Hungarian food is significantly more expensive in Hungary than abroad - why?

From time to time, Hungarians are confronted with cheaper food in shops when travelling abroad than in Hungary.

Given that income levels in most EU countries are better than in Hungary, this in itself may seem surprising, but even more questions arise when we see that a Hungarian product is cheaper in Germany, for example, than it is in Hungary.

It is easy to explain the price advantage of foreign products by taking into account more efficient, larger European manufacturers, but the different pricing of Hungarian products can be confusing, even outrageous for some.

In this article, we follow the fate of a fictitious meat product produced in Hungary at a cost price of HUF 5,000, in the hope of finding some answers.

This imaginary product is an exportable, high-quality good that sells well both domestic and abroad, so we assume that there would be demand for it. Temporary market disturbances, seasonal effects and promotions will not be considered, as these would mislead the comparison.

Efficiency matters here too

Efficiency is not a negligible issue. In professional discussions, it has become a truism that the efficiency of the Hungarian food industry lags behind the productivity of large European producers, which undoubtedly makes it more expensive to do business here.

Moreover, the domestic food industry, which in many cases needs to modernise, faces a higher interest rate environment if it wants to invest and develop.

All this is to the advantage of foreigners, but it only partly explains why a product produced in the home country can be cheaper abroad than domestically.

It is true, however, that the less efficient Hungarian food industry is finding it harder to cope with shocks without price increases

In general, more efficient, higher volume, more diversified and more technologically equipped operators are better able to stick to their prices than the smaller, less efficient producers.

Not only efficiency, but also the strength of competition provides a partial answer: a smaller domestic market with fewer producers gives a greater chance of domestic price increases than a large, more efficient and more diversified European market. We can also venture that higher domestic inflation gives more room for increases, as competitors also raise, and in an inflationary environment, workers are expected to demand higher wages.

Wage levels are no explanation either

Of course, wages in Hungary are still lower than in almost any other country in Europe, which favours domestic manufacturers. This wage gap has historically been narrowing in recent years, but it is still significant. The situation gives domestic producers a competitive advantage over foreign ones, but it still does not explain why the same Hungarian product is cheaper in Germany, for example.

It is the different burdens on sales and, to a lesser extent, on packaging, that are more likely to help to identify this discrepancy. In other words, we have to look at the different economic and regulatory systems.

EPR drives prices up more domestically

In Hungary, a disproportionate factor that increases the cost price is the system of charges for packaging materials, the so-called Extended Producer Responsibility (EPR).

The legislation, which came into force in July last year, is estimated to take around HUF 120 billion out of the food industry - by comparison, this is more than half of the sector's 2021 profit.

The cost of the previously existing product charge has increased many times over under the EPR, and it is also blatantly expensive in Europe. The charge depends on the weight and material of the packaging, but for example, the charge for a small tin can has risen by ten times, from HUF 1.2 to HUF 12 - compared to HUF 2.54 in the Czech Republic and HUF 6.93 in Austria. The same is true for all other packaging materials: whether our fictitious products are shelved in plastic, glass or other containers, the domestic system imposes significantly higher costs on producers than similar regulations in other European countries.

This is mainly to the advantage of foreign producers, i.e. the cost of a meat product made in the Czech Republic is lower than if the same product had been produced in Hungary.

However, the emphasis on the importance of the EPR is not accidental: it is also relevant for the different prices of domestic products that we are more interested in. The basic rule is that the domestic EPR rates apply to the packaging materials used in the production process, but after the actual packaging of the product, the charges depend on where it is sold.

So, if our fictitious product is bought in Hungary, the domestic EPR rate applies, if it is bought in Germany, the lower rate applies.

This also worsens the domestic sales position. In addition, EPR increases the input costs, i.e. the producer can sell abroad slightly cheaper due to EPR even with unchanged margins.

VAT is the largest item

One well-known example of the different burdens that inevitably are imposed on different products in different countries is VAT. Indeed, VAT varies considerably between EU member states and is complicated by the fact that many countries apply reduced VAT rates to foodstuffs for obvious reasons of public and political interest, as well as to whitewash certain product lines. This is also the case in Hungary, where a 5% VAT rate is applied to several product sectors, such as pork and chicken. However, this applies typically to raw materials and possibly to ready-to-eat meat (e.g. minced meat, chicken breast), but not to prepared products such as liverwurst and cold cuts. For the latter, the record high VAT rate of 27% still applies.

This in itself creates significant price differences. Hungary has by far the highest VAT burden on most foods.

