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06/12/2016

Foreign supermarket chains threatened by Hungary

Central Europe

Foreign supermarket chains threatened by Hungary

Auchan advert. Budapest, 2012. [Krista/Flickr]

Multinational supermarkets could be driven out of Hungary, a trade lobby said yesterday (29 November), after the government raised their inspection costs and threatened to shut them down if they fail to make a profit for two years.

The government of Prime Minister Viktor Orbán has a record of adopting idiosyncratic laws untroubled by how they are viewed outside Hungary. Those have included special taxes that have cost foreign banks, telecoms and a TV station billions of euros.

Orbán also favours a go-it-alone foreign policy: Hungarian Foreign Minister Peter Szijjarto was on a visit to Moscow yesterday, building on ties with the Kremlin that Brussels and Washington feel are too cosy.

Hungary’s economy ministry this week submitted to parliament a draft bill that says from 2018 retail chains with annual turnover above €163 million must close if they go for two years without turning a profit in Hungary.

French supermarket chain Auchan said the measure would discriminate against foreign firms, and Britain’s Tesco said it was assessing the impact on its business.

Other firms that could be hit include Lidl, Aldi and Metro Group of Germany.

Gyorgy Vámos, Chairman of Hungarian trade group OKSZ, said the supermarkets now faced a double burden: the profit rule, plus an increase proposed by the government a few weeks ago in the food safety fee levied on retailers, which is supposed to cover the cost of inspections.

He said the fee would push the retailers’ Hungarian units into loss, and the latest proposal would then penalise them for that loss. “This would mean that their operation could become impossible to sustain,” Vámos told Reuters in an interview.

“If you go to another country, you invest and you employ people, then the rug should not be pulled out from under your feet from one moment to the next.”

Foreign-dominated market

An Auchan spokesman said the company was reviewing its budget plans for Hungary, adding that it regarded the measure as “discriminatory as it affects mostly foreign companies”.

The government has said the measures are designed to protect Hungarian food producers and retailers from being pushed out of the market by foreign firms who use their financial muscle to sell food at a loss.

“Posting losses on a sustained basis indirectly represents an abuse of dominant market position, because competitors are forced out and the enterprise with the strong capital position ‘buys up’ the market,” Economy Minister Mihály Varga said in the reasoning attached to the draft bill.

The draft law does not give an exemption to Hungarian retailers, at least two of which have turnover higher than the threshold. But stores in the Hungarian chains, unlike in foreign ones, are often operated as separate franchises, which could allow the parent chain to escape the threshold. The government has not said how it would treat franchises under the law.

Even if Hungarian retailers are also subject to the rule on making profits, the burden will fall more heavily on foreign firms because they have a bigger share of the market.

According to a ranking by consultancy Planet Retail, 7 of the top 10 retailers in Hungary are foreign-owned.

Natalie Berg, Planet Retail’s global research director, said it was commonplace for multinationals to operate at a loss in growing foreign markets for a couple of years. The proposed law on profits “would definitely pose a problem”, she said.

Tesco is Hungary’s biggest supermarket chain. It says it operates over 200 stores and is the country’s third-biggest employer. A Tesco spokesman said the increased fee for food safety would significantly increase costs for many retailers.

Lidl’s Hungary unit said in an emailed reply to Reuters questions that “it considers additional burdens acceptable if all market participants are required to take part equally”.

Also this week, Hungary’s parliament passed legislation that will further raise the top bracket of an advertising tax, to which only a single company is subject this year: the Hungarian unit of European broadcaster RTL Group.

The company’s owner, German media giant Bertelsmann, has said the tax is aimed at driving it out of Hungary.

Background

Hungarian Prime Minister Viktor Orbán, leader of the Fidesz party (EPP-affiliated), has clashed repeatedly with the European Union and foreign investors over his unorthodox policies.

In the past four years, Orbán's policies have included a nationalisation of private pension funds, "crisis taxes" on big business, and a relief scheme for mortgage holders for which the banks, mostly foreign-owned, had to pay.

His policies helped Hungary emerge from recession, but some economists say Orbán may have scared off the kind of investment Hungary needs for long-term growth.

Orbán has stated that Europe has "shot itself in foot" by imposing sanctions on Russia, and that he would seek support from other EU countries to improve relations with Moscow.

>> Read: Hungary's Orbán wants warmer EU-Russia ties to boost business