State of Grocery Europe 2024: Signs of Hope (2024)

State of Grocery Europe 2024: Signs of Hope (1)

(44 pages)

For the European grocery industry, 2023 was a challenging year. Inflation led consumers to tighten their belts, leading to a drop in volume and significant downtrading. As a result, industry growth was significantly below food price inflation. Food price inflation in Europe was 12.8 percent in 2023,1Based on Eurostat data, January 2024. while grocery sales grew at a rate of only 8.6 percent.2Based on Europanel data. Discounters and private labels benefited from this market environment and were yet again the winners of the year.

In 2024, we expect macroeconomic uncertainty to persist, but at the same time, our research indicates the first small signs of recovery. The pressure on margins, costs, and prices remains a key concern for grocery retail CEOs, but leaders are less pessimistic than they were in previous years. In addition, thanks to initial signs of economic recovery and wage increases in many countries, consumer confidence is returning. Still, our consumer research shows that recovery of consumer behavior is very polarized for 2024. While most consumer segments are still price sensitive and trading down, some segments show an increased appetite for uptrading and innovations.

2023: Again all about price

Grocery sales in Europe3Includes Belgium, Czech Republic, France, Germany, Italy, Netherlands, Poland, Portugal, Spain, Sweden, and the United Kingdom. grew by 8.6 percent in 2023. This growth was a result of 12.8 percent food price inflation, a downtrading effect of 1.8 percent, and a 2.0 percent volume decline. This implies that grocery sales in real terms (that is, adjusted for inflation) declined again in 2023 and are now 4.5 percent below 2019 levels. This decrease from 2019 is driven by a small volume increase of 0.3 percent and a decline of the price per item in real terms by 4.8 percent.

About the authors

This article is a collaborative effort by Christel Delberghe and Anton Delbarre of EuroCommerce, Dirk Vissers of Europanel, and Alexandre Kleis, Franck Laizet, Daniel Läubli, and Rickard Vallöf, representing views from McKinsey’s Retail practice.

While inflation eased significantly over the course of 2023, it was still the dominant factor affecting the industry. Overall inflation came down from a historic high of 10 percent in October 2022 to a stable 3 percent at the end of 2023. European food price inflation was even higher, reaching a 19.0 percent peak in March 2023 and an average of 12.8 percent for the full year. Producer prices in the European Union started to decline in early 2023, following agricultural prices with a delay of six months. Food prices for consumers saw minimal decline at the time, in part because grocery retailers’ price contracts with suppliers remain in effect and labor costs increased significantly.4Eurostat, January 2024.

Real wages were compressed during 2022 and most of 2023. This has put severe pressure on many household budgets and curbed consumer purchasing power. Wage increases of 6.3 percent in the EU-27 in the second half of 2023 brought some relief for consumers, but not all countries returned to 2019 wage levels in real terms. For instance, real wages are still below 2019 levels in France, Germany, Italy, and the Netherlands. On average, real wages in the EU-27 were 1.2 percentage points below 2019 levels at the end of 2023.5Economist Intelligence Unit (EIU), January 2024.

As a result, consumers traded down significantly in 2023, and private labels and discounters benefited. The private label share increased substantially by 1.8 percentage points, to 38.0 percent of sales in 2023 from 36.2 in 2022. Discounters gained another 0.8 percentage points in market share on average, and at least 1.0 percentage point in Belgium, Germany, Poland, Sweden, and the United Kingdom. The overall market share of supermarkets remained stable at 37.2 percent in Europe. Supermarkets in Italy, the Netherlands, Portugal, and Spain found strategies to succeed despite high price pressure and even achieved market share increases of 0.5 to 0.8 percentage points. Online sales remained stable at 6 percent of total grocery sales, with significant differences among countries. France had the highest online gain with 0.5 percentage points, while the online channel lost market share in Sweden (–1.2 percentage points), the United Kingdom (–0.7), and Italy (–0.5), as well as in Belgium, the Netherlands, and Portugal (–0.2).6Europanel, March 2024.

With inflation easing toward the end of the year, the development of the grocery market also improved. Downtrading and declines in volume slowed from quarter to quarter and came close to zero in the fourth quarter of 2023 (Exhibit 1).

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State of Grocery Europe 2024: Signs of Hope (2)

2024: Signs of hope?

Our data shows signs of hope for 2024. While the first few months of 2024 may still be challenging as the economy contends with the aftereffects of high inflation, the fundamentals are slowly improving. Overall inflation is expected to stabilize around 2 percent, with food inflation slightly below in the short to medium term. Real wages are expected to grow. Grocery volume stopped decreasing toward the end of 2023 and even started to increase in some markets. In addition, in our survey, consumers tell us that they plan to trade down less than they did in 2023, and a few consumer groups even intend to start trading up again (Exhibit 2). If this trend holds, we expect grocery volume in Europe to return to growth in the second half of 2024.