The typical VAT rate on food is 7% in Germany, 10% in Austria, just 5% in Poland and zero in Ireland. In the middle of the scale are the Czech Republic at 15%, Slovakia and Serbia at 20%, while in Hungary - with the exception of the above-mentioned product groups - the predominant rate is 27%.

For our fictitious product, the net price of which is HUF 5,000, the VAT in Germany is HUF 350, in Romania HUF 450, in Slovakia HUF 1,000 and in Hungary HUF 1,350. Thus, for a product of the same composition and quality with a net value of HUF 5,000, the tax differential results in the Hungarian price being HUF 350 higher than the Slovakian price, HUF 900 higher than the Romanian price and HUF 1,000 higher than the German price.

If all other factors are disregarded, this would mean that the same product would cost HUF 5,350 in Germany, compared to a domestic price of HUF 6,350.

Of course there is not only VAT, the other additional charges are added on top of this difference. There are plenty of these too.

Constrained retail trade

One of the most important of these factors is the package of burdens on the retail sector, the most important of which is the special tax on the sector. This was already significant, at 4.1%,

and will increase from 2024, to 4.5% for operators with annual turnover above HUF 100 billion.

This includes almost all of the major players in the retail sector, with Lidl, Tesco, Spar, Aldi, Penny Market and Auchan all having turnover several times higher than this level. Coop and CBA also have aggregate results well above the 100 billion mark, but these chains do not operate as a single company but as a network of retailers, so lower rates apply to these chains.

Like it or not, they pass on the cost

For the smallest players, with an annual turnover of less than HUF 500 million, there is no special tax at all, which of course favours these businesses, but - knowing the characteristics of domestic trade - does not have a significant impact on the overall picture, as they account for a much smaller share of turnover than the big players.

For large companies, the total annual retail tax paid exceeds HUF 150 billion, which is an unaffordable cost even for them. The generally accepted margin in the sector is around 1-3%, and if any operator were to try to take on the burden on the grounds of commercial competition, it could essentially kiss profits goodbye straight away and face losses.

It is therefore not too bold to assume that commercial operators will pass on the surcharge one by one. This applies to the net price, so for our fictitious product, this means HUF 225.

Together with VAT, this has already turned a product with a net price of HUF 5,575 into a commodity worth HUF 6,575 - which so far in Germany is still at HUF 5,350. The difference is already HUF 1,225, almost 23%, just because of these two factors.

Risk pricing

The general market sentiment and the bad relationship with the government, which is not only reflected in political statements but sometimes also in regulatory actions, is a burden on retailers that is difficult to quantify. With decrees often issued overnight, unexpected bad news, hostile statements that can sometimes be interpreted as a declaration of war, and general unpredictability, it would be natural for retailers to be more cautious. It cannot be said that there are no examples of this, but given the limited purchasing power of the Hungarian population, the fierce competition and, not least, the undetectability of such "risk pricing", we will leave this factor aside for the moment.

Misguided regulations

However, a much more concrete impact is the previously existing price cap and the current compulsory action scheme. Both schemes have led to a loss for retailers on the products concerned, which they have sought to recoup on other products, a view that is generally accepted in the trade. As András Balatoni, director at the National Bank of Hungary (MNB) pointed out in an earlier technical paper,

the previous food price freezes did not even reduce inflation for substitute products. In the case of fixed-price products, traders passed on the price increases they had missed on to other products in their entirety.

In other words, products that were not named in the rules became more expensive, as operators sought to recover losses incurred elsewhere. For a product with a cost price of HUF 5,000, this effect would certainly also be present.

Health comes at a cost

Although our fictitious meat product is not subject to the public health product tax (NETA), a number of food products are. Commonly referred to, somewhat incorrectly, as the "chips tax", the public charge usually applies to snacks, soft drinks, jams, sweetened cocoa powder, flavoured beers and similar products that contain a lot of salt or sugar. The net rate varies widely, ranging from HUF 8 to HUF 780 per litre or per kilogram, usually involving an extra charge of around HUF 200-300. Overall, it is not an insignificant cost, and for foodstuffs in this category it can also widen the price gap dramatically to the benefit of other countries.

Transport does not improve the situation either

Of course, exports are made more expensive by the cost of transport, a factor that is more favourable when selling our fictitious product domestically. International transport is not only more expensive because of the distance, but such transport is also more complex, with strict rules on truck downtime and driver rest periods, and the use of a shift driver for longer distances is not uncommon. However, it is important to note that transport is a very efficient activity, both domestically and internationally.

This does not make a significant difference to the price of the product, even if we know that the cost of this has risen a lot in recent years.

