Speaker Raija Itkonen (1998)
(Source: Studies and Reports. Thirty-first in the series
The Impact of the European Union’s Enlargement on Co-operatives. Papers presented at a seminar held in Prague 3-4 November 1997, p. 46-53 )
The impact of EU membership on the trade sector
Finnish integration with Western Europe dates from 1961 when Finland joined the European Free Trade Association, EFTA, as an associated member, and subsequent negotiations over entry into the European Economic Area. By these measures Finland wanted to ensure access to the benefits offered by the European market, which was considered vital for the Finnish economy, although the country’s neutrality policy did not allow full integration. When the political polarization came to an end in Europe the situation changed. There was no longer any political reason why Finland should not fully participate in the European integration.
The Government of Finland submitted the membership application to the then European Community in March 1992. Three years later, on 1 January 1995, Finland became member of the European Union. In the referendum in October 1994 56.9 per cent of the votes were for and 43.1 per cent against membership, which gave the Finnish Government and Parliament a firm basis for their decision to join the Union.
However, voting against membership was fairly substantial proving that there was considerable uncertainty among ordinary people about the effects of membership on the everyday life of Finns and on the political and economic situation in Finland. It was felt fairly generally that EU membership would have a favourable effect on exports and foreign trade, science and research, overall entrepreneurial activity, competition in business and Finland´s image abroad, whereas a negative effect was feared on social security, national sovereignty, the crime rate, the amount of bureaucracy and the status of farmers.
The importance of the trade sector
Trade is the second largest area of economic activity within the European Union. The success of trade has important consequences for employment in all member states. Over 22 million people in the EU work in commerce, which is almost 16 per cent of the total work force in the area.
Concentration of trade is a reality in all member states, but in the food trade in particular this has gone further in the Nordic countries. For example, retail trade in Finland is dominated by four groups, with the three largest ones accounting for 82.5 per cent in 1996. The share of consumer cooperative food retail trade is also considerably higher in the Nordic countries; it was 35.5 per cent in Finland at the end of 1996.
Trade employees number 250,000 out of a population of 5.1 million in Finland, about 13 per cent of the total labour force, even though more than 80,000 jobs have been lost in this sector during the 1990s as a result of structural changes. Trade accounts for about 10 per cent of GDP. Some 30 000 people are working in the grocery trade in Finland.
Finnish trade sector favoured EU membership
The Finnish trade sector, including consumer co-operatives, defined its position on membership of the European Union by assessing the pros and cons of joining. The conclusion was that the trade sector would benefit from membership, although not dramatically as the earlier European Economic Area agreement had already extended the four freedoms of the internal market to Finland. The task of safeguarding the sector´s interests during the period of negotiations was carried out collectively by the joint interest organisations of wholesale and retail trade. They lobbied Finnish politicians and carried out negotiations with the state authorities. Co-operative leaders naturally also used every opportunity to lobby for their cause. In Brussels, the lobbying vis-à-vis the Commission was in addition to Finnish representations by Euro Coop and Euro Commerce, the latter being the joint representation of European wholesale and retail trade.
Effects of membership
The retail trade in particular was estimated to benefit most from membership of the European Union as it would bring down food prices. Such expectations were based on the fact that producer prices would fall to the European level. Changes in taxation practices, the freeing of imports and increased foreign competition were also forecast to have a reducing influence on prices. Falling producer prices were expected to be reflected in retail prices quickly after joining as the government had promised to compensate producers for loss of income and reduction in the value of stock held by industry and trade.
Prior to membership of the EU, the Finnish food industry had operated in a closed and regulated market. With many products, importation was virtually impossible and exports were heavily subsidised. The immediate effect of the EU price-adjustment model was to free imports from other countries of the internal market. Likewise, exports to these countries were now unsubsidised. Thus overnight the Finnish food industry and trade changed from a regulated market to a free economy in open competition with other EU countries.
All in all, foreign trade has become simpler. Problem areas in the food trade proved to be the transfer to the EU´s VAT system, adjustment to the customs system (there was virtually no transition period because the authorities were late in issuing new instructions) and bureaucratic delays in compensating for changes in the value of stocks. Also the transfer of the border control over foodstuffs to the trade itself involved a considerable change.
Further problems with foodstuffs have arisen in consequence of the protectionist quota and customs system of the EU concerning certain articles produced in countries outside the EU, for example bananas and tinned tuna, which have led to an increase in their prices in Finland.
The effect of membership on the cost of non-food items has mainly concerned goods coming from third countries, which have become more expensive. As regards the trade within the EU no changes have occurred, as consumer goods were already exempt from duty. The prices of goods coming from third countries were affected not only by customs duties but also by diminished quantities. The quotas set by the EU were some 30-70 per cent smaller than the quantities previously imported.
Due to the significant price decreases in the home market, imports have been smaller than forecasted. The market shares of domestic producers in the basic foodstuffs industry have been well maintained. Industry and trade have made effective use of the improved price competitiveness.
