Commission staff working document - The functioning of the food supply chain and its effects on food prices - Accompanying document to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - Food prices in Europe - Including a roadmap to improve the functioning of the food supply chain
Date: 2008-12-09
Institutions: European Commission
Subjects: economic consequence, economic policy, food price, price increase, price of agricultural produce, supply, trade policy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 9.12.2008 
SEC(2008) 2972 

COMMISSION STAFF WORKING DOCUMENT 

The functioning of the food supply chain and its effects on food prices 

Accompanying document to the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

FOOD PRICES IN EUROPE 

Including a roadmap to improve the functioning of the food supply chain 

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TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

6.1. 

6.2. 

6.3. 

6.4. 

7. 

Introduction and background ....................................................................................... 3 

Complexity of the food supply chain ........................................................................... 4 

Economic importance and efficiency of sectors along the food supply chain............. 6 

Share in EU value added, employment and consumption expenditure........................ 6 

Economic performance: productivity and innovation.................................................. 8 

Determinants of consumer food price developments in the EU ................................ 10 

Recent developments in food prices .......................................................................... 10 

The pass-through and price stickiness along the food supply chain .......................... 13 

The role of the food retail market structure ............................................................... 19 

Regulatory issues ....................................................................................................... 19 

The effect of the regulatory framework and price levels ........................................... 19 

Entry regulations ........................................................................................................ 20 

Shop opening hour restrictions .................................................................................. 21 

Regulations restricting the ability to compete on prices ............................................ 21 

Enforcement of consumer protection rules ................................................................ 23 

The role of competition along the food supply chain ................................................ 23 

Market structures along the food supply chain .......................................................... 23 

The link between competition, price levels and inflation .......................................... 27 

Horizontal practices ................................................................................................... 28 

Vertical issues ............................................................................................................ 29 

Conclusion.................................................................................................................. 32 

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COMMISSION STAFF WORKING DOCUMENT 

The functioning of the food supply chain and its effects on food prices 

1. 

INTRODUCTION AND BACKGROUND 

In  the  second  half  of  2007  price  increases  of  many  agricultural  commodities  accelerated 
rapidly  and  by  early  2008  reached  exceptional  levels.  These  increases  have  been  mainly 
driven  by  a  temporary  imbalance  between  demand  and  supply  –  against  the  background  of 
structurally  rapidly  increasing  demand  for  food  products  across  the  globe.  The  agricultural 
commodity price surge generated a rapid increase in consumer food prices, which peaked in 
July  2008.  Within  the  EU  the  largest  producer  and  consumer  food  price  increases  were 
reported  in  the  new  Member  States.  In  the  light  of  these  developments,  the  Commission 
decided  in  its  May  2008  Communication  "Tackling  the  challenge  of  rising  food  prices  - 
Directions  for  EU  action"1  to  investigate  the  functioning  of  the  food  supply  chain  with  the 
following  objectives:  1)  to  better  understand  how  the  degree  of  competition  in  the  food 
industry  and  the  downstream  retail  markets  may  have  affected  price  developments;  2)  to 
identify some best regulatory practices and formulate recommendations; and based on this 3) 
to  identify  possible  actions  at  the  Community  level.  This  analysis  has  benefited  from 
consultations  and  discussions  with  Member  States  including  competition  and  regulatory 
authorities, as well as dialogues with stakeholders in the markets along the food supply chain. 

The  food  supply  chain  is  complex.  It  is  composed  of  a  wide  diversity  of  products  and 
companies which operate in different markets and sell varied food products to various types 
of purchasers. The regulatory framework affects the food supply chain at all levels from the 
agricultural  sector  down  to  retail.  The  degree  of  market  power  held  by  the  firms  along  this 
chain  varies  by  product  category  and  is  influenced  by  the  relevant  markets  in  which  these 
firms  operate.  It  has  an  impact  on  the  contractual  relationships  between  the  main  players 
along  the  chain  and  can  influence  the  degree  of  transmission  of  the  increase  in  agricultural 
commodity prices into consumer prices.  

Given the complexity of the food supply chain, general conclusions regarding its functioning 
should  only  be  drawn  with  caution.  This  document  attempts  to  contribute  to  a  better 
understanding of the functioning of the food supply chain in order to allow a more informed 
debate on policy proposals. It also identifies a number of issues that would merit further in-
depth  analysis.  The  policy  recommendations  derived  from  this  analysis  are  presented  in  the 
Communication "Food prices in Europe: Including a roadmap to improve the functioning of 
the food supply chain". 

The  present  staff  working  paper  starts  with  a  description  of  the  food  supply  chain  and  its 
constituent sectors, thus setting the framework within which interactions between firms take 
place.  In  section  3,  the  paper  provides  an  overview  of  the  economic  importance  and 
performance of the sectors belonging to the food supply chain. Section 4 makes an analysis of 
the  food  price  transmission  mechanism,  looking  in  particular  at  the  pass-through  of  price 
developments along the food supply chain. The regulatory framework and its possible impact 

1 

COM(2008) 321/3, "Tackling the challenge of rising food prices - Directions for EU action". 

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on  prices  is  analysed  in  section  5.  Section  6  gives  an  overview  of  the  conditions  of 
competition along the food supply chain. Section 7 concludes. 

2. 

COMPLEXITY OF THE FOOD SUPPLY CHAIN 

The food supply chain connects three main sectors (see Figure 1): the agricultural sector, the 
food processing industry and the distribution sectors (wholesale and retail). Basic agricultural 
commodities undergo, to varying degrees, substantial series of intermediate alterations before 
they are sold as final food products to consumers. Therefore, a description of the food supply 
chain helps to better understand how prices are formed along this chain, how input costs are 
passed on, where interactions between firms take place and where different regulations may 
have an impact. However, since specific food supply chains exist for every single food item 
purchased by consumers, the following description is a necessary simplification.  

Figure 1: 

Schematic representation of the food supply chain 

Factor markets
(e.g. fertilisers)

Agricultural Sector

Wholesale

Wholesale

Wholesale

Wholesale

Food processing industry

Wholesale

Wholesale

Craft production
Craft production
(e.g. bakeries, 
(e.g. bakeries, 
butchery)
butcheries)

Retail sector
(incl. Retail chains, individual stores, 
petrol stations)

Food service
(canteens etc.)

Consumer
Consumer

Non-food sectors:
(e.g. biofuels)

Source: own presentation  

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The  first  sector  considered  in  the  food  supply  chain  is  the  agricultural  sector.  Its  activities 
include  crop  production  and  the  raising  of  livestock.  As  agricultural  commodities  comprise 
very  different  products,  the  sector's  distribution  channels  are  equally  diverse.  Firms  in  the 
agricultural sector primarily sell their output to the food processing industry and to itself (e.g. 
animal feed), but can also directly sell to retailers, final consumers or alternative markets (e.g. 
biofuels).  The  food  processing  industry  is  very  heterogeneous  and  comprises  a  number  of 
varied  activities.  These  include  for  example  refining  (sugar),  milling  (cereals),  cleaning, 
cutting  or  drying  (fruit  and  vegetables)  and  slaughtering  and  disassembling  (livestock).  The 
different  inputs  are  processed  in  successive  stages  and  to  different  degrees,  packaged  and 
dispatched  to  customers  (e.g.  distributors,  food  service).  Another  important  activity  of  food 
manufacturers is to carry out market and product research leading to the development of new 
products, and to engage in marketing. The distribution sector (and retail in particular) is the 
principal  outlet  for  food  products  and,  being  the  final  link  in  the  supply  chain,  it  interacts 
directly with final consumers. While the sector's main activity is the sale of products, in doing 
so,  retailers  may  also  carry  out  services  for  food  manufacturers,  such  as  promotional 
activities. 

The  moves  forward  along  the  supply  chain  –  between,  but  also  within  sectors  –  imply  a 
transfer  of  intermediate  goods  between  firms.  These  transfers  can  occur  directly  between 
firms  involved  in  production  or  sale  to  consumers  or,  as  is  often  the  case,  via  specific 
wholesalers.  Transfers  can  be  analysed  from  both  a  contractual  and  a  technical  perspective. 
The contractual aspects essentially refer to buyer-seller interactions and are influenced by the 
relative market power of the firms along the chain (see section 4 and 6). On the technical side, 
the  transfer  involves  a  series  of  activities  which  generate  additional  costs,  such  as  those 
incurred  for  transport,  storage  and  logistics.  Therefore,  besides  the  raw  material  –  which  in 
general accounts for a small share of total costs only 2 – the cost structure of food production 
comprises a number of other cost factors, most notably transport energy and labour, which are 
reflected in the final consumer prices. In addition, the functioning of the food supply chain is 
also  affected  by  a  number  of  external  factors  such  as  regulation,  public  policy  and  the 
macroeconomic  environment,  which  impact  cost  structures  and  price  developments  across 
Member States.  

The cost structure not only varies by product depending on the number of intermediate steps 
and the degree of processing but is also likely to vary across countries, even for comparable 
goods (see also section 4.2). Therefore, the effect of an increase in the raw material price may 
have  different  repercussions  across  countries:  while  "other  costs"  raise  the  final  consumer 
prices, they can either mitigate raw material price increases or exacerbate them, if the price of 
other cost elements also rises.  

While each product has its own cost-structure, first indications of how these structures vary by 
product category and sector can be inferred from input-output tables. A simple analysis shows 
that  the  share  of  intermediate  products  (excluding  wages)  is  substantially  higher  for  food 
processing  industry  than  for  the  distribution  (wholesale  and  retail)  sectors.  For  the  food 
processing  industry,  the  cost  share  of  intermediate  products  is  about  70%,  even  though  this 
varies  across  countries  and  type  of  product.  For  the  distribution  sectors  this  share  is  around 

2 

Generally  speaking  agricultural  commodity  shares  of  20%-30%  on  average  in  the  costs  of  consumer 
food products seem to be good approximations. 

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40%.  Energy  and  transport  on  average  represent  around  10%  of  the  costs  of  the  food 
processing  industry,  but  fluctuate  considerably  across  food  categories,  and  are  higher  for 
wholesale trade. The costs of rent account for a large part of the costs incurred by the retail 
sector.  The  input-output  tables  also  highlight  the  importance  of  marketing  and  advertising 
costs, notably in sectors producing confectionery, cereals or beverages. Finally, compensation 
of employees accounts for a larger share in distribution (around 30%), than in food processing 
(around 20%).  

The  remainder  of  this  document  takes  developments  in  the  agricultural  sector  as  given,  and 
focuses on the food processing industry and the distribution sector. 

3. 

