Strategyand European Grocery Retail 2020

7/25/2019 Strategyand European Grocery Retail 2020

1/16

Winning waysto play

European groceryretail 2020


2/16

2 Strategy&

Amsterdam

Coen de [email protected]

MarcoKestelooPartner+31-20-504-1942marco.kesteloo@strategyand.pwc.com

MarcHoogenberg

[email protected]

Copenhagen

PerHannoverSenior Executive [email protected]

Frankfurt

BenediktSchmausPartner+49-69-97167-437benedikt.schmaus@strategyand.pwc.com

London

RichardRawlinsonPartner+44-20-7393-3415richard.rawlinson@strategyand.pwc.com

Andre MedeirosPrincipal+44-22-7393-3407andre.m.medeiros@strategyand.pwc.com

Paris

OlivierdeCointetPrincipal+33-1-44-34-3131olivier.decointet@strategyand.pwc.com

San Francisco

NicholasHodson

Partner+1-415-653-3500

[email protected]

Contacts
mailto:coen.devuijst%40strategyand.pwc.com?subject=mailto:coen.devuijst%40strategyand.pwc.com?subject=mailto:marco.kesteloo%40strategyand.pwc.com?subject=mailto:marco.kesteloo%40strategyand.pwc.com?subject=mailto:marc.hoogenberg%40strategyand.pwc.com?subject=mailto:marc.hoogenberg%40strategyand.pwc.com?subject=mailto:per.hannover%40strategyand.pwc.com?subject=mailto:per.hannover%40strategyand.pwc.com?subject=mailto:benedikt.schmaus%40strategyand.pwc.com?subject=mailto:benedikt.schmaus%40strategyand.pwc.com?subject=mailto:richard.rawlinson%40strategyand.pwc.com?subject=mailto:richard.rawlinson%40strategyand.pwc.com?subject=mailto:andre.m.medeiros%40strategyand.pwc.com?subject=mailto:andre.m.medeiros%40strategyand.pwc.com?subject=mailto:olivier.decointet%40strategyand.pwc.com%20?subject=mailto:olivier.decointet%40strategyand.pwc.com%20?subject=mailto:nicholas.hodson%40strategyand.pwc.com?subject=mailto:nicholas.hodson%40strategyand.pwc.com?subject=mailto:nicholas.hodson%40strategyand.pwc.com?subject=mailto:nicholas.hodson%40strategyand.pwc.com?subject=mailto:olivier.decointet%40strategyand.pwc.com%20?subject=mailto:olivier.decointet%40strategyand.pwc.com%20?subject=mailto:andre.m.medeiros%40strategyand.pwc.com?subject=mailto:andre.m.medeiros%40strategyand.pwc.com?subject=mailto:richard.rawlinson%40strategyand.pwc.com?subject=mailto:richard.rawlinson%40strategyand.pwc.com?subject=mailto:benedikt.schmaus%40strategyand.pwc.com?subject=mailto:benedikt.schmaus%40strategyand.pwc.com?subject=mailto:per.hannover%40strategyand.pwc.com?subject=mailto:per.hannover%40strategyand.pwc.com?subject=mailto:marc.hoogenberg%40strategyand.pwc.com?subject=mailto:marc.hoogenberg%40strategyand.pwc.com?subject=mailto:marco.kesteloo%40strategyand.pwc.com?subject=mailto:marco.kesteloo%40strategyand.pwc.com?subject=mailto:coen.devuijst%40strategyand.pwc.com?subject=mailto:coen.devuijst%40strategyand.pwc.com?subject=


3/16

3Strategy&

Coen de Vuijst is a partner with Strategy& based in Amsterdam. Hespecializes in growth strategy, go-to-market models and organizationdesign, and commercial capability development for clients in theconsumer goods and retail industries.

Marco Kesteloois a partner with Strategy& based in Amsterdam andleads the firms global retail practice. He has more than 20 years ofconsulting experience in strategy, organizational and commercialimprovements, and the collaborative value chain between retail andconsumer goods organizations.

