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McKinsey Copenhagen

Creating Economic Growth In


Denmark Through Competition

November 2010
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced
for distribution outside the client organization without prior written approval from McKinsey & Company.

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

Summary in Danish: Vkst og velstand gennem get


konkurrence
0. Executive summary

7
19

1. Future growth depends on reversing declining productivity


trend
2. The service sector is important to stimulating productivity

29
41

3. Unlocking productivity potential of the service sectors through


competition
4. The construction sector

47
71

5. The retail sector

114

6. The professional service sectors

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

International sammenligning af priser


Nettoprisindeks (uden afgifter), DK=100, 2008

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

1 Inkl. post og tele


2 Opfrsel, vedligeholdelse og leje
KILDE: Eurostat comparative forbrugerprisindicer; Forbruger og konkurrencestyrelsen; McKinsey analyse

De beskrevne tiltag omfatter en bred vifte af instrumenter, herunder reduktion af barrierer


for konkurrence (tekniske standarder, ejerskabsbegrnsninger, planregulering og
administration) og aktiv tilskyndelse til produktivitet (samordning og krav i offentligt indkb,
tiltrkning af udenlandske aktrer til det danske marked). Disse forslag br suppleres af
en effektiv konkurrencehndhvelse.

LAV PRODUKTIVITETSVKST ER EN STOR UDFORDRING


Danmark er de seneste 15 r faldet ned ad ranglisten over verdens rigeste lande
overhalet af blandt andet Sverige, hvis velstand (BNP pr. indbygger) er vokset mere end
dobbelt s hurtigt som den danske velstand.
De kommende rtier vil den demografiske udvikling begrnse mulighederne for at styrke
velstanden: Arbejdsstyrken falder i forhold til befolkningens strrelse.
Stigende velstand skal derfor komme fra hjere produktivitet. Hjere produktivitet betyder,
at der skabes mere vrdi per arbejdstime - flere varer og tjenester eller nye produkter, der
kan slges til en hjere pris.
Udfordringen skrpes af, at produktivitetsvksten de seneste r nsten er get i st.
Siden 1995 har vksten udgjort godt pct. om ret. Sammenlignet med andre vestlige
lande sakker Danmark bagud og produktivitetsniveauet er nu under gennemsnittet, jf.

figur 2. Analyser viser, at hovedparten af Danmarks vkstefterslb skyldes lavere


produktivitet,

mens

andre

faktorer

ssom

forskelle

investeringsomfang,

sektorsammenstning eller arbejdsmarkedsforhold, har mindre betydning.

Figur 2

Sammenligning af arbejdskraftproduktivitet p tvrs af lande


Vkst i arbejdskraftproduktivitet (real bruttovrditilvkst pr. arbejdstime)
Gennemsnitlig rlig vkstrate, procent, 19952009

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)

Udfordringens strrelse kan illustreres med et regneeksempel. Hvis Danmark skal


opretholde historisk velstandsvkst vil produktivitetsvksten skulle mere end fordobles
fra 0,6 procent om ret (1995-2008) til 1,3 procent om ret. Skal Danmark flge med
vksten internationalt 2 , vil produktivitetsvksten skulle mere end tredobles til knap 2
procent om ret, baseret p OECDs seneste fremskrivning.
Den private servicesektor og byggeriet har vsentlig betydning for den samlede
produktivitetsudvikling. Dette skyldes for det frste, at servicesektoren og byggeriet
reprsenterer 50 procent af den samlede beskftigelse (1,5 million rsvrk), jf. figur 3.
Sledes reprsenterer detailhandel, bygge og anlg samt forretningsservice tilsammen
nsten en fjerdedel af beskftigelsen, mens eksempelvis medicinalindustrien udgr godt
procent.

2 Gennemsnit for Sverige, Finland, Tyskland, Frankrig, Nederlandende, Storbritanien

Figur 3

Oversigt over sektorer efter andel af beskftigelse og vrditilvkst


Vrditilvkst pr. time
DKK, 2009 priser
600

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%

Andel af samlet beskftigelse


1 Inkluderer ogs energi, rstofudvinding og vandforsyning
2 Inkluderer IT, Arkitekter og ingenirer, revisorer, advokater, rengring, markedsfring, forskning og udvikling, mm.
Kilde: Danmarks Statistik; McKinsey analyse

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

Produktivitetsudviklingen i servicesektoren p tvrs af lande


Gennemsnitlig rlig vkstrate, 19952007, Prisjusteret1

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

STYRKET KONKURRENCE KAN GE PRODUKTIVITETEN


Der er gennemfrt en rkke analyser af mulighederne for at ge produktiviteten i servicesektoren og byggeriet. Analyserne frer til tre overordnede konklusioner:
For det frste kan bedre udnyttelse af stordriftsfordele ge produktiviteten. Den danske
servicesektor er generelt karakteriseret ved en, i international sammenhng, hj grad af
fragmentering, dvs. at omstningen er fordelt p mange virksomheder og driftssteder. Det
indebrer tab af stordriftsfordele, der blandt andet viser sig via frre omkostninger til
ledelse, administration, IT, etc.
For det andet kan mere industrialiserede processer, bedre arbejdsdeling samt get brug
af teknologi ge produktiviteten. Det udmnter sig p forskellig vis p tvrs af delsektorer, men indeholder blandt andet potentiale i mere industrialiserede processer (f.eks.
get andel prfabrikerede konstruktioner i byggeriet), bedre arbejdsdeling mellem
faggrupper (f.eks. flere funktioner i sundhedserhverv udfrt af andre klinikere end lger)
og get brug af teknologi (f.eks. elektroniske prisskilte og automatisk betaling i
detailhandlen).
For det tredje er get konkurrence hovedsvaret p, hvordan man kan ge produktiviteten.
Talrige erfaringer fra Danmark og udlandet viser, at konkurrence generelt er det mest

11

virkningsfulde instrument til at ge produktiviteten i servicesektoren og byggeriet.


Eksempelvis er minutprisen p mobiltelefoni i Danmark faldet 80 procent siden
konkurrenceudsttelsen i 1990erne. Bde den danske servicesektor og den danske
byggesektor

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

Industristruktur for bygge- og anlgssektoren


Markedsandel for top 10 byggefirmaer1
Procent, 2009
46

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

Danmark er desuden karakteriseret ved en hj andel af unikke, ikke-standardiserede


byggerier. Eksempelvis udgr andelen af enfamiliehuse der bygges i enkeltudstykninger,
93 procent i Danmark mod 70 procent i Sverige og 30 procent i Holland. I sammenhng
hermed har Danmark en lav andel typehusbyggeri, som er vsentlig mere produktivt.
Tiltag 1: En mere produktiv bygge- og anlgssektor gennem bning af
konkurrence fra udenlandske virksomheder. Tilpasning af tekniske standarder til
strre

nabolande,

landsdkkende

samordnet

smidiggrelse

af

decentral

byggeadministration (strre udstykninger, frre indgange ift. tilladelser), styrket


anvendelse af det offentlige indkb til at fremme produktivitet (frre leverandrer,
funktionelle udbud), mlrettet tiltrkning af udenlandske virksomheder, samt styrket
uddannelsesindsats i forhold til projektledelse.

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

International sammenligning af antal dagligvarebutikker


Daglivarebutikker1 per 10.000 indbygger
Antal, 2007
5,8
5,7
3,8
3,5
2,5
2,4
2,2
1,1

1 Inkluderer hypermarkeder varehuse, supermarkeder og discountbutikker, men ikke specialforretninger som grnthandlere, slagtere, bagerier,
servicestationer og nrbutikker
KILDE: Planet retail; Eurostat; McKinsey analyse

Dagligvarehandlen i Danmark er kendetegnet ved meget lille udbredelse af de store og


mest effektive butiksstrrelser (skaldte hypermarkeder), som internationalt set har en
produktivitet, der er mere end 50 procent hjere end de supermarkeder, som i Danmark
dkker samme segment. I sammenlignelige lande ligger typisk 15 procent af den samlede

3 Finland, Belgien, Tyskland, Frankrig, Sverige, Holland og Storbritannien

14

omstning i hypermarkeder. Hypermarkeder vurderes derfor at kunne bidrage til et


vsentlige productivitetslft.
Den danske dagligvarehandel er karakteriseret ved frre udenlandske virksomheder end i
stort set alle andre lande. Kun to af de store udenlandske dagligvarekder Aldi og Lidl
er til stede i Danmark, begge i discount-segmentet. Dette segment har vret
karakteriseret ved mere konkurrence og hjere produktivitetsvkst end branchen som
helhed.
Desuden er forsyningskden til dagligvarehandlen kendetegnet ved, i international
sammenligning, hje inputpriser. get international konkurrence vil naturligt vre en del af
lsningen.
Sverige har de seneste ca. 15 r oplevet den hjeste produktivitetsudvikling i Europa,
udlst af reformer af planlovgivning og lukkelov.
Tiltag 2: En mere produktiv detailhandel gennem etablering af store butikker.
Landsdkkende og internationalt markedsfrte udbud af et antal (15-25) anlg
hver med adgang til etablering af et hypermarked samt tilgrnsende butikker og
restauranter. Hvert anlg kan vre forberedt i forhold til infrastruktur og tilladelser.

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,

ejendomsmglere og juridisk rdgivning, m.fl.


Produktiviteten

ligger

under

frende

lande.

Sammenlignes

eksempelvis

med

Storbritannien, ligger Danmark 15-20 procent lavere.


Der vurderes at vre et vsentligt potentiale for at lfte produktiviteten gennem bedre
udnyttelse af stordriftsfordele. Sektoren karakteriseres sledes ved et vre mere
fragmenteret end i andre lande. Eksempelvis arbejder der i gennemsnit 11 personer per
advokatfirma i Storbritannien mod 6 personer i Danmark.
Samtidig er der potentiale i at bne for strre konkurrenceudsttelse, eksempelvis
gennem

get

bning

for

konkurrence

fra

udenlandske

firmaer.

Her

hmmer

begrnsninger p ejerskab og eksklusivitet p visse serviceydelser, specielt inden for


juridisk rdgivning, dog i stor udstrking indtrden af nye spillere.
Tiltag 3: Fremme af konkurrence og produktivitet i forretningsservice og
rdgivning gennem deregulering og offentlige udbud. Undersgelser af
mulighederne for at fremme konkurrence og produktivitet gennem lempelse af
regulering der begrnser ejerskab, opretholder eksklusivitetsrettigheder eller
hmmer konkurrence fra udenlandske virksomheder. I forhold til de ikke-regulerede

15

dele af forretningsservice og rdgivning kan konkurrence og produktivitet fremmes


gennem offentlige udbud, jf. Tiltag 8.

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

er antallet af behandlinger per tandlge lavere end i

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.

Nedadgende tilpasning af tilskudssatser med henblik p at tilskynde til


effektivisering, samt sikre hensynet til de offentlige finanser. Afsgning af
alternativer til overenskomstsystemet i takt med, at branchestrukturen tilpasses.

16

Tiltag 5: Stimulering af udvikling mod strre enheder blandt praktiserende


lger. Umiddelbar nedsttelse af honorar for at tilskynde effektivitetsforbedringer.
bning af ejerskabsadgang for personer, der ikke er lger, med henblik p at tilfre
ledelseskraft og finansieringsgrundlag for at skabe bedre rammer for get
produktivitet. Nedadgende tilpasning af tilskudssatser med henblik p at fremme en
get effektivitet og sikre de offentlige finanser. Evaluering af brugen af
brugerbetaling og lgernes incitamentstruktur for at modvirke undvendige
lgebesg.

Samtidig overvgning af antal lgetilladelser, da en styrket

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.

supermarkeder), ndring af fastpriser til maksimumpriser for apoteksforbeholdt


hndkbsmedicin samt fjernelse af udligningsordning. P kortere sigt vurderes
fjernelse af begrnsninger p ejerskab, bningstider, og sortiment 4

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

anlgssektoren samt servicesektoren, som instrument til at fremme udnyttelse af


stordriftsfordele gennem samling af indkb p frre leverandrer, mlrettet
tiltrkning af udenlandske virksomheder, samt anvendelse af udbudsformer og
krav, der tilskynder til effektiv drift.
Tiltag 9: Styrkelse af rammerne for hndhvelse af konkurrencepolitik.
Konkurrencefremmende tiltag der frer til frre, men strre og mere effektive
virksomheder i bygge- og anlgssektoren samt servicesektoren, vil indebre bedre
udnyttelse af stordriftsfordele. En sdan udvikling skal balanceres af passende
rammer for hndhvelse af konkurrencepolitik, herunder eksempelvis gennem
styrkede

muligheder

for

at

retsforflge

sanktionsniveauet til international standard.

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.

THE SERVICE SECTOR 5 IS IMPORTANT TO STIMULATING


PRODUCTIVITY
Targeting the service sector is likely to have a large direct impact on productivity. The
private service sector accounts for almost 50 percent of total employment (manufacturing
20 percent, public sector 30 percent) and is therefore essential for overall economic
growth. Export driven and R&D intensive sectors like biotech, greentech and
semiconductors are also important, but these sectors make only a smaller contribution (in
terms of employment and output) to economic activity.
Improving service sector productivity also has large potential spillover benefits. Improved
productivity in services benefits the broader economy in three ways by improving access

19

to labor in export-driven sectors, by providing cheaper inputs for globally-competing


sectors, and by reducing the cost of living for consumers.
Substantially increasing economic growth in Denmark requires strong service sector
productivity growth. Building on the above, a core element of an overall growth strategy
would be to significantly increase service sector productivity to capture the direct economic
gains and at the same time to indirectly stimulate the growth of globally competing sectors
through improved access to labor and cheaper intermediate inputs.

INCREASED COMPETITION CAN UNLOCK THE PRODUCTIVITY


POTENTIAL OF THE SERVICE SECTORS
There is significant potential for improving service sector productivity. Most of the
productivity growth gap between Denmark and the US can be attributed to services,
notably local services. Local services overall contributed just 1 percent of productivity
growth from 1995-2005 in Denmark, versus 7 percent in the US. Recent productivity
growth has been lower than in Sweden for all service sectors. In retail trade for example,
productivity growth from 1995-2007 has been over 4 percent lower than in Sweden.
Currently there are barriers to both allocative efficiency (i.e., the degree to which output
and changes in market share in a sector reflect the productivity of firms) and firm efficiency
(i.e., the degree to which firms operate at their optimal efficiency) in many service sectors.
The Danish Economic Council has noted that the reallocation of employment share
between low and high productive companies could result in significant productivity gains.
At present, Danish service sector firms could do more to adopt best-practice processes,
including efficient division of labor, realizing benefits of scale, offshoring, and IT
enablement.
Competition is one of the key drivers of productivity. Competition drives productivity
through encouraging managers to reduce inefficiencies, by reallocating resources towards
the most productive firms, and by exposing firms to new ideas and providing incentives for
firms to innovate. In the UK, US and Sweden, there are numerous examples of the benefits
of competition to productivity and growth in service sectors. In Denmark, reforms to the
telecom sector helped spur competition and productivity, leading to Denmark having some
of the lowest global telecommunications prices.
Gaps in the competitive environment still exist. Denmark has implemented a series of
reforms to improve the flexibility of capital, labor and products markets, ranking 2
capital market flexibility within the OECD and 8

th

on

on product market flexibility. As an

5 In the English part of this report, the service sector includes the construction sector

20

nd

example, Denmarks compliance with EU regulation of building standards is at par with or


exceeding peer countries.
A number of analyses have been conducted addressing the possibilities of increasing
productivity in the service sector. Three recurring themes are:

Further developing economies of scale increases productivity. In an international


context, the Danish service sector is generally characterized by high fragmentation,
i.e. revenue is split among many companies with several locations. This leads to loss
of economies of scale, which typically shows as

lower costs of management,

administration, IT, etc.

Improved industrialization of processes, better division of labor and increased use


of technology increases productivity. This is implemented in different ways across
sub-sectors, but includes among others productivity potential from improved
industrialization of processes (e.g. through increased usage of pre-fabricated
building components in construction), optimal division of labor (e.g. several functions
to be carried out by other professional staff than general practitioners), and
increased use of technology (e.g. electronic price labels and self-service check-out
in retail).

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.

As part of the analyses conducted, the appetite of international companies to establish


operations in Denmark has been tested. As an example, international construction
companies view Denmark as less attractive due to the limited size of the market, technical
barriers, unfavorable contract structures as well as decentralized public decision and
procurement structure.
Nine specific initiatives could be considered to establish a Competitive Policy 2.0 directed
at increasing competition and productivity. The initiatives are detailed in the following
sections across four selected sectors: construction, retail, business services and regulated
advisory, and healthcare.

THE CONSTRUCTION SECTOR


Construction is one of the largest service sectors in Denmark: 7 percent of Danish total
employment (around 170.000 full time employees) is in construction and 27 percent of
the average Danish household expenditure goes to housing and utilities.

21

There is room for improvement on performance of the sector. Productivity of the


construction sector is significantly lower than for other service sectors. Danish
construction has experienced negative growth in GVA per hour since 1990 and Denmark
is now 5 percent after the Netherlands and 13 percent after Finland. In addition price
levels are significantly higher than in other countries (around 50 percent higher than
EU15 average incl. VAT). This is driven both by higher labor cost as result of lower
productivity and by high material prices.
Four opportunities exist to grow productivity performance:

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

Improved coordination and cooperation between stakeholders and focus on design


to cost. Rigorous division of tasks on the construction site and weak coordination
and accountability between stakeholder in the highly fragmented value chain (client,
advisors, construction company, contractors, etc.) drives significant waste in the
construction project and makes cross-functional cost optimization difficult. The
situation is upheld by an industry dynamic with contractual models favoring small
projects and advisors giving less room for construction companies to design to cost
through standardized materials and work processes (e.g. use of pre-fabrication).

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

Increasing exposure to international competition. Of the top-10 international


construction companies in Europe, only NCC and Skanska are present in Denmark.
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.
Initiative 1: A more productive building- and construction sector through
opening of competition from foreign companies. 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

22

tenders), targeted pull of foreign companies as well as strengthened project


management training.

THE RETAIL SECTOR


Retail trade is a large service sector dominated by the grocery subsector. 160,000 FTEs
are employed in retail (6 percent of Danish total employment. Grocery retail is by far the
largest sub-sector (25 percent of retail GVA) and accounts for 11 percent of household
spend.
Relatively weak productivity performance. Compared to peer countries, productivity levels
in the grocery sector are around 30 percent below the best performing European country.
Compared to other retail subsectors, Danish grocery retail has gone from the second most
productive subsector in 2000 to the least productive in 2006. Denmark also has the highest
food and beverage price index in the EU.
Low performance is driven by lack of scale. Danish grocery retail operates at a
significantly smaller scale than peer countries. There are 5,8 grocery stores per 10.000
capita in Denmark - almost twice the level of comparable countries - and sales per store
is almost half of peer country average This has led to lower economies of scale through
higher costs of administration and more complex grocery distribution. It has also led to
less use of IT in the sector (self-scan, electronic price tags) as capital investments are
higher with sales spread across more stores. For example, Denmark has half the share
of retail companies with self-service checkouts versus peer countries. The high number
of stores also link to inefficient consumer shopping habits. For example, 61 percent of
Danes visit the supermarket more than 3 times per week, versus just 35 percent in
Sweden. This results in increasing handling costs at the retail front line.
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). Evidence from
international best practice shows that larger hypermarkets are up to 50 percent more
productive than small formats. Current zoning legislation does not, however, allow the
construction of hypermarkets. This is also a barrier to entry of foreign players. Among top
10 European food retailers, only Aldi and Lidl are present in Denmark today, both in the
discount segment.
Denmark has some of the highest grocery prices in Europe. This is partly driven by the
sub-scale grocery retail sector but primarily driven by higher input prices relative to peers,
typically making up 80-90 percent of the grocery retailers costs. Increased international
competition will likely be beneficial.
International examples show that reforms can enable significant improvements:

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.

