Hungary turns big guns on international retailers

By bne IntelliNews November 19, 2014

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The Hungarian government has proposed a bill to protect local retailers from being driven out of business by big foreign chains. The draft bill would force fast moving consumer good retail chains with an annual turnover of more than HUF50bn (€164mn) to close if they fail to report a profit over two successive years. 
The government claims large chains have been deliberately running at a loss in recent years, using dumping prices to increase market share. While the international heavyweights can afford the losses, the tactic is driving smaller local retailers into the ground, says the bill, which was launched on November 18. 
"Posting losses on a sustained basis indirectly represents an abuse of dominant market position, because competitors are forced out and the enterprise with a strong capital position 'buys up' the market'," Economy Minister Mihaly Varga wrote in comments attached to the legislation, according to Reuters.
If passed by the Fidesz-dominated parliament, the legislation would take effect at the start of 2018.  Rubbing salt into the wound, the same day a major hike to a supervision fee for food retail chains was approved by lawmakers.
The bill will be seen as another attack on foreign-owned businesses in Hungary, with the aim of forcing them to sell out to domestic players, which are often closely connected to the ruling Fidesz party.
Blown out of the water
Critics of the Fidesz government have long accused it of having close connections to domestic retailers, in particular CBA and Coop. Coming on top of ongoing speculation that a ban on Sunday shopping is on the way - parliament is set to discuss a bill soon - international retailers are up in arms. Like the battered banks, telecoms and utilities - other sectors with a strong international presence - they have long warned tht investment and economic growth are at risk. The state has been buying international players out of utilities and banking over the past couple of years.
Analysts worry that despite a stronger than expected recovery in the economy through 2014, growth remains overwhelmingly state-driven, with government schemes the main source of new jobs and the central bank the only large lender in the country. They worry that the momentum currently seen will fade rapidly in the medium term because Budapest's erratic policymaking is a drag on investment and bank lending.
The new taxes were announced the same day that the European Bank for Reconstruction and Development (EBRD) warned tht the country's sector-specific taxes remain burdensome and continue to discourage private investment. Hungary also needs to restore financial intermediation through the private banking sector, the development bank said in its Transition Report 2014.
Analysts at suggest that the retail bill could  "blow Spar and Auchan out of the water". According to data compiled by Hungarian business weekly Figyelo, Tesco of the UK, Dutch retailer Spar and France's Auchan all had revenue above the HUF50bn threshold, reports Reuters.
The retailers have not been slow to react. Spar announced at a press conference that it will postpone planned investment in Hungary in the next few years, citing the effects of the raised supervisory fee and the proposed legislation on losses. Rudolf Staudinger, head of the Dutch group's Hungarian unit, insisted however that Spar - which has 400 outlets in the country - is not thinking of an exit.
Local produce
The bill openly declares that it aims to set up an uneven playing field. "If we want to offer protection to domestic [SMEs] efficiently but in harmony with EU regulations, we need to create different rules for the different types of stores," it states. 
Locally-owned FMCG retailers such as CBA, Coop and Real operate as separate business units and therefore their revenues drop below the HUF50bn threshold, report local media. It's also likely little coincidence that the trio have gone against the sector's resistance to the proposed clampdown on Sunday opening. CBA chief Laszlo Baldauf has been forced in the past to deny speculation that he is a major source of funding for Fidesz. 
The new legislation will "benefit Hungarian players, whereas its message for the foreign-owned chains is clear: you either start to make profits or it will be doom and gloom for you here," write analysts at "If the affected companies want to adjust to this situation, they have three years to show profit. However, they are to achieve this while they are subject to a massively raised supervision fee."
Hungarian lawmakers also approved new taxes on soap and alcohol on November 18. The healthcare tax - also known as the "chips tax" and "hamburger tax" - on unhealthy foodstuffs will be extended to alcohol, while an environmental fee will be extended to shampoo, soap and other products. 
The parliament also approved a raise in the upper band of the controversial advertising tax from 40% to 50%. The levy was introduced amidst huge protest from media companies earlier this year, with the Hungarian arm of RTL the only target that fits into the upper band.  
RTL Klub, the biggest commercial TV channel in the country, claims the tax is punishment for its critical coverage of the government.  RTL Group, owned by Bertelsmann of Germany, recorded a goodwill impairment on RTL Hungary amounting to €77mn in the first half of 2014 because of the tax. 

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