The Competition Authority (Konkurentsamet) is set to examine if pricing in Estonia's sales outlets is fair and transparent or not, since, according to Evelin Pärn-Lee, the authority's director, retail prices have risen significantly more than producer input prices.
Chief economist at Luminor bank Lenno Uusküla meanwhile noted that retail trade in Estonia is inefficient and expensive, which is also reflected in prices.
The prices of food in stores have risen significantly faster than the prices of input agricultural products and their processing, it is reported. For instance, the price of agricultural production and its processing as regards the food sector has risen by about 35 percent over a three-year period, yet prices in retail stores have risen by nearly 50 percent over the same time-frame.
Evelin Pärn-Lee was keen to stress that that no violation of any kind is suspected as having taken place within the retail trade. "However, we really want to ensure what goes on in this sector remains transparent and fair," Pärn-Lee added, conceding that she herself has observed the price of a particular product across different retail chains, and the price changes have given her pause for thought.
But why are prices rising so rapidly in the Estonian retail sector?
Pärn-Lee said: "Personally, my view is there is insufficient competition in Estonia, given that producer prices have fallen, but in-store retail prices have not."
Lenno Uusküla at Luminor said that retail space is too expansive, which makes the sector inefficient (for instance having to cover overheads on larger-than-needed store space – ed.).
Uusküla said: "It seems to be the case that trade overheads are quite high. Estonians on the other had are relatively poor compared with much of Western Europe, and perhaps we purchase less as a result. This exacerbates how much retail space per item sold we have, compared with the Western countries. This will ultimately be passed on in increased outgoings. Additionally, our stores are open relatively long hours compared with many Western European countries, so this too, in turn, increases the costs stores face."
According to Uusküla, full competition conditions in the industrial goods and clothing sector sectors still have not properly arrived in Estonia. "So maybe the Estonian consumer has not started to vote with their feet as strongly as they could when choosing an Estonian retail store and a western online store. The costs in a physical store are significantly higher compared with online sales. But the trend is moving in this direction more and more rapidly, as evidenced by the large number of parcel machines," he said, referring to services offered by Omniva, Itella and others.
Uusküla conceded that things are such that you can even get clothes cheaper in some foreign countries even when the flight from and to Estonia is factored in.
Cheaper delivery points can be a lifeline for retailers; for example, Lithuania re-sells a lot of goods brought in from Poland, while in Estonia we still have more expensive products imported from Scandinavia, Uusküla said - the price of many products in Poland half those of Finland, so it is worth heading South in that respect.
According to Uusküla, the situation for domestic retailers could worsen significantly if, for example, Amazon were to build a larger temporary warehouse somewhere near Estonia.
So might this ultimately lead to a situation where we essentially end up with grocery stores which only offer simpler essentials?
"I think that bricks-and-mortar stores will never completely disappear. People still want to be able to see and touch things. And they are ready to pay for that service offered in the store," he added.
Meanwhile Evelin Pärn-lee said that the Estonian consumer tends to be very loyal to the seller's brand. They surely go to Selver, Rimi or one of their favorite stores, even if prices are cheaper in the next store, 200 meters away, she said.
Lenno Uusküla concurred that Estonia's consumer culture is underdeveloped, as there are few price comparisons and few quality comparisons. "In Germany, products often get an assessment by an independent consumer organization, as to whether it is a high-quality or low-quality product. There is nothing like that in Estonia, and it doesn't look like it is coming any time soon."
At the same time, German cut-price chain Lidl has taken a significant share of the Estonian market with its newer products and somewhat lower prices. "This shows that some people are ready to change their consumption habits, while the majority of people have been too lazy to do so. But in a situation of rapid price increases, it has not been so easy to assess which store is cheaper, and where you can buy something cheaper," Uusküla went on.
The Competition Authority's investigation into the Estonian retail market by the will take at least a year-and-a-half.
Comment from the director of the Estonian Merchants' Union
Nele Peil, head of the Estonian Merchants' Union (Eesti Kaupmeeste Liit) provided the following commentary to ERR
Store pricing generally depends on category management strategies. This means that a seller puts a different markup on each different product. It is possible that they will place a higher markup on those products they know they can charge a higher price for, while they can put a significantly lower markup with another category when, for example, there is very tight competition with another retailer in this product category.
The idea of markup is to cover the cost of the trade itself by selling that product, plus to make a profit. In the food trade, overheads are quite high. They are primarily related to a store's own space, equipment, utility costs, rent due to the owner of the space, and wage costs.
Profit margins in the food trade are very small, since it is a volume business. They usually hover somewhere between the two and four percent mark. For example, the profitability for food industries is significantly higher. In contrast, the profit margin regarding fashion goods is higher, because it is not such a large volume business.
Peil says she does not particularly believe that if Estonian merchants were to significantly reduce the store network size (see above), prices in Estonia would drop significantly.
There are likely other factors that affect the price level more. Number one on this list is how small our economy is and how far away we are from major roads in terms of logistics. Our buy-in prices are simply higher than they are for most other major countries.
Peil said she also doesn't find the argument that Estonian retailers buy products from costlier Scandinavian producers, instead of looking to cheaper southern countries, to be an overly compelling one.
The interest for retailers is to buy a product at the cheapest possible price, because then they can add their markup and sell this product on to the consumer at a competitive price. The only reason why a retailer would intentionally buy a product at a higher price somewhere from the Scandinavian market, when they can get the same product cheaper in, say, Poland, would be when that manufacturer refuses to sell to him at the cheaper price in, say, the Polish market. This is certainly a thing. It is known as territorial purchase restriction, and the trade sector at EU level has actively battled to abolish such territorial purchase restrictions. That said, I am not aware of this being a very widespread problem in Estonia.
Editor: Andrew Whyte, Mirjam Mäekivi