To put it bluntly, much of the $5.7 trillion global grocery industry is in trouble. Although it has grown at about 4.5 percent annually over the past decade, that growth has been highly uneven — and has masked deeper problems. For grocers in developed markets, both growth and profitability have been on a downward trajectory due to higher costs, falling productivity, and race-to-the-bottom pricing. One result: a massive decline in publicly listed grocers’ economic value.
And it could get much worse. Monumental forces are disrupting the industry. If grocers don’t act, they’ll be letting $200 billion to $700 billion in revenues shift to discount, online, and nongrocery channels1 and putting at risk more than $1 trillion in earnings before interest and taxes (EBIT).2 When the dust clears, half of traditional grocery retailers may not be around.
What has driven the grocery industry to this point? The disruption can be attributed to three major forces: consumers’ changing habits and preferences, intensifying competition, and new technologies. Each of these forces is, to some extent, always at work, but the speed and magnitude of change have caught most grocers off guard.
These disruptions present considerable — yet surmountable — challenges. Based on our research into the global grocery industry, combined with our extensive experience working with the world’s leading grocers, we have identified six imperatives for grocers to win in this rapidly changing environment.
Disruption on three fronts
In the past decade, sales growth among large grocery chains in the mature markets of North America and Western Europe has been a pallid two percent (compared with 9.8 percent in Africa, 8.4 percent in Eastern Europe and South America and 6.2 percent in Asia). Even that two percent growth has been hard won. Between 2012 and 2017, as commodity prices and labor costs increased, traditional grocers in developed markets couldn’t charge higher retail prices because competition from lower-priced formats — such as discount chains and dollar stores — was just too intense. Grocers’ margins fell dramatically, forcing grocers to sweat their assets. During that period, more than 50 percent of the economic profit of large publicly traded grocery retailers evaporated (Exhibit 1).
This kind of upheaval has made the industry ripe for a major shakeout. Already, consolidation is on the rise, especially within countries. M&A activity in Europe and North America is picking up again after a dip in 2016, with the recent announcement of the proposed Sainsbury’s-Asda merger exemplifying the trend. We believe consolidation will continue apace — and could eventually spell the demise of all but the two to four strongest grocery retailers in each market. These grocers will have to battle it out with the likes of Walmart, Costco, discounters and the new “ecosystems” of Alibaba and Amazon. Grocery chains’ contribution to GDP could decline by $90 billion or even twice that, depending on the level of automation (which would reduce retail prices and labor costs) and the size of the shift toward e-commerce.
It’s a grim picture. Of course, consumer behavior is never static, technology is constantly advancing, and new competitors are always emerging in one form or another — but the pace and intensity of all three of these forces have been unparalleled. Very few grocers have managed to turn these forces to their advantage.
Changing consumer habits and preferences
Consumers today expect to be able to buy almost anything, anywhere, at any time — and at low prices to boot. Millennials, which now constitute the largest US demographic group, have especially high expectations. In a UK survey of grocery shoppers, millennials said they seek healthier food choices. They also want to know exactly where their food comes from and how it’s made; they expect companies to be socially and environmentally responsible and to offer sustainable, traceable products. At the same time, they want deals and discounts — not surprising, in light of the fact that they are the first generation that is less wealthy than their parents. Finally, millennials are drawn to the seamlessness and convenience of online shopping. Grocers therefore find themselves in the difficult position of trying to meet all these expectations without raising prices.
Baby boomers, too, have considerable buying power and thus are an important customer base for grocers, but present additional challenges. For one, baby boomers are different from past elder generations. They’re retiring later in life; many more of them are single; many more are comfortable with technology. They’re more concerned about health and wellness, they value in-store customer service and they’re more open to new products and experiences, especially those that are unique to their life stage. Grocers have to adapt their offering accordingly while, again, keeping prices low.
One behavioral change common to every demographic group, including millennials and boomers, has posed an enormous challenge for the grocery industry: people are less inclined to cook. Almost half of US millennials say they rarely prepare meals at home. Across the board, more consumers are buying ready-made meals. In both Europe and the United States, food service is growing faster than food-at-home consumption; in the US market, food-service revenues already exceed food-at-home sales.
Aggressive competitors and the emergence of ecosystems
Grocers were slow to adapt to these changes in the consumer landscape, so other types of retailers quickly stepped in. Discounters, convenience-store chains, club stores, dollar stores, and pure-play online retailers got into the grocery game. Consumer-packaged-goods (CPG) manufacturers began selling directly to consumers. Food-service players captured the lunch and dinner occasions.
Discounters, in particular, came on strong. Schwarz Group, which owns discounters Lidl and Kaufland, is now Europe’s largest food retailer. Discounters have a market share of 20 to 50 percent in Germany, Ireland, and the Netherlands; ALDI and Lidl are beginning to flex their muscle in the US market as well. With a limited assortment and a focus on delivering great value for each item, discounters maintain higher earnings before interest, taxes, depreciation and amortization than supermarkets, but their low prices have reduced the sector’s overall revenue by about four percent.
