The primary driver behind the rise in food prices from 2021 to 2023 has been the escalation in producer and import costs. Additionally, the surge in profit margins at major retail outlets has been attributed to increased gross wage expenses, which saw an average increase of 42 percent in 2024 compared to 2021, despite a decrease in wage taxes.

During this time, net profit margins for importers and distributors escalated at a pace quicker than that of large retail chains. Overall productivity also declined by 3.3 percent in this timeframe. When earnings outpace productivity growth, price hikes become unavoidable.

This analysis is detailed in the “Analysis of Prices and Operations of Retail Chains in Montenegro,” conducted for the Chamber of Commerce by a group of professors from the State Faculty of Economics.

“Given the elevated price growth of imported food products and the rise in wages within the trade sector relative to the broader economy, a further increase in food and beverage prices is anticipated,” the analysis mentions.

According to Monstat data, the annual growth in food and beverage prices was 7.2 percent in 2021, 28.9 percent in 2022, and an additional 1.7 percent in 2023. This translates to a total cumulative increase of 40.5 percent over the three years.

“The significant escalation in food prices stems from a 23.8% rise in the prices of imported food products in 2022, alongside an 11.2% increase in fuel prices. Following a stabilization in the prices of imported products in 2023 (up 1.2%) and a decrease in fuel prices (-0.3%), the rate of price increase for food and non-alcoholic beverages was slower than the overall price index – recording increases of 1.7% and 4.3% respectively,” the report states.

Nearly half of the margin is allocated to profits

The analysis reveals that 40 percent of margin revenue in large retail chains is consumed by salary costs. The average gross salary in the retail sector rose from 586 euros in 2021 to 852 euros at the start of the previous year, reaching 1,039 euros by November. Retailers have expressed challenges in recruiting staff, prompting them to raise salaries. In 2021, net earnings in stores were 395 euros, while by November last year, they had increased to 883 euros.

As indicated, the average gross margin for large retail chains was 25.01 percent in 2021, 25 percent in 2022, and 25.27 percent in 2023. The gross margin represents the excess that retailers add to the total purchase price of a product obtained from a manufacturer, importer, or distributor, which covers their expenses and generates profit. Even though the margin percentage remained relatively constant, it doesn’t imply that retailers were generating the same income; if a product cost one euro, their margin would be 25 cents, and if the cost rose to two euros the following year, the margin would increase to 50 cents. This document confirms that product prices from manufacturers and importers have risen, thus while the percentage margin for retailers remains stable, their actual income in monetary terms has grown.

The average profit margin of large retail chains, which is the ratio of net profit to total revenue, was 1.26 percent in 2021, increasing to 2.33 percent in 2022, and further to 3.38 percent in 2023. The data clearly illustrates that this uptick in net profit was a consequence of enhanced gross margin revenue and turnover growth.

Importers’ earnings significantly outpace those of retailers

The average gross margin for wholesale companies, importers, and distributors stood at 19.92 percent in 2021, dipped to 19.48 percent in 2022, and escalated to 23.54 percent in 2023. This percentage is calculated based on their purchase price from manufacturers, and as producer prices increased during this period, their earnings derived from this percentage also saw a boost. The average net profit margin for importers and distributors was 3.62 percent in 2021, 3.34 percent in 2022, and rose to 5.6 percent in 2023. Thus, their profit rates consistently surpassed those of retail chains.

When all duties and margins are accounted for, the consumer price ultimately becomes at least double the initial cost at the manufacturing level. For instance, if a product costs one euro, with potential import duties (customs, excise taxes, shipping, etc.) accounting for an average of 10 percent, the price increases to 1.10 euros. Then, adding the importer’s margin of 23 percent raises the price to 1.35 euros. When the retail chain’s margin of 25 percent is applied, this brings the total to 1.69 euros, and after applying a final VAT of 21 percent, the price reaches 2.05 euros. Moreover, there may exist additional costs, along with increased excise duties and levies (for sweets, carbonated drinks, dairy products, alcoholic beverages, etc.), meaning the final price could be three times that of the manufacturer’s price.

Price controls have no significant effect on inflation.

The analysis evaluates the effects of margin limits on essential food items imposed in Montenegro and the surrounding region. The conclusion reached is that while these measures temporarily reduced the prices of covered products, they did not curb inflation, as retailers adjusted the prices of items not included in the margin restrictions.

The analysis indicates that the trade sector is the largest employer in Montenegro, with Monstat data showing 157 thousand employees engaged in private companies or as entrepreneurs, of which 56.6 thousand (36%) work in the trade sector.

“Factoring in 19 thousand employees in transportation and storage, along with 33.9 thousand in the accommodation and food service sectors, these three technologically expanded sectors employ a collective total of 109.5 thousand people, equating to 70% of the total workforce in Montenegro’s private sector. This underscores the significance of the trade sector within the Montenegrin economy and suggests caution against any state intervention measures that may affect the dynamics of this technological chain, employment, and living standards,” the analysis asserts.

Reducing the margin to 10 percent could lead to losses

The analysis warns that any governmental attempt to cap gross margins for large retail chains at 10 percent for food products (down from the current 25 percent) could result in operational losses for those chains.

“Within market dynamics, equilibrium is established by the supply and demand relationship, with price serving as the indicator of that equilibrium – a fundamental economic principle that differentiates a market economy from a planned (interventionist) one. In cases where prices are dictated by a free market, production costs are reasonably met by revenues. If the government steps in and imposes lower prices, revenues may fail to cover costs. Retailers and producers may consequently withdraw goods from the market unless storage significantly depreciates their value, hoping for a shift in circumstances that would annul the government’s decision. Alternatively, retailers might increase margins on non-regulated products, eventually fueling overall price increases. The most dire scenario could involve a decline in economic motivation, leading some retailers to reduce operations or exit the market altogether, which could elevate unemployment, depress wages, and contract GDP growth,” states this Faculty of Economics analysis.

Alternativa urges a boycott of “Volija,” company plans to reduce purchases

The citizens’ group Alternativa, associated with the Europe Now Movement in previous elections, called on citizens to boycott “Voli” retail chain outlets from February 17th to February 24th, following a public poll.

The “Voli” company, which with farms and greenhouses in Ulcinj and Spuž holds the title of the largest agricultural producer and the foremost purchaser of domestic products, notified its producers that it would be diminishing the outlined purchase quantities due to the upcoming boycott.

The Tax Administration reported that the boycott of all retail chains, organized on Saturday, February 8th, prompted a 30 percent drop in turnover compared to the previous Saturday, February 1st, when no boycott was in effect.

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