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Preface
This report has been developed by McKinsey & Company for the November 25-26, 2010
meeting of the Growth Forum. The objective of the report is to explore opportunities to
increase economic growth through competition and productivity, with a focus on the service
sector.
McKinsey & Company is a global management consulting firm serving organizations in the
public, private, and nonprofit sectors. With more than 95 offices in over 50 countries,
McKinsey has extensive experience in all major industries in the private sector, and has
served governments and public-sector entities in more than 70 countries. McKinsey was
founded in 1926 and has had a permanent office in Denmark since 1972.
The study draws on the research methodology and international experience of the
McKinsey Global Institute, McKinsey & Companys business and economics research arm.
The McKinsey Global Institute (MGI) was established in 1990 as an independent
economics think tank to conduct original research on important global issues. Its primary
purpose is to provide insights into the workings of the global economy and a fact base for
decision-making for the benefit of business leaders and policymakers. Beyond its own
staff, MGI draws on expertise from the worlds leading economic advisors.
Distinguished experts outside McKinsey have provided invaluable insights and advice. We
would particularly like to thank Torben M. Andersen, Professor at the School of Economics
and Management at Aarhus University and former chairman of the Danish Economic
Council 2001-03; Svend Hylleberg, Professor at the School of Economics and
Management at Aarhus University and former head of the Danish Competition Council;
Martin N. Baily, a senior adviser to McKinsey, a senior fellow at the Brookings Institution,
and former chairman of the Council of Economic Advisers. We thank them for invaluable
comments and advice throughout the preparation of this report, but emphasize that they
are not accountable for the findings, statements and recommendations in this report.
Table of Contents
7
19
29
41
47
71
114
149
Summary in Danish:
Vkst og velstand gennem get
konkurrence
Dette er den danske sammenfatning til rapporten fra McKinsey & Company om vkst og
velstand gennem get konkurrence. Rapporten er udarbejdet til brug for drftelse p
mdet i Vkstforum den 25.-26. november 2010.
Arbejdet er baseret p konkrete analyser af dansk konomi, men trkker samtidig p
forskning fra McKinsey Global Institute, McKinseys konomiske tnketank 1 .
I overensstemmelse med opdraget er fokus for rapporten p den private servicesektor og
byggeriet. Sledes adresserer rapporten ikke fremstillingssektoren eller den offentlige
sektor. Den private servicesektor og byggeriet udgr i alt ca. halvdelen af den samlede
beskftigelse og pvirker derfor alene gennem sin strrelse rammerne for andre brancher.
Der peges p i alt ni konkrete tiltag til en Konkurrencepolitik 2.0. De konkrete tiltag sigter
p at styrke konkurrencen, der i flere brancher er utilstrkkelig.
get konkurrence betyder, at virksomhederne m anvende ressourcerne effektivt, og at
beskftigelsen stiger inden for de omrder, som giver de strste samfundskonomiske
fordele.
Nr arbejdsindsatsen bliver anvendt i mere effektive virksomheder, fx som flge af get
konkurrence, kan det bidrage til at afhjlpe mangel p arbejdskraft. Samtidig kan
lnmodtagerne f en hjere ln, fordi deres arbejdskraft bliver anvendt i mere produktive
virksomheder.
Strkere konkurrence vil ogs fre til lavere priser. Forbrugerne vil opleve lavere priser, fx
nr de kber ind i dagligvarebutikker eller fr lagt nyt tag. I dag betaler danske forbrugere
for hje priser sammenlignet med en rkke andre lande (jf. figur 1). Eksportorienterede
virksomheder vil samtidig f lavere produktionsomkostninger, nr underleverandrer kan
levere til en billigere pris. Service udgr i gennemsnit ca. en tredjedel af produktionsinput i
fremstillingsvirksomheder.
1 Herudover har professorerne Svend Hylleberg, Torben M. Andersen og Martin Baily gennem hele analyseforlbet bidraget med faglig
sparring, uden at disse dog kan tages til indtgt for rapportens konklusioner og anbefalinger
Figur 1
Byggeri2
Restauranter og hoteller
100 92
86 86 79 76
71
Fordeling af privatforbrug
Procent
100 92
85 82 81 77
71
8
3
6
32
28
7
Mbler og hvidevarer
13
10
100 95 93
89 86 84 83
13
Fdevarer
100 95
87 83 83 82
74
mens
andre
faktorer
ssom
forskelle
investeringsomfang,
Figur 2
Gennemsnit
4,0
3,5
Irland
Island
3,0
2,5
Finland
2,0
Japan
1,5
1,0
Sverige
USA
Storbritannien
40
Luxembourg
Belgien
Danmark
Italien
35
Norge
Holland
Tyskland
New Zealand
strig Frankrig
Canada
Schweiz
0,5
Australien
45
50
55
60
65
70
75
80
Arbejdskraftproduktivitet, 2009
USD per arbejdstime, PPP-justeret
Note: Se box 1.1 i rapporten for en redegrelse af produktivitetsml anvendt i dette arbejde. Til denne analyse er anvendt data fra The Conference Board
for GDP og produktivitetsestimater da disse dkker et bredere udsnit af lande end data fra eksempelvis OECD og EU KLEMS. Omend data fra
The Conference Board kan afvige noget fra data i andre datakilder, som OECD, er afvigelsen ikke af en strrelsesorden der medfrer andre
konklusioner.
Kilde: The Conference Board (Groningen Growth and Development Centre)
Figur 3
565
550
Servicesektorer:
Finansielle
ydelser
Forsikring
Transport
Engroshandel
500
450
400
350
300
250
Service-sektorer:
1. Forretningsservice2
2. Bygge- og anlg
3. Detailhandel
4. Hotel og restauration
424
Fremstillingssektorer1
326
277
Offentlig
sektor
200
242
242
1.
2.
179
3.
150
100
Primr
industri
165
4.
107
50
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
For det andet har servicesektorens og byggeriets produktivitet betydning for de udenlandskonkurrerende erhverv. Sledes vil hje priser p serviceydelserne ge omkostningerne i
de erhverv, der kber serviceydelserne herunder de udenlandskonkurrerende erhverv.
Derudover vil ineffektivitet i servicesektoren og byggeriet fre til, at en del af det samlede
arbejdsudbud bindes i arbejdspladser med forholdsvis lav produktivitet. De ressourcer
kunne have vret anvendt andre steder, hvor behovet er strre, eller produktiviteten er
hjere og kunne derfor bidrage til at afhjlpe mangel p arbejdskraft i de kommende r.
Produktivitetsudviklingen i servicesektoren og byggeriet i Danmark har imidlertid vret
blandt de laveste sammenlignet med en rkke andre lande, jf. figur 4.
10
Figur 4
3,1
2,3
2,2
2,2
1,6
1,4
1,3
1,2
0,9
1 Servicesektoren indeholder energi og vandforsyning; bygge og anlg; transport, post og tele; detail- og autohandel; engroshandel; hoteller
og restauranter; finansiering og forsikring; og forretningsservice
2 Tal for bygge og anlg 2006-2007 er fra Danmarks Statistik pga. diskrepans i EU KLEMS data
KILDE: EU KLEMS; Danmarks Statistik
11
er
blandt
andet
karakteriseret
ved
et
begrnset
internationalt
konkurrencepres.
Der er som led i analysearbejdet gennemfrt kortlgning af ledende udenlandske
servicevirksomheders appetit p at etablere sig i Danmark. Eksempelvis viser kortlgning
blandt udenlandske virksomheder i byggeriet, at det danske marked vurderes som
begrnset attraktivt p grund af dets beskedne strrelse, tekniske barrierer, vanskeligt
gennemskuelige branchenormer, samt decentral offentlig beslutnings- og udbudsstruktur.
Disse konklusioner uddybes i det flgende i forhold til fire udvalgte sektorer; bygge og
anlg, detailhandel, forretningsservice og rdgivning samt liberale sundhedserhverv.
Bygge- og anlgssektoren
Den danske bygge- og anlgssektor beskftiger ca. 170.000 rsvrk, fordelt p
vedligeholdelsesarbejder, nybyggeri og anlg.
Produktiviteten i sektoren har vret faldende de seneste rtier, mens vksten i
sammenlignelige lande har vret positiv. Samtidig ligger prisniveauet ekskl. afgifter i
Danmark ca. 10 til 20 procent hjere end i sammenlignelige lande.
Bygge- og anlgssektoren er karakteriseret ved mange mindre virksomheder. Sledes
ligger 70 procent af beskftigelsen i virksomheder med under 50 ansatte og 85 procent i
virksomheder med under 250 ansatte. Dette indebrer et produktivitetstab. Store
virksomheder (over 250 ansatte) i bygge- og anlgssektoren er typisk 20-30 procent mere
effektive end sm og mellemstore virksomheder.
I Danmark udgr de 10 strste virksomheders markedsandel 12 procent, mens andelen
eksempelvis er ca. 20 procent i Finland og Holland og knapt 50 procent i Sverige, jf. figur
5.
Samtidig er den danske bygge- og anlgssektor forholdsvis lokal. Sledes udgr
internationale virksomheders markedsandel kun 2 procent, mens tallet for eksempelvis
Sverige er 13 procent.
12
Figur 5
21
18%
Lokale
firmaer2
14%
Lokale firmaer
med international
tilstedevrelse2
13%
Internationale
firmaer2
22
4%
8%
12
1%
9%
7%
9%
6%
2%
DK
NL
9%
FI
SE
1 Store internationale firmaer som Skanska, NCC, PEAB, YIT, Veidekke og Bravida er til stede i flere af landene
2 Lokale firmaer har mere end 80 % af omstningen i hjemmemarkedet, Lokale firmaer med international tilstedevrelse har 2050 % af deres
omstning i udlandet, og Internationale firmaer har mere end 50 % af deres omstning i udlandet
KILDE: Euroconstruct; rsrapporter
nabolande,
landsdkkende
samordnet
smidiggrelse
af
decentral
Detailhandel
Den danske detailhandel beskftiger 160.000 rsvrk, hvoraf dagligvarehandel udgr en
tredjedel. Samlet set dkker detailhandlen 40 procent af det samlede forbrug fra danske
husholdninger.
13
Danmark har en rkke internationalt succesrige detailkder (Jysk, Bestseller, etc.). For
dagligvarehandel under t ligger produktivitetsniveauet imidlertid under sammenlignelige
lande, samtidig med at prisniveauet ligger ca. 10 procent over sammenlignelige lande 3 .
Produktivitetsklften til udlandet skyldes isr, at Danmark er karakteriseret ved mange
sm butikker. Der er sledes i Danmark 5,8 fdevarebutikker per. 10.000 indbyggere,
mens tallet for en rkke sammenligelige lande er omkring det halve (jf. figur 6). Dette
indebrer for det frste tab af stordriftsfordele. For det andet indebrer det, at danskere
kber ind oftere og besger flere butikker end forbrugere i andre lande, hvilket forger
ressourcetrkket i butikkerne. Endelig er en konsekvens af den danske butiksstruktur, at
IT-anvendelsen (elektroniske prisskilte, selvbetaling, etc.) er forholdsvis lav, blandt andet
drevet af gede investeringskrav, nr omstningen er delt p flere butikker.
Figur 6
1 Inkluderer hypermarkeder varehuse, supermarkeder og discountbutikker, men ikke specialforretninger som grnthandlere, slagtere, bagerier,
servicestationer og nrbutikker
KILDE: Planet retail; Eurostat; McKinsey analyse
14
Forretningsservice og rdgivning
Forretningsservice og rdgivning beskftiger ca. 165.000 rsvrk og dkker en bred vifte
af
sektorer
som
IT-konsulenter,
rdgivende
ingenirer
og
arkitekter,
revisorer,
ligger
under
frende
lande.
Sammenlignes
eksempelvis
med
get
bning
for
konkurrence
fra
udenlandske
firmaer.
Her
hmmer
15
Liberale sundhedserhverv
Denne gruppe beskftiger ca. 45.000 rsvrk, hvoraf de strste sektorer er tandlger,
apoteker, praktiserende lger og optikere.
Optikere er mindre reguleret end de vrige segmenter og produktiviteten er her hjere
end i sammenligningslande. For praktiserende lger og tandlger er produktiviteten dog
lavere. Eksempelvis
sammenlignelige lande.
Potentialet for at styrke produktiviteten vurderes primrt at ligge i strre enheder. I dag
er de liberale sundhedserhverv karakteriseret ved et meget stort antal sm enheder, ofte
bestende af en enkelt lge/tandlge med en vis klinisk og administrativ sttte. Antallet
af klinikker med kun n tandlge udgr sledes eksempelvis 46 procent. Denne
branchestruktur begrnser produktiviteten gennem to mekanismer.
For det frste hmmes udnyttelse af traditionelle stordriftsfordele fordi omkostninger til
administration, lokaler og IT dubleres.
For det andet begrnses mulighederne for effektiv arbejdsdeling mellem faggrupper,
sledes at lger og tandlger bruger tid p mindre specialiserede opgaver, som kunne
lses af klinisk eller administrativt personale.
Barriererne for at realisere dette produktivitetspotentiale bestr hovedsageligt af
regulering, der begrnser adgangen til ejerskab og dermed hmmer tilgang af
ledelseskraft og finansiering fra andre sektorer og fra udlandet. Herigennem hmmes
den produktivitetsvkst, der udspringer af, at de mest produktive virksomheder vokser
og vinder markedsandele.
Overvejelser om ndringer i regulering m naturligvis ske inden for rammerne af
sektorens srlige karakter, herunder hj offentlig finansieringsandel. Erfaringer fra andre
lande, herunder eksempelvis Sverige viser, at det er muligt at gennemfre reformer, der
styrker konkurrence og produktivitet samtidig med, at sundheds- og udgiftspolitiske
hensyn tilgodeses.
Tiltag 4: get produktivitet i tandlgebranchen gennem bning af ejerskabsadgang. bning for adgang til at eje tandlgeklinikker for personer, der ikke er
tandlger (herunder kder og udenlandske virksomheder), med henblik p at ge
stordriftsfordele og effektiv arbejdsdeling i branchen. Eventuelt bning for
priskonkurrence
gennem
ndring
af
fastprissystem
til
maksimumpriser.
16
konkurrence vil tilsige behov for frre lger til at yde den samme service.
Afsgning af alternativer til overenskomstsystemet i takt med at branchestrukturen
tilpasses.
Tiltag 6: Forberedelse af reform af apotekssektoren. Den danske apotekssektor
er karakteriseret ved en vsentlig mere konkurrencebegrnsende regulering end
tilfldet er i f.eks. Sverige og Storbritannien. Danmark har lave medicinpriser i
forhold til sammenlignelige lande. Men det kan overvejes, om den eksisterende
regulering fortsat er en effektiv vej til at sikre mlstningerne for sektoren, herunder
i forhold til kvalitet, forsyningssikkerhed og offentlige finanser. Potentielle
reformelementer
kunne
omfatte
alternative
distributionskanaler
(f.eks.
dog
hensigtsmssig bde i forhold til at tilskynde til effektivitet men ogs med henblik p
at fremme en branchestruktur, der udvider lsningsrummet for fremtidige reformer.
TVRGENDE FORSLAG
I tillg til de sektorspecifikke tiltag vil en rkke tvrgende tiltag kunne medvirke til at
styrke konkurrencen i bygge- og anlgssektoren samt servicesektoren.
Tiltag 7: Aktiv international markedsfring af muligheder i den danske byggeog anlgssektor samt servicesektoren. Tiltrkning af ledende udenlandske
virksomheder p tvrs af bygge- og anlgssektoren samt servicesektoren gennem
aktiv international markedsfring, eksempelvis gennem mandat til Invest in
Denmark.
Tiltag 8: Anvendelse af de offentlige indkbsbudgetter til at fremme
produktivitet i bygge- og anlgssektoren samt servicesektoren. Udnyttelse af
det offentlige indkb, der udgr 20 procent af den samlede omstning fra bygge- og
4 Sortiment refererer I dette tilflde til ikke receptpligtig medicin, som m slges i andre detailbutikker, og frihandelsvarer.
17
muligheder
for
at
retsforflge
18
overtrdelser
og
tilpasning
af
0. Executive summary
FUTURE GROWTH DEPENDS ON REVERSING DECLINING
PRODUCTIVITY TREND
Denmarks recent economic growth has been slower than that of its peers. Since 1995,
average income growth has been less than half that of Sweden and Finland, and Denmark
is no longer among the top 10 richest countries in the OECD.
Productivity is the key to boosting economic growth. Labor productivity growth has slowed
down over the past three decades averaging 3.1 percent per annum in the 1970s, but
slowing down since (unlike in the US). Productivity explains the majority of the gap in
average incomes versus peer countries (e.g. all of the 25 percent GDP/capita gap to the
US). The productivity gap is explained by performance within sectors, not by the
composition of sectors within Denmark. Labor inputs and capital investment do not explain
lower growth in gross value added versus the US productivity is the main driver.
There needs to be a step change in Denmarks productivity growth going forward if
significant economic growth is to continue. Like other European economies, Denmarks
aging population will create a headwind for future growth, by reducing the proportion of the
population which is working age. The boost in productivity needs to be significant if the
effects of these demographic changes on GDP per capita are to be offset. For example, for
Denmark to match the projected average income growth for OECD countries over the next
15 years, productivity growth would need to average nearly 2 percent per annum, which is
almost three times higher than the productivity growth over the last 15 years.
19
th
on
5 In the English part of this report, the service sector includes the construction sector
20
nd
Increased competition increases productivity. Danish and foreign evidence show that
competition in general is the most effective instrument to increased productivity in
the service sector. An example of this is the 80 percent decrease in Danish mobile
minute prices due to reforms in the telecommunications sector in spurring
competition the 1990s. The Danish service sector though, is generally characterized
by limited international competition.
21
Better exploitation of scale benefits. Denmark has fewer large companies, and
leverages scale of repetition and standardization much less in construction projects
compared to leading countries like Finland and the Netherlands. For example only 7
percent of houses are built as part of a multi-dwelling program versus 70 percent in
the. In Denmark. This results in less benefits from usage of standardized processes
and materials, e.g. Finlands use of pre-fabricated materials in residential projects is
7 times higher than Denmarks
Lowering input costs. Higher prices are seen across most material categories
(cement for example is up to 63 percent higher than in Germany) partly driven by a
very consolidated material supplier segment. Further, the use of different
construction and material standards in some applications compared to other
European countries limits the possibility to source materials from other countries
22
23
Retail reform in Sweden in the 1990s (e.g., eased zoning laws, liberalization of
opening hours) leading to growth of large-scale format stores, increased competition,
increased use of ICT and the highest retail productivity growth compared to US and
Europe.
24
In addition, productivity can be improved through increased exposure to best practice, e.g.
by opening up for competition from foreign companies. However, regulatory conditions,
such as ownership restrictions and exclusivity rights (right to practice) in legal services,
hinders international players in operating in the Danish market.
Initiative 3: Enhancing competition and productivity in business services and
regulated advisory driven by deregulation and targeted public procurement.
Investigating the potential of enhancing competition and productivity through
deregulation of ownership, exclusivity rights and other barriers inhibiting international
competition. For non-regulated sectors, public procurement can be used to enhance
competition and productivity, as described in initiative 8.
Healthcare services
Healthcare services employ 45.000 employees and consists of general practitioners,
pharmacies, dentists, opticians and other health providers. Healthcare services deals only
with consumers and is characterized by strong regulation, high fragmentation and almost
no international players, except in the optician sector.
There is significant potential in improving productivity through the development of larger
units. Today, the healthcare service sectors are characterized by a large number of small
units,
often
consisting
of
single
general
practitioner/dentist
with
some
Optimal division of labor is limited, since general practitioners and dentists are
spending
time
on
less-specialized
tasks
that
could
be
handled
by
25
with
productivity
improvements
to
ensure
continuous
efficiency
26
CROSS-SECTOR INITIATIVES
In addition to the sector specific initiatives, three cross-sector initiatives have emerged from
the analyses.
Initiative 7: International marketing of business opportunities in the Danish
service sector. Attracting leading foreign companies across the service sectors
through international marketing, e.g., through a mandate to Invest in Denmark.
Initiative 8: Use of the public procurement budgets to drive productivity in the
service sector. Procurement represents 20 percent of the total turnover in the service
sector. This could be used as an instrument to drive scale, e.g., through coordinating
procurement to ensure scale, attract foreign companies, as well as using tender
forms, leading to efficient operations.
Initiative 9: Strengthening the framework to enforce competition policy.
Initiatives enforcing competition leading to fewer, but larger and more effective
companies in the service sector, will lead to improved economies of scale. Meanwhile,
this type of development could be countered by an appropriate framework to enforce
competition policy e.g., through strengthening the possibilities of prosecuting
violations as well as adjusting the sanction level to international standards.