Low prices are also part of the consumer appeal of online players like Amazon, which is just getting started in grocery: its acquisition of Whole Foods Market (WFM) is a game changer. The combination of Amazon’s digital and operational prowess, WFM’s brick-and-mortar stores, and the two companies’ customer base creates an omnichannel behemoth — a retail ecosystem that grocers have to reckon with.
Indeed, ecosystems are emerging around the world and generating much of the growth in e-commerce. In China, Alibaba aims to seamlessly integrate online and offline channels; it calls its ecosystem “New Retail.” Data-driven personalization, as well as network and scale effects, drive down ecosystems’ costs while locking in customers.
Our analysis suggests that, by 2026, between $200 billion and $700 billion in revenues from traditional grocery retailers could shift to other formats and channels — further hurting sales productivity and aggravating space overcapacity (Exhibit 2).
A related (and equally disruptive) trend is the onslaught of new technologies. The success of Amazon and other online competitors is due in part to the price transparency that the digital world has enabled. To remain competitive, offline retailers have had to keep prices low even when their costs have risen.
Furthermore, most grocers haven’t deployed cutting-edge technologies — including digital solutions, advanced analytics, artificial intelligence, robotics and the Internet of Things (IoT) — as quickly and aggressively as their competitors have. For instance, Amazon’s website features a robust product-recommendation engine powered by advanced analytics, the company has more than 100,000 robots transporting bins and stacking pallets in its warehouses, and it has introduced innovations to make shopping faster and easier, such as its Echo and Dash devices. Many traditional grocers find themselves constantly having to play catch-up.
Six imperatives for profitable growth
But all is not lost. Resourceful and nimble grocers have shown that it’s possible not just to fend off competitors and hold on to market share but also to attract new customers and keep them coming back. Profitable growth is achievable — but it will take decisive action in each of the following six areas.
1. Define a distinctive value proposition: Convenience, inspiration, value for money.
To hold their own against aggressive competitors, grocers must build a distinctive offer that emphasizes one or more of the three value propositions that have resonated with today’s consumers:
• Ultraconvenience. Convenience is partly about having store locations that are easy to get to, such as at train stations or in residential neighborhoods. But location is only one aspect of convenience. Retailers should strive to make every part of the shopping experience more convenient, while maintaining standards of quality far above typical convenience-store fare. A grocery store’s assortment might include grab-and-go items, prepared foods, frozen meals and loose fruits and vegetables for shoppers looking for a quick snack. It might also provide self-service options, express checkouts, home delivery and other in-store services, such as dry cleaning or package pickup.
• Inspiration. A grocer can differentiate itself by creating an inspiring and exciting shopping experience that helps customers discover new products. Some grocery stores now feature digital signage that offers extensive product information, including products’ origins and nutritional properties. Others try to create an environment that feels like walking through a cookbook, with fully prepared meals on display or cooked on the spot, along with recipes and ingredients in the correct portions. A grocer might decide to offer a variety of health-and-wellness options, with an unrivaled assortment of specialty, organic and local brands. A mix of education and entertainment — for instance, cooking classes taught by a celebrity chef — can also transform the shopping experience.
•Value for money. This is, obviously, the value proposition of mass retailers and discounters, which means competing on this front will be highly challenging for traditional grocers. To stand a chance, a grocer would need considerable scale and a low-cost operating model. Practically, this would require expertly leveraging big data and analytics, partnering with other retailers on sourcing, and dramatically “leaning out” stores, whether through automation or by adopting a discount-store model. A more likely path for a traditional grocer might be to ensure that it’s almost on par with competitors in terms of value for money, but focus on either ultraconvenience or inspiration as a differentiator.
Shape your ecosystem— and either go big or get out
To stay competitive against the aforementioned emerging ecosystems, retailers must make big bets on which battlegrounds to fight in and, subsequently, which digital and analytics “use cases” to master. This requires a forward-looking perspective on how consumer behavior, the competitive landscape and technology are likely to change in five years or more. What are the potential disruptions? What will the growth areas and profit pools be? Important choices will revolve around food and nonfood assortments, payment systems, customer interfaces, service options and last-mile delivery.
And going it alone won’t work. To create an ecosystem, retailers must fill any capability gaps through partnerships or M&A — for example, by joining forces with digital, analytics, technology or convenience specialists. The goal is to start a virtuous cycle of using data and analytics to get closer to the customer, then gathering more data with every customer interaction — and radically reducing the total costs of the system by bringing together people, commodities and venues.
Let’s look at last-mile delivery as an example. In online grocery, delivery costs are the biggest hurdle to profitability (Exhibit 3). It’s a hurdle that can be overcome only with major investments in advanced analytics, warehouse relocation and automation. If a grocer isn’t willing to go big in e-commerce, it might as well get out.