This article originally appeared on Forbes.com.
For Europe’s grocers, Brexit, terrorism, electoral deadlines and economic stagnation create a haze of uncertainty at a time when the industry was already going through upheaval. The grocery business in Western and Southern Europe has grown more tumultuous than possibly anywhere else on Earth, with price wars resulting from the widespread popularity of discounters, massive shifts in shopping channels caused by the unabated demand for convenience and value, once-mighty hypermarkets losing steam and traditional grocers striving—and often failing—to crack digital commerce profitably.
Of course, some grocers have continued to thrive in Europe, but the average performance has been disappointing. Bare bones discount stores have swiftly spread across the continent, to the point that they now account for more than one-third of all grocery sales in Germany, and new formats are flourishing that morph the supermarket and discount store, such as Colruyt in Belgium or Mercadona in Spain. Meanwhile, households are getting smaller and older, and people are showing a preference for living in urban areas. From a practical standpoint, that means smaller basket sizes and more frequent trips to the store. Already, convenience stores in Europe are growing by 5% annually, a rate that could reach 7% by 2025. And mounting trouble faces big box stores, as the same trends of smaller households, aging populations and growing urbanization reduce the attractiveness of a concept that requires consumers to drive long distances to stock up for a week. Consequently, hypermarkets’ share of the grocery pie in Western and Southern Europe is dwindling, along with its smaller counterpart, the supermarket.
Finally, digital sales for profitable product categories such as cosmetics, diapers, pet care and baby food are high enough to hurt physical stores. As a result, many traditional grocers ﬁnd themselves in a variant of the prisoner’s dilemma: Should they participate in the online market at the risk of strongly diluting their profits (through such money-losing offerings as buy-online/drive-through pickup, aka “click-and-collect”)? Or should they choose not to participate at all, and still risk seeing their margins erode as some of their sales go to digital competitors?
We predict that traditional supermarkets and hypermarkets could watch their share of the market in Europe drop from 70% today to the 48% to 59% range by 2025. The expected closing of some of these larger stores, combined with the popularity of discount stores, convenience stores and online shopping, means that average store size could shrink by as much as 35% in the coming decade. We predict retail margins will also fall by 20% to 40% by 2025.
This shrinking store scenario will take a toll on the unprepared. Fortunately, we’re beginning to see glimmers of the types of moves that will help grocers get ahead of this game.
Consider how some grocers are reversing decades of helter-skelter growth and acknowledging the importance of local leadership. Grocers raced to open stores so they could build their national market share and increase purchasing power. But while the benefits of national scale are indisputable, local leadership can deliver far more value. Local leaders draw on their intimate knowledge of catchment areas to provide localized offerings that better suit local shopper needs. As the leading grocer in an area, they have greater customer visibility and appeal—and often more pricing power. They can also access the best locations and build more efficient logistical operations to serve a denser local store network. Local leadership fosters a virtuous circle in which increased customer advocacy results in faster-growing and more profitable stores that enable investments to create more value.
Also, grocers are finding ways to differentiate themselves from the rest of the pack, giving shoppers a reason to choose them over rival stores, including online food stores. When it comes to differentiation, all signs point to the fresh food department. A series of Bain & Company surveys of more than 35,000 consumers across Europe, the US, China and Australia found that beyond a reasonable price, shoppers value high-quality and abundant fresh food as their big lure to a store. The best grocers in Europe and elsewhere are investing to compete on fresh food, but it’s a tricky prospect. While fresh food departments have a “halo” effect—studies show that a majority of shoppers who go to a store mainly to buy fresh food also end up buying something else—they also can be one of the least profitable parts of the store for grocers.
Even the most innovative approach to differentiation won’t succeed if a grocer fails to pay attention to operations. Too often grocers try to improve procurement costs, for example, by broadly squeezing suppliers for better deals. That won’t do anything to unlock growth. Or, in an attempt to twist a supplier’s arm, they may delist an important product—a move that can backﬁre when shoppers can’t ﬁnd products they want and ﬂee to competing stores. The better move is to take a tiered approach when negotiating with suppliers, segmenting them based on each category’s strategic importance and a grocer’s actual bargaining power.
Beyond procurement, labor represents the next biggest portion of store costs. But this is an area where grocers can easily make the wrong decisions. Reduced foot trafﬁc combines with price pressure to compress the top line. Some instinctively cut store personnel, but that only causes poorer service, unreplenished shelves, stock-outs and other challenges that worsen the store experience. This inevitably pushes more shoppers toward the competition, further intensifying the losing cycle.
Instead, the best companies are discovering moves that not only keep expenses in line but also boost productivity. For example, Mercadona sets the standard for motivating employees, with stable work schedules, higher salaries, more training and opportunities for advancement. Fully 95% of the grocer’s employees qualify to receive bonuses if the company meets targets. If it doesn’t, nobody receives a bonus. Mercadona’s efforts have kept personnel turnover at a low rate of 3% to 4% while workforce productivity has risen by 3% annually from 2011 to 2016. Instead of cutting into its labor muscle, the grocer is continually building muscle.
There are other ways Europe’s grocers are preparing for the shaky future. Some are investing to introduce technology that improves the in-store experience, such as scan-as-you-shop devices that allow shoppers to easily pay for and bag items as they shop, avoiding long checkout lines. And acknowledging that consolidation is bound to happen in any industry with growing overcapacity and a declining profit pool, some are hoping to take control by proactively pursuing mergers or asset swaps. They’re looking for anything they can do to achieve local leadership, improve margins and build the new capabilities needed to win, even as the land shifts beneath them.
Marc-André Kamel is a Bain & Company partner based in Paris and the head of Bain’s Retail practice in the Europe, Middle East and Africa region. Jonathon Ringer is a partner based in London and a leading member of Bain’s Retail practice. Joelle de Montgolfier is Practice Area Senior Director for Bain’s Retail practice in Europe, Middle East and Africa based in Paris.