Will Hungary really drive Tesco, Lidl and Aldi out of the country?

The plan for the development of the Hungarian economy and food industry may be the best possible in view of the country's natural characteristics. If EU funds were spent in a more useful manner and more efficiently, Hungary would have an even stronger agriculture and food industry today, said János Lázár, an MP of the ruling Fidesz party, former head of the Prime Minister’s Office (2014-2018) and the Prime Minister's commissioner in charge of “the protection of non-smokers”.

“The government’s future plans also include pushing out foreign retail chains, for which an openly protectionist policy will be pursued," he also told an agricultural conference organised by Portfolio.

"You have to be on the offensive in this one, because there has to be Hungarian national retail, dominance of the market is in [our] own interest,” he added.

Strategic sectors

The retail sector is not the first or only sector where the cabinet strives to see Hungarian ownership in majority, but it is definitely the only one where no progress was made since Prime Minister Viktor Orbán took power for the second time in 2010. Four years ago he said "there are four areas where we must achieve that domestic capital outgrows international capital. These are the media, banks, energy and retail networks. We're done with three, but we came a cropper with the fourth one. Therefore we must resort to working on new ideas. Unfortunately, retail chains are craftier than we are. A few more years, though, and we'll achieve this goal too."

The share of Hungarian ownership has increased greatly in the financial sector, in the media, and in the energy sector. In retailing, however, reports were more about the ailing of local players, their technological backlog and operating difficulties. All this in a period when the economy was soaring, real wages took off and people were spending more and more in stores. 

It seems that the robust economic performance benefited mostly international retail chains over the past few years, as well, despite efforts by the government to erect regulatory barriers for them. The ban on mall constructions remains in effect to this day. 

Economies of scale

It may not come as a shock to anyone that Tesco is the largest retail chain in Hungary, but Lidl has been making great strides too, overtaking Spar and Coop. Tesco and Lidl achieved greater sales revenues with about 200 stores each than Spar with 570 and Coop with nearly 4,500 units. This sends a message that multinational chains operate with economies of scale, and their individual units generate massive turnover, ensuring a wide range of products on offer and strong competition in the sector. In the meantime, local chains are characterised by a fragmented structure, smaller stores, many owners who are often in dispute with each other and smaller efficiency. 

Revenue per employee at discount chains is about three or four times greater than that of the best-performing Hungarian chains, and even foreign-owned supermarkets and hypermarkets are well ahead of local units in this respect. And this signals not only that multinational retail chains operate efficiently, but also that they offer much better pay for their staff. 

Efficiency and high turnover ensure that large chains can offer a larger variety of products and that we don't have to frown when seeing their prices. If, however, we choose a smaller store for our shopping adventure (locally-owned chains usually operate such units), we won't be able to select from a wide array of breads or cheeses, and we might not be happy about the price tags, either. It is what it is because operating costs have be conjured up at lower revenues per employee. 

Takeovers and operation

Some locally-owned companies cheered Lázár's remarks. They were the ones (CBA and Coop) that acquired dozens of Match and Profi discount store networks from the exiting French Delhaize Group in 2012. Wonder if they did turned the takeovers into a success?

Local companies got the networks of the exiting businesses but they failed to bring them to prosperity and successfully compete with multinationals

, a source with in-depth knowledge of the retail sector told Portfolio. "They had every chance but fail to capitalise on it, as they lacked both capital and knowledge," the source added. Even if a great opportunity knocks on your door, you will not necessarily turn it into a success. You need serious capital, all kinds of knowledge, experience and a system of relationships to make and keep a store profitable while selling goods at affordable prices. 

Market players are now whispering that the government wants to put its hands, and as soon as possible, on tesco, the largest player on the local market, while hymns are unlikely to be sung about the breath-taking success of previous takeovers.

Over the past few years, you also find examples of Hungarian stores sold to foreign onwers. László Baldauf, the billionaire founder of Hungarian retail chain CBA sold operating rights to Lidl and Spar, i.e. he sold his business to foreign companies rather than to local ones. 

If there had ever been a powerful local player in the retail sector, it was the CBA/Príma supermarkets owned by Baldauf that have been becoming ever more efficient over the last few decades. The billionaire said three years ago he had offered CBA units to other managers and colleagues and had chosen a foreign buyer because he had considered it to have the most stable future. He said this even though he did support the idea of having the majority of the retail sector in Hungarian ownership. 

It is a great problem for Hungarian companies that because their stores have an inferior efficiency to that of multinationals they cannot be among the best even in terms of capitalisation so they would not be able to operate even Tesco efficiently. The situation is well demonstrated by the fact that the last few years were not about how successfully they were competing with multinationals, rather about how they would survive. Even the raise to the minimum wage presented a huge headache for an increasing share of Hungarian-owned stores. 

Pandemic puzzlement

There's a different approach, according to which it would make sense to have the retail sector mostly in Hungarian hands, as the pandemic taught us that strategic sectors do gain importance. While this is true, the problem arose primarily in health care in respect of personal protective equipment, as the pandemic highlighted shortcomings mainly in this area. And even in this field the emphasis is on striving for diversification. In the first wave of the pandemic, there was a shortage of PPE because a lot of countries simply do not manufacture them. And the lesson learnt is that the objective should be creating a good balance.