Marc Hoogenbergis a principal with Strategy& based in Amsterdam.He has more than 12 years of consulting experience, helping retailersand consumer goods organizations improve their commercial

capabilities using advanced analytics and customer insights.

About the authors


4/16

4 Strategy&

European grocers currently face a signicant and growing problemof overcapacity, which threatens their future earnings. Consumers inthe region are reducing their per capita spending, yet grocers havecontinued to build out new locations, leading to a drop in per-store andper-square-meter productivity.

Despite this challenging environment, we believe that large traditionalretailers can shore up earnings and improve their competitive footingfor 2020 and beyond. To do this, they must focus on three specic leversat their disposal: (1) merchandising excellence (in pricing, promotions,and assortment), (2) better store performance management, and (3)developing strategies that address ve distinct ways to play (the foodexperience play, the proximity play, the branded value play, the low-cost play, and the one-stop-shop convenience play). Today, manyretailers dont have a clearly dened position in the market, insteadoering elements of all ve models. Going forward, they need to focuson the selected way (or ways) to play, leveraging their core strengths tostave o competition, win over shoppers, and boost their own earnings.

Executive summary


5/16

5Strategy&

Judging by the decline in per capita spending, one might think allof Europe is on a diet. Between 2000 and 2012, spending on foodstagnated or fell both at the country level and on a per capitabasis. To put this anemic growth in perspective, consider that Swedenis the regions most robust market, with a compounded annualgrowth rate (CAGR) per capita of just over 1 percent during those12 years (adjusted for inflation). More countries have seen declinesthan have seen increases, including the big economies of the U.K.,France, and Italy.

Retail grocery companies have responded rather counterintuitivelyto this constrained growth. They have aggressively opened newstores, adding significant capacity. Between 2000 and 2012, salesat grocery store chains managed to grow 16 percent, thanks to anincreasing focus on selling nonfood items such as household products,but sales capacity grew at the even faster clip of 40 percent. As aresult, productivity has fallen across Western Europe. Between 2000

and 2012, productivity fell by 13.9 percent (measured by sales valueper square meter). The U.K. and France led decliners, at 32.7 percentand 25.3 percent, respectively (see Exhibit 1, next page).

To make matters worse, retailers have also stretched into a varietyof store formats, often undermining the efficiencies of existing

operations. During that same time period, sales capacity increasedfor hypermarkets (38 percent), supermarkets (18 percent), anddiscount stores (72 percent). But capacity for convenience stores

Retail grocery

companies have

aggressively

opened new

stores, adding

signifcant

capacity.

The pressure on productivity


6/16

6 Strategy&

2000 2002 2004 2006 2008 2010 2012

13,000

12,000

11,000

10,000

9,000

8,000

7,000

6,000

5,000

0

Grocery productivity by country, 200012

In euros per square meter of floor space

200012

-13.9%Average

-32.7%

-25.3%

+8.7%

+0.9%

-16.5%

+20.7%

-21.5%

-9.8%

-16.1%

Average

Decline

Growth

U.K.

Italy

Spain

Belgium

Germany

France

Netherlands

Denmark

Sweden

Exhibit 1

Productivity has declined steadily for grocers in most European countries

Source: Planet Retail,

Strategy& analysis


7/16

7Strategy&

Exhibit 2

Expansion in nontraditional store formats has contributed toproductivity declines

Note: Analysis basedon Western European

retailers included in Planet

Retail: Belgium, Denmark,France, Italy, Germany,

the Netherlands, Spain,

Sweden, and the U.K.