Freedom to build unconstrained store formats supported the transformation of the


US retail sector led by Walmart, with retail productivity more than doubling from mid1980s to late 1990s.
Initiative 2: More productive retail through the establishment of large stores.
National and international marketed tender of a number of facilities (15-25), each with
access to the establishment of a hypermarket as well as adjacent shops and
restaurants. Each facility can be planned according to infrastructure and permissions.

THE PROFESSIONAL SERVICES SECTORS


Professional services covers many sectors: Professional services includes individuals and
firms that provide independent services based on skill, knowledge, or reputation. It includes
12 sectors, ranging from IT services to general practitioners, that employ 8 percent of the
workforce in aggregate. The sectors are grouped into 3 categories for purposes of
comparison business services, regulated advisory, and healthcare services.
There is room for improvement in performance of professional services: On an aggregated
level, productivity level and growth is at par with average peer countries, but behind bestpractice countries. Danish productivity in terms of GVA per hour is PPP-adjusted DKK 280,
compared to 264 in Sweden and 362 in the UK. Productivity growth, however, has been
flat in the period 2000-07, whereas both Swedens and UKs grew 3.6 percent and 4.1
percent respectively. Given the nature of these human-capital-intensive businesses,
operational productivity measures are examined in addition to GVA per hour.
Business services and regulated advisory
Business services and regulated advisory sectors employ 165.000 FTEs and consist of a
broad range of sectors, such as IT services, legal services, auditing and bookkeeping,
engineers and architects, and real estate agents.
Productivity is below that of best practice countries. As an example, Danish productivity is
15-20 below that of the UK.
There is significant potential in improving productivity through developing economies of
scale. The sector is characterized by being more fragmented than seen in peer countries,
e.g. in Denmark, there are on average 6 employees per law firm compared to an average
of 11 employees per law firm in the UK.

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

clinical/administrative support. As an example, the share of clinics with only 1 dentist is 46


percent. The structure of the sectors limits productivity through 2 mechanisms:

Development of economies of scale is limited due to duplication of administration,


clinic space and IT.

Optimal division of labor is limited, since general practitioners and dentists are
spending

time

on

less-specialized

tasks

that

could

be

handled

by

clinical/administrative support staff.


Changes in regulation are to be considered within the special characteristics of the sectors,
e.g. high public financing. Experiences from other countries, such as Sweden, show that it
is possible to implement reforms that encourage competition and productivity
improvements while considering public health and financing.
Dentists
Denmark experiences low productivity in dental care, with the lowest ranking of capita per
dentist among peers. Barriers are largely regulatory and include limitations on pricing
structure and ownership, e.g. only authorized dentists are allowed to own clinics, and at
limited scale.
Initiative 4: Increased productivity in the dental sector by opening up ownership
to non-practitioners. Opening up ownership to non-practitioners (including chains
and/or foreign competition) to drive scale in the industry and encourage a more

25

optimal division of labor. Exploring the feasibility of increasing performance pressure


by reducing subsidies and setting maximum, rather than fixed, prices. Reducing
subsidies

with

productivity

improvements

to

ensure

continuous

efficiency

improvements while mitigating potential adverse effects on public finances.


Examination of alternative models to the collective bargaining agreement system as
industry structure develops towards larger entities.
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.
Initiative 5: Stimulation of development towards larger units among general
practitioners. Initial reduction of fees to increase performance pressure. Deregulating
ownership to allow the development of financially strong, large professional
organizations that use scale to drive productivity improvements, e.g. through a more
optimal division of labor. On-going adjustment of fees in order to ensure continuous
efficiency improvements while mitigating potential adverse effects on public finances.
Evaluation of patient co-payments and provider incentive structures to control
unnecessary visits. Continuous reassessment of total number of general practitioner
licenses, as patient throughput, at the same level of service, increases with
competition. Exploring alternatives to the collective bargaining agreement system as
industry structure develops towards larger entities.
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 the UK and Sweden. There is room to consider whether such
regulation remains best practice.
Initiative 6: Preparation of a reform of the pharmacy sector. The Danish
pharmacy sector is characterized by regulation limiting competition considerably more
than seen in Sweden and the UK. Denmark enjoys low prices on drugs compared to
peer countries. However, it could be considered whether the existing regulation
continues to be an efficient way of ensuring the objectives of the sector, in relation to
quality, access, and public finances. Potential reform elements could include
alternative distribution channels (e.g., supermarkets), setting maximum, rather than
fixed, prices, for OTC drugs, as well as removing the revenue redistribution system. In
the short term, removal of ownership, opening hour, and product assortment

26

limitations can encourage efficiency as well as promote an industry structure which


expands the solution space for future reforms.
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 exploring options for encouraging greater price
transparency through, for example, a comparison web site.

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

1. Future growth depends on


reversing declining productivity
trend
Denmarks recent economic growth has been slower than that of its peers, driven by
relatively slow productivity growth. Within sector, productivity must improve significantly in
the future if Denmark is to maintain its historical growth rates, despite an aging population
resulting in a lower share of people who are of working age.

1.1 DENMARKS RECENT ECONOMIC GROWTH RELATIVE TO


PEERS
Over the last two decades Denmark has lost its top ten position in the international
economic rankings. In 1990, for example, Denmark was the eighth richest country in the
OECD 6 and by 1995, average incomes were still approximately 12 percent higher than in
th
Sweden. Today, by contrast, Denmark ranks 13 in terms of GDP per capita among OECD

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

Ranking of GDP per capita among OECD countries


Ranking1
Ranking

19702

1990

2009

GDP per capita


(2009, USD 000s)

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

Comparison of recent growth rates in average incomes


GDP per capita in USD thousands1, CAGR, Percent

GDP per capita 1995


USD thousands
Norway

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

GDP per capita 2009


USD thousands

2.0

45.7

United States

Sweden

Annual real growth rate


CAGR; Percent; 1995-09

41.4

1.2 RECENT DECLINE IN RELATIVE INCOMES


In order to understand what has driven the recent decline in relative incomes in Denmark,
we have looked at all potential drivers of wealth. Average incomes are driven by two
factors. The first is labor utilization, which is the degree to which the population is active in
the labor market, comprising the percentage of the population of working age, participation
rates, employment rates, and the average number of hours worked. The second factor is
productivity, which includes both the mix of sectors and the productivity within each sector.
Labor utilization has fallen (as it has elsewhere in the EU) by 0.4 percent per annum on
average since 1970. Rising participation and employment rates in Denmark have only
partially offset the falling share of the working age population and the smaller number of
hours per worker. 9 Despite this, hours worked per capita are still higher than most
international benchmarks (e.g., from 2004 to 2008, average hours worked per capita was
1.5 percent higher than Finland, 2 percent higher than Sweden, and 7.2 percent higher
than Norway), driven by relatively high participation and employment rates. From 2004 to
2008 for example, participation rates were 6 percent higher than the EU-15 average and
unemployment, almost 3 percent lower than the EU-15 average over the same period.
Similar to what has happened in other European countries, productivity (the value of output
created in each working hour) has driven the bulk of average income growth in Denmark,
as measured by GDP per capita, over the past 40 years. 10 Productivity in Denmark has
risen by 2 percent annually over the period, roughly a quarter faster than the 1.6 percent
overall rate of annual growth in average incomes (Exhibit 3).
Economic theory also suggests that productivity is the long-term driver of GDP growth.
Productivity drives GDP growth, and the resulting economic surplus can benefit consumers
in the form of better products and/or lower prices, employees in the form of higher salaries,
and/or investors in the form of higher profits (Exhibit 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

Drivers of average incomes in Denmark


Contribution to real GDP per capita growth, thousand of 2009 PPP USD

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

Productivity growth is the engine of economic growth

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

Labor productivity in the US, EU and Denmark


Labor productivity, indexed to US = 100

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

Cross-country comparison of labor productivity growth and levels


Growth of Labor productivity (GVA per working hour)
CAGR Percent, 19952009

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

2009 Labor productivity level


USD/Hour 2009 PPP
Note: 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
SOURCE: The Conference Board (Groningen Growth and Development Centre)

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

sector productivity - Finlands within-sector productivity growth performance has been


almost 60 percent higher than that of Denmark (Exhibit 8). 13

EXHIBIT 7

Lower productivity per hour explains the lower average incomes


in Denmark versus the US
Estimated split of GDP per capita gap vs. US in 2009 by key drivers1
Thousand 2009 PPP USD
45.6

+19%

8.8
38.2
1.4

US GDP per capita

Productivity
per hour

Hours per capita

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

Contribution of sector mix and within sector performance


to productivity levels and growth
Productivity level

Within contribution
Mix effect

Productivity growth

Labor productivity gap vis-a-vis US1


PPP 2005 USD/worked hour

Labor productivity growth


% per year, 19952005

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

Contributions to growth in gross value added


Average percentage growth in gross value added and its drivers, 19972007

Contribution to growth

Gross value added


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.

1.3 STEP CHANGE IN PRODUCTIVITY GROWTH REQUIRED TO


ENSURE ECONOMIC GROWTH
Similar to other European countries, Denmarks population is on average getting older,
driven by increasing longevity, lower fertility rates, and the impact of the large baby
boomer generation. This aging population will intensify the pressure on public finances
according to European Commission estimates, future spending on pensions, health, and
long-term care represents an additional off balance sheet commitment for the Danish
government of 2.6 percent of GDP per annum. 15
The demographic trend also amounts to a significant headwind against future growth.
Roughly 16 percent of the population is currently aged over 65, but by 2030, the share is
projected to exceed 24 percent. The consequent shrinking of the labor force will reduce
GDP per capita growth by 0.4 percent per annum over the next 20 years compared to what
it would otherwise have been 16 (Exhibit 10).
As shown in Exhibit 11, for Denmark to match the projected average income growth for
OECD countries over the next 15 years, productivity growth would need to be about 2
percent per annum, which is three times higher than the productivity growth over the last
15 years (0.6 percent per annum). 17 Policies that increase the number of working hours
per capita will reduce the requirements for productivity growth.
It should be noted that while increasing productivity can make up for declining labor
utilization in terms of national income, it will not necessarily ease the burden on public
finances as the public sector wages and income transfers are indexed to private sector
wages and hence to productivity.

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

Contribution of working age population to growth


Contribution of share of working-age population growth to yearly GDP per capita growth1
% points
United
States

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

1 Under ceteris paribus assumptions on labor utilisation and productivity.


SOURCE: United Nations Population Division; Danish Economic Council; McKinsey analysis

EXHIBIT 11

Productivity requirements going forward

Simulation

GDP per
capita

GDP per capita


Thousand USD, PPP, 2009 prices
50

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

1 2009 numbers showed for 2010


2 Based on OECD projections of GDP per capita growth from 2010-2025 for peer countries (Sweden, Finland, Germany, France, Netherlands, UK)
3 Decline in hour per capita of 0.4 percent per year (Danish Economic Council)
SOURCE: The Conference Board (Groningen Growth and Development Centre); Danish Economic Council

38

Box 1.1. Using value added per hour as a productivity measure


Value added per hour is an accepted indicator of labor productivity
Though there are many ways to measure productivity, we focus on labor productivity
defined as the relation between output and the amount of labor input needed to produce
it. Labor productivity is widely used as a preferred productivity measure. It does not
compare the efficiency of use of other resources like capital, but a decomposition of labor
productivity into capital input and multi-factor productivity can easily highlight any capital
gaps.
Labor productivity is measured as real gross value added per hour (GVA/hour). Value
added is the difference between the value of products or services and the value of all the
inputs (raw materials, purchased services). Thus, GVA/hour equals the amount by which
the value of goods or services are increased by each stage in its production per working
hour put into the process.
Measuring and comparing value added per hour has its difficulties
Insights come from comparing productivity between countries or over time. To do that, the
GVA measures from national accounts have to be corrected for inflation, price differences
across countries, and exchange rates to reflect real changes in volumes or product
quality versus changes in price development. This is done through deflation as well as
Purchasing Power Parity (PPP) adjustment. A number of considerations make this
adjustment difficult over time and across countries:

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.

Adjusting for quality differences and product differentiation is difficult. For

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

2. The service sector is important


to stimulating productivity
The service sector is important to stimulating productivity due to its overall size and its
large potential spillover benefits to other sectors. A core element of an overall growth
strategy would be to significantly increase service sector productivity to capture the direct
economic gains and, at the same time, to indirectly stimulate the growth of globally
competing sectors through improved access to labor and cheaper intermediate inputs.

2.1 IMPACT OF SERVICE SECTOR ON PRODUCTIVITY


The private service sector accounts for almost 50 percent of total employment in Denmark
(with manufacturing representing around 20 percent and the public sector, 30 percent).
Similar to other developed countries, services in Denmark are the biggest component of
economic output (Exhibit 12), with private sector services accounting for over half of the
value added and public services contributing another 26 percent.

EXHIBIT 12

International comparisons of sector share of value added


Total share of value added by sector group for select countries, 2007; Percent

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

1 Includes agriculture and mining


2 Includes construction, infrastructure, utilities, transport, local services, business services, professional services and real estate
SOURCE: EU KLEMS; McKinsey Global Institute analysis

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

Sector share of value added over time


Total share of value added by sector group for Denmark; Percent

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

1 Includes agriculture and mining


2 Includes construction, infrastructure, utilities, transport, local services, business services, professional services and real estate
SOURCE: Statistics Denmark; McKinsey Global Institute analysis

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

Contribution of sectors to Danish employment


Share of DK employment, 2006, percent of total employment, 100% = 4.4 billion hours

New innovative sectors

Existing large employment sectors


10.5

6.3

0.6
Pharmaceuticals

7.2

1.6
Electronics

Retail trade

Construction Business
services

SOURCE: Statistics Denmark

2.2 SPILLOVER BENEFITS FROM IMPROVING SERVICE SECTOR


PRODUCTIVITY
Improved productivity in services benefits the broader society and economy in three ways
by improving allocation of labor; by providing cheaper inputs for globally-competing
sectors; and by reducing the cost of living for consumers.
The first benefit of a more productive service sector is the release of labor to other sectors
with skill shortages an inefficient domestic sector absorbs a larger share of total
employment and can thereby constrain growth in the export sector.
Improved service sector productivity can also benefit those sectors dependent on services
for critical inputs. Denmarks export-driven sectors, for example, rely significantly on local
services the latter account for almost one-third of the total inputs of sectors that export
more than 50 percent of their output (Exhibit 15). Lowering costs in these service sectors
through increased productivity can directly improve the competitiveness of Denmarks
export and import-competing sectors (particularly given Denmark operates a fixed
exchange rate, meaning that the exchange rate is unable to adjust for differences in
national versus international price levels).
Greater upstream competition can also increase the incentives for downstream industries
to improve their productivity levels. A recent joint paper by the OECD and the Bank of

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

Share of intermediate inputs in export sectors

Services2
Other sectors

Share of total intermediate inputs in export sectors1


Percent, 2006

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

International comparison of price level


Net price index (excluding taxes and tariffs), DK=100, 2008

Construction2

Restaurants and hotels

100 92
86 86 79 76
71

Share of private consumption


Procent

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

1 Incl. postal end tele services


2 Build, maintenance and lease
SOURCE: Eurostat comparative consumer price indices; Danish Competition and Consumer Authority; McKinsey analyse

2.3 SUBSTANTIALLY INCREASING ECONOMIC GROWTH IN


DENMARK THROUGH STRONG SERVICE SECTOR
PRODUCTIVITY GROWTH
In summary, significantly increasing service sector productivity is important for economic
growth in Denmark. This is simply mathematics if the average value of a working hour is
to be increased by over 30 percent by 2025 (as discussed in Chapter 1), from roughly DKK
320 today 21 to around DKK 440 in 2025, then large sectors like retail, construction and
business services cannot remain at around DKK 200 per hour (Exhibit 17). Improving
productivity in these service sectors can also support broader growth in other sectors such
as high-end manufacturing, principally through freeing up skilled labor for other sectors and
reducing the cost of intermediate inputs.
Although not addressed in this report, improving public sector productivity will also be an
important element of an overall growth strategy. The public sector represents almost a third
of total employment in Denmark; Wage increases are indexed to the private sector, which

20 2009 Competition Report, Danish Competition Authority, 2009


21 Based on data from Statistics Denmark

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

Current productivity and employment share by sector

GVA per hour


DKK, 2009 prices
600

565

550

Service sectors:
Financials
services
Insurance
Transportation
Wholesale

500
450
400
350

Required 2025 productivity to match projected OECD income growth1


Current productivity
Service sectors:
1. Professional services
2. Construction
3. Retail
Expand size
4. Hotel and restaurants

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%

Share of hours worked


1 Of peer countries: Sweden, Finland, Germany, Netherlands, France, UK
2 Based on estimated 30% required growth from 2010-2025 in labour productivity per hour and using current productivity per hour estimate from
Statistics Denmark of DKK 326
Kilde: Danmarks Statistik; McKinsey analyse

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

3. Unlocking productivity potential


of the service sectors through
competition
There is potential for improving service sector productivity by allowing successful and
productive firms to gain market share and scale, and ensuring that less productive firms
either improve or exit the market. Past MGI work has demonstrated that productivity is
driven by factors in the external environment (e.g., zoning laws, product market
restrictions) that shape the competitive dynamics of a sector. Whilst Denmark has
implemented a series of reforms to improve the flexibility of its capital, labor and product
markets, more could still be done to create a fully competitive environment. In this chapter,
we identify three ways to address the remaining gaps i) Removing technical barriers to
competition (e.g., zoning laws, harmonizing standards); ii) Actively focusing on attracting
leading foreign firms to Denmark; and iii) Continuously ensuring effectiveness of other
enablers such as competition policy and education.

3.1 POTENTIAL FOR IMPROVING SERVICE SECTOR


PRODUCTIVITY
Most of the productivity growth gap between Denmark and the US can be attributed to
services, notably local services. For example, the service sectors as a whole (including
local, business, and professional/financial services) 23 accounted for 5 percent of
productivity growth in Denmark between 1995 and 2005, admittedly slightly more than in
the EU-15 as a whole but importantly 7 percent less than the productivity contribution of
those same sectors in the US (Exhibit 18). Most of the relative underperformance is due to
local services such as retail; local services overall contributed just 1 percent of productivity
growth from 1995 to 2005 in Denmark, versus 7 percent in the US. In some instances,
slower productivity growth reflects rapid increases in employment, resulting in the
contribution of these sectors to GVA being significantly higher than their productivity
contribution. This, however, does not seem to be the case for local services, whose 3.9
percent contribution to value-added growth in Denmark from 1995 to 2005 compares with

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

Sectors driving productivity growth


Contribution to overall US, EU-15 and Danish productivity growth by sector, 19952005; Percent

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

1 Includes utilities, construction and transport sectors


2 Includes public services and real estate (productivity in both these sectors is particularly difficult to measure)
3 Numbers may not add up due to rounding
SOURCE: EU KLEMS; McKinsey Global Institute analysis

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 level and growth comparison of service sectors to Sweden


Share of Danish employment 2007

Productivity growth
Percentage point difference to Sweden, CAGR, 19952007, PPP adjusted, 2000 prices

Parity

5
4
3
2
1
0

Transport, post and telecom

-1
-2

Construction1

7%

5%

7%

Financial services and real estate

6% Wholesale trade
Business services

11%

Retail trade

-3
9%

-4
-5
-180 -160 -140 -120 -100 -80 -60 -40 -20

Hotels and restaurants


3%

20

40

60

80

100 120 140 160 180

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

To better understand the drivers of these productivity differences, it is useful to decompose


sector productivity into its two main components 24 :

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

3.1.1 Opportunities to improve allocative efficiency in Danish service sectors


A well-functioning competitive environment allows productive and efficient firms rapidly to
gain market share and scale so that firm level efficiencies translate into sector-wide
improvements. Past McKinsey analysis has shown that reallocation of employment share
to more-productive companies in a sector happens less quickly in Europe than in the US.
In 2000 for example, the most productive quartile of US firms experienced employment
growth of 6.2 percent per annum, versus only 0.3 percent in Europe. At the opposite
extreme, the least productive quartile of firms saw their employment shrink 1.6 percent per
annum in the US, but actually grow by 2.2 percent per annum in Europe 26 .
In the US for example, Walmart helped boost productivity of the retail sector as a whole
(Exhibit 20). In 1987, Walmart had a 9 percent share of the US retail market, with
productivity levels over 40 percent higher than the average player in the market. 12 years
later, Walmart had expanded its market share to almost 30 percent and its productivity
levels by almost 60 percent through its innovative business model, formats and operations.
Competitors had no option but to follow suit, some exiting the market while others
significantly raised their game. The retail trade sector excluding Walmart increased its
productivity by around 62 percent between 1987 and 1999, a higher growth rate than even
that of the market leader.
Denmarks service sectors, which can point to few productive firms that have rapidly
gained market share and scale, would appear not to have the same level of industry
dynamism. The Danish Economic Council for example, noted that the reallocation of
employment share from less productive companies to more productive companies could
result in significant productivity gains

27 .

