THEATER OF PRICE REDUCTIONS Traders can lower prices as much as suppliers and the state allow

Will the state cut square prices by decree? Whatever! In recent years, the APN loans have only contributed to the wild rise in real estate prices. Will banks (mostly owned by powerful European corporations) have to return part of the record profits from the first half of the year to the budget? Not a chance! Or will the cunning state resort to a special tax on car sellers, who skillfully raise prices every season with each new screw on the old model? No way!

All of this would be an interference in the market game, and we are a market economy, aren’t we? That is a rule that, like any other, has exceptions. The first exception was the frozen fuel prices, which were placed under state regulation. The second exception was the limited prices of eight ‘basic food items’ (sunflower oil, milk, two types of flour, sugar, a whole chicken, and two types of pork). Then there was consideration of freezing the prices of about a hundred items, and now it has expanded to the current ‘agreement’ of the Government with the largest traders to return the ‘price basket’ of 360 items to the last day of last year, culminating in the freezing of prices for 30 (groups of) products in the best manner of state socialism, and with the alleged support of retail chains, which, according to the minister’s interpretation, showed ‘high understanding that these prices need to be put under control’.

Government’s Fascination with Traders

It seems that the Government has assessed that traders are the weakest link. First, they tried to bring them into line after the transition to the euro, with a theater of significant price increases, which actually occurred largely before the conversion. Then, with a delay, they imposed the listing of prices from the ‘basket’, which are published on the Ministry’s price movement website. Of the ten largest, Konzum, Tommy, and KTC accepted the game, while state officials diligently list prices in Lidl, Kaufland, Studenac, Spar, Plodine, NTL, and Mlin and bakeries twice a month. Then they limited stores’ operations on Sundays (which will only come into effect next year, especially for small traders), and now they are blackmailing them to lower prices.

But traders are not just sitting idly by. The only statements made after being summoned to the Ministry were from representatives of Konzum plus, KTC, and NTL, while the others evaded journalists. They all took a time-out for consultations, ‘to see what can be done’. They have, in fact, other stakeholders who are more important to them than Davor Filipović. These are not even the owners, but primarily suppliers, domestic producers, and wholesalers who distribute foreign goods to the Croatian market. The minister’s summons of retail chain managers was a trip to Disneyland compared to negotiations with suppliers, which is much closer to inquisitional tortures (for both sides).

Negotiations with Suppliers

However, such negotiations are conducted in silence and usually last longer than a day or two, which the minister has at his disposal until the prime minister announces a new package of measures. In this context, price is the primary weapon of suppliers, which traders try to lower or relativize through shelf placement fees, mandatory promotions, and a series of other obligations. Usually, these negotiations end in an agreement, so the public is unaware of the drama that preceded the establishment of a price of two to three euros for a package of coffee.

An exception that confirms this rule was the recent removal of Podravka’s products from Kaufland’s shelves. The price was, of course, the contentious issue. The PR department of the German trader sent a conciliatory statement that some of Podravka’s best-selling products are still available: – Some other products are currently unavailable, but negotiations between Kaufland and Podravka are ongoing, and we believe that an agreement will be reached soon – they say at Kaufland.

Neither side went ‘to the bone’, explaining that Kaufland’s request for more favorable conditions, i.e., prices, compared to other trading partners is unacceptable to Podravka, and, moreover, contrary to the rules of the Law on Prohibition of Unfair Trading Practices in the Food Supply Chain.

And here lies the ‘catch 22’. For selling below the purchase price, traders are penalized by the Agency for the Protection of Market Competition, so they are left with no choice but to give up a percentage of their margin. The thin margin in question is best illustrated by data from Lider’s publication ‘1000 Largest’. The profit margin of 271 companies in the trading sector (retail and wholesale) last year was only 3.9 percent (and food wholesalers operated with an even more modest profit – three percent). At the same time, the average profit margin of companies from the top 1000 was 6.5 percent. Indeed, large foreign chains certainly report part of their profits in their home countries through ‘creative’ financial statements by skillfully using transfer pricing (paying high prices for imported goods to their parent companies), but this is difficult to prove, especially for the team in the Ministry of Economy.

Last year was, of course, the most profitable for bankers – 31.2 percent, and another 14 out of 50 sectors operated with double-digit margins, but no one is calling them to lower prices. When looking only at the food sector, it is interesting that food producers from the top 1000 also operated with a margin of 3.9 percent, while only beverage producers achieved a larger share of profit in revenues – 9.8 percent and, surprisingly, agricultural companies – 6.1 percent.

Extinguishing Inflation with Gasoline

Therefore, it is questionable where traders could even find room for price reductions, which should not be expected to a greater extent. It will be a success if new price increases are stopped in the fall. However, according to the Government’s policy, it is hard to expect inflation to calm down, which benefits the state as it boosts the budget. Then the state generously shares subsidies, incentives, and even raises salaries for its employees from that surplus. It all started with HAC’s indexing of salaries, which opened Pandora’s box.

According to the latest data, in June, salaries in sectors with the highest number of employees – manufacturing and trade – grew by 11.1 percent, while in sectors with the highest share of the state and public sector, they grew even more: in education by 12.9 percent, in public administration, defense, and mandatory social security by 14.7 percent, and in healthcare and social services by 17.6 percent. Thus, the state is extinguishing the inflationary fire with gasoline on its cost side, only to extinguish it with a drip of water at the end consumers by summoning traders.

This action ‘against price increases’, despite the freezing of 30 (groups of) products after the expiration of ‘promotional prices’, will yield such results – drop by drop. And only as much as suppliers allow. They have already started calling traders after the minister’s summons. Because, after all, they will be asked something too. And it is not that they would not be willing to cooperate, just let the state lower taxes and contributions for everyone, not just for them.