Foreign Brands Struggle to Gain Traction in Israel's Retail Market

Israel's unique geopolitical position as an island economy, lacking significant land-based trade routes despite peace treaties with Egypt and Jordan, contributes to its high cost of living. While the arrival of international brands often sparks anticipation for market changes and lower prices, genuinely successful examples that have altered Israeli consumer culture, like McDonald's, IKEA, and Decathlon, are rare. These successes often came through franchises rather than direct entry and typically featured higher prices than abroad.

This week, a significant step was taken towards introducing another anticipated foreign player: the British fintech company Revolut received a conditional banking license from the Bank of Israel. While the digital bank One Zero was noted in 2019 as the first new bank in 40 years to receive an Israeli license, it's important to note that several foreign banks, including Citibank and HSBC, obtained licenses between the late 1990s and 2011, though they focused exclusively on corporate clients. One Zero's significance lay in its intention to serve households and small businesses, but its market share remains minimal at approximately 0.15-0.2% of deposits, and it is still unprofitable.

The entry of Revolut Israel, backed by its parent company valued at $115 billion with over 80 million customers globally, could be the competitive catalyst needed for Israeli banking consumers. Revolut's expertise in foreign currency operations, a profitable area for Israeli banks, along with potentially lower trading fees and favorable credit card terms, may force local banks to actively retain customers. However, Israeli consumers have shown little initiative in switching banks, with only about 350,000 customers utilizing the "one-click switch" reform since 2021. Israeli banks have also profited significantly from low interest rates on household current accounts, earning an estimated 9.7 billion shekels annually while families lost out on potential earnings. Revolut's success is not guaranteed, and its timeline to full operation, following the pattern of One Zero and 'Ash Israel', will also test the Bank of Israel's oversight.

Many foreign brands have failed to establish a strong presence in Israel, including Starbucks, Dunkin' Donuts, KFC, Kika, and 7-Eleven. The supermarket chain Carrefour, which launched in Israel in spring 2023 with considerable fanfare and government backing, is also facing difficulties. Its Israeli franchise, operated by Electra Group, primarily rebranded existing stores and added a limited selection of private-label products. Carrefour's prices were not competitive, and its participation in government initiatives did not improve its reputation. The owner of the 'Victory' chain, Eyal Ravid, is seeking approval to acquire a significant stake in the Carrefour franchise, potentially leading to a full merger and rebranding.

Unlike the banking sector, retail faces critical logistical challenges such as delivery speed, warehouse operations, and kashrut compliance, which are significant barriers. While the arrival of major foreign retail chains capable of fostering real competition seems unlikely, a cautious optimism exists due to the increasing adoption of the "bona fide importer" mechanism. This streamlined process allows importers to bypass lengthy approval procedures by declaring compliance with European standards, potentially enabling hundreds of smaller importers to introduce competitive products rather than relying on high-profile brands.