At present, the three quarters of firms in an

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

WalMarts impact on US retail trade productivity

WalMart

US retail sector example

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

SOURCE: BEA; U.S. Census; McKinsey Global Institute

3.1.2 Potential to improve firm efficiency


Past McKinsey & Company and MGI work has identified several operational best practices
that explain sector performance. Many are not currently being adopted in Denmark. These
include:

Efficient division of labor: In many service sectors, there is evidence of a lack of


effective task management, with inefficient handover processes and suboptimal
allocation of labor. For example, the rigid division of tasks in the Danish construction
sector requires a significant number of handover points in the building process. In
the case of building a bathroom, there are as many as 10-15 handover points
between up to seven different types of workers. A large share of building workers
time is wasted waiting for the handovers. In professional services, there are many
examples of suboptimal usage of resources. In Denmark, doctors are used for a
range of tasks such as regular diabetes treatments which are often performed by
nurses in other countries such as Sweden.

IT enablement: There is also a lack of IT enablement in some sectors, despite the


clear benefits it can create for operational efficiency. In retail, for example, IT can
boost retail productivity through more intelligent stock management and optimizing
customer shopping behavior through say the provision of self-service checkouts. IT
was a significant factor in the growth of US retail productivity in the 1990s, as

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

Price comparison in selected service sectors

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

Lack of scale: Most service sectors in Denmark are characterized by a


predominance of relatively small-scale firms, despite clear benefits from scale
(Exhibit 22). In construction, for example, Denmark has a smaller share of large

52

companies than other comparable countries. The Danish construction sector


consists of around 33,000 companies, of which the top ten account for only 12
percent of the total construction turnover. In Sweden, by contrast, the top ten
account for 46 percent of the total turnover. For Finland, the number is 22 percent.
The advantages of scale are nevertheless substantial in this sector, the cost of
constructing new houses as part of a large-scale building program is as much as 25
percent lower than stand-alone homes.
A similar effect is apparent in retail. The clear international evidence is that larger
formats like hypermarkets and superstores are more productive than smaller formats.
Yet this is not reflected in the Danish mix. In peer countries, outlets larger than 2,500
sq.m. (hypermarkets and superstores) represent as much as 50 percent of total
grocery retail sales. In Denmark, however, grocery retail stores account for just 30
percent of the subsectors total revenue.

EXHIBIT 22

Size and productivity of Danish service sector firms


Denmark has a lower share of large
format stores, despite being higher
productivity
Share of grocery sector revenues;
Percent, 2009

Most employment in construction is


in smaller firms, despite larger firms
having higher productivity
Employment and productivity by firm
size, construction; 2007

High
Discounters

13

Hypermarkets

25

Productivity2

29
7
Superstores

39

Firm size

Share of
employment;
Percent

19 workers

32

Convenience
Low

21
2

Employment and productivity by firm


size, legal services; 2007

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

Most employment in legal services is


also in smaller firms, despite larger
firms having higher productivity

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

Offshoring: Offshoring has significant potential to improve cost efficiency across


service and good sectors. Past MGI analysis 28 has shown that 11 percent of

28 The Emerging Global Labor Market: The Demand for Offshore Talent in Services, McKinsey Global Institute, June 2005

53

worldwide service employment could be performed remotely 29 .

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.

3.2 COMPETITION AS A KEY DRIVER OF PRODUCTIVITY


Academic research generally focuses on three mechanisms by which competition affects
productivity. First, competition encourages managers to reduce inefficiencies 31 . For
example, research by McKinsey and the London School of Economics has shown a strong
correlation between the level of perceived competition and management quality, which in
turn is closely linked to firm productivity growth (see Box 3.1). Second, through changes in
market share and entry/exit rates, competition reallocates resources towards the most
productive firms (improving allocative efficiency) 32 .

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

Box 3.1. The link between competition, management quality, and


productivity
The Management Matters Research project is a joint venture between McKinsey and
Company and the Centre for Economic Performance at the London School of
Economics which explores the relationship between management quality and firm
performance. Large-scale surveys of management quality have been conducted for
thousands of firms, across 16 countries, focusing on 18 dimensions in three major
areas: (1) Lean operations; (2) Performance management; (3) and Talent
management.
A key finding has been the impact of management quality on productivity and output.
For example, an improvement of 1 point on a scale of 1 to 5 in the quality of
management practices is correlated with an improvement of six percentage points in
TFP. A single point improvement in management practice score is associated with the
same increase in output as a 25 percent increase in the labor force or a 65 percent
increase in invested capital.
The level of perceived competition in a market is a key driver of management quality.
Firms that had more exposure to international competition, particularly MNCs, were
found to have particularly high management scores on average.

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

competition in a market. 35 However, there are numerous sector level examples


demonstrating the strong linkages between productivity and competition 36 :

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

Changes in call costs in Denmark following competition reforms

Lowest price per minute1


DKK
Series of reforms to
Danish telecom. industry
since 1990s, including
Removing barriers to
entry and
discriminatory
restrictions on foreign
companies
Enhancing competition
through
interconnection and
carrier pre-selection
reforms
Prices for tele-services in
Denmark have generally
been among the lowest in
OECD countries, and
have declined further as a
result of competition

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.

3.3 GAPS IN THE COMPETITIVE ENVIRONMENT STILL EXIST


Denmark has implemented a series of reforms to improve the flexibility of its capital, labor,
and products markets and today, Denmark rates second among all OECD countries in
terms of capital market flexibility, and eighth on labor and product market flexibility (Exhibit
24). 40 As an example, Denmarks compliance with EU regulation of building standards is

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

12 percent of GVA today.

has

fallen

from

20

percent

in

2006

to

approximately

41

EXHIBIT 24

OECD rankings on capital, labour and product market flexibility


Restrictiveness of various markets1, OECD countries 2010
Indices between 0 and 5, lower being least restrictive
Capital market
UK
Denmark
Spain
Norway
Hungary
Switzerland
Ireland
Belgium
Iceland
Korea
Japan
Netherlands
US
Germany
France
Luxembourg
New Zealand
Canada
Portugal
Czech Republic
Mexico
Finland
Austria
Sweden
Greece
Australia
Turkey
Italy
Slovak Republic
Poland

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

However, there is still room for improvement in supporting a competitive environment. A


survey by the Danish Competition and Consumer Authority found that Danish firms
consider the threat from rivals to be 7 percent lower than the same assessment made by
firms in Germany and 3 percent lower than that made by firms in the UK 42 . Three broad
areas may explain the gap:

Regulatory barriers to competition: Despite Denmark performing strongly on


measures of product and capital market flexibility, regulatory barriers to
competition remain.

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

Lack of exposure to international competition: International competition can


boost productivity by exposing local firms to best-practice processes and
approaches, and by the pressure to change introduced by this additional
competition. However, Danish service sector firms appear to be relatively little
exposed to international best practice, given that a low share of foreign direct
investment is directed towards the local service sector and the presence of
international firms is lower than in peer countries.

Weaknesses in key enablers: Cross-sector issues supporting competition and


productivity also need to be addressed. One particular issue is the powers of the
Danish Competition and Consumer Authority. The Danish Competition and
Consumer Authority currently lacks powers to directly prosecute cases and the
mandated fine levels are too low to act as a powerful deterrent to
anticompetitive behavior.

3.3.1 Regulatory barriers to competition


In a recent survey by the Danish Competition and Consumer Authority, 20-30 percent of
firms claimed that regulatory barriers inhibit competition to a great degree 43 .

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

43Competition Culture, Danish Competition Authority, June 2010


44The OECD notes that this is primarily due to the legal services profession having exclusive rights to provide an array of services, as
well as zoning restrictions for retail trade. The Danish Competition and Consumer Authority has found several mistakes in the OECD
analysis for Denmark after correcting for these errors, the barriers to entry numbers are estimated to be higher than indicated by
the OECD, but remain fairly constant throughout the three time periods

59

EXHIBIT 25

Barriers to entry in services in Denmark versus peer countries

1998
2003
2008

Barriers to entry in retail trade and professional

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

3.3.2 Lack of exposure to international competition


There are also concerns with the exposure of Danish firms to international competition.
Supporting international competition is not about replacing Danish companies with foreign
companies rather it is about boosting productivity by ensuring Danish workers are
employed in the most productive enterprises and by improving the performance of local
firms by exposing them to best-practice processes and approaches and increasing the
pressure from them to improve. For example, sectors exposed to international competition
generally contribute disproportionately to productivity growth (relative to their size) by
comparison with protected domestic sectors. Danish export sectors cover 16 percent of the
economy but account for roughly 30 percent of the overall productivity growth (Exhibit
26). 45

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

Relationship between exposure to competition and growth


of GVA and labor production in Denmark
GVA and labor productivity growth 20002006

Other private sectors

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

FDI per capita

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

US multinational company productivity versus


other private sector firms from 19902007

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

Sector contribution to GVA versus FDI in Denmark


Current prices; Percent

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.

3.3.3 Weaknesses in key enablers


Cross-sector issues affecting competition and productivity are also important, ranging from
skill gaps to regulatory burden. One particular concern is the institutional power of the
Danish Competition and Consumer Authority. There is strong evidence that competition
policy has a significant influence on productivity. For example, a paper by the Center for
Economic Policy and Research (CEPR) empirically investigated the impact of competition
policy on TFP growth for 22 industries in 12 OECD countries over the period 1995-2005. 48
It found a robust positive and significant link between competition policy and productivity
growth, with the effects particularly strong in relation to the institutional arrangements and
the antitrust dimension.

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

Exposure to foreign competition in Denmark


Denmark has a lower penetration of
foreign firms in construction

Only 2 of the 10 European highest


revenue grocery retailers operate in
Denmark

Market share of foreign companies


among top 10 firms; Percent, 2009

Presence of top 10 European


grocery retailers in Denmark, 2009
Present in
Denmark?

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

There are no foreign firms among the


top 4 legal service firms in Denmark
Number of foreign owned companies
among top 4 legal service companies by market share, 2009
4

( )

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:

Organizational setup: Competition authorities require sufficient independence


from government to ensure neutrality (and to raise their status) and authorities
also need to be closely coordinated with related agencies, such as consumer
protection authorities and industry regulators to ensure consistency in
approaches and minimize duplication of activities.

Enforcement powers: Competition authorities require the appropriate powers


to investigate anti-competitive behavior and prosecute alleged transgressions.
This includes the ability to impose meaningful sanctions, including criminal
sanctions, to allow immunity for whistle-blowers (which has been shown to
increase conviction rates and lower the costs of enforcement) and to have the
powers to appropriately investigate mergers.

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.

Weak sanctions: The level of sanctions for competition violations in Denmark is


relatively weak. There are no possibilities of imprisonment (in contrast to, say,
the UK where individuals can be imprisoned for up to five years) and fines are
too low to be a powerful deterrent. For example, the largest fine imposed in
Denmark was for DKK 5 million, equivalent to just 0.06 percent of the
prosecuted firms turnover. The Swedish, UK, and EU competition authorities
can impose fines of up to 10 percent of a firms turnover, and have actually
imposed significant penalties. Whilst the actual size of the penalty should be
viewed relative to the size of the company, Exhibit 30 shows that the maximum
fines imposed for violations of competition laws have been much higher in other
countries. 50

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

Size of largest fines by competition authorities


DKK millions1

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

3.4 BARRIERS TO COMPETITION AND PRODUCTIVITY IN THREE


SERVICE SECTORS
Most classical academic and policy research fails to identify the factors that drive
productivity in individual sectors because it takes an economy-wide perspective. As a
result, government intervention in markets often tends to be hit and miss. In contrast to this
top-down approach, and over the course of nearly two decades, the MGI has used sector
level research in more than 20 countries and 28 industrial sectors, employing
microeconomic intelligence to build a picture of macroeconomic outcomes. We believe that
this micro-to-macro approach is vital in finding the key to better productivity.
MGI has previously highlighted how the operational decisions of businesses (e.g.,
product/format mix, scale, capacity utilization) influence productivity in different sectors; it
has also demonstrated that these operational decisions are in turn driven by factors in the
external environment (e.g., zoning laws, product market restrictions) that shape the
competitive dynamics of a sector (Exhibit 31).

66

EXHIBIT 31

McKinsey Global Institute (MGI) growth framework

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

Exposure to global best practice


Domestic competitive intensity
Non-level playing field/informality

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.

Significant potential spillover effects: As mentioned earlier, service sectors have


large potential spillovers by allowing companies to reduce their costs (notably
wage costs) and become more internationally competitive (particularly given that
Denmark operates a fixed exchange rate), by creating new incentives for globally-

67

competitive businesses to increase their own productivity, and by improving the


supply of talent. The spillovers are likely to be particularly significant for
construction, retail trade, and professional services, given they represent such a
large share of total employment and the fact that construction and food and
beverages are large drivers of consumer price levels.
For each of these sectors, we benchmark level and development of productivity
measured as value added per hour against peer countries to size the improvement
opportunities. Then, we identify underlying operational explanations of the performance
and identify levers and structural barriers to improvement.

3.5 CRUCIAL LEVERS FOR INCREASING COMPETITION AND


PRODUCTIVITY IN THE SERVICE SECTORS
Using the above approach, we find three broad levers can tackle barriers in the external
environment currently limiting exposure to best-international practice and firm growth.
These are:

The removal of technical barriers to competition: A number of specific barriers


hinder competition in the retail trade, construction, and professional services. These
include zoning regulations, which limit large retail formats and prevent construction
companies from achieving economics of scale from large building programs, as well
as the lack of harmonization of standards with other markets (e.g., in building
materials) and various market restrictions such as exclusivity agreements for
attorneys at law, and ceilings on the numbers of pharmacies and dentists.

Actions to attract best-practice foreign companies: In addition to removing these


technical barriers, a smaller country such as Denmark may need to market itself to
international business. Research by the MGI has shown that the size of the local
market is a key determinant of the location and investment decisions of Multinational
Corporations (MNCs). 51 This may mean placing a greater emphasis on active
outreach to foreign firms in these sectors. For example, foreign participation in
tenders for public construction projects is currently limited by a lack of awareness of
tenders abroad, in part due to tenders only being publicized in Danish. In addition,
Invest in Denmark, which is part of the Ministry of Foreign Affairs, has only a limited
focus on the service sectors, instead concentrating more on knowledge-intensive
export sectors such as life sciences, ICT, creative industries, maritime services, and
cleantech.

51 Growth and competitiveness in the United States: The role of its multinational companies, McKinsey Global Institute, June 2010

68

Building critical enablers: Key enablers to productivity and growth are


sometimes missing in the service sectors. In the construction sector, these include
training programs that provide a broader scope of training and education to facilitate
coordination across trades. Changes are also necessary in the institutional powers
of the Danish Competition and Consumer Authority, including providing the authority
with direct powers to prosecute cases and to impose greater fines than is presently
mandated.

69

70

4. The construction sector


4.0 CONSTRUCTION SUMMARY
Construction is one of the largest service sectors in Denmark: 7 percent of Danish total
employment (around 170.000 full time employees) is in construction and 27 percent of
the average Danish household expenditure goes to housing and utilities.
There is room for improvement on performance of the sector. Productivity of the
construction sector is significantly lower than for other service sectors. Danish construction
has experienced negative growth in GVA/hour since 1990 and Denmark is now 5 percent
after the Netherlands and 13 percent after Finland. In addition price levels are significantly
higher than in other countries (around 50 percent higher than EU15 average incl. VAT).
This is driven both by higher labor cost as result of lower productivity and by high material
prices.
Four opportunities exist to grow productivity performance:

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.

Improved coordination and cooperation between stakeholders and focus on design


to cost. Rigorous division of tasks on the construction site and a poor coordination
and accountability between stakeholder in the highly fragmented value chain (client,
advisors, construction company, contractors, etc.) drives significant waste in the
construction project and makes cross-functional cost optimization of difficult. The
situation is upheld by an industry dynamic with contractual models favoring small
projects and advisors giving less room for construction companies to design to cost
through standardized materials and work processes (e.g. use of pre-fabrication).

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.

Increasing exposure to international competition. Of the top-10 international


construction companies in Europe, only NCC and Skanska are present in Denmark.

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.

4.1 SECTOR OVERVIEW


Construction is a labor-intensive activity and one of the largest sectors in Denmark by
employment, engaging approximately 170,000 people and accounting for seven percent of
the total Danish workforce (comparable to the size of the construction sector in other
countries). Total production in the sector amounted to DKK 215 billion in 2006, or
approximately five percent of total Danish GVA. In that year new building starts reached 13
million sq.m. 52 However, the financial crisis has had a significant impact, reducing
production to DKK 196 billion in 2009 and more than halving new building activity, with a
reduction of 6 million sq.m. last year the lowest level seen in this decade.
The construction sector consists of three subsectors (Exhibit 32):

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.

Construction of new housing, businesses, and public buildings including extensions,


foundation laying, pipes, etc. accounting for 41 percent of production and 43 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

Employment and gross value add in the construction sector

Private non-residential

Denmark

Private residential
Public

Construction
segments

Employment
Hours worked, millions, 2006

Gross value added


DKK billions, 2006, 2000 prices

Share of production
Percent
17

Total construction
sector

318 (100%)

Repair work and


maintenance

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

SOURCE: Statistics Denmark

4.2 PERFORMANCE OF SECTORS


4.2.1 Productivity performance
Construction activity is highly cyclical, as in other countries, with total output and GVA
oscillating in relation to the performance of the broader economy. Since the 1970s and until
today, total GVA in the Danish construction sector has been fluctuating around an
unchanged level of DKK 55 billion. 55 However, on average, productivity (GVA/hour) in the
sector has been declining by around one percent per annum since 1990 (Exhibit 33)
effectively increasing total hours worked in the sector. Recently, with the severe slowdown
in building activity, both employment and productivity have declined; total construction GVA
fell by around five percent per annum from 2007 to 2009.
The weak productivity evolution in the construction sector means that Denmark is currently
falling behind European peer countries 56 given that these other countries either managed
to keep construction productivity relatively stable or increased it over the 2000-07 period

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 level and growth in construction

Share of total employment

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

Development in labor productivity for construction versus rest of economy


GVA per hour, DKK, PPP adjusted, 2000 prices

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

4.2.2 Price performance


Construction prices relative to peers
Danish construction prices are among the highest in Europe (Exhibit 35). According to
Eurostat, construction prices in Denmark are more than 50 percent higher than the
average of the EU-15 (including VAT) and 30 percent higher than Finland with the lowest
prices in the peer group. This is supported by an analysis published by the Danish
Enterprise and Construction Authority in 2000 showing that the construction cost for an
identical single family house (excluding land and VAT) was around 20 percent higher in
Denmark than in comparable European countries (the Netherlands, Sweden, Finland, and
Germany). 57 Construction prices significantly influence overall cost of living, as 27 percent
of Danish household expenditure is related to housing and utilities. 58

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

Comparative price level index for construction

VAT

2008, Index 100 = EU15 (incl. 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

Drivers of price difference


The major construction price driver is input costs (materials), with salaries and VAT also
contributing significantly (Exhibit 36).
Comparisons between Denmark and other countries like the Netherlands with significantly
lower construction prices (Exhibit 37) show that higher VAT and higher input costs in
Denmark explain much of the cost differential. However, about one third of the differential
is attributed to higher salary costs driven by more hours worked in Denmark versus the
Netherlands for a similar construction service - not driven by higher wage levels
indicating significant room for productivity improvements in Danish construction.
Our analysis of the performance of the Danish construction sector focuses on two areas:

Labor productivity in terms of working hours going into production of output

Input prices driven by the upstream value chain dynamics

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

Break down of Danish construction prices


Price index, 100=DK, 2007

100
20

48

26
4

1
Danish price

VAT

Input
costs

Salaries

Depriciation

Profits

SOURCE: Eurostat; EU KLEMS; McKinsey

EXHIBIT 37

Drivers of price difference in construction between Denmark


and the Netherlands
Denmark compared to Netherlands
Comparable price index, 2007, Index 100 = EU27
162

12
-23%

14
11

Danish
price index

VAT

Input
costs

External costs

Hours
worked

Salary
per hour

Depriciation Profits

125

Netherlands
price index1

Salaries

SOURCE: Eurostat; EU KLEMS; McKinsey

77

4.3 OPPORTUNITIES TO GROW CONSTRUCTION SECTOR


PRODUCTIVITY
As highlighted in the summary, four major opportunities to drive operational performance
have been identified:
1.

