The largest Hungarian-owned food companies can get a chance to make a government-backed takeover bid for the Hungarian subsidiaries of foreign food retail chains. The government intends to keep the profits generated in the food trade in Hungary by crowding out foreign chains, and acquisitions could be one of the fastest ways to achieve this goal.
The current situation in the food retail business in Hungary can be interpreted as a period of calm before the storm, as sooner or later the government will certainly take firm(er) action to change the status quo. It is becoming increasingly clear that the government is determined to curb the predominance of foreign multinationals in the food trade, similarly to the media, banking and energy sectors.
This intention was already expressed by Prime Minister Viktor Orbán several years ago; he added, however, that retail chains are “smarter”, so it may take longer to put domestic capital in a favourable position.
The issue was brought up again by Government Commissioner János Lázár at the end of last year, when he publicly advocated the restriction of foreign-owned food chains.
The fact that Agriculture Minister István Nagy, who does not usually make harsh statements, further strengthened the government position advocated by János Lázár and took a tough stance against foreign ownership, also indicates that the issue is to be taken seriously. In an interview with növekedés.hu, the minister made it clear that he considers the food retail trade to be of strategic importance, adding that today the amount of profit taken out of the country has reached such proportions that "something has to be done".
In other words, the minister finds it objectionable that multinational chains take out a significant part of the generated commercial profit from Hungary, and so it does not land at Hungarian-owned enterprises.
Central Statistical Office (KSH) data show that
the annual retail turnover for food and beverages is around 4,500 billion forints, most of which is generated by retail chains. Previous surveys have also revealed that the market share of foreign-owned hypermarkets, discount stores and supermarkets is around 60-65 percent, while small shops of domestic chains and independent stores generate the rest of the turnover.
Research data show that the largest foreign food chains,
Tesco, Lidl, Spar, Auchan, Penny Market, Aldi or Metro typically reach a profit margin of 3-6 percent on sales,
depending on the size of the stores and the business policy of the brand.
Thus, the total annual profit of the major retail chains exceeds 100 billion forints, most of which comes from food sales.
Although the food chains do carry out expansion and development within the possibilities of the regulatory framework,
experience has shown that the biggest part of the profit is taken out of the country by the owners in the form of dividends.
It has become clear in recent years that the government is not in favour of this practice, so several measures have already been taken to ensure that the profit of foreign chains lands in the domestic budget instead of the owners’ pockets.
Such measures included the introduction or increase of the food chain supervision fee, or the so-called special retail tax, which caused EU disputes leading to a lawsuit in the European Court of Justice. However, these measures were not fully effective, and the chains tried to “adapt” to the stricter regulatory environment by applying “smart” solutions, as the Prime Minister put it, so the government would now prefer to use other solutions to reduce the dominance of foreign chains.
The most reasonable solution would be for agricultural players - farmers and food processors - to take ownership in the retail sector, as this would leave the full profit with the sector, most of which is currently pocketed by retail companies.
According to the most ideal concept, first farmers should acquire ownership in key processing industries, and then the food companies owned by producers should enter the retail business.
The drawback of this version is, however, that it would be a very long process, since farmers would first need to gain strength in order to be able to acquire ownership in the food industry and run the businesses, and later they would have to manage the process of acquiring retail companies.
In order to shorten the procedure, there are suggestions that domestic food companies, which are not owned by farmers but are in Hungarian ownership and already have significant market positions, should make bids for foreign retail chains.
Mostly companies involved in processing so-called primary raw materials such as meat, poultry, dairy or cereals could be considered, because for these companies the safe storage of food products is vital, and these businesses and the sectors they represent are related to most domestic raw material producers.
Although there is no further information on the potential companies or the actual solutions, István Nagy has already explained in recent statements what the potential benefits of curbing store chains could be.
The Minister claims that one of the biggest benefits would be that the profit generated in the trade of food could be spent on further development, which could increase the competitiveness of the food producer and processor industry.
This could be of great importance in the long run, because although agriculture will have huge amounts of resources to spend on development in the coming years, later these subsidies may be cut significantly, so the profit from the food trade could compensate for the possible reduction in subsidies.
István Nagy also drew attention to the fact that economic planning would be more predictable if it was possible to know what the food trade actually needs.
In addition, price fluctuations would become more preventable, and the market could be more easily regulated if a larger part of the retail trade were in Hungarian hands.
Not to mention the fact that this would make it easier to achieve the long-standing goal of the government that the proportion of Hungarian and foreign food products in stores come close to 80-20 percent, which would mean a significant reduction in food imports.
However, the main question remains how Hungarian capital could be quickly brought to the fore in the food trade under the current circumstances, when the market is characterized by established ownership and operational structures.
It could easily happen, for example, that Hungarian companies make their bid for foreign chains in vain, as the owners are not willing to sell.
It is currently hoped, however, that there is a price which could convince the owners to sell their chains. Thus, it is only a matter of preparation and political will that plans to increase Hungarian ownership in the food retail business become implemented.