ECONOMIC  IMPORTANCE  AND  EFFICIENCY  OF  SECTORS  ALONG  THE  FOOD  SUPPLY 
CHAIN 

This section shows that the sectors belonging to the food supply chain, in particular the food 
processing  industry  and  the  distribution  are  economically  important  and  have  many 
interactions  with  other  sectors  of  the  economy,  either  as  purchasers  or  as  suppliers  of 
intermediate inputs. Therefore, a malfunctioning of the food supply chain can have significant 
repercussions  on  the  whole  EU  economy.  This  analysis  also  shows  that  there  is  a  room  for 
improving the efficiency of this chain, which is particularly relevant in the present economic 
conditions. Reforms improving the functioning of the food supply chain could contribute to 
preserve  the  purchasing  power  of  households,  particularly  of  low  income  households  which 
spend a relatively larger proportion of their expenditures on food products. It is also essential 
in a period of deceleration of  price increases to ensure that the downwards price movement 
are transmitted to consumers without delay (see also section 4). 

3.1. 

Share in EU value added, employment and consumption expenditure 

The  sectors  making  up  the  food  supply  chain  –  agriculture,  food  processing  and  the  food 
distribution sectors – can be considered as economically important as they jointly account for 
approximately 6% of EU value added and 12% of EU employment. The food and beverages 
industry makes up 1.7% of EU value added, while the wholesale and retail sectors (including 
non-food  products)  account  for  3.8%  and  4.5%  respectively  (see  table  1).  The  size  of  these 
two  sectors  is  typically  larger  in  new  Member  States.  For  example,  while  the  value  added 
share of the food and beverage industry and of the wholesale and retail trade equalled 1.7% 
and  8.3%,  respectively  in  2005,  they  represented  2.6%  and  13.2%  respectively  in  the  new 
Member States. The value added share of the food and beverage industry is particularly high 
in Ireland (4.1%) and Lithuania (3.6%), that of the wholesale trade sector in the Baltic States 
(12.4% in Latvia, 7.9%, in Estonia and 7.6% in Lithuania) and in the Slovak Republic (7.7%) 
and that of the retail trade in Poland (7.8%), Lithuania (7.4%) and Greece (7.3%). 

The European food and beverage industry employs around 4.5 million persons, accounting for 
2.3  %  of  total  EU  employment  in  2005.  The  European  distribution  sectors  (including  non-
food  items)  employ  over  26  million  persons  or  13%  of  total  EU  employment,  with  the 
wholesale  trade  sector  accounting  for  4.4%  and  the  retail  sector  representing  8.5%  of  total 
employment. More than a third of them (3% of all employees) are active in food retail. The 

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share of employment in the food and beverage industry and of in wholesale trade is higher in 
the new Member States than in the EU15. 

Table 1: 

Sector shares in total valued added and total employment (in %), 2005 

Sector share in total employment
Retail 
Wholesale 
trade*
trade*

Sector share in total value added

Wholesale 
trade*

Retail 
trade*

Agriculture Food and 
beverages
1,8%
2,2%
n.a.
2,7%
2,7%
2,1%
2,6%
1,7%
1,9%
1,7%
2,3%
2,5%
4,1%
1,8%
2,7%
3,6%
0,9%
2,4%
2,1%
2,8%
2,3%
n.a.
2,2%
1,9%
2,0%
1,5%
1,9%
1,9%
1,7%
2,6%

Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovak Republic
Slovenia
Spain
Sweden
United Kindgom
Euro Area
EU27
NMS
Source: ESTAT (food retail) and EUKLEMS 
Note: (*) Wholesale and retail excludes motor vehicles and motorcycles 

6,5%
7,1%
n.a.
5,3%
6,9%
6,7%
7,9%
5,3%
4,6%
4,4%
3,7%
4,8%
4,4%
5,5%
12,4%
7,6%
4,7%
6,2%
7,8%
7,4%
5,6%
n.a.
7,7%
5,4%
4,4%
5,9%
4,4%
5,1%
3,8%
6,9%

1,1%
0,9%
n.a.
3,5%
2,3%
1,2%
2,1%
1,1%
2,0%
0,8%
4,8%
4,2%
2,5%
2,1%
2,4%
5,1%
0,4%
2,1%
2,1%
4,2%
2,1%
n.a.
3,1%
2,3%
2,9%
0,5%
0,9%
n.a.
1,2%
3,1%

4,4%
4,2%
n.a.
5,6%
4,4%
3,6%
5,2%
3,5%
4,3%
4,1%
7,3%
4,8%
4,4%
4,4%
5,4%
7,4%
3,2%
4,7%
3,3%
7,8%
4,6%
n.a.
6,5%
4,7%
4,7%
3,7%
5,7%
4,3%
4,5%
6,3%

Agriculture Food and 
beverages
1,9%
2,2%
n.a.
3,7%
2,8%
2,5%
3,6%
1,6%
2,2%
2,4%
2,9%
3,5%
2,8%
1,9%
3,3%
3,4%
1,4%
2,6%
1,6%
3,5%
2,2%
n.a.
2,3%
2,3%
2,4%
1,4%
1,5%
2,2%
2,3%
3,3%

11,1%
1,9%
n.a.
7,1%
3,1%
2,7%
3,3%
4,1%
3,3%
2,1%
11,8%
4,4%
5,4%
3,8%
4,9%
10,0%
1,3%
2,3%
3,2%
18,6%
11,2%
n.a.
3,2%
9,9%
4,7%
1,6%
1,3%
4,1%
4,6%
11,1%

5,0%
5,2%
n.a.
6,6%
4,8%
6,2%
5,6%
4,2%
4,1%
4,1%
2,6%
2,4%
3,5%
4,7%
5,1%
6,5%
4,9%
6,2%
5,8%
5,2%
6,1%
n.a.
7,4%
4,8%
3,5%
5,0%
4,2%
4,4%
4,4%
5,0%

7,6%
7,3%
n.a.
8,5%
7,6%
7,4%
5,9%
6,5%
7,4%
8,7%
10,5%
10,5%
7,8%
7,5%
9,6%
6,8%
6,2%
7,2%
9,0%
8,3%
8,3%
n.a.
9,1%
5,8%
8,9%
5,6%
10,5%
8,2%
8,5%
8,4%

Total Food 
Retail

2,6%
2,9%
n.a.
2,4%
2,9%
2,8%
3,2%
2,2%
2,8%
2,2%
4,1%
3,6%
4,1%
2,6%
4,2%
3,8%
1,6%
0,0%
3,2%
3,9%
2,8%
n.a.
1,2%
2,8%
3,4%
2,3%
4,4%
2,7%
3,2%
3,4%

The economic importance of the food supply chain can also be gauged by the share of its final 
products – food and beverages – in household expenditure. On average 16% of EU household 
spending is devoted to food and beverages. This share typically falls as per capita GDP rises 
and  vice  versa.  Consequently,  the  share  of  food  expenditure  is  typically  higher  in  the  new 
Member States, where in many cases it exceeds 20%.  

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Figure 2: 

Composition of food consumption basket by Member State, 2008 

UK
LU
DE
AT
NL
IE
SE
FI
DK
FR
GR
SI
BE
IT
MT
SK
CY
PT
CZ
HU
ES
EE
PL
LV
BG
LT
RO

0

5

10

15

20

25

30

35

40

% of total household expenditure

Bread and cereals Meat Milk, cheese and eggs Other food Non-alcoholic beverages

ource: Eurostat (based on HICP weights) 

S

The food processing industry and the wholesale and retail trade can also help to improve the 
capacity of the EU to adjust. Indeed, these sectors have important linkages with other sectors 
of the economy. This means that the market performances of these sectors (in terms of price, 
quality, variety etc.) have immediate repercussions on the rest of the economy, as well as final 
consumers.  In  other  words,  market  inefficiencies  in  these  sectors  will  propagate  throughout 
the  economy  and  ultimately  hamper  performance  in  upstream  and  downstream  sectors. 
Moreover, the wholesale and retail trades can be categorised as important users of information 
and  communication  technologies  and  therefore,  they  can  contribute  to  the  diffusion  of  new 
technologies, which is another dimension of the adjustment of an economy.  

3.2. 

Economic performance: productivity and innovation 

An analysis of labour productivity growth in the three sectors of the food supply chain (food 
processing industry, wholesale and retail) reveals that the average annual growth rate over the 
period 1995-2005 was lower in the EU than in the US in all these three sectors. The EU-US 
gap is significant in the case of the food-processing (2.1 percentage points) and retail sectors 
(3.5  percentage  points),  but  relatively  narrow  in  wholesale  trading  (0.3  percentage  points). 
Such  differences  could  indicate  that  there  may  be  room  for  further  improvement  in  the 
efficiency along the food supply chain. 

In the food and beverages industry, the labour productivity growth over the period 1995-2005 
has been particularly slow (or even negative) in Cyprus, Denmark, Italy, Luxemburg, Malta 
and  Spain.  Among  the  old  Member  States,  high  productivity  growth  in  this  sector  has  been 
observed  in  Austria,  Finland  and  Ireland  and  among  the  new  Member  States  in  Latvia, 

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Lithuania Poland and the Slovak Republic. In the wholesale and retail trade, the dispersion in 
the labour productivity performance among the Member States is larger than for the food and 
beverage industry. The countries having recorded the lowest labour productivity growth rates 
overt that period are Spain (wholesale), Cyprus (retail) and Malta (wholesale and retail). The 
highest rates in both distribution sectors have been observed in the Czech Republic, Estonia 
and Lithuania. 

Figure 3: 
wholesale and retail trade, 1995-2005 

Labour  productivity  growth  in  the  EU  food  and  beverages  industries, 

Food and beverages

Wholesale trade 

Retail trade

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-4%

-2%

0%

2%

4%

6%

8%

10%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

AT

BE 

CY 

CZ 

DK 

EE

FI 

FR 

DE

GR 

HU 

IE 

IT 

LV

LT

LU 

MT

NL

PL

PT

SK

SL 

ES

SE 

UK

EU25

USA

AT

BE 

CY 

CZ 

DK 

EE

FI 

FR 

DE

GR 

HU 

IE 

IT 

LV

LT

LU 

MT

NL

PL

PT

SK

SL 

ES

SE 

UK

EU25

USA

AT

BE 

CY 

CZ 

DK 

EE

FI 

FR 

DE

GR 

HU 

IE 

IT 

LV

LT

LU 

MT

NL

PL

PT

SK

SL 

ES

SE 

UK

EU25

USA

Source: Calculations based on EUKLEMS 

The productivity gap with the US in the retail sector3 has been explained by a lower use of 
information  and  communication  technologies  (ICT)  in  the  EU.  It  is  plausible  that  different 
degrees  of  ICT  adoption  partially  explain  cross-country  productivity  gaps  in  the  EU.  The 
remaining segmentation of the European Single Market which is illustrated by the diverging 
price levels and price developments across countries (see section 4) may also contributed to 
the  lower  productivity  performance  of  the  EU.  But  other  causes  of  the  productivity 
differentials observed across countries include differences in the intensity of competition, in 
the regulatory framework and in labour market policies, as indicated in a recent analysis made 
on the possible causes of malfunctioning on EU product markets4. Labour productivity growth 
in the three sectors considered here has generally been higher in the new Member States. This 
most likely reflects catching-up effects and lower initial productivity levels. 