Even at 2,000 kilometres, the cost of a few euros per kilometre is not much more than a few thousand euros. This may seem like a lot, but it is still not a significant factor for our HUF 5,000 product. It should be noted, of course, that this is of course much lower domestically, which, unlike before, is in favour of domestic consumer prices - although it is much less of a factor.

How is the EUR-HUF exchange rate performing?

There is also the exchange rate effect as a factor, mainly the unpredictable movement of the forint against the euro. In principle, a weak forint favours exports, but this basic economic rule is largely modified by the cost structure of exporters.

Although most of the costs are paid in forints to a domestic company, this does not mean that the exchange rate has no effect on expenditure.

Wages and, to some extent, the price of domestically produced raw materials are denominated in forints, but the latter is already not fully dominated by the domestic currency: pork prices are in euro, and many agricultural production costs in general are measured in or derived from euros or dollars, from fertilisers to fuel and veterinary products. Food companies producing domestically are exposed to energy costs, also not originally priced in forints, and many other production inputs and equipment, from machinery and packaging to spices.

The industry's operation in a value chain reduces the impact of the forint exchange rate, simply put: exports bring more income when the forint is weak, but also increase a significant proportion of expenditure.

The cost of unpredictability

In general, industry actors say in informal discussions that they can adjust to a given exchange rate over time, within certain limits, provided that it is sufficiently stable.

In the case of the forint, it is precisely this stability and predictability that is lacking.

While over the past decade the forint has weakened steadily, sometimes to a greater extent, it is no exaggeration to say that it has collapsed in the autumn of 2022. From the spring 2022 level of around 360, the price of a euro rose rapidly to over 420 in just a few days. Although central bank reactions have sought to halt the process, many exporters have taken it as a given that they should settle for an exchange rate above HUF 400. However, this has not been the case, with the forint showing a spectacular strengthening in 2023 relative to itself, typically hovering around 370-380 levels last year, in a surprisingly stable range. Even with the weakening in recent weeks, we are still somewhat far from the 400 level.

So the forint is not only unpredictable in its weakening, it also seems to be unpredictable in its strengthening.

However, in the export contracts that will be in place at the end of 2022, food operators were probably expecting a more expensive euro, which implies that they were expecting a lower euro price in their bids, if they were not supplying under prompt agreements but under annually renewable contracts. This could also have reinforced the perception that Hungarian products were being sold at a lower price abroad.

Differences of 25-30% in the system

So it is clear that only VAT, the special retail tax, adds 23% to the price of the same product in Hungary compared to Germany. Add to this the difference in EPR - the cost of fictitious packaging of a fictitious product would be difficult to estimate. Other factors, such as the uncertainty of the commercial sector, the unpredictability of the exchange rate and regulation, the inertia of a less efficient industry and imperfect competition, add further percentage points that are harder to quantify. This makes domestic sales significantly more expensive compared to foreign markets, which cannot be offset by the cost of transport.

Given the items that are more difficult to estimate, it is therefore not at all surprising that a product manufactured in Hungary can be 25-30% cheaper in Germany than in Hungary.

Of course, there are wholesale and retail margins in every country, but it can be assumed that they are at roughly the same level - the more competitive a market is, the more so.

The other way around

Of course, similar effects apply in the opposite direction. Take another imaginary product, this time produced in Germany and sold there as well as in our country. For the sake of simplicity, let's assume that the cost price of this product is €13, which is roughly equivalent to HUF 5,000. To this is added the 7% VAT in Germany, which brings the price of the product to EUR 13.91. On arrival in Hungary, the importer sells the product for HUF after purchasing it in euros. Of course, when converting, the importer tries to protect itself against hectic exchange rate movements as much as possible, but this should not exceed 1-2%. Assuming an exchange rate of 388, for simplicity's sake we get HUF 5,044, and then, using a conservative estimate of 1%, we are at HUF 5,094.

A more elusive factor is wholesale and retail margins, which are also variable in this case, and presumably somewhat lower in Germany, where competition is stronger. However, as our aim is to explore the differences, grossing up the net price will shed some light on the difference:

the price plus VAT is €13.91 in Germany, compared to HUF 6,470 in Hungary. The special retail tax is also added to the net price, at HUF 230, which brings us to HUF 6,700.

Then there are the more elusive factors: the EPR price, the margins of retail chains, the scope for price increases arising from competition and inflationary sentiment, and the purchasing power of consumers, which also hampers often justified attempts to raise prices.

Overall, however, it is clear that even with soft factors - which are otherwise very important - there is a 25-30% price difference in the system to the detriment of domestic consumers.

Cover photo: Getty Images