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.