Innovation  can  lead  to  efficiency  gains,  both  through  the  introduction  of  new  and  better 
production methods, and through the introduction of new and better products, which raises the 
long  term  productivity  growth  rate.  In  addition  to  the  effect  on  the  firms  producing  them, 

3 

4 

It should be noted that these indicators apply to the retail and wholesale sectors as a whole, and may not 
fully reflect developments in the distribution of food. 
See European Economy, Economic Paper n° 271 at   
http://ec.europa.eu/economy_finance/publications/publication_summary13085_en.htm 

EN 

9 

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novel  products  can  ensure  that  consumers  have  a  wide  choice  of  food  products,  satisfying 
their  health  and  value  expectations.  Innovation  takes  place  at  all  levels  of  the  food  supply 
chain. Examples from the food industry include development and subsequent launch of new 
products.  In  the  retail  sector  innovation  activities  could  for  example  focus  on  distribution 
channels,  store  design,  new  services  making  it  easier  and  quicker  for  consumers  to  do  their 
shopping (e.g. ordering via internet and collecting the products at the outlet), etc.  

Innovation  can  be  examined  from  an  input  side  (i.e.  investment  in  R&D,  both  private  and 
public5,  and  research  personnel)  and  an  output  side  (i.e.  innovation  per  se).  Data  from  the 
Community innovation survey suggest that firms in the food and beverage industries are more 
likely to pursue R&D activities than firms in other sectors of the EU economy. Firms in the 
distribution sectors are generally less likely to be involved in R&D activities and also spend 
less on them, which can largely be explained by the nature of their core activities.  

In terms of innovation outcome, the proportion of firms succeeding in product innovation – 
i.e. the development of new or improvement of existing products and services – is higher in 
the  food  and  beverage  industry  compared  to  other  sectors.  Inherent  to  their  function,  the 
distributive  sectors  are  effectively  engaged  to  a  far  lesser  extent  in  product  innovation  than 
other  sectors.  However,  the  retail  sector  seems  relatively  successful  in  terms  of  process 
innovation – i.e. the way in which products and services are produced. 

4. 

DETERMINANTS OF CONSUMER FOOD PRICE DEVELOPMENTS IN THE EU 

This section presents and discusses the results of an empirical analysis of the determinants of 
consumer  food  price  developments  in  the  EU.  It  investigates  the  price  transmission 
mechanism  along  the  food  supply  chain  (from  agricultural  commodity  prices  and  producer 
food prices to consumer food prices). 

4.1. 

Recent developments in food prices  

In  the  second  half  of  2007,  price  increases  of  many  agricultural  commodities  accelerated 
rapidly  and  reached  exceptional  levels  by  the  end  of  the  year.  The  agricultural  commodity 
price  surge  generated  a  rapid  increase  in  producer  and  consumer  food  prices  within  the  EU 
(see  figure  4).  Even  more  striking  was  the  wide  dispersion  in  terms  of  the  magnitude  of 
consumer food price increases between EU Member States. Within the EU the strongest food 
price  increases,  at  both  producer  and  consumer  level,  were  recorded  in  the  new  Member 
States.  In  Bulgaria,  Latvia  and  Lithuania  price  levels  increased  by  more  than  15%  between 
July  2007  and  August  2008.  Among  the  old  Member  States,  consumer  prices  rose  by  more 
than 6% over this period in Austria, Denmark, Ireland and the UK. 

Moreover,  in  nearly  all  Member  States  processed  food  prices  increased  more  rapidly  than 
unprocessed food prices.6 The differences observed in price developments between processed 

5 

6 

At  the  Community  level,  the  Commission  has  already  invested  about  €135  million  in  food  research 
projects through its different research framework programmes. 
The  'processed  food'  category  is  a  weighted  average  of  the  following  product  categories:  'Bread  and 
cereals',  'Milk,  cheese  and  eggs',  'Oils  and  fats',  'Sugar,  jam,  chocolate  and  confectionery',  'Food 
products  not  elsewhere  classified',  'Coffee,  tea  and  cocoa',  'Mineral  waters,  soft  drinks,  fruit  and 

EN 

10 

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and  unprocessed  food  appear  mostly  due  to  composition  effects.  The  category  "Processed 
food" includes food products that are produced on the basis of commodities most affected by 
the  international  price  increases,  notably  cereals  and  dairy  products.  The  input  costs  for  the 
category  "unprocessed  food"  –  including  meat  –  have  increased  much  less.  Moreover,  the 
sharp increases in fuel prices may have had a greater effect on processed food prices. 

Figure 4: 
the period 2002:1-2008:8 (y-o-y growth rates) 

Consumer, producer and raw material food price increases in the EU over 

Food producer prices
Consumer food prices
Raw material food prices

2003

2004

2005

2006

2007

2008

50

40

30

20

10

%

0
2002

-10

-20

Source: Own calculations based on ESTAT and DG AGRI 

The share of food in the household expenditure differs significantly across EU countries (see 
figure 2 in section 3.1) and is strongly correlated with GDP per capita. As the weight of food 
in household consumption baskets is typically higher in new Member States, the contribution 
of food inflation to overall inflation was also higher in these Member States.  

Due to the inelasticity of the demand for food the recent price increases have had a negative 
effect on the consumers' purchasing power, and there are indications of changes in purchasing 
behaviour  (e.g.  switching  to  discounters)  and  reductions  in  the  purchase  of  number  of  food 
products they typically purchased. Households in the new Member States were hit harder than 
others.  At  the  EU  level  the  food  price  increases  of  2007  and  early  2008  reduced  household 
purchasing power by around one percent. 

After having reached its peak in May-June 2008, consumer food price inflation has been on a 
decreasing  trend  in  all  Member  States  with  the  exception  of  Slovenia.  This  decrease  in 
consumer  price  inflation  followed  the  decline  in  producer  price  inflation,  which  peaked  in 

vegetable juices'  and  'Alcoholic  beverages'. The  'unprocessed food'  category  is  a weighted  average of 
the following product categories: 'Meat', 'Fish', 'Fruit' and 'Vegetables'. 

EN 

11 

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April-May  2008.  However,  differences  between  Member  States  in  terms  of  price  stickiness 
can  be  observed.  While  in  some  countries  consumer  food  prices  appear  to  have  adjusted 
downward rather quickly following the decline in agricultural price levels, in others consumer 
prices have reacted more slowly (see also section 4.3).  

Figure 5: 
annual growth rate) 

Consumer  and  producer  food  price  changes  2007:7  -  2008:8  (average 

bg

lv

lt

ee

hu

si

ro

cz

mt

at

sk

pl

uk

dk

ie

es

cy

de

be

lu

fi

se

EURO AREA

gr

it

fr

nl

pt

0

Source: Eurostat 

Producer price index - food

Harmonised consumer price index - food

5

10

%

15

20

25

Changes  in  agricultural  commodity  prices  can  only  partly  explain  the  changes  in  consumer 
food  prices  observed.  Other  macroeconomic  factors  and  factors  related  to  the  degree  of 
competition along the food supply chain, the regulatory environment, wage developments and 
changes in tax rates have played a role as well.  

A  salient  aspect  of  the  analysis  is  the  observation  that  the  largest  food  price  increases  have 
occurred  in  the  new  Member  States  (see  figure  5).  This  has  been  influenced  both  by  the 
generally higher levels of wage and price inflation in these countries, but also by the fact that 
agricultural commodities take up a greater share in the cost structure of food products in the 
new Member States than in the old Member States. Prices in the new Member States would 
therefore be more sensitive to increases in the price of agricultural commodities. Prices and 
price changes could also be impacted by the functioning of downstream market conditions in 
these countries. Currency appreciation appears to have had a dampening effect on food prices 
in countries such as the Czech Republic, Poland, Romania and Slovakia. 

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4.2. 

The pass-through and price stickiness along the food supply chain 

When investigating the pass-through of agricultural commodity prices and producer prices to 
consumer  prices,  a  distinction  should  be  made  between  the  magnitude  and  the  speed  of  the 
pass-through. The magnitude measures how much of the initial price change is reflected in the 
changes in consumer prices observed. The shorter the lag with which consumer prices follow 
commodity  and  producer  prices,  respectively,  the  higher  the  speed  of  pass-through.  Finally, 
one  needs  to  consider  the  degree  of  asymmetry  between  the  effects  of  price  increases  and 
price  decreases.  One  could  make  the  proposition  that  in  order  to  raise  their  profit  margins 
actors  along  the  food  supply  chain  would  have  an  interest  to  pass  through  price  increases 
more rapidly than price decreases. As a result the measured pass-through would differ in the 
case of price increases from that in the case of price decreases. The magnitude, the speed and 
the  degree  of  asymmetry  in  the  pass-through  are  influenced,  among  others,  by  market 
conditions.  

4.2.1.  The pass-through from agricultural commodity prices to consumer prices 

This  section  investigates  the  extent  to  which  agricultural  price  increases  have  been  passed 
through  to  the  final  consumer  prices.  For  the  purpose  of  this  analysis,  this  pass-through  is 
calculated as the ratio of the price increase of consumer food product over the price increase 
of the agricultural commodity used as an input, taking into account the necessary time lag. 

The pass-through has been computed for two specific supply chains: from cereals (as a raw 
material)  to  "bread  and  cereals"  and  from  milk  (farm  gate)  to  "milk,  cheese  and  eggs".  The 
pass-through for the "Food" category as a whole has not been calculated given the difficulty 
to aggregate agricultural input prices.  

The  average  pass-through  across  the  EU  of  an  increase  in  the  cereal  price  to  "bread  and 
cereals"  supply  chain  is  28%  (see  box  1).  In  other  words,  the  consumer  price  increase  is 
around one third of the price increase of the agricultural input used. However, there is a large 
cross-variation in this pass-through, which varies from 9% in France to 64% in Estonia. With 
the exception of Greece and Spain, the countries with a pass through above the EU average 
are  all  new  Member  States.  Even  though  the  levels  of  pass-through  for  "milk,  cheese  and 
eggs"  are  generally  higher  than  that  of  "bread  and  cereals",  their  variation  across  Member 
States  is  less  pronounced,  ranging  from  25%  in  Greece  to  figures  above  100%  in  Slovenia, 
Finland and Estonia. 

The analysis of the pass-through in these two specific supply chains globally confirms the fact 
that  food  related  markets  in  the  Member  States  have  different  cost  structures  and  appear  to 
have reacted very differently to the 2007 agricultural price rise. This observation is confirmed 
in  the  following  two  sub-sections,  which  focus  on  the  developments  in  the  upstream  and 
downstream parts of the supply chain, respectively. 

The  recent  drop  in  agricultural  raw  material  prices  has  not  yet  fully  reflected  in  consumer 
food prices in most Member States. Downwards price adjustment seems especially slow in the 
specific  supply  chain  'Bread-making  Common  Wheat'  to  'Bread  and  Cereals'.  However,  the 
decline  in  milk  raw  material  prices  is  starting  to  push  consumer  milk  prices  down  in  some 

EN 

13 

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Member States. 

