THE INCREDIBLE SHRINKING RETAIL CHANNEL: MARKET SHARE FOR EUROPE'S TRADITIONAL HYPERMARKETS, SUPERMARKETS COULD PLUMMET TO LESS THAN 50 PERCENT BY 2025 AS CONSUMERS FLOCK TO VALUE AND SMALLER STORES AND ONLINE

Bain & Company identifies five imperatives for consumer goods companies to thrive in Europe's new grocery landscape

New York – April 13, 2016 – Europe's food shoppers are increasingly foregoing the big-box grocery retail format in favor of value and smaller stores and even online shopping.  New research from Bain & Company, which includes interviews with 30 top executives at major consumer goods companies that sell to grocers in Europe, reveals this trend could slash market share for Western and Southern Europe's hypermarkets and supermarkets to less than 50 percent in the next decade (compared to 70 percent in 2014). This outcome would create broad implications not only for retailers, but also for consumer goods companies, altering the moves they will need to make to maintain a competitive edge.

Over the last several years, Europe's grocers have felt the squeeze from three major trends: the weakening performance of big-box grocery stores, the unstoppable rise of everyday value pricing and the growth of e-commerce.  While none of these is new to the industry, Bain believes their mutually reinforcing and cumulative effects are not widely understood.

"Grocery executives are well aware of the individual shifts that are reshaping the retail industry.   What's less obvious for them is how the cumulative impact of these shifts fundamentally transforms the grocery distribution landscape in Europe, and how this is in turn rapidly rewriting the rules for the consumer goods sector," said François Faelli, who leads Bain's Consumer Products Practice for Europe, the Middle East and Africa, and co-authored the report. "Up until now, it's been possible for many brands to down play the impact, but they won't have that luxury for long as growth of traditional grocery formats continues to slow and retailers face increasingly tough times."

In its report, developed in collaboration with AIM – the European Brands Association – Bain modeled two forward-looking scenarios, a base case and an accelerated case, to assess the impact of these forces.  The base case suggests that market share of supermarkets and hypermarkets will erode from 70 percent today to 59 percent by 2025.  In the accelerated case, market share will shrink to 48 percent as value and convenience stores take over.

In the fallout from the shift towards smaller stores, Bain estimates the average size of grocery stores could decrease by about 10 percent (base case).  In an accelerated case, the average store could shrink by 30-35 percent, resulting in a sizable reduction of available shelf space.  As a result, the average number of products in each store could drop 25-50 percent from today's levels.  Grocery retail margins are also likely to fall over the next decade by 20 percent in the base case and by up to 40 percent in the accelerated case.

The outcome of either scenario will be less than encouraging for European retailers if they don't revisit their current strategies to transform themselves.  Similarly, consumer products manufacturers may also find themselves learning a different set of rules.  Bain has identified five imperatives for consumer goods companies to thrive in Europe's new world:

1. Assess the value—and the risks—at stake. Know where your sales and margins are headed, and shift resources accordingly. 
2. Build simpler but stronger brand and product portfolios.  Consumer goods companies must prune their portfolios, keeping just their best-selling brands, and focus on proven ‘hero' SKUs if they want to unlock incremental growth and rid themselves of stranded costs. 
3. Reinvent how you work with supermarkets and hypermarkets to rejuvenate growth and protect margins.  Consumer goods companies need to take grocery stores' predictable erosion and probable consolidation into account, and adjust how they serve them to minimize margin erosion risk. 
4. Define winning commercial and operational strategies to gain ground in growing channels.  As value and convenience stores continue to expand, brands will need to develop the right strategies to win there. 
5. Engage in a holistic digital transformation. By digital transformation, we mean the ability to use digital technology across as many business areas as possible to help recreate competitive advantage and operate better, faster and cheaper.

"Standing still in today's changing grocery landscape is a sure-fire way for consumer goods companies to lose valuable ground and see their margins shrink," said Joëlle de Montgolfier, senior director for Bain's Consumer Products and Retail Practices in Europe, the Middle East and Africa, and co-author of the report.  "In our experience, companies must actively adapt their businesses to sustain healthy performance, or they risk surrendering growth and profitability to the impact of current market forces."

Editor's Note: For a copy of the report or to schedule an interview with Mr. Faelli or Ms. de Montgolfier, contact: Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

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