Disclaimer: The war in Ukraine is having a deep human, as well as social and economic, impact across countries and sectors. The exact implications for grocery retail are still unclear. This article was written before the war started. Our first analysis of the impact of the war indicates that it mostly accelerates the trends we have identified in this article—particularly that it might increase food and energy inflation even further and, as a result, make the increase in price sensitivity and downtrading more pronounced. We therefore believe the trends outlined in this article gained even more relevance through the current crisis.
Looking back on 2021
The European grocery retail market in 2021 was shaped by the ongoing effects of the COVID-19 pandemic, the gradual reopening of the hospitality sector, the emergence of instant-delivery players (also called quick commerce), and price inflation.
Sales decreased in Europe by 0.6 percent in 2021 compared with the previous year, to a level that was still substantially higher than 2019. Volume decreased by 2.1 percent, but this development was partially offset by price inflation of 1.3 percent and slight uptrading of 0.2 percent. The results varied significantly across countries (see “Food and grocery market KPIs”). The first quarter of 2021 was significantly higher than the prepandemic first quarter of 2020, reflecting the effects of market restrictions. From the second quarter of 2021 onward, hospitality activity began to resume and grocery retail sales stayed below the previous year, though they remained substantially above 2019 levels across quarters and countries.
From a format standpoint, online and discounters posted highest results in 2021, growing faster than the market in most countries. Supermarkets and hypermarkets saw a decline in sales as a result. Online revenues across Europe rose by 8.8 percent compared with 2020. Most of online’s growth occurred in the first quarter of 2021; in the following quarters, online stayed at roughly the same level as in 2020. This growth was quite unequal across Europe: countries in Southern Europe (such as Italy and Portugal) and Central Europe (for example, Poland) saw a decrease in online. On the other end, Germany, the Netherlands, Sweden, and the United Kingdom recorded robust growth in 2021. Despite falling sales in offline formats and even higher declines in offline volume, retailers kept expanding their store networks, with available sales space expanding by 1.6 percent (see “Food and grocery market KPIs”). Especially for discounters, with store space 4 percent greater than that of 2020, this strategy was successful, resulting in growth and strong results reported by this format.
Within online, instant delivery had a year of substantial expansion, fueled by massive inflows of funding. The top 15 players in Europe had opened more than 800 dark stores by the end of 2021. Further, many traditional grocers formed partnerships with instant-delivery companies to extend their offerings beyond physical stores. Still, the instant market remains in its early days. It is small, lacks transparency, and is unprofitable in most cases. Our research suggests that the instant-delivery market in Europe reached between €3 billion and €6 billion in 2021, accounting for less than 1 percent of the total market but with three-digit percent growth annually.
Market outlook and key trends in 2022
Going into 2022, and before the invasion of Ukraine, grocery CEOs expect market conditions to deteriorate (Exhibit 2). In our State of Grocery CEO Survey, which included 57 European grocery CEOs, 60 percent of respondents said they believe market conditions this year will be worse than in 2021. Top reasons for their pessimism include the shrinking size of wallet for grocery retail as restaurants reopen in many parts of Europe, increased price sensitivity and competition (including from a maturing online market), and rising inflation. Wage increases, labor shortages, supply chain issues, and new regulations in some markets are other factors that affect the outlook of CEOs. The top opportunity cited by CEOs is e-commerce and omnichannel offerings, which remain a key priority for many of them.
The top opportunity cited by grocery CEOs is e-commerce and omnichannel offerings, which remain a key priority for many of them.
Through our consumer research, CEO survey, and market analysis, we identified ten trends that we believe will shape the grocery landscape in 2022 and beyond. Some of the trends reinforce patterns we identified in last year’s report, while others are new and will likely prompt grocery executives to reassess and adapt their existing strategies.
1. Economic headwinds put pressure on retailer margins
Several factors could shrink the margins of grocery retailers. Overall inflation in the European Union reached 5.6 percent in January 2022, while food prices rose 3.5 percent. These changes will likely be accelerated by the invasion of Ukraine.
For grocery retailers, inflation has two primary effects: costs increase and consumers’ disposable income shrinks.
From 2007 to 2008, food price inflation had little effect on grocery’s profitability, because retailers were able to partly pass along rising prices from suppliers to consumers. By contrast, inflation during 2011 and 2012 led to a small reduction in margins (Exhibit 5). This time, heightened price sensitivity among low-income consumers, combined with decreasing overall volumes and competitive markets, might make it more difficult for retailers to pass on price increases. To avoid further losses in volume, some retailers might opt to delay part of the price increases, resulting in lower margins, at least temporarily.
Higher inflation also affects consumers. It reduces their available income, as adjustments to wages tend to trail inflation, leaving them with less money for groceries. If inflation stays high, consumers will likely continue downtrading to cheaper products and to actively search for promotions; we saw some of the first effects of this in the fourth quarter of 2021. Discounters and players with competitive entry-level private-label offerings are best positioned to serve these changed consumer needs.