Box 1.Relation between bread-making common wheat prices and bread and cereals prices 

During  the  year  2007,  the  price  of  bread-making  common  wheat  in  the  EU  has  increased  by  63%  in  nominal 
terms. Behind this average increase, there is a wide variation of price increases across Member States, ranging 
from around 35% in Lithuania and Slovenia to more than 70% in Sweden and Denmark.  

As can be seen in the figure B.1, the average pass-through from bread-making common wheat prices to bread 
and cereals prices – defined as the ratio of the percentage increase in prices of food products over the percentage 
increase in prices of the agricultural commodity used as an input – was 28% in the EU during the recent period 
of exceptional increase of agricultural commodities.  

Figure B.1: Ratio of changes in bread prices over common wheat prices, 2007 

0,8

0,6

0,4

0,2

0,0

0,16 0,17 0,18 0,20 0,20 0,20 0,22 0,23 0,23

0,09 0,11 0,13

I

R F
F

E
D

K
D

E
S

T
P

I

E S
B

K
U

T
A

T
U I
H

0,64

0,55

0,52

0,36 0,36 0,37

0,34

0,28 0,29

L
P

R
G

K
S

S
E

Z
C

V
L

T
L

E
E

e
g
a
r
e
v
a
U
E

Source: Statistical Analysis of the Food Price Increase, DG MARKT, mimeo  

The  most  striking  feature  of  this  graph  is  the  wide  magnitude  in  the  differences  in  levels  as  regards  the  pass 
through in the “Bread and cereals” supply chain, ranging from 9% (France) to 64% (Estonia). This could be the 
result of different market situations at different levels of the supply chain (e.g. competition and efficiency along 
this supply chain). These differences may also be due to composition effects and reflect the fact that the share of 
the primary input (i.e. wheat) is likely to be lower in those countries where the observed ratios are low, and the 
cost share of inputs other than wheat is consequently higher. The value of the pass-through amounted to around 
20%  in  nine  Member  States  (Denmark,  Sweden,  Portugal,  Belgium,  Slovenia,  the  UK,  Austria,  Hungary  and 
Italy). In Poland, Greece, Slovakia, Spain and the Czech Republic the ratio was between 30% and 40%, while it 
exceeded 50% in Latvia, Lithuania and Estonia.  

With  the  exception of Greece  and Spain,  the  countries  with  a  pass  through  above  the  EU  average  are  all  new 
Member States. The three Baltic States for which the price increase of wheat have been among the lowest, rank 
in the top 3 in terms of a pass-through.  

4.2.2.  Production costs and producer prices in the food processing industry 

This  section  aims  to  assess  whether  the  changes  in  producer  prices,  i.e.  the  prices  that  the 
industry  charges  to  wholesalers  and  retailers,  observed  in  the  different  Member  States  (see 
figure  5)  reflect  changes  in  the  production  costs  in  the  food  and  beverages  industry.  As  no 
direct information on production costs is available, input-output (I/O) tables and price changes 
of the main inputs categories (i.e. compensation of employees, agricultural inputs, energy and 
transport,  inputs  coming  from  food  processing  industry  itself,  as  well  as  other  intermediary 
products)  are  summarised  in  a  weighted  cost  index  for  the  food  and  beverage  industry  of 

EN 

14 

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individual  Member  States.  The  changes  in  this  index  are  then  compared  to  the  observed 
changes in the producer price index for the food and beverage industry.  

Figure 6: 

Cost structure of the food and beverage industry by Member States 

UK

SL

SK

SE

RO

PT

PL

NL

IT

IE

HU

FR

FI

ES

EE

DK

DE

CZ

BE

AT

0%

20%

40%

60%

80%

100%

Agriculture

Food and beverages industry

Energy and Transport Other intermediary products

Compensation of employees Other

Source:  own  calculation  and  sub-aggregations  based  on  ESTAT.  Only  Member  States  included  where 
Input/Output tables for 2003 or after are available.   

As  the  cost  structure  of  the  food  and  beverages  industry  differs  quite  substantially  between 
Member States (see figure 6), the impact of a change in input prices will be different as well. 
Factors that play a role include the degree of technological advancement of a country and the 
composition of its food industry. In the new Member States, the input share of the agricultural 
sector and the food process industry itself tends to be higher, while in the old Member States 
the  share  of  business  services  (including  advertising)  and  compensation  of  employees  is 
relatively  large.  The  analysis  has  been  carried  out  at  the  level  of  the  food  and  beverages 
industry as a whole due to data limitations.  

Figure 7 compares the evolution of changes in the calculated cost index with changes in the 
observed producer price index over the period 2005-2008 in the larger EU Member States. In 
all countries, the rise in input costs was relatively moderate early on but rose to higher levels 
later  within  this  period  before  slowing  down  most  recently,  suggesting  that  the  order  of 
magnitude of observed price changes is to a large extent justified by changes in the underlying 
input  costs.  However,  there  seem  to  be  differences  between  countries,  which  are  more 
apparent  when  comparing  the  changes  in  input  costs  with  the  changes  in  producer  prices. 
While  in  the  UK  and,  to  a  lesser  extent,  in  the  case  of  France  and  Poland,  changes  in 
producers  prices  seem  to  track  changes  in  input  prices,  albeit  with  a  small  time  lag,  in  the 
other large EU Member States this seems to be much less the case. 

EN 

15 

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Figure 7: Comparison between changes in the food and beverages producer price index 
and the production cost index 

Germany

Spain

12

10

8

6

4

2

0

12

10

8

6

4

2

0

janv-05

mars-05

-2

mai-05

juil-05

sept-05

nov-05

janv-06

mars-06

mai-06

juil-06

sept-06

nov-06

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

janv-05

mars-05

mai-05

juil-05

sept-05

nov-05

janv-06

mars-06

mai-06

juil-06

sept-06

nov-06

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

Observed food PPI

Cost index

Observed food PPI

Cost index

France

Italy

12

10

8

6

4

2

0

12

10

8

6

4

2

0

janv-05

mars-05

-2

mai-05

juil-05

sept-05

nov-05

janv-06

mars-06

mai-06

juil-06

sept-06

nov-06

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

Observed food PPI

Cost index

Poland

-4

10

8

6

4

2

0

janv-05

mars-05

-2

mai-05

juil-05

sept-05

nov-05

janv-06

mars-06

mai-06

juil-06

sept-06

nov-06

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

-4

-6

janv-05

mars-05

-2

mai-05

juil-05

sept-05

nov-05

janv-06

mars-06

mai-06

juil-06

sept-06

nov-06

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

Observed food PPI

Cost index

United Kingdom

-4

14

12

10

8

6

4

2

0

janv-05

mars-05

mai-05

juil-05

sept-05

nov-05

janv-06

mars-06

mai-06

juil-06

sept-06

nov-06

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

Observed food PPI

Cost index

Observed food PPI

Cost index

Source: Own calculations based on ESTAT data 

4.2.3.  The pass-through from producer to consumer prices 

This section considers the pass-through in the downstream segment of the food supply chain. 
Over  the  most  recent  period,  a  structural  break7  in  the  pass-through  of  changes  in  producer 
prices to consumer prices (now measured as an elasticity8) was observed in some of the EU 
countries. In most of the euro area countries, increases in producer food prices started to rise 
faster than consumer food prices from mid 2007 onwards, whereas the opposite had been true 
in the period from 2002 to mid-2007 (see figures 8 and 9). This could suggest that the recent 
producer price increases have not been transmitted fully to consumer food prices. This could 

7 

8 

The structural break was confirmed by Chow test results in the case of Belgium, the Czech Republic, 
Denmark,  Spain,  France,  Italy,  Latvia,  Lithuania,  Hungary,  Poland,  Romania,  Slovenia  and  Sweden). 
Accordingly,  the  period  chosen  for  the  estimation  of  the  pass-through  is  from  January  2002  to  June 
2007. 
The  pass-through  is  estimated  by  the  application  of  a  simple  OLS  regression.  In  order  to  test  the 
robustness  of  our  estimation  results,  we  introduce  the  additional  estimation  results  achieved  by 
application of the GMM (Generalised Method of Moments).   
Individual  country  single  equation  regressions  were  carried  out,  regressing  overall  food  prices  on 
lagged food producer prices, world food commodity prices, unit labour costs, oil, lagged values of the 
dependent variables and seasonal dummies.  

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be an indication that the effects of the increase in producer prices were partially absorbed by 
the food retail sector through a reduction of profit margins. 

Figure 8 
(January 2002-June 2007) 

Percentage  point  difference  between  inflation  of  consumer  and  producer  prices 

RO BG LV HU ES

SI

DK GR UK LT

PL NL

SE

CZ

FR AT

SK

FI

IE

BE DE CY

IT

LU PT

s
t
n
i
o
p
e
g
a
t
n
e
c
r
e
p

10

5

0

-5

-10

-15

EN 

17 

   EN 

 
 
 
 
Figure 9: 
(July 2007-July 2008) 

Percentage  point  difference  between  inflation  of  consumer  and  producer  prices 

NL

CY PT

RO

IT

FR

SE

DE

ES

LU UK LT AT

SK

FI

LV GR

BE

CZ

PL DK

IE

SI

BG HU

s
t
n

i
o
p
e
g
a
t
n
e
c
r
e
p

4

2

0

-2

-4

-6

-8

A  further  investigation  into  the  link  between  consumer  and  producer  food  prices  reveals  a 
different level and speed of pass-through across the EU countries. The results show that the 
magnitude  of  the  pass-through  of  producer  prices  to  consumer  prices  is  relatively  large  in 
most of the new Member States when prices go up. In fact, in this case, the elasticity is larger 
than one suggesting that margins increase. Interestingly, when producer prices decrease, the 
estimated  elasticity  is  less  than  one  and  there  are  lags  (see Annex  1).  For  the  euro  area,  the 
magnitude of the transmission is similar in the case of price increase and decrease and prices 
decreases are actually transmitted rapidly. Thus, the results confirm that price stickiness is not 
an issue in the euro area, whereas there is found evidence of downwards price stickiness in the 
new Member States. While it is difficult to generalise and these results should be interpreted 
with care, they suggest that in the euro area retail markets are relatively competitive whereas 
this seems to be less the case for the new Member States.  

Several  additional  caveats  have  to  be  kept  in  mind  when  comparing  the  size  of  the  pass-
through  and  market  structure  in  the  new  Member  States  and  in  the  euro  area  respectively. 
There are a number of factors which may have contributed to the different trends in the pass-
through  in  the  old  Member  States  compared  to  the  new  Member  States.  First,  in  the  new 
Member  States  with  the  lowest  price  levels,  the  contribution  of  (unprocessed)  food  to  the 
(final) retail price also tends to be greater, which leads to higher percentage increases in the 
retail  prices.  In  addition,  an  increase  in  indirect  taxes  contributed  to  the  relatively  higher 
consumer  food  price  increases  in  most  of  the  new  Member  States.  Moreover,  energy  price 
increases were stronger in most new EU member states. Given that some food products are 
highly tradable, food price arbitrage within the EU may have taken place and exerted upward 
price pressures on food products in the Member States with the lowest price levels. Finally, 

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the market structure has changed more in the new Member States over the recent period. This 
aspect is analysed further in the following section. 

