Hungary’s new retail margin cap explained

Designed to rein in soaring costs, this measure has sparked debate about its effectiveness and fairness. So, what’s it all about? Let’s break it down.

What is a Margin, and How Does it Differ from Profit?

Before diving into the policy, let’s get the basics straight. A margin is the difference between what a retailer pays for a product (the purchase price) and what they sell it for (the selling price). For example, if a store buys an item for 1000 forints and sells it for 1500 forints, the margin is 500 forints—or 50%. Simple, right?

But here’s where it gets tricky: margin isn’t the same as profit. In retail, that 500-forint margin has to cover a laundry list of expenses—employee salaries, energy bills, rent, and taxes (like Hungary’s retail tax). Only what’s left after these costs is profit, and in the retail world, that’s often a tiny sliver. In Hungary, retailers typically see profit margins around 1%. The government, however, has been framing high margins as evidence of “excessive profits,” a claim that doesn’t quite hold up when you peek under the hood.

What Exactly is the Margin Cap?

Here’s the gist: starting March 17, the government is capping retailer margins at 10% for 30 product categories—think essentials like milk, eggs, and meat products. If a retailer’s margin was already below 10%, they can’t raise it beyond that prior level. This cap will stick around until May 31, 2025. It doesn’t apply to every corner store, though—only businesses with a net revenue over 1 billion forints in 2023 (about 200 companies) are in the crosshairs. Consumer protection authorities will enforce it, with fines ranging from 500,000 to 5 million forints for violators.

The move came after negotiations with six major chains—Lidl, Aldi, Penny, Tesco, Auchan, and Spar—hit a wall. According to National Economy Minister Nagy Márton, only two offered price-cutting proposals, prompting the government to step in with this decree.

Does the Margin Cap Apply Only to Retailers?

Not quite, but retailers are the ones taking the heat. Every link in the supply chain—producers, processors, wholesalers—adds its own margin. Take UHT milk as an example:

• A farmer sells raw milk to a processor for 206.96 forints (January 2025 average, per the Agricultural Economics Institute).

• The processor turns it into UHT milk and sells it for 335.33 forints, adding a 62% margin (128.37 forints).

• A wholesaler might tack on a small margin, bringing the retailer’s purchase price to 340.44 forints.

• The retailer then sells it for 558.57 forints (branded) with a 64% margin (218.13 forints), or at a slimmer 13% margin for own-brand versions.

The government also grabs a slice via VAT. So, while retailers are the final stop, the price you pay reflects margins piled up along the way—not just the store’s cut.

Are Retail Margins Really as High as the Government Claims?

The government has pointed fingers at sky-high margins: 40%+ on eggs, 80%+ on butter and sour cream, 70%+ on cottage cheese and yogurt. Sounds shocking—but where’s the proof? Requests to the National Economy and Agriculture Ministries for hard data went unanswered. The Agricultural Economics Institute offers some clarity: margins on some products (like those previously under price caps) have been high for years, while others have stayed steady. For many items, the 10% cap won’t shake things up much. A government video later hinted at higher average margins for regulated products, but the data’s origins remain murky.

Are Retailers Profiteering from High Prices?

The numbers say no. In 2023, two-thirds of affected retailers had profit margins below 5%, with nearly half under 3%. Among the big six chains, three were in the red, and two of the profitable ones scraped by with less than 1% profit. Hardly the picture of greedy profiteers the government paints.

What Impact Will the Margin Cap Have on Inflation?

The government’s rosy forecast? A 10% price drop in the 30 categories, slashing overall inflation by 1 percentage point and food inflation by 2 points. Experts aren’t buying it. K&H’s Németh Dávid predicts a fleeting effect—maybe a month or two. ING’s Virovácz Péter doubts even that, warning retailers might hike prices on uncapped items to offset losses. Post-cap, prices could rebound, just like after past price controls. It’s a gamble with uncertain payoffs.

How Do Similar Measures Work in Other Countries?

Hungary’s not breaking new ground here:

• Croatia: Caps fuel margins and sets maximum prices for some foods, paired with tax cuts (e.g., VAT dropped from 26% to 5% on certain items). Inflation slowed, but it’s creeping up again (4.7% food inflation in January 2025).

• Romania: A 2023 margin cap on 14 foods applies across the supply chain—20% for processors and retailers, 5% for wholesalers—crafted with industry input. Food inflation held at 4.5% early this year.

• North Macedonia: A 10% retail margin cap on 100 products echoes Hungary’s approach. A prior attempt flopped, and inflation hit a 16-month high in February, with food prices up 6.6% year-over-year.

How Will the Margin Cap Affect Retailers Financially?

The government’s targeting “multinational” giants, but smaller, Hungarian-owned stores are also snagged—especially those just over the 1-billion-forint threshold. These retailers often rely on higher margins due to limited product ranges and higher costs. Capping them at 10% could mean losses, layoffs, or even closures. Big chains might weather the storm; smaller players might not.

The Bottom Line

Hungary’s margin cap is a flashy fix for a thorny problem. It might trim prices briefly, but the ripple effects—on retailers, supply chains, and inflation—could muddy the waters. With thin profit margins already the norm, and the policy’s scope raising more questions than answers, it’s a high-stakes experiment. Will it tame inflation or just shuffle the deck? Time will tell, but don’t expect miracles.