2. Widening polarization with higher price sensitivity and more health, premium, and sustainability at the same time
Our research indicates consumer preferences in 2022 will become even more differentiated—by income, age, and household size. On the one hand, the growth of healthy, premium, and sustainable products is likely to accelerate even more. These attributes will be fuelled primarily by high-income consumers, younger generations (particularly Gen Z), and larger households (those with more than three people). For example, in 2022 high-income households are much more likely to increase their focus on healthy, premium, and environmentally friendly goods.
On the other hand, the share of consumers who plan to save more money on food and trade down to cheaper products also has risen substantially compared with 2021. Lower-income consumers are the driving force behind this increase.
Grocers could consider trimming the middle of their assortments and further strengthening their entry-price offerings and premium assortment. Adjusting the assortment to the specific needs of a store’s catchment area will become even more important.
3. Slower online growth with more differentiated offers
Our consumer research suggests online growth might take a yearlong pause in 2022 in many markets. This pattern could be especially evident in markets that have less-developed online offerings, where consumers might even reduce their spending online. In markets with mature online offerings, consumers declare they will further increase their spending, albeit at a slower pace.
In the midterm, we expect the growth to continue, with e-grocery reaching above 20 percent of share in 2030 depending on the country and scenario (see “The next S-curve of growth: Online grocery to 2030”).
To create this growth, it is important that online offers become more differentiated and tailored to the needs of additional consumer groups and shopping missions. We already see the first signs, that the online market in the future might consist of several, well-differentiated segments.
The most prominent new online market segment is instant delivery. It offers the fastest and most convenient delivery of a reduced assortment at a higher price per item, similarly to what convenience formats offer in the offline channel. Other players differentiate themselves through larger assortments (for example, Ocado), local or organic offerings (for example, Farmy in Switzerland and Rohlik), or a lean value proposition (for example, Picnic).
Thanks to these more differentiated online offerings, we see consumers starting to split their online purchases across different online shops. About one-third of frequent online shoppers (that is, those who shop online at least once a week) regularly order from three or more e-grocers. The more often consumers shop online, the more online grocers they use. There is therefore a good chance that as the online market matures, several different online formats and value propositions will coexist and compete for consumer baskets.
4. The search for new profit pools
With their core business under pressure, many retailers are looking for new profit pools—either within their core business, through advanced analytics and artificial intelligence, or outside of their core, by entering new revenue streams.
Leading retailers increasingly master advanced analytics to inform their business decisions, especially around assortment, price, and promotions. Plenty of untapped potential remains in this area. Recent breakthroughs in the field of personalized offers and localized, store-specific assortment could bring a new wave of value that can be captured to improve sales and profitability.
Many retailers are tapping into new revenue streams beyond their core. For example, some are investing more in health offerings and solutions. Another new profit pool with high potential might be retail media networks. Several US players have built dedicated units to sell advertising space to media agencies and brands. These networks use loyalty card data to target the advertising by customer segment and are therefore attractive to consumer brands. Leading US players achieve up to 8 percent of their online sales through retail media networks, with margins of more than 50 percent. Some European grocers, such as Ocado and Tesco, are also embarking on this journey.
5. A shift in the people model
Talent has become a bottleneck for many retailers: 39 percent of grocery CEOs see attracting the right talent as one of their key challenges. In addition to high employee attrition in grocery retail, demand for different skills—such as social-emotional skills and advanced analytical and technical skills—went up. To win in this future landscape, attracting and retaining the right talent while ensuring availability of key skills becomes critical. In the postpandemic labor market, competition for talent is increasing as unemployment levels fall.
To compete, retailers may want to adjust their people models to strategically plan and manage for the required skills for the next three to five years, ensure workforce retention, and offer a robust reskilling program.
The market environment in the next 12 to 18 months might be difficult.
Implications for grocers
The market environment in the next 12 to 18 months might be difficult. To overcome the diverse array of challenges while meeting consumer needs, retailers must be prepared to take bold actions and keep investing in key areas such as online, new profit pools, analytics, sustainability, and people.
While the underlying recipe for these actions is not completely new, its complexity increases with divergent demands from low- and high-income consumers and more differentiated offerings in the online market. It will therefore be vital for retailers to strengthen their distinct offerings tailored to these different needs—for example, through rebalancing the price tiers, building up private labels, making assortment and prices more store-specific, and personalizing promotions.
Retailers will also likely benefit from exploring new revenue sources (such as retail media networks) by monetizing their traffic and data.
In the short term, the impact of the invasion of Ukraine as well as inflation and energy costs are top of mind for CEOs, putting even stronger pressure on prices and operational efficiency, along with the wellbeing of employees.
This content was originally published here.