27
28
countries below many of its Northern European peers including the Netherlands,
Sweden, and Belgium (Exhibit 1) and average incomes are now 4 percent less than in
Sweden. Indeed, the countrys average income growth since 1995 has been less than half
that of Sweden, Norway, and Finland (Exhibit 2). 7 Finlands growth has been achieved
despite the impact of falling prices in the ICT sector where much of their production is
concentrated. 8
6 Based on GDP per capita estimates from the Conference Board as more recent data is available than in other sources. OECD data
shows some slight differences (e.g., Denmark is ranked 6th in 1970, 11th in 1990)
7 Data from 1995-2009 is used as this has been the time period over which Danish relative growth has been particularly weak
8 According to data from the OECD and Global Insight, Denmarks terms of trade (i.e., the ratio of export to import prices) is similar in
2009 to what it was in 1995, despite significant fluctuations in the intervening period. In contrast, Finlands terms of trade fell by over
13 percent during the same period
29
EXHIBIT 1
19702
1990
2009
Switzerland
Luxembourg
Luxembourg
85.5
Luxembourg
Norway
Norway
60.2
US
Switzerland
US
45.6
Sweden
US
Australia
44.7
Norway
Canada
Switzerland
44.4
Netherlands
Netherlands
Austria
42.1
Australia
Australia
Netherlands
42.0
Denmark
Denmark
Ireland
41.4
Canada
Austria
Canada
40.5
10
New Zealand
Japan
Iceland
40.2
11
France
Sweden
Sweden
39.8
12
Belgium
Iceland
Belgium
38.5
13
UK
Germany
Denmark
38.2
14
Austria
Belgium
Finland
36.7
15
Italy
France
UK
36.5
16
Japan
Finland
Germany
36.2
17
Finland
UK
Japan
34.0
18
Iceland
Italy
France
33.7
19
Greece
New Zealand
Greece
31.9
20
Spain
Spain
Italy
31.1
1 Based on GDP per capita at current prices and current PPPs (Purchasing Power Parity)
2 No data available for Germany in 1970
SOURCE: The Conference Board (Groningen Growth and Development Centre)
EXHIBIT 2
33.2
Denmark
33.1
25.6
Ireland
25.4
45.6
42.0
1.7
38.2
1.0
29.5
Finland
60.2
1.5
37.1
Netherlands
39.8
2.2
36.7
2.6
3.6
1 Constant 2009 prices at PPP. Benchmarks include Scandinavian countries, plus selected other benchmarks
SOURCE: The Conference Board (Groningen Growth and Development Centre)
30
2.0
45.7
United States
Sweden
41.4
9 Between 1993 and 2008, Denmarks unemployment rate among adults fell from 8.9 percent to 2.5 percent, a 6.4 percentage point
reduction that was far larger than the 2.2 percentage point cut achieved on average by the EU-15 in that period. This was driven in
part by a series of government reforms in wage bargaining, benefits, labor market policies, and taxation. These reforms are
discussed in more detail in McKinsey Global Institutes recent report Beyond austerity: A path to economic growth and renewal in
Europe, October 2010
10 This has been measured in productivity per hour (2009 values). Source data available from http://www.conferenceboard.org/data/economydatabase/. See Box 1.1 for a discussion of the productivity measures used in this analysis. Throughout this
analysis, data from the Conference Board is used for productivity and GDP estimates, except for sector-level analysis, where data
from EU-KLEMS is used. While the data from the Conference Board shows some differences from the data available from other
sources (e.g., OECD), none of the differences are of significant magnitude to change the conclusions reached
31
EXHIBIT 3
6.5
38.2
24.1
20.6
GDP per
capita in 1970
Annual growth
rates (19702009)
Percent
Productivity
contribution1
Labor
contribution2
GDP per
capita in 2009
-0.4
1.6
2.0
1 Represents implied growth in real GDP per capita based on increases in productivity per hour (assuming total hours per capita is constant)
2 Represents implied growth in real GDP per capita from changes in total hours worked per capita
SOURCE: The Conference Board (Groningen Growth and Development Centre); McKinsey analysis
EXHIBIT 4
Greater surplus
Higher value
added
Lower
labor/capital
costs
Productivity
growth in a
company
32
Distribution
of surplus
Customers
(lower prices)
Employees
(higher salaries)
Owners (higher
profits)
Economic impact
Higher demand for
Goods
Services
Higher
investments
Capital goods
Buildings
Faster
GDP
growth
The problem has been the countrys more recent performance. While labor productivity
growth averaged 3.2 percent per annum in the 1970s, it fell to 2.5 percent from 1980 to
1995 and then just 1 percent from 1995 to 2007. This recent slowdown is best illustrated by
international comparisons. After decades of catching up, Denmarks productivity was
almost equivalent to that of the US by 1995; yet by 2009, it had fallen to just over 80
percent of US levels. 11 Wider comparisons tell a similar story. As Exhibit 5 shows, valueadd per hour in the EU-15 as a whole is now higher than it is in Denmark.
EXHIBIT 5
1.00
0.90
0.80
0.70
0.60
1970
Annual
average
labor
productivity
growth
Percent
1975
1980
1985
1990
1995
2000
2005
2009
1.5
1.4
2.1
1.6
3.2
2.5
1.0
-1.6
3.8
2.3
1.5
-0.1
19701980
19801995
19952007
20072009
1 GDP per hour expressed in USD at 2009 purchasing power parities (PPP) values. EU data represents EU-15
SOURCE: The Conference Board (Groningen Growth and Development Centre)
Exhibit 6 highlights how Denmarks productivity performance has worsened relative to the
20 richest OECD countries. Output per hour in Denmark has grown by just 0.6 percent
annually from 1995-2009, 60 percent below the average productivity growth rate of the
other OECD countries.
11 Comparing the sector contributions to productivity growth in the US since 1995 to the EU and Denmark shows that local services
(e.g., retail trade) have been the biggest driver of differences in productivity growth (see Chapter 2 for further details). Productivity
growth in retail trade explains much of this outperformance productivity grew rapidly throughout the 1980s and 1990s, driven by
Walmarts innovations in its operations and the pressure this placed on other competitors to improve. Chapter 3 contains future
details on the drivers of the US retail trade sector performance
33
EXHIBIT 6
Average
4,0
3,5
Ireland
Iceland
3,0
2,5
Finland
2,0
Japan
1,5
USA
UK
Switzerland
1,0
Sweden Australia
35
40
Germany
Luxemburg
Belgium
Denmark
Italy
Norway
Netherlands
Canada
New Zealand
0,5
Austria France
45
50
55
60
65
70
75
80
Comparing the Danish GDP per capita to one of the most consistently rich countries in the
world, the US, we find that lower labor productivity can explain the total gap between
Danish and US GDP per capita in 2009. Labor utilization, on the other hand, is better in
Denmark than in the US due to low unemployment and higher participation rates (Exhibit
7).
Earlier research by McKinsey Global Institute (MGI) has shown that productivity
performance within each sector matters more than an economys overall composition of
sectors or sector mix. For example, comparisons between EU-15 countries and the US
suggest that the sector mix accounts for less than 20 percent of the differences in both
productivity growth rates and productivity levels. 12 This analysis also holds for Denmark
while the countrys sector mix gives it a slight edge over the US in productivity terms, the
gap between Denmark and the US can be explained by lower productivity within sectors.
Other peer countries have also significantly outperformed Denmark in terms of within-
12 There are, of course, some exceptions to this general rule. Our analysis excludes mining due to different endowments of natural
resources in various economies. It also excludes real estate, health, education, and public services due to measurement and
comparability issues. Norways strong oil industry alone, for instance, gives Norway a USD 11 per hour productivity advantage over
the economy in the US 90 percent of Norways total advantage. For a more detailed discussion of this point, see also How to
compete and grow: A sector guide to policy, McKinsey Global Institute, March 2010 (www.mckinsey.com/mgi)
34
EXHIBIT 7
+19%
8.8
38.2
1.4
Productivity
per hour
Denmark GDP
per capita
1 Hours per capita effect is estimated by taking the difference in hours worked per capita between the two countries and multiplying the US productivity
per hour. The productivity per hour effect is then calculated as the residual difference in GDP per capita between the two countries
SOURCE: The Conference Board (Groningen Growth and Development Centre); McKinsey analysis
Denmarks weaker growth stems from sub-par increases in multi-factor productivity rather
than a lack of capital investment or labor input (Exhibit 9). 14 Differences in multi-factor
productivity explain almost the entire gap in value-added growth rates between the US and
Denmark since 1997 increasing labor inputs over this period contributed similarly to
value-added growth in Denmark and the US, and the contribution of capital investment,
albeit lower in Denmark than the US, accounted for only a relatively small amount of the
difference.
13 2005 data is the latest available from EU KLEMS where detailed sub-sector information is available for all countries. The 2007 EU
KLEMS dataset only has sector data at a higher level of aggregation
14 Multi-factor productivity describes residual per capita GDP growth after accommodating for capital increases (at constant returns),
labor increases, and improvements in labor quality (estimated via wages). It is usually considered as a metric reflecting the efficiency
of use of inputs and its growth related to innovation in technology and processes
35
EXHIBIT 8
Within contribution
Mix effect
Productivity growth
11
1.6
-5
1.2
2
1.0
5
2.1
1.7
1.6
22
2.8
4.1
14
0.4
-18
0.8
1
1.6
24
1.5
13
0.4
-2
2.3
9
1.9
1 Excluding mining, real estate, education, health and other public goods
SOURCE: EU KLEMS; McKinsey Global Institute analysis
EXHIBIT 9
Contribution to growth
United States
Denmark
3.0
1.8
Labor input
0.9
1.0
Capital input
Multifactor productivity1
1.5
1.2
0.6
-0.4
1 Multifactor productivity (MFP) is a productivity measure that relates gross output to primary (capital and labor) and intermediate inputs (energy, other
intermediate goods, services)
SOURCE: EU KLEMS; McKinsey analysis
36
The above analyses demonstrate that the decline in relative incomes is due to weak withinsector productivity, rather than sector mix, investment levels or labor market
characteristics.
15 2009 Ageing Report: Economic and budgetary projections for the EU-27 Member States (2008-2060), European Commission, 2009
16 The Danish Economic Council report on the Danish economy is available at: http://www.dors.dk/graphics/SynkronLibrary/Publikationer/Rapporter/Efter%E5r%202010/ Diskussionsopl%E6g/www%20Hele%20pub.pdf
17 Exhibit 11 is expressed in USD as productivity data from the Conference Board is expressed in PPP adjusted US dollars. Based on
exchange rates as of November 12, 2010 (USD 1 = DKK 5.42372), productivity of USD 48 today corresponds to roughly DKK 260
and USD 65 in 2025 corresponds to around DKK 350
37
EXHIBIT 10
0.1
0
-0.1
0.4
-0.3
-0.4
Denmark
Sweden
-0.1
-0.2
0.1
-0.3
-0.4
-0.2
0.4
-0.6
EU-15
-0.1
19801990
19902000
-0.3
20002010
20102020
-0.5
20202030
EXHIBIT 11
Simulation
GDP per
capita
2025
492
Labor utilization
Hours per capita
7473
796
Productivity
USD per hour
65
45
1.9%
20101
40
38
49
0.6%
35
1995
33
752
44
30
1980
25
20
1965
25
18
15
10
1950 60
1950
70
80
90 2000 10
20
11
=
=
=
816
985
1,033
x
x
x
2.5%
30
3.5%
18
3.4%
11
30
38
Defining the output volume can be very difficult for some sectors. For example,
defining the output unit within education, in healthcare, or for a lawyer. In practice, value
added is then often simply measured to reflect the labor (salary) input, or via other workarounds.
example, the price premium for a better shopping experience or for higher service levels
is difficult to capture. In practice, quality differences are often not accounted for at all or
only at a very high level (e.g., engine displacement for cars), so there is a risk that
product innovation is removed by the deflator.
These considerations mean that one has to be careful concluding from comparisons of
GVA/hour across countries and over time. For this reason, we use GVA/hour only as an
indication of productivity performance and support the analyses with other more
operational productivity measures within sectors. This in turn, also enables us to pinpoint
the root causes of productivity performance. This approach is especially valuable for
sectors with hard-to-define output, like professional services.
39
40
EXHIBIT 12
ResourceIntensive
industries1
Manufacturing
24
Public services
21
All private
services2
51
Finland
15
14
13
12
12
23
25
25
24
26
58
59
60
61
20
24
25
22
53
53
54
Germany
Denmark
Sweden
Netherlands
United
States
France
United
Kingdom
Service sectors are also becoming increasingly important over time private sector
services have increased their share of total value added by 5 percent since 1980 (Exhibit
41
13). Also, as is discussed in detail in Chapter 3, service sectors account for the majority of
the productivity growth gap to the US, providing significant opportunity for improvement.
Boosting performance of these service sectors can therefore have a sizable impact on
overall economic growth.
EXHIBIT 13
ResourceIntensive
industries1
Manufacturing
19
19
Public services
27
26
All private
services2
49
1980
3
13
17
17
16
14
27
27
26
27
30
49
51
52
52
54
54
1985
1990
1995
2000
2005
2009
Many policy makers around the world see innovative new sectors like biotech as key to
better productivity, increased economic growth, and rising employment. Yet, these
emerging sectors in themselves are often too small to make a significant difference. The
pharmaceuticals sector, for example, only accounts for about half a percent of Danish
employment (Exhibit 14). 18 Continuing innovation in sectors such as semiconductors,
pharmaceuticals, or clean-tech has the potential to provide broader benefits to the
economy (IT adoption, for instance, has improved business processes and productivity
across many sectors).
18 For further detail, see McKinsey Global Institutes report How to compete and grow: A sector guide to policy, March 2010
42
EXHIBIT 14
6.3
0.6
Pharmaceuticals
7.2
1.6
Electronics
Retail trade
Construction Business
services
43
France found evidence that lack of upstream competition may curb incentives to improve
efficiency in downstream sectors or firms. 19 Why will downstream firms bother if part of the
rents that they might expect from productivity improvements has to be shared with these
upstream suppliers of intermediate services? The paper suggests that anti-competitive
upstream regulations have curbed multi-factor productivity growth in these downstream
sectors over the past 15 years in 15 OECD countries (including Denmark).
EXHIBIT 15
Services2
Other sectors
Local services
45
37
37
34
63
63
66
Agriculture
Chemicals
and plastics
22
32
55
78
68
Textiles
Metals
Food,
beverages
and tobacco
Other sectors
1 Defined as sectors with ~50%+ export share: agriculture; chemicals; plastic and rubber; food and drink; metal products and textile
2 Includes construction; retail and wholesale trade, hotels and restaurants; transport, post and telecommunications; finance
SOURCE: Statistics Denmark; McKinsey analysis
Lowering costs in the service sector can also help consumers by reducing the cost of living
in Denmark. Danish price levels are above those in the EU-15, in large part, but by no
means entirely, due to higher relative taxes on goods and services (Exhibit 16). The
Danish Competition and Consumer Authority noted that Danish prices were approximately
7 percent higher than the EU-9 average level in 2007 (after adjusting for indirect taxes and
real per capita income), equivalent to approximately DKK 9,000 of additional costs for the
average Dane. 20
19 Renaud Bourls, Gilbert Cette, and Jimmy Lopez, Do product market regulations in upstream sectors curb productivity growth?
Panel data evidence ffor OECD countries, OECD working paper, July 2010
44
EXHIBIT 16
Construction2
100 92
86 86 79 76
71
100 92
85 82 81 77
71
8
3
6
32
28
7
Furniture and home appliances
13
10
100 95 93
89 86 84 83
13
Groceries
100 95
87 83 83 82
74
45
makes it critical that public sector productivity (while challenging to measure) increases at
a similar rate to that in the private sector, otherwise there is a risk of the so-called Baumol
Effect, where the public sector requires an increasing level of taxation to finance its
activities over time. 22
EXHIBIT 17
565
550
Service sectors:
Financials
services
Insurance
Transportation
Wholesale
500
450
400
350
424
4402
Increase
productivity
Manufactu
ring
300
326
277
250
Public sector
242
242
1.
2.
200
150
179
3.
100
Primary
industry
165
4. 107
50
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
22 Baumols cost disease (also known as the Baumol Effect) is a phenomenon described by
William J. Baumol and William G. Bowen in the 1960s. It involves a rise of salaries in jobs that have experienced no increase of labor
productivity in response to rising salaries in other jobs that did experience labor productivity growth
46
23 Local services groups activities that are local by nature such as hotels, restaurants, retail and wholesale trade, and personal
services (e.g., leisure, private household personnel, and media); Business services groups all services that are provided to other
companies, with the exception of financial services. Professional and financial services groups activities related to financial services.
This group also includes professional services, as these sectors show similar productivity levels and include finance-related activities
such as accounting, auditing, and tax. Technical services and advertising should be classified as business services, but granular
data is not available for these activities. See McKinsey Global Institutes report Beyond austerity: A path to economic growth and
renewal in Europe, October 2010, for further information on how these sector groupings are defined
47
4.5 percent in the EU-15 and 9.1 percent in the US. Nor is this performance due to the size
of the sector local services, after all, account for a larger share of GVA in Denmark than
in the EU-15 (17.9 versus 16.6 percent). The explanation, rather, lies in the relatively low
productivity growth within these local service sectors: 7 percent in Denmark from 1995 to
2005 against 12 percent in the EU-15 over the same period.
EXHIBIT 18
Primary resources
Manufacturing
Infrastructure1
Local services
Business services
Professional/financial services
2
5
7
3
3
4
7
1
4
2
3
2
Other2
Mix effect
22
15
11
Total3
Comparing the productivity levels and growth of service sectors to Sweden (Exhibit 19)
shows that productivity growth has been lower across all of the sectors. Take retail trade
for example, productivity growth from 1995 to 2007 has been over 4 percent lower than in
Sweden, which has implemented significant reforms in retail trade, including the
liberalization of opening hours and modifying zoning regulation.
48
EXHIBIT 19
Productivity growth
Percentage point difference to Sweden, CAGR, 19952007, PPP adjusted, 2000 prices
Parity
5
4
3
2
1
0
-1
-2
Construction1
7%
5%
7%
6% Wholesale trade
Business services
11%
Retail trade
-3
9%
-4
-5
-180 -160 -140 -120 -100 -80 -60 -40 -20
20
40
60
80
Productivity level
Difference to Sweden, GVA per hour, DKK, 2007, PPP adjusted, 2000 prices
1 GVA and employment in Danish construction sector is from Statistics Denmark due to discrepancies in EU KLEMS data
SOURCE: EU KLEMS; Statistics Denmark
Allocative efficiency: The degree to which output and changes in market share in a
sector reflect the productivity of firms. In a dynamically competitive environment,
successful and productive firms gain market share and scale, and less-productive
firms either improve or exit the market. A previous study has suggested that
allocative efficiency can explain 20-40 percent of productivity levels in sectors 25 .
Firm efficiency: The degree to which firms are operating to their optimal technical
efficiency. This is driven by the degree to which firms adopt best-practice techniques
such as leveraging economies of scale, ensuring efficient division of labor, offshoring
and minimizing input costs.
Danish service sectors appear to have significant potential to improve both these sources
of sector productivity.
24 For more details on this methodology, see Baily, Hulten and Campbell (1992), Griliches and Regev (1995) and Foster, Haltiwanger
and Krizan (2001)
25 See for example, Olley, and Pakes, The Dynamics of Productivity in the Telecommunications Equipment Industry. Econometrica,
1996, 64(6), pp. 1,26397
49
27 .
industry with the lowest Total Factor Productivity (TFP) only contribute 8-30 percent of
industry value added, but employ 23-45 percent of employees.
26 Based on analyses by Eric J Bartlesman, Vrije Universiteit in Amsterdam. See e.g. Understanding productivity: Lessons from
longitudinal microdata, Finance and economics discussion series from Board of Governors of the Federal Reserve System (US),
2000.
27 Danish Economic Council semi-annual analysis of the economy. Report (in Danish) available at the following web address:
http://www.dors.dk/graphics/Synkron-Library/Publikationer/Rapporter/Efter%
E5r%202010/Diskussionsopl%E6g/www%20Hele%20pub.pdf
50
EXHIBIT 20
WalMart
Rest of market
Key changes
Creative destruction
in US retail
WalMarts innovative
business model,
formats, operations led
to higher productivity
Impact
Productivity levels
Index: 100 = 1995 remainder of the market
1987
1995
Competitors forced to
follow suit and partially
exited the market
1999
Market share
Percent
114
79
44%
148
27
48%
100
181
128
41%
30
51
exemplified by Walmart. The Danish grocery sector, however, has not fully
embraced IT in its operations, in part due to the sectors fragmentation into a large
number of subscale stores. The share of Danish retail companies with self-service
checkouts, for instance, is just half what it is in comparable countries. Tesco in the
UK, for example, is pushing ahead with self-scanning technology, having opened
100 percent self-scan stores in 2009.
Input costs: Input costs are another key driver of firm efficiency. Input costs drive a
large share of overall costs in many sectors and are particularly high in Denmark.
Those service sectors supplying a large share of intermediate inputs demanded by
downstream
sectors
in
Denmark,
such
as
construction,
transport
and
communication, all have significantly higher costs than in other countries (Exhibit
21). For example, the cost of building materials typically represents around 60
percent of overall construction costs in Denmark. Material prices, moreover, are
higher across almost all categories than in the average Western European country.
Take cement, for example, where the standard price in 2009 was around 40 percent
lower in the Netherlands and around 60 percent lower in Germany than in Denmark.
EXHIBIT 21
Gross price
Comparable price levels for service sectors with largest downstream linkages,
EU15 = 100, 20081
VAT
Other taxes
and tariffs
Net price
Construction
Transport
156
132
108 36
143
110 3
Finland
83 25
108
109
Netherlands
99 23
123
Germany
95 22
UK
95 20
Denmark
117
Sweden
39
Communication
7 1 132
69 16
85
110
53 12
65
109
70 15
85
101 7
108
73 13
87
118
92 10
102
78 14
92
115
96 6
102
86 12
98
14
1 The division of gross price into net price, VAT and other taxes and tariffs is only taking into account VAT and other taxes and tariffs that are directly
allocable to the specific sector. The service sectors listed above were found to represent a large share of intermediate inputs used in downstream
sectors, based on information from the Danish input-output tables from 2006
SOURCE: Statistics Denmark; Eurostat; Danish Competition and Consumer Authority; McKinsey Analysis
52
EXHIBIT 22
High
Discounters
13
Hypermarkets
25
Productivity2
29
7
Superstores
39
Firm size
Share of
employment;
Percent
19 workers
32
Convenience
Low
21
2
Labor productivity
(250+
workers =
100)
Firm size
83
19 workers
81
1049 workers
24
Share of
employment;
Percent
Labor productivity
(250+
workers =
100)
33
66
23
1049 workers
Supermarkets
38
67
35
50249 workers
16
93
50249 workers
21
250+ workers
14
100
250+ workers
22
84
DK
Peer
group1
100
1 Peer group consists of Sweden, Norway, Finland, Germany, Belgium, Netherlands, UK, France, US, Austria, Switzerland, Italy, Spain, and Portugal
2 Productivity assessment based on McKinsey survey of European retail operators, measures in terms of sales per FTE hour
SOURCE: Planet Retail; Euroconstruct; Eurostat; McKinsey analysis
28 The Emerging Global Labor Market: The Demand for Offshore Talent in Services, McKinsey Global Institute, June 2005
53
The savings
potential is significant MGI estimates that 30-40 percent cost savings could be
achieved in service sectors from offshoring, through improvements in task and
process reengineering. Despite this, Denmarks intensity of offshoring is below that
of peer countries in service sectors. Both the rate of offshoring and its growth are
lower than in peer countries for example, Denmark has an offshoring intensity of
22 percent in 2006, which is less than half that of Sweden. Since 1991, offshoring of
services has actually experienced negative growth in Denmark, versus growth of
over 8 percent per annum in Sweden. 30
In many countries, regulatory barriers beyond companies control have so far been
held largely responsible for their slow uptake of offshoring. However, MGI research
indicates that company-specific barriers are generally more powerful than regulatory
barriers in deterring many companies. Such barriers include having processes
unsuited to offshoring, managers attitude toward offshoring, or insufficient scale. The
role of competition appears particularly important most of the sectors MGI evaluated
reported cost pressure at home to be a main incentive for offshoring.
29 Individual sectors vary quite widely in the amount of labor they could employ remotely only about 3 percent of retail sector jobs
could be performed remotely; in contrast, almost half of all employment in the packaged software industry could be performed
remotely
30 William Milberg and Deborah Winkler, International Review of Applied Economics, Economic insecurity in the new wave of
globalization: offshoring and the labor share under varieties of capitalism, Volume 24, Issue 3, Pages 285-308, 2010
31 Two streams of literature have analyzed the effects of competition on incentives the first analyzes competition effects in terms of the
comparative performance information that other firms can provide enabling the principal to estimate agent effort with greater precision
(e.g., Meyer and Vickers, 1997); the second analyzes the direct effects of product market competition on agent effort (e.g., Schmidt,
1997)
32 Arnold, Nicoletti and Scarpetta (2008) for example, find that at the industry level, resources were allocated less efficiently across firms
in countries where service regulations are less market friendly
54
Finally, competition exposes firms to new ideas and provides an incentive for firms to
innovate 33 . For example, there is empirical evidence showing that more competition has
the greatest positive effect on productivity in sectors in one country that lags far behind the
same sector in terms of technology usage because it enables the employment of concepts
from others that are well tested and this can increase productivity quickly. 34
The economic evidence of the link between competition and productivity is somewhat
inconclusive at the macroeconomic level, partly due to the twin challenges of controlling for
other factors influencing productivity and finding metrics that reflect the intensity of
33 The exact relationship between competition and innovation is disputed by academics. Whilst some academics such as Nickel (1996)
and Blundell et al. (1999) find clear evidence of a positive relationship between competition and innovative activity at the industry
level, others such as Aghion et al. (2005) find that the impact of competition on innovation depends on specific industry
characteristics (e.g., the distance of a given firm to the technology frontier)
34 See Nicoletti, Giuseppe and Stefano Scarpetta, "Regulation, productivity and growth: OECD evidence," Economic Policy, CEPR, vol.