Our data also shows large differences among countries and consumer segments. In some countries, including Germany, consumers report a strong intention to reduce downtrading and to start trading up again selectively. In other markets, consumers are still less optimistic about the future (for example, in Italy and Switzerland). We therefore expect market performance in Europe in 2024 to be quite heterogenous, with significant differences between countries. We expect the same to be true for consumer segments. For example, low-income households are still trading down, while high-income households intend to trade up again on specific occasions or in selected categories.

Grocery CEOs remain concerned—although less so than last year. Seventy-six percent of European grocery retail CEOs in our survey remain concerned about challenging market conditions (Exhibit 3). Thirty-six percent expect market conditions to become worse than in the prior year (down from 44 percent in 2023 and 60 percent in 2022), while 40 percent expect them to remain the same (up from 33 percent in 2023). CEOs are particularly concerned about prices and inflation. That said, CEOs in Central and Eastern Europe are somewhat less pessimistic than their peers in Western Europe. Only 29 percent of Central and Eastern European CEOs expect market conditions to become worse, compared with 50 percent in Western Europe.

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The 2024 grocery CEO agenda remains similar to last year’s. Increased margin pressure and downtrading take the top two positions again, well ahead of other priorities (Exhibit 4). However, four priorities gained between seven and 12 ranks compared to last year: talent, food to go, government regulations, and loyalty programs.

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Based on our CEO and consumer surveys and further research, we identified eight trends that we believe will shape the grocery industry in 2024. Some of the trends build on last year’s, while others are new and will shape the strategies required to win in the grocery industry in the coming years (see “Key Trends”).

1. Cost and margin pressure

The profitability of grocers declined further in 2023, and the pressure will not go away in 2024.

Margins decreased for both grocery retailers and consumer packaged goods (CPG) companies between 2019 and 2022. While grocery retailers lost 0.4 percentage points of EBITDA margin in that period, CPG companies lost 1.3 p­oints. However, 2023 followed a different trajectory. Retailers were losing another 0.3 percentage points because of additional cost increases, while CPG ­companies gained back 0.8 percentage points as they passed their cost increases on to retailers (Exhibit 5).

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In 2024, grocery retailers will continue to feel margin pressure. The main driver in 2024 is rising rent and labor costs. According to our CEO survey, cost and margin pressure is a top three priority for 70 percent of CEOs (compared with 67 percent last year).

To improve their margins, retailers are expected to intensify supplier negotiations, buying-alliance activity, and consolidation efforts in 2024. In 2023, we saw intense supplier negotiations during which some leading products were temporarily not available in stores. This year we expect to see even more intense negotiations. Buying alliances are gaining strength, and selected new ones are emerging—such as the recently announced partnership between Auchan and Intermarché. “This will be a real game changer,” Auchan CEO Yves Claude told us during an interview (see “A growth journey toward green and local”). Meanwhile, M&A activity is expected to stay high as retailers seek economies of scale, building on the 2023 record of 21 transactions in Europe,7GlobalData, March 2024, data available for past ten years for Europe. including Reitan’s acquisition of the majority of the ALDI store network in Denmark.

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2. The return of polarization

Most consumer groups still intend to trade down in 2024, while high-income households are starting to trade back up.

More than 45 percent of respondents to our European consumer survey said they are still looking for ways to save money when shopping in 2024. Still, this number is lower than it was last year, while it continues to be similar across income groups (Exhibit 6). While downtrading is still highly prevalent across low-income households, we saw initial signs in 2023 that high-income households are uptrading again. The net intent of high-income households to buy more high-quality or organic products further increased at the beginning of 2024 and is now clearly positive. We therefore expect to see downtrading and uptrading at the same time, depending on the consumer group and the geography. The consumer survey results vary greatly across countries, leading us to expect significant differences in market development across Europe.

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Private label growth continues and is expected to persist, even if the economy improves. Both private labels and discounters experienced strong growth across Europe, gaining 1.8 and 2.9 percentage points, respectively, and consumers continue to have positive experiences with private label offerings. According to our consumer survey, 83 percent of consumers rate private label products of equal or better quality than branded options. Therefore, we do not expect shoppers to switch back even if the market environment improves.

