European grocery industry to face major reshape in coming decade

12 May 2016 6 min. read
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Large European supermarkets and hypermarkets are set to lose considerable market share as value conscious consumers seek discounters and online propositions. A new report considers the three largest trends as well as two models in which different factors affect market share in the grocery industry and, ultimately, margins.

In many western economies global grocery retailers, particularly supermarkets and hypermarkets, have come to dominate in recent decades, the rapid expansion saw the demise of the traditional trade— family-owned grocery chains, small independent stores, and open air farmers markets that formerly served local communities. In recent years, European giants have sought to enter emerging markets, banking on similar success; however, the forays have in part been rebuffed and, as new research highlights, even in Europe their model is under threat.

In a new report, titled ‘How Brands Can Prepare for European Retailing’s Tectonic Shifts’, Bain & Company explores the changes set to affect the retail landscape in Europe as well as the knock on effects changes may have on brands.

Operating margins of CPG

Margins tendencies
Retailers have been squeezed in recent years, with margins, while relatively stable, ticking down slightly since 2010. Consumer packaged goods players, on the other hand, have managed to generate robust margins, at an average of around 13% over the past ten years, on the back of expansion in emerging markets, as well as a M&A bonanza and relentless discipline in cost cutting. This has allowed consumer goods players a greater and greater share of the global retail and consumer products' profit pool.

The drop in margins for retailers, and their long term lack of growth, is, according to the research, the result of a number of trends affecting the industry, the three largest of which are: the weakening performance of hypermarket stores, the unstoppable rise of everyday value concepts and the acceleration of digital commerce.

Major trends
The weakening performance of hypermarket stores is, according to the research, the result of consumer demographics and lifestyles: the shift to smaller households, aging populations and growing urbanisation that have reduced the attractiveness of a concept that requires consumers to drive relatively long distances to stock up for a week. Meaning hypermarkets are losing ground to more accessible shopping options, such as discount and convenience stores and e-commerce, as well as to specialised and online competition for non-food products.

Another area attracting consumers is the discounter phenomenon, which has, in recent years, managed to rapidly increase its marketshare through selling private-label products in a no-frills environment to price conscious consumers. The value market too is changing, however, with more and more supermarkets competing for value brand customers, further eating into their respective margins and forming the basis for a race to the bottom.

The final trend is a move towards more digital shopping, which, particularly in non-food grocery items, is cutting considerably into sales. Baby supplies and cosmetics are, in particular, already being sourced at around 5% online – which is set to grow considerably over the coming five years to more than 10% for many categories. According to the report’s analysis, that’s high enough to affect the economics of these categories in stores and, eventually, to influence the grocery sector at large, particularly as many of the online solutions developed by grocers are proving largely unprofitable.

The consulting firm suggests that these three major trends need to be carefully considered as mutually reinforcing trends that bear cumulative effects, and not necessarily as an independent phenomenon. If consumer goods players do not act on countering these three major trends, then weakening performance, competitive discounter formats and digital sales could further challenge their already threatened market share. 

Grocery share landscape changes
As it stands, the grocery landscape is worth €930 billion, with around 40% captured by supermarkets, around 30% by hypermarkets and around 20% by value stores. The market share of the different sales formats is set to change significantly, however, over the coming decades to 2025. The consulting firm developed two models to map projected changes, a base case and an accelerated case:

In the first scenario (the base case), the firm assumes that the overall grocery market, as well as the convenience and value channels, would continue growing at their current rates; the growth of supermarkets and hypermarkets would slow down by 1%; and the penetration of online grocery pure plays would nearly triple—essentially, more of the same trends.

In the second scenario (an accelerated situation), the firm assumes that the overall market would continue growing at the current rate; convenience and value would grow 2% faster; the penetration of online pure plays would end up 2% higher than in the base case; and the growth of supermarkets and hypermarkets would fall nearly 3% lower than their historical rate.

According to the base case model, by 2025 supermarkets and hypermarkets combined are set to lose out on the €1,275 billion pie; the market share of supermarkets and hypermarkets will erode to 59%, down from 70% today. In our accelerated case, their market share will shrink to 48%. At the same time, for the base case, the online presence will grow slightly to around 5% while convenience stores will increase their share marginally; in the accelerated case, the online segment takes almost 10%, with a similar result for convenience stores, while the value store segment is set to grow rapidly.

Based on the assessment, the authors suggest there are five imperatives for consumer goods players to thrive in the new grocery world: to assess the value and risks at stake, to build simpler but stronger portfolios, to rejuvenate growth and protect margins, to define successful commercial and operational strategies and, lastly, to engage in a holistic digital transformation. In order to sustain a healthy performance in the changing grocery environment, the consultancy argues that "standing still isn’t an option" at this point, but rather "a proven method for getting caught off guard".

A recent study by McKinsey & Company found that grocery retailers are struggling with expansion into emerging markets, while another study, from BCG, found that in the US SME players in the $670 billion industry are increasingly eating market share from the giants.