In recent weeks, accusations have surfaced suggesting that Estonia's high food prices are due to excessively large retail spaces. This is a mistaken notion that is based neither on facts nor on market logic.

Retail is a volume business, not a vanity project. To offer consumers a wide selection, affordable prices and a modern shopping environment, operations must be efficient, high in volume and subject to intense competition.

Will we ban new stores?

If there really were too much retail space, would the solution be to prevent new stores from opening or to force one business to close so another could have an easier time? That won't lower the price of a package of ground meat. On the contrary — it would allow the remaining store to raise prices, because consumers would have fewer choices and traveling farther to shop means higher costs. When competition decreases, prices go up — that's a basic economic principle.

It's true that the era of hypermarkets is over, and that's the one point where the recent analyses by the prime minister and finance minister are correct. These formats are not cost-effective, which is why retailers have stopped investing in them for several years now. New stores are being built smaller, making expansion more manageable in terms of administrative costs.

Market self-regulating

Over the past decade, mistakes when opening new stores have been rare. If a new shop turns out to be unsuccessful, it's shut down quickly. The market is unforgiving and retailers make very precise calculations before investing. Tallinn, Tartu and Pärnu make up a large share of Estonia's economy, and in those cities, there's fierce competition for every customer. No retailer wants to lose hundreds of thousands of euros a month selling milk and bananas at a loss — but they do, because the pressure from competition is that strong.

The profitability of Estonia's grocery retail sector doesn't even come close to that of other industries. While in Finland, the market leader K Group earns a 10 percent operating profit, you can only dream about figures like that in Estonia's retail sector. In 2024, Telia alone earned more profit than the entire Estonian grocery retail sector combined.

Retail invests to stay competitive

The money needed to build new stores comes from owners' profits over a longer investment payback period — not from price increases. In 2005, it was possible to recoup the cost of opening a store within a couple of years, but today, the payback period is at least five years or more. Retail cannot be considered wasteful; on the contrary, it is a sector in a constant process of becoming more efficient.

Automation, ordering systems, self-service checkouts and reduced labor costs are all aimed at offering consumers the best possible prices. In just the past ten years alone, labor costs have decreased by as much as 30 percent.

Competition keeping prices down

It is competition that keeps prices in check. If one retailer tried to raise prices, competitors would immediately step in with a better offer. Grocery retail is a volume business — if you can't retain customers, you lose sales volume, market share and eventually your business. That's why retailers are constantly working to keep prices as low as possible.

The price comparison methodology used by the Rural Economy Research Center (METK) does not take into account the internal logic of retail. If the margin on one product is increased while another's is lowered, that doesn't mean the overall retail share of the price is rising. It simply means the pricing strategy for a specific product has changed, driven by the category strategy.

These kinds of dynamics are beyond what METK's simplified methodology can assess. Nor can they account for consumption patterns, where most products are no longer purchased at full price but rather at promotional prices.

Less choice as a possible solution

If we look for ways to lower prices by narrowing product selection — which is, in fact, a realistic way to reduce prices — then the first to suffer would be small local producers. The first items to disappear from shelves would be lower-volume cheeses, breads and sausages — exactly the kinds of products made in Estonia, with high purchase prices and average sales volumes. Do we really want an Estonia where the food selection is limited to Polish and Russian goods, sold on pallets in warehouse-style stores like A1000?

The fact is, consumers prefer stores that are clean, convenient and offer a wide selection. Even if some warehouse store manages to undercut prices on a few products by a couple of percent, that's not enough to attract the Estonian consumer en masse.

Stores operating in run-down buildings with outdated technology account for just 5 percent of the retail chains' market share. In reality, consumers don't shop there, and prices aren't actually lower either, because those stores lack economies of scale.

Retail doesn't just set prices, it also shapes our urban landscape. In many European cities where retail development has been restricted, former business districts have declined and become unsafe. When a store disappears, the life around it often disappears too.

In summary

Usually, people who've worked in their field for a couple of decades know it best. I can say, hand on heart, that all retailers know how to do the math and manage their money. They have no desire to burn it on building retail palaces — and no one is doing that. All the data cited about the volume of retail space (from Nielsen) covers only the sales areas of the nine largest retail chains. The figures do not include shopping centers, some of which may indeed look palatial, but have no effect whatsoever on the price of food.

Retail is not to blame for the high cost of food. On the contrary, it is precisely thanks to retailers' investments, efficiency and fierce competition that prices aren't even higher.

The current search for someone to blame for high food prices seems more like a PR tactic, mainly aimed at avoiding the debate over food VAT, because the state doesn't want to give up tax revenue in order to make staple foods more affordable for people. As the Estonian Traders' Association, we continue to propose a reduction in value-added tax — even as a pilot in some product categories — so that the market economy can demonstrate how it works.

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