The Lack of Government Action on Rising Food Prices and the Passivity of Competition Supervisors in Latvia

The entry of the German company “Lidl” into the Latvian market has not been compared to much. Perhaps the only thing is that if “Lidl” was not there, then the increase in food prices would be even more noticeable.

Elsewhere, governments are taking action

Food prices have risen and continue to rise in other countries, so governments are trying to take all kinds of measures to stop it.

The governments of Hungary and Croatia have acted in the “most socialist” way against price increases, setting price ceilings for certain groups of food products.

There are still countries where the government has agreed with supermarket chains that they will be good and prices will not rise. This has been done in France and Slovakia.

Bulgaria has developed a “price comparison tool” – so that the buyer can see in which store the prices are lower.

Food prices are not at the top of the list of priorities for the Latvian government.

The Latvian government is sleeping, only the Minister of Agriculture is awake

Only the Minister of Agriculture Didzis Šmits (AS) is trying to invent something for the time being. At the same time, he suggested that supermarkets should be banned from working on holidays or reduce their working hours on holidays. This is with the idea that then the small shops will feel better and the prices will therefore be lower. After that, he has started talking that maybe we need to create a special food price regulator – something similar to the Public Services Regulatory Commission.

Such steps, if actually taken by the government, will be quite risky and may even have the opposite effect. The introduction of price controls can have significant long-term effects on the economy, including competition and consumer welfare. For example, price controls on some products may lead to price increases for other products that are not price-capped.

There are already state institutions in Latvia that must take care of competition, and there are also many laws that should promote competition and curb the arbitrariness of cartels and monopolies. The problem is in the operation and compliance of these laws. And it may also be that there are defects in these laws as well, which should then be evaluated and reworked by the Saeima.

It points to the passivity of competition supervisors

An interesting article entitled “We feel the passivity of competition supervisors in our wallets” was published on the portal “Dienas biznes” by sworn lawyer Artūrs Spīgulis, who in recent years has represented a number of clients who needed help in disputes on the topic of competition. “And I have a mother who goes shopping to the stores,” A. Spīgulis added in a conversation with “Neatkarisīgo”.

He writes: “Over the past 15 years, a series of legislative initiatives have been developed and passed to regulate the terms of transactions between the producer, processor and marketer, with the latest legislative initiative including the farmer in this food supply chain to promote fair business practices at all stages of the food supply chain . Norms are designed to clearly tell everyone that the strongest player is the buyer of food (and also non-food) goods – the retailer, against whom the farmer and food producer must defend themselves. Therefore, the public rhetoric of retailers about price increases by manufacturers should not be allowed, as the legislator has clearly determined that the responsibility for the final price should be borne by the retailer. In the last decade, there has been no application of these norms by the supervisor, who accordingly wings the retailer. While the prices of public services are limited by the PUK, commercial banks are supervised by the Bank of Latvia, the maximum price mark-ups of medicines are determined by the regulations of the Cabinet of Ministers, and retailers have been supervised by the Competition Council (KP) since 2008.”

A promising start with a fluid continuation

The beginning was hopeful, recalls A. Spiğulis. “Amendments in which Article 13 of the Competition Law was supplemented with provisions on the prohibition of a retailer in a dominant position to exercise its purchasing power over its suppliers entered into force on October 1, 2008. The Saeima adopted these restrictions for retailers following the calls of the Competition Council to set them by law. In the annotation of this law, there was a reference to the findings of six studies conducted by the Competition Council in 2006, that the biggest mark-up for certain food groups is formed directly in trade networks, which significantly increases the final price of the product.

The new legal norms were immediately applied in life. In November 2010, the Competition Council fined “Rimi” for the fact that “Rimi” applied mandatory payments to AS “Valmieras piens” for its products being in the “Supernetto” store network.

In January 2011, the Competition Council fined “Maxima” for the fact that “Maxima” has applied too long a payment term for goods supplied by SIA “Siguldas Maiznieks”.

In December 2012, the Competition Council fined “Drogas” for imposing unfair, disproportionate and unreasonable conditions of cooperation on its supplier, leading it to insolvency.

The legislator went further, detailing the restrictions and implementing them in a special law.

The Law on Prohibition of Unfair Retail Trade Practices entered into force on January 1, 2016, and the Law on Prohibition of Unfair Trade Practices on November 1, 2021. The first of the two laws was developed by the Ministry of Economy on the initiative of the Competition Council. The purpose of the law was to limit the use of purchasing power by retailers against suppliers in order to balance the interests of suppliers and retailers in retailing. On the other hand, the second special law currently in force was developed by the Ministry of Agriculture on the basis of the first law, the aim of the law being to prohibit unfair trade practices in the entire supply chain of agricultural and food products. Since October 1, 2008, when the regulation protecting manufacturers and suppliers from the purchasing power of retailers was adopted for the first time, the Competition Council has been authorized to enforce these prohibitions.

The Competition Council chooses to rest more and work less

However, the Competition Council is silent. For more than ten years, there has been no decision on the application of these specialized laws and the detection of violations. This means either that there are no violations or that they are not detected due to the “timidity” or inaction of the competition watchdog. While the decisions prepared by the cartel department and their impact on European funds are announced on average once a year, the unanswered question is how it is possible to measure the impact of the Competition Council’s unadopted decisions and uninvestigated violations on those residents of Latvia who shop at retail outlets.

The representative of the Competition Council states in a discussion on Latvijas Radio that in the last eight years, “Rimi” and “Maxima” occupied 60% of the market share until the entry of “Lidl”. However, during this time there was no competition between these players, which led to excessive markups. Therefore, the publication calls on government representatives to go abroad to look for other large chains that should enter the Latvian market, and to create this competition.

But maybe you don’t need to go to foreign countries, but investigate here whether there is a forbidden agreement between these two players not to compete excessively? Or maybe they are in a dominant position and are abusing it against both the producers and their customers?” asks A. Spīgulis.

He also points out that the number of decisions taken by the Competition Council is decreasing.

“For many years the Competition Council was subordinated to the Ministry of Economy, now it is independent in its activities and under the supervision of the Cabinet of Ministers. This is also the result of the institution’s independence – the institution does as it wants and as much as it wants,” lawyer A. Spīgulis quips.

Meanwhile, the Competition Council itself is not at all ashamed to admit that it expects the entire investigation of the case from the manufacturers and does not intend to check the activities of the retailers themselves.

200% and 300% markup

“In the middle of July, food manufacturers clearly stated in the media that it is retailers who increase the markup of goods and apply even 200% and 300% markups, while manufacturers have not changed their prices, sometimes even for a year. The reaction was immediate. The very next business day, the manufacturers received emails from a major retailer instructing the manufacturers to… reduce their prices by approximately 30% within two weeks and set them at the retailer’s choice. Yes, it is not a mistake – it is not the manufacturer who decides how much he will sell his product to the retailer, but the retailer decides both how much the manufacturer can sell it to the retailer and how much he will sell it to the buyer in the store,” admits A. Spīgulis.

2023-07-28 02:15:17
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