18(36), pages 9-72, 2003
55
In Sweden, the liberalization of opening hours and zoning regulation in the retail
trade unleashed competition, helping boost productivity by an average of 4.6 percent
per annum for ten years after 1995. 37
In the UK, regulatory changes such as the unbundling of the local loop, spurred
competition in the telecommunications sector and increased the rate of productivity
growth by 20 percent.
Liberalization of the road freight sector in Europe in the 1990s led to rapid
productivity growth. Measures included the removal of barriers to market access, the
deregulation of fixed price lists and a relaxation of capacity restrictions. These
reforms stimulated competitive intensity and cross-border demand, resulting in
higher average truck sizes, longer hauls, industry consolidation and investment in IT
tools (e.g., GPS and route optimization). Productivity in the freight sector in France
and Germany increased by 5 percent per annum and 5.2 percent per annum
respectively from 1990 to 2000, far exceeding productivity gains in the US (which
averaged 1.2 percent per annum over the same period).
After opening the retail trade sector to foreign investors, Russian retail productivity in
the
past
ten
years
has
more
than
doubled
from
15
percent
to
31 percent of the US level, while turnover has increased six fold in real terms. 38
These changes followed the introduction of modern formats, which are three times
more productive than traditional formats.
Denmark has its own examples demonstrating the link between competition and
productivity. For example, reforms to the telecom sector have helped spur competition and
improved productivity, resulting in Denmark having some of the lowest global telecom
prices (Exhibit 23).
35 For example, the World Economic Forum Competitiveness Index uses a qualitative measure based on survey responses of the
intensity of local competition, which is potentially subject to significant perception bias. More quantitative measures (e.g. HerfindahlHirschman Index) have the advantage of being more objective measures of competition, but they too have their limitations. For
example, quantitative measures may capture market structure, but not necessarily market conduct
36 The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability (2004) by William Lewis, former Director of the
McKinsey Global Institute, provides a useful overview of the international evidence of the sector-level link between competition and
productivity
37 For further details on these reforms, see McKinsey Global Institutes report, Swedens economic performance: recent development,
current priorities, May 2006
38 For further details on Russias reforms, see McKinsey Global Institutes report, Lean Russia: Sustaining economic growth through
improved productivity, April 2009
56
EXHIBIT 23
1,4
DKK 1.20
1,2
1,0
0,8
-79%
0,6
0,4
0,2
DKK
0,25
0
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2003
2002
2004
2005
2006
1 Per minute price is for residential customers and excludes setup charges and subscription costs
SOURCE: OECD; Bank of America Merrill Lynch Industry Overview, July 9 2010
Improving competition is not the only available lever for increasing productivity and growth
in Denmark. As noted by the OECD in its 2009 Economic Survey of Denmark 39 , for
example, it is important to go beyond product market reforms and make further
improvements in areas such as education outcomes in compulsory schooling and dropout
rates in upper secondary education. However, as the analysis above has demonstrated,
competition is a vital foundation of any effort to stimulate long-term productivity. That is
why the focus of this report is on how to address constraints to competition.
39 OECD economic surveys: Denmark, November 2009, Organization for Economic Co-operation and Development
40 Product market flexibility is an aggregate index which assesses barriers to entrepreneurship, barriers to trade and investment, and
the degree of state control of markets. On product market flexibility, Denmark rates particularly strongly in terms of low administrative
burden to start-ups. The capital market flexibility index is a subindex of product market flexibility, which focuses on barriers to foreign
57
on a par with, or better, than peer countries. And the Danish Competition and Consumer
Authoritys 2009 Competition Report notes that the number of sectors with substantial
competitive
problems
has
fallen
from
20
percent
in
2006
to
approximately
41
EXHIBIT 24
0.19
0.39
0.42
0.43
0.46
0.52
0.90
0.91
0.93
0.94
0.97
0.97
1.11
1.27
1.28
1.33
1.34
1.44
1.51
1.61
1.67
1.71
1.73
1.74
1.81
1.92
1.94
2.63
2.79
3.45
Labor market
US
UK
Switzerland
Canada
Australia
New Zealand
Ireland
Denmark
Belgium
Iceland
Italy
Japan
Hungary
Poland
Finland
Norway
Mexico
Greece
Korea
Austria
France
Slovak Republic
Turkey
Netherlands
Luxembourg
Sweden
Spain
Germany
Czech Republic
Portugal
0.17
1.12
1.16
1.25
1.42
1.56
1.60
1.63
1.73
1.73
1.77
1.87
1.92
2.06
2.17
2.25
2.25
2.33
2.37
2.37
2.47
2.50
2.56
2.72
2.75
2.86
2.92
3.00
3.05
4.17
Product market
US
UK
Ireland
Canada
Netherlands
Iceland
Spain
Denmark
Japan
Norway
Switzerland
Finland
Australia
New Zealand
Hungary
Sweden
Germany
Italy
Belgium
Portugal
Austria
France
Korea
Luxembourg
Czech Republic
Slovak Republic
Mexico
Poland
Turkey
Greece
0.84
0.84
0.92
0.95
0.97
1.00
1.03
1.06
1.11
1.16
1.18
1.19
1.23
1.26
1.30
1.30
1.33
1.38
1.43
1.43
1.45
1.45
1.47
1.56
1.62
1.63
1.85
2.26
2.35
2.37
1 Indices are Barriers to foreign direct investment; Protection for regular employment; and Restrictiveness of economy-wide product market regulation
SOURCE: OECD
direct investment. The labor flexibility index relates to the degree of protection for regulation employment, which includes difficulty of
dismissal
41 2009 Competition Report, Danish Competition Authority, 2009
42 Competition Culture, Danish Competition Authority, June 2010
58
These
barriers seem to be especially prevalent in local services. For example, the OECD finds
that barriers to competition in the retail trade and in professional services are higher than in
many peer countries (Exhibit 25). 44
59
EXHIBIT 25
1998
2003
2008
services1,
19982008
4.77
4.28
3.54
3.83
3.71
3.66
3.64
3.27
2.40
2.19
2.29
1.78 1.90
1.69
1.29
Denmark2
3.31 3.42
United
Kingdom
United
States
1.46
Sweden
Finland
Netherlands
1 Represents an index from 15 where higher values indicate greater barriers to entry
2 Danish Competition and Consumer Authority has found several errors in the OECD analysis after correcting for these errors, the barriers to entry
numbers are higher than indicated above, but remain fairly constant throughout the three time periods.
SOURCE: OECD
45 These results must be interpreted with some degree of caution given that it is not possible to determine how much of these
productivity growth effects are due to exposure to international competition versus basic differences in the sectors included in each
category
60
EXHIBIT 26
84
Export-driven sectors1
16
Share of private
sector GVA 2006
70
30
Share of private
sector productivity
growth 200020062
1 Defined as sectors with ~50%+ export share: agriculture; chemicals; plastic and rubber; food and drink; metal products and textile
2 Growth in productivity per hour by sector, weighted by average shares of employment and GVA from 20002006
SOURCE: Danish National Accounts
The same pattern is evident in the US, where multinationals have raised their productivity
quicker than other firms over the past two decades and contributed disproportionately more
to overall productivity improvements (Exhibit 27). In 1990, US multinationals labor
productivity or contribution to real GDP per worker was approximately the same as that
of other private sector firms. However, between 1990 and 2007, they increased their
productivity at more than twice the rate of other private sector businesses.
Academic research has shown that FDI in services has strong productivity effects. 46 But
while overall foreign investment in Denmark is relatively healthy (with
almost two thirds higher than in Norway and Finland, albeit over a quarter less than in
Sweden), it is concentrated in a limited range of sectors. Local services account for around
22 percent of private sector GVA, for example, but represent a mere 3 percent of FDI
(Exhibit 28). This also appears relatively low compared to international benchmarks. From
2000 to 2007, FDI relative to GVA of local services averaged 3.8 percent in Denmark,
which was similar to Sweden (3.7 percent) but lower than the Netherlands (4.1 percent),
UK (5.6 percent) and Finland (9.2 percent).
46 See for example, Molly Lesher & Sbastien Miroudot, 2008. FDI Spillovers and their Interrelationships with Trade, OECD Trade
Policy Working Papers 80, OECD, Trade Directorate
61
EXHIBIT 27
Recession years
Labor productivity real value added per worker; USD thousands, 2000 prices
120
US
multinational
companies
110
CAGR, 19902007
Percent
3.6
100
90
All other
companies
80
1.5
70
0
1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 2007
SOURCE: Bureau of Economic Analysis; Bureau of Labor Statistics; McKinsey Global Institute analysis
EXHIBIT 28
Other
Infrastructure utilities
Primary resources
10
7
7
Infrastructure construction
Infrastructure transport
Finance
Business services
11
Real estate2
14
Manufacturing
19
8
8
10
16
37
4
Local services
22
16
3
Share of private
sector GVA 20081
1 Public sector GVA is excluded
2 Real estate FDI related to specific sectors has been apportioned to those sectors
SOURCE: OECD; Statistics Denmark
62
Share of FDI
Average 20002008
The same picture emerges with foreign firms in Denmark. Across the retail trade,
professional services and construction sectors, there appears to be little exposure to
foreign competition (Exhibit 29). In the construction sector, for example, just 0.1 percent
of firms are foreign owned, less than in Sweden (0.4 percent), Norway (0.6 percent) and
the UK (0.8 percent). 47 Of the top ten international construction companies in Europe,
only NCC and Skanska have operations in Denmark. Skanska, moreover, recently
decided to cease the majority of its activities in the Danish market the company cited
inefficiencies in the supply chain, notably restrictive materials standards and the degree
of control exercised by consulting engineers. International construction companies, the
evidence suggests, are more productive than domestic companies, for example, the
average costs of international companies are more than 20 percent less than those of
Danish companies.
In the wholesale and retail trade, and in hotels and restaurants, meanwhile, only 2.4
percent of firms are foreign owned, less than in Sweden (2.6 percent), Norway (3.4
percent) and the UK (3.8 percent). Only two of the top ten leading European grocery
firms are present in Denmark, for example. However, the introduction of foreign
competition in the grocery discount sector has led to significant increases in productivity
in Denmark.
47 Data obtained from the respective national statistic offices. For the UK, information is sourced from the FAME database. The
definition of foreign ownership for Denmark, Norway, and the UK is a foreign ownership interest greater than 50 percent. In Sweden,
the definition used is a foreign control of more than half the voting rights
48 Paolo Buccirossi & Lorenzo Ciari & Tomaso Duso & Giancarlo Spagnolo & Cristiana Vitale, Competition Policy and Productivity
Growth: An Empirical Assessment, Center for Economic Policy and Research, September 2009
63
EXHIBIT 29
Revenue group
Euro (bns), 2009
13
Carrefour
86
Tesco
67
Metro Group
66
58
Schwartz
Aldi
6
4
2
DK
NO
NL
FI
SE
51
Rewe Group
46
Edeka
42
Auchan
Ahold Group,
ICA
Casino
40
28
27
( )
DK
SE
FI
DE
UK
1 Peer group consists of Sweden, Norway, Finland, Germany, Belgium, Netherlands, UK, France, US, Austria, Switzerland, Italy, Spain, and Portugal
2 Productivity assessment based on McKinsey survey of European retail operators, measures in terms of sales per FTE hour
3 Both Edeka and Metro Group are present within wholesale in Denmark
SOURCE: Planet Retail; Euroconstruct; Eurostat; Annual reports; The Lawyer (UK); McKinsey analysis
A review of competition policy literature and interviews with competition experts highlighted
several common institutional features of effective competition authorities:
On many of these dimensions, the Danish Competition and Consumer Authority performs
relatively strongly. In August 2010, the Danish Competition Authority was merged with the
Consumer Authority, allowing for more effective coordination of activities. In addition, in
64
April 2010, the threshold for the investigation of mergers was recently lowered. 49 In July
2007, a leniency program was introduced, including regulation concerning immunity from
fines or reduction of fines to companies cooperating with the authorities on unraveling
cartels.
However there are two remaining gaps that limit the effectiveness of the Danish
Competition and Consumer Authority:
i.
Lack of direct powers to prosecute and impose fines: The Danish Competition
and Consumer Authority does not have the power to directly prosecute cases
and impose fines. Instead, the DCCA must hand over the case to the police and
public prosecutor who can bring the case to a criminal court in order to obtain a
criminal fine. The police initiate their own investigation and afterwards the public
prosecutor decides whether there is enough evidence to bring the case before
the courts. In contrast, many other competition authorities can directly impose
administrative fines such as in the UK, the Netherlands, Germany, Belgium,
France, Italy, Finland, and the European Commission.
ii.
49 Lower turnover thresholds for merger notifications were introduced the upper threshold is lowered from
DKK 3,800,000,000 to DKK 900,000,000, and the lower threshold from DKK 300,000,000
to DKK 100,000,000
50 Converting these fines to share of firm turnover is difficult as many of the fines relate to cartels.
65
EXHIBIT 30
6,679
1,978
5
Denmark2
399
Sweden3
UK4
EU5
1 Converted from local currency to DKK using exchange rates as of November 11, 2010
2 Fine of 5 million DKK
3 Fine of SEK 500 million for Asphalt cartel
4 GBP 225m fine
5 EUR 896 million fine for cartel infringement
SOURCE: Press Search; Office of Fair Trading; Swedish Competition Authority; Danish Competition and Consumer Authority; XE currency website
66
EXHIBIT 31
Right
regulations
External
factors
Macroeconomic environment
Product and land market barriers
Capital and labor market barriers
Regulatory environment
Legal enforcement
Competitive
market
environment
Industry
dynamics
Product/format mix
Technology
Scale
Viable/non-viable investment
Operations
Capacity utilization
Supplier relations and management
OFT (organizations of functions and
tasks)/DFM (design for manufacturing)
Marketing
Operational
factors
resulting in
productivity
gaps
Strong
incentives for
companies to
improve
productivity
Productivity
Using this approach, we have later in this report analyzed productivity in three sectors:
Construction, retail trade, and professional services. These sectors were chosen based on
three principal criteria:
i.
Large sectors: Together these three sectors cover around 20 percent of Danish
employment and almost half of total employment in private services.
ii.
High potential for productivity improvements: All of these sectors show significant
productivity and cost improvement potential. For example, construction costs in
Denmark are ~20 percent higher than average WEU peer countries. In the
grocery sector, productivity levels are around 30 percent below the bestperforming European country and Denmark also has some of the highest
consumer prices in the world. In professional services, productivity levels are
equivalent to peer countries (e.g., Sweden, Germany); however, Denmark
experienced
flat
productivity
growth
in
the
period
2000-07, whereas both Sweden and the UK have grown 3.6 and 4.1 percent
respectively.
iii.
67
51 Growth and competitiveness in the United States: The role of its multinational companies, McKinsey Global Institute, June 2010
68
69
70
Better exploitation of scale benefits. Denmark has fewer large companies, and
leverages scale of repetition and standardization much less in construction projects
compared to leading countries like Finland and the Netherlands. For example only 7
percent of houses are built as part of a multi-dwelling program versus 70 percent in
the. In Denmark. This results in less benefits from usage of standardized processes
and materials, e.g. Finlands use of pre-fabricated materials in residential projects is
7 times higher than Denmarks.
Lowering input costs:. Higher prices are seen across most material categories
(cement for example is up to 63 percent higher than in Germany) partly driven by a
very consolidated material supplier segment. Further, the use of different
construction and material standards in some applications compared to other
European countries limits the possibility to source materials from other countries.
71
And Skanska recently decided to withdraw the majority of its activities from the
Danish market. The absence of foreign companies is due to a general lack of scale
in Danish projects and contracting models with central role of advisors limiting their
ability to leverage scale and technical competences.
Potential actions to strengthen productivity and competition: Adjusting technical
standards to those of larger neighboring countries, national coordinated building
administration (larger partitionings, fewer entry points for permission), strengthened use
of public procurement in order to drive productivity (consolidation on less suppliers,
functional tenders), targeted pull of foreign companies as well as strengthened project
management training.
Repair work and maintenance to existing housing, businesses, and public buildings,
including remodeling, accounting for 34 percent of production 53 and 48 percent of
GVA.
Heavy infrastructure including roads, railways, sewers, harbors, etc. accounting for
25 percent of production and nine percent of GVA.
Public spending accounts for a significant share of total construction output. Approximately
17 percent of total output and 39 percent of infrastructure output is publicly funded. 54
52 The Danish Construction Association, Konjunkturanalyse, juni 2010. National Accounts, Statistic Denmark
53 Intermediary inputs plus GVA
54 Statistics Denmark and BBR database
72
EXHIBIT 32
Private non-residential
Denmark
Private residential
Public
Construction
segments
Employment
Hours worked, millions, 2006
Share of production
Percent
17
Total construction
sector
318 (100%)
168 (53%)
62 (100%)
47
11 23
30 (48%)
66
9
New buildings
36
108 (34%)
33
27 (43%)
58
Infrastructure
42 (13%)
6 (9%)
39
61
55 Statistics Denmark, NAT07, Production, etc. (DKK millions) by kind of activity, variable, and price unit
56 An error in the construction productivity figures in the EU-KLEMS database suggests that Danish construction productivity is higher.
The error has been corrected for the analyses in this report
73
(Exhibit 33). Danish construction productivity is respectively five percent and 13 percent
below that of the Netherlands and Finland, two of Europes top performers.
EXHIBIT 33
Productivity Growth1
Percent CAGR, 20002007, PPP adjusted, 2000 prices
Parity
2,0
8%
United Kingdom
1,0
Netherlands
Sweden
7%
7%
0
Germany
-1,0
-2,0
130
140
150
160
170
9%
Finland
220
230
6%
180
7%
Denmark
190
200
210
240
250
Productivity Level
GVA per hour, DKK, 2007, PPP adjusted, 2000 prices
1 GVA and employment in Danish construction sector is from Statistics Denmark due to discrepancies in EU KLEMS data
SOURCE: EU KLEMS; Statistics Denmark;
The productivity improvement potential is not only evident from the international
comparison, but also when looking at productivity development versus other domestic
service sectors, and the broader economy where the construction sector has not followed
pace (Exhibit 34). The weak performance is the symptom of a sector that remains
characterized by high amounts of manual labor driven by decentralized and non-automated
assembly and fitting processes carried out across various construction sites.
74
EXHIBIT 34
x%
280
CAGR 1995-2007
0.6%
270
DK whole economy
260
0.9%
250
DK service sector
240
230
+14%
+34%
220
210
200
-0.7%
190
DK construction1
180
170
160
1995 96
97
98
99
00
01
02
03
04
05
06
07
1 GVA and employment in Danish construction sector is from Statistics Denmark due to discrepancies in EU KLEMS data
SOURCE: EU KLEMS, Statistics Denmark
57 The difference in the magnitude of price difference between the Eurostat price index and the analysis done by the Danish
Construction Authority is due to the fact that the Eurostat price index does not take quality and product mix into account
58 Eurostat consumption expenditure of households by consumption purpose, Denmark, 2009
75
EXHIBIT 35
VAT
Excl. VAT
155
143
39
36
123
23
-30%
117
115
22
20
108
25
117
DK
108
SE
99
95
95
NL
DE
UK
-29%
83
FI
SOURCE: Eurostat
Together, these two areas account for the majority of what drives the price difference
between Denmark and top-performing countries like the Netherlands and Finland
mentioned in section 4.2.
76
EXHIBIT 36
100
20
48
26
4
1
Danish price
VAT
Input
costs
Salaries
Depriciation
Profits
EXHIBIT 37
12
-23%
14
11
Danish
price index
VAT
Input
costs
External costs
Hours
worked
Salary
per hour
Depriciation Profits
125
Netherlands
price index1
Salaries
77
Better exploitation of scale benefits. Denmark has fewer large companies, and
leverages scale of repetition and standardization much less in construction projects
compared to leading countries like Finland and the Netherlands. For example, only 7
percent of houses in Denmark are built as part of a multi-dwelling program versus 70
percent in the Netherlands. This results in less benefits from usage of standardized
processes and materials, e.g. Finlands use of pre-fabricated materials in residential
projects is 7 times higher than Denmarks.
2.
3.
Lowering input costs. Higher prices are seen across most material categories
(cement, for example, costs up to 63 percent more than in Germany), partly driven
by a highly consolidated material supplier segment. Further, the use of different
construction and material standards in some applications compared to other
European countries limits the possibility to source materials from other countries.
4.
78
Exhibit 38
1 and 9 employees
10 and 49 employees
2007
Denmark
Labor
productivity1
Index 100 =
250 or more
employees
Netherlands
83
55
81
66
-45%
32
38
38
29
16
17
14
17
100
-28%
-15%
38
37
24
22
94
100
37
17
85
87
100
-34%
85
81
101
100
Finland
72
86
87
100
Share of
employment
Percent
Sweden
76
93
-17%
UK
38
29
17
13
20
Denmark has fewer large companies: The construction sector in Denmark appears to be
even more fragmented than in peer countries (Exhibit 39). For example, the top-10
companies in Denmark account for only 12 percent of total construction turnover, versus
22 percent in Finland and 46 percent in Sweden.
79
EXHIBIT 39
21
18
Domestic
companies2
14
Domestic companies
with international
presence2
13
International
companies2
22
4
8
12
1
9
7
9
2
DK
6
NL
FI
SE
1 Large international companies like Skanska, NCC, PEAB, YIT, Veidekke and Bravida are present in several of the countries
2 Domestic companies have more than 80% of revenue in home market, domestic companies with international presence have between 2050% of
revenue abroad, International companies have more than 50% of revenue abroad
SOURCE: Euroconstruct; annual reports
Danish companies are smaller due to more small projects and informal labor limiting
incentives to grow: One reason for the low level of large and productive companies in
Denmark is that building projects in general are smaller. We substantiate this in the next
section. Higher prevalence of smaller projects limits the advantage of being a large
company.
Another likely reason is the high amount of informal labor in the Danish construction sector.
The annual survey of informality in construction by the Rockwool Foundation shows that
half of all informal labor in Denmark can be found in the construction sector; one in five
delivered services in construction are informal. Similarly, almost half of construction
workers perform informal labor (Exhibit 40). High marginal taxes on both worker and client
raise the formal price of construction and encourages informality. The client typically saves
around 50 percent and the construction worker is around 15 percent better off in added net
income when operating informally.
