Adjusted for inflation, European food retail sales fell 7.1% last year as consumers paid closer attention to prices. Pressure on margins also continues. Retailers are seeking refuge in cooperation and further automation.
Prices rise, volumes fall
High food inflation had a solid impact on consumer behaviour in 2022: households saw costs rising faster than their incomes and therefore bought cheaper products, more private brands, more often from discounters. Total grocery sales still grew by 2.9% in Europe, but that growth was the result of 10.7% higher prices, compared to a volume decline of 3.6% and a “downtrading” effect of 3.6%.
Total grocery volume was 2.3% above 2019 levels last year. In Belgium, the sector’s sales were up 1.8%. All this is according to the latest report “The State of Grocery Retail” by EuroCommerce and McKinsey.
Online stagnates, discounters win.
Private label share grew by 1.9%. Only 0.8% of this is explained by shoppers exchanging A-brands for private brands. Other factors at play were higher-than-average price increases for private brands and higher-than-average growth for the discount channel, where private brands are dominant.
Indeed, discounters gained 1.4% market share in Europe last year, and did so at the expense of all other store formats. Online food sales also stagnated in most countries last year. In the UK and Sweden, they fell by about one percentage point. In Belgium, the trends are even more pronounced: online retail sales in our country fell by 2.7% in 2022, while discounters’ sales rose by 2.6%.
Margins shrink further
The combination of cost inflation, lower volumes and more price-sensitive customers produced a toxic cocktail for European food retailers: they saw margins fall by an average of three percentage points between 2019 and 2022. The EBITDA margin fell by one percentage point, while the EBIT margin stagnated.
Is improvement in sight? Inflation is now easing somewhat, but is likely to remain quite high throughout the year. Consumer confidence is gradually returning, but it is still significantly lower than before the pandemic. A survey of 47 CEOs of European food retailers shows that 44% expect 2023 to be a worse year than 2022. According to them, pressure on margins will continue, consumers will continue to downshift and the importance of private brands will increase further. Only 23% expect an improvement this year.
Looking for economies of scale
According to McKinsey, consumer prices will not return to normal until the second half of 2023. Only then would volume declines also end. However, consumers will continue to watch prices: after all, they appear very satisfied with private labels and discounters.
For retailers, pressure on margins continues, partly because wages continue to rise. At the same time, they face large investments in digitalisation, automation and sustainability. And that while working capital is becoming significantly more expensive. Smaller retailers in particular will have to look for economies of scale. This could trigger a wave of franchises, partnerships, purchasing combinations, mergers and acquisitions in Europe. This trend was already visible last year: think of the acquisition of Jan Linders by Albert Heijn in the Netherlands, Aldi‘s exit from Denmark, or the private-label partnership between Scandinavian Coop and Carrefour.
Retail media boost
Although online stagnated in 2022, researchers again expect long-term growth. Remarkably, research shows that 75% of UK consumers order online from a different retailer than offline. Pure players are threatening traditional players and more and more of them will break even or even achieve profitability, McKinsey thinks. Rohlik, the Czech web supermarket hoping to conquer Europe, is already that far. Meal delivery companies are growing faster than online grocery services and have the prospect of better profitability, thanks to higher margins.
An increasingly important source of revenue for retailers is their media operations. Retail media is a very attractive channel for advertisers as it allows them to target specific audiences and also calculate their Return on Ad Spending (ROAS) precisely. Typical examples are the partnership between Carrefour and Publicis, or the acquisition of the digital platform Adhese by Ahold Delhaize.
AI and sustainability
Another lever to create value for food retailers is technology. Automating distribution centres is becoming one of the biggest investment items for European retailers. Modernising IT systems is also a priority. Advanced analytics applications could improve EBIT margins by one percentage point. McKinsey then thinks about optimising pricing and assortments, and improving supply planning. That potential becomes much greater thanks to generative AI, which can be used for personalised customer interaction.
Finally, retailers face the big challenge of reducing their carbon emissions. Especially the so-called ‘Scope 3’ emissions, upstream and downstream in the supply chain, will force retailers to work more closely with their suppliers and also involve consumers more strongly in this pressing issue.