The quest for health and longevity is the only premiumization trend that has not been negatively affected by inflation. The intent of shoppers to buy healthier products has remained constantly high for several years. According to our consumer survey, consumers also prioritize products perceived as “good for myself” over those “good for the planet.” Functional food claims such as “boosting energy” and “supporting health” continue to gain traction.

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3. Food to go: A wrestling match for share of stomach

As consumers spend more time on the move, the food-to-go market is surging.

The food-to-go market declined during the COVID-19 pandemic, but it has recovered and continues to grow. Food to go encompasses various channels: prepackaged ready-to-eat meals, ready-to-heat convenience meals, counters and kiosks, restaurant takeaways, and meal delivery. The growth of these channels is driven by the return of workers to offices and consumers’ increasingly busy lifestyles. According to our CEO survey, food to go is one of the top five trends for 2024; CEOs expect food to go to drive traffic, raise margins, and generate cross-selling opportunities.

In Paris, half the population now lives alone, so they prefer packaged meals and smaller portions. Our new concept stores will help us gauge the demand for ready meals.

Yves Claude, CEO, Auchan Retail

Foodservice providers such as restaurants, takeaway players, and meal delivery services are gaining share from grocery retailers. Despite the inflationary environment and consumers trading down, the foodservice industry outpaced the grocery retail industry by nearly three percentage points. While foodservice grew at 11.5 percent,8Eurostat foodservice turnover. grocery achieved a growth rate of only 8.6 percent last year. France and Italy now have higher foodservice volume compared with prepandemic levels, while Germany and Spain are still below those levels.9Eurostat, February 2024; McKinsey, growth in sales value adjusted for change in Harmonised Index of Consumer Prices for catering. Going forward, food to go is expected to grow at roughly 8 percent per year over the next five years in Europe,10GlobalData: Away-from-home food in retail channel 2023, sample of 23 European countries. while the grocery retail market is expected to grow at roughly 3 percent.

Grocery retailers are expanding their food-to-go offerings to capture this growth. Grocers are expanding their offerings of traditional ready-to-eat, ready-to-heat, and ready-to-cook products. They are also increasingly experimenting with foodservice offers such as hot food to go, cafeterias, and seated restaurants, either through third-party concepts or by offering them directly.

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4. Sustainability: Progress made, still a long way to go

A step change for sustainability in grocery requires bold actions from retailers; our 2024 consumer research does not show increasing pull from consumers.

In fact, the share of consumers who want to buy products that are more sustainable in the next 12 months decreased by one percentage point from 2023. Also, the intent to buy more alternative-protein products remains stable at the low levels of 2023. Only members of Generation Z and millennials signal a high intent to buy more environmentally friendly products in 2024.

The window of opportunity to reach 2025 sustainability targets is closing. All of the top ten European grocery retailers have set sustainability goals for 2025, covering a variety of sustainability dimensions (Exhibit 7).11The top ten European grocers are Schwarz Group, ALDI Süd, Ahold Delhaize, Tesco, Edeka, Rewe, Leclerc, Carrefour, Sainsbury, and Casino; Euromonitor, accessed February 2024. Many of the dimensions still have sizable gaps to close to reach these targets. We therefore expect to see accelerated sustainability efforts across the industry in 2024. For targets on Scopes 1–3,12Scope 1 is direct emissions generated by an organization. Scope 2 is emissions generated by production of purchased energy. Scope 3 is indirect emissions from up and down the value chain. working toward these presents a dual opportunity to reduce carbon emissions and capture cost savings; we have found that, depending on the category, up to 40 percent of emissions can be reduced in a way that also reduces cost.

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So far, none of the top ten European grocers are reporting any progress on Scope 3 emission reductions.13Scope 3 refers to all greenhouse gas emissions that happen in the value chain before or after grocery retailers (that is, suppliers and consumers). This is mainly because measuring these emissions accurately is very difficult. However, pioneering retailers have started to build Scope 3 accounting capabilities that use actual emissions by product and supplier instead of global averages across all suppliers. This shift will enable grocers to measure and reduce their Scope 3 emissions more effectively. For example, by understanding the real emissions associated with each supplier, grocery retailers can switch to suppliers with lower emissions or agree with suppliers on concrete reduction targets.

Regenerative agriculture14Regenerative agriculture includes farming and grazing practices that improve soil health, crop resilience, nutrient density, water management, and biodiversity, as well as the livelihoods of farmers. could become the new ‘organic.’ Most of grocery retailers’ greenhouse gas emissions are driven by agriculture. About 50 percent are driven by dairy and meat alone. Regenerative agricultural practices are therefore the key to meet the net-zero ambitions proclaimed by many retailers. Introducing regenerative agricultural labels in their assortment as an alternative to organic labels can be a big opportunity for retailers to differentiate their offerings while working toward their sustainability targets.

