Are you sure?

Trying to share the burden of the crisis tax

The question of who will bear the brunt of crisis taxes launched by Hungary’s government last year has been on the table for a while now. Recently, some indication has emerged in the retail sector.

Hungary’s second biggest supermarket chain, Spar Magyarország has asked the owners of its rented store spaces not to raise rental fees and to waive one month rent a year until 2013, the year until the crisis tax is to be paid by the company. According to local weekly Budapest Times, which learned the request of Spar, drugstore chain Rossmann Magyarország has made a similar request to its landlords.

A letter, in which Spar sent out its request mentions the whole economic crisis as a reason, but also singles out the crisis tax. “The various effects of the crisis represent such a burden to the company that we have no other choice but to request your cooperation,” the weekly cites the letter signed by Péter Feiner and Gábor Csiba, managing directors of Spar Magyarország Kft. The letter says that the crisis tax levied on retailers “requires an unrealistically high sacrifice on just one side”.

According to the letter’s calculation, to fully compensate for the annual sum of the special tax, all Spar landlords would have to reduce their rental fees by €3.2 (HUF 864) per square meter. However, the company is not going that far, but it expressed that it would appreciate if landlords would comply with the request not to raise rental fees and waive one month’s rent a year.

Commenting on the news, Péter Feiner told the Budapest Business Journal that he believes that hitting the retailers with an extra burden but leaving the partners whom a retailer deals with, or on whom the retailer is dependent in some business processes, is unfair. He said he would like their partners to share the extra burden of Spar. He added that the company has already received answers from some landlords, positives and negatives alike.

Feiner earlier told business daily Világgazdaság that the amount of the extra burden the company had to pay last December was around HUF 6 billion, and that the company was only able to pay it with the help of its Austrian parent group Aspiag AG.

Common practice

According to Anita Csörgő, director of retail properties at real estate consultant Colliers International, negotiation for rent exemption is neither questionable, nor surprising in the retail sector nowadays. It has become quite common since the crisis. “There are already examples, mainly in the cases of shopping malls in regional cities, of successful deals on holding rents below inflation for a few years,” Csörgő said. “I think it is not impossible for these retailer giants either to achieve such deals” she added.

Although Spar’s current call is just a request in form, the company probably has a good negotiating position. The letter says that its partners should share the extra burden in the interests of securing the company’s market share, stability and competitiveness in the long term. This is indirectly the interest of the owners of the rented retail facilities as well, since a tenant losing market share (or going bankrupt), also has bad consequences on the landlord.

At the renegotiation of an expiring contract, fighting for better conditions – and from the lessors’ aspect to take price reduction into consideration – is evident, but sometimes the landlord has to think over exemptions also when a contract is still in effect, Csörgő explains and highlights the current case of Electro World Hungary. Electro World decided to close one of its stores in Budakalász in mid-February after negotiations for decreasing the rent failed. Then, a few days later the company applied for bankruptcy protection. “Sometimes being generous is advantageous for a landlord, as it can be the key to receiving the rent and on time,” Csörgő added.

Cutting back on what?

Spar told the BBJ that they are examining every possibility of cost-saving now, and their current aim for rent exemption is not the only idea they came up with.

After the announcement of the crisis tax last year, retailers have declared that they will not be able to pass the burden onto customers with raising prices, because it would badly affect consumption, which is already declining since the crisis. This means that some price rising will happen, and is happening, anyway, but retailers have to be careful not to make it spectacular – raising prices at a higher rate than inflation would justify.

Retailers (as the players of other levied sectors, energy and telecoms) have expressed that investments would likely be the area, where the budgets could be cut in order to balance the unexpected obligatory expenditure.

Spar has announced recently that it has decided to postpone the establishment of its second Hungarian meat processing factory, which was planned because the first factory in Bicske operates very successfully, manufacturing for export as well. However, as Feiner told Világgazdaság, the company will keep on thinking about the enlargement of the Bicske-based facility, and they will continue the transformation of the former stores of acquired competitor chain Plus.

Spar has also disclosed lately that in 2010 it had to lay off 717 workers (6% of its workforce in 2010) as its turnover decreased 4% last year. Spar Magyarország is in the red since 2008, but the company has expanded very strongly in the last few years. 2008 was also the year of the mentioned Plus acquisition, and since then the company restructured 73 former Plus shops.