Letter from Switzerland: why market forces matter

What kind of goods come to your mind when you think of Switzerland? Swiss watches, Swiss chocolate, Swiss cheese, right?

The most famous Swiss cheese bears the name of Emmental. For many years its production volume has been steadily decreasing and today manufacturers are struggling for survival.

And the reason for this decline is mainly home-made.
 
The whole world sees Switzerland as a stronghold of capitalism where free markets are highly respected. But in its consumer markets Switzerland has been one of the world’s most regulated countries for years. Since our federal constitution was established in 1874, industry agreements and syndicates have been largely tolerated by legislation. They were not seen as a restriction but as a useful market regulation, rightfully protecting the interests of the industries involved. But in some cases, the outcomes of these agreements have been quite absurd.

For example the Swiss Beer Convention, installed in 1935 and which embraced almost all Swiss breweries, dictated mandatory regulations to its members: product range, product descriptors, ingredients, containers, labels and prices. It even replaced individual brand advertising with generic beer advertising. The whole industry went into a deep sleep and was only rudely awakened in 1991 by the ending of that cartel.

Faced with this new situation, established breweries were unable to cope. They merged without success only to be later taken over by Heineken or Carlsberg. Today these two international groups account for 65% of the Swiss beer market. Their market share would be even higher but for a large number of independent micro breweries appearing within the last few years.

It was a slightly different picture in the cheese sector. In 1914 the Swiss government handed total responsibility for the marketing of traditional Swiss hard cheese varieties (Emmental, Gruyère and Sbrinz) to the newly founded Swiss Cheese Union to manage all production at regulated prices.

All economic pressure was taken away from the producers. This had consequences…

Production volume rose, but the domestic price level was too high and quality was not a key factor.  Demand weakened, exports were state-subsidised, and the shortfall was shouldered by tax-payers. In 1999 the Swiss Cheese Union was suspended. This was the end of sales guarantees and regulated milk prices so production of Emmental cheese dropped by half and 70 % of all manufactures went out of business.

Today an organisation called Emmental Switzerland is responsible for its promotion. It has taken a decidedly more market-driven approach, aligning with a glamorous brand ambassador to target new customer segments.  

We wish good luck to this new initiative as it would be a pity if one day the only remaining thing about Emmental cheese was its holes.

And the moral of this story? Never try to lever out market forces. Because in the worst case, it produces exactly what it was meant to avoid.

Roland Sutter is a Partner at The Observatory International, Switzerland