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5. Online: Liberation from offline

Online grocery is returning to growth, and it is increasingly evolving into an independent, profitable format with its own differentiated value proposition.

Online grocery lost market share in 2023, but consumers are starting to return as spending power recovers. The net intent of consumers to buy more food online has returned to positive, increasing by eight percentage points in the first quarter of 2024. We expect e-grocery to grow faster than the overall grocery market over the next years. Meal delivery from restaurants might grow even faster than e-grocery (Exhibit 8). Pure players in particular show extraordinary growth rates as they expand into new regions. For instance, Picnic grew at more than 30 percent per annum over the past five years,15Picnic company accounts, February 2024. driven by rapid expansion.

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Pure players are starting to reach profitability. For instance, Rohlik is profitable.16Zosia Wanat, “Brunch with the founder of Rohlik — a profitable disruptor of a trillion-dollar grocery industry,” Sifted, December 12, 2023. Picnic claims to be “operationally profitable in mature markets,”17“Online supermarket Picnic gets €355 million capital injection from shareholders,” NL Times, January 9, 2024. and Ocado returned to profitability in 2023. Moreover, leading meal delivery players have also reached breakeven (DoorDash and Deliveroo over the course of 2023), thanks to a successful shift of priorities from growth to rightsizing.18Company financials; Corporate Performance Analytics by McKinsey, March 2024.

Increasingly, consumers expect different value propositions from online and offline channels. It is becoming progressively clear that the two channels satisfy different shopping needs. For example, 37 percent of consumers in our UK survey (two percentage points higher than 2023) always shop at a different banner online than offline because they exhibit different needs by channel. In addition, UK consumers see promotions as more important than price for offline store selection, while for online, price is more important than promotions.

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6. Retail media: Click here to boost the bottom line

Retail media (RM) undoubtedly remains a substantial profit driver for grocery retailers, with 20 of Europe’s top 30 grocery retailers now active in the market.

Grocers view RM as a fundamental driver of profitability. In Europe, the RM market was worth €11 billion in 2023 and is expected to grow at a rate of 15 percent annually in the coming years. With EBIT margins reaching 65 to 70 percent within three years of launching, RM presents an attractive opportunity for grocery retailers.19IAB Europe, Statista, January 2024. In our survey, grocery retail CEOs confirmed this opportunity, naming RM as one of the top five opportunities for the year ahead.

2024 will be marked by a bold expansion of retailers’ RM footprint. The name of the game for RM is scale—only the largest players are expected to remain relevant for CPG advertisers in the long run, especially in light of Amazon’s large share in the market (Exhibit 9). This will prompt smaller players to consolidate and form partnerships to maintain relevance in the RM world. Alliances, such as the Unlimitail partnership between Carrefour and Publicis, and the growth of ad network aggregators such as Amazon Ads are expected to shape the market this year.

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Standardization, impact measurement, and ad diversification are critical for engaging CPGs on RM. Regulatory changes have increased the difficulty of targeted digital marketing, boosting the appeal of RM for CPG companies to engage with consumers at the point of purchase. Transparency and standardization of impact metrics, such as return on ad spending, are essential for RM success, and CPG companies rank these as the top barrier to further investing in RM.20Retail Media Standards Survey 2023, IAB Europe, 2023. To address this, Ahold Delhaize, for example, has launched a self-service platform for suppliers to manage and track the impact of RM campaigns. Moreover, retailers are expected to expand their offerings beyond classic paid search and website banners to include video, connected TV, shoppable (video) content, and innovative in-store activations in order to stay relevant to CPG advertisers.

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7. Conversational commerce: The next wave of analytics

Advanced analytics and traditional AI still account for most of the impact, but conversational commerce enabled by generative AI has the potential to reimagine how we shop.

Retailers have started to experiment with generative AI but have yet to unlock real value. From the total advanced analytics and AI impact pool in grocery retail, an estimated 10 to 20 percent of value potential stems from generative AI. In grocery, six revenue-enhancing and efficiency-driving use cases are expected to drive value: hyper-personalized content, smart search, copilots for category management (for example, supplier negotiations), copilots for support functions (such as software development), content creation, and conversational commerce (Exhibit 10). By engaging shoppers with a human-like chatbot as a personal shopping assistant, conversational commerce can significantly improve the on- and offline shopping experience. For instance, US-based Walmart launched its Text to Shop proposition last year, allowing consumers to shop for groceries by texting. They can also get inspiration for recipes, make restocking suggestions, and schedule delivery or pickup times.

