Food retail, in 2024 companies that focus on innovation and sustainability will be rewarded

The state of the groceryThe McKinsey report on European food retail it does not predict major upheavals for the near future but offers some indications for charting the course. Meanwhile, it is now well established that 2023 was a year of significant difficulties for the sector. With inflation forcing consumers to review their spending habits, we have witnessed a sharp contraction in sales volumes.

The report offers us some numbers in this regard: “Food sales in Europe grew by 8.6% in 2023. This growth was the result of food price inflation of 12.8%, a markdown effect of 1.8% and a decline in volumes of 2.0%. This implies that food sales in real terms (i.e. adjusted for inflation) fell again in 2023 and are now 4.5% below 2019 levels. This decrease compared to 2019 is due to a slight increase in volumes of 0.3% and a drop in the price per item in real terms of 4.8%”.

However, despite the adversities, the sector has shown remarkable resilience, quickly adapting to changes and seeking new ways to attract customers. The ones who benefited most were the private label, which increased in Europe by 1.8% and the discounters who took advantage of an average market share of 0.8%, reaching 1% in some countries. Online has not shown large increases (France is the country where it performed best with +0.5% while it decreased slightly in other countries, includingItaly, with -0.5%. In general, retailers of Italy, Netherlands, Portugal And Spain they found winning strategies, despite high pricing pressure, and even achieved market share increases of 0.5 to 0.8 percentage points. This spirit of adaptation has prepared the ground for a 2024 where cautious optimism lingers. Although the shadow of economic uncertainty continues to loom over the market, signs of a timid recovery are beginning to make their way into analysts’ forecasts. The latest data suggests that consumers are gradually regaining confidence, boosted by improving economic conditions and wage increases in several nations. But pay attention to the “chicken” averages, in fact, it is true that wage increases of 6.3% in the EU-27 in the second half of 2023 brought some relief to consumers, but not all countries have returned to wage levels of 2019 in real terms. For example, real wages are still below 2019 levels France, Germany, Italy And Netherlands. On average, at the end of 2023, real wages in the EU-27 were 1.2 percentage points lower than 2019 levels.

So what awaits us for the next few months? According to the analysis, there are eight key trends for 2024let’s see them.

Pressure on margins and costs: Retailers will face continued economic challenges, but innovation in purchasing strategies and more effective management of resources could lead to improved operating margins. Which means that on the one hand we will see even more muscular negotiations between industry and distribution, on the other hand new alliances on the distribution side, such as the recent agreement between Auchan and Intermarché, aimed at strengthening the negotiating position towards the branded industry. Furthermore, if in 2023 we witnessed 21 M&A transactions, such as Reitan’s acquisition of the majority of the Aldi store network in Denmark, by 2024 McKinsey analysts expect more to come, resulting in the consolidation of forces by the large-scale retail trade.

Polarization of consumption: The polarization of purchasing behaviors is expected to continue, with consumers oscillating between extreme savings and seeking premium products. With an improving market, the choices of high spenders will be oriented towards organic and sustainable products, and in general consumers (although with different data from country to country) look to the future with more optimism. Furthermore, if the MDD seemed a bit like a lifeboat during the rise of inflation, improved economic conditions will not cause it to retreat; entered the hearts and carts of consumers, will continue to enjoy their favor as research confirms: “According to our consumer survey, 83% rate private label products as equal or better quality than branded options . Therefore, we do not expect buyers to turn back, even if the market environment improves.” Just as the key word for the future of products will continue to be “health”, which however will increasingly translate into “longevity”.

Rise of food-to-go: takeaway food, which sees various variations including: pre-packaged ready meals, ready meals, ready to heat, counters and kiosks, takeaway dishes in restaurants and meal delivery, stimulated by the return to the workplace and lifestyles more frenetic, will continue to gain ground, pushing retailers to diversify their offerings. Taking a look at the numbers offered by the report it is highlighted that “while the restaurant sector grew by 11.5% last year, the food sector recorded a growth rate of only 8.6%. France and Italy now experience higher food service volumes than pre-pandemic levels, while Germany and Spain are still below those levels. Looking ahead, takeaway food is expected to grow by around 8% per year, over the next five years in Europe, while the food retail market will grow by around 3%.” According to the CEOs interviewed, it is the area where the highest margins can be found. As Yves Claude, CEO of Auchan Retail, confirmed to McKinsey: “In Paris, half the population now lives alone and prefers packaged meals and smaller portions. Our new concept stores will help us measure the demand for ready meals.”