4.3. 

The role of the food retail market structure  

This section presents the results of an econometric analysis9 of the determinants of consumer 
food  price  developments  (see  annex  2).  The  analysis  distinguishes  between  two  groups  of 
countries:  new  and  old  Member  States.  This  choice  is  based  on  the  heterogeneity  of  these 
countries as discussed above.  

Producer prices explain a high proportion of consumer food price developments in both the 
old and new Member States in the period from 2003 to 2007. Unit labour costs appear to have 
a significant impact on consumer food prices in the old Member States only. The reduction in 
the  number  of  individual  retail  outlets  does  not  appear  to  have  had  an  impact  on  consumer 
food price development in the old Member States. This suggests that the consolidation of the 
food retail sector has not led to higher consumer prices in the old Member States. In the case 
of the new Member States, there seems to be some evidence of a negative link between the 
number  of  individual  food  retail  outlets  and  consumer  food  prices.  Indeed,  the  number  of 
retail outlets per inhabitant is lower in the new Member States but has increased rapidly. A 
higher number of alternative outlets at the local level should in principle benefit consumers. A 
consumer satisfaction survey conducted in the meat and vegetables sectors has shown that still 
in  many  new  Member  States  consumers  seem  to  have  less  possibility  to  switch  between 
stores. 

5. 

REGULATORY ISSUES 

This  section  discusses  the  effects  of  the  regulatory  framework  on  competition  and  prices 
along the food supply chain. A distinction is made between regulation creating entry barriers, 
such as planning regimes, regulations restricting shop opening hours and regulations limiting 
price competition. It is important to bear in mind that these regulations can have an impact on 
other  general  policy  objectives  that  must  not  be  overlooked  when  assessing  their  overall 
impact on social welfare and their compatibility with the EU Treaty. 

5.1. 

The effect of the regulatory framework and price levels 

The  regulatory  framework  affects  the  food  supply  chain  at  all  levels  from  the  agricultural 
sector  down  to  retail.  Regulation  may  affect  the  functioning  of  markets  through 
industry/sector-specific regulation (e.g. urban planning regulations and opening hours in the 
case  of  the  retail  sector)  or  economy-wide  provisions  (e.g.  labour  market  regulation,  or 
competition  policy).  The  regulatory  framework  can  raise  compliance  costs  for  firms,  which 
will be passed on to customers in the form of higher prices. Regulation can also directly affect 
prices through price regulation. Another aspect that needs to be taken into account is the level 
at which the regulatory framework is designed, decided and enforced (i.e. EU-wide, national, 
regional, local). To the extent that the applicable regulatory framework varies across countries 
(and  even  regions),  the  regulatory  impact  across  the  EU  is  consequently  likely  to  differ  as 
well and may explain some of the observed price differentials. 

9 

The analysis is carried out by the application of a simple OLS regression on pooled annual data. 

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While an analysis of regulation should take into consideration the costs imposed on firms and 
ultimately  passed  on  to  consumer  prices,  it  should  also  take  into  account  the  regulatory 
benefits and the contribution of regulation to overall social well-being. For example, planning 
restrictions  or  opening  hour  restrictions  are  often  identified  as  competition-inhibiting 
regulations that raise entry barriers for potential entrants and protect incumbents. At the same 
time they aim to address congestion issues, noise pollution or considerations about the image 
of  town-centres.  Therefore,  an  in-depth  examination  of  the  impact  of  the  regulatory 
framework  on  the  functioning  of  the  food  supply  chain  needs  to  fully  take  into  account  the 
different objectives of regulations that are imposed on firms and whether those objectives are 
met  in  a  proportionate  manner  and  in  a  manner  consistent  with  other  general  policy 
objectives.  

5.2. 

Entry regulations 

Certain  regulations  have  the  effect  of  potentially  hampering  competition  by  constituting 
significant  barriers  to  entry.  Such  regulations,  which  effectively  shelter  incumbents  from 
potential rivals, occur frequently, notably at the local and/or regional level, and tend to lead to 
increased margins, higher prices and lower productivity of retailers. This is for example the 
case  for  general  regulation  on  commercial  establishments,  or  land  and  urban  planning 
regulations affecting the attribution of construction permits, which limit the establishment of 
new stores.  

For  instance,  in  some  Members  States,  specific  regulations  foresee  authorisation  procedures 
for shops above a certain size (the threshold being sometimes designed to focus especially on 
a  certain  type  of  commercial  format).  The  procedure  can  be  based  on  a  number  of  criteria 
(amongst  them  criteria  of  an  economic  nature,  such  as  the  impact  of  the  establishment  on 
competitors or on the “balance” between different forms of shop formats) which give a very 
large margin of discretion for the authorities delivering the authorisation. The procedure itself 
is  not  such  to  guarantee  an  objective  and  impartial  application  of  the  relevant  criteria. 
Consequently, these conditions restrict entry to the market. 

A  survey  carried  out  amongst  national  competition  authorities  also  suggests  that  planning 
regimes  place  more  limited  constraints  on  the  extension  of  existing  stores  by  retailers 
compared with new entry. An incumbent retailer, by extending its store more easily, will thus 
make new larger store entry by a rival retailer more difficult.  

As indicated in section 6, a consolidation is taking place in the retail sector and this sector is 
already  highly  concentrated,  especially  in  the  old  Member  States.  This  consolidation  may 
under  certain  conditions  give  rise  to  efficiency  gains  leading  to  lower  consumer  prices. 
Evidence  suggests  that  the  presence  of  several  large  retail  chains  appears  to  contribute  to 
increased  price  flexibility  and  greater  economies  of  scale  and  scope,  achieved  for  example, 
through  lower  logistic  costs.  However,  high  concentration  levels  may  have  a  potential 
negative impact on competition, particularly if entry barriers are high. Therefore, regulations 
that  restrict  entry  in  the  medium-term  need  to  be  scrutinised  with  a  view  to  ensuring  that 
incumbents  face  a  constant  threat  of  rapid  entry  by  newcomers.  This  is  being  done  in  the 
context of the transposition of the services directive and will be further checked in the context 

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of the retail monitoring report. However, when examining such regulations, their social and 
environmental objectives must not be overlooked. 

5.3. 

Shop opening hour restrictions 

Different regulations restricting opening hours of certain types of retail formats are in place 
all across Europe and often even vary within Member States. These restrictions may also have 
a  potential  negative  impact  on  competition  but  to  a  lesser  extent  than  planning  regulations, 
according to the survey made amongst national competition authorities. They may also reduce 
retailers'  efficiency  by  limiting  the  possibility  to  sell  their  products,  and  thereby  increase 
operational, logistics and wastage costs of retail outlets. According to some studies relaxing 
opening hour restrictions could significantly reduce costs.  

The most marked differences in shop opening hour regulations relate to Sunday opening. In 
practice, some Member states do not impose closing days (except a few public holidays such 
as  Christmas  day),  while  others  impose  Sunday  closing  or  limit  the  number  of  Sundays  per 
year  that  larger  shops  can  open.  Furthermore,  in  some  Member  States  shop  opening 
regulations  vary  according  to  regions.  For  example  in  one  Member  State,  depending  on  the 
region a variation of 6 to 20 Sundays for which opening is allowed exists. In many instances, 
derogations to Sunday closing are permitted for touristic regions. 

Given  that  Saturdays  are  key  volume  sales  days  for  retail  stores,  it  is  clear  that  the  risk  of 
having unsold stock in stores at closure is high. As fresh or primary processed food needs to 
be  kept  in  refrigerators,  average  costs  of  storing  food  in  stores  with  more  limited  opening 
hours  will  be  higher  and  risks  of  wastage  will  be  greater.  Moreover,  restrictions  of  shop 
opening hours may prevent significant levels of the working population from having access to 
certain retail stores, which is problematic if the restrictions affect the most price competitive 
outlets.  Nonetheless,  the  efficiency  considerations  of  lessening  restrictions  of  shop  opening 
hours should be see in the light of the potential social impact, notably on smaller shops and 
shop-keepers.  

5.4. 

Regulations restricting the ability to compete on prices  

Some  regulations  contribute  to  limit  price  competition  between  retailers  and  may  create 
distortions  and  a  lack  of  transparency  in  the  relationships  between  suppliers  and  retailers. 
Sales below costs restrictions and associated regulations fixing invoice price levels belong to 
this category. These regulations can be complemented by additional regulations limiting, for 
example,  listing  fees  (i.e.  payments  by  suppliers  to  retailers  to  be  granted  shelf  access)  or 
reverse  payments  (i.e.  fees  to  be  paid  by  suppliers  to  retailers  for  services  such  as  in-store 
promotions, etc.). The extent of such practices can also be affected by the negotiation power 
of  suppliers  and  retailers  and  may  under  certain  circumstances  have  detrimental  effects  for 
competition.  In  some  Member  States  (e.g.  the  United  Kingdom)  some  of  these  commercial 
practices are addressed by codes of conduct. 

In  many  Member  States  restrictions  of  sales  below  costs  are  in  place  through  specific 
regulations  prohibiting  sales  below  costs  per  se.  These  latter  regulations  aim  to  establish  a 
certain threshold price under which operators are not allowed to sell except in a limited set of 
circumstances.  Where  these  regulations  exist,  the  coverage  of  the  prohibition  to  sell  below 

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costs vary widely across Member States (e.g. application of the prohibition to all retail sectors 
or only to certain firms or products; circumstances under which a sale below cost would be 
allowed  even  if  the  practise  is  generally  prohibited;  elements  included  in  the  calculation  of 
"costs", etc). 

Such regulations were originally designed to deter predatory behaviour by larger firms to the 
detriment of smaller market operators, under the hypothesis that the latter would be driven out 
of  the  market  if  their  larger  competitors  could  systematically  engage  in  sales  below  cost. 
Recent studies were not able to show that the structure of the retail sector was influenced by 
the  existence  of  such  sales-below-cost  prohibitions.  Therefore,  they  do  not  appear  to  be 
efficient in protecting small shops which is their primary justification. This is further backed 
up  by  national  competition  enquiries  in  the  Member  States  where  sales  below  costs  are 
allowed that have concluded that this has not resulted in predatory pricing. Other justifications 
invoked  can  be  linked  to  protection  of  small  suppliers  (by  avoiding  excessive  pressure  on 
them to lower the purchase price), protection of consumers (which would be attracted in the 
store by the low price of a given product but would then buy the rest at a higher price), and 
finally protection of brands (potential devaluation of the value of a brand if the retail price is 
too low). 

