VZCZCXRO1126
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVI #0969 1891620
ZNR UUUUU ZZH
P 071620Z JUL 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 0509
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS VIENNA 000969 
 
SIPDIS 
 
STATE FOR EEB/TPP/ABT/ATP JANET SPECK 
 
E.O. 12958: N/A 
TAGS: EAGR ETRD ECON PGOV PREL AU
SUBJECT:  FOOD PRICES - BLEAK OUTLOOK FOR AUSTRIAN CONSUMER 
 
REF:  (A) VIENNA 0965; (B) VIENNA 0945; (C) VIENNA 0621 
 
Summary 
------- 
¶1.  Food prices are a continued concern in Austria and will remain 
high on the agenda of Austria's new government, to be elected in 
September 2008.  The May 2008 inflation rate of 3.7% was the highest 
monthly rate in fifteen years, food price inflation was 7.2%.  Food 
prices (excluding VAT) in Austrian supermarket chains are up to 20% 
higher than in Germany, even though suppliers reportedly under 
extreme press of these chains to hold cost down.  A recent European 
Commission merger decision will result in even higher market 
concentration and could lead to a further rise in food prices.  End 
Summary. 
 
Continued High Food Price Inflation 
----------------------------------- 
 
¶2.  The May 2008 CPI was up 3.7% from May 2007, the highest monthly 
rate in fifteen years.  As in previous months, the CPI increase was 
mainly driven by the costs for energy and food.  Prices for 
household energy were up 6.8%, food prices 7.2%.  Consumers had to 
pay 41% more than a year ago for pasta, 11% more for bread and grain 
products, 16% more for dairy products, and 15% more for edible fats 
and oils 15%.  Economic researchers now project an annual average 
CPI increase of 3.2-3.5%, with food prices expected to go up 7% and 
energy prices 13% (ref B).  Austrian National Bank Governor Klaus 
Liebscher recently warned against populist proposals to lower the 
VAT, the petroleum tax or road tolls to relieve industry and 
consumers of inflation effects.  Such steps would "open a Pandora's 
box," according to Liebscher, who suggested enforcing competition 
policies as an alternative. 
 
High Retail Concentration - High Food Prices 
-------------------------------------------- 
 
¶3.  As mentioned in ref C, domestic factors behind at least some of 
the food price rise are high retail concentration in the food 
sector, a lack of competition, and a weak competition authority.  In 
the past twenty years, Austria's food trade underwent an 
unparalleled concentration from 11,600 shops in 1985 to 6,076 in 
2007, combined with a doubling of the combined market share of 
supermarket chains REWE and Spar.  Today, the top three chains hold 
a market share of 77.4% (REWE 30%, Spar 27.7% and Hofer 19.7%), 
according to the ACNielsen market research institute.  Austria has 
one supermarket for 12,300 citizens, the second highest 
concentration in the EU after the UK. 
 
¶4.  Even though suppliers are reportedly under extreme pressure to 
hold cost down, prices in Austrian supermarkets average 13-20% 
higher than in Germany - excluding VAT, according to the Austrian 
Labor Chamber's consumer protection department.  A food basket of 13 
products costing Euro 17.56 in Passau, Germany costs Euro 21.33 in 
Vienna.  Price increases for selected products in Viennese 
supermarkets over the last twelve months have also been exorbitant, 
e.g., for penne 80%, sunflower oil 65%, flour 23%, gouda cheese 20%, 
orange juice 16%, fruit yoghurt 14%, beer 12%. 
 
EU Merger Decision Not Helpful 
------------------------------ 
 
¶5.  In this situation, the European Commission's recent approval of 
the proposed takeover of ADEG, an Austrian chain with a 5.5% market 
share, by REWE pursuant to the EU Merger Regulation does not seem 
helpful.  The Commission redefined the "critical market 
concentration" from the so far accepted regional 30% to 50%.  Its 
argument that "the transaction would not significantly impede 
effective competition in the European Economic Area (EEA) or any 
substantial part of it" seems odd, particularly since the Commission 
could not exclude that REWE/ADEG deal would result in increased 
price levels on the Austrian retail market. 
 
¶6.  As a result of the Commission's decision, REWE's Austria-wide 
retail market share will go up to about 35%, in some Austrian 
regions to as much as 50%, despite a commitment to divest ADEG 
outlets.  The combined market share of the top three chains in 
Austria (REWE/Billa, Spar, and Hofer) will rise from 77.4% to about 
83%.  In comparison, the market share of the top three chains 
elsewhere in Europe exceeds 65% only in Scandinavia, Belgium and 
Switzerland.    The outlook for Austrian consumers seems bleak. 
Inflation, high food prices and competition policies will remain on 
the agenda for Austria's new government, to be elected in September 
2008 (ref A). 
 
GIRARD-DICARLO