Source: Planet Retail,Strategy& analysis

In euros per square meter

CAGR

200012

+1.4%

+9.4%

+4.6%

+2.7%

CAGR

200012

-2.0%

-2.5%

-1.5%

-1.0%

Hypermarkets

Supermarkets

Discount stores

In million square meters

Real floor productivity per format

200012

Sales capacity per format

200012

0

10

20

30

40

50

2000 2002 2004 2006 2008 2010 2012

72%

18%

38%

193%

2000 2002 2004 2006 2008 2010 2012

5,000

10,000

1,000

8,000

9,000

7,000

6,000

-12%

-26%

-21%

-16%

where economies of scale are the hardest to f lex jumped

193 percent. As expected, productivity of all formats declined,with the biggest drop of 26 percent occurring at convenience stores(see Exhibit 2).

There are some logical reasons for continued capacity expansion.Opening a store is usually based on local circumstances and

opportunities, and most companies are always on the lookout for


8/16

8 Strategy&

Exhibit 3

EBIT risk for large European grocery retailers

Source: Planet Retail,

Euromonitor, IGD,Strategy& analysis

Potential loss in EBIT by 2020

U.K.

Spain

Italy

Belgium

France

Germany

Netherlands

1.9%

2.0%

3.0%

3.0%

5.2%

6.5%

7.8%

promising new locations. At the same time, assessing store

performance and closing or relocating underperforming stores isdifficult. Most retailers are locked into long-term real estate leasesand also fear losing market share.

Nevertheless, the industry cannot continue to add capacity at thecurrent rate without putting earnings in serious jeopardy. By our

calculations, earnings before interest and taxes (EBIT) in the U.K.could tumble by as much as 7.8 percentage points by 2020, if currenttrends continue. In Spain, earnings could decline 6.5 percent, and inItaly they could fall by 5.2 percent. In all countries where data isavailable, losses in EBIT are more likely than gains (see Exhibit 3).


9/16

9Strategy&

0.40.8%

0.51.2%

0.51.3%

0.71.9%

Pricing

Promotions

Merchandising excellence

Assortment

EBIT gap

Store

performance

Performance

management

Differentiation

New ways

to play

Short-term

improvements

Long-term

improvements

Source: Strategy& analysis

We believe these projected losses in EBIT are just that projectedlosses. They are not written in stone. To close the EBIT gap andimprove their competitive footing for 2020 and beyond, traditionalretail grocery chains need to focus improvements in three key areas:(1) merchandising excellence, (2) store performance management,and (3) developing strategies that address the five distinct ways toplay that are emerging in the industry. We have calculated howimprovements in each of these areas can add EBIT and improve theretail grocers performance (see Exhibit 4).

Closing the earnings gap

Exhibit 4

Three initiatives to close the EBIT gap


10/16

10 Strategy&

Merchandising excellence

In years past, many merchandising decisions regarding assortment,promotions, and sometimes even pricing were made based on littlemore than the gut feelings of store managers and category managers.But the environment today has become far too complex to rely onhunches. Merchandising excellence depends on fact-based decision

logic, which in turn requires data and analytics in areas such asconsumer buying behavior, promotional pricing, and competitiveresponses.

In regard to pricing, key questions include the following: Should Iadjust pricing on products with low or negative margins? Can I adjust

the prices of products to steer customers toward a more profitable margin

mix? And how much can I change product prices before eliciting a

competitive response?

For example, the margins might be higher on a stores private-labelproduct than on the premium brand. With this in mind, a groceryretailer could decide to increase the price gap slightly, lowering theprice of the private label and increasing the price of the premiumbrand. The idea is to entice more customers to shift from the namebrand to the private label. The customer spends less money on theproduct, but the store benefits from the higher margins on those sales.Done right, this can improve total gross margins.

As for promotions, these are the key questions:How many promotionalcampaigns should we undertake? What product lines should we promote

and how often? What is the best timing for the campaign? And what isthe best type of promotion for each campaign?

It sounds obvious, but retailers need to understand the success of pastpromotions in order to plan future promotions effectively. Yet manyretailers struggle to understand results because its not simply amatter of counting the numbers of cans sold off the shelf. A companyneeds to analyze a breadth of other data, including spending on eachpromotion, how much manufacturers might have paid into thepromotion, and the volume that customers didnt buy because they

bought the promotional item instead (i.e., the cannibalization rate),among others.

