European food retailers are facing a bleak future: their margins are under pressure from rising costs, changing purchasing behaviour and increasing competition – including online. Moreover, a battle for talent is ensuing. What can they do now to avert doom?
Sales fall
Even before the Russian invasion of Ukraine, supermarket chains were already expecting a worsening outlook in 2022: sales are expected to decrease further as the pandemic subsides and the catering industry reopens. Pressure on prices will increase, competition will become fiercer and the online market will mature. Add to that inflation, rising labour costs, supply problems and a shortage of workers. This looks a lot like a perfect storm.
The war in Ukraine will only exacerbate these challenges and likely increase consumer price sensitivity, McKinsey and EuroCommerce state in a new report after interviewing sixty CEOs of European food retailers and holding a survey of more than 12,000 consumers from nine countries. The researchers see five major trends emerging. However, there are two sides to the coin: the threats fortunately also contain opportunities.
1. Inflation puts margins under pressure
Retailers expect shrinking margins as a result of inflation, but the latter also puts consumer purchasing power under strong pressure – meaning food retailers are unable to implement the large price increases they want/need. Families are looking for cheaper alternatives (private labels) and promotions. Discounters are best placed to meet that demand.
2. The market is polarising
Price is not everything, however: retailers are seeing a strongly polarised demand. Consumers with higher incomes continue to buy healthy, sustainable and high-quality products. On the other hand, lower-income households are buying less or downgrading to cheaper products. Dealing with this dichotomy will be a tough challenge.
3. Online growth slows down
Online growth may take a break this year, the study suggests. In markets with a less developed online offering, consumers may even reduce their online spending. In more mature markets, consumers will still increase their online purchases, but at a slower pace. Nevertheless, online shopping could grow to a share of 20 % by 2030, with large differences between countries. The online offer will further differentiate according to specific target groups: think of flash deliveries or specific webshops for organic products. Consumers will therefore spread their online purchases over more players.
4. Looking for new revenues
Retailers who see their core business under pressure will have to look for new sources of income. Advanced analytics and artificial intelligence enable retailers to make better decisions about product offerings, pricing and promotions. In this way, they can increase turnover and profitability. They can also tap into new revenue streams: health solutions, or selling advertising space based on loyalty card data.
5. Talent as a bottleneck
More than a third of the interviewed CEOs see attracting talent as one of their biggest challenges: winning in the competitive landscape of the future can only be achieved with the best employees. There is a strong demand for new skills and profiles – think of digitisation and sustainability transformation. This calls for an adapted human resources policy, focused on retention and on training and education.
