Last year, the prices of consumer goods in Estonia rose above the European average, with the high cost of local production affecting food prices. Strong competition compared to other Baltic states did not drive prices down.
Tõnu Mertsina, Swedbank's chief economist, said that due to rapid inflation, the overall price level in the Estonian economy rose to 89 percent of the EU average.
Last year, prices of goods and services in Estonia in actual individual consumption — goods and services actually consumed by households, irrespective of whether they were purchased and paid for by households directly, or by government or by nonprofit organizations — increased to 91 percent of the EU average, with prices of consumer commodities increasing to 102 percent of the average and prices of consumer services increasing to 85 percent of the average.
According to retailers, price levels are also affected by the intense competition on the Estonian market.
Maxima's CEO, Kristina Mustonen, said the price level of the chain's stores is comparable throughout the Baltic market, and that while the average price of the chain's shopping basket is the same in Estonia and Lithuania, Maxima's food basket is between 8 and 10 percent cheaper than in Estonia.
"A further distinction is that the local producer's prices are substantially higher here, due to inefficiency of low volumes. The volume of purchases is lowered if the consumer cannot pay the higher price of the local producer due to high input costs such as labor, energy and feed. Purchases and the viability of local producers both decline. This is where we see the most potential risk," Mustonen said.
High-cost local goods must compete with imports
Talis Raak, the head of purchasing at Rimi, a company that operates in Latvia and Lithuania, said that differing tax regimes, for example, influence the ultimate price of food.
"Everything begins with the price our supplier offers. Each retail chain has its own strategy that establishes expectations for certain product categories and cooperation with their suppliers," he said.
"Of course, market conditions are also important. This is especially evident here in Estonia, the most competitive of the three Baltic states."
The state, according to Mustonen, must make an effort to retain local producers because shops can sell imported products at a much lower price. The question then becomes whether Estonians are willing to pay twice as much for the same products produced locally.
Customers may soon notice a drop in the availability of local products. If the government does not intervene, the price of meat will rise even further, and it would cost three times as much as beef from Lithuania or Poland, she said.
Local fruits and vegetables are taxed at a rate of 5 percent in Latvia
In Estonia, on the other hand, the value-added tax (VAT) will increase even further, Mustonen said, adding that this will result in additional price increases as the company has exhausted all conceivable cost-cutting measures.
"The limit is here now. What else can we do if taxes increase? The end-user will see another price increase," she said.
Due to the larger market size, the situation is less challenging for Latvian and Lithuanian producers, according to Mustonen. "If the volume is small, production is inefficient, and the average cost price is 30 percent higher than that of Latvian and Lithuanian production."
Consumers increasingly looking at alternatives
Buying of promotional and "best before" products has increased, she went on to say.
"Poland and Lithuania are producing an increasing number of cheaper goods and consumers are still looking for value," she said. "As a result, there is a very high likelihood that local products will disappear from shelves at some point."
Due to price increases, products in some categories have disappeared from store shelves. In the case of Maxima, Mustonen gave the example of Estonian livestock.
Raak said that Rimi provides regular discounts and promotions on popular products. "Something must be done to address the situation. If we do not look for measures to help local producers and raise taxes, prices will continue to grow, leaving consumers with two options: consume unhealthy products while seeking out cheaper alternatives, or reduce their consumption altogether," Mustonen said.
Editor: Kristina Kersa