Secondly, the pandemic wreaked havoc in manufacturing globally. A disruption of supply chains seriously set back the automotive sector, the manufacture of machinery and electronics, just to name a few examples. The food industry and trade did not suffer such a huge blow, only in countries that were not deeply integrated in global trade. 

The food industry and retail sales passed the hardships of the pandemic with flying colours. Supply remained uninterrupted and only panic buying caused hiccups for a couple of days/weeks after the outbreak in the spring. This shows that local producers and suppliers weathered the storm, while the world-class logistics networks of multinational corporations managed to maintain continuous supply. The retail sector in Hungary comprises both domestic and foreign players, so why would the government want to make a diversified market exposed entirely to local owners?

Online sales

The curfew in the first wave of the coronavirus pandemic complicated the lives of people and businesses alike. Offline sales declined and online sales boomed in the retail sector, mainly as businesses that had offered online sales before stepped up their game. The massive increase in demand caused some delays in delivery but expanding existing systems is a lot easier than setting up new ones. 

Needless to say, the presence of large multinational retailers was an advantage in the sector. They responded to restrictions such as the curfew and mandatory home officing extremely rapidly, as they expanded their existing capacities overnight. 

Zombie apocalypse?

Showing the door to foreign multinationals would not lead to a diversification of food supply. It would have exactly the opposite impact. Such a protectionist measure makes sense only if 

• there are several powerhouse Hungarian businesses that can replace those displaced;
• the country wants to gear up for a zombie apocalypse that would spare only Hungarians. 

As we highlighted above, there are no mighty locally-owned chain stores that could easily take the place of multinationals, as those on the market grapple with fragmented structures and feeble efficiency. 

As for the zombie apocalypse, if global trade ceases to exist and we can rely only on ourselves, well, this might be an argument why the cabinet wants to get rid of foreign-owned chains. The probability of that, however, is just about 0%. 

it is extremely difficult to come up with sound arguments why the country would be better off without foreign retail chains.

Hungarians need Hungarian products!

The main drive might be that the government wants to see exclusively Hungarian products on the shelves. The problem with this goal is that it is daft. Already 80% of goods are locally produced. Former agricultural minister Sándor Fazekes said in January 2018 that "the ratio of import can hardly go any lower because there will always be colonial produce and seasonal imported goods." Yet, the question keeps popping up why there are foreign products on the shelves when they can be produced locally?

For starters, the same quality probably cannot be achieved locally at the same price as on the market of origin. The case could simply be that the locally produced 'replacement' product offers no comparative advantage or that the regulatory/subsidy regime is bad. Or it can also happen that a foreign canned bean producer is the recipient of illegal state aid and that is why it can sell the beans at such low prices. Yeah, it is possible, but cans of beans generally do not constitute a sound argument why a government sends packing entire retail chains, particularly because the operators themselves probably have nothing to do with the bean producer and its illegal state aid. 

Price hikes

If a certain product of given quality cannot be produced locally as cheaply as elsewhere, the solution is exceedingly simple. Force out every foreign retailer that have that product on their shelves, and leave Hungarians with no possibility to choose. From that moment onward Hungarian food producers and traders will not be under any kind of pressure to operate more efficiently and sell their goods at competitive prices. Foreign players would leave, competition would be limited, the choice of products would narrow and prices would go up.  

What Hungary would "gain" by ousting multinational retailers is a less efficient network of stores (price hikes), a less efficient logistics network (price hike), fewer kinds of products on the shelves and smaller competition (price hikes). 

Connecting the dots is easy-peasy. When the raise to the minimum wage causes locally-owned companies a problem, when the gap between their efficiency and that of their multinational peers is wide as the Pacific Ocean, it might not be the idea of the century to try and kick anyone out of the market. 

Conclusion

Taking steps to drive international retail chains out of Hungary in the current situation would not be a rational move. Until there is a competitive local retail chain it is the multinational 'monsters' that ensure relatively low prices and a wide array of goods. The fragmented structure and low efficiency of local players with stores begging for upgrades are no match for the big league. 

As one of our sources versed in the matter put it:

It would take years or even decades to build up a strong Hungarian retail chain.

"Even if Tesco ends up in Hungarian hands, I still do not see the capital position, experience and relevant knowledge by which the new owner would be able to maintain Tesco's leading position among retail chains in Hungary."

As Baldauf had also pointed out earlier, Tesco is being squeezed by the expansion of discount chains. And if a mighty multinational such as Tesco has problems fighting off the likes of Aldi and Lidl, why would a Hungarian owner with less capital and poorer know-how be in a better position?

The country would benefit the most if the government supported the development of farming, the food industry and the retail sector, but not by chopping down the tree under multinationals. The way to go is to let people cultivate lands who know the difference between a rake and a spade, provide assistance to the food industry that increase the processing level of products that would end up on the shelves of stores that meet the requirements of the 21st century. 

Cover photo: MTVA/Imre Faludi