I have tried in another way using regex, but this can be done still more efficiently.

$str = '<businesses>
    <entity name="Retail">
      <description>Products and items available in retail</description
+>
      <product min="0" max="3">
          <description>Product information</description>
        <item name="Title">
          <description>Title</description>
          <text maxlength="80" size="65" />
        </item>
      </product>
    </entity>
    <item name="Patrol">
          <description>Title</description>
          <text maxlength="80" size="65" />
    </item>
    <entity name="Sports">
      <description>Sports Items</description>
      <product min="0" max="3">
        <item name="Title">
          <description>Title</description>
          <text maxlength="80" size="65" />
        </item>
      </product>
    </entity>
</businesses>';

$str =~ s/(<entity)([^>]+)>((?:(?!(?:<product)).)*)(<product (min="[^"
+]*" max="[^"]*")>)/<block$2 $5>$3$4/gsi;
$str=~ s/<\/product>\s*<\/entity>/<\/block>/gsi;
print "$str";
[download]

This gives the following output.

<businesses>
    <block name="Retail" min="0" max="3">
      <description>Products and items available in retail</description
+>
      <product min="0" max="3">
          <description>Product information</description>
        <item name="Title">
          <description>Title</description>
          <text maxlength="80" size="65" />
        </item>
      </block>
    <item name="Patrol">
          <description>Title</description>
          <text maxlength="80" size="65" />
    </item>
    <block name="Sports" min="0" max="3">
      <description>Sports Items</description>
      <product min="0" max="3">
        <item name="Title">
          <description>Title</description>
          <text maxlength="80" size="65" />
        </item>
      </block>
</businesses>
[download]

updated: