Oligopoly: The path to Lithuania’s current retail market

Last week, some 100,000 consumers in the country joined a three-day boycott initiative in protest at rising food prices. Prime Minister Algirdas Butkevičius said the price increases were down to supermarkets’ mark-ups and urged retailers “to ask themselves if their appetites are not too big”. He also said that competition watchdogs would investigate the situation in the market.

Parliamentary Speaker Loreta Graužinienė, in turn, said a mistake had been made years ago when big supermarkets were allowed to open in town centres, rather than being relegated to suburbs as is the case in most European cities, pushing out most small businesses that were unable to compete with the majors.

Killing small businesses

Market research firm Euromonitor recently published a study showing that concentration in the Lithuanian retail market is greater than anywhere else in Europe. The concentration index in the country is 0.23, while in Poland it is 0.1, in Estonia 0.15, in Latvia, 0.17.

“Our major supermarket chains enjoy a bargaining power double the strength of their Polish counterparts,” said Danukas Arlauskas of the Lithuanian Employers Confederation.

He said that it is market dominance, and not the low exchange rate of the Polish currency, zloty, that makes food prices significantly lower and draws Lithuanian shoppers across the border.

“I think it is high time stop talking and start doing something about that,” Arlauskas told Lietuvos Žinios.

This has not always been the case. Statistics indicate that two decades ago in 1995, small businesses of under five employees made up 82.7% of all retail companies in the country and employed 32% of sales people. Two years later, however, the market had changed dramatically, with a rapid expansion of a handful of majors pushing out most of the small retailers.

The Competition Council‘s latest data on the composition of the retail market is from 2002 and it shows that four companies – VP Market (now Maxima), Palink (the owner of Iki stores), Norfos mažmena (Norfa) and Rimi Lietuva – took up 47% of the national market.

Last year, the total turnover in the food, drink and alcohol retail market (VAT excluded) was €3.9 billion, according to Statistics Lithuania – 72% of that pie went to the four majors.

Another telling piece of data comes from 2007. That year, inflation was running high in Lithuania and aggregate profits of all Lithuanian companies grew a factor of 1.7 times. Meanwhile retailers posted profits quadruple the previous year’s levels.

“It was a time of fast and aggressive expansion of supermarkets. They launched a massive assault on the market, expanding their chains into cities and villages,” said Labour Party chairman Valentinas Mazuronis, adding that politicians failed to adopt laws to prevent the dramatic concentration of power in the market into a few hands.

Their own policymakers

“Supermarket chains took hold in Lithuania for two reasons, I think,” said Arlauskas. “First, the government had no experience [of regulating business). Second, most evils in our country derive from the fact that Lithuanian politicians are cheap, they are easy to bribe. The supermarkets managed massive funds and had all the resources to support political parties. Nudging politicians with financial injections was very easy.”

Vilniaus Prekyba (previously VP Group), the owner of Maxima supermarkets, was founded in 1995. That same year, its owners privatized four sugar plants across Lithuania, selling them to Denmark’s Danisco three years later for a huge profit. Making skilful use of tax breaks intended for disability organizations, the company later claimed back €22 million of VAT, leaving politicians and inspectors panting in disbelief.

Between 1999 and 2001, Vilniaus Prekyba expanded its retail chain from 34 to 107 outlets. The company now runs 200 supermarkets in Lithuania.

Iki was founded in 1992 by the three Ortiz brothers, George, Oliver and Nicolas, and their partner Gerard Bourdon from Belgium. By 1995, they had three outlets in Vilnius; today, Iki owns over 200 stores across the country.

Rimi entered the Lithuanian market in 1999 and currently runs over 40 retail outlets. The first Norfa store opened in Vilnius in 1997 and increased its holding to 43 stores by 2002. Today, Norfa supermarkets number 138.

Data by market researcher ACNielsen shows that during the most intense period of expansion between 2000 and 2004, the big chains expanded their network 2.2 times, while the share of small retailers went down about 15%.

Kęstutis Glaveckas, economist and former MP, claims that the retailers could use their capital to shape whatever policies they wanted.

“Recall who was in power at the time: the Social Democrats and their prime minister Adolfas Šleževičius, the Homeland Union and Gediminas Vagonorius who headed their cabinet. Had they resisted the dictatorship of the supermarkets, they could not have gotten entrenched to the extent that they did. But there was probably neither the will nor the resources to resist,” Glaveckas tells Lietuvos Žinios.

Vagnorius, who headed the Lithuanian government during the key period between 1996 and 1999, disagrees that there is too much market share is concentrated in too few chains in the Lithuanian retail market, or the majors have too much power.

“In Lithuania, we have a good situation with 4-5 medium-sized chains competing with one another. Retailer’s profit margin is about 3%, while in many European countries it is 5-6% or even 7% in some places. The relatively low margin attests to intense competition,” Vagnorius insisted.

Little or no regulation

Arlauskas disagreed with Vagnorius’ assessment. At the time, he headed the Lithuanian Business Employers Confederation, an organization of small and medium-sized businesses, and drafted a legislative proposal to curb the power of the majors. The proposed measures included bans on the big chains working on weekends and on opening big stores in city centres.

However, the Ministry of Economy criticized the proposal, saying: “drawing on experience of countries, we conclude that it would be inexpedient to limit working hours or distribution of supermarkets,” it said in its conclusion in 2005.

A report by the Competition Council at the time showed that, in some regions, the major chains had carved out more than half of the market.

Other legislative initiatives have met similar end. In 2009, the Seimas heard and endorsed a bill on capping retailers’ mark-ups at 20%. However, the law was vetoed by the then president, Valdas Adamkus, and conservative prime minister Andrius Kubilius panned the attempt as “Soviet-style” imposition. “We all know what price regulation leads to. It’s a Soviet relic. We know the laws of the market and ignoring those laws can cost us dearly,” Lubilius said.

Legislators have also made more attempts to limit working hours of supermarkets. Last year, MP Bronius Pauža, a social democrat, submitted a bill to make supermarkets close on the most important public holidays. The bill went through the legislature, but was scrapped a month later at the suggestion of the Committee on Economy.

“As the saying goes, they have two misfortunes in Russia: roads and fools. In Lithuania, I’d say, we have banks and supermarkets. It is no secret that today, a handful of big chains have almost monopolized the market. They have and continue to influence all branches of the Lithuanian government. I think that, on the level of the legislature, it is not the state that sets the rules of the game, but the big retailers,” says Labour Party chairman Valentinas Mazuronis.

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