Nova workboard

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Inadequate competition is driving Finnish retail food prices up

Finnish retail food prices are one of the highest in the European Union. According to a comparison between 15 EU-countries with similar income levels made in 2012, Finland was the fourth most expensive country after Denmark, Sweden and Austria. Part of this can be explained by variation in value added taxes in different countries, but it can’t explain everything.

The most likely reason for this is the level of competition inside the business in each country. For example Dutch food retail prices are 24 percent lower than the Finnish ones.  There are eight strong competitive food retailers in the Netherlands, but only two can be found from Finland. Thus, it is most likely that there is more competition in the Dutch market.

In May 2012, European Commission recommended Finland to reform its regulations in the retail trade, because the market was seen highly concentrated. At that time, the two biggest players, S-Group (45%) and Kesko (35%) were together holding over 80 percent of the market. In 2012, the Finnish Government reformed the Finnish competition law and started a support program targeting to increase healthy competition in the retail trade.

Since then not much has changed. S-Group and Kesko are still holding dominant positions and there are no relevant changes in their market shares. Both vertical and horizontal constraints still exist and they’re preventing free competition to happen. S-Group and Kesko have too strong positions towards both food distributors and customers.

For example, if a food distributor wants to expand its business by selling to other retailers, it is very likely to lose its contract with both of the biggest ones. That makes it almost impossible for a distributor to sell to anyone else. A study made in January 2012 reveals that both of the retailers had been using “doubtful ways” to take advantage of their strong position towards the food distributors.

Customers are somewhat locked to these retailers as well. There is a public monopoly for a government owned company called Alko for selling beverages containing more than 4.7 percent of alcohol. This means that locations of these liquor stores are extremely important for food retailers, because customers prefer buying food and drinks from the same place. At the moment almost all of the Alko stores are located inside or next to the stores of S-Group and Kesko and the third biggest player Lidl actually has only one store which has Alko in it. There are many politicians in the boards of S-Group, Kesko and Alko, which may have an effect on who is getting those licenses and who is not.

The other problem from a customer’s perspective is bonus cards provided by the two biggest retailers. There is an investigation going on whether they have elements that are binding customers too much.

To solve the problem of too high retail food prices in Finland, the level of competition has to be increased. This could be done by reducing the power of the two big retailers towards both food distributors and customers. For example, there could be higher sanctions for selective buying and bonus card schemes could be restrained. Also, reducing the influence of politicians in the boards of these companies would reduce their incentives to favor them in the political decisions. Breaking the alcohol selling monopoly and bring wines to the supermarkets would also make entering the market easier. To get the Finnish retail food prices lower, more big players in the market are needed. 

Petri Lehtonen

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Author: studentnovasbe

Master student in Nova Sbe

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