Sustainability: Despite growing pressure for sustainable policies, the path to sustainability remains complex, with consumers still hesitant to radically change their purchasing behaviors. On the industry side, sustainability is no longer a vague promise or a philosophical objective but is gradually enriched with KPIs that are not easy to achieve. Among the various trends in this area, much interest is being aroused by regenerative agriculture, which could become the new standard, as has already happened for organic farming, since it offers a solution to reduce greenhouse gas emissions in the food sector, in particular those coming from dairy products and meat, which represent about half of the total. Adopting regenerative farming practices can help retailers reach their goal of net zero emissions and, at the same time, offer a point of differentiation through the introduction of regenerative farming labels, which act as an alternative to organic ones and highlight the commitment to sustainability of those who adopt them.

Growth of online commerce: Online commerce is finding new vitality, with growth forecasts that exceed those of the traditional retail sector, pushing brands to renew their digital strategies. Indeed, pure players are starting to achieve profitability just as major delivery operators have achieved breakeven (DoorDash and Deliveroo during 2023), thanks to a successful shift in priorities from growth to scaling. Consumers also look at channels differently, according to a Mckinsey report, in the United Kingdom, 37% buy online from different brands compared to offline ones, and if promotions are important at the point of sale, they are much less so when the The purchase is made online.

Retail Media: indicated by many as one of the most interesting profit drivers, Retail Media already sees two thirds of the main European retailers active. Valued at around 11 billion euros in 2023, it is expected to grow by 15% annually. 2024 will see retailers looking to expand their presence in this field but predictions tell us that only the major players will be relevant in the long term. This will encourage the little ones to form alliances to stay competitive. One of the fundamental points will be the need to standardize and measure the effectiveness of RM to attract further investments, in addition to the expectations that retailers diversify their advertising offers to maintain relevance in the sector, we are talking about video, digital TV and others services.

Conversational commerce: Artificial intelligence and conversational technologies are starting to transform the way consumers interact with brands, promising an evolution of shopping experiences. We are certainly still in the early days of profitability, but the margins for growth are very large and McKinsey identifies six of them: hyper-personalized content, intelligent search, co-pilots for category management (for example, negotiations with suppliers), co-pilots for support (such as software development), content creation and conversational commerce. The research points out that “for grocery stores, assortment, prices and optimization of promotions represent the areas of greatest opportunity. 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.”

Retail talent: The war for talent intensifies, forcing retailers to revisit their human resources management strategies and invest in training and development to attract and retain the best. To give the dimensions of the problem, the report helps us with some numbers: “In the third quarter of 2023, 2.2% of all retail jobs were vacant, an increase of 29.4% compared to to 1.7% before the pandemic. -and emphasizes- Attractive food industry employers offer careers, not just jobs, combined with the right work-life balance. 40% of retail employees in Germany and 33% of retail employees in the Netherlands are considering changing jobs. Respondents cited unmet candidate needs, pay and working hours among the top five factors related to retail vacancies in Germany.” On the other hand, again in Germany, over 50% of employers in food retail say they do not offer individual career opportunities to their employees. It’s no better in the UK, where working in retail ranks in the bottom third in terms of career progression opportunities compared to other sectors. Walmart took action by offering different types of career paths and training depending on employee preferences.

In conclusion, despite persistent challenges, 2024 promises to be a year in which companies that have been able to keep the bar straight towards innovation and environmental and social sustainability will be rewarded, which in addition to the micro were also attentive to longer-term macro designs. However, the “work” issue remains quite unclear and in Italy even more so, given the difficulties encountered in renewing the trade contract. On this point, a profound rethink is necessary and an equally important change of pace (if not a sudden turning point). (Human) resources are scarce and there is no more time.

*Director of Mark up And Gdoweek