European food retailers are facing three radical changes: hypermarkets are under a lot of pressure, discounters are surging and eCommerce's growth is speeding up. Name brands have to act quickly to guarantee their future existence, according to a Bain & Company report.
Online gets underestimated
The so-called "big box stores" (which are hypermarkets with more than 5,000 sqm) are struggling with well-known issues. Demographically they need to deal with smaller families, an increasingly older population, urbanization.... lower turnover combined with increased price pressure have put these stores in a bind. They have to lower costs, but that will lead to a diminished service, shelves that get replenished slower and supply interruptions. The consequence would be that even more shoppers run away to the competition.
Both hard discounters (Aldi, Lidl) and soft discounters (Colruyt, Mercadona) have grown considerably over the past few decades. Value for money seems to be a successful formula, but it does mean that the average food prices have dropped - even with traditional retailers who tend to fight for their market share with price wars.
Food is still only a small part of the online world, but it is rapidly growing. Many FMCG (fast-moving consumer goods) parties underestimate what eCommerce could do to their particular branch, partially because the panel date they use and trust does not sufficiently take online purchases into account. Online diapers, baby food, pet food and cosmetics sales already rake in more than 5 % of the total turnover and that number will quickly double, which will in turn cause havoc in retailers' and brands' profitability.
5 pieces of advice
The trends may not be new, but they are mutually supportive, something few FMCG managers realize. If discounters grow, then they do so to the detriment of hypermarkets, while eCommerce's growth will hit discounters, supermarkets and hypermarkets alike.
Bain & Company's simulations point out that the European food retail landscape will look markedly different in 2025. Supermarkets and hypermarkets will have lost further ground, while discount, convenience and online have taken over the market. An average supermarket will have become at least 10 % smaller, while hypermarkets will have downsized even more. Its product range will also have dwindled 15 to 25 %, while margins will shrink 20 %. These are even the careful forecasts, because those numbers double in the worst case scenarios...
Most retail brands have managed to sustain themselves, keeping alive healthy profit margins, but as emerging market's growth continues to slow and retailers are facing harsher times, that may become a problem. What should these brands do? Bain & Company hands out 5 pieces of advice in a recent report.
1. Use resources cleverly
Many FMCG organization still target the ever-smaller hypermarket and supermarket model. Discount and convenience require an entirely different supply chain, with smaller packaging, mixed pallets, different activation models and so forth.
2. Simplify your brand portfolio
If there is not as much shelf space, brand competitiveness will increase, forcing FMCG manufacturers to focus on their best-selling brands before retailers make that choice for them. Companies will have to look at innovation differently: they need fewer, but better innovations that can strengthen their best brands, be relevant to shoppers and provide margins to retailers.
3. Re-examine collaborations
Brand manufacturers stand to gain if they focus on the food retail industry's winners, with a differentiated product range. Retailer consolidation will result in even more stringent conditions and cost-cutting measures are inevitable.
4. Focus on growing channels
Brands have kept discounters and convenience players at bay for a long time. Maybe they did approach them on a purely opportunistic basis, but now it is time for them to create adjusted strategies focused on the right price and the right product range. Alternative channels should also receive their overdue attention: specialty stores, drugstores or an online sales channel directed straight at the consumer.
5. Invest in digital transformation
eCommerce requires many different forms of collaboration, with new partners like Amazon or Alibaba, while digital media are essential to reach the consumer. A thorough big data analysis will give you valuable shopping insights.