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.

Improved coordination and cooperation between stakeholders and focus on design


to cost. Rigorous division of tasks on the construction site and a poor coordination
and accountability between stakeholders in the highly fragmented value chain
(client, advisors, construction company, contractors, etc.) drives significant waste in
the construction project and makes cross-functional cost optimization difficult. The
situation is supported by an industry dynamic with contractual models favoring small
projects and advisors giving less room for construction companies to design to cost
through standardized materials and work processes (e.g. use of pre-fabrication).

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.

Increasing exposure to international competition. Of the top-10 international


construction companies in Europe, only NCC and Skanska are present in Denmark.
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 the
ability of foreign players to leverage scale and technical competences.

In the following four sections, we go through each of these in greater detail.

4.3.1 Potential for leveraging economies of scale in the Danish construction


sector
Overall, we have identified three drivers that will enable Danish construction to better
leverage the benefits of scale: i) removing barriers for companies to grow, ii) increasing the
size of building projects, and iii) driving more standardization in building projects. These
three drivers are of course highly interlinked, as larger projects will, in itself, enable more

78

standardization and will incentivize companies to grow. In the following section, we go


though each of the drivers in greater detail.
i) Removing barriers for companies to grow
Large companies are more productive: Data from several countries, including Denmark,
indicate that larger companies are able to reap scale benefits and are more productive
than smaller companies (Exhibit 38). Despite these scale advantages, the industry remains
highly fragmented. Across many European countries, including Denmark, only about one
third of construction workers are employed in companies with 50 or more employees and
up to 40 percent are employed in companies with less than 10 employees.

Exhibit 38

Labor productivity by size of construction company

1 and 9 employees
10 and 49 employees

2007

50 and 249 employees


250 or more employees

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

1 Gross value added per person employed


SOURCE: Eurostat

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

Danish construction market fragmentation compared to peer countries


Market share of top 10 construction companies1
Percent, 2009
46

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

Extent of informal labor in Danish construction


Tax wedge drives significant cost differential
between formal and informal work

Leading to high levels of informal


construction work

Marginal net wage for construction work


DKK per hour, 2008
Informal

Extend of informal construction


Response to question: Did you
perform informal labour the last 12
months? Percent, 19982005

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

1 Average 2008 construction worker monthly gross income of DKK 35,310/mth


2 Assuming customer gross income of DKK 40,000/mth (top tax bracket)
3 Assuming VAT of 25%, Copenhagen municipality tax rate of 32.6%, State taxes of 3.7% up to an gross income of DKK 389,900 and 15% above
4 Do It Yourself
SOURCE: Statistics Denmark; Rockwool Foundation; Danish Tax and Customs Administration; McKinsey

ii) Increasing size of building projects


Large-scale projects are more productive: The cost of construction for houses built as part
of a large-scale program can be as much as 25 percent lower than stand-alone houses
(Exhibit 41).
Research suggests that repetition effects are a significant source of productivity
improvement, both in new buildings and repair work. A recent study on repair processes
(based on a facade renovation project) in Denmark showed repetition gains of up to 60
percent (Exhibit 42). The benefits of scale in this case came from the way groups of
workers were able to specialize within the group.

81

EXHIBIT 41

Productivity by size of building project


Cost of new buildings can be reduced by
roughly 25 percent by increasing scale
Total cost of new buildings
Index 100 = Cost for stand-alone house

How scale drives higher utilization

Workers spend less time

NETHERLANDS

100

75

50
0

10 20 30 40 50 60 70 80

Number of houses built on


same construction site

preparing compared to executing


as tasks are bigger
More time is spent on site and
less on transportation between
sites
Supply chain is more efficient hen
shipping more material to same
site
Amount of needed overhead
functions (e.g., engineer) does
not increase proportionally with
size of project

SOURCE: Expert Interviews; McKinsey

EXHIBIT 42

Effect of repetition on productivity


Cost of repair projects in Denmark can be reduced by up to 60 percent
as scale becomes larger...
Total cost of repair project1
Index 100 = First project for work gang

DENMARK

100

-60%

50

10

Initial hours

1 Best performing work gang


SOURCE: Expert Interviews; McKinsey

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

Share of large building programs compared to peers


Distribution of large programs
in Denmark
Percent, 20072009

Share of all single family houses built


Percent, 2004/20072009

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

1 Based on houses built in 20072009


SOURCE: Bygnings- og Boligregisteret (BBR); Ejendomsstamregister (ESR); Officielle Standardadresser; MGI; McKinsey

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

In addition, the handling of building applications is undertaken separately by each


municipality with the result that the different requirements are relatively large and the
processing of building permits time-consuming.
iii) Driving more standardization in building projects
Use

of

standardized

processes

and

materials

increase

productivity:

Product

standardization is another important feature of scale. New buildings in Denmark, on the


other hand, tend to have their own individual characteristics and it is rare for two projects to
be exactly the same. By shifting towards more standardized buildings, construction
companies can make productivity gains by adopting well-known processes, reducing the
need

for

architects

or

engineers

to

engage

in

tailoring

activities,

using

prefabricated/preassembled materials, and procuring materials in larger volumes (with less


variety). For example, thanks to the repetition effects, construction of the standard
house format in Denmark (in Danish typehuse) is 15 percent more productive than the
construction sector in general (Exhibit 44).

EXHIBIT 44

Productivity in standard house construction


and productivity is higher
among standard house than the
overall building sector2
The market for standard
houses has been growing

GVA per hour3


DKK, 2007

Survey results (SBI)1

+15%

~30% of standard house

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

Prevalence of pre-fabricated houses in Denmark and Finland

Finland use 7 times more pre-fabrication


of houses compared to Denmark
Percent Pre-fabricated dwellings of total
1+2 family dwellings
61

7x

Pre-fabricated
dwellings
include wholly
prefabricated
dwellings and
dwellings
where most of
the assembly
process is done
off-site

SOURCE: Euroconstruct; Ingeniren; Pientaloteollisuus

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

61 Interviews with Scandinavian construction companies

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).

BOX 4.1 Success of Danish highway project through functional


tender and attraction of international players
In March 2010, construction began on a 25 km highway in Southern Jutland connecting
Snderborg and Kliplev. The project was the first road public private partnership (PPP)
tendered in Denmark and was won by KMG, a conglomerate led by German-Austrian
Strabag SE, at a cost of DKK 2.1 billion.
The construction project was originally planned to end in 2012, but is already expected
to finish 12-18 months ahead of schedule. In addition, the project will cost the Danish
government less than originally expected. Estimates by the Danish Road Authority
place risk-adjusted cost savings at around 20 percent.
KMG is responsible for building, maintaining, and operating the highway until 2038.
The success of the Kliplev highway tender is based on three things:
1.

The involvement of a large international player bringing new techniques and


building processes. For example, bridges have been built without central
supporting pillars, less dirt needs to be moved and that which is moved can remain
on site with the addition of lime.

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.

4.3.2 Potential for improving process efficiencies


As mentioned in the introduction, construction involves a high amount of on-site manual
labor. Difficulties in coordinating construction tasks and processes lead to a high degree of
inefficiencies and waste. Standardization and more use of prefabrication described in the
previous section would in part address this; here we have identified two additional drivers
that specifically can improve process efficiency in the construction sector, i) increasing
cross-functional skills and project management capabilities, and ii) minimizing seasonal
fluctuations in construction activity. In the following we go though each of the drivers

87

i) Increasing cross-functional skills and project management capabilities


The construction processes is complex involving many stakeholders and trades.
Construction work involves many different professions, mostly working separately, but in
close relation to each other. The rigid division of tasks requires a significant number of
handover points in the building process. In the case of a bathroom, there are as many as
10-15 handover points between seven different types of workers (Exhibit 46). The need for
coordination increases, but there is less accountability. A large share of building workers
time is wasted waiting for the handovers. Whilst regulatory changes have removed most of
the legal constraints, the division of tasks continues because of a lack of appropriate
training.

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

Typical process for building a bathroom in Denmark

Typical building workers distribution of time

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

1 Waste includes rework, waiting, unused time, interruption, and other


2 Based on measurement of Danish workers performing installations of concrete elements
SOURCE: Interviews; Danish Enterprise and Construction Authority; McKinsey

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

Amount of rework due to errors

Share of total production driven by rework due to errors


DKK billions, 2000-prices

100% =
Rework

155
4%

178
7%

Other
production

96%

93%

2003

2008

Industry experts indicate that


the high degree of rework is
driven by
Lack of accountability in the
sector
Need for coordination due
to the strict division of tasks

SOURCE: Rambll; Statistics Denmark; Danish Enterprise and Construction Authority; expert interviews; McKinsey

Improving cross-functional training could reduce the number of handover points.


Since 2007, when measures were introduced to reduce the administrative burden in the
sector, workers without authorization have increasingly been able to perform simple
electrical and plumbing jobs. However, whilst a regulatory barrier to reducing the number of
handovers has been removed, a skill gap remains. Workers are typically trained in, and
specialize in, just one profession such as electrical work or carpentry. And whilst the
government has identified skill gaps as an issue, there is still little overlap in the teaching of
trade skills.
Improving project management and coordination has brought down completion times and
cost: More importantly, there is limited focus on providing project managers with the
capabilities to better coordinate the building process. Interview findings and international
evidence suggests that there is a big potential in improving planning, coordination,
communication and accountability between the construction stakeholders (contractor,
subcontractors, engineers, advisors, etc.).
IT solutions can help facilitate easier coordination: IT solutions can facilitate coordination
and data sharing for larger construction projects. For projects of that size, it can pay off to
develop the software just for that project, but for projects of more moderate size, such
systems need to be in place and used by all parties to be cost-eficient. In Japan, a
nationwide tool, CI-NET, has been adopted by around 9,000 companies since the year
2000. This tool facilitates electronic data interchange among companies in the construction

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

62 Kvalitetsforskelle mellem sommer- og vinterbyggeri, SBI, 2007

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***
*

Heidelberg Cement Danmark

**

Finland - advances in concrete and cementitious composites and applications to civil infrastructure, 2007

***

The Kilpisjrvi Project: Case Study of Cold-Regions Research in Finland

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

4.3.3 Effect of consolidation in the upstream value chain on material costs


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,
including the big ones like cement, concrete, steel, and construction wood, than in the
average Western European country (Exhibit 48).

EXHIBIT 48

Comparison of international prices across material categories


Cost of materials for construction of a single family house, DKK thousands, 2009
Breakdown of main materials in a single family house (150m2)
Material category

DK material costs1

DK delta to WEU peers1


87

Cement and concrete


51

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

Market concentration of building material suppliers


Top 4 market share, Denmark, Percent

Material category1

Concentration
86

Plaster
75

Steel
Tiles

73

Concrete

68
67

Concrete elements
43

Plumbing
34

Roof tiles
Plywood

30
21

Construction wood

1 No information available on Windows/doors, bricks, polystyrene, insulation, floor covering, paint


SOURCE: Eurostat; Danish Enterprise and Construction Authority; McKinsey

EXHIBIT 50

Concentration of material supply sector compared to construction sector


Percent, Concentration ratio of top 4 players1, Import adjusted

Material supply
Manufacturing
56.8

Construction
Contractors

Wholesale
57.8
Inequality
of market
power

12.9

2007

2007

2007

1 Based on average across sub-sectors


SOURCE: Statistics Denmark

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

Cement prices in Denmark compared to Germany


and the Netherlands

CASE STUDY

Cement price
Index, Denmark = 100, 2009

~100%

Market share top 3 cement


producers (unadjusted
for import)

~100%

~50%

100
64

-63%
37

DK

NL

DE

1 Based on 2006 data


SOURCE: Danish Enterprise and Construction Authority; Danish Competition and Consumer Authority; SOMO; expert Interviews; McKinsey

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

Role of material discounts in contractor profits

Breakdown of typical construction invoice


Percent

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

SOURCE: Danish Enterprise and Construction Authority; expert interviews; McKinsey

ii) Lack of harmonization of material standards


Material standards are not fully harmonized: The absence of upstream competition is partly
driven by the way national building norms and material standards act as barriers to entry
for foreign competitors. Efforts to harmonize building and material standards across the EU
have led to the introduction of Eurocodes and CE markings. Eurocodes specify standard
properties and parameters for building materials and building methods, while CE markings
specify that products should meet requirements on certain selected properties.
Introduction of Eurocodes have helped and likely contributed to the increase in
construction material imports from 22 to 26 percent 63 in the period 1996 to 2006. However,
there are further national regulations beyond these EU requirements so-called National
Determined Parameters (NDPs) (Exhibit 53). These NDPs define national standards where
no EU standards have been defined and effectively limit the extent to which standards are
harmonized and therefore, the freedom of trade in building materials between countries.

63 Statistic Denmark [input and output tables]

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

Uploads of nationally determined parameters to Eurocodes across peers


Eurocode text
National annex
specifying NDPs
A National Standard consists of Eurocode text and
a National Annex specifying nationally determined
parameters
ILLUSTRATIVE

Number of NDP1s uploaded to JRC database2


Total

1,476
737

DK
206

SE
NDPs

-86%

75

NO

-50%

-95%

FI

344

-77%

NL

330

-78%

Eurocodes
DE

-100%

1 Nationally Determined Parameter


2 JRC manages the NDP database for the European Commission with the purpose of facilitating analysis and further convergence
SOURCE: Eurocodes

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

64 McKinsey press search and reports

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

Price comparison of steel classes used in Denmark and Germany

CASE STUDY

Reinforcement steel price1


Index 100 = DE Class A Steel
120

+20%

10

100

DE Class
A2

Production costs

Test costs3

Markup

DK Class B2

1 Prices are indicative and based on interviews with market experts


2 Class B steel is primarily used for building based on plasticity theory and Class A steel is primarily used for building based on elasticity theory
3 The required tests in Denmark include tensile test, elastic limit, proportional limit, and yield stress
SOURCE: Experts Interview; Dansk Beton

97

4.3.4 Limited exposure to international best practices


Although foreign construction companies are interested in entering the market something
we discuss below the international dimension in the Danish construction sector is weak
(Exhibit 55). The top ten players with international operations account for just 12 percent of
the market, against 27 percent in Sweden. Only two of the leading European construction
companies (by turnover) are currently present in Denmark.

EXHIBIT 55

Presence of highest revenue European construction companies in


Denmark
International presence of top 10 European construction companies (by revenue)
Origin Company name

Revenue1
# of countries Presence in
EURm, 2009 present
Denmark

Taylor Wimpey Plc

2,596

FCC SA

2,265

54

Royal Volker Wessels

1,640

NCC AB

877

ACS SA

547

10

Skanska AB

632

18

()2

Grupo Ferrovial SA

257

35

Balfour Beatty Plc

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

Scandinavian construction company interest in operating in Denmark


Share of respondents, Interviews with Top-10 Swedish and Finnish construction companies1, percent
Companies operating in residential
and office building segments

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

1 90% response rate


2 Two companies entered the Danish market, but subsequently decided to withdraw
SOURCE: Interviews; McKinsey

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

Operating margins in Denmark compared to other Scandinavian countries


Average operating margin1
Percent, 2009

4.2

4.3

4.6

1.3

1 Based on NCC, Veidekke and Bravida


SOURCE: Annual reports

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

Barriers experienced by Swedish construction companies interested in


operating in Denmark
Share of respondents, Interviews with Top-10 Swedish and Finnish construction companies1

Entry barriers to Denmark mentioned by Swedish


residential and office building construction
companies

Low margins

75

Higher contractual risk

75

Bigger role of advisors

50

Limited scale in projects

33

Other issues mentioned


Availability of favorable land
is limited both with respect
to scale and costs
Local presence important,
and getting people with the
right network is difficult
Cross ownership between
contractors and suppliers
gives favorable prices to a
select few

1 90% response rate


SOURCE: Interviews; McKinsey

EXHIBIT 59

Withdrawal of Skanska from the Danish construction market


in 2007

CASE STUDY

Reasons for Skanskas withdrawal from the Danish construction market


Skanska earnings call February 15, 2007

Skanska Danmark struggled to gain a strong


position, and withdrew in 2007
Revenue for Skanska Danmark A/S
DKK billions
EBIT-margin
2.9

3.2

3.3

Low profits in
Danish construction

There are also some issues embedded in the industry in


Denmark. You know if you look at the whole construction
industry in Denmark, you will not see much profit.

High employee
turnover

We have three times the turnover of personnel in


Denmark as the rest of Skanska. You can't have that kind
of instability in the construction business.

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

Skanska AB, Global Operations, 2009


Foreign presence, number of countries

18

Total revenue, DKK billions

96

Employees, thousands

53

Commercial and
residential losses

There is an extremely inefficient supply chain in Denmark.


There are strange phenomena. For example, the standard
for reinforcing steel in Denmark cannot be met by
reinforcing steel suppliers from any other country, even
though they're in the EU.
This [Denmark] is a market that is dominated by
consultants. The constructors are down the food chain.
The consultants are between us and our customers. They
write the rules; they run the industry. They make us
responsible for all the mistakes in design. So, those
conditions really make it a very, very difficult market.
The CEO of Skanska Denmark determined that it is in the
commercial building and residential sectors where we're
building commercial buildings and residential projects for
third party customers that all the losses come. So, we're
suspending any further activity in that sector.

Stuart Graham, President & CEO, Skanska

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.

BOX 4.4 Banedanmarks Signaling Program : an illustration of


actively attracting international supplier
The context is, that the Danish Parliament in January 2009 decided to fund a Euro 3.2
Billion replacement program of renewing all Danish railway signaling before 2021 - both
on the mainlines and regional lines (fjernbane) and on the Copenhagen S-bane (Sbane).
The size of the coming signaling system contracts will be large and the deliveries will
be complex and multi-disciplinary. The potential suppliers are expected to be large
multi-disciplinary companies or joint ventures with sufficient references.
To actively attract international suppliers, Banedanmark has opened and maintained a
dialogue with top management of all potential bidders globally, including visiting all
company headquarters. Additionally, Banedanmark has actively worked on developing
the tender material in a way that enables the bidders opportunities to leverage existing
knowledge and standards, as well as to bring in foreign staff.

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

4.5 INTERNATIONAL POLICY EXAMPLES


This section looks at initiatives undertaken in other countries to improve productivity in the
construction sector. No country stands out as representing clear best practices, so we
have looked at the UK 65 , the Netherlands 66 , and Finland 67 for relevant initiatives.
We have categorized the policy initiatives from these countries into three categories:
1.

Removing technical barriers to competition

2.

Actively promoting and fostering best practices

3.