Informality inhibits scale and growth in the construction sector, as elsewhere. Businesses
employing informal labor cannot rely on the legal system to enforce their contracts, protect
property rights, or resolve disputes, so it is risky for them to engage in transactions with
parties outside the immediate community. Moreover, operating informally creates perverse
disincentives since a larger company is likely to attract more government scrutiny.
Furthermore, the cost benefits of avoiding taxes and regulations allow small informal
companies to keep bigger, more productive formal competitors out of the market.
80
EXHIBIT 40
Formal
306
24
61
-49%
157
+15%
137
Informal
net wage
Net wage
Yes
48
No
52
108
76
Income
tax3
VAT3
Invoice of
work
Male
Female
81
EXHIBIT 41
NETHERLANDS
100
75
50
0
10 20 30 40 50 60 70 80
EXHIBIT 42
DENMARK
100
-60%
50
10
Initial hours
82
Reduction during
1-3 projects
Reduction during
4-56 projects
40
Marginal hours
per project
Land allocation sizes are small in Denmark compared to other countries: Only a small
share of Danish stand-alone houses are built as part of larger building programs compared
to other Western European countries (Exhibit 43). Whereas 30 percent of houses are built
as part of multi-dwelling programs in Sweden and 70 percent in the Netherlands, the figure
in Denmark is only seven percent. Within the multi-dwelling programs in Denmark, around
70 percent are part of a program of nine dwellings or less.
EXHIBIT 43
Small
program
(1 dwelling)
2-4 dwellings
49
30
5-9 dwellings
22
70
85
Large
program
(>1 dwelling)
93
10-19 dwellings
14
20-29 dwelling
70
30+ dwellings
13
Large programs
100
30
15
NL
SE
DE
7
DK1
The preponderance of Danish single dwelling houses and the limited amount of tract
housing 59 is due to lack of supply rather than lack of demand: Denmarks small land
allocations are the direct result of local planning and tract tendering procedures aimed at
developing highly diverse residential areas municipalities will often tender building plots
individually, sometimes even with a maximum limit the number of building plots per buyer.
It is not within the scope of this report to judge where the balance lies between
standardization and productivity versus individualization and higher costs. Nevertheless,
we note that the number of houses built on a large mass-production scale in Denmark is
low.
59 Housing development with multiple identical homes and few design variations
83
of
standardized
processes
and
materials
increase
productivity:
Product
for
architects
or
engineers
to
engage
in
tailoring
activities,
using
EXHIBIT 44
+15%
construction companies
have been established
after 2000 indicating a
young market
73% of companies asked
say their revenue have
increased over the years
2005 to 2007
273
Building
sector
312
Standard
houses
1 Survey by Danish Building Research Institute from 2010 of 232 standard house construction companies in Denmark
2 Based on data from 23 Danish standard house construction companies and 1,358 Danish house construction companies
3 GVA per hour is estimated as EBITDA plus costs of employees, and based on 1,800 hours per employee per year
SOURCE: Bureau van Dijk; Danish Building Research Institute; Typehuse Info
Open standards and prefabrication are widely used in Finland: Finland has the highest
level of productivity in construction among the peer countries examined. An international
84
productivity study 60 as well as interviews with local players indicate that this high
productivity is linked to the use of open building standards with a large number of
standardized and inter-compatible building processes and measures, and an extensive use
of prefabrication. For example, the high degree of dimension standardization through open
standards, allows for more prefabrication within multistoried construction. Examples of
these open building standards include a fixed floor-to-floor distance of 3.44 m, and
standard dimensions for elevator shafts and staircases. As a result, project planning
becomes easier and companies can source wall elements, insulation, facade elements,
elevator shaft, staircases, etc. from any supplier because they all use the same standard
measures.
Denmark uses less prefabricated construction materials than Finland: Fully prefabricated
houses and prefabricated house elements allow for a much higher degree of repetition
than houses fully created on-site. The elements can be created more efficiently and in
larger quantities and then later combined into fully prefabricated houses or used as input
for on-site construction. Finland owes its long tradition of prefabrication for single and dual
family dwellings to a climate that makes on-site construction difficult during large parts of
the year. Such pre-fabricated houses are not considered to be lower in quality than those
constructed on-site. The largest single house construction company in the Nordic region,
Finnish Finndomo, produces prefabricated houses from seven house factories in Finland
and Sweden. Finland uses prefabrication seven times more frequently in family dwellings
than Denmark (Exhibit 45).
There is less focus on cost and standardization in the project design phase:
A key barrier to increased use of standardization, particularly in larger projects, is that
Danish construction companies have limited degrees of freedom to design to cost. The
general conduct and tradition in the Danish construction industry is that projects are often
designed with detailed specifications limiting the construction companies ability to leverage
its experience and reuse existing designs, known processes, building techniques, and
materials. Danish clients typically leave planning and design to advisors (engineers and
architects) while construction companies are brought in late in the process to execute the
plan. The advisors typically win projects based on design reducing their incentive to
suggest low-cost standardized construction projects. In addition, they will design
construction projects with minimal risk to themselves, effectively constraining the
construction company from subsequently making changes to design and optimize for
costs.
60 Construction Industry Development Board [CIBD] construction productivity taskforce report, 1992
85
EXHIBIT 45
7x
Pre-fabricated
dwellings
include wholly
prefabricated
dwellings and
dwellings
where most of
the assembly
process is done
off-site
Interviews with several industry players, both Danish and foreign, have brought this up as
one of the biggest issues with Danish construction projects; some companies even refrain
from entering Denmark because of this situation (see more later on barriers to entry of
international companies). The interviews reveal that in contrast to Denmark, greater
standardization of engineering construction and less involvement of external advisors is
found in Finland and Sweden where construction companies are often the first point of
contact for the client. 61 This allows focus on functional design and reuse of cost-efficient
building processes from the early planning stage, and drives higher productivity. Industry
interviews suggest that Danish firms could be 15 percent more productive if they replicated
the Swedish and Finnish approach.
Switching to functional tenders could be part of the solution: The common model in
Denmark is the constructive tender, in which most project design specifications are
determined beforehand as mentioned before. This limits scale benefits as it often requires
very specific processes tailored for each specific project. In contrast, functional tenders
dictate scope and function rather than design and material specifications it is, therefore,
easier for bidding construction company to design cost-beneficial projects reusing existing
86
designs and known processes. Whenever functional tenders have been used in Denmark,
they have achieved impressive cost savings and delivery results (see Box 4.1).
2.
The opportunity, provided by more flexible PPP rules, to optimize the project
proposal during the tender process resulted in clear cost and functional benefits.
3.
The incentives to deliver on or ahead of time. As part of the PPP agreement, KMG
will receive payment in full when the construction is completed, and not sooner.
87
EXHIBIT 46
Relation between handover points in the building process and wasted time
There are many handover points between different
workers in the construction process
Require
authorization
which leads to significant waste
Tasks
Percent
0 Design
1 Foundation
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Wall construction
Water and heating
Electricity
Filling out of drillings
Insulation
Floor heating
Concrete floor
Walls are sanded down
Water-proof layers
Ceiling
Tiles
Grouting
Painting
Electrical installations
H&P installations
Completion report
Worker
Architect/Engineer
Authorized sewerage
worker
Bricklayer
Authorized H&P worker
Authorized electrician
Bricklayer
Bricklayer
H&P worker
Bricklayer
Bricklayer
Bricklayer
Carpenter
Bricklayer
Bricklayer
Painter
Electrician
H&P worker
Sewerage worker, H&P
worker, Electrician
100%
Waste1
33
Preparation
37
37
45
Value add
30
17
DK2
SE
Interviews with industry players suggest that handover inefficiencies is a significant driver
of the growing share of construction sector revenue coming from rework due to errors (up
from four to seven percent for the industry as a whole) (Exhibit 47).
88
EXHIBIT 47
100% =
Rework
155
4%
178
7%
Other
production
96%
93%
2003
2008
SOURCE: Rambll; Statistics Denmark; Danish Enterprise and Construction Authority; expert interviews; McKinsey
89
industry. Denmark too has great focus on implementing IT in the construction sector.
Through The digital construction, the Danish government has made the use of digital
planning and construction design compulsory for publicly-aided building projects.
ii) Minimizing seasonal fluctuations in construction activity
Productivity is lower during the winter: Construction work in the winter season requires
special measures to avoid snow, frost and, cold temperatures damaging/hindering the
construction. These measures include clearing of snow from the building site, heating and
insulation of excavations, protection of concrete slabs from frost during drying, storage of
specific building materials in dry and warm locations, etc. Obviously, these measures add
additional cost and labor to the construction process lowering productivity and increasing
costs.
In addition, there is a general perception in the Danish market that winter construction is of
lower quality 62 . If all necessary measures and precautions are not met, it can certainly
have serious implications for the construction outcome. This, however, does not appear to
be the real issue. Studies of Danish summer and winter construction have shown that
quality is comparable throughout the calendar year62.
The combination of higher costs and a perception of lower quality during winter
construction has led to a lower demand for construction services in the winter months.
Many buyers try to plan construction activities in the warmer summer months. This
difference in demand over the season is quite significant, leading to many construction
workers being laid off in the winter months due to low construction activity levels. While this
does not impact measured labor productivity (by hours worked), it does lower total annual
productivity of construction workers and it drives up prices in the summer months. Thus,
if activity levels were upheld throughout the calendar year, fewer total workers would be
needed in the construction sector to uphold the current level of total production.
Current regulation reduces incentives to increase cost-efficiency of winter construction: To
ensure that clients and construction companies do not terminate activities or workers
during the cold winter season, the Danish Enterprise and Construction Authority has
implemented specific regulation for construction services carried out between November 1
and March 31. This regulation requires that construction projects that are initiated within or
extending into this period are continued by the construction company regardless of
weather conditions. It also requires the client to cover all additional costs incurred by the
construction company due to weather-determined activities. Hence the regulation does not
incentivize the construction company to try to lower its costs of winter construction as these
costs can be forwarded to the client. At the same time, it discourages the client to acquire
90
construction services in the winter period as costs are higher, leading to increased demand
in the busy summer months.
This regulation is specific for Denmark, and not seen in other Nordic countries. In Finland,
for example, where parts of the country experience frost and snow year-round, cold
weather construction is unavoidable. Here, innovation in cold construction techniques has
led to significant improvements in technology, work processes, and productivity (see box
4.2).
BOX 4.2 In Finland, the cold climate has led to innovation in winter
construction techniques
The cold climate in Finland is a major challenge to conventional construction
techniques. For example, casting of concrete in Denmark is traditionally done at 5
degree Celsius or higher*, but the temperature in Finland is below this for most of the
year and parts of Finland never get above this temperature. This has led to significant
innovations within concreting.
Most concrete used in Finland is precast (60 percent), avoiding on site casting. The
high usage of precast concrete has been a significant driver of the development of
open building standards as mentioned earlier. This is so since keeping the number of
types of precast concrete modules low reduces construction costs.
When precast concrete cannot be used, concrete is cast at the construction site using
ready-mix concrete. Here, innovation has led to significant improvements in the minimal
temperatures at which concrete can be cast on site. In Southern Finland, normal
minimal temperatures for concreting is -15 degree Celcius and in Northern Finland, it is
-20 degrees *** significantly lower than traditional minimal temperature for concreting
in Denmark of 5 degrees.
In Kilpisjrvi, at the northwest corner of Finland, an experimental village has been built
to test state-of-the-art materials and design techniques for construction. Here,
preliminary results on casting concrete at temperatures as low as -29 degree Celsius
are promising to significantly advance the frontier in the field***
*
**
Finland - advances in concrete and cementitious composites and applications to civil infrastructure, 2007
***
A change to the winter construction regulation in 2007 included a trial period of three years
allowing clients to enter into agreements with construction companies in which the latter
covers winter costs at a fixed price. The trial ended in April 2010 and only covered larger
projects (turnkey contracts above DKK 20 million). The effect of this regulation is now
being evaluated.
91
EXHIBIT 48
DK material costs1
Windows/doors
Concrete elements
34
Steel
33
6 (17%)
16 (47%)
30
Construction wood
9 (29%)
29
Roof tiles
15 (50%)
25
Bricks
1 (6%)
22
Polystyrene
2 (10%)
21
Tiles
2 (11%)
19
Plumbing
Insulation
13
Floor covering
12
1 (4%)
5 (38%)
2 (13%)
10
Paint
8 (76%)
Plywood
Plaster
9 (11%)
1 (1%)
1 (10%)
n/a
395
77 (19%)
1 Adjusted based on aggregated construction material price index, WEU peers are the Netherlands, the UK, Sweden, Finland and Germany
SOURCE: Eurostat; Danish Enterprise and Construction Authority; McKinsey
High material prices in the Danish market appear to be driven by i) a highly consolidated
building material production and supply sector, limiting bargaining powers of buyers, and ii)
lack of harmonization of material standards. In the following, we go through these drivers
i) Highly consolidated building material production and supply sector
Material suppliers and wholesalers are highly concentrated: More than two-thirds of the
market in concrete, plaster, tiles, and steel is controlled by the top four players (Exhibit 49).
Furthermore, concentration is much greater upstream than in the downstream construction
market, where the top four operators only command a 13 percent or so market share
(Exhibit 50). Such an asymmetric industry structure fragmented construction companies
on the one hand and concentrated construction material suppliers on the other is likely to
put the suppliers in a stronger bargaining position and thereby lead to inflated prices.
92
EXHIBIT 49
Material category1
Concentration
86
Plaster
75
Steel
Tiles
73
Concrete
68
67
Concrete elements
43
Plumbing
34
Roof tiles
Plywood
30
21
Construction wood
EXHIBIT 50
Material supply
Manufacturing
56.8
Construction
Contractors
Wholesale
57.8
Inequality
of market
power
12.9
2007
2007
2007
93
Cement prices are higher in Denmark: Take cement, for example, one of the largest
categories and the main component of concrete, where the standard price in 2009 was
around 40 percent lower in the Netherlands and around 60 percent lower in Germany than
in Denmark (Exhibit 51). In view of the absence of any barriers to trade within Europe for
this commodity, one would expect German suppliers to take advantage of the price
difference by exporting cement to Denmark and the Netherlands. As it happens, 70 percent
of cement consumption in the Netherlands is imported, the majority of it from Germany.
However, Danish imports in 2009 only amounted to 20 percent of consumption. Our
conversations with industry executives suggest that transport and storage costs from
Northern Germany would be only of the order of 10-15 percent meaning supplies from
this source would still be significantly below Danish price levels. However, it seems that
cement producers will typically supply their local markets before exporting to other
markets, a practice that effectively limits the quantity of cement imports from neighboring
countries (Germany, Sweden, and Norway). The dominant local producer therefore enjoys
a strong market position.
EXHIBIT 51
CASE STUDY
Cement price
Index, Denmark = 100, 2009
~100%
~100%
~50%
100
64
-63%
37
DK
NL
DE
At the wholesaler level, non-transparent pricing limits pressure from clients and
contractors: Construction companies and contractors often lack the incentive to squeeze
prices as they often earn a premium by buying materials at a discount to the nominal price
at which they sell (this can be more than 15 percent of the invoice price) (Exhibit 52). Part
of their profit can therefore be derived from higher material prices. This obscures
94
contractors incentives to negotiate lower prices for their clients and limits end clients
transparency on price of services versus materials used.
EXHIBIT 52
ILLUSTRATIVE
100
Contribution
to internal
costs
35
External
costs
65
20
15
45
Total
invoice
20
Wages
Discount
Materials
costs
Subcontractor
Barriers to competition
Contractors often charge
customers a nominal
price for building
materials while buying at
a discount from
wholesalers
Wholesalers use various
discount structures, and
the complexity creates
low price transparency in
the material market
Contractors often refuse
to install the components
if building owners
purchase building
materials directly from
the supplier
95
Countries are obliged to upload their NDPs to an EU database, allowing the EU to initiate
further analysis, comparison, and convergence of EU standards. There are a total of 1,476
areas where NDPs need to be specified (Exhibit 53). Denmark is at the forefront of this
process having submitted half of its NDPs. Most of the other countries are far behind,
holding back a harmonization process that will only initiate once all NDPs have been
collected.
EXHIBIT 53
1,476
737
DK
206
SE
NDPs
-86%
75
NO
-50%
-95%
FI
344
-77%
NL
330
-78%
Eurocodes
DE
-100%
Use of reinforced steel is an example of an area that has not been harmonized leading to
higher prices (see 4.3). However, even when standards are not the barriers to free trade,
the absence of strong competition can exacerbate price differences, as seen in the case of
cement. Cement prices used to be high in Germany too, but action to prevent collusion
among the top six players in the early part of the last decade ushered in a period of intense
price competition among the German cement producers and saw prices drop by almost
half. 64
96
BOX 4.3 Steel prices are higher in Denmark and are driven by
demand for a particular steel type
Prices of reinforced steel used in Denmark are 20 percent higher than prices of steel
used in Germany. The main reason for this is that, in the absence of harmonized
building norms, Danish engineers use a different building technique that sets stricter
requirements for the steel used than in other countries. Around 95 percent of the steel
used in Denmark is therefore the higher quality Class B variety, rather than the Class A
steel used in most other places in the world. Class B steel accounts for less than one
percent of the global steel market. The difference in price between Class A and Class B
in Denmark is due to higher production and test costs. Furthermore, the prices of Class
B steel are volatile due to its small market share and the consequently higher markup
by producers. The price difference between Class A and Class B steel was DKK 1,000
per ton (~30 percent) in July 2008. Industry interviews suggest that this higher quality
steel may reduce costs elsewhere in the construction project, albeit the extent to which
this is true is not known.
EXHIBIT 54
CASE STUDY
+20%
10
100
DE Class
A2
Production costs
Test costs3
Markup
DK Class B2
97
EXHIBIT 55
Revenue1
# of countries Presence in
EURm, 2009 present
Denmark
2,596
FCC SA
2,265
54
1,640
NCC AB
877
ACS SA
547
10
Skanska AB
632
18
()2
Grupo Ferrovial SA
257
35
N/A
Strabag SE
N/A
21
Hochtief AG
N/A
>20
1 Revenue includes revenue from residential and non-residential building and property developments only
2 Skanska decided to pull out of the Danish market in 2007, but still have limited activities in Denmark
SOURCE: Statistics Denmark; press search; annual reports; McKinsey
Large international companies enjoy the benefits of scale and are therefore more
productive than their smaller domestic counterparts. By exposing local firms to the best
practices of international companies productivity in the sector can be improved.
Non-Danish companies would like to operate in Denmark. A survey among the ten largest
Southern Swedish construction companies shows that 75 percent of respondents would
actually like to be present, but have chosen not to because they found the barriers
insurmountable (Exhibit 56).
98
EXHIBIT 56
Companies operating in
infrastructure segment only
0
25
25
75
75
Response
Has not considered entering DK
Has been in DK and withdrawn or considered entering but found it unattractive
Currently operates in DK
Interestingly, the reasons cited were the lack of scale in Danish building projects
highlighted earlier in this chapter, a more prominent role of advisers in the Danish
construction sector, and higher contractual risks these were more prominent complaints.
The latter refers to the point made earlier, that construction companies in Denmark are
more constrained from designing projects to lower costs and optimize value as advisers
control the project design. In relation to that, most of the Swedish companies in the survey
mentioned low margins as a barrier to entry. In support of that, a comparison of profit
margins across Scandinavian countries for companies present in Norway, Sweden, and
Finland shows that profit margins averaged just 1.3 percent in Denmark in 2009, against
4.2-4.6 percent in the other countries (Exhibit 57).
The higher contractual risks also relate to the strong adviser position and low margins. A
company that is struggling to make a profit on a project won on price but predefined by
advisers, is more likely to run into unforeseen added costs and delays compared to a
company that is executing on a project it defined and designed itself.
Several respondents suggested more functional tenders as a solution to this issue
(described in section 4.3.1). In contrast to the traditional constructive tender, where the
project tender describes all parts of the construction project (for example, earthwork,
building work, mechanical, and electrical engineering) and bidders compete on price, the
functional tender describes only the scope, context, and function of the project, not how it
is to be performed. This type of project tender, more prevalent in Sweden and used in the
99
so-called Public Private Partnership projects in the UK and the Netherlands (discussed
later in this chapter), gives the contractor more freedom and incentive to design a more
cost-efficient project and building process that delivers lower prices and higher profits.
EXHIBIT 57
4.2
4.3
4.6
1.3
The interviews also suggested that some perceived barriers to entry are not key concerns.
For example, local building codes, the acquisition of local labor, and the bringing in of own
workers are not seen as barriers to entering the Danish market.
Skanska, one of the largest construction companies in the world, entered the Danish
market in 2000, but was not successful and withdrew in 2007 (Exhibit 59). Skanskas
experience highlights many of the same issues raised in our survey of Swedish
construction firms, such as low-profit margins, high material costs, and lack of coordination
between different parts of the value chain, but emphasizes the dominant role of advisers as
a key reason for their exit.
100
EXHIBIT 58
Low margins
75
75
50
33
EXHIBIT 59
CASE STUDY
3.2
3.3
Low profits in
Danish construction
High employee
turnover
2.6
Inefficient supply
chain
0.6
2004
05
06
07
2008
1.4%
1.3%
2.2%
-1.2%
-31.0%
Consultant driven
market
18
96
Employees, thousands
53
Commercial and
residential losses
SOURCE: Bureau van Djik; Transcript of Skanska Earnings Conference Call; Skanska annual report; McKinsey
101
Successful examples of attracting foreign players, like the case of the Kiplev high-way (Box
4.3) shows that there are significant potential benefits. The case of Banedanmarks
Signaling Program is an illustration of actively attracting international suppliers.
Furthermore
Banedanmark is working closely with bidders to identify opportunities for bidders and
Banedanmark to jointly take out cost
As a result of this effort, six major international bidders have developed substantial
organizations in Denmark to prepare attractive bids. The bids are due in 2010 and
2011.
102
2.
3.
In the following section, we will go through the policy initiatives within each category.
65 Coming from a low level, the UK has significantly increased productivity in the construction sector through its Rethinking
Construction initiative, achieving one of the highest productivity growth rates of 1.7 percent per annum in construction in Europe
between 1995 and 2005
66 Known for innovative policies in construction through, for example, the Vinex program initiated in 1993, the Netherlands has
sustained high and slightly increasing productivity levels since the end of 1990s. Dutch construction productivity surpassed Danish
construction productivity in 2007
67Finland has the highest productivity level among selected peer countries
103
Incentivizing scale: Large building projects are typically more productive than smaller
ones due to the scale effects described earlier. Governments can therefore act to
increase productivity by incentivizing larger building projects. For example, in the
Netherlands, as part of the VINEX Planning Process, the central government has
persuaded the municipalities typically to build larger programs in certain
geographical areas. In return, the municipalities receive infrastructure subsidies.
Some 70 percent of new houses were built on VINEX sites in the period 1995-2005,
so the impact on the productivity of the Dutch construction section should be
significant.