The environmenttoday has

become far too

complex to rely

on hunches.


11/16

11Strategy&

On the issue of assortment, a retail grocer can substantially improve

decisions by analyzing local demographics, buying patterns, and otherdata. Key questions include these:What price segments merit furtheranalysis? Should we expand the product range with top market sellers?

Where should we reposition or develop new products? Where should we

increase product distribution? And where should we delist products?

For instance, the space constraints of convenience stores force aretailer to be far more selective about the assortment, compared to ahypermarket environment where the retailer can include a largerrange of products.

All three merchandising levers pricing, promotions, and assortment must be closely coordinated. Merchandising optimization andexcellence is not achievable if a company attempts to manage theselevers in isolation from one another.

Store performance management

In any store network, there are differences in store performance, interms of both sales and profitability. An assortment of factors drivethis variation location and demographics, merchandising andmarketing support, and staff quality and local promotions. To improveoverall corporate performance, its necessary to identify storedifferences, describe best practices, and disseminate those bestpractices across the store network to standardize and improveoperations.

The first step is to use agreed-on metrics to compare store

performance. This transparency facilitates analysis, highlighting eachstores strengths and weaknesses. Once a best practice has beenidentified, it must be codified and described in a way that all storemanagers can understand and replicate. Finally, the company mustdisseminate that best practice through publications and face-to-facegatherings, and support it with any necessary changes in storeprocesses and technology.

Identify local

best practicesand apply them

throughout the

store network.


12/16

12 Strategy&

For example, its useful to analyze clusters of stores that are similar in

terms of size, demographics, traffic, competitors, and so on. Thisanalysis might reveal that a certain store in the cluster excels in somekey performance indicators, such as conversion, basket size, oraverage price per item. If this is the case, its critical to understandwhy. Has the store manager had some fantastic idea thats improvedbasket size? Maybe he or she has designed a new f loor plan that

prompts customers to purchase more impulse items? Whatever thecause, management needs to describe that best practice so that storesin the same cluster can replicate it.

New ways to play

Besides limited market growth and increased sales capacity, anothertrend challenging large traditional retailers is the convergence of their

value propositions. Large retailers are steadily looking more and more

alike, which is making differentiation and pricing power harder tomaintain. For example, discount chains are improving their offeringsby adding elements like fresh, in-store bakeries. All grocery chains,not just discounters, are working hard on their price images, offeringeveryday low prices. Most grocery store chains have two to fourprivate-label brands, and loyalty cards are omnipresent.

At the same time, smaller competitors and new entrants are definingdistinct value propositions or ways to play to grab market sharefrom the traditional retailers. Specifically, five distinct ways to playare emerging in the industry: the food experience play, the proximity

play, the branded value play, the low-cost play, and the one-stop-shopconvenience play.

Food experience play: An inspir ing and fun shopping experience whereconsumers shop, taste new foods, and receive suggestions and adviceabout food types and recipes. These stores, where consumers top offtheir food needs with a few high-end purchases, can exist both onlineand offline.

Proximity play:A premium, though shallow, assortment of fresh food

in close proximity to customers. These stores are also geared towardtopping off food needs, and exist both online and offline.

Large retailers

are lookingmore alike,

making

dierentiation

and pricing

power harder

to maintain.


13/16

13Strategy&

Branded value play: A broad but shallow assortment with multipletiers of high-quality private-label offerings in a pleasant atmosphere.This category of supermarket, where consumers go to stock up onitems and also top off their food needs, exists online and offline.

Low-cost play:A no-frills, low-price offering for consumersdeliberately shopping for the lowest price. These stores are exclusively

for stock-up shopping and exist largely offline.