The full effect on consumer prices of decreases in raw material prices and changes in taxes brought about by the Accession Treaty with the EU was in advance estimated to be 9.5 per cent. The change in prices has been studied by comparing November 1994 prices to those for the similar period in 1995. During this time consumer prices declined by an average of 11 per cent, which meant that consumers paid over four billion marks less for their food. The price of eggs fell most (by over 42 per cent), with margarine and vegetable oils coming second by almost 24 per cent. The prices of meat products fell by almost 20 per cent. The situation has remained virtually unchanged, but pressure has grown to increase prices due to the rise in the exchange rate of the US dollar, for instance.
Finnish food products also compete on grounds other than price. Proximity, freshness, cleanliness and familiarity are all competitive advantages. There is a greater appreciation of Finnish-produced food since the country joined the EU. Consumers and consumer organisations have started to value domestic quality, one reason being the so-called “Mad Cow” disease. Another positive result has been to activate pro-duct development in the Finnish food industry. The removal of protectionism has forced it to become more customer-oriented and modernising.
The quality and diversity of ranges grows in importance as a means of competition in the food trade. In practice this means an expansion in the range of the average supermarket from about 5000 articles as now to some 10000 articles. This offers increasing opportunities for pro-duct development among those Finnish producers who remain in the lead, but also increasing demands for the trade to adjust.
Finnish food must also succeed in competition with leading international brands. The possibilities for domestic industry lie in a more customer-oriented product development and improved co-operation with trade, especially in the field of logistics. For a formerly protected food industry, adhering to outdated operating models poses one of the biggest threats when facing competition from European industry.
Membership of the EU has not significantly altered the source of imports as previously about half of them already came from the EU area, and now this has increased to 60 per cent. At present imported food accounts for about 10 per cent of the total on offer and it would seem that foreign suppliers will continue in their role of supplementing ranges.
Adjustment to membership
The sales efficiency of the Finnish grocery trade is relatively high compared to Europe as a whole. The recession of 1991-94 strengthened the structures of Finnish trade, forcing enterprises to examine their cost levels and improve cost-effectiveness.
Structural changes in the Finnish grocery trade began in the 1980s which helped adjustment to EU membership. The main changes in addition to concentration and wholesale-retail integration, have been:
- growth in the number and market-shares of hypermarkets and supermarkets
- a radical growth in the share of chain-based stores.
- a growth in the number and market-share of discount stores
More than the other new members of the EU, Finland has managed to pass on the benefit of lower prices to the consumers. In order to face the challenges posed by present competition and future consumers, trade has to continuously improve its cost effectivity and price favourableness to its customers. Much can still be done to improve cost-effectivity through cooperation between domestic industry and trade. Collaboration in developing logistic processes in industry and trade demands a more unbiased attitude. Similarly, the quality of products and services must be guaranteed and strengthened. This is all possible through closer collaboration between trade and the food industry.
Finnish consumer co-operative operations in the grocery trade were well prepared when the country joined the EU. Computerised goods-flow control had converted the former producer-wholesale-retail system into one allowing more direct deliveries from suppliers to retail outlets. Consumer co-operatives had also increased their buying power and reduced costs through concentrating the sourcing, storage and delivery of groceries into one jointly-owned company. They had modernised their store networks and introduced chain operations. The main principles of these chains, cost-effectivity and advance control system proved their worth during the transition stage.
Due to its centralised pricing system, the cooperative S Group, the second biggest retailer in Finland, was able to use Euro-prices from the first day of membership. It had carefully prepared for the changes and provided chain units with detailed instructions from pricing and taxation to marketing. Centralised pricing, which extended as far as producing the shelf labels, gave the Group the leading position during transition. From the long perspective, it can be seen that the thorough preparation for membership provided the opportunity to increase market shares. The S Group´s market share in food retail trade is estimated to have risen from 20.3 per cent in 1994 to 25 per cent now. According to the National Consumer Administration´s shopping basket study, the S Group was foremost in making price changes. The Group´s average price level decline was 12.3 per cent. Its food basket is by 2-5 per cent cheaper than its competitors and it was also much quicker at reducing prices. Second best was Co-operative Tradeka Group with 11.8 per cent average price decline.
Membership of the EU offers greater opportunities for improving the competitiveness and services of co-operative chains and to differentiate them from each other and competitors. In a small market in a closed economy, price is virtually the only way to be distinguished from competitors.
As the markets open up so the power of negotiation increases. Also as advanced information technology allows improved monitoring of consumer behaviour, so consumer co-operation can more clearly profile itself in the consumers´ interest.
Success, however, depends on continuous modernisation, vigilance, diligence and creativity.
Co-operative retail trade success factors in the EU:
Finnish membership in the EU has not been without problems, yet no serious difficulties have been met with so far. Economic co-operation and a sense of political affinity are among the most positive results.
Looking at developments in Finnish living conditions as a whole, 67
per cent of Finns think that they are not affected in any way by membership.
There are, however, three matters in which favourable impact is seen more
than anywhere else. They are prices of foodstuffs, impact on exports
and foreign trade, and Finland´s overseas image.
Manager of International Relations , FCCA Helsinki
Vice Chairperson of the ICA European Council