Latvia will lose 20 percent of its current workforce by 2030. Automation is floated as the solution to the impending labor shortages to overshadow the debate about low wages or foreign workforce.
After packing their suitcases with flour, sugar, cottage cheese, spices, and bread, a team of five employees of a Latvian fast-food chain LIDO boarded a plane from Riga to Hannover, Germany. From there, a car took them to a small town in the German state of Lower Saxony. As the group made their way to their final destination, they stopped by a small shop to buy some pre-arranged meat. The whole trip was planned down to the smallest detail. The team couldn’t afford making mistakes; those would cost hundreds of thousands of euros.
In the next few days, company’s board members and food experts baked crepes and meat cutlets in the industrial size super-pans, manufactured by a German family-owned company and sold at a price up to a half million euros. They had to test whether pancakes were sufficiently stacked, cutlets juicy enough and everything tasted as if it was home-made despite none of the regular workforce being involved in preparations.
The main reason for the purchase of industrial pan was the productivity. LIDO employees make 500 cottage cheese pancakes a day by hand. The pan bakes 1,200 by hour.
Cutlets made in the industrial pan tasted as good as the ones made in the Riga’s bistro, so company decided to go ahead with purchase.
Salaries up, productivity not
Economists call it increasing productivity. It means allowing a worker to produce more at a smaller cost. In Latvia, however, the term has been so overused by politicians and economists alike that it now contains a hollow meaning, causing the audience to yawn and reach for a TV remote control.
In reality, Latvian labour productivity is less than half of EU average. If a German worker makes about 106 pancakes an hour, a Latvian worker would only make 66.
Partially it is down to the fact that for a long while people were willing to work for smaller paycheck just to have a job. Joining the EU in 2004 was a game-changer. Over 250,000 Latvians — almost 10 percent of the total population — left the country in search of a better life in the “old” Europe. Those that remained began demanding higher wages.
Businesses agree to pay more because they have no choice. In the last five years, Latvia posted one of the largest average wage increases in the 28-nation EU (to 927 euro a month, up from 684 euros). However, the productivity growth has failed to catch up with the income.
When LIDO gets its super-pan, the company will be able to produce 8,000 pancakes a day instead of the current 500. It will be done by two people instead of the current six. However, the four extra people will not be laid off because there is a shortage of workers.
The shortage will become more acute. Using data by Eurostat, the EU statistical bureau, assistant professor at the Stockholm School of Economics in Riga Zane Vārpiņa estimates that by 2030 Latvia’s workforce will shrink by 20 percent, while every fourth Latvian will be a pensioner aged 65 or above.
It would mean that two workers will have to sustain one retired person and his state-paid pension. It is three times as less as in the early 1990s when Latvia regained its independence.
Saving at the expense of a worker
This has led to the Ministry of Economy developing two scenarios for the Baltic nation’s future development. One of those provides for the economic growth by average 5 percent a year, raising productivity by automation and re-educating the workforce to fill the gap of over 35,000 people. In this scenario by 2030 there will be almost as many people living in Latvia as today (around 1.92 million).
If that doesn’t happen and economy stagnates, there will be only 1.64 million.
“This achievement is not a goal in and of itself, that is whether or not we will exist a state,” says the minister of economy Arvils Ašeradens (from the ruling Unity party). “When we regained our independence, there were 2.6 million residents in Latvia. Right now we are below a 2-million mark.”
Ašeradens says the key reasons why businesses do not want to change is the lack of knowledge and motivation, as profits were reaped at the expense of the low wages. As a proof he brings up the comparison with Germany. On a five-year average, German worker will produce goods worth 67,000 euros while for his Latvian counterpart that figure is 26,000 euros.
Meanwhile, the profit is larger for a Latvian business: 53 percent of the added value of the produced goods versus German 44 percent.
“It means that a German businessman is ready to invest into his worker and innovations,” concludes Ašeradens. “By paying a lower wage, a Latvian businessman is able to generate much larger profit. And instead of investing it in a further development, he turns to the government and says, “Please, cut the taxes, because this employee is now more expensive” or “Please, bring me an even cheaper employee, who is happy to continue working like this.”
How a bank forced change
The looming bankruptcy forced change in the one of the best-known Latvian fast-food companies, LIDO. The mini-empire, which consists of 15 bistros and owns food retail shops in the Latvian capital, for over 20 years was run single-handedly by its owner Gunārs Ķirsons: a charismatic and boisterous former bartender who turned into a successful self-made businessman.
When heavy economic crisis hit Latvia in 2009, LIDO debt to banks was around 32.7 million euros as the owner had wandered into side businesses which were eating up the money. The company was on the verge of bankruptcy. “[Before the crisis] the state said, ‘borrow as much as you need.’ And I did, because I was a fool. I should have left a security cushion,” Ķirsons said in an interview with Re:Baltica, as he reclined in a chair and drinking coffee in his largest establishment in Riga which resembles a kitschy Disney-land with folklore motives.