Building critical enablers for increasing productivity

In the following section, we will go through the policy initiatives within each category.

4.5.1 Removing technical barriers to competition


An important barrier to scale lies in the variations in regulatory requirements and processes
between countries. Unfortunately, regulation in the construction sector has also become
increasingly complex and lacking in transparency over the years. Countries are therefore
concentrating on the simplification of regulations in the sector.

Simplification of regulatory requirements: Countries have simplified regulation by


relaxing planning codes, by loosening requirements on approval processes, and by
consolidating building requirements.
The Federal Ministry of Transport, Building, and Urban Development significantly
relaxed planning codes of inner cities in the German Town and Country Planning
Code in 2007. The changes involved the simplification of local development plans and
a relaxation of aesthetic requirements for existing residential buildings.
The Dutch Building Decision 2003 expresses safety, environmental, and energy
norms in terms of broad performance metrics of the finished project instead of specific
regulations covering the materials used (for example, specifying the total heat loss
allowed for a single family house rather than how to obtain the profile). This increases

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

flexibility and incentivizes construction companies to be more creative and innovative


about finding solutions to meet the requirements. The Dutch building process was
also simplified by reducing the number of types of permit, exemptions, and
notifications needed for construction activities from 25 to one. To further ease
approval processes of building plans, architects and advisors can be certified to
approve building plans themselves. Furthermore, the Dutch building regulation will be
simplified in 2011 so that both professional and non-professional readers can
understand it better.

Harmonization of regulatory requirements: Successful regulatory systems require


national, regional, and local administrations to function as a single entity as far as
the industry is concerned, thereby making decisions more predictable.
A Dutch amendment of the so-called Tracwet dealing with large infrastructure
projects was proposed at the beginning of 2010. One important feature of this change
is that local authorities will be less likely to appeal decisions of the government. The
aim is a reduction in legal battles between different authorities and therefore greater
certainty for construction companies. Building Decision 2003 also reduces the
differences between municipalities by, among other things, setting a limit on building
requirements that municipalities cannot exceed. Different sets of municipal fire safety
regulations are consolidated into one national set.

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.

4.5.2 Actively promoting and attracting best practices


The public sector accounts for a significant part of the total construction demand in all peer
countries, from 17 percent in Denmark to 25 percent in Germany and 33 percent in the UK.
Several governments use this position to influence the conduct of suppliers. Examples
include:

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

In these projects, the UK government also demands interdisciplinary thinking and


expects each construction project to use a coordinated team approach during
implementation to include different parts of the value chain at an early stage and to
try to eliminate idle time. Computer modeling, standardized components, and
preassembly were all encouraged. In these demonstration projects, the government
set clear improvement targets, demanding, for instance, a cut in building time of 10
percent and a 10 percent rise in productivity. 68
The Netherlands has implemented the concept of Quality on Site, which applies to
pilot projects on VINEX sites and focuses on the exchange of knowledge between
central and local governments, market partners and designers, and interest groups. 69

Tendering excellence: Competition in tendering has historically revolved around the


initial price, but other factors such as life cycle costs and quality are increasingly
being introduced. For example, the Rijkswaterstaat (a Dutch government agency
under the Ministry of Transport, Public Work, and Water Management) has adapted
its process to include time to completion and quality as well as price (the new system
is called Most Economically Advantageous Tender, or MEAT). In 2007, more than
half of the project volumes tendered by Rijkswaterstaat were based on MEAT rather
than the lowest bid.
Since 1999, the functional project approach has also become prominent in the
Netherlands. The most common form is called DBFMO (Design, Build, Finance,
Maintain, Operate). The state and a consortium of companies sign a contract for a
long period (typically 25 years). By contrast with conventional projects, the
government provides guidance on the output rather than controlling the content, giving
the consortium freedom to be as creative and as cost-efficient as possible. Cost and
time

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

4.5.3 Building enablers to increase competition and productivity

Increasing transparency for customers: Many customers in construction are one-time


clients with limited experience of the construction business in the UK, 95 percent of
buyers fall into this category. 71 In Denmark, 80-90 percent of new houses are built
for first-time clients. 72 One-time clients typically have little knowledge of what to
expect in terms of cost, products, building time, or contractual terms with the result
that they apply far less pressure in negotiations than more informed buyers in other
industries. Online tools are a proven and low-cost method to provide buyers with the
relevant information, such as standard terms, to make informed decisions about
builders, contractors, and advisers. TrustMark and Constructionline are two
examples from the UK. 73 TrustMark, introduced in 2006, issues a quality stamp for
builders based on independent on-site assessment and monitoring of the firms
technical skills, quality of work, trading practices customer satisfaction, and trading
record; by 2008, more than 16,000 building businesses were registered.
Constructionline has a similar aim, but is focused on business-2-business
(B2B),where TustMark is for domestic use. Capita and the Department of BIS
launched Constructionline as a joint public-private partnership. More than 8,000
buyers are currently using Constructionline. 74

4.6 POTENTIAL ACTIONS


In our analysis of the Danish construction sector, we have observed that:

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.

Significant process inefficiencies stem from the inefficient handover of activities


(the result of gaps in the training of workers and managers), lack of coordination
across the many elements of the value chain, and strong role of construction
advisers limiting construction companies ability to design to cost.

71 Construction Matters [House of Commons, 2008]


72 Interviews with Huskompagniet and Lind & Risr
73 Construction Matters [House of Commons, 2008]
74 Information on www.constructionline.co.uk [2010]

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.

International competition is weak due to many of the issues raised above,


including the limited scale of construction projects and a lack of coordination across
the value chain.

Potential actions to strengthen productivity and competition are: i) adjusting technical


standards to those of larger neighboring countries, nationally coordinating building
administration (larger partitionings, fewer entry points for permission), ii) strengthened use
of public procurement in order to drive productivity (consolidation on less suppliers,
functional tenders), iii) targeted pull of foreign companies, and iv) strengthened project
management training. These are described in further detail below.

4.6.1 Adjusting technical standards to those of larger neighboring countries and


nationally coordinating building administration
Adjusting technical standards to those of larger neighboring countries
Denmark is furthest ahead among EU member states in the adoptation of EU building
codes and standards. Most other countries significantly lag behind, and progress is slow.
Despite increased harmonization, there are still large national differences in building
codes that obscure the operating environment, for example, making it difficult to know if
imported materials are compliant with national specifications.
A JRC initiative is currently aiming to create an overview of the national differences in
building codes among the EU member states. The objective of this initiative is to identify
national building codes where further convergence will be possible. However, only half of
the member states are currently uploading their values in the database Denmark being
furthest ahead.
To speed up the harmonization process, Denmark could consider a more ambitious
approach, directly adopting standards from other countries. For example, Denmark could
align NDP with, for example, Northern Germany or Sweden for the parameters that have
been nationally determined in these countries. Even just adopting a subset could have
significant impact in a relatively short time.
For example, adopting the German Schuko standard for electrical outlets could
potentially reduce prices on electrical outlets by 15-45 percent through increased

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

4.6.2 Strengthened use of public procurement in order to drive productivity


Public spending accounts for around 17 percent of construction sector revenue. Best
practices by the public sector in procurement and tendering, and in what it demands of
suppliers and contractors, could drive improvements across the construction sector. The
case of Banedanmarks Signaling Program is an illustration of actively attracting
international suppliers (Box 4.4).
In the longer term, the public stakeholder may even invest in initiatives that may be costly
in the short term, but which will drive productivity and cost efficiency in the long term. We
see four components of a publicly driven promotion and attraction of best practices in
public construction:
Build public construction planning and tendering excellence
Establish cntral public center of excellence for design and tendering of construction
projects responsible for coordinating and standardizing construction projects across
states, regions, and municipalities: Procurement of public construction work is relatively
decentralized. There are several major buyers at the state level (FEB, UBST, SES, VD,
BaneDanmark, etc.), five regional buyers, and 98 municipalities. This limits the ability of
the Danish public sector to act in a coordinated manner and to leverage best expertise
when tendering construction projects.
A center of excellence could be established to track, establish, and document best
practices in public construction within the various types of construction projects (for
example, infrastructure, government buildings). The center would aid public stakeholders
with the planning, designing, and tendering of construction projects, coordinate and
even bundle projects across country and government authorities, and potentially set
public requirements for productivity improvements in public construction work (for
example, requiring evidence for the use of the most cost-effective building techniques).
This would ensure that public tendering and contracting expertise are improved and
leveraged to the greatest extent for all public projects, that all stakeholders have better
visibility of upcoming public construction projects, and that nationally determined
requirements on public construction are enforced to the greatest extent. It would further
provide construction companies and suppliers of construction services with one common
interface to the public customers.
Incentivize best practice construction conduct in public contracting
A more unified public tendering approach enables coherent requirements of best
construction practices from suppliers of construction services to public buyers. Similar to
the UK demonstration projects, common requirements could be imposed on all suppliers

roughly half, and in Sweden roughly a quarter, of Danish producer prices

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.

4.6.3 Targeted pull of foreign companies


Attract more large-scale players by translating and actively promoting tenders in the
international community
Large construction companies are more productive, but only few really large players exist
in Denmark. Attracting large-scale foreign players will boost competition and introduce

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.

4.6.4 Strengthened project management training


A lot of idle time is generated by the strict division of tasks between the various trades
and the poor coordination of this on building sites. Construction workers and managers
are generally not trained in lean processes, use of planning tools, and project
management. A stronger focus on lean construction and the encouragement of a mindset
that understands the bigger picture rather than the individual trades could be built into
education.

4.6.5 Other potential actions to consider


Increase transparency on construction quality and prices
There is limited transparency in the area of construction quality and prices, which is a
particular challenge for the large share of first-time customers. Establishing an overview
of best practices and historical prices of construction work could help create a more
equal relationship between the construction company and the building owner. This would
involve benchmarking construction companies against best practices to create more
transparency on quality and reliability of construction work similar to the TrustMark and
ConstructionLine web tools in the UK. Collection and publishing of a best practice
overview and price statistics could be undertaken by a public center of construction
excellence, for example, in cooperation with the Danish Association of Construction

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

5. The retail sector


5.0 RETAIL SUMMARY
Retail trade is a large service sector dominated by the grocery subsector. 230,000 people
are employed in retail (6 percent of Danish total employment. Grocery retail is by far the
largest sub-sector (25 percent of retail GVA) and accounts for 11 percent of household
spend.
Relatively weak productivity performance. Compared to peer countries, productivity levels
in the grocery sector are around 30 percent below the best performing European country.
Compared to other retail subsectors, Danish grocery retail has gone from the second most
productive subsector in 2000 to the least productive in 2006. Denmark also has the highest
food and beverage price index in the EU.
Low performance is driven by lack of scale. Danish grocery retail operates at a significantly
smaller scale than peer countries. There are 5,8 grocery stores per 10.000 capita in
Denmark - almost twice the level of comparable countries - and sales per store is almost
half of peer country average This has led to lower economies of scale through higher costs
of administration and more complex grocery distribution. It has also led to less use of IT in
the sector (self-scan, electronic price tags) as capital investments are higher with sales
spread across more stores. For example, Denmark has half the share of retail companies
with self-service checkouts versus peer countries. The high number of stores also link to
inefficient consumer shopping habits. For example, 61 percent of Danes visit the
supermarket more than 3 times per week, versus just 35 percent in Sweden. This results in
increasing handling costs at the retail front line.
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). Evidence from international best
practice shows that larger hypermarkets are up to 50 percent more productive than small
formats. Current zoning legislation does not, however, allow the construction of
hypermarkets. This is also a barrier to entry of foreign players. Among top 10 European
food retailers, only Aldi and Lidl are present in Denmark today, both in the discount
segment.
Denmark has some of the highest grocery prices in Europe. This is partly driven by the
sub-scale grocery retail sector but primarily driven by higher input prices typically making
up 80-90 percent of the grocery retailers costs. Increased international competition will
likely be beneficial.
International examples show that reforms can enable significant improvements:

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

Freedom to build unconstrained store formats supported the transformation of the


US retail sector led by Walmart, with retail productivity more than doubling from mid1980s to late 1990s

Potential

action

to

strengthen

productivity

and

competition

through

the

establishment of large stores. National and international marketed tender of a number of


facilities (15-25), each with access to the establishment of a hypermarket as well as
adjacent shops and restaurants. Each facility to be planned according to infrastructure and
permissions.

5.1 SECTOR OVERVIEW


The retail sector is a labor-intensive service sector employing around 230,000 76 people,
corresponding to about 160,000 FTEs (due to many employees working part-time). It is
one of the largest service sectors in Denmark, accounting for 6.3 percent of employment
and 4.2 percent of GVA.
In the national accounts, the retail sector consists of 4 major subsectors and other retail:
Grocery
Grocery stores primarily sell food and beverages, but sometimes stock products other than
food, such as clothing or household items. Grocery retail stores include nonspecialized
stores like hypermarkets, supermarkets, superstores, convenience stores, as well as
specialized stores like groceries, fish, bread, wine, cheese, tobacco, and health and
nutrition stores. Grocery stores make up 28 percent of total retail employment.
Clothing
Clothing stores sell clothes, footwear, glasses, jewelry, yarn, and textiles. Clothing stores
make up 14 percent of total retail employment.
Department stores
Department stores are self-service stores with an assortment of food, where turnover of
nonfood constitutes more than 20 percent of the total revenue and the sales area

76 Analyse af detailhandlen, konomi og erhvervsministeriet, 2009

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

Danish Retail Employment and Gross Value Added


over time per sub-sector

Grocery

Clothes

Department stores

Other

Pharmacies
x%

Employment

Gross Value Added

Hours worked; Millions, percent

DKK billions, 2000 prices, percent

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%

SOURCE: Statistics Denmark

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:

Dansk Supermarked is Denmarks largest retail company. It currently operates over


1,300 stores in food and nonfood, and employs 43,000 people. The discount store
Netto (owned by Dansk Supermarked) has successfully expanded its business to
more than 450 outlets in Germany, Sweden, and Poland.

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.

Bestseller is a retailer of womens wear, mens wear, maternity wear, childrens


wear, and young fashion. The group employs more than 41,000 people and is
currently present in more than 5,700 stores in 43 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.

77 Dansk supermarked [www.dsg.dk] and press searches

117

EXHIBIT 61

Retail sub-sector production and turnover of main players


Largest companies per sub-sector
DK retail production
DKK millions, 2006, 2000-prices
100% =

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.

5.2 PERFORMANCE OF SECTOR


5.2.1 Productivity performance
Retail is a low productivity sector. GVA per hour was DKK 160 per hour in 2009 (DKK 188
in 2009 prices), which is 30 percent lower than the national average of DKK 267 per hour
(DKK 327 in 2009 prices). Productivity grew during the economic upturn from 2000 to 2007

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

Retail productivity over time by sub-sector

x%

Share of GVA (2006)

GVA per hour, DKK, 2000 prices1


Grocery
0,4 p.a.
25

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

International comparison of retail productivity levels


and growth including share of total employment

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

Productivity of retail sub-sectors

Denmark

DKK, GVA per hour, PPP adjusted, 2000 prices, 20071


Grocery
177
174

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

5.2.2 Price performance


Price levels in Denmark are the highest in Europe. For example, the gross price of a
standard basket of groceries is 39 percent above the EU27 average and 24 percent above
the peer group average (Exhibit 65).
Gross price consists of net price plus taxes and tariffs. The largest component of retail
prices, especially within grocery retail, is the input cost. In grocery retail, input costs are
typically 80-90 percent of the total cost base. Hence, it makes sense not only to look at
retail productivity but also at what is driving input prices. 80

80 Sample of pofit and loss statements from various retailers across Northern Europe

121

EXHIBIT 65

Comparative price level index for food and beverages


for peer countries

Gross price index

2009, Index 100 = EU27

Other taxes and tariffs

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

SOURCE: Eurostat; Danish Competition and Consumer Authority; Mckinsey Analysis

EXHIBIT 66

Breakdown of comparative price index for food and beverages

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

5.0 4.8 4.5 4.2

FI

21.3 20.0

FR UK DK SE

Salary costs1 per basket


Index, 2009
9.3 8.7 8.7
8.4 8.4 8.1 8.0 7.6

84

BE DK FR DE

Average salary cost per personnel hour


Index, 2009

+
DK DE SE FR UK

SE NE UK

FI

BE NE

Intermediary costs per basket2


Index, 2009
91 89 89
81 81 78 75

19.0 18.8 17.6

SE FR BE DK

FI

11.7

9.1

DE UK NE

Average hours per basket


Hours, 2009
0.8

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

Danish food and beverages price index


compared to selected peers

In scope

Comparable price index, 2009, Index 100 = EU27

DK compared to SE
Danish
price index

Profits
Comparison
price index

DK compared to UK

139

139

139

23

18

Taxes & tariffs


Input
costs
Labor productivity
(hours
worked)
Wages
(salary per hour)

DK compared to NL

18

19

15

23

104

0
98

-25%

97
-29%

-30%

SOURCE: Eurostat; McKinsey

5.2.3 Overall performance


In summary, when looking across productivity, price, and employment, significant
improvement potential is found in all categories:

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

Box 5.1 Store format definitions


For the analysis of the Danish grocery sector, the following format definitions by Planet
Retail has been used to categorize the stores:
Hypermarkets: Self-service store with a sales area of more than 5,000 sq.m., offering
both a comprehensive food range and a wide choice of non-food items. Depending on
the individual operation, the non-food offer can be as deep and wide as in a department
store. Examples include the Bilka chain.
Superstores: Self-service store with a sales area of between 2,500 sq.m. and 5,000
sq.m. As with hypermarkets, superstores offer a comprehensive food range, but due to
their smaller sales area, their non-food offer is generally more limited than in a
hypermarket. Examples include the Ftex and Kvickly chains.
Supermarkets: Self-service store with a largely grocery offer, ranging from 400 sq.m.
to 2,500 sq.m. Depending on individual store sizes, there are also non-food items
available. Examples include SuperBrugsen, SuperBest, and Irma.
Discount stores: Efficiency-based food outlet selling a small number of items in vast
quantities, often trading from roughly 1,000 sq.m. Examples include Netto, Aldi, Lidl,
Fakta, Rema1000 and Kiwi.
Convenience stores: Small food outlet selling from less than 400 sq.m. Often,
convenience stores are similar to supermarkets, but there is also a non-self service
version. Examples include DagliBrugsen, LokalBrugsen and 7-Eleven.
Above segments exclude specialized food stores, e.g., green grocers, butchers, and
bakeries as well as kiosks, mobile stores, and petrol station stores.

5.3 OPERATIONAL EXPLANATIONS OF PERFORMANCE


As shown earlier, VAT, input costs, and labor productivity are the primary drivers of high
grocery prices. In this report, focus is on input costs and labor productivity as these can be
addressed at a sector level. MGI productivity studies in other countries, 81 have found that
the following operational indicators for productivity and input costs in grocery retail are
most relevant:

81 For more information on this work, visit the McKinsey Global Institute website
(http://www.mckinsey.com/mgi/rp/CSProductivity/index.asp)

124

1.

Penetration of modern and more efficient store formats

2.

Frequency of grocery store visits and size of shopping basket

3.

Degree of IT enablement in the sector

4.

Extent of competition and exposure to best-practice operators

5.