One-stop-shop convenience play:A shopping platform where consumerscan get advice and place orders to stock up on both food and nonfooditems. These stores exist in large hypermarket formats and also aspure online plays.

Today, many traditional retailers operate in a sort of ill-definedmiddle ground, offering elements of all f ive ways to play without evenrealizing they are doing so. Due to their size and breadth of market,

many retailers will probably need to continue to offer multiple ways toplay. But they need to sharpen their approach to each in order tobetter defend against newcomers and companies from outside theindustry such as Amazon that are laser focused on just one wayto play. Large traditional grocery retailers also must contend with therise of online grocers. The online segment hasnt gained much marketshare yet, but could eventually add to the pressure on productivity.

A companys right to win in any of these f ive ways to play depends onhaving a set of distinctive capabilities. For instance, if the companywants to excel at food experience, it needs a world-class, fresh supply

chain; an innovative assortment of the latest products; and aknowledgeable, high-quality staff. A proximity play, by comparison,relies less on a great supply chain and more on localized assortmentand productivity management (see Exhibit 5, next page).

Large traditional grocery retailers shouldnt make radical shifts andfocus on one way to play exclusively, even when threatened by new,smaller retailers with a more clearly defined value proposition. Infact, large retailers risk alienating current customers and weakeningtheir competitive position by making bold moves too quickly. They

need to deliberately and visibly add specific elements of the ways toplay to their current offering, and do so cost-efficiently, by leveragingexisting operations. For instance, a company might decide to establish

Retailers needto strengthen

their way to

play in order to

defend against

newcomers.


14/16

14 Strategy&

a new format to defend itself against a competitor with a verysuccessful food experience play. Instead of creating a new supplychain to source products to this new store format, however, thecompany could leverage its current supply chain (carefully selectingcertain high-end products), add some food experience elements

(such as tastings), and improve the skills and knowledge of itsemployee base through hiring or training.

Fresh

supply chain

Innovative

assortment BrandingQuality staff

and service

Food

experience

Localizedassortment Multichannel

ProductivitymanagementProximity

Private label Branding MultichannelBranded value

Standardization

and scale

Low-cost

operationsLow cost

Pickup and

delivery network Wide rangeMultichannel

customer insights

One-stop-shop

convenience

Supply chain Merchandising Marketing Digital Store management

Exhibit 5

Each way to play requires focusing on specic capabilities

Source: Strategy& analysis


15/16

15Strategy&

2020 and beyond

The concurrent trends in grocery retail particularly the decliningper capita spending and aggressive capacity build have created achallenging earnings environment in Western Europe for largetraditional retailers. Meanwhile, the emergence of five distinct waysto play, as well as the rise of the Internet, is creating new competitivethreats. However, by focusing on merchandizing excellence,

improving store performance, and bringing a sharper approach toeach of the five emerging ways to play, traditional retailers canexpand their customer base, close the earnings gap, and positionthemselves as stronger competitors for 2020 and beyond.


16/16

2014 PwC. All r ights reserved. PwC refers to the PwC network and/or one or more of its member rms, each of which is a separate legal entity. Please see www.pwc.com/structure for furtherdetails. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

www.strategyand.pwc.com

Strategy& is a global teamof practical strategistscommitted to helping youseize essential advantage.

We do that by workingalongside you to solve yourtoughest problems andhelping you capture yourgreatest opportunities.

These are complex andhigh-stakes undertakings often game-changingtransformations. We bring100 years of strategyconsulting experienceand the unrivaled industryand functional capabilitiesof the PwC network to thetask. Whether youre

charting your corporatestrategy, transforming afunction or business unit, orbuilding critical capabilities,well help you create thevalue youre looking forwith speed, condence,and impact.

We are a member of thePwC network of rms in157 countries with morethan 184,000 peoplecommitted to deliveringquality in assurance, tax,and advisory services. Tell uswhat matters to you and ndout more by visiting us atstrategyand.pwc.com.

Documents

Strategyand European Grocery Retail 2020