The largest lender, DNB Bank, demanded that Ķirsons hire a financial consultant. The task fell to Valērija Lieģe. “You could see that the woman was a business lady. I am still an owner and I dictate all the rules, but now I also listen,” Ķirsons says.
An analysis of all restaurants in a fast-food chain quickly revealed weak spots. Each bistro worked independently: paid workers, launched advertising campaigns, bought supplies. Each dish was prepared right there. The main office was responsible mainly for accounting and quality control. “We needed to pull together and improve efficiency, so that we could pay all our debts,” Valērija Lieģe explains.
The first goal was to create a centralized menu. “This was a difficult first step because every manager thought that his client will come only because his cutlets were covered in pineapple. If now it would be covered in oranges, that would scare people off,” Lieģe recalls with a smile.
The second goal was to centralize all purchases.
The third goal was one production facility, which prepares semi-finished products and takes them to restaurants.
The innovation allowed to control product quality easier, cut the labor force and quicker open restaurants in a new place.
As a result of the optimization, the company shred one fifth of its workforce.
The turnover increased along with the profit, which allowed the company to pay off part of its debts and start thinking about expanding. In 2014, LIDO opened three new restaurants in Riga and two years later, its first restaurant outside of the Baltic states, in Germany. This is why the company posted a 1.2 million euro loss last year.
A bistro in Berlin is the company’s attempt to conquer a market in ‘old’ Europe. They picked Germany because the tastes seemed similar to Baltic cuisine. During the Latvia’s presidency of the European Union at the food exhibition in Berlin people stood in line to try the company’s fried potatoes and sausages. Even the German chancellor Angela Merkel stood in line, says Lieģe.
“But that is a complicated market. Now it’s hard,” she says. Lieģe concluded that the company needed to attract a large local partner and do a better research of the Berlin consumers. Lieģe, who has become a board member and a minority stakeholder in the company, thinks LIDO will be able to afford to experiment on the German market for another year. The company needs to improve its results and start making money.
LIDO’s founding father Ķirsons hopes to stay in the German market for a bit longer. Part of the motivation is probably his youngest daughter, who lives in Germany with her mother. “The German market is very large and ruthless, no one wants us there, but everybody is willing to talk. If it will work out, thanks God. If it doesn’t … just like in sports,” he says. “To conquer a market is like sports.”
Export makes up 80 percent of the GDP in the neighbouring Estonia and Lithuania. In Latvia, its share is only 60 percent, according to the Ministry of Economy. The very small share of it is export of hi-tech (3.9 percent) which equals Lithuania and is twice as low as in Estonia (8.7 percent). Among the Baltic states, Latvian businesses spend the least on research and development.
“Latvian entrepreneurs lack knowledge how to enter the global market: foreign languages, digital technologies,” says Jānis Salmiņš, an expert at the Ministry of Economy. “Such small states as ours can only export. The market size of two million people is like a small town.”
The investment into the LIDO expansion in Berlin dampened plans to purchase the super-pan. However, the company has not given up. The head of the production department Harijs Sproģis says that they used to make solyanka, a classic soup of meats and vegetables, in five 20-litre pots. Now the company uses a giant pot it bought in Sweden, which automatically regulates the temperature and chills the soup. The investment will pay off in a year because it requires less work and fewer people.
LIDO claims this is not happening at the expense of wages. Average wage in the company is between 700 and 800 euros a month after all taxes are paid, which, according to Ķirsons, seldomly happens in a local food industry.
Wages for chefs, for example, have grown by 20 percent, even though there is still a shortage of them. LIDO cannot afford to pay more because the wages make up 30 percent of the turnover, which is the common share in Europe, says Lieģe. “We raise wages, and the only ones who are not making money are the owners.”
LIDO wants to see cheaper foreign workers enter the Latvian market, which reflects the next political dilemma for the Baltic nation. The Ministry of Economy, which is responsible for the labor market development, is categorically opposed because it will eliminate the motivation for businesses to change.
Ķirsons says that his goal is to pay an average wage of 1,200 euros a month, “like in a similar industry in Germany”. He cannot say when that will happen.
Minister Ašeradens calculates that the average wage of 1000 euros in Latvia will be reached in 2018, growing to 1500 euros a month in the next three to five years. He hopes it will be enough to attract those who have left Latvia to return home: an argument which so far has proven without much grounds, but allows to escape painful debate about opening the market to foreign workers to plug the upcoming hole. Automation will solve part of it, but no one knows how much.
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Text: Inga Spriņģe, Re:Baltica
Photo: Reinis Hofmanis
Illustrations and graphics: Lote Lārmane, Re:Baltica
Data analysis: Zane Vārpiņa, a demographer and
an assistant professor at the
Stockholm School of Economics in Rīga
Editor: Sanita Jemberga, Re:Baltica
Translation to English: Aleks Tapiņš
The series are financed by State Culture Capital Foundation;
the statistical analysis was sponsored by Friedrich Ebert Stiftung, Germany.