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Advanced analytics and traditional AI are still the largest sources of technology-driven value creation in retail. Eighty to 90 percent of future value creation for grocers is driven by advanced analytics and traditional AI. For grocers, assortment, pricing, and promotion optimization are the largest opportunity areas. Rigorously leveraging advanced analytics and traditional AI across the organization has the potential to improve EBIT margins in retail by up to one percentage point. Most large retailers in Europe have adopted a range of advanced analytics use cases by now and started to capture a significant share of that potential. The remaining opportunity resides in expanding to further use cases, increasing adoption of use cases, and using the new capabilities to localize and personalize the offering for each store and consumer.

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8. Talent: Making retail a career again

Grocers across Europe face an unprecedented number of job vacancies, and the average employee tenure is shrinking.

Vacancy and fluctuation rates are high. In the third quarter of 2023, 2.2 percent of all retail jobs were vacant, a 29.4 percent increase from 1.7 percent prior to the pandemic.21Eurostat EU-27 countries. While retailers work hard to fill open positions, they are also confronted with high turnover rates—especially in frontline positions. In addition, there is a shortage of skilled talent, particularly in supply chain activities, as well as for jobs that require digital and technological know-how. The aging of the population further exacerbates the situation. The number of citizens of working age in the EU-27 will decline by approximately one million people per year going forward. Hiring and developing talent is one of the top three priorities of European grocery retail CEOs, according to our survey. Yet only 21 percent of retail employers in Germany say they have a professional retention program in place, and even fewer—11 percent—say they have the tools in place to survey employee satisfaction regularly.22Study: Talents4Retail 2023/24, EHI Retail Institute, January 2024.

As automation and digitalization progress, the roles and job profiles of retail employees will change significantly over the next decade. Social, emotional, cognitive, and technological skills will become more important as the need for physical activity decreases. Our analysis shows that by 2030, the time workers spend using social or emotional abilities will increase by 32 percent, and the time they spend leveraging technical skills will increase by 64 percent. Physical and manual activity, on the other hand, will decline by 17 percent as a result of technological advancements.

Attractive grocery employers offer careers, not just jobs, in combination with the right work–life balance. Forty percent of retail employees in Germany and 33 percent of retail employees in the Netherlands are considering changing their jobs.23McKinsey HR-Monitor Germany 2024; Distrifood 2023. Respondents cited unmet needs of applicants, compensation, and working times among the top five factors in ongoing retail vacancies in Germany. Flexible work arrangements and a multitude of career paths gain in importance. Yet only 16 percent of retail employers in Germany say they offer work–life benefits to frontline retail employees, and more than 50 percent of retail employers in Germany say they do not offer individual career opportunities to their employees. In the United Kingdom, the retail sector ranks in the bottom third in terms of offering career progression opportunities compared with other sectors. Meanwhile, retailers such as Walmart have started acting on these developments by offering different types of career paths and trainings depending on employee preferences.

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Implications for grocers

The state of grocery continues to present challenges, but—supported by stronger consumer sentiment—there are opportunities for executives to build new sources of competitive advantage. We see three strategic priorities for grocery retailers that will help them strengthen their assortments, increase profitability, and leverage the momentum for RM networks.

Future-proofing the assortment

Confronted with polarized consumer behavior, grocers seek to balance affordability with value-adding products while rationalizing the assortment to optimize costs. To defend their market share, supermarkets and hypermarkets will want to keep strengthening their private label offerings. At the same time, growing demand for healthy products and for food-to-go, ready-to-eat, and ready-to-heat options provides further opportunities for uptrading consumers. Retailers that can differentiate assortment by store depending on local needs will be best positioned to win in this market environment—especially given that different countries, regions, and neighborhoods will show varied recoveries in 2024.

Driving nontrivial efficiency savings

As margin and cost pressure remains high, grocery retailers need to take rigorous mitigating actions to achieve cost savings. With low-hanging fruit already captured, cross-functional and nontrivial cost positions need to be addressed in 2024—for example, operating model redesign, end-to-end supply chain optimization from supplier to store, rent renegotiation, or design-to-value for private label assortment.

Monetizing retail media

When it comes to building and scaling a RM business that drives profits in 2024 and beyond, grocers have no time to lose. To go from good to great in RM, players need to think like ad agencies and secure the right leadership commitment, business autonomy, and resources dedicated to RM business development. Grocery retailers enjoy a privileged position in today’s media landscape. However, to remain relevant to advertisers over time, RM players should consider improving their impact measurements, as well as continuously enhancing and renewing their advertising offerings.

State of Grocery Europe 2024: Signs of Hope (2024)

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