The retail landscape is constantly changing, and while most companies have managed to successfully navigate the huge pressure that has mounted for the past few years, they must now make sure they are prepared for any possible scenario. Because if recent history taught us anything, it’s that things can turn around in the shortest of time spans.
Throughout 2022, the most common concern among suppliers, food merchants, and consumers was inflation. According to McKinsey’s ‘The State of Grocery Retail 2023’, in the European Union, general inflation rose from 2.9% in 2021 to 9.2% in 2022, with a peak of 11.5 % in October.
In many nations, food inflation exceeded overall inflation by up to twice. The household economy was put under a lot of strain since spending grew far more quickly than disposable income. Many customers traded down in response. Europe’s total food sales increased by 2.9% in 2022 over 2021. This growth was caused by 10.7% price increases, a 3.6% drop in volume sold, and a 3.6% downtrading effect. This suggests that overall grocery volume is 2.3% higher than 2019 levels, with notable national differences.
Downtrading by consumers has resulted in significant growth for private labels throughout Europe (the value share of private labels rose by 1.9% points in comparison to 2021). However, same-store downtrading only accounts for 0.8 percentage points of this rise. The remaining part is caused by ‘faster–than–average price increases for private–label goods (0.8 percentage points) and above–average growth of the discount channel, which has a higher private–label share (0.3 percentage points)’, according to McKinsey’s study. In comparison to 2021, discounters’ market share increased by 1.4% in Europe.
The combination of aggressive footprint expansion in recent years, the market’s recovery from the pandemic-related sales decline, price inflation that occurred more quickly than the market average, and a rise in price sensitivity were the main drivers of this. All other channels had a fall: 0.8 percentage points for traditional trade, 0.2 for hypermarkets, 0.3 for online, and 0.1 for supermarkets, as discounters expanded. Except for Sweden and the United Kingdom, where it fell by roughly one percentage point, online penetration remained largely unchanged in 2022.
Many European grocery merchants saw significant pressure on their margins because of cost inflation, declining volumes, and an increase in price-conscious consumers. McKinsey’s data indicates that the average margin of European grocers fell by three percentage points between 2019 and 2022. The industry is under more strain because of the growing amount of capital required from food stores.
The McKinsey report, which was published earlier this year, goes on to show that the industry needs to invest a total of EUR70bn to EUR125bn more between now and 2030 to advance automation, digitization, sustainability, and IT advancements—a 25–50% increase over present levels. The rising cost of capital and pressure on margins will make it more difficult for food merchants to finance these initiatives. Due to rising interest rates, the weighted average cost of capital increased from 2.6% in 2021 to 6.7% in 2022 – retailers now pay more to borrow money or acquire more capital as a result.
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