The new government regulation will put shops in an impossible situation: they would have to stock as many price cap products as there are currently not enough in Hungary. Cheap imports could flood the country, but shops cannot obtain them overnight – which the regulation would require. The industry could be under pressure, with a further drastic price increase for non-price-capped products.
A market-destroying regulation?
According to one of the sources of portfolio.hu, the new “market-destroying” regulation is impossible to enforce with the double stock level, meaning that the government’s aim could easily be to punish and close down some (foreign) stores.
The Hungarian industry will not be able to meet the double order of price capped products. This is simply impossible, said a source to Portfolio in connection with the new government regulation. The rule, which will come into operation from mid-January, will require companies to stock price capped products on the shelves always, with a strict interpretation that they must provide twice the average daily stock previously required.
“In many cases, they could not even provide the single amount,”
said one of their sources, who said that there had been a continuous shortage of the price capped products in recent months and that there were still problems with the delivery of UHT milk and sugar. According to him, the Hungarian industry is not at all prepared to supply twice the volume, which the food industry will not be able to do later.
“It’s hell in the shops because people are already hoarding. But the cow won’t give any more milk than it has been. The chicken won’t have four breasts.”
Retail chains will now have to order double the quantity, regardless of demand, if they want to avoid a fine, said one of our sources on the fresh regulation. Therefore, many may open up to imports, but to prepare and double the quantity in 15 days seems impossible.
The purpose of the regulation and its effects
The regulation’s unhidden purpose is to end the shortage of groceries. However, by stimulating the market, all the cabinet is achieving is:
- either bring the moment closer when the government has to remove the price cap overnight, because the regulation is impossible to apply
- or the price of other non-price-capped products will continue to rise dramatically in order to cover the deficit.
One source said customers will face a huge problem. Companies have so far been covering the deficits on price capped products using other non-price-capped products. If they now have to stock twice as much as before, and therefore the deficit doubles, they will have to increase the price of non-price-capped products even more. This could happen in a few weeks, as companies will calculate within days how much their losses will increase as a result of the new regulation.
All deficits will be devolved, one of their sources pointed out. Of course, this is only true for the big chains, with more and more of the smaller ones closing down temporarily or permanently.
Highlighted by a source with insight into the retail sector:
“After the goverment publishes the regulation, the sector has once again raised the issue of attacking it in all possible areas.”
The removal of price cap
It could easily be that, due to market distortions, the food price cap will not allow soft lending, i.e. a slow removal of price cap. Therefore, the government has to bring back the market price overnight. In this case, the price of products now subject to a price cap would rise dramatically. The harsh business environment would ensure that the non-price-capped products, to which the deficits from the price cap have now been transferred, would not be cut back once the price cap is removed.
So, consumers will face a higher price level for groceries after the price cap than they would have if there had been no price cap.
The later the price cap is planned to be removed, the bigger the price growth will be. This is due to the continuous rise in purchase prices, unless the price cap market collapses before the removal, concluded one of their sources.
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