In recent weeks there have been accusations that Estonia's high food prices are caused by retail floor area being too large. This is a mistaken view that is grounded neither in facts nor in market logic.
Retail is a volume business, not a vanity project. To offer the consumer a wide selection, low prices and a modern shopping environment, you have to operate efficiently, at large volumes and in fierce competition.
Should we ban the building of stores?
If retail floor space really were too large, would the solution be to block new stores from opening or to push one operator to close its store so another has it easier? That does not bring down the price of a packet of mince. It actually lets the remaining store raise prices, because the consumer has less choice and a more distant store means higher costs. When competition decreases, prices rise — that is a simple law of economics.
The era of hypermarkets is over, that is true, and it is the only point on which one can agree with the Prime Minister's and Minister of Finance's recent analyses. Those formats are not cost-efficient, which is why retailers have not been investing in them for several years now. New stores are being built smaller, which makes expansion more functional in terms of operating costs.
The market regulates itself
Over the past decade, mistakes in opening new stores in Estonia have been rather rare. When a new store turns out to be a failure, it is closed quickly. The market is unforgiving and retailers do very precise calculations before investing. Tallinn, Tartu and Pärnu account for a large share of the entire Estonian economy, and there is fierce competition there for every customer. The retailer does not want to subsidise the sale of milk and bananas to the tune of hundreds of thousands of euros every month, but does so because the pressure of competition is so strong.
The profitability of Estonian grocery stores does not even bear comparison with other sectors. While in Finland the market leader K-Group earns ten percent operating profit, that is something Estonian retail can only dream of. Telia earned more profit in 2024 than the whole of Estonian food retail put together.
Retail invests to stay competitive
The money needed to build new stores comes from owners' profits over a long investment payback period, not from price increases. While in 2005 it was possible to recoup the cost of building a store in a couple of years, the payback period is now at least five years or more. Retail cannot be called wasteful; on the contrary, the sector is in a constant process of becoming more efficient.
Automation, ordering systems, self-service checkouts and reducing labour costs are all aimed at offering the consumer the best possible price. In the past ten years alone, labour costs have come down by up to 30 percent.
Competition keeps prices down
It is competition that keeps prices in check. If one retailer tried to raise prices, competitors would immediately be ready to offer a better deal. Grocery retail is a volume business — if you cannot retain customers, you lose sales volume, market share and ultimately your business. That is why retailers are constantly working to keep prices as low as possible.
The price-comparison methodology used by the Centre of Estonian Rural Research and Knowledge (METK) does not take account of retail's internal logic. If the margin on one product is raised while at the same time the margin on another is lowered, that does not mean retail's overall share of the price grows. The strategy on a particular product has simply changed, driven by the strategy for the category.
METK's simplified methodology cannot capture such dynamics. Nor can it capture the structure of consumption, where most products have long since not been bought at full price but at promotional prices.
Cutting the assortment as a solution
If you look for a way to lower prices by narrowing the assortment, which is in fact a real way to lower prices, the first to suffer would be local small producers. The first to disappear from shelves would be slow-moving cheeses, breads and sausages — exactly the products made in Estonia, with high purchase prices and average turnover. Do we really want an Estonia where the food choice is limited to Polish and Russian products sold from euro pallets in A1000-style warehouse stores?
The fact is that consumers prefer stores that are clean, comfortable and offer a wide selection. Even if some warehouse store can offer a couple of percentage points' price advantage on certain products, that does not draw the Estonian consumer in en masse.
Stores operating in run-down buildings on outdated technology account for only five percent of the retail chains' market share. Consumers do not actually shop there, and prices are not in fact lower either, because they do not enjoy economies of scale.
Retail does not just shape prices, it also shapes our urban environment. In many European cities where retail development has been restricted, once-thriving commercial districts have gone to seed and become unsafe. When a store disappears, often the life around it disappears with it.
In conclusion
Usually, the people who have spent a couple of decades working in their field know it best. I can put my hand on my heart and say that all retailers know how to count and to count their money. They have no desire to burn it on building retail palaces, and no one is doing so. All the underlying data cited about the volume of retail floor area (from Nielsen) is based only on the sales floor area of the nine largest retail chains. The underlying data does not include shopping centres, some of which really are palatially beautiful but which have no effect on food prices whatsoever.
Retail is not to blame for the high price of food; on the contrary, it is precisely thanks to retail's investments, efficiency and intense competition that prices are not even higher.
The current search for someone to blame for high food prices looks more like a PR move whose main purpose is to avoid debate on food VAT, because the state does not want to give up its tax revenue so that staple foods would be cheaper for people. From the Merchants' Association we continue to propose piloting a VAT cut, even on just a few product categories, so the market economy can show how it works.