The crisis caused by the spread of COVID-19 both globally and in Latvia, has shattered the business environment in Latvia significantly. The Competition Council of Latvia (the CC) is concerned about the trade restrictions, which may lead to long-term consequences on the competition.
Small and medium market participants become weaker, whereas the large ones – more powerful
The Latvian Traders Association has indicated that the COVID-19 crisis and the trade restrictions implemented during the emergency situation have significantly modified the trade sector in Latvia, causing the most severe impact on the small local traders and their physical trade, catering and other places, as well as traders that do not offer food products and other essential goods, for example, clothes, footwear, hobby goods etc. Bankruptcy of these market participants will reduce the competition, drastically affecting the shopping habits of consumers.
At the same time, contrary to the small traders, the leading trade networks in Latvia are much more capable to absorb the restrictions introduced during the COVID-19 crisis and find solutions for overcoming them. For example, the leading daily consumer goods trade networks in Latvia were able to expand their trade in the online environment relatively fast, as well as to invest resources in order to ensure convenient deliveries to their customers. The limited financial capabilities of small and medium enterprises for reorienting their activities to the online environment already strengthen the market position of the leading trade networks, which will affect the market development also in a long-term perspective.
Risks caused by the increase in the market concentration
As indicated by the OECD, small and medium enterprises are those that have suffered from the COVID-19 crisis the most. The introduced trade restrictions affect these companies most heavily; therefore, there is a risk of their insolvency. This makes the CC concerned that the concentration on several markets will increase significantly on a long-term basis, namely, the companies that are already more powerful and will be capable to survive the crisis, will increase their market shares significantly.
At the same time, bankruptcy of small market participants and them exiting the market can lead to a situation, where the Latvian economy will lose companies that potentially may develop and become significant and efficient market players in the future. There are also risks that exactly the leading market participants may use the COVID-19 crisis situation to merge with competitors having difficulties on more favourable conditions for them, thus strengthening their own market position and liquidating competitors, increasing the concentration level on the market in general.
Different conditions for lessees
The CC indicates that a situation of unequal competition forms among merchants also in relation to the Cabinet of Ministers Regulations No.453 “Regulations Regarding Application of Release or Reduction of Rental Fee for Property of Capital Company of Public Administrative Body or Controlled by a Public Administrative Body Due to the Spread of Covid-19”. These Regulations stipulate that lessees that lease premises from a public administrative body – state or local government, or their capital companies – can be granted release or reduction of rental fee, as well as release from interest on arrears or contractual penalty. Such reliefs and advantages are not available to lessees that lease premises from private persons.
Since the first wave of COVID-19 in the spring of 2020, and also this year the CC has received several complaints about such inequality. It arises from the complaints that private market participants that lease out their premises, have limited possibilities to reduce the lease fee for lessees affected by the crisis. Currently, the operation of lessees is restricted and they have no income, thus being unable to cover their regular payments for the lease of premises and consumed services. By the crisis extending, this situation may lead to companies, especially small merchants, exiting the market.
The CC holds a view that a solution should be found for preventing this problem, so that the support for covering the lease fee would reach also lessees, whose lessors are private persons, not public administrative bodies. The provided support should also promote equal distribution of the loss resulting from the crisis between lessees and lessors. In the opinion of the CC, the solution mentioned above will promote an equal situation among market participants and faster resumption of the economic activity after full or partial cancellation of restrictions.