This study examines the importance of EU membership of the Baltic countries for the Finnish food sector. The study focuses on three main issues: First, aggregate economic factors affecting trends in the Baltic food market are described. Second, the structure of trade in the food sector between the Baltic countries and Finland and the development in its value are investigated, as well as the trade policy of the Baltic countries. Third, the repercussions of EU membership on the food market in the Baltic countries and on the trade between Finland and these countries are also evaluated. The focus of the study is on considering the future options of certain food sectors, namely dairy, meat, bakery, brewery, alcohol, sweets and biscuit industries, in the Baltic food market. The research is based on published literature as well as interviews conducted with 25 managers of Finnish food firms involved in penetration of the Baltic food market.
Finnish firms have a significant position on the Baltic Market
The Baltic food market is deeply influenced by firms in the Finnish food sector. Finnish firms have normally captured a market share in the Baltic food market by buying local firms, since local tastes and the traditional characteristics of food products are highly appreciated by Baltic consumers. Because Finnish firms are usually rather small, and hence unable to bear great risks, the Baltic countries have been an excellent location to learn the running of international operations. Moreover, due to the small size of the Baltic markets, multinational enterprises have taken rather modest steps towards gaining access to them.
The EU membership of Baltic countries is a positive challenge
The study suggests that as a result of their forthcoming EU membership, the Baltic countries will form closer relations with western markets and bilateral trade will become easier. Although competition in the Baltic markets will become stronger, the interviewed managers regarded EU membership as a positive challenge rather than as a threat.
New challenges for the competitiveness of Finnish firms
As far as the competitiveness of the Finnish food sector is concerned, the interviewed persons considered the familiar operational environment of Baltic markets a major advantage, but the high quality of products and price competitiveness were also highlighted. Product differentiation and quality traits will play an ever-increasing role in the Baltic market. The interviewed managers assume that the price competitiveness of Finnish products will improve in the future. However, special emphasis was placed on improving collaboration in the supply chain to control delivery and raw material purchases, and therefore enhance the quality of products. A key advantage for Finnish food firms in the Baltic market is the close co-operation as well as mutual trust in business relations with local retailers. As a consequence of the increasing dominance of large retail chains and the greater negotiating power of retailers, the importance of this factor will be enhanced. The interviewed persons stressed the importance of strategic actions such as marketing and establishing alliances as a tool to enhance competitiveness. Interestingly, they found this a more important factor in maintaining competitiveness than the efficiency of production. In addition, a successful business is always based on skilled and committed local management.
Investments made by Finnish firms in the Baltic milk or meat-processing sectors can in most cases be regarded as defensive. In fact, milk and meat imports, especially from Estonia, are considered a threat by the Finnish dairy and meat industry. The motivation behind Finnish investments in the Baltic countries has not been to prohibit food imports to Finland, but rather to secure an active role for Finnish firms in possible export business to Finland, and in this way to benefit the owners. This defensive strategy, aiming at protecting domestic markets by buying Baltic firms and therefore prohibiting actions by other foreign firms, was not only chosen by the milk and meat industry, but also by other Finnish food sectors. These measures are also aimed at preventing the possible penetration of multinational firms close to the domestic market.
Multinationals can establish themselves in the Nordic market via the Baltic market
Multinational enterprises usually try to be present in every market and supply the special product categories chosen for their portfolios to all countries. There is no doubt that after the Baltic countries have joined the European Union, multinational enterprises will seek a market share in the Baltic market, too. As the Baltic market is small, multinational enterprises may find it tempting to penetrate not only the Baltic countries but also the Nordic market at the same time. This, in turn, would result keener competition in Finland.
Wage differences cause a threat of transferring production from Finland to Estonia
Wages in the Baltic countries are well below the Finnish level, representing only one sixth of Finnish wages. Despite wages having been significantly enhanced in the Baltic states in the past few years, it will take at least ten years before they are equal to the Finnish level. Thus, the Baltic countries have a considerable advantage in labour-intensive production. The interviewed managers considered it likely that, due to lower wage costs, Finnish labour-intensive food production will to a certain extent be transferred to Estonia.
Increasing dominance of large chains in retailing will improve efficiency in the food sector, but at the same time the negotiating power of the industry will decrease
The interviewed managers recognised both positive and negative aspects that will emerge in the Baltic food market after joining the EU. The concentration of retailers and movement towards an increasing dominance of a few large retail chains will increase the efficiency and clarify several functions within the food sector as a whole. Logistical obstacles will be gradually overcome. As a counterweight, the negotiating power of retailers will increase and, hence, similarities to the Finnish retail sector will increase. Retailers will emphasize private label products, and it will be possible to conduct competition bidding and purchasing in the whole EU. This, in turn, implies that the access of a product to an assortment of retailers is crucial to any new Finnish food firm when entering the Baltic market.
EU membership of the Baltic countries only indirectly increases possibilities to export to the Baltic region
The interviewed persons assumed that EU membership of the Baltic countries will have only a limited influence on Finnish food exports to the Baltic market. However, the market position already captured in the Baltic region will enable the export of special brand products. As a consequence of EU membership and the increasing efficiency of the Baltic economy, the purchasing of power of Baltic consumers will most likely increase, which will also enhance import demand from Finland. The interviewed managing directors placed special emphasis on the simultaneous entry of the Baltic countries into the European union and on prohibiting the re-emergence of new trade barriers between the Baltic countries.
Imports of food stuff from Baltic countries will increase
Imports from the Baltic markets represent a very small share of Finlandís total food imports. Finnish consumers are not yet convinced of the quality or safety of Baltic products. Furthermore, differences in consumption patterns will also hinder the import of Baltic products in the future, even though import barriers will be lifted following EU membership. However, the price competitiveness of Baltic labour-intensive production will be fairly good. In addition, Finnish consumers may become convinced of the quality of Baltic products, at least if they are sold under familiar domestic brand names.
However, imports of Baltic food products may strongly rise in certain sectors. The Finnish brewing and alcohol industry considers Baltic imports to be a real and a significant threat due to the differences in alcohol taxation. EU membership of the Baltic countries will lead to a relaxation of alcohol import restrictions to Finland, which may result in a sharp rise in tourist import purchases, unless the price differences between Finland and Estonia are reduced.
The Finnish dairy sector is also vulnerable to imports of Estonian milk products. The producer price of milk in Estonia is well below that in Finland and the processing costs are also significantly lower. The price wedge in Finland between domestic and Estonian milk products may be large enough to promote the import of milk products. This, in turn, will lead to serious pressure to reduce the producer price of milk in Finland. However, the magnitude of the import flow will depend on the Estonian milk quotas decided on in the EU enlargement negotiations. If the milk quota system in the EU is abolished in the future, the Finnish dairy sector will face an even more complicated situation.