Pilot projects: The UK has done a lot in recent years to address the performance of
its construction sector. For example, they have established demonstration projects
aimed at embedding best practices. These include switching the focus to life cycle
project costs instead of lowest initial offer prices, and requiring cost transparency
and cost effectiveness measurements such as material usage and productivity data.
104
savings
have
been
of
the
order
of
15
percent
or
more. 70
In Finland and Sweden, the road authorities have attracted bids from international
players by bundling smaller projects with larger and more attractive ones and actively
promoting
the
tender
to
international
construction
companies.
In 2009, a Chief Construction Adviser (CCA) position was introduced in the UK, and it
serves as chair on the Public Sector Construction Clients Forum with the mandate to
strengthen the leadership and coordination of public sector construction activities. The
CCA has an independent role, but reports to the Department of Business Innovation
and Skills (BIS) and HM Treasury
68 Rethinking Construction, 2001 [UK association of clients, government and industry players]
69 Various industry expert interviews
70 Various expert interviews
105
Potential scale advantages are not leveraged to their full potential. Many
companies are sub-scale in size, residential land allotments are too small to take
advantage of the sort of efficiencies enjoyed by tract housing projects, building
projects are typically non-standardized using less prefabricated materials, and public
projects are small and tendered individually by different bodies.
106
Input costs are high due to the way low harmonization of material and building
standards deter foreign companies; opaque prices inhibit any negotiation by the end
customer.
107
competition in this highly consolidated segment. 75 The Schuko standard is currently not
allowed in Denmark, but is compatible with Danish electrical systems
In addition To ensure competition and low prices, the material supplier segment could be
scrutinized for ways to increase the level of competition in the supplier segment. It is
important that competition works well in the supplier segment, pressuring prices down
and spurring innovation. However, with a highly concentrated supplier sector, there is
significant risk that competition is not working sufficiently. Indications of inefficient
competition are, for example, seen in the large price differences in cement between
Denmark and Germany.
nationally coordinating building administration
Municipalities make decisions on allocation of land building permissions. The handling of
building applications is undertaken separately by each municipality and results in
relatively large differences in conducts and interpretation of rules and of processing time
for issuance of building permits. Fully consolidating and harmonizing building codes and
application requirements between municipalities and increased focus on transparency
and consistency in building requirements will encourage greater standardization in
projects as they will allow construction companies to replicate projects and work
processes without the additional risk that permission could be refused.
A centralization of the technical requirements of the approval process has been
undertaken for some categories of buildings, but there are opportunities to expand this to
cover all technical requirements. Similar to the Dutch Building Decision 2003, limiting
individual communities ability to increase the building standard over and above or below
a national standard could have a positive effect on the transportability of services. This
could be achieved by handling building applications centrally at national level or by
licensing engineers and architects to approve building plans for all domestic construction.
In addition, a simplification of building requirements and zoning plans, similar to the
changes seen in Germany (2007) and the Netherlands (2003), could focus on broader
performance and functional requirements instead of strict material requirements, and on
a relaxation of aesthetic requirements.
The municipalities could be incentivized to allow more multi-dwelling land development
allocations that are tendered as whole projects to one contractor. Incentives could be in
the form of national co-funding of infrastructure as is the case in the Netherlands VINEX
Planning Program or through (for example, mandatory) targets on percentage of projects
above a certain size. To create buy-in, government-sponsored pilot projects
demonstrating the benefits could be initiated, as was done in the Netherlands.
75 The Danish Competition and Consumer Authority found in a 2006/07 report that producer prices of electrical outlets in Germany were
108
109
of construction services. These would encourage and enforce cost efficiency and could
include:
1. Increased use of functional tenders: Functional tendering increases the ability to
negotiate project design during the tender, hence encouraging a more cost-efficient
approach in collaboration with bidders. Functional tenders also focus more on life
cycle costs than building costs. Functional tenders can be through either Private
Public Partnerships or turnkey contracts. The MEAT and DBFMO in the Netherlands
are examples of functional tenders
2. Implementation of national-defined open standards, norms, and dimensions
on basic key building parameters, for example, storage height, door and window
dimensions, staircase and elevator dimensions, similar to the open building standards
used in Finland. This ensures standardization and compatibility between products
from different producers, increased competition between suppliers, and allows
contractors to innovate better practices. To maximize the impact, these guidelines
could be aligned to the greatest extent with guidelines and building norms in
neighboring countries.
3. Reducing use of any other special requirements in public construction projects that
diverge from the open standards and are not directly related to functional
requirements. This means to avoid special requirements on, for example, roof
elevation and window dimensions in tenders.
4. Defined KPIs and targets for the use of prefabricated components and the use of
imported materials (where applicable) and labor productivity in construction projects.
5. Incentivized collaboration between advisers, contractors, and subcontractors on
process and planning. This could be driven by an incentive structure that motivates
collaboration between all stakeholders.
6. Implementation of common IT solution facilitating planning, coordination, and
communication between building clients, contractors, advisers, and suppliers.
7. Prequalification of contractors bidding on public tenders could be implemented to
ensure compliance with the above best practices similar to the Constructionline
effort in the UK. Pre-qualification would be based on assessment of capabilities to
comply with, historic use of best practices, and achievement of high productivity
levels.
110
new best practice processes to the Danish construction sector. In large-scale public
construction tenders, the government could actively encourage international construction
companies to bid through, for example, the staging of road shows. Invest in Denmark
could reach out to the largest international construction companies.
In addition, removing administrative obstacles for international construction companies,
for example, by translating tender material into English and making available on the
central national website, could help attract international players.
Increase scale in public tenders
A more centralized public procurement process of large-scale projects could attract larger
and more international construction companies, creating more competitive pressure
upstream in the value chain. Insufficient scale in public tenders is a recognized entry
barrier for some foreign companies. Increasing scale in tender projects would make it
easier to attract foreign companies and to leverage their scale in procurement and supply
chains.
Several smaller projects can be bundled into larger projects, facilitated by the
centralization of public procurement. It is important that these bundled projects are
handled as functional tenders to allow the bidding construction companies to design the
individual pieces of the project with maximum synergies between them.
111
Clients. Additional assistance to first-time clients in the sector could be provided through
this function, for example, on standard contracts.
Reduce premium for informal labor
Increase penalties for informal labor by increasing tax audits and on-site visits to improve
detection rates and consider a review of tax policy in the sector.
Ensure incentives to keep construction activity high in the winter season
The present regulation, which allows clients to enter into agreements with constuction
companies in which the latter covers winter cost, could be made permanent and
expanded to cover all projects.
112
113
114
Retail reform in Sweden in the 1990s (e.g., eased zoning laws, liberalization of
opening hours) leading to growth of large-scale format stores, increased competition,
increased use of ICT and the highest retail productivity growth compared to US and
Europe
Potential
action
to
strengthen
productivity
and
competition
through
the
115
constitutes a minimum of 1,500 sq.m. Department stores make up 11 percent of total retail
employment.
Pharmacies
Pharmacies primarily sell prescription and over-the-counter drugs, and make up 5 percent
of total retail employment. Being a highly regulated subsector, the productivity of
pharmacies is analyzed in the chapter on professional services.
Other retailers
Other retailers include stores that, among other things, sell computer hardware, consumer
electronics, office supplies, furniture, kitchen equipment, appliances, home improvements,
and books and paper. Other retailers makes up 42 percent of total retail employment. Of
those employed by other retailers around 24 percent are in household equipment around
17 percent lies in cultural and recreational goods, and around 10 percent in information
and communication equipment.
EXHIBIT 60
Grocery
Clothes
Department stores
Other
Pharmacies
x%
Employment
0,2% p.a.
277
278
275
275
273
277
32
32
32
32
31
29
28
12
5
11
5
11
5
11
5
12
12
13
14
14
11
4
12
4
12
13
13
50
3,3% p.a.
274
39
40
40
41
41
42
2000
01
02
03
04
05
2006
41
42
34
31
30
42
-0.8%
2.9%
1.5%
47
44
24
-2.1%
12
4.7%
26
-2.5%
2.2%
39
41
CAGR in subsector
29
29
12
12
12
7
7.2%
11
6
11
11
6
12
12
6
12
12
13
39
39
40
40
40
40
41
2000
01
02
03
04
05
2006
14
15
9.5%
4.5%
Detailed statistics at the subsector level only appear in the Danish National Accounts until
2006. In the period from 2000 to 2006, employment was fairly constant in the retail sector
at around 160,000 FTEs (275 million hours). However, employment in grocery retail fell
while employment in pharmacies, clothes, and other retail increased. GVA grew by 3.3
percent per annum in the period, primarily driven by clothes and other retail (Exhibit 60).
116
The largest retail players in Denmark are in the grocery subsector, which is also the largest
and most concentrated. Dansk Supermarked and Coop are the two largest players in
grocery. H&M and Bestseller are the two largest players in clothes; Magasin du Nord is a
major player in department stores; Matas is a major player in pharmacies; and Harald
Nyborg, Top-Toy, and Jysk are the largest players in other retail (Exhibit 61).
Examples of successful companies that have expanded internationally include:
Jysk is a retailer of bedroom, bathroom, and living room fittings. Jysk expanded
quickly and has become a market leader in Danish furniture retailing. The Jysk
concept is built around low prices, limited services, and a narrow product range. Jysk
employs 15,000 people with over 1,700 stores in 34 countries.
Upstream of retail, the value chain consists of two other large sectors, which contribute
significantly to the input costs of the retail sector 77 :
1.
Food processing supplies the grocery retail sector. It consists primarily of abattoirs,
dairies, breweries, and bakeries. Food processing makes up 2.5 percent of the
countrys GVA and 2.2 percent of employment.
2.
Wholesale supplies the entire retail sector with a broad range of mostly non-food
goods for resale. The sector makes up 6.6 percent of GVA and 6.4 percent of
employment.
117
EXHIBIT 61
81,390
Grocery
25%
Clothes
14%
Department
Stores
Pharmacies
and Drugstores
Other
14%
5%
42%
Company name
Coop Danmark
Dansk Supermarked2
Dagrofa
SuperBest
Reitan
H&M
Bestseller
PWT (Tjeksperten)
Axel Kaufmann
Babysam
Total turnover
DKK millions, 2009 (2008)
51,978
41,770
16,358
13,648
5,152
2,110
n/a
501
499
479
Magasin du Nord1
2,142
Matas A/S1
2,068
Harald Nyborg
Top-Toy
Jysk
IKEA
3,177
2,924
2,893
2,462
1 2008 data
2 Many activities of Dansk Supermarked could be defined under Department Stores
SOURCE: Statistics Denmark; Planet Retail; Bureau van Dijk
Denmark has some of the highest consumer prices in the world and the highest food and
beverage price index in the EU (Exhibit 65). With 39 percent of household spending being
in retail, the sector is the most significant driver of consumer price levels and the countrys
overall economic performance. Within retail, grocery takes the biggest share with 11
percent of household spending. 78
In this chapter, focus is on grocery retail as it is the largest sector in terms of employment
and has considerable potential to improve productivity and price levels.
78 Eurostat statistics
118
at 2.9 percent per year, but has since lost most of this gain. Over the 10 years, from 2000
to 2009, productivity growth averaged just 0.7 percent per annum (Exhibit 62).
EXHIBIT 62
x%
157
144
142
143
145
141
149
157
160
155
178
191
178
189
205
251
280
250
Clothes
+7% p.a.
Total retail sector
15
127
0,7% p.a.
150 148 150 154 160
184
173 181
169 160
Department stores
+6% p.a.
12
148
142
149
Pharmacies
2000 01
02
03
04
05
06
07
08 2009
153
+4% p.a.
200
196
149
148
152
154
154
166
177
2000
01
02
03
04
05
06
195
Other
41
164
210
+3% p.a.
1 Data for the retail sector as a whole is available until 2009, but only until 2006 for sub-sectors
SOURCE: Statistics Denmark; McKinsey
In international terms, the productivity of the Danish retail sector is about average.
However, the gap with Belgium, the most productive country benchmarked in terms of
PPP-adjusted GVA per hour, is 21percent, countries like Finland and Sweden are moving
further ahead and the UK is catching up. Furthermore, the figures overstate some of
Denmarks productivity performance because of the way market barriers artificially inflate
productivity. In the Danish pharmacy subsector, for example, tight regulation constrains
competition and boosts profits (chapter 6 provides an analysis of the pharmacy sector).
119
EXHIBIT 63
Share of total
employment
Productivity growth
Percent CAGR, 20002007, PPP adjusted, 2000 prices
Catching up
Shooting ahead
5
5.8
Sweden
4
6.1
8.6
Finland
United Kingdom
2
1
Netherlands
7.6
6.5
Denmark
6.2
7.5
Belgium
Germany
-1
Staying behind
Falling behind
-2
115 120 125 130 135 140 145 150 155 160 165 170 175 180 185 190 195 200 205
Productivity level
GVA per hour, DKK, 2007, PPP adjusted, 2000 prices
SOURCE: EU KLEMS, Statistics Denmark; McKinsey
Meanwhile, the share of the Danish workforce employed in retail (6.5 percent), is larger
than in countries with higher retail productivity, such as Belgium and Sweden where the
figures are 6.2 percent and 5.8 percent respectively (Exhibit 63).
Grocery performance has been relatively weak compared to the rest of the retail sector. In
this subsector productivity grew by just 0.4 percent per annum between 2000 and 2006,
going from the second most productive subsector in retail trade in 2000 with a GVA per
hour of DKK 157 to the least productive in 2006 with GVA of DKK 160 per hour (Exhibit
64).
In terms of GVA per hour, Danish grocery is on average at par with its peers 79 ; however,
the best performing countries such as Sweden, Finland, and Belgium are 10-19 percent
ahead (Exhibit 64).
79 Peer countries include Sweden, Finland, The Netherlands, Belgium, Germany, France, and the UK
120
EXHIBIT 64
Denmark
165
151
149
140
112
102
BE
SE
DE
DK
FR
NL
UK
170
169
167
164
153
151
134
124
BE
NL
SE
DK
FR
FI
UK
DE
FI
Clothes
Total retail sector
186
170
169
166
156
149
146
125
BE
FI
SE
DK
NL
FR
DE
Department stores
170
148
144
143
143
141
140
120
SE
FR
DK
UK
DE
FI
BE
NL
Pharmacies
237
218
213
206
186
174
164
162
FI
NL
FR
DK
SE
UK
DE
201
195
188
172
172
144
142
140
BE
NL
DK
SE
FI
DE
FR
UK
UK
BE
Other
1 Estimates for Denmark in grocery and department stores subsectors are based on extrapolation of 20002004 data. Data on hours worked in the
sector is taken from the 2004 Eurostat Labour Cost Survey. EU KLEMS data is applied for total retail sector, and Eurostat data is used to make the split
on subsectors
SOURCE: EU KLEMS, Eurostat; McKinsey analysis
80 Sample of pofit and loss statements from various retailers across Northern Europe
121
EXHIBIT 65
VAT
Net price
139
120
115
111
110
104
98
97
28
14
11
104
DK
105
95
BE
FI
-30%
1
97
103
DE
FR
11
13
90
89
84
SE
NE
UK
EXHIBIT 66
Denmark
Net price level index of food and beverages, 100=EU27 gross prices, 2009
Profit per basket
Index, 2009
7.7 7.4
6.4 5.7
+
DE BE NE
Net index price per basket
Index, 2009
105 104 103
97
95
90
89
FI
FI
21.3 20.0
FR UK DK SE
84
BE DK FR DE
+
DK DE SE FR UK
SE NE UK
FI
BE NE
SE FR BE DK
FI
11.7
9.1
DE UK NE
0.7
0.6
0.5 0.5
0.4 0.4 0.4
71
NE UK DE DK
DK FR BE
FI
14.4
FI
BE FR SE
DE SE NE UK
1 Salaries per basket is approximated using the ratio of total grocery retail industry personnel cost as a share of total grocery retail industry turnover across
European countries in 2007 (2004 for DK)
2 Price less salaries and profits
SOURCE: Eurostat; McKinsey analysis
122
Besides, VAT and tariffs input costs are the biggest factor in price comparisons with that of
Sweden, France, and Belgium all have lower prices and higher retail productivity as
measured by GVA per hour.
EXHIBIT 67
In scope
DK compared to SE
Danish
price index
Profits
Comparison
price index
DK compared to UK
139
139
139
23
18
DK compared to NL
18
19
15
23
104
0
98
-25%
97
-29%
-30%
Danish grocery price levels are 39 percent above the average for EU-27 (Exhibit 65).
The gap between Danish and Swedish grocery retail productivity is 10 percent
measured in GVA per hour (Exhibit 64) and 21 percent measured in hours per
basket (Exhibit 66).
123
81 For more information on this work, visit the McKinsey Global Institute website
(http://www.mckinsey.com/mgi/rp/CSProductivity/index.asp)
124
1.
2.
3.
4.
5.
125
EXHIBIT 68
Danish performance
n/a
Superstore
1,245
Supermarket
1,280
Discounter
1,751
1,569
3,099
1,915
Convenience
1,484
Weighted
average = 1,485
1,472
Weighted
average = 1,940
Discounters, for example, are the most productive grocery retail subsector and are twice as
productive as supermarkets per FTE (Exhibit 68). This is primarily because they tend to
stock a tightly controlled range of products, employ a no-frills approach to store
presentation and put less of a premium than other retailers on the level of service. The
business model keeps labor to a minimum and maximizes stock turn. Discounters,
however, only appeal to a specific and limited consumer segment, though their 29 percent
share of total grocery retail revenue in Denmark (Exhibit 68) is the fourth largest share in
Europe: Across the EU, only Germany, Austria and Poland have larger discount segments
(44, 35 and 32 percent respectively of total grocery sector revenue). 83
In the full range category (supermarkets, superstores and hypermarkets), size is a primary
driver of efficiency with the large hypermarket format being the most productive in terms of
output per employee. This format typically offers a broader product range than discounters
and leverages scale in the supply chain and store operations to compensate for lower turn
per stock keeping unit. Supermarkets, and to a lesser extent, superstores, cannot reach
the same scale efficiencies and productivity levels. They offer a similar product range, but
126
the lower customer throughput results in more complexity in the supply chain and lower
utilization of labor.
Convenience stores are small and typically less productive than any of the larger formats
as their value proposition is based on easy access to a limited selection of essentials
products outside ordinary opening hours, rather than low price or one- stop shopping.
Format performance in Denmark follows a roughly similar pattern to performance in bestpractice countries. Across the board, though, productivity levels in Denmark are on
average 30 percent below European best practice (Exhibit 68).
Scale of grocery stores in Denmark
A large part of the reason for the lower productivity levels is that Danish stores operate at a
much smaller scale than in any other peer country analyzed. Denmark has the highest
number of grocery outlets per capita among peers (and rest of Western Europe) and very
low average Purchasing Power Parity (PPP)-adjusted sales per store relative to other
countries (Exhibit 69). Many small subscale stores drives up costs in the sector (more
overhead staff, more complex supply chain and in-store logistics, etc.) and lowers
productivity. Hence there appears to be a significant potential in decreasing the number of
stores while increasing their average size. For example, reaching the level of scale of
Sweden (close to average of peer group) would mean reducing number of stores by almost
40 percent.
EXHIBIT 69
DK
DE
0.58
FI
0.57
DE
0.38
0.35
SE
36.4
FI
38.4
BE
0.25
BE
FR
0.24
NE
NE
UK
0.22
0.11
33.0
DK
SE
FR
UK
Denmark
41.8
48.2
53.1
73.7
134.9
1 The grocery retail segment include non-specialized stores e.g., hypermarkets, supermarkets and discounters, but excludes specialized grocery stores,
e.g., green grocers, butchers and bakeries as well as neighborhood stores e.g., 7-Eleven and Statoil
SOURCE: Planet retail; Eurostat; McKinsey analysis
127
Looking closer at the mix of store formats in the Danish grocery retail sector further
confirms the observation of a sector operating at subscale. The international comparison of
format performance clearly shows that larger formats like hypermarkets and superstores
are more productive than smaller formats like supermarkets and convenience stores. But in
Denmark, the format mix is skewed towards the less productive formats. In comparable
countries, outlets larger than 2,500 sq.m. (hypermarkets and superstores) represent
roughly 50 percent of total grocery retail sales whereas in Denmark they represent only 30
percent of the subsectors total revenue (Exhibit 70).
EXHIBIT 70
Share of outlets
Share of revenues
15
38
32
35
Supermarkets
Discounters
Convenience
US
19
5
3
EU peer
group1
34
37
40
43
16
13
EU peer
group1
DK
52
29
6
0.5
6
32
52
Superstores
23
41
Hypermarkets
DK
US
1 Peer group consists of Sweden, Finland, Germany, Belgium, Netherlands, UK, France
SOURCE: Planet Retail; McKinsey analysis
128
There is a spill over effect to other formats: The price drop of 2,7 percent found in
cities with hypermarkets was not isolated to the hypermarkets themselves, but
found throughout retail stores, indicating a spill-over effect from the hypermarkets
pushing competitor formats to charge lower prices.
Study By BIPE for E. Leclerc of price levels in the 209 largest cities in France representing 29 percent of the population,
E.Leclerc communique de presse , 4 juin 2008
Entrance of more hypermarkets can thus increase productivity directly (as they are more
productive), but in addition, entrance of more productive hypermarket formats seems key
to unlocking the productivity potential observed for other formats.
A helpful guiding example of what it concretely could mean for Denmark comes from
simulating a change in format mix to that of more productive peer countries and increasing,
within format, performance to that observed for best practice players. Such a simulation
shows that, depending on the peer country of comparison, reaching best practice would
require about 10-25 additional hypermarkets and up to 80 additional superstores, at the
expense of increasing consolidation of supermarkets and discounters (in the range of 300800 stores). Such top-down estimations should be taken with caution though and reflects a
best practice end state. In the shorter term, the establishment of 10-25 hypermarkets
would more likely lead to 100-300 fewer supermarkets/discounters.
129
EXHIBIT 71
1,485
Broader implications
Current
Potential
Calculation method
Increasing the share of large productive
formats at the expense of smaller ones
Bring Denmark in line with average of
European best practice for each format
segment
Transforming the grocery retail sector to a scale level seen in peer countries is not trivial
and requires a change both in format mix and performance within each format segments.
Observations from other countries (e.g. Walmart in the US and E.Leclerc in France) shows
that the entrance and expansion of a more efficient format itself can raise productivity in
the entire sector through increased competition.
Trend towards consolidation and emergence of larger formats
Success of large formats at the expense of smaller ones is not a new trend and not at all
unprecedented in Danish grocery retail. Since the 1950s, grocery retail has been in a
constant trend of increasing size and scale. Larger and more efficient retail stores with
increasingly broader product ranges and lower prices have gradually squeezed small and
inefficient specialty stores out of the market a development that has been driven by
increased standardization of grocery products, prolonged shelf lives, and increased
mobility of consumers with ability to travel longer distances for their grocery shopping.