Productivity and competition in the upstream value chain (the food


processing sector)

5.3.1 Penetration of modern and more efficient store formats


Productivity across different formats
Scale through store format is a key driver of retail performance with large formats generally
having higher productivity than small formats and specialized formats (e.g., discounters)
being more productive than general formats. A McKinsey benchmarking study of the 21 top
performing store concepts in Denmark and Northern Europe confirmed that format type
and size is key to the performance of international retailers. This is also true for Danish
grocery retailers. 82

82 Proprietary McKinsey benchmark

125

EXHIBIT 68

International comparison of retail productivity per format


Sales per FTE hour, DKK, PPP, 2009
Average productivity per format
Format
Hypermarket

Danish performance
n/a

European best practice1


1,983

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

1 Based on McKinsey survey of European best practice companies


SOURCE: McKinsey Benchmark of top European grocery retailers

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

83 Data from Planet Retail

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

International comparison of grocery retail outlets per capita


and average sales per outlet
Grocery outlets1 per thousand capita
Number, 2007

Average sales per outlet


DKK (millions), PPP, 2007

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

International comparison of retail revenue and number


of outlets per format
Percent, 2010
Format

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

The difference seems to be especially pronounced in the hypermarket segment where


hypermarkets share of total outlets is 4 times higher in Denmark compared to peer
countries. There is thus a potential of closing the gap to peer countries in the hypermarket
segment and increase productivity level in the sector.
Effect of large efficient formats on the performance of other formats
Hypermarkets leverage scale better than any other format, making them the most
productive format in the fullproduct-range category. Further, they compete with both
discounters and supermarkets (on low-price products and on one-stop shopping
respectively) pressuring these formats to innovate their value proposition and optimize
costs and productivity, effectively increasing productivity of the entire sector (see box 5.2
for French example of the positive benefits of hypermarkets).

128

BOX 5.2 Hypermarkets increase competition and drive down


prices scross formats
A French study in 2008 for E.Leclerc* found that:

Competition from hypermarkets drive down prices more effectively than


supermarkets and discounters: Cities with high presence of hypermarkets
showed average price levels 2,7 percent lower than comparable cities with a low
number of hypermarkets. In contrast discounters were found not to lower the
average price level of similar products, though some effect was seen on
substitutable products through the offering of private brands (the price drop of 2,7
percent found in cities with hypermarkets related to comparable products).

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.

Effect from non-conglomerate hypermarkets is greater: In cities where


hypermarkets belonged to a multi-format conglomerate with high local presence,
the effect on prices was smaller.

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

The productivity improvement potential is likewise significant. The simulation shows a


possible improvement potential of ~25 percent on labor productivity (Exhibit 71).

EXHIBIT 71

Productivity potential of reaching best practice for Denmark


Sales per hour, DKK, 20091
Change in performance
1,827
+23%

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

As the improvement is constituted


by reduction in worked hours, it
translates directly into a
corresponding 23% improvement
in GVA/hour for the subsector
Productivity improvements in the
larger retail sector as well as the
overall economy may result from
spillover effects

1 Average across the analyzed formats


SOURCE: McKinsey analysis

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

Reduction in number of grocery stores since 1998


Number of grocery outlets1 in Denmark

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

5.3.2 Frequency of grocery store visits and size of shopping basket


Danes visit grocery stores much more frequently than in other countries, for example, 61
percent of Danes visit the supermarket more than 3 times per week, versus just 35 percent
in Sweden (Exhibit 73). A consequence of this is increased handling costs, corresponding
to 5 percent of frontline staff time. 84 Customers, meanwhile, have to spend more time
commuting to, and queueing in different stores, time that could be better spent on other
more value adding or leisure activities. The value of this loss of potential working hours has
not been thoroughly investigated, but for Denmark as a whole,
it could be significant. Preliminary analyses show that around 20 minutes per shopper
could be saved every week by changing to the Swedish shopping pattern. 85

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

Nordic comparison of shopping patters

Danish potential from reaching Swedish


shopping patterns1
Fewer visits per year

Visits to grocery stores per week

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

leading to less need for frontline staff


FTEs
15,951

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

5.3.3 Degree of IT enablement in the sector


In the US, IT has shown to boost retail productivity through more intelligent stock
management, optimizing customer shopping behavior through, say, the provision of selfservice checkouts. IT was a significant factor in the growth of US retail productivity in the
1990s, as exemplified by Walmart (Exhibit 74).

86 Nordic Food Markets a taste for competition, 2005, by the Nordic competition authorities

132

EXHIBIT 74

Productivity growth changes in the US due to IT-enabled operations


Percent

Real growth in sales per hour


6.5
3.1

3.4

Productivity growth
10.1

1995
1999

Delta

4.8

5.3

1987
1995

1987
1995

1995
1999

Delta

Most of delta (2.3%)


accounted for by
improvements in business
processes, e.g., through ITenablement and better
organization of functions
and tasks (OFT)
One-third of OFT
improvements explicitly due
to Walmart; two-thirds due
to market reaction to
Walmart

Real growth in value add per


unit of sales

1.9
1987
1995

3.4
1.5
1995
1999

Delta

SOURCE: BEA; BLS; Census; McKinsey Global Institute analysis

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

Danish IT investments and IT enablement compared with peer group

Investing in IT will occupy a relatively higher


share of Danish store revenues

which may explain the lower IT enablement in


the Danish retail sector

IT investment costs
per store1
DKK thousands

Share of companies piloting self-service check-outs


Percent

Average revenues
per store2
Index 100 for Denmark

77

Peer group

2,728

38

Denmark

(Bilka, Ftex and Netto)

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

1 Based on interviews with international retailers


2 COOP and DSG used as proxy for Denmark while peer companies include top 8 European retailers by revenue
SOURCE: Interviews; McKinsey analysis

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

5.3.4 Extent of competition and exposure to best-practice operators


The Danish grocery retail sector is generally characterized by significantly less competition
than seen internationally. Only in the discount segment are more players present than the
average of peer countries. For the full range formats, Denmark has very few players with
just one in the hypermarket segment, two in the superstore segment and four in the
supermarket segment (Exhibit 76). Naturally, this leads to less competition within format
segments.

EXHIBIT 76

Number of grocery companies per format in Denmark


and selected countries

Denmark
Average of
selected countries1

Grocery retail companies


Number, 2009
10.3

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

1 UK, France, Germany, Sweden, Belgium, Netherlands, Finland


2 Convenience stores exclude specialized grocery stores e.g., green grocers, butchers and bakeries as well as neighborhood stores, e.g., 7-Eleven and
Statoil
SOURCE: Planet Retail; McKinsey analysis

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

Format dispersion of the two main grocery players in Denmark


2009, Share of revenues within format segment2

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

Danish presence of top 10 European grocery retailers


Revenue group
DKK billions, 2009

Revenue share of Aldi and Lidl


in Danish discounter segment
641

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

Aldi revenue share


Percent
18.9
15.5
12.0

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.

5.3.5 Productivity and competition in the upstream value chain


The largest component of a retailers food prices is the retailers input costs (costs of goods
sold). These typically represent 80-90 percent of the grocery retailers total costs. Thus,
high input prices are a significant driver of high prices for groceries.
A price breakdown of Danish food and beverage consumer prices shows that Danish
retailers have high intermediary costs (including costs of inputs, rent, utilities, depreciation,
etc). Intermediary costs are 28 percent higher than in the UK (Exhibit 79). This clearly
indicates that input costs are higher in Denmark as input costs in grocery retail typically
make up 90-95 percent of the intermediary costs.
Productivity level and growth in the food processing sector
High prices of processed foods could be due to low productivity in the upstream food
processing sector, but could also be because of low price competition in that sector.
Looking at productivity first, a low level is indeed found in Denmark compared to most
other peer countries except Germany and France. In addition, Denmark falling further
behind with the second lowest productivity growth in the group (Exhibit 79). Ireland is
included in the analysis as they are known for their large and successful food processing
sector and is best-in-class at the highest productivity level and growth rate.
Besides Ireland, the Netherlands is the peer group country with the highest productivity in
food processing. A breakdown of the price difference of food manufacturing prices between
Denmark and the Netherlands does indeed show that productivity is the greatest driver
(Exhibit 80). Also, compared with other EU countries, Denmark has the most concentrated
food processing sector. (Exhibit 81)

137

EXHIBIT 79

Danish productivity in food processing compared


to peer countries

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

Danish food manufacturing price index compared to the Netherlands


Decomposition of Danish Food, Beverage, and Tobacco Manufacturing production compared to the
Netherlands; Comparable price index, 2007, Index 100 = EU-25

107

99

Danish
Price Index

Input costs

Hours worked Wages


Salaries

SOURCE: EU KLEMS; Eurostat; McKinsey Analysis

138

Profits

Dutch
Price Index

EXHIBIT 81

Degree of concentration in food manufacturing and grocery retail

Concentration in food & beverage processing sector


Herfindahl index1, 2006
DK

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

5.4 BARRIERS TO COMPETITION AND PRODUCTIVITY


As shown, the largest productivity improvement potential lies in changing the format mix
towards more productive modern formats, supporting IT enablement, increasing basket
sizes, and attracting international best practice and further competition to the sector.
Zoning regulation is the primary barrier behind all these operational weaknesses (Exhibit
82). Zoning limits the expansion of modern formats which provides scale to justify IT
enablement; modern formats can also offer a product range which can contribute to
increased basket sizes (notwithstanding any cultural preferences for more frequent trips)
and can help attract international operators that specialize in these large-scale formats.
A major reason that large-format penetration has been limited in Denmark is a 3,500 sq.m.
grocery retail store size limitation set by current zoning legislation. Since 1997, grocery
stores above 3,500 sq.m. have been prohibited in urban areas, in rural areas the limit is
1,000 sq.m. For non-grocery stores, the size limit is 2,000 sq.m. , but large cities can grant
3 exceptions to this rule per year.
All Danish hypermarkets and most superstores are above this size limit and were built
before the rule was implemented in 1997. Since then, opening of new large stores has not
been permitted in Denmark. In a period where presence and efficiency of modern formats
have grown and resulted in large productivity gains in countries like US and Sweden, the

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

Danish legislation on format size


Average square meters per store, 2009

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

91 Interview with head of business development at Dansk Supermarked

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

Foreign presence of the top 10 European highest revenue grocery


retailers by format

Home
Abroad

Revenue (DKK billions), 20091

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

5.5 INTERNATIONAL CASE EXAMPLES


In terms of reforms, Sweden provides one of the clearest examples of the potential impact
that could occur in Denmark from reform of zoning laws. In 1992, the Swedish zoning law 93
was deregulated with the purpose of stimulating competition and lowering prices for the
benefit of consumers. According to the 1992 amendment, the consumer must have
access to a comprehensive supply of products and services and be able to prioritize
between low prices, proximity to the store, and high service level. Competition was
stimulated through liberalization of retail trade establishment, and reduction of
municipalities influence on store type decisions. Before, the municipalities were able to
specify what retail store types should be built in their locality and were indirectly able to
discriminate against retailers that could be perceived as a threat to their small, local
retailers.
After the reform, the Swedish municipalities were required to act in the interest of
increased competition, such as, allowing the entry of foreign grocery retailers or largeformat stores that could offer the consumer a better price due to scale advantages (Exhibit
84). According to the 1992 amendment, the municipality has a responsibility to ensure
that competition is given as much freedom as possible to keep prices down, and to
increase the companies effectiveness to the advantage of the consumers. The
municipalities were obliged to allow the entry of a broader range of store types and fair
competition among them: The purpose of retail should not be specified further unless
there are specific reasons, e.g., a suitable store structure, considerations for the
surrounding area and design of the buildings.
The deregulation led to increased competition from new entrants, growth of large, highly
efficient stores, and a shift in consumer shopping patterns:

Better access to prime locations (and a significant reduction of corporate taxation)


made it increasingly attractive for foreign retailers to enter the Swedish market. Netto
and Lidl entered Sweden in 2002 and 2003, which lead to increased price
competition to the benefit of the consumer.

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

The effect of zoning law deregulation on size of outlets in Sweden


SWEDEN CASE EXAMPLE
When zoning laws were deregulated in 1992, the size of new grocery
outlets increased steadily in the late 90s
Number and size of new retail outlets
Number of outlets, m2

Average size of new


outlets
Number of new outlets
Average size m2

Number of outlets
100

2,800

90

2,400

80

and led to a shift in industry structure


Growth in shopping centers, and
thereby better access to retail space
for new entrants
Increase in retail trade in shopping
centers from 2033% today
Change of consumer patterns
Higher average basket size
Fewer shopping trips

2,000

70
60

1,600

50
40

1,200

30

800

20

Growing interest among municipalities


to attract large, retail chains to spur
growth and employment in local
community
Growth of integrated chains that
operate more efficiently

400

10
0

1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 2004

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

The increased number of large-size stores led to a shift in consumer shopping


patterns towards more concentrated shopping trips. One example is the growth of
retail trade taking place in shopping centers, rising from 20 percent in the early
1990s to 33 percent today.

94

According to interviews with retail experts, the

development was driven by better access to large-format stores as well as growing


consumer demand for convenience that made it increasingly attractive to do their
shopping in higher quantities at the same place. Additionally, there was a trend

94Fredrik Bergstrm, Forskningsrapport S56, Handelns Utredningsinstitut (HUI)

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

Impact of Swedish reforms in retail sector


Productivity level

Productivity growth

Index: 100 = US 2005


114

Compound annual growth rate 19952005


%
4.6

100
78

3.2

1.5

SOURCE: EU KLEMS; McKinsey Global Institute analysis

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

Shopping pattern in the UK 20002010


Total UK

Hypermarkets are increasing their


share of total sales

Hyper

Super

100
2

72

leading to fewer shopping trips


Shopping frequency
Trips per week

Share of sales by format


Percent
100

100

13

2.83

-5%

2.74
66

61

2.69

Convenience
Discount

23

22

21

2000

2005

2010

2000

2005

2010

SOURCE: Nielsen; Verdict; McKinsey Analysis

5.6 POTENTIAL ACTIONS


In our analysis of the Danish grocery retail sector, we have observed that:

Low performance is driven by lack of scale. Danish grocery retail operates at a


significantly smaller scale than peer countries. There are 5,8 grocery stores per
10.000 capita in Denmark - almost twice the level of comparable countries - and
sales per store is almost half of peer country average This has led to lower
economies of scale through higher costs of administration and more complex
grocery distribution. It has also led to less use of IT in the sector (self-scan,
electronic price tags) as capital investments are higher with sales spread across
more stores. For example, Denmark has half the share of retail companies with selfservice checkouts versus peer countries. The high number of stores also link to
inefficient consumer shopping habits. For example, 61 percent of Danes visit the
supermarket more than 3 times per week, versus just 35 percent in Sweden. This
results in increasing handling costs at the retail front line.

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

establishment of large stores. National and international marketed tender of a number of


facilities (15-25), each with access to the establishment of a hypermarket as well as
adjacent shops and restaurants. Each facility to be planned according to infrastructure and
permissions.
More detail is given below.
Initiating the establishment of hypermarket formats requires exemption from current zoning
regulation to allow the building of a number of large grocery retail formats greater than
3,500 sq.m. Exempting from the current size limits at a defined number of locations
provides opportunity to balance zoning concerns and the need for more productive, largerformat stores. It also allows for strategic selection of suitable sites and attraction of new,
and especially foreign, players to establish hypermarkets in Denmark by preparing of
multiple sites simultaneously to offer sufficient scale. In contrast, permitting hypermarkets
one by one, e.g. on an independent application and assessment basis will likely only lead
to an incremental expansion of existing players in the hypermarket segment
Presence of best-practice retailers adds competitive pressure on all market players and
boosts overall productivity of the sector. For hypermarkets, best practice is found abroad in
chains like Tesco, Carrefour, Casino, Walmart, etc. Attracting one or more of these players
to Denmark could thus increase productivity. Interviews with large retailers and experience
from other countries show that a number

considerations like site location and

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.

Close to urban area with easy access to road infrastructure


Large high-throughput retail stores are typically located outside larger cities, very
close to main infrastructure like high-trafficked highways and beltways (taking
advantage of the easy accessibility of customers traveling by car).

2.

Colocated with other large retailers and food outlets


There are significant synergies in bundling grocery hypermarkets with other nongrocery retail outlets, such as, electronics, apparel, furniture, and restaurants. This
ensures strong customer flow as it allows the customer to go to one place for

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.

High-capacity parking facilities


Establishment of these large retail outlets sites with several large retailers requires
significant parking capacity.

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

6. The professional service


sectors
6.0 SUMMARY
Professional services covers many sectors: Professional services includes individuals and
firms that provide independent services based on skill, knowledge, or reputation. It includes
12 sectors, ranging from IT services to general practitioners, that employ 8 percent of the
workforce in aggregate. The sectors are grouped into 3 categories for purposes of
comparison business services, regulated advisory, and healthcare services.
There is room for improvement in performance of professional services: On an aggregated
level, productivity level and growth is at par with average peer countries, but behind bestpractice countries. Danish productivity in terms of GVA per hour is PPP-adjusted DKK 280,
compared to 264 in Sweden and 362 in the UK. Productivity growth, however, has been
flat in the period 2000-07, whereas both Swedens and UKs grew 3.6 percent and 4.1
percent respectively. Given the nature of these human-capital-intensive businesses,
operational productivity measures are examined in addition to GVA per hour.
Business services and regulated advisory
Business services and regulated advisory sectors employ 165.000 FTEs and consist of a
broad range of sectors, such as IT services, legal services, auditing and bookkeeping,
engineers and architects, and real estate agents.
Productivity is below that of best practice countries. As an example, Danish productivity is
15-20 below that of the UK.
There is significant potential in improving productivity through developing economies of
scale. The sector is characterized by being more fragmented than seen in peer countries,
e.g. in Denmark, there are on average 6 employees per law firm compared to an average
of 11 employees per law firm in the UK.
In addition, productivity can be improved through increased exposure to best practice, e.g.
by attracting international competition. However, regulatory conditions, e.g. ownership
restrictions and exclusivity rights (right to practice) in legal services, hinders international
players in operating in the Danish market. Potential actions include:

Enhancing competition and productivity in business service 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-

149

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

clinical/administrative support. As an example, the share of clinics with only 1 dentist is 46


percent. The structure of the sectors limits productivity through 2 mechanisms:

Development of economies of scale is limited due to duplication of administration,


clinic space and IT.

Optimal division of labor is limited, since general practitioners and dentists are
spending

time

on

less-specialized

tasks

that

could

be

handled

by

clinical/administrative support staff.


Changes in regulation are to be considered within the special characteristics of the sectors,
e.g. high public financing. Experiences from other countries, such as Sweden, show that it
is possible to implement reforms that encourage competition and productivity
improvements while considering public health and financing.
Dentists
Denmark experiences low productivity in dental care, with the lowest ranking of capita per
dentist among peers. Barriers are largely regulatory and include limitations on pricing
structure and ownership, e.g. only authorized dentists are allowed to own clinics, and at
limited scale. Potential actions to increase scale, promote a more optimal division of labor,
and increase exposure to best practice include:

Opening up ownership to non-practitioners (including chains and/or foreign


competition) to drive scale in the industry and encourage a more optimal division of
labor. Exploring the feasibility of increasing performance pressure by reducing
subsidies and setting maximum, rather than fixed, prices. Reducing subsidies with
productivity improvements to ensure continuous efficiency improvements while
mitigating potential adverse effects on public finances. Examination of alternative
models to the collective bargaining agreement system as industry structure develops
towards larger entities.

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:

Initial reduction of fees to increase performance pressure. Deregulating ownership to


allow the development of financially strong, large professional organizations that use
scale to drive productivity improvements, e.g. through a more optimal division of
labor. On-going adjustment of fees in order to ensure continuous efficiency
improvements while mitigating potential adverse effects on public finances.
Evaluation of patient co-payments and provider incentive structures to control
unnecessary visits. Continuous reassessment of total number of general practitioner
licenses, as patient throughput, at the same level of service, increases with
competition. Exploring alternatives to the collective bargaining system as industry
structure develops towards larger entities.

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.

The Danish pharmacy sector is characterized by regulation limiting competition


considerably more than seen in Sweden and the UK. Denmark enjoys low prices on
drugs compared to peer countries. However, it could be considered whether the
existing regulation continues to be an efficient way of ensuring the objectives of the
sector, in relation to quality, access, and public finances. Potential reform elements
could include alternative distribution channels (e.g., supermarkets), setting
maximum, rather than fixed, prices, for OTC drugs, as well as removing the revenue
redistribution system. In the short term, removal of ownership, opening hour, and
product assortment limitations can encourage efficiency as well as promote an
industry structure which expands the solution space for future reforms.

