Extra Profits in Baltic Retail Space?


With food inflation skyrocketing, there has been a surge in consumer criticism directed towards retail store chains in the Baltics. Indeed, when we examine the raw material prices for basic food products, we observe that the majority have declined to the levels seen in 2020-2021. Are retail companies like Selver (accounting for 80% of Tallinna Kaubamaja Grupp sales) and Maxima, reaping additional profits? We sought to investigate this claim by comparing the profit margins of these companies across Baltic countries and analyzing their capital returns. Additionally, we examined the market landscape to identify who is gaining market share and who is falling behind.

Profit margins

It would be inaccurate to assert that Baltic retail chains are earning excess profits, with a few exceptions. The average gross profitability (profits after accounting for product and material costs) in the retail store segment is akin to what we see in Europe and globally, standing at 24%. Net margins are also comparable to European and US retail store chains. On a global scale, the average profitability of food retail, based on earnings before taxes relative to sales, hovers at 3-4%, mirroring the figures exhibited by supermarkets in Latvia and Lithuania.

Source: Corporate annual reports

Notes: Madara 89 – the largest retail company operating under Top! Brand; Maxima gross margins are not calculated due to different reporting structure.

However, Estonia presents a markedly different scenario compared to Latvia and Lithuania. It appears to host a highly competitive retail market, with the top position held by the non-profit organization Coop, which maintains essentially a 0% profitability, fostering intense competition. Consequently, Estonia exhibits the lowest gross margins and lowest pre-tax profit margins.

Regarding margin trends in the Baltic retail space in 2022, it can be concluded that retail chains did not alter their pricing policies significantly, as evidenced by stable gross margins. Net margins, on the other hand, witnessed a decline across the board, attributed to rising labor and energy costs.

Where can you get the highest profit?

To ensure consistency in evaluating whether any of the retail chains can command higher prices in the Baltic retail space, we compared the margins of the same store chains in all Baltic countries, specifically focusing on Rimi and Maxima. Examining the gross margins of the Swedish Ica-owned Rimi chain, we find they are highest in Lithuania (28-29%), followed by Latvia (20%), with Estonia recording the lowest margin level at 15%. Net margins for Rimi consistently outperform in Latvia (3.6-4.4%), significantly surpassing what the company earns in Estonia and Lithuania, where it averages at 1% (and even dips into negative territory in Lithuania in 2022).

Maxima, a Lithuanian retail giant, enjoys the highest margins in Lithuania at 5%, well above the usual levels in the retail industry. In Latvia, their net margins hover around 3.6%, making them the second least profitable retail chain. Conversely, Maxima’s margins in Estonia struggle at around 0%, which is unsurprising given the fierce competition in the Estonian market.

Lidl’s expansion in the Baltic countries is a positive development for consumers and market competitiveness, albeit a cause for concern for shareholders. Surprisingly, Lidl has managed to achieve commendable margins in Lithuania, where it established itself several years ago.

Capital Returns

Returns on assets (ROA) in the retail space are highest in Latvia, where the leaders in terms of capital profitability are Rimi and the locally-owned Madara89 (the largest company operating under the brand Tops!). Estonia, predictably, displays substantially lower ROA figures, with Selver, a part of the stock exchange-listed Tallinna Kaubamaja Grupp, leading in terms of asset management efficiency. To put these figures into context, global retail chains typically exhibit profitability in the range of 5-6%, making the ROA levels above 9% observed in Latvia and Lithuania appear rather exceptional.

Source: Corporate annual reports

Notes: Madara 89 – the largest retail company operating under Top! Brand

Comparing the return on assets of store chains present in all three Baltic countries, namely Maxima and Rimi, reveals that Rimi excels in Latvia with an ROA exceeding 20%, while achieving more moderate ROA levels in Estonia and Lithuania. Maxima effectively manages its assets to generate profit in its domestic market, Lithuania, but lags behind in Estonia, where its ROA stands at a modest 7%.

Market share trends

Considering the overall development in the Baltic retail space, it is noteworthy that the turnover growth of the majority of store chains has struggled to keep pace with food inflation. Evidently, consumers have significantly altered their consumption habits to curb expenditure growth.

Market share distribution among the largest players in all three Baltic countries has fluctuated. In 2022, market share was understandably seized by discount stores, while higher-end segment player Rimi lagged behind in Latvia and Lithuania. Additionally, the newcomer in the retail space, Lidl, has substantially disrupted the established positions of all market players in Lithuania, and it is likely to have a similar impact in Latvia and Estonia. However, the competitive landscape in Estonia may see fewer drastic changes.

Source: Corporate annual reports

Notes: Madara 89 – the largest retail company operating under Top! Brand

Main takeaways:

  • It appears that Latvia currently offers the most favorable conditions for earning in the retail space, characterized by higher margins and superior capital returns. Conversely, Estonia may be less appealing to newcomers due to its highly competitive landscape.
  • In 2022, despite food price inflation, the pricing policies of retail store chains remained largely unchanged, resulting in a decline in net profitability across the industry.
  • Market share dynamics are in flux, with Lidl’s presence intensifying the shifts in the Baltic retail landscape.
  • Particularly relevant for Baltic investors companies, Tallinna Kaubamaja and Maxima, obviously seem to be well-managed and proficient in capitalizing on their domestic markets.