New cap on supermarket profit margins takes effect in Hungary – key details you need to know

The National Economy Ministry has announced that a mandatory 10% cap on supermarket profit margins for 30 basic food products came into effect on Monday.

The ministry stated that the measure could reduce product prices by more than 10%. It also warned that failure to comply with the new regulation would result in the profit margin being applied to all food products. As a last resort, the government could reintroduce regulated prices, it added.

As we reported last week, food inflation stood at 7.1% in February, and the government has announced a price-cut freeze on retail chains. Details HERE: Orbán’s response to inflation is to fuel inflation: supermarket margins capped.

Margin does not equal profit

The background is that the government had already communicated in late February that such a restriction could be introduced if shops did not implement voluntary price cuts. The government has held several meetings with the heads of the six largest supermarket chains: Lidl, Aldi, Penny, Tesco, Auchan, and Spar. However, only two of them have made proposals that would have led to price reductions, according to Economy Minister Márton Nagy. Consequently, last week, a fresh government decree introducing a margin freeze was issued.

What is a margin, and how is it different from a profit? A margin is the difference between the purchase price of a product and its selling price. The government consistently confuses the concepts of profit and margin, leading people to believe that margin is simply profit. However, in retailing, the margin is far from being the same as profit.

In retail, the margin represents only the revenue that shops earn; it is an additional item in a shop’s budget. From this, they must cover all costs, including employees’ wages, energy bills for running stores, and the retail tax levied by the government. Given these numerous deductions, experience shows that there is not much profit in this sector, with companies in Hungary often content with a profit margin of just 1%.

According to Telex, available financial data shows that two-thirds of the retailers affected by the margin freeze ended 2023 with a profit below 5%, with almost half reporting profits below 3%. Three of the six largest chains recorded losses in 2023, while the two profitable ones barely broke even at 1% of revenue. This clearly demonstrates that, as with the previous price freeze, the government is placing the financial burden on retailers rather than reducing VAT, which remains the highest in Europe.

According to the government, the reason for the newly devised price freeze is their belief that retailers are operating with unrealistically high margins, which they deem “unacceptable”. Of course, this is contradicted by the figures mentioned above, yet the government has decided to cap the margins retailers can apply to 30 product groups at 10% from 17 March. Where margins were previously below this level, they cannot exceed their previous rate. For now, the restriction will remain in place until 31 May 2025, but as next year’s elections approach, the likelihood of the government lifting this regulation decreases.

The provision will only affect a subset of retail businesses, specifically those whose main activity is the “mixed retail sale of foodstuffs” and whose net turnover in 2023 exceeded HUF 1 billion. Based on this, around 200 firms will be affected by the price freeze from Monday. Consumer protection authorities will fine retailers who breach the restriction between HUF 500,000 and HUF 5 million.

Prices from producer to consumer in several steps

The margin freeze now in place applies only to retail. Do only shops apply margin squeeze on sales? The government is demonising the players visible to shoppers – the retail chains – and accusing them of excessive price mark-ups. However, they are merely the final players in the distribution chain. By the time a food product reaches consumers, it has already passed through multiple companies, each adding their margins, which also do not equate to profit.

Telex used the example of milk to illustrate how one of the products affected by the margin freeze, 2.8% UHT milk, moves from farm to table. In January 2025, the average producer price of raw milk was 206.96 forints per litre – the price at which the producer sells the milk to the processor, who then resells it to retailers. According to AKI figures, the average selling price to processors in January 2025 was 335.33 forints. The processor, therefore, applied a margin of 128.37 forints, equating to a 62% margin. In January 2025, the average retail purchase price of producer-brand (non-private label) milk in stores was 558.57 forints, with a margin of 218.13 forints, or 64%. Own-brand milk was sold for significantly less, at 340.44 forints, with a margin of about 13%. It is, therefore, evident that the price of a product is influenced by multiple actors, including the state, which also generates revenue from each product sold through VAT. For example, in a three-stage process, the milk is subject to three different margins, but there can be even more stages before it reaches consumers.

Margins and inflation

The government and experts do not entirely agree on this issue. According to Dávid Németh, a macroeconomic analyst at K&H, the measure’s impact on inflation is likely to be minimal. Even if it results in a short-term decrease in food prices, the effect will last for only one or two months at most. Péter Virovácz, a senior analyst at ING, does not anticipate any significant impact, arguing that the restriction is likely to have a political rather than economic effect – that is, it may lower the inflation rate perceived by voters in their daily lives but will not significantly affect figures measured by the Central Statistical Office (CSO). If the restriction does impact inflation, it could even be detrimental.

As we have previously reported, it is expected that, just as with the price freeze, shops will attempt to compensate for their losses by increasing prices on other, non-restricted products. Once the restrictions are lifted, prices are likely to rebound in the same manner as they did after the previous price caps were removed.

The government argues in favour of the margin freeze, stating that similar measures have been introduced in other countries, which is true. However, in most cases, those governments have also reduced VAT, whereas in Hungary, the government only finds it acceptable if someone else bears the cost while they continue to collect high taxes. Furthermore, experiences in Croatia, Romania, and North Macedonia have shown that applying a margin freeze for a short period may be effective, but in the long run, inflation remains just as rampant.