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

6.1 SECTOR OVERVIEW AND OVERALL PERFORMANCE


6.1.1 Characteristics of professional services
The professional services sector typically comprises individuals or firms that offer
independent services on the basis of skill, knowledge, or reputation. These services are
primarily knowledge intensive and their quality is, therefore, hard to evaluate. Professional
services in Denmark have traditionally been subject to regulation in order to guarantee
quality and to ensure that they are accessible to consumers.
This broadly defined sector covers roughly 12 sectors ranging from IT services and real
estate agents to dentists and pharmacies. In total these sectors include approximately
209,000 FTEs, corresponding to 8 percent of the workforce (Exhibit 87).

EXHIBIT 87

Professional services employment

xx FTEs (thousands)

17
8

Other health
providers1,2

11

Opticians1

13

12

209

100

Total

Dentists1

PR & marketing

Auditing & bookkeeping

21

Engineers &
architects

IT Services

24

14

General
practitioners1

16

Pharmacies1

20

Legal services

44

Real estate
agents

50

R&D services

Professional services employment


Share of hours worked, 2006

1 Split is estimated based on number of full-time employees in sector


2 Includes home nurses (36 %), psychologists (33 %), specialist doctors (14 %), physiotherapists (6 %), chiropractors (3 %), laboratories (2 %), midwifes
(2 %), chiropodists (0.2 %), and other health services (4 %)
SOURCE: Statistics Denmark

6.1.1 Productivity performance


To ensure correct understanding of sector-specific productivity performance, a number of
productivity measures are applied and compared to a peer group comprised of Sweden,

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

Danish productivity in professional services compared


to peer countries

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.

Within professional services in Denmark, sector productivity shows large differences

B.

Denmarks performance in each of the sectors is different to that of peer countries

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

Danish GVA/hour across sectors


GVA per hour, DKK 2006, 2000 prices
GVA per hour is only used as an
indication of productivity performance.
Operational productivity measures are
consequently also taken into account.

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

Auditing & book-keeping

70%

80%

90%

100%

Doctors,
R&D
Real estate
dentists
Services agents3
and other2
Share of employment
(hours worked)

1 Includes personnel care retailers


2 Includes GPs, specialist doctors, dentists, home nursing, midwifes, physiotherapists, psychologists, laboratories, chiropractors, chiropodists, and
veterinarians
3 Figure for real estate is from 2005 due to 2006 fixed prices issue
SOURCE: Statistics Denmark

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

Productivity in Danish professional services compared


to peer countries across example sub-sectors
Index 100 = Denmark, 2007, PPP adjusted, 2000 prices
34

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

1 Includes personnel care retailers

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

Engineers & architects


114
104
100
UK

UK

DE

Legal services and Auditing & book-keeping


116
101
100
90
77
62
UK

75

Denmark

81

UK

Total professional services

Share of Danish GVA, 2007

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

Peer group average labor productivity, Danish share


of employment

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

1 Gross value added per person employed


2 Data available for peer group: IT Services includes SE, NL, FI and UK, R&D services includes NL, UK and DE, Lawyers and accountants includes DE
and UK, Engineers and architects includes SE, NL, FI, UK and DE, and PR and marketing includes SE and UK
3 For NL = 52%, UK = 66%
SOURCE: Eurostat

6.1.2 Categories of professions


The difference in sector performance can be attributed to many factors (regulation,
conduct, etc.). The sectors vary with respect to degree of regulation (e.g., whether
authorization is required), end customers (B2C or B2B), type of services (advisory,
technical product, treatment), and payer (end customer, public sector).
Rather than evaluating performance and barriers on an aggregated level, three rather
homogeneous categories have been identified in order to better understand the drivers of
performance (Exhibit 92).

Business services: Services provided to businesses on the basis of professional


qualifications, but without authorization requirements. This includes IT services, PR
& Marketing, R&D services.

Regulated advisory: Services provided to businesses or private consumers on the


basis of professional qualifications and authorizations. This category includes legal

156

services, auditing and bookkeeping, real estate agents, and engineers and
architects. 96

Healthcare services: Professions providing healthcare services to private consumers


under regulation and full or partial payment from the public sector. This category
includes dentists, general practitioners (doctors), pharmacies, opticians, and other
health providers.

EXHIBIT 92

Three groups of professions: Business services, Regulated advisory


and Healthcare services
Degree of regulation
Business
services

Regulated
advisory

Endcustomer Type of service

No authorization
requirement to
practice

B2B

Authorization
requirement to
practice

B2B

Legal services

B2C

Auditing and bookkeeping

PR & Marketing

Authorization
requirement to
practice

End-customer

R&D Services

Some regulation of
conduct and entry

Healthcare
services

Payer

IT Services

Real estate agents

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

6.2 BUSINESS SERVICES


6.2.1 Characteristics and performance
Category Characteristics
Business services consists of the following sectors: IT services, R&D services, and PR &
Marketing. Business services is characterized by B2B selling and limited regulation.
Companies are sourcing business services externally to an increasing extent and in many

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

Overview of Business services


Denmark

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

Basic and applied


research as well as
experimental
development within
natural and social
sciences and
technology

LAB
Research
Agrotech
Exiqon
Santaris

12,500

400

31.3

Limited

IT Services

PR &
Marketing

Example
companies

# of
FTEs,
2007

SOURCE: Statistics Denmark; Bureau van Djik; McKinsey

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

Productivity Measures: Business Services


Peer group ranking
IT Services

PR & Marketing

1. GVA/hour
index to DK, 2007

2. Share of large size


companies1, 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

5. Share of high margin


segments2, 2009

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

Operational drivers of performance


Productivity in the business services sectors is influenced by operational factors that
include scale, focus on high-margin activities, and exposure to best practice.
Economies of scale can drive productivity by reducing costs in areas such as
administrative staff, billing, financing, facilities, and marketing. Scale also provides benefits
from sharing best practices and can lead to higher revenue opportunities in serving larger
clients. Indeed, the data in Exhibit 91 confirms that labor productivity for the category is
correlated with scale. Scale, however, varies across the business services sector. While
there is little scale in the R&D sector, Danish IT services firms are quite large compared to
peers: 57 percent of enterprises have more than 50 persons employed, second only to
Finland.
While Danish IT services firms are relatively large and reap some benefits of scale,
however, they do not appear to do so to the same degree as in peer countries. Productivity
in small companies with less than 49 employees is 12-15 percent lower in Denmark
compared to peer countries. For larger companies with more than 50 employees the
productivity is ~25 percent lower in Denmark compared to peer countries (Exhibit 95).

159

EXHIBIT 95

Productivity by size of IT services company compared


to peer countries

Denmark
Peer group1

GVA per hour in IT services


DKK, 2007, PPP-adjusted

936 -25%
830
673

579

-15%

594

-12%

-24%

704
630

493

1 - 9 employees

10 - 49 employees

50 - 249 employees

+ 250 employees

1 Weighted average of the UK, the Netherlands, Sweden and Finland


SOURCE: Eurostat; EU KLEMS

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

98 McKinsey research based on company filings

160

percent and 16 percent, respectively. 99 This is a symptom of small scale, rather than
strong competition.

6.2.2 Example: IT services


Productivity performance
GVA per hour in IT services is at par with peer countries, but 22 percent lower than best
practice in the UK. However, as discussed above, market revenue in high-margin activities
is the lowest compared to peers, and Denmark has the next-highest number of employees
per thousand capita, at 10.2 compared to 5.4 in Germany. This could be due to a relatively
high level of outsourcing of IT services to domestic firms in Denmark compared to
Germany. In Denmark, the domestic outsourced share of IT services is ~70 percent,
compared to ~55 percent in Germany and ~58 percent in the UK. 100 Finally, the share of
large-size companies 101 within IT services influences productivity, as detailed above in
Exhibit 91. In Denmark, 57 percent of enterprises have more than 50 persons employed,
which is higher compared to peer countries, except Finland (Exhibit 94).
Barriers to productivity
In IT services, there are no direct regulatory barriers limiting productivity and competition.
Industry norms, therefore, constitute the main barriers to productivity and competition
within the IT services sector. These include switching costs and access to highly skilled
labor.
Switching between providers of IT services is not always easy, e.g., in the case where the
initial choice of hardware and software results in a limited number of IT services companies
that can provide support. In addition, poor vendor management with complex IT services
contracts and limited documentation can result in lock-ins with one supplier of IT services.
Furthermore, for many software products, service partners may be restricted by license.
However, open-source software is increasingly gaining share of the markets. 102 Opensource programs like StarOffice as substitutes for a licensed product like Microsoft Office
are being supported by recognized IT suppliers like SUN (Oracle).
For knowledge-intensive sectors like IT services, access to highly-skilled labor is essential
for the industry to improve. In a survey for the Danish Ministry of Science, Technology and

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:

Responding to change: Enabling cross-sharing of ideas between businesses,


academia, and the government while monitoring IT services performance through an
annual scorecard.

Creating the skill base: Ensuring highly educated graduates while strengthening the
relation between business and education, e.g., through employer education.

Facilitating a supportive business environment: Enabling a level playing field for


offshoring providers.

Promoting the case for offshoring: Highlighting the positive impact of offshoring on
the UK economy.

UK companies have increasingly outsourced IT services, and the low-value-add IT


workforce in the UK is increasingly being sourced from offshore locations like India and
China. 106 The tasks being offshored are mainly related to programming and other technical
roles, and the onshore workforce is focused on key value- adding activities related to
driving innovative solutions in cooperation with end customers. 107
Actions to increase productivity
Public procurement can be used to support the development of productive market players,
both in the public and private spheres. Best practices in tendering, purchasing

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.

6.3 REGULATED ADVISORY


6.3.1 Characteristics and performance
Category characteristics
The regulated advisory sector consists of legal services, auditing and bookkeeping,
engineers and architects, and real estate agents. The regulated advisory sector primarily
deals with business clients, except real estate agents, where consumers are the
predominant customer.
The total employment in the sectors mentioned above amounts to ~84,600 full-time
equivalents employed in ~17,100 companies in 2007. 108 The largest sector is engineers
and architects accounting for 47 percent of employment and 37 percent of the companies
(Exhibit 96).

EXHIBIT 96

Overview of Regulated advisory


Denmark

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

Real estate agents


or brokers

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

108 Statistics Denmark, REGN1: Regnskabsstatistik for private byerhverv

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

Regulatory conditions compared to peer group


for regulated advisory

Conduct regulation
Entry regulation

Indicators of regulation in professional services


2008 (High barriers = 6, Low barriers = 0)

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

Regulatory conditions compared to peer countries across


regulatory advisory sub-sectors

Entry regulation
Conduct regulation

Indicators of regulatory barriers, 2008 (High barriers = 6, Low barriers = 0)

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

Productivity Measures: Regulated Advisory (1/2)


Peer group ranking
Legal services
1. GVA/hour index to
DK, 2007

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)

Auditing and book-keeping


2. Enterprise/
accountant1, 2006

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

Productivity Measures: Regulated Advisory (2/2)


Peer group ranking
Real estate agents
1. Trades/agent,
2006

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)

Engineers and architects


1. GVA/hour index
to DK, 2007

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)

1 Euros, PPP adjusted based on GDP


2 Non PPP adjusted Danish salary level; Engineers & architects = EUR 51,000
SOURCE: Eurostat; EU KLEMS; National Statistics Bureaus; ERA Europe Market Survey; Global Insight

166

Operational drivers of performance


Productivity in the regulated advisory sectors is influenced by operational factors that
include scale, division of labor, and exposure to best practice.
Economies of scale drive productivity by reducing overhead costs in areas such as
administrative staff, billing, financing, facilities, and marketing. Scale also provides benefits
from sharing best practices and can lead to higher-revenue opportunities in serving larger
clients. Regulated advisory professions in Denmark, however, are limited in scale relative
to peers. For instance, Danish law firms have about half the number of employees of
English firms (Exhibit 99).
Scale also allows providers to better optimize the division of labor, so that professionals
focus on higher-value activities while delegating lower-value activities to lower-cost labor.
The division of labor can be optimized both within and outside the firm: lower-value
activities

can

be

delegated

to

lower-cost

labor

within

the

firm,

or

can

be

outsourced/offshored to lower-cost options in other firms/geographies.


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 and
better task allocation. The regulated advisory professions, however, are relatively nonconcentrated, which is not a symptom of high competition, but rather of small scale.
Auditing and bookkeeping is the sector with the highest concentration ratio, at 35 percent.
Engineers and architects and legal services follow with 19 percent and 17 percent
respectively. The lowest concentration ratio is 9 percent for real estate agents, where many
local real estate agents act as franchisers of large real estate brands. 112
Furthermore, regulated advisory professions are traditionally dominated by domestic
players. While international companies are present within auditing and bookkeeping, and
engineers and architects, they do not play a role in legal services and real estate agents.
Within the legal sector there are no international companies among the top 4 in Denmark.
However, in the UK and Finland, larger international law firms are present. The worlds
three largest law firms are UK firms, for instance, and two of the largest Finnish law firms,
Roschier and Hannes Snellman, have expanded into other Nordic countries, with Roschier
venturing into the Baltics as well. The limited presence of large international companies in
Denmark lowers the benefits reaped from both scale and transfer of best practices (Exhibit
101).

112 Statistics Denmark

167

EXHIBIT 101
International player
Domestic player

Concentration index and level of internationalization


compared to peer group

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

1 CR4 = four largest firm concentration ratio


SOURCE: ODIN; Mklarsamfundet; SCB SNI advokatbyrer and Tekniska konsultbyrer; Federal Statistical Office; JUVE, Brsen Zeitung;
Immobilienmanager; CBS statline; Annual Business Inquiry (UK); Office of Fair Trading (UK); Building magazine (UK); Accountancy Age (UK);
The Lawyer (UK)

6.3.2 Legal services


Productivity performance
Denmark is performing relatively well within the legal sector, but still productivity is not at
the level of the best peer countries. Danish GVA per hour is at par with the peer country
average and only really outperformed by the UK. The number of enterprises per lawyer is
the second highest, ~30 percent lower than Sweden, and the purchasing-power-adjusted
salary per lawyer is second lowest among the peer countries (Exhibit 99). Productivity
within legal services is correlated with scale (Exhibit 91), and on average UK law firms are
twice the size of the Danish. In Denmark, there are 5.5 employees per law firm compared
to 10.9 employees per law firm in the UK (Exhibit 99).
Barriers to productivity
The Danish regulatory conditions within legal services are mainly related to exclusivity
rights (right to practice), authorization for foreigners, restriction on ownership and interprofessional cooperation and pricing norms.

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

Overview of UK de-regulation in legal services


19851990

The Courts and Legal


Services Act 1990
The UK lifted a
number of
restrictions bringing
an end to,
The barristers
monopoly on
advocacy in
higher courts and
litigation
The solicitors
monopoly on
conveyance
services and
permitted
authorized
practitioners in to
the market

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

The Legal Services Act 2007


Reform in the regulation of the legal
services market, initiated on the basis of
a 2004 report to promote competition,
innovation and consumer interests
Key measures of the reform includes,
Creation of a single supervisory
body, the Legal Services Board
(LBS)
Initiation of Alternative Business
Structures (ABS) to allow
cooperation between lawyers and
non-lawyers
Establishment of a single point of
entry for consumer complaints
Requirement for professional bodies
to separate regulatory and
representative functions

SOURCE: Office of Fair Trading; OECD Product Market Regulation

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

Example breakdown of employment by size of law firms

Number of FTEs1

Share of employment by size of law firm1,


Percent 2010
Cost per
employee
Low

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

1 Estimated FTEs based on occupation


SOURCE: Company websites

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

Example breakdown of law firm Profit & Loss statement


Type
Turnover

Personnel
costs

P&L accounts

Share of revenue
Index, 2007

Operating revenue

100

Lawyers and assistants

46

Administration

12
8

Facilities and rents


Nonpersonnel
costs

Profits

Bad debt

Depreciation

Other operating expenses

Operating margin

24

SOURCE: Bech-Bruun Annual Report 2007

Actions to increase productivity


While legal services are performing at par with peers, there is room for improvement
compared to the best of peer countries. Main differences include smaller scale, higher
regulation, and the use of alternative services. For example, Danish law firms are about
half the average size of the UK firms, and lawyers are granted exclusive rights to client
representation, where this has been deregulated in Sweden and Finland. In the UK, we
also see promotion of the use of mediation and arbitration as a less costly and more
productive manner of dispute resolution.
Considering the alternative models in Sweden, Finland and the UK, it could be further
investigated whether the Danish model remains beneficial in ensuring productivity.
Potential actions include:

Reassessing ownership requirements for law to consider allowing for majority


ownership by non-practitioners. This could increase productivity by encouraging
greater scale in law firms and attract international presence and best practice in the
sector.

Further deregulation of legal services, based on best practices seen in peer


countries, could be considered. This could involve an investigation into the feasibility
and impact of removing the exclusive right of audience for attorneys at law in

172

certain instances, allowing greater freedom of cooperation between professions, and


promoting the use of mediation and arbitration.
While considering such increases in competitive exposure, it would be equally important to
ensure measures are in place to safeguard quality and standard of service. For example, if
the right of audience is relaxed, it will require measures to ensure that the quality of legal
assistance does not decline, e.g., through education or practical requirements for other
professionals wishing to represent clients in court.

6.3.3 Auditing and bookkeeping


Productivity performance
Danish GVA per hour for auditing and bookkeeping is at par with the peer countries.
However, operational measures indicate a lower performance, since Denmark has the
second lowest number of enterprises per accountant. Salary per accountant and
bookkeeper is the lowest among peer countries (Exhibit 99).
Barriers to productivity
Foreign-trained accountants face significant entry barriers in Denmark. Those wishing to
obtain authorization in Denmark as Statsautoriseret revisor must be able to prove similar
education and authorization as that required in Denmark, and furthermore, pass an
aptitude test written in the Danish language, covering specific elements of Danish
accounting practice.
In addition, while Danish accounting standards and financial reporting requirements are
fairly harmonized across the EU, significant differences exist between countries in the
areas of tax rules, bankruptcy and commercial law, codes of ethical conduct, and auditing
requirements, making it difficult to leverage international scale. 119 For example, Denmark
requires auditing of companies greater than 12 employees. The UK, however, requires
audits only of companies greater than 50 employees. 120
Actions to increase productivity
While Denmark has standardized some requirements within auditing and book-keeping,
further reduction of cross-border differences and adoption of least- restrictive practices
could be examined as potential actions for improving productivity:

For auditing of small companies, adopting the least-restrictive requirements amongst


peers could be considered. If, for example, the requirement for small company audits

119 Association of State-Authorized Accountants


120 Association of State-Authorized Accountants

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.

