Marc-André Kamel: How to Thrive in Europe's Vexing Grocery Business

Read the transcript below.

MARC-ANDRÉ KAMEL: The European grocery retailing industry is a mature industry going through massive consolidation right now, under the combined effect of changing shopping behaviors, significant store overcapacity, and the emergence of digital disruptors—all leading to intensifying competition and challenged economics. We at Bain believe that the European retail landscape will be significantly reshaped by 2025. The market share of hypermarkets and traditional high-low supermarkets could erode from 70% down to 50% in 2025. In turn, convenience stores, value stores, and the online channel will pick up and could represent more than 50% of sales by then.

With this, we believe that there will be a significant reduction in the average store size—a 10% to 30% reduction. And eventually, some network rationalization will occur. This in turn will put pressure on the grocery retailing profit pool. And we believe that 20% to 40% of the margin will be at risk by 2025. In such a turbulent environment, there will inevitably be winners and losers. Winners will be those grocers that will stick to the fundamental rules of the game in grocery, while constantly reinventing the customer experience through a viable and consistent omnichannel model.

Specifically, the winners will have to fulfill five obligations. The first one will be to lead locally. While national market share is very important to capture purchasing savings, the local market share is important, because it increases the brand visibility, the commercial relevance, and the pricing power of the brand. In capturing this impact of local leadership, grocers will have to make some new decisions on resource allocation and revisit the way they manage their store networks, allocating capex and people to those areas where they have a potential for local leadership.

The second obligation is to design a distinctive and appealing customer value proposition. And the grocers, the winners, will have to hit on those elements that make the differentiation in the minds of the consumers. It's value for money, it's fresh, and it's in-store experience. In particular, grocers can use the space in their stores, the abundance and the theater around fresh, to make sure that they create this differentiation.

The third obligation is to never compromise on operational excellence. Many grocers tend to forget that prices go down in grocery retailing every year. And if grocers don't take their costs down as fast as prices are going down, inevitably they will see their margins reduced. So operational excellence is important. And some grocers around Europe, like Mercadona, for example, have really set new standards in terms of productivity and efficiency gains.

The fourth obligation is around omnichannel—inventing this valuable and consistent omnichannel experience. As we said earlier, online grocery is picking up. But online grocery has challenged economics, until retailers start charging for picking and packing and delivery. But if they do that, growth will slow down. So it's a very difficult conundrum. But omnichannel is not just the e-commerce part of it.

It's also creating a strong and consistent relationship with consumers, leveraging in-store technology, digital marketing, and many other tools. And traditional retailers are still far behind across Europe. Finally, winners will be those players who will anticipate the consolidation of the industry. We believe at Bain that store sizes will reduce and that networks will consolidate. There is no industry where you can have significant overcapacity consistently over time without consolidation. And when consolidation happens, it's much better to be driving it than to suffer from it.

Read the Bain Brief: How to Thrive in Europe's Vexing Grocery Business