In  effect,  sales-below-cost  restrictions  set  a  price  floor  –  often  being  defined  as  the  invoice 
price  –  which  amounts  to  resale  price  maintenance,  limiting  intra-brand  price  competition 
between retailers. Furthermore, they lead to higher stock-management costs as retailers may 
face  more  difficulties  in  selling  excessive  stocks.  These  costs  are  likely  to  be  higher  for 
perishable products. Regulation defining how this price floor ought to be calculated can also 
contribute  to  exacerbate  price  stickiness.  In  market  segments  where  food  suppliers  have 
considerable market power, these restrictions can lead to the establishment of relatively high 
price floors. Indeed, there is tentative evidence to show that the imposition of such bans has 
reduced  price  competition  between  major  retailers.  Food  products  as  necessities  are  an 
essential  part  of  the  consumer's  typical  shopping  basket  and  where  sales  below  cost  are 
allowed, retailers can use temporary sales below costs on food products to attract customers 
from their competitors. Selling below cost may also ease the introduction of new products on 
the market. 

Regulations fixing invoice price levels are often the practical translation of sales below costs 
restrictions.  By  stipulating  that  retailers  cannot  sell  below  a  pre-defined  invoice  price,  this 
may  strengthen  the  negotiation  power  of  the  strong  suppliers.  Likewise,  the  option  of 
compensating higher invoice prices by a reverse margin (i.e. a fee not included on the invoice) 
may significantly lessen a retailer's incentive to negotiate low prices in the first place. Finally, 
as  negotiations  on  this  price  floor  are  typically  national  and  annual,  this  tends  to  lead  to 
differences in prices across national markets and to price stickiness. 

However, if sales below costs and invoice price rules were relaxed, there should be sufficient 
safeguards in order to preserve competition and consumer protection. For instance, it should 
be  ensured  that  such  a  relaxation  does  not  result  in  price  wars  and  predatory  pricing. 
However,  this  risk  can  be  covered  by  stringent  competition  monitoring.  Furthermore  the 
accessibility to food retailers for all consumers should be ensured. It should also be warranted 
that a relaxation of such rules does not affect the development of "qualitative" relationships 

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between  suppliers  and  retailers  in  the  food  chain  that  encourage  investment  and  innovation 
throughout the chain.  

5.5. 

Enforcement of consumer protection rules 

At  a  time  of  sharply  fluctuating  food  prices,  the  risk  of  misleading  price  advertising  may 
increase. For example, consumers may be misled by suppliers altering pack size or contents in 
order to apparently maintain the same price for the relevant product.  

In  general,  transparency  measures  allowing  better  price  comparisons  across  products  and 
stores  for  consumers,  as  set  down  for  instance  in  the  Unit  Pricing  Directive,  can  facilitate 
consumer choice. Misleading commercial practices, which distort consumers' behaviour and 
actions  in  a  way  that  turns  out  detrimental  to  them  (e.g.  provision  of  false  information  or 
omission  of  relevant  information)  are  proscribed  by  the  Unfair  Commercial  Practices 
Directive. To be effective, both Directives obviously need to be adequately enforced.  

6. 

THE ROLE OF COMPETITION ALONG THE FOOD SUPPLY CHAIN 

The functioning of the food supply chain is also affected by the degree of competition at all 
stages of the chain. Continuous vigilance is thus required to ensure that competition rules are 
enforced at EU and Member State level in order to avoid competition infringements such as 
anticompetitive agreements and practices. This section reviews the role that competition can 
play  for  the  functioning  of  the  food  supply  chain.  The  practices  identified  in  table  2  and 
described  in  sections  6.3  and  6.4  constitute  the  most  frequent  competition  concerns 
encountered in relation to the food sector at large but they do not constitute an exhaustive list.  

6.1.  Market structures along the food supply chain  

The assessment framework for competition between firms is the relevant market. It is defined 
according to a product and a geographic dimension at a moment in time. Food retail markets 
typically involve bundles ("food baskets") sold by individual stores and are local in scope – 
encompassing  a  so-called  catchment  area.  In  the  presence  of  entry  barriers,  the  competitive 
constraints  faced  by  a  particular  retail  store  thus  depend  on  the  presence  of  other  nearby 
stores.  The  geographic  size  of  a  food  retail  market  also  depends  on  the  substitutability  of 
stores  from  a  consumer  perspective,  which  is  influenced  by  the  stores'  formats  and  by 
consumers'  valuation  of  time  and  travel.  Retailer  chains  themselves  act  as  buyers  of  food 
products  on  a  large  number  of  upstream  markets.  These  markets  tend  to  have  a  much 
narrower, product-specific, delimitation and are typically much larger in terms of geographic 
scope – often country-wide or international. 

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Figure 10:  Combined  market  share  of  the  five  largest  retailer  chains  (2007)  and 
change (2004-2007) 

o
i
t
a
r
n
o
i
t
a
r
t
n
e
c
n
o
c
m
r
i
f
-
5

90

80

70

60

50

40

30

20

10

0

BE

BG

CZ

D K

DE

I E

GR

E S

FR

I T

H U

NL

AT

P L

P T

RO

SK

FI

SE

U K

2004

2007

Note:  There  are  no  data  for  CY,  EE,  LT,  LV,  LU,  MT  and  SI.  Market  shares  are  based  on  turnover  and

include non-food items sold by retailers. 

Source: Euromonitor International 

Following a period of consolidation, the degree of concentration in the EU food retail sector is 
relatively high – in most Member States the five largest retailer chains account for over 50% 
of  the  market  (see  figure  10).  It  is  higher  in  the  old  Member  States,  but  the  consolidation 
movement  is  stronger  in  the  new  Member  States.  In  many  of  the  old  Member  States  this 
consolidation  movement  has  been  accompanied  by  a  switch  from  smaller  to  larger  store 
formats  and  an  overall  reduction  in  the  number  of  stores  (see  figure  11).  In  contrast  the 
number of individual stores in most new Member States has increased. In all Member States 
with exception of Sweden food retail surface has increased as has the number of large retail 
stores (i.e. hypermarkets, supermarkets and discounters).  

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Figure 11:  Change in number of outlets per capita, 2002-2007 

)
e
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a
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(

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40%

30%

20%

10%

0%

-10%

-20%

-30%

be

bg

cz

dk

de

ee

ie

gr

es

fr

it

cy

lv

lt

lu

hu mt

nl

at

pl

pt

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si

sk

fi

se

uk

250%

200%

150%

100%

50%

0%

-50%

-100%

-150%

)
e
g
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(

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Note: Large retail outlets include hypermarkets, supermarkets and discounters. 
Source: Euromonitor International 

Outlets/capita

Large retail outlets/capita

Another  trend  which  may  contain  prices  is  the  increase  in  the  market  share  of  discounters, 
who typically focus on low prices at the expense of other product dimensions (see figure 12). 
Indeed,  it  is  plausible  that  the  presence  of  discounters  exerts  pressure  on  other  retailers  to 
increasingly  focus  on  the  price  dimension.  Their  growing  presence  may  also  have  been 
spurred  by  changing  household  purchasing  habits  and  a  higher  price  sensitivity.  Over  the 
period  2002-2007,  covered  in  the  figure,  the  share  of  discounters  has  increased  almost 
everywhere and in particular so in some of the new Member States (Slovakia, Romania and 
the Baltic States). With a market share of over 30%, discounters are by far most successful in 
Germany  and  Austria,  where  they  have  a  long-established  presence.  In  the  new  Member 
States,  discounters  are  particularly  strong  in  Poland,  Hungary  and  the  Baltic  States,  where 
they account for a significant market share (over 20%) and continue to grow at a high rate.  

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Figure 12:  Combined market share of retail discounters, 2002 and 2007 

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

uk

fi

mt

fr

ie

sk

gr

es

lu

it

se

be

nl

pt

cy

si

ro

ee

lt

cz

lv

hu

pl

dk

at

de

Note:  Market  share  calculated  as  the  share  of  discounters'  turnover  in  turnover  of  large  retailers  (hypermarkets, 
supermarkets and discounters). 
Source: Euromonitor International 

2002

2007

Even though high concentration levels may  prima  facie be suggestive of weak competition, 
the  size  of  a  retail  chain  may  also  allow  it    to  better  exploit  economies  of  scale  and  scope, 
equipping it in turn to compete more intensely. As indicated above, the presence of more than 
one retail store in a catchment area is crucial for competition to occur and there do not seem 
to be any indications that this has been reduced as a result of the consolidation trend in the 
sector. Furthermore, the market position of a retail chain will condition its market power vis-
à-vis  suppliers.  A  potential  upstream  consequence  of  consolidation  at  the  retail  level  is  that 
suppliers  are  limited  in  the  number  of  alternative  outlets.  The  fact  that  many  large  retailers 
increasingly operate in more than one Member State and thus have access to wider potential 
consumer base strengthens their position. Analogously, when concentration occurs in the food 
industry, retailers themselves face a reduction of alternative sources of supply.  

Given the large number and the heterogeneity of food products, the food processing industry 
needs to be analysed more narrowly on the basis of groups of similar products. As the types of 
products and characteristics of these groups strongly vary, strong differences are observed in 
the structure of sub-industries. Market concentration is typically higher in markets for product 
categories  in  which  brands  play  an  important  role.  A  strong  brand  may  serve  as  a  signal  of 
quality and may contribute to the differentiation of a good, thus helping to secure consumer 
loyalty. At the same time it may make it harder to compete against, thus dissuading potential 
rivals from entering and making it difficult for retailers not to carry it (so-called 'must-stock' 
products).  Sectors  that  are  characterised  by  high  concentration  and  strong  brands  include 
biscuits,  confectionery  and  soft  drink  production.  Food  products  that  are  less  differentiated 
such  as  bread,  meat  or  flour  are  typically  produced  by  food  sub-industries  that  are  less 

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concentrated, including craft production (e.g. bakeries, butcheries). The incidence of private 
label  and  no-label  products  is  more  widespread  in  the  latter  categories.  However,  the 
geographic scope of these products is also likely to be narrower.  

6.2. 

The link between competition, price levels and inflation 

The more intense the level of competition, the lower price levels are likely to be, as firms face 
competitive  constraints  that  compel  them  to  lower  their  costs  and  bring  prices  down.  The 
effect of competition on price changes resulting from increasing input costs is more difficult 
to assess as on the one hand, firms operating at low margins in competitive markets will be 
forced to increase output prices and on the other hand, firms in less competitive markets may 
use the occasion to exploit their market power and raise output prices as well. 

Consumer  decision-making  is  based  on  consumers'  characteristics  and  preferences.  The  so-
called 'retail offers' among which they can choose consist of many dimensions (e.g. quality, 
range,  services,  proximity)  –  the  price  being  just  one  of  them.  As  a  consequence  of  this, 
different retailers are likely to focus to a different extent on these respective dimensions. All 
of  these  are  equally  valid  dimensions  of  competition.  Even  though  the  focus  of  this  staff 
working  paper  is  on  prices,  it  is  important  to  recall  that  retailers  compete  on  'retail  offers' 
rather than on product price only. Depending on the heterogeneity of consumers' valuation of 
the  different  dimensions,  prices  for  similar  products  are  likely  to  vary  substantially  across 
retail  chains  within  the  same  country,  provided  that  their  retail  offers  are  different.  To  the 
extent  that  consumer  characteristics  and  preferences  vary  across  countries  and  retailers 
respond to this, it is also likely to observe price differentials across countries. 

