheer

JERUSALEM (Reuters) - For generations of Israelis, brand names like Heinz Ketchup, Skippy peanut butter and Kellogg's Cornflakes were a costly luxury -- available in stores but often passed over in favor of cheaper, locally made products.

Now, after decades of coddling domestic manufacturers, Israel is about to revise one of its oldest protectionist policies, allowing freer competition for some food imports in response to public outrage over high prices.

Despite average wages that are 17 percent below its Western peers, food prices in Israel have risen 50 percent since 2000 and are now 20 to 60 percent above the OECD average, with dairy products, eggs and soft drinks particularly expensive.

One reason is that Israel limits competition from imports to protect local producers, a throwback to the socialist principles it was founded on in 1948 and which persist in some areas despite a shift toward a free market economy in 2003.

In a recent report, the Paris-based OECD said Israel's products' markets had low foreign trade exposure and were characterized by oligopolies and monopolies, a situation that directly affects its 8.5 million people.

Israel's cost of living -- an issue that stoked mass protests in 2011 and helped give several reformist parties a foothold in government -- is 20 to 30 percent higher than in Spain and South Korea, respectively. Both countries have a per capita GDP similar to Israel's, the OECD noted.

Under a new food reform, dubbed the "Cornflakes Law", imports of low health risk dry goods such as cereal, rice and pasta will have easier entry access to Israel and will not have to be inspected at ports - which should lower costs even though hefty customs tariffs will remain.


The importer would merely need to declare that the goods meet EU and Israeli health regulations rather than present original documentation from the food manufacturer. The health ministry will then make checks once food is in stores.

Smaller importers and supermarkets will be allowed to "parallel import" products -- such as buying the same brand of pasta from Greece or directly from the original producer in Italy rather than going via the main importer.

The government expects this to lead to competition between companies like Kellogg's <K.N> and Telma, an Israeli maker of cereal that is sold by Unilever <ULVR.L>, and, in pasta, between Italy's Barilla and Israel's Osem, owned by Nestle <NESN.S>.

"The four biggest (food) companies control 35-40 percent of the market," said Amir Reshef, a finance ministry official.

He was referring to dairy group Tnuva, which also produces frozen vegetables and schnitzel, Strauss <STRS.TA>, which sells milk, coffee, ice cream, chocolate and snacks, Osem, a maker of snacks, pasta, drinks and sauces, and Coca Cola Israel <KO.N>.

As a result, both the cost to consumers and the companies' profits have risen simultaneously. "That's a strong indication of a decline in local competition," said Gilad Brand, an economist at the Taub Center for Social Policy Studies.

Food prices have slipped slightly the past two years but the government believes that by making it easier to import, prices of both imported goods and locally produced items will fall much more. Reshef estimates average households will save as much as 900 shekels ($233) a year on food costs.


Some supermarkets have already begun to parallel import goods. The Victory chain last year began to bypass the main importer for brands such as Nutella, Kinder, Barilla and Quaker and sold those items for less.

But while prices in some food categories may come down by double digits, it's too early to say it is a game-changer, said Leumi Capital Markets analyst Gil Dattner.

"Israeli producers are the threatened party unless they can adapt," Dattner said. "But the domestic suppliers are very strong and I don't see their power getting decimated."

"It's not like Walmart is coming to Israel."

Brand, the Taub Center economist, noted food accounts for 16.5 percent of household expenses, on average, and 24 percent for low income earners. He said the food reform is a step in the right direction but doubted there would be a significant boost to the economy since not all food is included.

Meat, dairy, cheese and other perishable food products that require more strict inspection are excluded but Reshef believes the food reforms will be expanded later this year.

Eyal Ravid, the chief executive of Victory supermarkets, sees a win-win for consumers and retailers.

"When you bring prices down, people buy more," he said, adding that supermarkets' operating margins should rise from the current 3 percent. Importers' margins in Israel are about 12 percent.

Major food companies played down the reform's expected impact on their brands.

"I don't see it hurting us," said Osem Chairman Dan Propper, noting that Osem can always bring in more products from its parent Nestle if necessary. "The extra expense of taxation (on imports) will be balanced by lower costs to import so it won't make a difference to the cost of living here."

Unilever, which sells brands like Hellmann's, Knorr, Lipton and Mazola as well as local Israeli-made products, said the law would require both suppliers and retailers to change the way they operate but welcomed more competition, a position also taken by Strauss.

"More competition is good for everyone and makes you more innovative," a Strauss spokesman said.

(Editing by Philippa Fletcher)