Value-added tax reduction adds up to a lot of work and costs for German grocery retailers

The German government wants to boost consumption as part of its economic stimulus package by lowering value-added tax. The temporary reduction of value-added tax from 19 to 16 percent (e.g. beverages) and from 7 to 5 percent (food and milk) respectively will be effective from July 1st to December 31st, 2020. For grocery retailers, however, this is entailing effort and costs.

All major food retailers decided to pass on the tax cut to customers in the form of reduced prices. Some deduct the tax cut from the sum of the total purchase upon check-out. Others decided to decrease the price of all SKUs or selected SKUs (some more, some less). Annual negotiation agreements have to be revisited and amended etc.

The price-focussed discounters are using the reduction in value-added tax to outdo each other in price reductions. This price war is costing companies a great deal. Aldi has recently announced “In order to strengthen the intended economic effect of the government, Aldi Nord and Aldi Sued are investing a three-digit million amount by foregoing margin”.

Whether the reduction in value-added tax will have the intended effect in the end, remains to be seen.