6.3.4 Real estate agents


Productivity performance
On average, a real estate agent in Denmark only completed 18 trades in 2006, a boom
year in the market for real estate transactions. 122 This was the second-lowest number of
trades per agent among the peer countries, and appears to be driven by a high number of
Danish agents per thousand capita at 10.1, Denmark lies approximately 2.5 times higher
than the Netherlands. The average commission of 3 percent is the second-highest among
peer countries (Exhibit 100).
Barriers to productivity
To operate as a real estate agent in Denmark, one must complete two to three years
theoretical education, two years of practical training, and pass a final examination prior to
authorization.
In addition, regulatory barriers to switching in the form of exclusivity clauses in real estate
contracts exist. The typical real estate contract provides exclusive rights to the fee for sale
of a home for six months, the maximum allowed by law. Such exclusivity clauses limit the
customers ability to switch providers, reducing overall competition.
Finally, limited use of alternative fee structures that allow customers to customize their
service level present an important barrier to competition in this sector. 123

121 Statistics Denmark, GF3: General enterprise statistics


122 120,000 transactions (Statistics Denmark)
123 Danish Competition and Consumer Authority. Residential Real Estate. 2009

174

International case examples


While the real estate agent sector in Denmark experiences low overall regulation, entry
regulation concerning authorization to practice and conduct regulation concerning contract
exclusivity clauses exists. In addition, industry norms limit the customer to customize
service levels.
This differs from peer countries such as the Netherlands, which deregulated in 2000 such
that anyone can act as a real estate agent, without authorization. The deregulation, along
with a number of other market conditions, has created a real estate agency market with
significant competition. 124
Standard contracts between real estate agents and consumers in Denmark include
exclusive rights to commission fees for six months, the maximum allowed by law. This
appears to be the upper limit of practice among peer countries, with Sweden limiting
exclusivity to three months. 125 In the Netherlands, contracts typically do not require the
same exclusivity clause, but rather allow the consumer to break the contract so long as
they pay a termination fee. 126 In addition, alternative fee structures have become
increasingly common in the Netherlands. Rather than quoting a single percentage
commission for a large number of bundled services, brokers have begun to offer menus of
a la carte pricing, flat fees, or do-it-yourself packages, with varying levels of broker
involvement. 127 The less restrictive contract terms, as well as increased variety in pricing,
combine to allow for greater consumer choice and competition in the sector. In Denmark,
alternative fee structures are emerging, but volume has yet to pick up.
Deregulation and the resulting increase in competition has had a clear impact on the
market for real estate agency services. Where Dutch agent fees used to be a standard 2
percent of the sale price, prices began to vary between 0.5-2.5 percent after
deregulation. 128 The Netherlands also saw a modest increase in scale, with the share of
real estate agencies employing more than five people increasing from 14 percent of all real
estate agencies in 2000 to 21 percent in 2007. 129 Finally, increased competition from
substitutes, such as direct sales by owner, rather than broker, caused broker involvement
in housing sales to decrease from 80 percent in 2002 to 75 percent in 2006. 130 This
evidence suggests that there is room for improvement in competition through both
deregulation and market mechanisms.

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

Actions to increase productivity


As discussed, there are few regulatory restrictions within the real estate agent market, yet
operational performance is not up to the level of peer countries, particularly with regard to
trades per agent. Potential actions to increase productivity include:

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.

6.3.5 Engineers and architects


Productivity performance
Danish GVA per hour for engineers and architects is on par with the average of the peer
countries. Denmark outperforms peer countries with respect to sales per employee, which
goes well with the Danish reputation of delivering world class design services. 131 This
performance, however, is counterbalanced by having the second-highest number of
employees per thousand capita at the second-highest salary level among peers (Exhibit
100).
Barriers to productivity
Engineers and architects are affected by the lack of product standardization in the
construction sector. As building standards and norms vary from country to country, so too
does the knowledge required to perform engineering and architecture services. 132 This
reduces the incentive for foreign players to enter the market and limits the ability to
replicate and scale services beyond Danish borders.
Furthermore, Danish engineers and architects tend to provide highly-customized services,
making prices difficult to compare among providers, as the end product varies
substantially.

130 ERA Europe Market Survey 2006


131 Dansk Arkitektur Center
132 Interviews with Danish Enterprise and Construction Authority and various construction companies

176

Actions to increase productivity


While there are no regulatory restrictions on engineers and architects in Denmark, norms
within this profession impact productivity both within the sector itself as well as other
sectors in the value chain, such as the construction sector. Potential actions to increase
productivity through public procurement could include:

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.

Increasing focus on efficient, low-cost construction projects by requiring that public


procurement contracts disclose lower-cost building options. This incentivizes
consulting engineers and architects to involve construction companies earlier in the
design process in order to identify more efficient building options.

In considering the instruments mentioned above, certain quality measures could be


accounted for as well, such as the physical architectural landscape. More standard
requirements could, therefore, focus on the basic elements of buildings, such as the base,
but allow for differentiation in other aspects of the architecture, to allow for some variety in
design.

6.4 HEALTHCARE SERVICES


6.4.1 Characteristics and performance
Category characteristics
Healthcare services consists of general practitioners, pharmacies, dentists, opticians and
other health providers. Healthcare services deals only with end customers.
The total employment in the sectors mentioned above amounts to ~43,000 full-time
equivalents in 2007. 133 The largest sector is dentists, accounting for 32 percent of
employment.
In Denmark, the healthcare services category is highly regulated with respect to both
conduct and entry regulation, except for opticians who generally enjoy low regulation
(Exhibit 105). The objective of regulation in healthcare service sectors has generally been
to ensure quality and accessibility of healthcare services for all citizens and in all parts of
the country.

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

Overview of Healthcare services


Denmark
Description of sector Example

# 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)

Doctors licensed for


private practice in
general medicine

Individual
GPs
practice

4,8471
(3,6553
doctors)

2,163

2.2

High entry regulation (licensing)


High conduct
regulation (price,
marketing)
Barriers to
switching

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

Productivity Measures: Healthcare services (1/2)


Peer group ranking
Dentists
1. Visits/
dentist, 20071

1a. Visits/capita,
2007

1b. Capita/ dentist,


20071

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

Productivity Measures: Healthcare services (2/2)


Peer group ranking
Pharmacies1
1. GVA/hour index
to DK, 2007

2. Capita/pharmacy,
2007

3. Prescriptions/
pharmacy, 2007

4. Price level index,


VAT adjusted, 2005

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

Operational drivers of performance


Productivity in the healthcare sectors is influenced by operational factors that include scale,
division of labor, and exposure to best practice.
Economies of scale drive productivity through sharing services such as scheduling and
billing, finances, facilities, and marketing. Scale provides benefits from the sharing of best
practices and increased purchasing power to negotiate lower prices on goods, materials,
and equipment. With small firm sizes compared to peers across general practitioners,
dentists, and pharmacies, such scale advantages have yet to be developed.
Scale also allows providers to better optimize the division of labor, so that professionals
focus on higher-value activities while delegating lower-value activities to lower-cost labor,
such as nurses, hygienists, and assistants. With the lack of larger scales among Danish
general practitioners and dentists, room for improvement exists in the division of labor
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 and
better task allocation. With the exception of opticians, the healthcare service sectors
experience low levels of competition. General practitioners, pharmacies, and dentists are
highly fragmented, while in the optician sector, the four largest chains make up 75 percent
of the market. 134 In addition, large foreign players are only present in the optician sector.
While increasing competition in healthcare can improve productivity when wisely
applied 135 , it can be a managed journey, in which both fees and quality are closely
managed to ensure that society gains in tandem with private interests.

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).

134 Press clippings


135 For example, the UK saw positive financial, operational, and clinical improvements from increased competition in public hospitals. It
is important, however, to ensure incentives do not de-emphasize quality. Bloom, et al. The Impact of Competition on Management
Practices in Public Hospitals

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,

136 In accordance with EU directive 2005/36/EC


137 For both groups, a certificate of Current Professional Status Standing (certificate of good standing) from the health authorities in the
most recent country of work and residence needs to be provided
138 Dentists Collective Bargaining Agreement (Overenskomsten), paragraphs 6,9
139 Industry associations Dansk Tandlgeforening and Sveriges Tandlkarfrbund
140 International Journal of Dental Hygiene, 2009. Dental hygienists in Europe: Trend towards harmonization of education and practice
since 2003
141 Sundhedsstyrelsen: Tandplejeprognose 2010, 2009 estimated data based on projections

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

Task allocation in Danish and Swedish dental clinics

INDICATIVE

Percent

Resource use

Activity

Share of
total time

Scheduling & billing

15

Room & tool preparation


X-rays & diagnostic tests

20
3

Patient education

Examination

15

Cleaning & gum treatment


Cosmetic treatments

25
2

Fillings, specialized work

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

Comparing task allocation in Denmark to Sweden, we see market differences particularly in


X-rays and diagnostic tests, patient education, and cleaning and gum treatment. For
example, dentist involvement in cleaning and gum treatment, which consumes about 25

142 2009. International Federation of Dental Hygienists


143 US Bureau of Labor Statistics. 2008 figures; American Dental Hygienist Assocation, 2007-08
144 Tandlgeforeningen

182

percent of clinic time, is limited to 20 percent in Swedish clinics, whereas dentist


involvement in Danish clinics is 70 percent. 145
Achieving optimal task allocation, however, is not possible without sufficient scale, since a
dental clinic must be large enough to ensure appropriate ratios of staff for full utilization.
While the number of hygienists is expected to increase in proportion to dentists over the
next 10 years 146 , greater scale will be required to fully take advantage of productivity
improvements, though this is currently not possible under existing regulation. Dental clinics
in Denmark are smaller in scale than those of Sweden, with 61 percent of clinics employing
no additional dentists beyond the owner, compared to only 35 percent in Sweden. At the
high end, 11 percent of clinics in Sweden employ more than 5 employees, where only 5
percent do so in Denmark. 147 While most dental practices remain small in the US, we do
see an increasing trend towards large-group practices that achieve even greater scale than
what we have seen in Sweden, with chains such as Great Expressions comprising 130
locations. 148
Beyond enabling better task allocation, increased scale also allows for operational
improvements in overhead costs and utilization, and decreased input costs through greater
buying power. Experience in large healthcare organizations has shown that significant
benefits accrue from sharing services such as scheduling and billing, finances, talent
management, facilities and equipment, and marketing activities. With increased practice
size, it is also easier to optimize utilization of all labor, so there is less wasted time between
visits or covering after-hours emergencies, etc. Finally, increased buying power,
particularly when consolidated among a small number of suppliers, can reduce materials
and equipment costs. 149
Scale can therefore have a large impact on the GVA of single-dentist clinics, which account
for 46 percent of all clinics. 150 Such clinics typically spend 15 percent of revenue on
materials, 35 percent on dentist salary, 23 percent on administrative and assistant salaries,
19 percent on other SG&A, and 6 percent on capital costs, leaving 2 percent in profits. 151
Applying the operational improvements that come with scale, discussed above, could
therefore lead to substantial improvements in productivity. If, for example, a clinic lowers its
cost of labor by 10-15 percent through increased use of hygienists and assistants, reduces
SG&A by 10-20 percent by pooling resources, and achieves cost savings of 10-15 percent

145 Industry association, clinic interviews, McKinsey analysis


146 Sundhedsstyrelsen report: Tandplejeprognose 2010
147 Sundhedsstyrelsen report: Tandplejens struktur og organisation, 2004; Statistics Sweden, 2007
148 American Dental Association
149 McKinsey Healthcare Practice experience
150 Sundhedsstyrelsen report: Tandplejens struktur og organisation, 2004; Statistics Sweden, 2007
151 Tandlgebladet 2008: Der er konomi i en ansat tandlge i mange tilflde

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

Benefits of scale on GVA for single dental clinics


Percent
110118
48
106110
10-18%

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

152 McKinsey Healthcare Practice experience


153 Tandlgebladet 2008: Der er konomi i ansat tandlge i mange tilflde
154 Prices are not PPP-adjusted, as this has little effect on the prices, according to EU-KLEMS PPP levels for healthcare services
(adjustments would cause Swedish prices to increase only by 1.04 times)

184

EXHIBIT 110

Swedish dental pricing relative to Denmark

Government reference price

Price index, DK = 100

High-end chain of clinics


Discount clinic
xx Average DKK price in DK

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:

Allowing non-practitioners to own dental practices. Practitioners who are good at


providing care are not necessarily good business managers, and opening up
ownership allows the formation of larger professional organizations. Professional
management can impose discipline on operations, provides access to the resources
necessary to achieve scale and exposes the business to best practices. Finally,
foreign players could be encouraged to enter the sector, once deregulated, to create
larger chains and take advantage of economies of scale.

Replacing fixed prices with a system of maximum prices could be further


investigated. This would allow competition to apply downward price pressure, and
thereby, increase performance pressure. In the long term, when competition

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.

Options for further increasing performance pressure could be considered. For


example, subsidies could be decreased, without increasing the price to patients, for
those services which lower-skilled labor can perform. This would force productivity
improvements and encourage the increased use of hygienists. However, it would be
preferable to do this once competition is real, so that competitive pressures ensure
prices on unregulated services do not increase, in compensation for the decrease in
prices of regulated services.

With a focus on further increasing performance pressure, e.g., by decreasing


subsidies, broader changes to the underlying system, such as the collective
bargaining agreement, could be required in the future.

With productivity improvements, measures could be taken to mitigate potential adverse


effects, ensuring that quality remains high and total public spend does not increase. For
example,

fees

could

be

reassessed

and

potentially

reduced

with

productivity

improvements, e.g., as average prices decrease, fees could be decreased. Patient


demand could be influenced through various subsidy schemes that impact patients out-ofpocket spend, such as introducing subsidy caps or deductibles, or decreasing overall
subsidy levels. In addition, performance pressure could be managed to ensure that it does
not result in an unexpectedly large decrease in availability of care.

6.4.3 General practitioners


Productivity performance
Danish general practitioners rank among the highest of peer countries with respect to visits
per general practitioner. However, this is driven by the highest number of visits relative to
population size among peer countries at 7.5 visits per capita, Denmark has close to three
times the number in Sweden, at 2.8. This includes all visits to general practitioners,
including physician visits to patients in institutional settings and their homes, as well as
telephone consultations. As seen in Exhibit 111 below, controlling for nurse visits and
phone consultations brings the respective visits per capita to 4.2 in Denmark and 1.4 in
Sweden, with specialist consultations only 0.5 visits per capita higher in Sweden than
Denmark. The high number of visits means that general practitioners in Denmark serve a
smaller portion of the population, with capita per general practitioner at 1,299. Salary for

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

155 General practitioner salary without PPP adjustments is EUR ~122,000


156 Danish Doctors Association
157 This applies for the majority of patients, who are insured under Group 1 health insurance. Those that choose to opt in to Group 2 are
allowed free choice of provider, but must pay for visits
158 This is the fee for a new insurance card and is waived if occurs in conjunction with the patient changing address
159 Organization of General Practitioners (PLO)
160 For patients with Group 1 insurance; those with Group 2 must pay for visits

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

combined with greater access to information, this increases competitive pressure on


general practitioners to provide high-quality service in an efficient way.
Increased scale is apparent in general practitioner practices in peer countries. In Germany,
for example, group practices make up 38 percent of general practitioner workplaces. The
improved cost structure provides average net profit margins (excluding general practitioner
salary) of 55 percent for group practices, versus 48 percent for single practices. 165 Taking
this concept even further, German general practitioners have since 2007 been allowed to
form polyclinics 166 with multiple branches, which employ several general practitioners. In
Sweden, where large healthcare centers are often responsible for primary care, practices
also tend to be larger, with 48 percent of practices employing five to ten general
practitioners. 167 By contrast, 37 percent of general practitioner practices in Denmark are
group practices 168 , but only 8 percent of practices have four or more doctors. 169
A benefit of larger clinic size is the ability to better optimize task allocation across varying
levels of healthcare providers. Nurses can be more involved in more routine primary care,

161 McKinsey Healthcare Practice experience


162 National Health Service. www.nhs.uk
163 BMC Health Services
164 Press clippings
165 German Federal Statistics Bureau, 2006
166 A polyclinic is a place where a range of healthcare services including diagnostics can be obtained without the need for an overnight
stay
167 McKinsey Healthcare Practice experience
168 With an additional 20 percent operating as solo practices in cooperation with others
169 Finance Ministry, Division of health and health economics. Almen praksis rolle I fremtidens sundhedsvsen, 2007 data

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

170 Physician interviews


171 Public general practitioners make up 74 percent of primary care practices in Sweden. Association of Swedish Local Authorities and
Regions; Danske Regioner: Organisering af almen praksis, 2007
172 However, a report from the Danish Regions indicates that larger practices are beginning to route more visits to nurses. Danske
Regioner: Organisering af almen praksis, 2007
173 Lancet 2008, 372: 728-36. Effect of financial incentives on inequalities in the delivery of primary clinical care in England
174 UK National Health Service, QRESEARCH
175 University of York, Center for Health Economics, Paper 28. Doctor behavior under a pay for performance contract

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

Breakdown of primary care visits1 for Sweden and Denmark


Visits per capita, 2009
2009 data used for
comparison, since Swedish
data is only available for 2009

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.

Enabling capture of opportunity through ownership. Deregulating ownership allows


operational improvements through exposure to best practices and application and
discipline of professional management and ownership, similar to the benefits
discussed for dentists.

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.

In order to mitigate potential adverse effects on public finances, fees could be


reduced further with costs, ensuring that private interests are not the sole winners.
Experience from the private hospital sector indicates that a managed journey is
required to gradually decrease fees.

As the industry structure develops towards larger entities, alternatives to the


collective bargaining system could be explored.

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

179 GEK-Report 2008, Gesundheitsmonitor 2007 (Bertelsmannstiftung)

191

general practitioner licenses. As patient throughput increases with competition, fewer


licenses may be required to maintain the same level of service. With performance
pressure, however, it is also important to ensure that the number of general practitioners
does not decrease faster than implied by productivity improvements, in order to maintain
access to care.
Finally, it is important to ensure that changes are made in a cohesive and balanced way
that provides the correct incentives for the entire system. For example, incentive changes
to increase productivity can be made so as to increase capacity in primary care, reducing
pressure on acute and specialized care.

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

Danish regulation in pharmacies compared to peer countries

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, with one


exception1

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

International case examples


The pharmacy sector in Denmark is subject to significantly less competition than peer
countries.
UK, for instance, places no limits on the total number of pharmacies, who can own a
pharmacy, or how many pharmacies an entity can operate. The market is thus open to
greater scale and competition, and we see international chains like Boots and Lloyds. 185 In
addition, pharmacies are incorporated in alternative distribution outlets, including
supermarkets like Tesco. Opening hours and non-pharmaceutical product and service
assortment are not limited, and pharmacies have expanded into provision of basic health
services, such as health checks and vaccinations. 186
Sweden has recently undergone extensive deregulation in the pharmacy sector, effective
from the beginning of 2010, in which 65 percent of the previously state-owned pharmacies
has been privatized 187 , effectively removing ownership requirements and limits on scale.
This has attracted private equity interest and has already resulted in the creation of large

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.

188 Press clippings, Company web sites


189 Office of Fair Trade. The Pharmaceutical Price Regulation Scheme
190 Swedish Dental and Pharmaceutical Benefits Agency (TLV)
191 Press clippings
192 OECD Health Policy Studies, 2008 Pharmaceutical Pricing Policies in a Global Market
193 OECD Health Policy Studies 2008 Pharmaceutical Pricing Policies in a Global Market, 2005 price level comparison, adjusted for
VAT. Prices reflect not only productivity, but mirror differences in regulatory systems as well

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:

Deregulate ownership requirements to allow for non-practitioners to own


pharmacies, without limits on how many licenses an entity may acquire (within the
fixed total number of licenses available). 194

Remove restrictions on opening hours and non-pharmaceutical product assortment


to allow greater competition along customer service dimensions.

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

International case examples


The Danish optician market provides an example of how scale and international
competition can improve productivity in the absence of regulatory barriers. Indeed, the last
ten years have seen increased consolidation and international presence in the Danish
optician market. Prior to 2000, independent opticians comprised 45 percent of the market,
with some joining cooperative networks. 196 Chains were mostly local, with limited
international scope. The fragmented market, along with overcapacity and prices that were
ranked the highest in Europe, attracted a number of international players and private equity
firms. Between 2003 and 2007, Synoptik and Louis Nielsen were each acquired by large
European players, while Profil Optik was acquired by a private equity firm. 197 Following a
strong period of growth, these chains now control 70 percent of the market. The change in
market dynamics has caused increased price wars and efficiency improvements, with an
increase of 23 percent in sales per employee from 2006 to 2010, driven largely by a 17
percent reduction in employment. 198 These benefits were less likely to have been realized
if high entry and conduct regulations had inhibited scale and international competition in
this sector.
Actions to increase productivity
As discussed, the optician sector generally performs at par with our peer countries.
Competition can, however, be improved by encouraging greater price transparency

Greater price transparency could be encouraged in the industry, so that customers


can better understand and compare the full cost of their glasses, including both
frames and lenses. This could be done, for example, through a cost comparison web
site that allows customers to calculate total price.

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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www.mckinsey.com