Denmark participated in this development with proliferation and success of supermarkets
during the 1980s and 1990s when many smaller grocers (kbmnd) closed. In the last 20
years, the retail sector has gone through a dramatic development in other countries with
the proliferation of the highly productive hypermarket format, led by companies like
130
Walmart in the US. However, Denmark has not been able to follow this development due to
these size limitations (Exhibit 72).
EXHIBIT 72
CAGR %
5,702
-5%
-1%
Small
outlets
Medium and
large outlets
3,593
3,268
4,617
1,085
1988
-8%
2,095
-7%
+3%
1,498
+4%
1998
1,007
2,261
2008
1 Small outlets are defined as outlets with revenue less than DKK 15 million. Due to the data source the revenue threshold is measured in current prices for
1988 and 1998, while 2008 revenues are deflated to 1998 level using retail price index. In 2008 the distinction between big and small outlets is made by
calculating the average revenue per outlet for each grocery chain operating in Denmark, i.e., each grocery chain has either big or small outlets
SOURCE: Danish Ministry of Economic and Business Affairs; Planet Retail; EU KLEMS
84 This is due to a fixed handling time per customer (e.g., greeting customer, processing payment)
85 Own calculations
131
Cultural factors, including the short distances to stores and the lack of choice within them,
play a part in this. In a 2004 report on the Nordic food markets, 86 the Nordic competition
authorities found that the Nordic region had the smallest selection of groceries across
grocery retail outlets in Europe.
EXHIBIT 73
190
Visits
Denmark
>3 times
0-1 time
Norway
61
2-3 times
Sweden
48
27
12
148
42
Percent, 2004
35
37
15
43
Current
Potential
Future
15,078
Current
frontline FTEs
Potential
frontline FTEs
22
1 Visits per year estimated as simple average of visits per year for Denmark versus Sweden. Corresponding reduction in FTEs is estimated assuming
30% idle time for frontline staff and a 25% increase in handling time per customer as basket size is increased
SOURCE: ACNielsen Nordic Market Monitor 2004; McKinsey analysis
86 Nordic Food Markets a taste for competition, 2005, by the Nordic competition authorities
132
EXHIBIT 74
3.4
Productivity growth
10.1
1995
1999
Delta
4.8
5.3
1987
1995
1987
1995
1995
1999
Delta
1.9
1987
1995
3.4
1.5
1995
1999
Delta
The Danish grocery sector, however, has not fully embraced IT in its operations, in part
due to the sectors fragmentation into a large number of subscale stores. The share of
Danish retail companies with self-service checkouts, for example, is just half what it is in
comparable countries (Exhibit 75). Tesco in the UK, meanwhile, is pushing ahead with
self-scanning technology, having opened its first 100 percent self-scan Tesco store in
2009.
IT-enabled operations can significantly improve operational efficiency, but require high upfront investment. Here, the small average scale of Danish retail stores puts the country at a
disadvantage. Strongly capitalized food retail chains, in particular, those operating large
format stores, have a significant edge over smaller players.
133
EXHIBIT 75
IT investment costs
per store1
DKK thousands
Average revenues
per store2
Index 100 for Denmark
77
Peer group
2,728
38
Denmark
1,773
Share of companies with electronic price labels
Percent
718
SelfElectronic
service
price labels
check-outs
25
Peer group
100
Danish
stores
Peer
country
stores
Denmark
(Ftex)
13
Denmark could be a world leader in terms of IT-enabled grocery services, given that online
shopping is quite widespread (30 percent of Danish adults made online purchases in
2009 87 , against 13 percent in 2009 in the UK. 88 In grocery retailing, however, only 9
percent of Danish adults made an online purchase in 2009. 89 Online grocery retail is
potentially highly productive since consumers make frequent purchases and in high
volumes
compared
to
other
retail
goods.
Moving
to
e-enabled channels will be a challenge for the supply chain and will require smart delivery
solutions. Online retailers like Amazon have successfully overcome these problems in the
nonfood segment, but successful examples in fresh foods are only found in the urban
convenience segment (e.g., Franprix and Monoprix in France) where delivery distances are
short and customer density high. 90 One way to circumvent the delivery issue is the Drive
concept. In France, Auchan, ITM, Metro, Carrefour, Casino, E.Leclerc, and System are all
adding Drive sites to their stores. Shoppers place their order online and pick it up at the
back of the store at a specified time.
87 Statistics Denmark
88 IGD UK Online Grocery Retailing
89 OECD, Danmarks Statistik
90 IGD Online Mobile and Commerce Global Trends
134
EXHIBIT 76
Denmark
Average of
selected countries1
6.0
6.3
5.0
4.0
2.6
2.0
1.0
Discount stores
Top 2 company
market share
by turnover
66
79
Supermarkets
71
73
Superstores
100
84
Hypermarkets
100
90
Even across formats, competitive intensity seems limited; at least incentive to compete is
absent for the majority of grocery chains (69 percent by revenue) that are owned by the
two largest players as these players are present in all formats (Exhibit 77). Hence, it is
difficult to see how competition can increase without the entrance of international players
(or forced breakup of the large incumbents). Exposure to competition has proven highly
efficient in the US where Walmart increased the productivity of the US retail sector (see
Chapter 3 for a more detailed discussion).
135
EXHIBIT 77
Segment1
Dansk
Supermarked
Hypermarkets
Bilka (100%)
Superstores
Ftex (55%)
COOP
Kvickly (45%)
Supermarkets
Discounters
Netto (42%)
Convenience
Total
Other
31%
SuperBrugsen (34%)
Irma (6%)
SuperBest (36%)
Spar (21%)3
Other (3%)
Fakta (25%)
Rema1000 (13%)
Aldi (12%)
Lidl (5%)
Other (3%)
DagliBrugsen (98%)
Other (2%)
38%
31%
1 Grocery segments exclude specialized grocery stores, e.g., green grocers, butchers and bakeries as well as neighborhood stores e.g., 7-Eleven and Statoil
2 Market size is measured as total turnover by companies with a market share above 0.5%
3 Spar has multiple brands including Super Spar (400-2,500 sq.m.) and Kwik Spar (<400 sq.m.). In Planet Retail Spar is categorized as a supermarket
SOURCE: Planet Retail; McKinsey analysis
EXHIBIT 78
Carrefour
496
Tesco
Schwarz Group
Lidl revenue share
Percent
5.4
488
Metro Group
Schwartz Group,
Lidl
Top 10
European
grocery
retailers2
4361
3811
Aldi
3441
Rewe Group
314
Edeka
296
Auchan
Top 2
Danish
grocery
retailers
Ahold Group,
ICA
208
Casino
199
Dansk Supermarked
Coop
2000
2005
2009
56
37
2000
325
1 Total sales in grocery retail stores in EU27, US, Norway and Switzerland
2 Converted from Euro to DKK using exchange rates as of November 11, 2010
SOURCE: Planet retail, Annual reports, XE currency website, McKinsey analysis
136
70% CAGR
0.4
2005
2009
-5% CAGR
International presence is currently very low in the Danish grocery retail sector. Among top
10 European food retailers, only the two leading discount chains, Aldi and Lidl are present
in Denmark today (Exhibit 78). None of the large international non-discount players (mostly
hypermarkets) are in Denmark. This fits well with our observation that the discount
segment is much more productive compared to the other format segments in Denmark, but
also suggests that there are inherent structural barriers to competition and entry of new
players in the larger-format segments.
137
EXHIBIT 79
Share of total
employment 2007
Productivity growth
Percent CAGR, 20002007, PPP adjusted, 2000 prices
Average
14
12
10
2,6
1,4 Finland
United Kingdom
France
2
0
Ireland
2,2
Germany
2,5
1,6
2,2
1,4
2,1
Belgium
1,7
Netherlands
Sweden
Denmark
-2
-4
100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400 420 440 460 480 500 520 540
Productivity level
GVA per hour, DKK, 2007, PPP adjusted, 2000 prices
SOURCE: EU KLEMS
EXHIBIT 80
107
99
Danish
Price Index
Input costs
138
Profits
Dutch
Price Index
EXHIBIT 81
0.55
0.32
FI
NL
0.31
DE
0.22
BE
UK
0.10
0.07
SE
0.04
FR
0.04
1 The Herfindahl Hirschman index (HHI) measures the market concentration of companies within an industry by summing the squares of the percentage
market shares held by the respective firms. The HHI index ranks market consolidation on a scale from 0-1 with 1 being a monopoly
SOURCE: EU KLEMS; McKinsey analysis
139
size limitation is a significant barrier for the Danish grocery retailers. This is illustrated by
the fact that of all 32 Ftex stores built since year 2000, every single one has been at the
size limit 91 (3,000 sq.m. before 2007 and 3,500 since then).
EXHIBIT 82
5,000
Hypermarkets
Bilka
12,147
Current size
limitation
3,500
Superstores
Supermarkets
SuperBest
SuperBrugsen
Super Spar
Irma1
1,000
400
Kvickly
3,067
Ftex
2,500
2,378
1,258
1,023
605
531
Discounters
Convenience
DagliBrugsen2
400
Lidl
Rema 1000
Kiwi
Fakta
Netto
Aldi
845
604
540
519
479
454
1 Irma includes the convenience stores Irma City, effectively reducing the average store size of the company
2 DagliBrugsen includes LokalBrugsen as the latter is being phased out by 2009 onwards
SOURCE: Convenience segment based on Planet Retail data while other segments are based on Supermarkedshndbogen 2010
The inability to build new hypermarkets not only hinders expansion of a productive format,
but also removes competitive pressure in the large-format segments as entrance of new,
and potentially more efficient, players is not possible. Thus, large international players
cannot enter Denmark with efficient hypermarket formats and pressure performance of
local players. Further, many Danish hypermarkets are not located optimally close to
infrastructure and outside city centers, but new and better-located hypermarkets are not
built.
In theory, there are no barriers to entrance of international players in the supermarket
segment, Denmarks largest and least productive segment as supermarkets are below the
3,500 sq.m. limit. However, experience from other countries shows that this is a
predominantly local format that is not well suited for international expansion. Where 32
percent of the revenue of the top 10 European hypermarket chains comes from operations
140
outside the chains home markets, this is only the case for 2 percent of the revenue of the
top 10 supermarket chains (Exhibit 83). The reason is that the supermarket segment is
very mature, stores are located within cities where it is difficult to find new store locations,
the number of stores needed to reach sufficient scale in supply chain is high and finally it is
often not the most profitable format and hence not the first choice when expanding abroad.
EXHIBIT 83
Home
Abroad
Top 10 European
supermarket chains
Top 10 European
superstore chains
Top 10 European
hypermarket chains
Top 10 European
discount store chains
100% =
100% =
100% =
100% =
901
2
98
2009
Top 10 Chains:
Intermarch Super,
Mercadona, Rewe,
Super U, GB, E aktiv
markt, Albert Heijn,
Simply Market, Coop,
Conad
1,249
15
32
85
2009
Top 10 Chains:
Carrefour, Leclerc,
Tesco, Sainburys,
Kaufland, Morrisons,
Ipercoop, Esselunga,
Waitrose, MM Migros
672
68
2009
Top 10 Chains:
Auchan, Tesco Extra,
Real, Cora, Gant
Casino, Carrefour,
Globus, Sainsburys,
Alcampo, Prisma
1,014
49
51
2009
Top 10 Chains:
Lidl, Aldi, Penny, Netto,
Dia, Biedronka, Rema
1000, Leader Price, Ed,
Norma
1 Converted from local currency to DKK using exchange rates as of November 11, 2010
SOURCE: Planet retail; XE currency website; McKinsey analysis
It is, therefore, unlikely that international players would attempt to enter the Danish market
with a supermarket format and unless zoning regulation is changed to allow hypermarkets,
international entry should only be expected in the discount segments, which is exactly what
is observed. This is confirmed in an interview with a large Northern European grocery
retailer. The retailer experienced significant difficulties entering the Danish food retail
market, despite having competitive advantages in scale of procurement, efficient supply
chains, and advanced market intelligence systems.
In addition to the barriers posed by the zoning limits, the building application process itself
can be a barrier to firms, with a lack of transparency on processes across municipalities
and evidence of significant delays in the decision-making process. Even domestic retailers
rely on the expertise of developers to help them negotiate with local authorities to get
building permissions; it is conceivable that foreign companies will have far less patience
and appetite for engaging in such processes.
141
The zoning law is not only a barrier to growth in grocery retail. Elgiganten, for example, has
plans of opening 6 mega-stores of 3,000 to 6,000 sq.m. but are facing significant
challenges due to current size limitations. 92
92 Press search
93 Plan- och Bygglagen
142
Growth of large-size stores outside the city centers benefitting from a larger
customer base, cheap land, lower rents, and simplified logistics. In Stockholm,
medium-size retail stores (SEK 15-50 million in annual sales) went from a market
share above 45 percent in 1990 to 33 percent in 1997 while mega-stores (SEK >100
million in annual sales) went from 18 to 34 percent. 94 Another trend was the growth
of integrated chains benefitting from scale advantages in purchasing, supply chain,
store management, and marketing. An example is the increasing number of
specialized, category killers, e.g., IKEA that set new standards of price and
assortment.
EXHIBIT 84
Number of outlets
100
2,800
90
2,400
80
2,000
70
60
1,600
50
40
1,200
30
800
20
400
10
0
Note: In 20032004 the average size dropped due to Lidl and Netto small hard discount stores (30 and 48 respectively)
SOURCE: McKinsey Global Institute Sweden 2006
94
143
towards increased retail trade outside city centers. In Stockholm, the revenue share
of externally-located retailers expanded by 60 percent, whereas the revenue share
of retailers located in the city center only grew by percent in 1990-98. Among 28
medium-sized municipalities, the trend was even stronger. The revenue share of
externally-located retailers expanded by 85 percent compared to a decline in city
94
center retail trade of 14 percent .
The overall result of these changes was that Swedish retail had the highest productivity
growth in Europe between 1995 and 2005 and today outperforms US retail productivity by
14 percent (Exhibit 85).
EXHIBIT 85
Productivity growth
100
78
3.2
1.5
A similar trend of changing consumer pattern is seen in other countries with hypermarket
presence. In the UK, where hypermarkets have been increasing their share of consumer
spend in the last 10 years, shopping trips have decreased (Exhibit 86).
144
EXHIBIT 86
Hyper
Super
100
2
72
100
13
2.83
-5%
2.74
66
61
2.69
Convenience
Discount
23
22
21
2000
2005
2010
2000
2005
2010
Zoning regulation inhibits growth of the productive hypermarket segment. The lack of
scale relates directly to Denmarks small hypermarket segment compared to peer
countries (7 per cent by revenue compared to 15 percent for peers). Despite clear
evidence from international best practice that larger hypermarkets are up to 50
145
percent more productive than small formats current zoning legislation does not allow
the construction of hypermarkets. This is also a barrier to entry of foreign players as
these can not enter with their large and successful hypermarket format. Among top
10 European food retailers, only Aldi and Lidl are present in Denmark today, both in
the discount segment.
Potential
action
to
strengthen
productivity
and
competition
through
the
development, available infrastructure, and presence of other retail outlets are extremely
important to success of a hypermarket and, hence, also for international retail players.
Success criteria for hypermarket positioning include:
1.
2.
146
several types of shopping. The high customer flow is necessary to reach the critical
mass needed for the large formats to be efficient.
3.
Obviously, authorities can play a key role in identifying and developing these retail outlet
sites. Planning and coordinating the process at national level ensures strategic positioning
across the country. To accelerate the process, the Danish government can lead in
proactively identifying and planning for at least 10 and up to 25 suitable sites in Denmark
together with local authorities and large retail players/development companies.
To allow for sufficient scale, the permission to establish outlets at these 10-25 sites may be
tendered in groups as opposed to individually. Tendering several locations at the same
time will attract more large-scale players as they optimize their supply chain operations. An
organization like the Danish foreign investment promotion agency is expectedly well
positioned to actively market this opportunity to best-practice foreign retailers and
development companies. In addition, to further ease the expansion of local players or the
entrance of foreign, simplification and and harmonization of the building application, project
planning requirements, and hearing process on a national level could be considered. This
may increase the attractiveness for retailers to establish new modern retail stores and
catalyze the transformation process.
147
148
149
often
consisting
of
single
general
practitioner/dentist
with
some
Optimal division of labor is limited, since general practitioners and dentists are
spending
time
on
less-specialized
tasks
that
could
be
handled
by
150
General practitioners
Productivity in this sector is lower than peers, with the lowest capita per general
practitioner, at 1,299 compared to 1,408 in the UK and 1,667 in Sweden. This is driven by
the highest number of visits per capita across peers, at 7.5 in Denmark compared to 2.8 in
Sweden. Barriers are mainly regulatory in nature and include license availability, switching
costs, price setting, and limitations on ownership and scale, e.g. only authorized general
practitioners are allowed to own a practice and are limited to one. To increase scale,
optimize division of labor, and expose the sector to best practices, potential actions
include:
Pharmacies
Productivity in pharmacies is at par with peer countries, with Denmark ranked third in terms
of GVA per hour and the highest number of capita per pharmacy. The sector, however, is
quite regulated compared to peer countries.
Opticians
Denmark leads peers in productivity performance, with the highest sales per employee
across peers. Barriers in this sector include transparency of prices, e.g. it is difficult for a
customer to compare total price as elements are priced separately. Potential actions to
increase competition therefore include:
151
Exploring options for encouraging greater price transparency through, for example, a
comparison web site
EXHIBIT 87
xx FTEs (thousands)
17
8
Other health
providers1,2
11
Opticians1
13
12
209
100
Total
Dentists1
PR & marketing
21
Engineers &
architects
IT Services
24
14
General
practitioners1
16
Pharmacies1
20
Legal services
44
Real estate
agents
50
R&D services
152
Finland, UK, Netherlands, and Germany. The peer group of countries has been selected
based on geographic proximity and structural similarities. GVA per hour is used as a
measure of productivity. However, measuring and comparing GVA per hour presents
difficulties in some sectors, e.g., healthcare, lawyers, where it is difficult to define the
output unit. For this reason, GVA per hour is used only as an indication of productivity
performance. Operational productivity measures are consequently also taken into account.
The overall productivity level and recent productivity growth rates of Danish professional
services are equivalent to the average of the peer group (Exhibit 88). However, Danish
productivity in terms of GVA per hour is PPP-adjusted DKK 280, compared to 264 in
Sweden and 362 in the UK. In addition, Denmarks productivity growth has been flat in the
period 2000-07, whereas both Swedens and UKs grew 3.6 percent and 4.1 percent
respectively. The UK is recognized as having one of the least restrictive regulatory regimes
so it is significant that the UKs professional services rank highest on both productivity level
and growth (Exhibit 88). 95 It is important to emphasize, though, that additional comparisons
at the sector level are necessary to truly characterize and understand differences in
productivity.
EXHIBIT 88
Share of total
employment 2007
Productivity growth1
Percent CAGR, 20002007, PPP adjusted (2000 prices)
Average
6
5
4
6,3
Sweden2
8,2
United Kingdom
3
2
Netherlands
1
0
9,2 4,6
Finland
6,7
Denmark
-1
-2
-3
5,9 Germany
-4
100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400 420 440
Productivity level1
GVA per hour, DKK, 2007, PPP adjusted, 2000 prices
1 Professional services include IT services, legal services, auditing and bookkeeping, engineers and architects, PR & Marketing and pharmacies.
Real estate agents and GPs are excluded from the analysis due to lack of data at subsector level
2 R&D and pharmacy sector are excluded for Sweden due to lack of data
SOURCE: EU KLEMS; Eurostat
95 Productivity level and growth measured in 2007 prior to the financial crisis which may have impacted todays productivity levels.
Though professional service sectors are not directly impacted by trouble in the financial sector
153
While the overall productivity of the Danish professional services sector is at par with the
peer group average, performance varies at the sector level, in three respects:
A.
B.
C. Evidence that labor productivity increases with company size can be found in a
sample of five of the sectors
A. Labor productivity within professional services in Denmark, measured as GVA per hour,
was on average DKK 234 in 2006. However, productivity by sector varies from DKK 367 for
legal services down to DKK 57 for real estate agents. It is important to note that GVA per
hour provides an indication of productivity, but not a full explanation (Exhibit 89).
The majority of employment within the professional services is distributed across
IT services (above average productivity), engineers and architects (average productivity)
and general practitioners, dentists, and other (below average productivity).
EXHIBIT 89
367
308
280
262
234
227
234
195
145
57
0%
Legal
services
10%
20%
30%
IT Services
Pharmacies1
PR & marketing
40%
50%
60%
Engineers &
architects
70%
80%
90%
100%
Doctors,
R&D
Real estate
dentists
Services agents3
and other2
Share of employment
(hours worked)
B. Comparing labor productivity across peers, Danish productivity is below that of bestperforming peer countries. Comparison shows that Denmark consistently ranks below the
UK and Germany for most sectors. For example, Danish productivity is 14 to 22 percent
154
below that of the UK in several large sectors, such as IT services, legal services, auditing &
bookkeeping, and engineers and architects (Exhibit 90).
EXHIBIT 90
IT Services
122
102
129
104
100
31
95
77
68
67
DE
DK
SE
NL
FI
R&D Services
238
192
152
135
100
n/a
NL
FI
DK
SE
23
DE
DK
SE
FI
NL
6
3
SOURCE: Eurostat; EU KLEMS
DE
PR & marketing
298
166
UK
DE
DK
SE
FI
NL
87
80
70
DK
SE
NL
FI
157
142
130
100
NL
FI
DE
DK
100
94
91
73
DK
DE
SE
UK
UK
DE
75
Denmark
81
UK
100
UK
x%
SE
Pharmacies1
129
117
FI
NL
C. A positive relationship exists between scale and productivity through, e.g. lower costs
when sharing services such as scheduling and billing, finances, facilities, and marketing.
When analyzing average labor productivity for the peer group across five of the sectors,
there is evidence of scale benefits. Labor productivity increases with the size of companies
within each of these five sectors (Exhibit 91).
For IT services, lawyers and accountants and engineers and architects, moving from
company size of 1-9 employees to 250 or more employees improves labor productivity by
between 33-39 percent. For R&D services and PR and marketing, labor productivity is
maximized at company sizes of 50-249 employees, improving labor productivity by 19-34
percent. Danish share of employment across sectors in company sizes of 250 or more
employees ranges from 22-41 percent, leaving room for labor productivity improvement.
