PM attacks retail chains over rising prices

[29.10.2007, Ľuba Lesná, NEWS]

Retailers and analysts say criticism is unfair.

The government of Robert Fico is changing the law on retail chains, with the prime minister accusing the country's retailers of price gouging.

"There are practically no effective tools that would limit the abuse of economic power by the chains," he said, as quoted by the Pravda daily on October 15.

"One of the main reasons why the prices of some basic foods went up is the abuse of economic power by some retail chains. It is not right that retail chains keep most of the profit on the goods that are sold."

The head of the Coop Jednota Bratislava supermarket, Adrián Ďurček, strongly denied Fico's criticism.

"The reason for the price increase is neither an attempt to strike it rich, nor speculation," he was quoted in the Sme daily on October 15. "The prices were increased by our supplier, without any chance to negotiate them."

Slovak consumers are already paying more for bread, eggs and milk, and food prices in Slovakia are likely to continue climbing by 10 to 20 percent, the Slovak Chamber of Food and Agriculture said.

Farmers and retailers say shrinking grain stocks, natural conditions, more demand from developing countries and the production of bio-fuel are to blame, leaving them with no choice but to pump up their prices.

"Neither the domestic farmers, nor the food producers are the ones who inflate the prices, but the global market, which Slovakia became part of after it entered the EU," Stanislav Nemec, spokesman of the Slovak Chamber of Food and Agriculture, told The Slovak Spectator.

"We know that the rise in food prices is a global trend," Fico said. "However, we will not allow anyone to try to make a fortune on it."

Analyst Ondrej Dostál, head of the non-governmental M. R. Štefánik Conservative Institute, said it is nonsense to blame retail chains for the rise in prices. Food prices have increased in other countries, not just in Slovakia, he said.

Instead, Dostál thinks retail chains try to keep food prices as low as possible.

"Chains strongly pressure their suppliers so that they can offer their clients the lowest possible prices," he told The Slovak Spectator. "This is evident from the fact that in Bratislava, for example, where the general price level is higher than in other places in Slovakia, food prices are lower than in the rest of the country because there is a bigger number of retail chains."

The head of the Institute of Economic and Social Studies (INESS), Richard Ďurana, agreed that Fico's criticism of the chains is neither true, nor justified.

"Food prices are influenced by many external factors," he told The Slovak Spectator. "We cannot eliminate a lot of them in Slovakia - the low corn yield in Ukraine or Hungary, growing demand from China, using corn for producing bio-fuels, or others."

Ďurana also pointed to the basic rule of business for selling any good or service: the profit margin of every participant in the chain of sale depends on their ability to satisfy clients.

"So an inadequate profit margin is proof that the person has not understood the basic economic principles," he said. "If the prime minister has a suspicion about (retailers) abusing their position on the market, he can file a request for an investigation to the appropriate institution, which is the Anti-trust Bureau."

The way to lower food prices may be cutting the value-added tax, which is 19 percent in Slovakia, Ďurana said.

"The criticism is also absurd for this reason - the state gets a certain 'profit' from every item of food that is sold, amounting to 19 percent," he said.

Fico claimed that Slovakia's euro adoption could be delayed because of the retail chains.

"This is not just about people, but also about the strategic interests of the state," he said. "Moreover, if anyone intentionally increases these prices, they threaten the government's - and the whole country's - goal to adopt the euro in January 2009, as the raising of prices can have a negative impact on the inflation rate."

That line of thinking is completely wrong, Dostál said. When euro introduction is considered, a country's inflation is not evaluated on its own, but in comparison with the inflation in other eurozone countries.

"So the inflation caused by higher food prices in Slovakia will be compared to the inflation in the eurozone, which is affected by higher food prices in other countries," he told The Slovak Spectator.

Ďurana also refuted the prime minister's claims.

"Food makes up less than one quarter of household expenses, so the growth of inflation cannot be blamed on the profit margin of retail chains alone," he said. "But according to bank analysts, the price increase does not represent a threat to euro adoption."

The retailers' representatives also dismissed Fico's criticism.

"We support all legal arrangements that comply with EU legislation," said the president of the Slovak Trade Association, Pavol Konštiak.

But he said it's important that the law does single out specific groups.

"If the law is supposed to apply to the retailers, what about producers or processors?" he said, as quoted in the Sme daily on October 15. "Why do we bypass the processors, and say that it is just retail that is responsible for everything?"

Analysts say Fico's statements imply that he is trying to regulate food prices.

"Attempts to regulate food prices in any way would mean a regression to the status quo before the November 1989 and the Velvet Revolution," Dostál said. "However, it may be that Fico is only trying to get the public's attention, or to scare retailers a bit."

Ďurana said that the best "remedy" for high profits would not be regulating food prices, but rather competition, which tends to push prices down.

"Casting doubts on market mechanisms, which Western countries owe for their current prosperity, sends no positive signals to domestic and foreign investors," he added.

Dostál said Fico confirmed with these statements that "he is a populist inclined to the communist way of thinking".

"He noticed the rising food prices, and he sensed that people did not like it," he said. "In the common knowledge, it is deeply rooted that prices are set arbitrarily by retailers, and that if they increase prices, their aim is to make the biggest profit at the expense of their clients."

The second reason why the PM turned his criticism to retail chains is that Fico's style of politics is based on looking for an enemy and confronting them, Dostál said.

"One time the enemy is private health insurers, the next time it is the pension fund management companies, then it is employers as a whole, and then maybe journalists," he said. "Now, the time has come to attack retail chains."

Article was published in the Slovakia`s English-language weekly The Slovak Spectator.