Even though 2020 was a record-breaking year for many food retailers, the coronavirus pandemic made a lasting impression on food retail. McKinsey and EuroCommerce identify three major trends at work that are forcing supermarkets to adopt new strategies and innovate.
Fear of decline
After the peak year of 2020, CEOs across the food industry consider this year to be rather gloomy: they expect the year to remain challenging and highly uncertain, according to a survey by McKinsey in collaboration with interest group EuroCommerce. A survey in January showed that almost half of them feel the state of the market get worse.
Their main concern is that price seems to be regaining importance, as many consumers – whether affected by the Covid crisis or not – are starting to ‘downtrade’. Indeed, 34 per cent of consumers across Europe say they would like to cut back on their grocery spending: for example, more than a quarter (27 per cent) would like to pay more attention to promotions, and one in six would like to switch to less expensive products. Reinforced by consumers’ higher quality expectations, even in the lowest price range, this puts considerable pressure on food retailers.
Nevertheless, consumers have indicated that they want to carry some of the habits they formed during the Covid period over to post-pandemic times. For example, many consumers plan to continue to buy more in supermarkets and less through other channels, such as the hospitality industry. The fear that the total market will shrink as soon as restaurants reopen may, therefore, be only partly justified.
30 per cent wants to eat more healthily
It is worth noting that those on higher incomes are generally less price-conscious and prepared to spend more on healthy foods and nutrition in general. In contrast, those on lower incomes focus more on saving money and are less concerned with healthy food choices. This reaffirms the increasing polarisation already noticeable in 2020. Although, all of these occurring trends apply, to some extent, to all income groups.
The importance of lifestyle and healthy eating is a second major shift that forces the food industry to adapt. The coronavirus crisis has accelerated the trend towards more healthy, more sustainable and more local products. This trend shows no signs of slowing down. In Europe, 30 per cent of respondents plan to focus more on healthy eating and nutrition by 2021, almost a quarter plan to spend more on regional and local products, and 19 per cent say they will buy more sustainable products.
Online at the top of the priority list
Meanwhile, CEOs see the accelerated growth of online channels as their second most important priority – coming in after the increase in price awareness. E-commerce has made its big breakthrough: most consumers expect to shop online more often in 2021 in comparison to 2020. The more often consumers already bought online, the more likely they want to increase their online share even further.
Those who have not yet done so, however, have no immediate plans to commence. So, a proportion of consumers cannot yet be reached online. When asked what holds them back from ordering online, 49 per cent said they preferred personal contact in the store, 33 per cent found the delivery costs too high and 22 per cent said the threshold for minimum orders is too high. However, retailers obviously see the need to improve their online profitability. So they will have to strive for more efficiency and find new margins to grow profitably.
More breathing space in niche markets
McKinsey calls for urgency: while food retailers are likely to work on all three trends, executives need to examine whether their efforts are ambitious and fast enough to win. The shifts are happening on a much larger scale and much quicker than ever before, and this could lead to significant changes in market share over the next few years. Smaller players can win by excelling in one or two areas and nurturing their niche, but leading supermarket chains will struggle to maintain market share unless they excel in all three trends.
Even while demand for value-added or quality products will take some of the pressure off, retailers are likely to have to make significant efforts to remain profitable. Retailers need to reduce costs further and create new margins. Automation of the supply chain and back-office processes are possible levers to achieve just that.
Assortment per store
Advanced data analysis also makes it possible to respond to the increasing polarization of consumers. According to the researchers, assortment planning is done ideally at a more detailed level. This could include adapting stock to local or store-specific needs to reflect the dynamics within the area each store serves more effectively. Personalised pricing and promotions can also provide an interesting margin boost.
“All these shifts are excellent opportunities to win new customers,” the report concludes. “We see some retailers taking bold steps, for example by introducing new private brands focused on health or by expanding and improving their low-price assortments. Others are reorganising their businesses to shift more resources to online.”