A war of words broke out last week between the Hungarian government and Hungary’s largest employer, Tesco Hungary Kft., following the announcement that Tesco will close 13 stores because of laws passed at the end of last year targeting foreign-owned grocery store chains.
The government responded angrily by claiming Tesco’s decision to close the stores and discharge 560 employees from February 2 has nothing to do with some 16 changes to the law and everything to do with the poor performance of its parent company in the United Kingdom.
Now the Hungarian Chamber of Trade and Industry has waded into the public feud, releasing the findings of a report according to which the enormous competitive advantage enjoyed by multinational grocery store chains is responsible for up to 50 shop closures a day in Hungary.
It is not clear at this time who commissioned the report or why. Nor is it clear why the chamber has taken a sudden interest in this topic considering multinational grocery store chains have been present in Hungary for over 20 years.
According to the chamber, in 2013, 16,098 new grocery stores opened and 20,874 closed. During the first half of 2014, 7899 new shops opened and 9462 closed. The chamber projects that this trend will continue because the market for grocery stores and traders is too crowded in Hungary.
The chamber believes the inability of Hungarian grocery stores to compete with multinational companies will result in an exponential increase in shop closures. The study says multinational companies enjoy economics of scale giving them a 5-10 percent price advantage over smaller shops. Furthermore, the fact that 50 percent of the turnover of multinational grocery store chains arises from global contracts with large international producers results in an additional 5-10 percent price advantage over small, Hungarian-owned shops.
The study points out that multinational chains can afford to offer customers services, such as a complimentary bus service, that further increase their competitive advantage. The study further notes that the number of employees per shop square meter in Hungary is significantly smaller in the case of multinational grocery chains, even as they put smaller downtown grocery stores out of business.
It appears that it is not merely individual grocery stores which are affected, but Hungarian-owned grocery chains as well, such as CBA, which experienced a sharp fall in turnover in 2013 (and one suspects 2014) despite managing to open a national tobacco shop at nearly each of its stores.
After four years of steady growth, CBA’s turnover fell by a third in 2013, plunging the company into negative territory.
CBA’s poor performance and excellent political connections may be behind the adoption by parliament of a series of laws at the end of 2014 generally seen as favoring domestic grocery store chains at the expense of multinationals. One law requires grocery stores over 400 sqm to close on Sundays and at night (all of CBA’s shops are under 400 sqm). Another law modifies the so-called grocery chain oversight tax so that it is punitively progressive–the higher the turnover, the higher the percentage of gross revenues it must remit to Hungary’s oversight authorities. In the case of Tesco and other foreign-owned grocery store chains in Hungary, the effective increase in the oversight tax is nearly twenty-fold.
The government insists, however, that such measures have nothing whatsoever to do with the Tesco store closures. The government has yet to comment on the announcement by the German-owned Spar grocery store chain that it is substantially scaling back planned investments for 2015, as a result of which some 600 new jobs will not be created.