Kester Eddy in Budapest -

The Hungarian government had a decidedly upbeat New Year message for any high-flying executive pondering a move into Central Europe. “Foreign investors continue to regard Hungary as an attractive business destination,” Antal Nikoletti, deputy state secretary for external economic relations at the Ministry for National Economy, told state news agency MTI on the eve of 2015.

Not only is Hungary “in the forefront among European countries as an investment destination,” he argued, but reports of a supposed “unpredictable legal environment” are well off the mark: there is “continuous dialogue” between the government and foreign investors, he stressed.

From these words, it would appear unlikely Nikoletti shared a wee Hogmanay dram with any of Hungary's large foreign-owned retailers, whose bosses spent December frantically trying to fight, and fathom, the implications of a package of new laws that will seriously affect their business risk and profitability.

Specifically, legislation passed before Christmas bans Sunday and overnight trading at all but small shops: inspection fees for businesses with incomes of over HUF50bn (€160mn) are to become progressive, leading to a leap in total fees for the largest companies from HUF2bn in 2014 to HUF30bn this year: and, from 2017, any business above the same HUF50bn threshold that reports losses for two consecutive years must be closed down. The government said Hungarians should be free to rest on Sundays, and justified the financial measures as necessary to help Hungarian-owned small businesses and combat large multinationals juggling costs to avoid paying justifiable taxes.

On January 12, Tesco, the country's largest retailer and pioneer of 24/7 trading in Hungary, gave its judgment on the package: the UK-based hypermarket chain said it would close 13 out of a total of 222 stores in Hungary, with the loss of “about 500” jobs.

Leaving town

In a carefully constructed interview on YouTube, Nigel Jones, chief executive of Tesco Hungary, said that while his business had been “pretty much the top performing country in the whole of the Tesco group,” recent legislation meant “we can't trade on Sundays… or overnight,” which, along with “various other taxes and supervision charges,” threatens profitability. “We must stay profitable here to continue to be able to operate,” he continued, in an apparent reference to the legal threat of closure. Hence the “tough decisions” that had to be taken.

Zoltan Kovacs, the Hungarian government spokesman, attacked the Tesco reaction, saying it was “unfair” to blame store closures on government measures. Rather, Tesco's “aggressive” and unprofitable expansion programme in Hungary, along with massive losses in the parent company's UK operation, were the reasons for the cuts. Kovacs said Hungary would continue to view Tesco as a strategic partner, but its management “must be restrained and tell the truth.”

But Tesco is not alone. The Austrian-owned retail chain Spar, ranked by Trade Magazine as Hungary's fourth largest retailer with turnover of HUF454bn (€1.5bn) in 2013, has also announced it will slash investment this year from a planned €59mn to €25mn, all down to the legislative changes. Spar said it expects the costs of the inspection fees to hit HUF9bn (€29mn) this year, some 28-times the figure in 2013.

Left-liberal opposition parties have condemned the ban on Sunday and overnight trading, saying it will cost jobs and restrict individual freedoms. “[These measures mean] about 20,000 workers in retail will lose their jobs, and about 100,000 workers on Sundays will lose their bonuses, worth an extra €20 per person,” Zoltan Lukacs, vice-chairman of the Socialist Party, tells bne.

“Back in 2011, [Prime Minister] Viktor Orban himself admitted that while people are unable to make ends meet on a regular five-day working week, there was no way to close shops on Sundays. It's the same today. We cannot agree to a Sunday [trading] ban in these circumstances,” he says.

Gyorgy Vamos, general secretary of the Hungarian retailers association (OKSz), calls the new measures “unfortunate” and “disproportionate”. “You must understand, this will affect not just the [stand-alone] supermarkets, but also the shopping centres and malls, which all contain supermarkets.”

As a result, loss of customers will inevitably have a knock-on effect on “all sorts” of associated businesses, from cinemas to cobblers, hotels and catering, he says.

Furthermore, Vamos argues that the measures “really only affect seven big foreign players” – namely Aldi, Auchan, Tesco, Metro, Lidl, Pennymarket and Spar, since the three large Hungarian supermarket chains – Coop, CBA and Real – are all structured in a way that none of their businesses exceeds the HUF50bn threshold. “You could say this all targets the foreign companies,” he says.

Asked if the Hungarian government had conducted negotiations with the multinational retailers, in line with Nikoletti's New Year statement asserting “continuous dialogue” with foreign investors, Vamos retorted: “They never consulted with us, not beforehand. After the legislation was passed, I know some incensed managers went to the ministry to protest. But by then the decisions had been made.”