155
EXHIBIT 91
1-9 employees
10-49 employees
50-249 employees
250 or more employees
IT Services2
Peer group
average
labor
productivity1,
2007
Index 100 =
250 or more
employees,
PPP adjusted
Danish share
of employment, 2007
Percent
R&D Services2
80
61
66
71
73
Lawyers and
accountants2
100
-39%
-20%
-34%
33
22
22
24
33
19
38
373
78
21
22
110
100
100
21
74
69
84
120
PR and
marketing2
65
60
67
89
100
Engineers and
architects
100
-40%
-35%
21
18
20
30
18
28
41
24
156
services, auditing and bookkeeping, real estate agents, and engineers and
architects. 96
EXHIBIT 92
Regulated
advisory
No authorization
requirement to
practice
B2B
Authorization
requirement to
practice
B2B
Legal services
B2C
PR & Marketing
Authorization
requirement to
practice
End-customer
R&D Services
Some regulation of
conduct and entry
Healthcare
services
Payer
IT Services
End-customer
Consulting engineers
& architects
B2C
Substantial
regulation of
conduct and entry
Dentists
General practitioners
Pharmacies
Opticians
Other health providers
End-customer
with substantial
public subsidies, varying
across sectors
SOURCE: McKinsey
96 Engineers and architects are included under the category regulated advisory as they constitute a profession that is regulated in
many countries, even though it is not in Denmark
157
cases, knowledge-intensive services are offshored to lower-wage countries, e.g., India for
IT services. 97
In Denmark, the business services professions employ ~76,300 full-time equivalents
across ~11,400 companies. The largest sector is IT services, accounting for more than 66
percent of employments and 73 percent of the companies (Exhibit 93).
EXHIBIT 93
Description of sector
R&D Services
# of
enterprises,
2007
FTE/
enterprise,
2007
Regulation
IT consultancy
related to hardware
and software
IBM
CSC
SAS Institute
KMD
50,500
8,300
6.1
Limited
Marketing services
advertising
agencies and,
including
advertising space
and distribution
Aegis Media
WPP
North Media
Omnicom
13,300
2,700
4.9
Limited
LAB
Research
Agrotech
Exiqon
Santaris
12,500
400
31.3
Limited
IT Services
PR &
Marketing
Example
companies
# of
FTEs,
2007
Category performance
Danish labor productivity (GVA per hour) ranks below best peer countries for business
services across all sectors. Denmark is performing at par with peer countries within IT
services, but within both PR & Marketing and R&D services, Denmark ranks last among
peer countries in many metrics (Exhibit 94).
97 OECD 2007, Summary report of the study on globalization and innovation in the business services sector
158
EXHIBIT 94
PR & Marketing
1. GVA/hour
index to DK, 2007
1. GVA/hour
index to DK, 2007
2. Employees/
1,000 capita, 2007
3. Turnover/empl.,
EURth, 2007
1. UK
(122)
1. FI
(64%)
1. UK
(298)
1. FI
(1.5)
1. UK
(326)
2. DE
(102)
2. DK
(57%)
2. SE
(166)
2. UK
(1.5)
2. FI
(207)
3. DK
(100)
3. SE
(55%)
3. NL
(157)
3. DE
(2.6)
3. SE
(179)
4. SE
(81)
4. DE
(53%)
4. FI
(142)
4. SE
(3.3)
4. NL
(118)
5. NL
(68)
5. NL
(51%)
5. DE
(130)
5. NL
(3.6)
5. DK
(116)
6. FI
(67)
6. UK
(48%)
6. DK
(100)
6. DK
(4.5)
6. DE
(88)
R&D Services
3. Employees/
1,000 capita, 2007
1. GVA/hour
index to DK, 2007
2. Patents/1,000
researchers, 2007
3. Researchers/
R&D empl., 2007
1. DE
(5.4) 1. UK
(26%)
1. UK
(238) 1. NL
(204)
1. UK
(73%)
2. FI
(8.3) 2. FI
(25%)
2. DE
(192) 2. DE
(171)
2. FI
(69%)
3. NL
(9.3) 3. DE
(15%)
3. NL
(152) 3. SE
(148)
3. DK
(64%)
4. UK
(9.9) 4. SE
(15%)
4. FI
(135) 4. FI
(112)
4. SE
(62%)
5. DK
(10.2) 5. NL
(12%)
5. DK
(100) 5. DK
(72)
5. DE
(57%)
6. SE
(12.5) 6. DK
(10%)
6. UK
(46)
6. NL
(56%)
1 Share of employment of companies with more than 50 persons employed, 2 Share of revenue in software support and business process management
SOURCE: Eurostat; EU KLEMS; National Statistics Bureaus; Gartner Research; World Intellectual Property Organization
159
EXHIBIT 95
Denmark
Peer group1
936 -25%
830
673
579
-15%
594
-12%
-24%
704
630
493
1 - 9 employees
10 - 49 employees
50 - 249 employees
+ 250 employees
Furthermore, the structure of the sectors can impact productivity in their focus on highmargin activities. In IT services, for example, the industry in Denmark is less involved in
high-margin segments than peers. Margins vary significantly in IT services segments;
where software support and business process management have margins of ~22 percent,
IT management and hardware maintenance and support have margins of only ~4
percent. 98 Denmark generates the lowest share, 10 percent, of market revenues in highmargin segments compared to peers; the UK generates 26 percent of revenues in these
segments. This could be an indicator of a lower level of offshoring of low-margin activities
compared to peers.
Finally, exposure to best practice, usually in the form of competition, adds performance
pressure and drives improvement, e.g., through greater pressure to achieve scale. The
market for business services, however, is relatively non-concentrated. The highest
concentration ratio is within IT services, where the four largest companies account for 41
percent of the market. The concentration ratio in R&D services and PR & Marketing is 20
160
percent and 16 percent, respectively. 99 This is a symptom of small scale, rather than
strong competition.
99 Statistics Denmark
100 Gartner Research
101 Companies with more than 50 persons employed
102 The European Union, 2008 Software and IT Services in the European Union
161
Innovation among 364 IT companies, the main drivers of growth was to increase the
access to highly-skilled IT workers and lower corporate and personal income taxes. 103
International case examples
Over the past two decades, the UK economy has become increasingly focused towards
the business services sectors. 104 The UK government and organizations such as the
Confederation of British Industry (CBI) have been engaged in promoting the importance of
the business services sectors, particularly in IT services.
In 2006, the CBI started its initiative on Building a Globally Competitive IT Services
Industry. 105 This initiative focused on bringing together stakeholders to create a plan for
the IT services sector as a driver of growth and innovation in the UK economy. The
initiative set out a number of key actions:
Creating the skill base: Ensuring highly educated graduates while strengthening the
relation between business and education, e.g., through employer education.
Promoting the case for offshoring: Highlighting the positive impact of offshoring on
the UK economy.
103 The Danish Ministry of Science, Technology and Innovation, 2005 Analyse af IKT-erhvervene
104 Department of Business, Innovation and Skills, 2007, Business Services and Globalisation
105 Confederation of British Industry, 2006, Building a Globally Competitive IT Services Industry
106 Confederation of British Industry, 2008, UK Competitiveness: the role of IT services
107 Ovum, 2006, The impact of global sourcing on the UK software and IT services sector
162
requirements, and attracting large-scale players drive productivity pressure and new
market standards that influence the entire industry.
EXHIBIT 96
Legal
services
Auditing and
book-keeping
Real estate
agents
Engineer and
architects
Example
Description of sector companies
Individual and
Bech-Bruun
corporate legal
Dragsted
Kromann
services
Reumert
Gorrissen
Plesner
# of
# of
enterFTEs, prises,
2007
2007
10,000
1,600
FTE/
enterprise,
Regulation
2007
6.3 Restrictive entry
and conduct
conditions, e.g.,
most legal
exercises are
required to be
undertaken by an
attorney at law
4,400
4.3 Limited restrictions
on entry and
conduct
Accounting and
reporting
Tax consultancy
Auditing
Deloitte
PWC
KPMG
Ernst &
Young
18,700
EDC
Home
Nybolig
Estate
16,200
4,800
3.4
Limited regulation
of entry and
conduct
Architectural and
engineering
activities
Technical testing
and analysis
COWI
Rambll
Carl Bro
Atkins
39,700
6,300
6.3
Limited regulation,
e.g., no tenders are
exclusively
reserved for
architects and
engineers
SOURCE: Statistics Denmark; OECD Product Market Regulation; IHS Report: Economic impact of regulation in the field of
liberal professions in different Member States; Bureau van Djik; McKinsey
163
In a report for the EU Commission, 109 Denmark is recognized as having one of the least
restrictive regulatory regimes within the regulated advisory professions 110 compared to
other European countries. And according to the OECD 111 overall regulatory conditions in
Denmark are on par with peer countries (Exhibit 97).
EXHIBIT 97
Conduct regulation
Entry regulation
2.9
1.2
1.2
Denmark1
Netherlands
1.0
0.6
Sweden
0.7
United Kingdom
Finland
Germany
1 According to the Danish Competition and Consumer Authority the barriers for Denmark are overestimated
SOURCE: OECD Product Market Regulation
Within the sectors, Denmark has the least restrictive regulation in auditing and bookkeeping compared to the peer countries and across countries, there is limited regulation for
engineers and architects. However, there is further potential for deregulation in legal
services, where regulatory conditions in Denmark are more restrictive than in Sweden,
Finland, and UK (Exhibit 98).
109 Institut fr Hhere Studien (IHS), 2003, Economic impact of regulation in the field of liberal professions in different Member States,
Study for the European Commission, DG Competition
110 Real estate has been excluded in the IHS study for the European Commission
111 Conway, P. and G. Nicoletti (2006), Product market regulation in non-manufacturing sectors: measurement and highlights, OECD
Economics Department Working Paper No. 530
164
EXHIBIT 98
Entry regulation
Conduct regulation
Country
Legal services
Sweden
Engineers and
architects
Auditing and
book-keeping
1.8
United Kingdom
0.3
Finland
0.3
2.6
0
0.7
2.2
Denmark
3.31
Netherlands
2.9
Germany
1.9
3.6
1.8
1.5
0
3.1
2.4
2.1
0.6
1 According to the Danish Competition and Consumer Authority the barriers for Legal services in Denmark are overestimated
SOURCE: OECD Product Market Regulation
Category performance
Danish productivity in the regulated advisory sector is at par with average of peer
countries. However, compared to the best of the peer countries, Germany and the UK,
productivity in Denmark is lagging behind (Exhibit 99 & 100).
165
EXHIBIT 99
2. Enterprise/lawyer1,
2006
3. Salary/lawyer2,
2008
4. Employees/
Law firm, 2008
1. UK
(116)
1. SE
(55)
1. UK
(36,900)
1. UK
(11)
2. DE
(101)
2. DK
(38)
2. DK
(47,800)
2. NL
(6)
3. DK
(100)
3. NL
(33)
3. SE
(49,900)
3. DK
(6)
4. SE
(90)
4. FI
(14)
4. FI
(53,000)
5. FI
(77)
5. UK
(12)
5. NL
(61,750)
6. NL
(62)
6. DE
(12)
1. GVA/hour index
to DK, 2007
3. Salary/
accountant3, 2009
1. UK
(116)
1. DE
(130)
1.
DK
(40,400)
2. DE
(101)
2. SE
(130)
2.
FI
(46,000)
3. DK
(100)
3. NL
(81)
3.
UK
(46,900)
4. SE
(90)
4. FI
(66)
4.
SE
(47,800)
5. FI
(77)
5. DK
(41)
5.
DE
(61,000)
6. NL
(62)
6. UK
(31)
6.
NL
(61,900)
1 Rank does not change if we compare number of professionals to capita rather than enterprises;
2 Personnel cost used as proxy for salary, Euros, PPP adjusted based on GDP
3 Euros, PPP adjusted based on GDP
SOURCE: Eurostat; EU KLEMS; National Statistics Bureaus; ERA Europe Market Survey; Global Insight
EXHIBIT 100
4. Average %
commission, 2006
3. Agent/10,000
capita, 2006
2. Trades/10,000
capita, 2006
1. UK
(42)
1. UK
(188)
1. NL
(3.8)
1.
UK
(1.5)
2. NL
(35)
2. DK
(184)
2. UK
(4.5)
2.
NL
(1.6)
3. SE
(25)
3. SE
(165)
3. SE
(6.5)
3.
SE
(2.8)
4. DK
(18)
4. NL
(134)
4. DE
(6.7)
4.
DK
(3.0)
5. DE
(9)
5. DE
(62)
5. DK
(10.1)
5.
DE
(5.3)
2. Employees/1,000
capita, 2007
3. Sales/employee,
EUR thousands 2007
4. Salary1/employee,
2007
1.
UK
(114)
1.
DE
(5.3)
1.
DK
(179)
1.
DE
(26,200)
2.
DE
(104)
2.
FI
(7.0)
2.
UK
(150)
2.
SE
(30,700)
3.
DK
(100)
3.
UK
(7.3)
3.
FI
(123)
3.
FI
(31,900)
4.
SE
(86)
4.
NL
(7.5)
4.
SE
(121)
4.
NL
(32,500)
5.
FI
(80)
5.
DK
(8.2)
5.
NL
(117)
5.
DK
(37,600)
6.
NL
(70)
6.
SE
(9.2)
6.
DE
(95)
6.
UK
(46,100)
166
can
be
delegated
to
lower-cost
labor
within
the
firm,
or
can
be
167
EXHIBIT 101
International player
Domestic player
19%
Engineer &
architects
4
35%
Auditing &
book-keeping
Legal services
Real estate
agents
25%
86%
43%
23%
8%
17%
8%
6%
12%
2
2
3%
1%
22%
9%
47%
22%
11%
4
20%
17%
3%
38%
23%
n/a
X% CR41 index
168
According to the Danish Administration of Justice Act, attorneys at law (Advokat) have
the exclusive right of audience before the court. 113 The exclusivity ensures that an
independent professional with expert knowledge of the legal system provides legal
assistance. However, the right of exclusivity is a barrier to competition in some instances,
e.g., non-lawyer professions such as collection agencies 114 or tax advisors cannot exercise
their profession in court. These non-lawyer professions with expert knowledge within their
specified areas are restricted from representing their clients in court, and therefore, have to
hand over the case to an attorney at law. In 2007, the law was changed to allow others to
handle some legal representation, but this is limited to only small claims collections with a
value under DKK 50,000. 115
Persons from within the EU can operate under their EU home-country authorization, but
not as an attorney at law. Admission to the bar as an attorney at law is determined by the
Ministry of Justice and typically requires previous legal work in Denmark or completion of a
probationary period. Lawyers from outside the EU must obtain a Danish law degree to
practice law in Denmark.
Only attorneys at law can own a law practice, though employees have, since 2007, been
allowed to own up to 10 percent of a firm. In addition, regulation of conduct restricts
attorneys at law to engage in multidisciplinary partnerships, e.g., cooperation between
accountants and attorneys at law. The premise for this regulation is that it ensures the
independence of the attorneys at law, and thus avoids conflicts of interest. There are
cases, however, of companies that are not law firms but wish to offer legal services, such
as KPMG offering advice in tax law, corporate law, or employment law. In fact, a report for
The Danish Bar and Law Society indicates that accountants undertake nearly all general
tax advisory and around 65 percent of the tax-complaint cases, but zero percent of the
cases in court, given that this is exclusively reserved for attorneys at law. Furthermore, the
report indicates that the cost per hour of tax advisory services is 25 percent lower for
accountants compared to attorneys at law. 116
International case examples
Several international examples of less restrictive regulation in legal services exist.
In Sweden and Finland, there are no requirements that only attorneys at law are allowed to
provide legal services or represent clients in court, i.e., there are no exclusivity restrictions
113 According to the Danish Administration of Justice Act, the plaintiff and/or the defendant are entitled to plead before the court without
representation from an attorney at law
114 One exception is that collection agencies are allowed to represent clients in cases regarding claims of up to DKK 50,000
115 DJF. Advokaters virksomhed, 2008
116 Copenhagen Economics, 2005, Advokatbranchen Konkurrenceforhold og liberalisering
169
for attorneys at law in Sweden. 117 This means that non-lawyer professions like tax advisors
and collection agencies are free to represent their clients in court.
In the UK, deregulation lifted the exclusivity rights for barristers and solicitors in the 1990s,
e.g., in relation to conveyance services where authorized practitioners are now allowed to
operate. In 2001, the professional bodies identified and eased restrictions by giving access
to professionals and allowing comparative advertising. Currently, the UK is further
deregulating the market with the Legal Services Act of 2007, e.g., allowing for cooperation
between attorneys at law and non-lawyers (Exhibit 102), and promoting the use of
mediation and arbitration as a more time-effective and cost-effective way to resolving legal
matters. 118
EXHIBIT 102
2001
Competition in professions
Professional bodies across
the sector where to identify
restrictions on competition
and promptly remove these
unless they could be
justified as benefitting the
consumers
The following major conduct
restrictions were lifted,
Payment of referral fees
Direct access to the
professional, previously
through a solicitor
Cold calling (except for
consumers)
Comparative advertising
20072012
As mentioned previously, on average UK law firms are twice the size of the Danish, which
impacts productivity as the division of labor varies with firm size. In a sample of four largeto medium-sized law firms, the larger firms appear to utilize more legal employees
(attorneys or assistant attorneys) per partner, compared to smaller firms, in which legal
117 European Commission, European Judicial Network, Legal professions - General information
118 Expert interview
170
employees are leveraged to a lesser extent. Exhibit 103 illustrates the division of labor by
firm size the very large firm has about 4.3 legal employees per partner, compared to the
medium firms with an average of 1.3 legal employees per partner. This implies that the
partners in larger law firms leverage lower-cost labor to a greater extent than mid-sized law
firms, resulting in improved utilization of higher-cost labor.
EXHIBIT 103
Number of FTEs1
Occupation
Large
Medium
Firm B
Firm C
Firm D
Law student
10
15
Administration
27
42
33
39
Assistant
attorney at law
Attorney at law
High
Very large
Firm A
19
14
20
33
12
Partner
Total
15
~480
18
14
100
17
19
100
~330
11
33
100
~170
100
~155
This significantly impacts the Profit and Loss statement, since personnel expenses could
amount to 76 percent of total operating costs, or 58 percent of revenue, as exemplified for
one of Denmarks largest law firms (Exhibit 104).
171
EXHIBIT 104
Personnel
costs
P&L accounts
Share of revenue
Index, 2007
Operating revenue
100
46
Administration
12
8
Profits
Bad debt
Depreciation
Operating margin
24
172
173
was eased from 12 employees to only include companies with more than 50
employees, such as the UK, the number of required audits would be reduced by
more than 80 percent. Revenue under audit, however, would decrease only ~30
percent. 121
Through the use of public procurement, best practice by the public sector in
tendering and purchasing could drive improvements both in public and private
spend.
In considering such deregulation, it is important to once again assess the potential tradeoff, e.g., additional risk that comes with less regulation of small-company financials. It
could, therefore, be considered whether exceptions should be made to the regulation such
that sensitive industries remain under the audit requirements, e.g., public companies.
174
124 OECD Policy Roundtable, Improving competition in real estate transactions. 2007
125 Sec. 11 para. 2 in the Swedish Real Estate Agents Act
126 Interview with Voet & Van der Velden Makelaars
127 OECD Policy Roundtable, Improving competition in real estate transactions. 2007
128 Press clippings
129 Statistics Netherlands
175
Promotion of alternative fee structures in the Danish market could enable a more
competitive real estate agent sector, e.g., through increasing share of do-it-yourself
packages or unbundled services. Such alternative fee structures are emerging, but
could be promoted further.
Reducing the exclusivity period for sales of property, e.g., to a three-month period
similar to Sweden, could be considered. This would decrease customer switching
costs while enforcing greater competition among real estate agents.
176
Using more simple construction of residential and office buildings and more
standardized designs. For example, this could be driven through requirements for
more standardized construction in procurement of public facilities.
133 Also including Other health providers such as home nurses, psychologists, specialist doctors, physiotherapists, chiropractors, etc.;
Statistics Denmark, ERH17X: Arbejdssteder, job, fuldtidsbeskftigede og lnsum efter erhverv
177
EXHIBIT 105
# of
enterprises,
2007
FTE/
enterprise,
2007
Regulation
Dentists licensed
for private practice
in dentistry/
orthodontics
Individual
dentists
practice
12,7091
(4,9932
dentists)
2,500
5.1
High conduct
regulation (price,
scale)
Individual
GPs
practice
4,8471
(3,6553
doctors)
2,163
2.2
Dentists
General
Practitioners
# of
FTEs,
2007
Pharmacies
Opticians
Prescription and
over-the-counter
drugs
Retail sale of
optical goods and
services (i.e. eye
exams)
Kongelig Hof
Apotek
Apoteket
Trianglen
4,6811
Synoptik
Profil Optik
Louis
Nielsen
Thiele
2,7401
318
14.7
641
4.3
High entry
regulation
(licensing)
High conduct
regulation (price,
scale)
Low entry
regulation
No conduct
regulation
1 Full time equivalents from ERHX table in Statistics Denmark; 2 2007 projection from Tandplejeprognosen 2010; 3 2007 data from PLO
SOURCE: Statistics Denmark; OECD Health Data; Tandlgeforeningen; PLO, Danish Ministry of Interior and Health; McKinsey
Category performance
OECD data has been used to compare performance in healthcare services across
countries, as this is the best international data set available for such comparisons.
However, the data may reflect differences in data registration methods, which should be
considered when interpreting the data. Sector specific uncertainties are discussed in the
relevant sections below.
Productivity in healthcare services trails best of peers in general practitioners and dental
care. For example, general practitioners serve fewer patients, with a low capita per general
practitioner compared to peer countries. Dentists have the lowest number of visits per
dentist compared to peers (Exhibit 106).
Productivity in pharmacies and opticians is relatively high, though room for additional
improvement exists, particularly in pharmacies (Exhibit 107).
178
EXHIBIT 106
1a. Visits/capita,
2007
2. Salary2/Dentist,
EUR 2009
1. NL
(3,837)
1. NL
(1.9)
1. UK
(2,375)
1.
SE
2. DE
(1,825)
2. DE
(1.4)
2. NL
(2,019)
2.
FI
(51,200)
(51,900)
3. UK
(1,662)
3. FI
(1.3)
3. SE
(1,325)
3.
DK
(56,600)2
4. FI
(1,654)
4. SE1
(1.0)
4. DE
(1,304)
4.
UK
(79,800)
5. SE
(1,384)
5. DK
(0.9)
5. FI
(1,272)
5.
NL
(95,300)
6. DK
(1,142)
6. UK
(0.7)
6. DK
(1,269)
6.
DE
(126,000)
General practitioners
1. Visits3/GP,
2006
1a. Visits3/capita,
2006
2. Salary2/GP, EUR
2005
1b. Capita/GP,
2006
1. NL
(11,915)
1. SE
(2.8)
1. NL
(2,128)
1.
SE
(53,700)
2. DK
(9,615)
2. FI
(4.3)
2. SE
(1,667)
2.
FI
(56,200)
3. UK
(7,183)
3. UK
(5.1)
3. UK
(1,408)
3.
NL
(84,700)
4. FI
(5,890)
4. NL
(5.6)
4. FI
(1,370)
4.
DK
(87,200)2
5. DE
(5,034)
5. DE
(7.4)
5. DK
(1,299)
5.
DE
(90,000)
6. SE
(4,667)
6. DK
(7.5)
6. DE
(680)
6.