The  analysis  of  competition  can  be  broken  up  into  horizontal  issues  (i.e.  referring  to 
interactions  between  actors  at  the  same  level  of  the  supply  chain)  and  vertical  issues  (i.e. 
referring  to  interactions  between  actors  at  different  levels  of  the  supply  chain),  the  two  of 
which are interrelated. The consequences of interactions between firms are situation-specific 
and consequently need to be assessed in terms of their effect on competition as well as from 
an  efficiency  perspective  –  i.e.  in  terms  of  innovative  performance,  economies  of  scale  and 
economies of scope, arising for example from lower logistic costs.  

The potential and actual effects of both horizontal and vertical agreements between firms are 
manifold.  In  some  circumstances  agreements  may  indeed  result  in  price  levels  that  are 
excessive in comparison to the competitive price. The types of practices listed in table 2 may 
merit  a  closer  scrutiny,  always  bearing  in  mind  the  context  in  which  they  take  place.  

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Table 2: Overview of main practices that may give rise to competition concerns 

Practice 
Cartels 

Purchasing agreements 

Resale price maintenance 

Single branding 

: 
Tying 

Description 
Agreements among competitors relating 
inter alia to price fixing, output 
restriction and market partitioning 

Main competition risk 
Maintenance of high prices and stalling 
of innovation to the detriment of 
consumers 

Agreements concluded by firms to 
achieve volumes and discounts similar to 
their bigger competitors 

Under certain conditions, tool for 
foreclosing rivals' access to essential 
inputs at competitive conditions; 
collusive behaviour between competitors 
on downstream markets  

Restriction of the buyer's ability to 
determine the sale price to end 
consumers 

Obligation or incentive scheme which 
makes the buyer purchase practically all 
of his requirements on a particular 
market from only one supplier, for a 
certain duration 

Reduction of price competition  

Restriction of in-store inter-brand 
competition and/or foreclosure of the 
market to competing and potential 
suppliers 

Purchase of a product (tying product) 
made conditional on purchase of other 
product (tied product) 

Foreclosure on the market of tied 
product, and indirectly of the tying 
product 

Exclusive supply agreements  Direct or indirect obligation causing a 

Foreclosure of other buyers / retailers  

supplier to sell a good only to one buyer 

: 
Private label products 

Products made by third parties upstream 
in the supply chain and sold under 
retailers' brand 

Foreclosure of existing and potential 
competing buyers; restriction of in-store 
inter-brand competition 

Certification schemes 

Requirement to comply with a number 
of conditions set by individual buyers 

Risks of foreclosing competing buyers 

6.3. 

Horizontal practices  

The  functioning  of  the  food  supply  chain  may  be  affected  by  a  lack  of  competition  in  the 
market.  For  instance,  distortion  of  competition  may  arise  from  operations  of  concentration 
leading to dominant positions or anticompetitive unilateral conducts on either the purchasing/ 
procurement  markets  and  on  the  resale  markets  for  foodstuffs,  as  well  as  from  agreements 
between firms or unilateral conducts violating respectively Articles 81 and 82 of the Treaty.  

Cartels 

Cartels  constitute  the  main  anti-competitive  behaviour  which  should  always  be  prohibited. 
Practices  such  as  price  fixing,  output  restriction  or  (downstream  or  upstream)  market 
partitioning,  could  lead,  amongst  other  effects,  to  market  foreclosure,  the  artificial 
maintenance of high prices and a stalling of innovation to the ultimate detriment of European 
consumers. Recent experience shows that cartels can occur in the food sector. These cartels 
tend  to  vary  in  terms  of  territorial  scope.  Special  attention  should  be  given  by  competition 
authorities  to  uncovering  the  most  harmful  cartels  amongst  suppliers  of  both  processed  and 
non-processed foods. 

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Purchasing agreements 

Other horizontal agreements, such as joint purchasing agreements ("buying alliances") among 
several  large  retailers  should  also  be  scrutinised.10  These  purchasing  agreements  are  often 
concluded  by  small  and  medium-sized  retailers  and  wholesalers  to  achieve  volumes  and 
discounts similar to their bigger competitors. These agreements between SMEs are therefore 
normally  pro-competitive  since  even  if  a  moderate  degree  of  market  power  is  created,  this 
may  be  outweighed  by  efficiency  gains  resulting  from  economies  of  scale.  The  size  and 
number of buying alliances in the food sector has grown considerably throughout the EU. The 
involvement  of  larger  buyers  in  such  alliances  has  led  to  increasing  concerns  expressed  by 
producers of both processed and unprocessed food, as well as farmers. The impact of this kind 
of agreements on the functioning of the food supply chain needs to be closely followed since 
such  agreements  may  serve  as  a  tool  for  foreclosing  rivals'  access  to  essential  inputs  at 
competitive  conditions  and/or  for  competitors  to  engage  in  collusive  behaviour  on 
downstream markets (i.e. price fixing, output limitation or market allocation). The Guidelines 
on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements, as 
well as the Guidelines on vertical restraints, provide the right analytical framework to address 
joint  buying  from  a  competition  policy  perspective.  The  Commission  and  National 
Competition Authorities will continue to use these tools to carry out the relevant analysis. 

Mergers 

Concentration at all levels of the food supply chain shall be continuously monitored. Through 
rigorous merger control mechanisms, which include the obligation for all companies involved 
to  notify  proposed  structural  operations  to  the  Commission  or  National  Competition 
Authorities, European competition rules ensure that the increased concentration resulting from 
mergers  does  not  significantly  impede  effective  competition  at  any  level  of  the  food  supply 
chain.  Among  the  mergers  with  a  so-called  'Community  dimension'11  analysed  by  the 
European  Commission  since  2000  in  sectors  relating  to  the  food  supply  chain,  the  large 
majority was unconditionally approved, indicating that they did not give rise to impediments 
to competition. Only a small number was approved subject to conditions. This distribution is 
fairly  consistent  with  merger  decisions  in  other  sectors  of  the  economy12,  suggesting  that 
mergers in sectors along the food supply do a priori not give rise to higher anti-competitive 
risks than those in other sectors of the economy.  

6.4. 

Vertical issues 

The degree of market power held by the firms in vertically-related markets varies by product 
category and can potentially lead to imbalances in the food supply chain. It is influenced inter 
alia  by  the  position  of  firms  in  the  markets  in  which  they  operate,  be  it  as  suppliers  or  as 

10 

11 

12 

The  Guidelines  on  the  applicability  of  Article  81  of  the  EC  Treaty  to  horizontal  cooperation 
agreements, as well as the Guidelines on vertical restraints, provide the right analytical framework to 
address joint buying from a competition policy perspective.  
Council  Regulation  (EC)  No  139/2004  of  20.01.2004  on  the  control  of  concentrations  between 
undertakings.  A  'Community  dimension'  exists  where  the  merging  parties  have  an  aggregate 
Community-wide turnover exceeding a certain threshold, of which two-thirds at most  are achieved in 
one and the same Member State. 
http://ec.europa.eu/comm/competition/mergers/statistics.pdf 

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buyers. Consolidation in a sector may allow firms to countervail market or buyer power in a 
vertically-related  market,  but  may  also  result  in  foreclosure.  The  ongoing  consolidation  in 
both  the  retail  sector  and  the  food  industry  can  generate  efficiency  gains  and  does  not 
necessarily  constitute  a  competitive  risk,  to  the  extent  that  it  counteracts  upstream  market 
power  or  buyer  power  respectively.  Nonetheless,  excessive  concentration  may  ultimately 
result  in  anti-competitive  developments  leading  to  price  increases.  For  this  reason  the 
developments  in  the  sectors  along  the  food  supply  chain  and  the  behaviour  of  market 
participants need to be monitored closely to pre-empt anti-competitive situations that would 
ultimately  fuel  price  increases.  A  number  of  features  other  than  the  market  share  of  firms 
involved in a vertical transaction may affect their bargaining power or already be a reflection 
of it. These features include product attributes, for example the relative importance of branded 
products, as well as contractual terms between vertically-related firms. These features are by 
and large legitimate activities, but deserve consideration in any deeper assessment of the food 
supply chain. 

The effects of vertical agreements on prices are ambiguous and may either foster competition 
by generating efficiency gains, or inhibit it by leading to vertical foreclosure or by facilitating 
collusion  on  any  level  of  the  supply  chain.  Besides  resale  price  maintenance  and  some 
practices  relating  to  market  partitioning,  which  are  considered  hard-core  restrictions  of 
competition,  a  large  number  of  vertical  agreements  (including  exclusive  distribution,  single 
branding,  tying,  exclusive  customer  allocation,  selective  distribution,  franchising,  exclusive 
supply  agreements  and  recommended  and  maximum  resale  prices)  can  be  identified  which, 
given  their  ambiguity,  typically  require  a  case-by-case  assessment,  for  which  detailed  rules 
exist at Community level.13  

Resale price maintenance 

Practices  relating  to  resale  price  maintenance  are  considered  hard-core  restrictions  on 
competition.  Such  practices  restricts  the  buyer's  (i.e.  the  wholesaler  or  retailer's)  ability  to 
determine the price level at which he will sell the product to his customers. As a result, price 
competition  in  the  downstream  market  is  significantly  reduced.  Practices  relating  to  resale 
price maintenance often appear local in scope National Competition Authorities are also well 
equipped to address them. 

Single branding (and tying) 

Other  vertical  agreements  such  as  single  branding  could  also  have  detrimental  effects  on 
consumers. Single branding involves an obligation or an incentive scheme which makes the 
buyer  purchase  practically  all  of  his  requirements  on  a  particular  market  from  only  one 
supplier.  As  a  result,  the  buyer  will  not  buy  and  resell  competing  goods.  This  may  lead  to 
foreclosure of the market to competing and potential suppliers or a loss of in-store inter-brand 
competition. The market position of the supplier is of importance since it is only likely that 
competing suppliers are foreclosed if they are significantly smaller than the supplier applying 
the  non-compete  obligation.  In  the  food  sector,  single  branding,  including  direct  or  indirect 
practices  that  result  in  brand  exclusivity,  requires  a  case-by-case  analysis  to  determine  the 

13 

Regulation 2790/1999 on the application of the Article 81(3) to categories of vertical agreements and 
concerted practices, and Guidelines on vertical restraints 2000/C 291/01 

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potential  detrimental  effect  on  the  food  supply  chain.  The  Commission's  Block  Exemption 
Regulation14  and  the  Guidelines  on  vertical  restraints  provide  detailed  rules  for  such 
assessment. Other business practices such as tying the purchase of a product to that of another 
product may also result in brand exclusivity and consequently have similar effects requiring 
further analysis to determine their potential detrimental effects on the food supply chain.  

