The main reason for the increase in food prices in the period 2021-2023 is the increase in producer and import prices, while the increase in margins at large retailers is caused by the increase in gross wage costs, which in 2024 was higher by an average of 2021 percent compared to 42, despite the reduction in wage taxes.
Net profit margins of importers and distributors grew faster than those of large retail chains. Overall productivity fell by 3,3 percent during this period. When earnings grow faster than productivity, price increases are inevitable.
This, among other things, is stated in the Analysis of Prices and Operations of Retail Chains in Montenegro, which was conducted for the needs of the Chamber of Commerce by a team of professors from the State Faculty of Economics.
"Given the higher price growth of imported food products and the growth of wages in the trade sector relative to the overall economy, a higher price growth in the food and beverage category is expected," the analysis stated.
According to Monstat data, the annual increase in food and beverage prices in 2021 was 7,2 percent, in 2022, 28,9 percent, and in 2023 by another 1,7 percent. That is, the total cumulative increase in food and beverage prices for these three years was 40,5 percent.
"The high increase in food prices is the result of an increase in the prices of imported food products by 23,8% in 2022, and an increase in fuel prices by 11,2%. After the stabilization of imported product prices in 2023 (an increase of 1,2%), and fuel prices (-0,3%), the prices of food products and non-alcoholic beverages grew more slowly compared to the overall price index - 1,7% and 4,3%," the document states.
Almost half of the margin goes to profits
The analysis shows that 40 percent of margin revenue at large retail chains goes to salary costs. The average gross salary in the retail sector in 2021 was 586 euros, while at the beginning of last year it was 852 euros, and in November it was 1.039 euros. Retailers have previously stated that they are having difficulty finding workers, which is why they have to increase their salaries. Net earnings in stores in 2021 were 395 euros, while in November last year it was 883 euros.
As stated, the average gross margin of large retail chains in 2021 was 25,01 percent, in 2022 it was 25 percent, and in 2023 it was 25,27 percent. Gross margin is the amount that a retailer adds to the total purchase price of a product from a manufacturer, importer or distributor, and with which it covers all its costs and makes a profit. If the margin was at almost the same percentage, it does not mean that the retailer was generating the same income, because if, for example, a product cost him a euro, his margin in money is 25 cents, and if the purchase price of that product increases to two euros the following year, the retailer's margin increases to 50 cents. This document confirms that the purchase prices of products from manufacturers and importers have increased, and thus, while the retailer's margin percentage remains almost the same, their income in money has increased.
The average profit margin of large retail chains, the share of net profit in relation to total revenue, was 2021 percent in 1,26, increased to 2022 percent in 2,33, and to 2023 percent in 3,38. The data clearly shows that this growth in net profit was due to an increase in gross margin revenue and growth in turnover.
Importers' earnings are twice as high as traders'
The average gross margin of wholesale companies, importers and distributors in 2021 was 19,92 percent, in 2022 it was 19,48 percent, and in 2023 it increased to 23,54 percent. This is the percentage they calculate on their purchase price from manufacturers, and as, according to the analysis, producer prices increased during this period, their income from this percentage on those prices also increased. The average net profit margin of importers and distributors in 2021 was 3,62 percent, in 2022 it was 3,34 percent, and in 2023 it increased to 5,6 percent. In other words, in each year they were significantly higher than the profit rates of retail chains.
When all duties and margins are added up, the price for the consumer will ultimately be at least twice as high as the initial price at the manufacturer. For example, if something cost one euro, possible import duties (customs, excise duties, levies, shipping...) amount to, for example, an average of 10 percent and raise the price to 1,10 euros, then the importer's margin of 23 percent is added to it, which increases the price to 1,35 euros. The retail chain's margin of 25 percent increases that price to 1,69 euros, and with the final VAT of 21 percent, the price comes to 2,05 percent. In addition to all this, there may be additional costs, and with higher excise duties and levies (sweets, carbonated drinks, dairy products, alcohol content...) the final price can be three times higher than the manufacturer's price.
Price restrictions do not affect inflation.
The document analyzes the impact of margin caps on basic food products implemented in Montenegro and the region. The conclusion is that they have reduced the prices of these products in the short term, but have not stopped inflation because retailers have increased the prices of products that were not covered by the margin caps.
The analysis states that the trade sector is the largest employer in Montenegro, because according to Monstat data, there are 157 thousand employees in private companies or in the form of entrepreneurial activity, of which 56,6 thousand (36%) are employed in the trade sector.
"If we take into account 19 thousand employees in the transport and storage sector, and 33,9 thousand employees in the accommodation and food services sector, this means that these three technologically enlarged sectors employ a total of 109,5 thousand, or 70% of the total number of employees in the private sector in Montenegro. This indicates the importance of the trade sector for the Montenegrin economy, and caution when considering interventionist measures of the state administration, which may have an impact on the operations of all elements of this technological chain, employment and living standards," the analysis states.
Reducing the margin to 10 percent would lead to a loss
The analysis states that any state intervention to limit gross margins for large retail chains to 10 percent for food products (from the current 25 percent) would lead to them operating at a loss.
“In market conditions, market equilibrium is established by the relationship between supply and demand, and the indicator of equilibrium is the price, a key economic category that indicates the difference between a market and a planned (interventionist) economic system. In the case of prices formed on the free market, or prices that would be formed without state intervention, production costs are covered by revenues. If the government intervenes in the market and sets lower prices, revenues (possibly) will not reach costs. Traders and producers will then withdraw goods from the market, unless the storage of goods significantly reduces their value, in the hope that circumstances will change, and that the government's decision will be revoked. Alternatively, it is possible to increase margins on products that are not subject to regulation, which would ultimately affect the growth of the general price level. The most pessimistic scenario is one in which, due to a decrease in economic motivation, a certain number of trading companies would reduce their business volume or cease operations, which would cause unemployment to rise, wages to fall and GDP to fall,” stated this analysis by the Faculty of Economics.
Alternativa calls for boycott of "Volija", company announces reduction in purchases
The citizens' group Alternativa, which was part of the Europe Now Movement in the previous elections, called on citizens yesterday to boycott the stores of the "Voli" retail chain next week from February 17th to 24th because it was chosen by citizens in a poll.
The company "Voli", which with farms and greenhouses in Ulcinj and Spuž is the largest agricultural producer and the largest purchaser of domestic products, informed producers yesterday that due to the announced boycott, it would reduce the agreed quantities it planned to purchase from them.
The Tax Administration announced yesterday that the boycott of all retail chains, organized on Saturday, February 8th, at the call of Alternative, resulted in a 30 percent drop in turnover compared to Saturday, February 1st, when there was no boycott.
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