UK
(134,500)
1 DK numbers from 2004, FI numbers from 2006, SE numbers from 2009 and from National Social Insurance Agency
2 PPP adjusted. Non PPP adjusted Danish salary level: General practitioner = EUR 122,000, Dentist = EUR 77,000
3 Includes all visits at the practitioners office and the practitioners visits to patients in institutional settings and in the home of the patients. DK 2004-data
SOURCE: Eurostat; National Statistics Bureaus; WHO; OECD Health Data; BMC Research; Swedish National Social Insurance Agency
EXHIBIT 107
2. Capita/pharmacy,
2007
3. Prescriptions/
pharmacy, 2007
1.
FI
(129)
1.
DK
(11,863)
1.
DK
(120,652)
1.
UK
(88)
2.
NL
(117)
2.
SE
(10,762)
2.
UK
(68,647)
2.
SE
(92)
3.
DK
(100)
3.
NL
(6,826)
3.
NL
(61,523)
3.
DK
(96)
4.
DE
(94)
4.
FI
(6,611)
4.
FI
(57,000)
4.
FI
(97)
5.
SE
(91)
5.
UK
(5,256)
5.
SE
(49,412)
5.
NL
(103)
6.
UK
(73)
6.
DE
(3,826)
6.
DE
(27,628)
6.
DE
(107)
Opticians
1. Sales/employee,
EUR thousands 2010
1b. Emp/100,000
capita, 2009
1a. Sales/
capita, 2009
2. Capita/store,
2009
1.
DK
(69.9)
1.
DK
(38.8)
1.
DK
(39.9)
1. FI
(11,404)
2.
SE
(60.4)
2.
SE
(35.4)
2.
SE
(40.2)
2. SE
(10,010)
3.
FI
(59.5)
3.
FI
(33.8)
3.
FI
(40.2)
3. DK
(8,628)
4.
NL
(57.8)
4.
NL
(32.3)
4.
NL
(40.5)
4. UK
(8,409)
5.
UK
(56.1)
5.
UK
(31.4)
5.
UK
(40.8)
5. NL
(7,864)
6.
DE
(51.9)
6.
DE
(29.3)
6.
DE
(42.2)
6. DE
(6,880)
1 Number of pharmacies include: 320 community pharmacies, 140 pharmacy shops (apoteksudsalg)
SOURCE: Eurostat; EU KLEMS; National Statistics Bureaus; WHO; OECD Health Data; national pharmaceutical
associations; Global Insight; BMC Research; Barnes Report: Worldwide Optical Goods Stores Industry
179
6.4.2 Dentists
Productivity performance
When looking at visits per dentist, Danish dentists rank last among peer countries, at 1,142
visits per dentist, driven by the second-lowest number of visits per capita at 0.9 and below
average capita per dentist at 1,269. This is based on all dentists, both public and private,
and visits by patients of all ages. Salary levels are on par with peer countries (Exhibit 106).
180
Barriers to productivity
To become a dentist in Denmark, foreigners from within the EU and Nordics are required to
apply for recognition of qualifications 136 , while those coming from outside the EU or
Nordics are assessed on a case-by-case basis and must pass a language test. 137
Only authorized dentists are allowed to own their own practices and are limited to two
practices. They are, however, allowed to open a second, satellite clinic under each license,
and can apply for permission for more than two addresses, as long as they regularly work
at all locations 138 . A holding company wholly owned by dentists may combine their licenses
to operate multiple locations (i.e., up to two per license held jointly in the holding company).
While the government subsidizes certain treatments, the customer pays for the remaining
bill directly. Patient prices for many services are fixed, rather than having a maximum
ceiling, further inhibiting competition. For those services where price is not fixed, individual
dentists pricing is available on the sundhed.dk web site.
In addition, industry norms dictate limited use of dental hygienists, who can provide a more
effective division of labor. About half of all dental clinics in Denmark employ a dental
hygienist, where almost all clinics in Sweden, for example, employ hygienists. 139
International case examples
The dental care industry in Sweden, with its reputation for low prices and high quality,
exhibits more productive industry norms and is significantly less regulated than dental care
in Denmark, with no ownership restrictions and free pricing.
Task allocation appears to be an area in which Sweden is closer to best practice than
Denmark in terms of industry norms. Dental hygienists, for example, provide a lower cost
source of labor for many of the treatments currently performed by dentists, including all
preventative care, cleanings, and gum treatments. Academic literature has documented
the positive cost efficiencies from increasing the use of hygienists in Sweden, with a
benefit-to-cost ratio of 1.48 to 1 and no loss in quality. 140 With only one hygienist for every
2.8 dentists 141 ; however, Denmark uses these lower-cost resources less than Sweden,
181
where we see one hygienist for every two dentists. 142 The use of hygienists is even more
pronounced in the US, with a ratio of about one hygienist per dentist. 143
Looking closer at the major activities performed in dental clinics, a clear potential for
improvement exists particularly in X-rays and diagnostic tests, patient education,
examinations, and cleaning and gum treatments (Exhibit 108). Shifting more activities to
lower-cost labor in these categories frees up time for the dentist to focus on providing
higher-value-add treatments to more patients. However, only about half of all clinics
employ hygienists at all 144 , and many of those that do, have not fully transferred
responsibilities to the hygienists. This is evident from the average division of labor in dental
clinics (Exhibit 108).
EXHIBIT 108
INDICATIVE
Percent
Resource use
Activity
Share of
total time
15
20
3
Patient education
Examination
15
25
2
15
Dentists
Hygienists
Assistants
DK
DK
DK
SE
SE
SE
15
20
20
85
60
10
50
90
50
25
10
25
30
50
60
50
10
30
50
20
40
70
60
30
40 assist1 assist1
70
20
30
50 assist1
30
30
20
30
60
20
100
100
01
01 assist1 assist1
40
1 Indicates activities which the resource is legally not allowed to perform (in whole or in part)
SOURCE: Clinic interviews
182
183
in materials and equipment through increased purchase size, real productivity (GVA per
hour) could increase by 10-18 percent (Exhibit 109). 152
EXHIBIT 109
25
100
Productivity
index,
2009
45
Task
allocation1
SG&A labor2
Nominal
productivity
potential
Change in
input prices3
Real
productivity
potential
1 Increasing use of lower cost dental hygienists on cleaning and gingivitis treatments (assume 1015% lower cost of labor)
2 Assume 1020% savings by pooling SG&A resources
3 Material and equipment price reduction of 1015%, SG&A non-labor cost reduction of 1020%
SOURCE: Tandlgebladet 2008; McKinsey analysis
While data regarding the economies of scale in large dental practices is limited, we also
see productivity benefits even from small increases in scale. Increasing the number of
dentists from one to two, for example, can raise profit margins from 2 to 5 percent. 153
Finally, we see that in Sweden, where the government recommends, but does not fix
prices, clinics are able to take advantage of task allocation and scale to compete on price.
Indeed, prices for dental care in Sweden are generally lower than Denmark for high-cost
treatments (Exhibit 110). 154
184
EXHIBIT 110
296
750
5,000
17,000
191
162
98
91
76
75
58
Standard cleaning1
Plastic filling
DK
81
71
61
71
45
Porcelain crown
Single implant
1 In Denmark, price set by government, who pays 40% of total cost. All prices here are total price, without considering government subsidies
SOURCE: Interviews; McKinsey analyses
Thus, evidence from Sweden suggests that there is merit to removing regulatory barriers
and encouraging more productive industry norms to allow for better task allocation and
greater scale and competition.
Actions to increase productivity
Danish dental care is a sector where productivity suffers from small scale, suboptimal task
allocation, and high prices in relation to neighboring peer countries. Scaling back
regulatory barriers and increasing competitive pressures in this industry could be
considered in order to stimulate productivity improvements. Potential actions could include:
185
becomes adequate, full price deregulation, allowing dentists to freely set prices,
could be considered.
Transparency in quality and pricing could be improved by expanding the scope and
ease of use of sundhed.dk, to include both service rankings and price comparisons,
similar to that used by the UKs National Health Service for general practitioners.
fees
could
be
reassessed
and
potentially
reduced
with
productivity
186
general practitioners is relatively high at EUR 87,200 after accounting for PPP 155 (Exhibit
106).
Barriers to productivity
A fixed number of practice licenses are available for general practitioners (including
geographic restrictions) and new licenses are issued only if the underlying patient
population and work levels indicate a need. Setting up a practice is usually done by buying
an existing practice, where annual practice turnover is ~5 percent. 156
There are varying requirements for foreign-trained general practitioners to obtain
authorization to practice in Denmark. While those trained in the EU are subject to a simple
review of qualifications, those trained outside the EU are subject to a probation period,
multiple vocational examinations, and a language test. In addition, standards for drug
regime and treatment plans vary across countries.
Patients can only choose a general practitioner within five kilometers of their residence, if
living in Hovedstadsomrdet, and 15 kilometers elsewhere. 157 There is no publicly
available quality of service information on which to base their choice of provider, and the
direct cost of switching general practitioners is DKK 170. 158
Only authorized general practitioners are allowed to own a practice, and it is limited to one.
The concept of group medical practice, which otherwise supports efficiency improvements
through building scale, has developed slower than expected. 159 Converting a single
practice to a group practice can trigger an additional tax burden on the physicians involved,
as the transaction would involve a sale of assets into a new corporation. However, this
financial burden can be avoided if the practitioner incorporates his single practice prior to
creating a group practice.
Treatment is free at the point of service 160 and customers are not aware of the actual price
of the service. Prices are fixed by negotiation between Organization of General
Practitioners (PLO) and the Regions Board for Wages and Tariffs. Reimbursement is
based on a majority fee-for-service model, with 25 percent of the fee based on patient list
187
and 75 percent on type of patient treatment. This model has the potential for inducing
overtreatment and unnecessary visits 161 . Marketing activities are not allowed.
International case examples
Peer countries provide examples of less regulated general practitioner regimes with
respect to entry and conduct barriers.
The UK has introduced commercial pressure to increase quality and competition among
general practitioners. While marketing is limited, the UK offers consumer reviews of
general practitioners, on issues such as access and patient involvement, on the NHS web
site. 162 Such reviews help both patients to make an informed choice of provider, and
general practitioners to improve service levels.
In addition, peer countries demonstrate lower barriers to switching, in the form of more
liberal choice of general practitioner. Germany places no limits on the choice of general
practitioner 163 , and the UK is expected to soon increase patient options. 164
When
188
freeing up general practitioners to focus on areas that require their knowledge, ultimately
serving more patients. In Sweden, for example, nurses are often the first point of contact
for a patient and a gatekeeper to the doctor. Nurses are also used for more regular tasks
involved in treating chronic illnesses, such as diabetes, or performing gynecological
exams, that are otherwise mostly performed by doctors in Denmark. In addition, district
nurses, who have further education than traditional nurses, are licensed for independent
practice and can write some prescriptions. There is also a tradition in Denmark that doctors
take phone consultations directly from their patients, often during a specified time period,
rather than having nurses route only those calls that are necessary. 170 The expanded use
of nurses in primary care is reflected in the staffing numbers where Danish general
practitioner practice employ only 0.27 nurses per doctor, public general practitioners in
Sweden employ 1.87 nurses per doctor. 171
Exhibit 111 illustrates the results of these operational differences on the breakdown of
primary care visits. In particular, nurses handle a third of all primary care visits in Sweden,
where it is primarily the general practitioner who handles visits in Denmark. 172 In addition,
general practitioners are involved in seven times more phone consultations per capita than
in Sweden.
Systems that disincentivize unnecessary patient visits, increasing productivity of the
general practitioner sector, exist in peer countries. As discussed above, Denmark
reimburses its general practitioners primarily based on a fee-for-service model (patient
visits and treatments provided). Alternative models that place greater weight on capitation
measures, however, can reduce overtreatment and unnecessary visits, which are
otherwise incentivized in a fee-for-service model. A capitation model can be further
balanced by modest pay-for-performance measures, if implemented correctly, to ensure
patient access and adequate levels of care. The UK has attempted such an approach, with
fee structure based primarily on capitation, plus some pay-for-performance and fee-forservice, and has seen modest quality improvements 173 along with a halt in the growth of
patient visits for three years following implementation. 174 The fee structure, however, has
been widely criticized for setting lax performance targets with room for manipulation 175 and
189
providing too great a bonus for general practitioners 176 ; it appears that while the concept
was sound, its implementation in the UK indicates issues regarding incentives and
outcome versus costs, which could be considered carefully.
EXHIBIT 111
2.7
0.9
0.4
Sweden
7.1
1.4
0
2.9
4.2
Denmark
Total primary
care visits2
Nurse visits
Phone
consultations
Total GP
visits
1 GPs are official gatekeepers only in 30% of Swedish counties. Correspondingly, visits to specialized doctors are higher per capita, at 1.4 compared to
0.9 in Denmark. Visits to all specialized providers, beyond doctors, however, is only slightly higher, at 2.57 in Sweden compared to 2.45 in Denmark.
2 Excludes email consultations. In addition, calculation methodology changed after 2006 (2006 number of visits per capita = 7.5)
SOURCE: Sundhedstyrelsen; Sweden Association of Counties
Finally, some peer countries have successfully introduced financial incentives to regulate
demand from the patient viewpoint. In Sweden, which exhibits the lowest visits per capita
at 2.8, a co-payment system exists that covers about 2 percent of total costs. Swedes pay
a nominal amount each time they visit a general practitioner, until their total healthcare
costs have a reached a set deductible level, after which the government subsidizes 100
percent of their treatment. 177 Experiments reducing co-payments in Sweden have led to
significant increases in patient visits, up to 30 percent. When co-payments were reinstituted, visits once again normalized at their previous level. 178 Another change case can
176 The UK system provided what was essentially a 20 percent bonus to doctors reaching targets, while best practice in the US bases
only 5-10 percent of compensation on pay-for-performance measures. McKinsey analysis
177 Frontier Center for public policy. User fees for healthcare in Sweden
178 Experiment involved elimination of fees for acute child care in Stockholm in the 1990s. Atlantic Institute for Market Study, User fees
for healthcare in Sweden, 2002
190
be observed in Germany, which in 2004 introduced a co-payment for doctor visits without a
referral, in order to reduce unnecessary visits to specialists. While total general practitioner
visits did not decrease as a result of this initiative, there was a 44 percent decrease in
patients directly contacting specialists within a year of implementation, as was intended by
the co-payment structure. It thus appears that both Sweden and Germany have been able
to use patient co-payment systems to influence demand. 179
Actions to increase productivity
As discussed above, productivity for general practitioners is inhibited by lack of
competition, small scale, and a fixed fee system. In addition, the sector exhibits the highest
number of visits per capita among our peer countries, and the lowest capita per general
practitioner. Increases in productivity therefore have the aim of increasing capita per
general practitioner, while enforcing high quality of care for the lowest possible public
spend. Productivity improvements in this sector involve changing the industry structure to
reduce fragmentation, leveraging economies of scale, and improving the division of labor.
Potential actions for achieving this include:
Initially creating performance pressure. This can be done in a number of ways, such
as reducing fees paid to providers.
Regulating demand using both provider and patient incentives. Provider fee
structures could be reassessed and patient co-payments could be explored, given
the successful use of patient co-payments in reducing unnecessary visits in Sweden
and Germany.
To ensure that patient demand does not simply increase as a result of productivity
improvements, it would also be important to continually reassess the total number of
191
6.4.4 Pharmacies
Productivity performance
Danish GVA per hour for pharmacies is on par with peer countries. In addition, Danish
pharmacies have both the highest capita per pharmacy, at 11,863, and prescriptions per
pharmacy, at 120,652, among peer countries (Exhibit 107), which could indicate high
productivity in the sector. This data includes 320 community pharmacies and 140
pharmacy shops (apokteksudsalg).
However, in a report published by the Danish Competition and Consumer Authority in
2010, it is evident that revenue redistribution is required to support the existing structure of
pharmacies. The report indicates that the number of pharmacies and their geographic
location can be optimized to increase competition and better meet demand, reducing the
need for revenue redistributions, while still maintaining social and quality imperatives. 180
Thus, despite the productivity indicators discussed above, there is room for improvement in
the performance of pharmacies in Denmark. Finally, VAT-adjusted country variations in
pharmaceutical prices are small; however, UK obtains the lowest prices, at an index value
of 88, compared to 92 and 96 for Sweden and Denmark 181 (Exhibit 107).
Barriers to productivity
A fixed number of licenses are available (including geographic restrictions) and new
licenses are only issued if a large demographic shift has occurred. Setting up a new
pharmacy can, therefore, only be done by taking over the license of an existing pharmacy.
However, the annual turnover of licenses is only ~six percent. 182
180 Danish Competition and Consumer Authority, Regulering af apotekssektoren February, 2010
181 Without VAT adjustments, index values are 92 for UK, 94 for Sweden, and 120 for Denmark (UK and Sweden add VAT to OTC
drugs only, not prescription drugs, while Denmark adds 25 percent to all drugs). Prices reflect not only productivity, but mirror
differences in regulatory systems as well
182 Danmarks Apotekerforening
192
Foreign-trained pharmacists must apply for authorization to practice, and generally receive
a decision within four months. Danish language skills are required, however, it is assessed
by hiring pharmacist.
Ownership is limited to pharmacists and one pharmacist can own a maximum of four
pharmacies, which inhibits the possibility of building scale.
Opening hours are regulated and especially in urban areas, waiting time for service is
perceived high. During opening hours, a pharmacist must be present. 183 Product
assortment is regulated as are prices for both prescription drugs, which made up 77
percent of pharmacy sales in 2008, and Over The Counter (OTC) drugs whose sale is
restricted to pharmacies, at five percent of sales. 184 The goal of price regulation is to
ensure all customers have access to pharmaceuticals at the same prices, regardless of
geography. Generic substitution must be offered to customers to ensure they receive the
lowest priced product. Internet sales are permitted.
Pharmacy margins are regulated at the sector level and low-revenue pharmacies are
subsidized by high revenue pharmacies, which leaves room for the continuous existence of
pharmacies in rural areas that cannot exist on their own. Subsidizing a sub-optimal model
limits incentives to improve efficiency, however, this model also serves the purpose of
ensuring accessibility of pharmacy services for citizens in all parts of the country.
As seen in Exhibit 112, these regulations are significantly more restrictive than those in
Sweden and the UK.
183 In pharmacy branches, a pharmacist is not required to be physically present as long as all employees are pharmaconomer and
the pharmacist is on call ( 10, stk. 3)
184 Danish Competition and Consumer Authority Regulering af apotekssektoren, 2010
193
EXHIBIT 112
Ownership open
to nonpharmacists
Creation of
chains allowed
Alternative
distribution
allowed
Regulation on
pricing
Regulated
opening hours
and assortment2
Other
No
Yes
Yes
No
No: limited to
4 locations
Yes
Yes
No: limited to
4 locations
No: limited to
4 locations
No
Yes: supermarket
pharmacies
Yes: supermarket
pharmacies
Yes: internet
pick-up
counters
No
Yes:
prescription
and OTC
Yes:
prescription
only
Yes:
prescription
only
Yes:
prescription
only
Yes:
prescription
and OTC
Yes
No
No
Yes for
assortment,
not hours
Yes for
assortment,
not hours
Low revenue
pharmacies
subsidized by
high revenue
pharmacies
Gross
margins
regulated
Payers3 can
limit profits
Gross
margins
regulated
Some basic
health
consultations
provided in
pharmacy
1 In Finland, University Pharmacy (Yliopiston Apteekki) owned by the University of Helsinki, owns a chain of pharmacies, 2 Other than pharmaceuticals, 3
Payers refer to Primary Care Trusts, the organizations that directly pay health care providers in the UK
SOURCE: Swedish Medical Products Agency; AESGP; Espicom; National Pharmacy Associations; General Pharmaceutical Council; COOP website;
interviews; McKinsey
185 OECD Health Policy Studies 2008 Pharmaceutical Pricing Policies in a Global Market
186 For example, Tesco Pharmacies; Company web site
187 Swedish pharmacies are sold in bundles that include both high and low performing pharmacies
194
multi-store chains, e.g. Apotek Hjrtat, leveraging scale. 188 In addition, Sweden does not
limit opening hours or non-pharmaceutical product assortment.
Peer countries operate with differing degrees of price and profit regulations. UK system is
structured such that patients pay either no fee or a small flat fee for their prescriptions, with
payers reimbursing pharmacies for the remaining value of the medicine dispensed. On the
revenue side, then, reimbursement rates for these prescription drugs are fixed. On the
supply side, pharmacies can choose to purchase from their own suppliers, or take
advantage of rates negotiated directly by the Department of Health. If pharmacies are able
to obtain abnormally high profits, however, payers reclaim some reimbursement such that
private interests do not gain inappropriately from public funds. 189 The UK, however, does
not redistribute revenues from high-revenue pharmacies to low-revenue pharmacies as
seen in Denmark.
In Sweden, patients pay out-of-pocket only for the first SEK 1,800 spent per year; beyond
this amount, the government provides full reimbursement directly to the pharmacies. Prices
vary between pharmacies, but gross margins are regulated by the government. 190 The
government is not involved in large-scale supplier negotiations, and two large wholesalers
dominate the supply of prescription medication.. 191
There are no pricing regulations on OTC drugs in either UK or Sweden, only on
prescription medications. 192 Overall, VAT-adjusted country variations in pharmaceutical
prices are small. However, UK obtains the lowest prices, at an index value of 88, compared
to 92 and 96 for Sweden and Denmark, respectively. 193
Actions to increase productivity
As previously discussed, performance in the pharmacy sector is generally at par with peer
countries. Nevertheless, aspects of the pharmacy sector are inexpedient, particularly in
comparison to peer countries.
195
Considering the alternative models in Sweden and UK, it could further be investigated
whether the Danish model remains best practice in ensuring productivity. Potential actions
could include:
Other initiatives, based on best practices seen in other peer countries, could also be
considered. This could include an assessment of the opportunities within the
revenue redistribution system, alternative distribution channels, e.g. supermarkets,
and maximum, rather than fixed, pricing for OTC drugs.
In considering such initiatives, demand for pharmaceuticals and pharmacy profits could be
managed to ensure that private interests do not gain inappropriately from public funds.
6.4.5 Opticians
Productivity performance
Productivity for Danish opticians is best practice among peer countries when measured as
sales per employee, at EUR 69,900. This is driven by a high level of sales per capita, at
38.8, as well as low employment per capita when comparing with peer countries.
Productivity when measured as capita per store, at 8,628, is below best practice in Sweden
and Finland (Exhibit 107).
Barriers to productivity
The Danish optician sector experiences a far lower degree of regulation than other
healthcare services, and is not subsidized. There is some entry regulation in that
authorization is required to be an optician (perform eye exams, etc.). 195 The main barrier to
competition, however, is the difficulty of total price comparison, which proves both difficult
and time consuming. This is driven by the assortment and pricing structure, as the prices
for different elements such as frames, lenses, special lens coatings, etc. are priced
separately, even though they are somewhat interdependent also.
194 Exceptions should apply to avoid conflicts of interests, e.g. ownership by pharmaceutical companies or prescribing doctors
195 Danish Optician Association
196
196 Danish Competition and Consumer Authority. Competition in Optician Sector, 2002
197 Press clippings
198 Barnes Report. 2009 Worldwide Optical Goods Stores Industry Report. Sales in this period grew
by 2 percent
197
198
November 2010
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