Exclusive supply agreements 

Exclusive  supply  agreements  may  also  require  careful  scrutiny.  Exclusive  supply  relates  to 
any  direct  or  indirect  obligation  causing  the  supplier  to  sell  the  goods  specified  in  the 
agreement only to one buyer inside the Community for the purposes of a specific use or for 
resale.  The  main  competition  risk  in  this  situation  is  foreclosure  of  other  buyers/retailers 
within  the  food  supply  chain.  The  market  position  of  competing  buyers  on  the  upstream 
market  is  thus  crucial  since  competitors  are  only  likely  to  be  foreclosed  if  their  market 
position is significantly smaller than that of the buyer benefiting from the agreement. If the 
buyer  has  market  power  downstream,  appreciable  negative  effects  for  consumers  can  be 
expected.  However,  countervailing  power  of  suppliers  is  also  of  relevance,  since  important 
suppliers will not easily allow themselves to be cut off from alternative buyers. 

Certification schemes 

Certification schemes can be mentioned as an example of arrangements that could indirectly 
compel  the  suppliers  to  sell  to  only  one  buyer.  Certification  schemes  required  by  retailers 
often  involve  a  significant  financial  and  administrative  burden  for  farmers  and  food 
producers. The functioning of these schemes in the EU market needs to be scrutinised with a 
view  toward  reducing  their  costs  and  removing  barriers  to  market  access  and  integration. 
Recent  years  have  indeed  seen  a  substantial  growth  in  private  and  national  food  quality 
certification  schemes.  These  schemes  may  be  useful  for  producers  and  consumers,  as  they 
guarantee quality and origin and therefore allow customers to make better informed choices. 
Furthermore, as many of these schemes are related to environmental standards their aim is to 
halt environmental degradation and to add to food security in the long-term, for example by 
promoting sustainable farming practices. Nonetheless, the proliferation of schemes and labels 
in  recent  years  has  given  rise  to  concerns  about  their  transparency  requirements,  the 
credibility of the claims made and their possible effects on equitable commercial relations. In 
particular, the pressure to participate in more than one scheme because of different customer 
requirements  entails  a  significant  financial  and  administrative  burden  for  agricultural 
producers,  and  especially  small-scale  producers.  There  is  thus  a  need  to  analyse  to  which 
extent  certification  schemes  act  as  barriers  to  market  access  and  to  the  free  movement  of 
goods, thereby impeding the smooth functioning of the Single Market. The Commission has 
opened  a  debate  on  the  various  aspects  of  agricultural  product  quality  policy,  including 
certification schemes and their functioning in the EU market.15 Building on these reflections 
the  Commission  will  develop  strategic  orientations  in  a  Communication  on  agricultural 
product quality policy scheduled for spring 2009. 

14 
15 

Guidelines on vertical restraints 2000/C 291/01 
COM(2008) 641 final, 15.10.2008, Green Paper on Agricultural Product Quality. 

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Private labelling 

The  introduction  of  private  label  products  by  retailers  is  a  growing  trend  in  the  food  retail 
sector.  The  market  share  of  such  products  varies  by  country,  product-category  and  store 
format. In some Member States they now account for more than 40% of products sold. For 
many store formats – in particular discounters – private labels represent the quasi-totality of 
listed  products.  While  they  widen  the  range  of  available  products  and  thus  represent  an 
additional source of competition, they may lead to foreclosure effects as supplier of branded 
products  become  a  direct  competitor  to  the  retailer.  Similarly,  while  private  label  products 
provide  opportunities  for  their  producers  to  have  access  to  a  large  customer  base,  they  may 
also reinforce their dependency towards a particular retailer. Their long-term impact on prices 
is ambiguous, but there is nonetheless some evidence that they exert a downward impact on 
the  price  level  of  a  given  product  category,  which  is  particularly  strong  upon  their 
introduction.  Nonetheless  the  effect  of  private  label  products  on  buyer  power  and  on 
innovation in the food industry will continue to deserve attention.  

The  increased  bargaining  power  of  retailers  resulting  from  the  introduction  of  private  label 
products  may  be  offset  by  the  strong  bargaining  power  of  firms  offering  (internationally) 
branded products due to the 'must-have' status of such products. Producers of homogeneous 
products, for which brand awareness is not high, are likely to be in a much weaker position. A 
stronger  brand  image  results  from  product  differentiation  through  investment  in  product 
innovation, quality and advertising. Ultimately strong brands may constitute entry barriers, as 
new  entrants  would  be  faced  with  high  levels  of  upfront  costs  they  could  not  recover 
subsequently (endogenous sunk costs). 

7. 

CONCLUSION 

This  working  document  has  provided  a  brief  description  of  the  food  supply  chain  and  has 
investigated the impact of the conditions of competition and of the regulatory framework on 
the  functioning  of  food  markets  in  general  and  food  price  and  inflation  levels  in  particular. 
With food prices forecast to remain firm in the coming years, every effort should be made to 
improve  the  efficiency  of  Europe's  food  supply  chain  and  to  overcome  its  still  existing 
fragmentation. This could provide relief to European households in a context of low economic 
growth and rising unemployment.  

The document has shown that the sectors belonging to the food supply chain, in particular the 
food  processing  industry  and  the  distribution  sectors  are  economically  important  and  have 
many interactions with other sectors of the economy, either as purchasers or as suppliers of 
intermediate inputs. The slow productivity growth in these sectors indicates that there is room 
for improving the efficiency of the food supply chain. 

In  this  context,  this  document  has  examined  how  the  degree  of  competition  in  the  food 
industry  and  the  downstream  retail  markets  may  have  affected  price  developments.  It 
identifies  a  number  of  factors  and  practices  –  notably  behaviours  lessening  the  degree  of 
competition and unnecessary regulations – that may lead to higher price levels and explain the 
observed  variation  across  Member  States.  While  it  finds  that  price  increases  on  specific 

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products in certain markets may well be the result of anti-competitive behaviour by a firm or a 
group of firms, it does not suggest that a direct causality link exists between the recent across-
the-board food inflation and competition along the food supply chain in Europe. 

The food supply chain is going through a process of consolidation in both food processing and 
distribution.  While  consolidation,  when  it  reaches  certain  levels  in  specific  markets,  could 
constitute  a  competitive  risk,  it  often  generates  efficiency  gains  and  cost  reductions  also. 
According to the preliminary findings presented in this paper, no general conclusion can be 
drawn that the ongoing market consolidation in food retailing has raised consumer food prices 
levels in the old Member States. In the new Member States, the consolidation goes hand in 
hand with a higher and faster transmission of consumer price increase. But the simultaneous 
increase in the number of retail outlets appears to have limited the increases in consumer food 
prices  caused  by  the  higher  producer  prices  to  some  extent.  A  competitive  framework, 
supported  by  vigilant  competition  authorities  and  a  regulatory  framework  that  does  not 
unnecessarily  hamper  market  entry  should  continue  to  ensure  that  the  food  supply  chain 
delivers benefits to consumers. 

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Annex 1: 

Consider a simple OLS regression of the form: 

∆

CP
t

=

βα

+∆+

P
t

ε
t

β

=

+
⎧
β
⎨
−
β
⎩

if
if

P
≥∆
t
P
<∆
t

0
0

with 

where ∆CP is a change of the consumer food prices, ∆P is a change of the producer prices and 
ε is an error term. The reaction of the consumer prices is symmetric to increases and decreases 
in P if 

+ βββ
−
:
=∆

−

≈

0

The estimates of β (and hence of ∆β) may be biased if the entire reaction of consumer food 
prices  to  changes  in  producer  prices  is  delayed.  In  order  to  account  for  this  possibility  a 
regression with three lags can be estimated: 

∆

CP
t

=

∆+
βα
1

P
t

1
−

+

β
2

∆

P
t

−

2

∆+
β
3

P
t

−

3

+

ε
t

β
i

=

+
⎧
β
i
⎨
−
β
⎩
i

if

if

with 

∆

∆

P
t
P
t

≥

0

<

0

−

i

−

i

 for i=1,2..6. 

According  to  the  Wald  test,  the  difference  of  the  coefficients  β+=1.09  (instant  reaction)  β-
=0.89 (3 lags) is significant at 1% test level in the case of the new Member States. Thus, the 
results show that the magnitude of the pass-through of producer prices to consumer prices is 
relatively large in most of the new Member States when prices go up. In fact, in this case, the 
elasticity  is  larger  than  one  suggesting  that  margins  increase.  Interestingly,  when  producer 
prices decrease, the estimated elasticity is less than one and there are lags. 

Table A1: Price stickiness: Transmission of producer price decreases and increases into 
consumer prices in the new Member States 

Dependent Variable:
Estimation sample

Explanatory variables

Coefficient
Std. Error
t-Statistic

(***) - indicates significance at 1% test level.

(**) - indicates significance at 5% test level.

(*) - indicates significance at 10% test level.

Consumer food prices increases
2005 January - 2008 August

producer price 
decreases (-3 lag)

producer price 
increases 
(instant 
reaction)

0,85**

0,42

2,04

1,08***

0,18

5,99

R-squared
0,53

Adjusted R-
squared
0,50

Table A2: Transmission of producer price decreases and increases into consumer prices 
in the euro area  

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Dependent Variable:
Estimation sample

Explanatory variables

Consumer food prices increases
2005 January - 2008 August

producer price 
decreases 
(instant reaction)

producer price 
increases (-1 
lag)

producer price 
increases (-3 lag)

R-squared

Adjusted 
R-
squared

Coefficient
Std. Error
t-Statistic

0,95***

0,29

3,31

0,48***

0,18

2,65

0,47***

0,18

2,59

0,40

0,36

(***) - indicates significance at 1% test level.
(**) - indicates significance at 5% test level.
(*) - indicates significance at 10% test level.

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Annex 2: 

Table 1: Results of the pooled data analysis 

Dependent Variable:

Estimation sample

Explanatory variables

Old member states

Coefficient
Std. Error
t-Statistic

New EU member states

Coefficient
Std. Error
t-Statistic
(***) - indicates significance at 1% test level.

 Consumer food price increases 

Producer food 
prices 
increases

Unit labour 
costs increases

2003 - 2007

The increase in 
number of 
outlets per 
person  

R-squared

Adjusted R-
squared

0,45***
0,11
3,97

-

0,20***
0,06
3,40

0,91***
0,10
9,83

-

0,56

0,51

-0,32***
0,08
-3,88

0,82

0,81

Note 1) The analysis is carried out by the application of a simple OLS regression on pooled annual data  

Note  2)  The  new  EU  member  states  pool  includes:  the  Czech  Republic,  Latvia,  Lithuania,  Hungary,  Poland,  Slovenia.  The  rest  of  the 
countries are not   included due to missing food market structure or food producer price data. 

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