Noris Krūzītis, Chief Executive of Latvian Food Retailers Association (LPTA)
The food price hike affects all of as, and in a time when these prices have increased more rapidly than our income, tension in society is an unfortunately natural consequence. However, although some want simple recipes to solve complicated problems, accusing retailers of the food price rise is not only incorrect, but also unproductive.
The government needs to admit mistakes in failing to halt the avalanche of inflation caused by energy resource price surge, which still impacts food prices and residents’ wealth. We have to mobilise efforts to prevent this from repeating. At the same time, we have to start addressing problems that still exist for Latvia’s competitiveness – labour and energy resource costs, growth of manufacturing companies and EU-wide tax practices to support businesses and residents.
Food prices are but the tip of the iceberg
The claim that retailers are the only ones responsible for the food product price rise and that it is their responsibility to dampen the consequences caused by the inflation is just populism. The prices of food in stores are just the visible tip of the iceberg that is composed of numerous and very large processes – starting from a cow in Latgale or wheat in Zemgale, all the way to matters of processing companies’ productivity, energy resource prices and tax policy.
As costs grow in each of these sectors, so do food prices, shocking people in the process. Yes, even us – the food retailers. It was September 2023 when
retailers nearly “went belly up” after receiving their electricity bills
Retailers and their suppliers became hostages of the enormous energy resource hike. Retailers are flooded with requests from producers to increase prices.
Since the crisis retailers have operated in “red regime” to reduce costs wherever they can – stores have become darker, and colder during winter. During summer air conditioners are switched to energy saving regime. And the freezers cannot be switched off at all. No matter how much people talk about retailers’ “appetite”, their profits for 2022, according to published annual accounts, indicate that they have carried the cost increase burden largely on their own. The net profits of the largest retailers is down when compared with previous years. It is around only 2-3%.
Government solves business environment’s challenges too slowly
Similarly how a patient suffering from acute appendicitis cannot be healed with headache pills, the economic challenges that have accumulated in Latvia over the years cannot be resolved by attacking retailers. Prices of goods in stores are directly linked to the decisions made or not made by the government, and Latvian businessmen face many, many problems that impact competitiveness.
We are still stuck in discussions about unbalanced labour force taxes, incapacity for work and general employment-related costs, which remain non-competitive when compared with other Baltic States.
If we cannot resolve something so seemingly simple, yet so important for retailers – the pointless certification of cash register systems for whatever change is requested, which costs thousands of euros and slows technical innovations.
Discussions regarding the improvement of energy improvement support measures should result in specific changes to regulations. For whatever reason, however, unlike other sectors, no support is available for the trade sector.
Energy crisis support
The failure of decision-makers to respond to the energy resource price hike in a timely and wise manner paved the way for unbalanced surge of inflation. While retailers’ profit indexes rapidly went down, a company like Latvenergo, which is owned by the state, raked in record profits from enormous bills sent to both private persons and businesses in 2022. Their profits grew 2.6 times, reaching EUR 183.4 million.
Latvijas Gāze was even more “successful”, increasing their profits by 12.1 times.
Latvenergo’s super profit clearly shows the government had more room to maneuvre when it comes to reducing the negative impact of energy resource prices. It would have slowed the price rise for both producers and retailers, which would have resulted in lower prices for consumers.
And here we have a question for politicians – was the state support policy aimed at reducing the negative impact from the price rise truly successful?
Was there a support plan for businesses that had signed contracts for the supply of electricity at very high fixed prices during the crisis? Fixed electricity prices was exactly the factor that still increases businesses’ costs.
Is it cheap to sell, or is it the opposite?
The challenges of competitiveness and efficiency of Latvian food producers are closely related to the opportunities to reduce food inflation. Currently we have a situation when it is very expensive for store networks to maintain local product offers, and
they have to make unpopular choices
between cheaper products or more variety of local products. For example, members of LPTA report that in recent months they received only a small number of requests to reduce prices – retailers continue mostly receiving information about suppliers about increasing prices.
Most complaints about high prices are received by networks that have a wide variety of local products, rather than those that sell mostly Lithuanian, Polish or other countries’ produced goods. Selling foreign and cheaper products to improve the general situation and removing a couple of popular local products turned out to be a successful strategy – stores can present lower price levels and avoid attacks from politicians and local producers.
Political pressure from the Ministry of Agriculture is clear, scolding merchants who have always been loyal to local produce. At the same time, the topic of Latvian producers’ competitiveness and government tools to enhance it is not a topic that was discussed sufficiently in the past.
For example, the government could push producers to consolidate so they can enhance their positions and come close to their Lithuanian competitors’ levels of efficiency.
Instead, the desire to see only Latvian goods on the shelves grows into a misunderstood protectionism of local goods, which is demanded by some manufacturers and has political support. Unfortunately, such “taking” on the local market, without trying to resemble and compete with similar companies in Lithuania and Estonia, does not solve the competitiveness challenges of local manufacturers by their very nature.
We want to be like it is elsewhere in Europe, but we don’t want their VAT
Another important topic is the effect the tax policy has on food prices. Often it is the main source for difference in prices between countries. Labour force taxes, excise tax policy for various product groups have a strong impact on the end price of products. However, their policies are composed weighted and long-term.
VAT reduction for food products is one of the ways to help rapidly reduce the cost burden for households. Poland’s example makes it clear. This country’s government set the VAT for food products between 0% and 5% in in 2022. Poland also reduced VAT for fuel from 23% to 8%.
Focused decisions helped ensure price and inflation reduction.
The side effect from this step, which affirms benefit for buyers, is the rapid drop of Polish shopping tourists to Lithuania’s retail stores along the Polish border. Poland is no exception. While the Latvian government categorically resists reducing VAT for food, VAT for food in Germany is 7%, in Luxembourg it is 3%. In Cyprus and Spain VAT for products like bread, eggs and milk have been cancelled entirely until the end of the year.
Latvia has one of the lowest solvency levels in the EU – this is the reason why families have less money for food and children’s education left after paying bills and loans. At times it is easier to mislead residents by telling tall tales about 300% price markups for necessities instead of intensely working on increasing Latvian residents’ welfare and reducing the social burden.
The excuse that reduction of VAT would not reach buyers is unjustified. When Latvia adopted euro or when VAT for fruits and vegetables was reduced from 21% to 5%, retailers and producers demonstrated the ability to lead the VAT drop all the way to the buyers. Submitting detailed reports to the Ministry of Economy and Ministry of Agriculture also helped.
Of course, they can continue demonising a single sector, blaming them for all inflation-related problems. However, this is a sketchy view that acts as a political distraction rather than reducing the inequality currently felt by the Latvian population.
Also read: Electricity tariffs in Latvia to be reviewed in December