Before the pandemic, Europe’s retail sector was already undergoing a seismic shift. The digitization of consumer activity was gathering pace, while traditional brick-and-mortar retail was paddling fast to adapt to this growing mode of consumption. Now, a year and a half of sustained Covid-related disruptions have only compounded and embedded new behaviors and expectations among consumers. This has ushered in an even bigger sea change for the sector, putting businesses, supply chains, marketing operations, and customer strategies under immense pressure – and wiping certain businesses off the high street altogether.
However, with digital becoming the dominant mode of purchase in this period of flux, forward-thinking and fast-adapting traditional players have held their ground and gone head-to-head with the pure digital retailers.
Here, we look at the retail trends, particularly for the grocery segment, that have emerged over the past 12 months and how flexibility, adaptability, and relationship-building have been vital to creating value.
After the global financial crisis in 2008, private capital fueled a rapid retail expansion in Europe. With high rents and increasing fixed costs, high streets across many European cities began to look alike as chain retailers moved in, slowly eroding the local identity of these communities. At the same time, technology was rapidly changing consumer behavior – personalization became increasingly the norm as e-commerce (the rise of pure-play online retailers), mobile phones, and social media allowed instant access to whatever consumers wanted, whenever they wanted it. This flipped the traditional retail business model on its head: the consumer, not the retailer, really was now king. To put this shift in perspective, online spending in the UK grew to about 31% of total retail sales in 2020 from just 7% in 2010.1
As the role of the physical store began to change, many retailers found themselves with high debt, excess floor space, and balance sheets that struggled to fund the IT infrastructure required to meet their customers’ needs. This resulted in supply chain issues, an erosion of customer loyalty, and ultimately a swath of brands, particularly in the fashion sector, becoming insolvent and filing for administration. For Europe’s typical high street and fashion-led shopping centers, vacancy rates increased while rents were being challenged.
A new reality was becoming apparent: the need for “omnichannel retail” – the ability to communicate with customers and allow them to browse and make purchases through multiple touch points – was growing more urgent as customers sought out the most convenient options and the best value.
For the likes of retail parks (typically single-level warehouse units without enclosed malls) on the edge of town, however, this was an opportunity. A good example is the discount sector, which has seen significant growth over the past five years.2 With cheaper overheads, ease of access, and adaptability (for use as “click and collect” hubs or for last-mile logistics/fulfilment in store), along with large, free surface parking (for vans, too), retail parks in the right locations were high on retailers’ acquisitions list. Consequently, this sector continued to perform well.
The onset of the pandemic only quickened the pace of disruption. Social distancing, travel restrictions, and safety concerns reduced and altered consumers’ mobility (for example, they took fewer trips to the city). European consumers cut back on in-person grocery shopping frequency by around 5% on average, while increasing basket sizes by approximately 16%.3 This proved beneficial for some retailers, such as local neighborhood stores in markets like Italy, where residents were only permitted to venture out close to their homes during the lockdown.
As a general trend, certain countries across Europe have either better protected their historic town centers from new construction or didn’t have the land value to justify the new builds seen across the US and the UK. This lack of oversupply in retail space has been a very defensive tool against structural change. In the UK, words like “convenience,” “local,” and “hyper local” came into frequent use during the pandemic as consumers became far more attached to their local amenities and supported local businesses. Consequently, grocery-anchored retail parks and rural town centers have fared well.
As online shopping became an imperative during the pandemic, traditional retailers that were forced to close but already had a digital presence were steps ahead in keeping their businesses going. Meanwhile, others not as advanced were investing heavily into their digital platforms. For retailers with already high debt and limited online exposure, recovering from Covid-related disruptions was exceptionally tough – or proved terminal in many cases.
Pure online retailers faced different challenges. Chief among them were securing enough delivery staff to meet the increase in demand while ensuring workers’ health and safety. On the supply side, a number of fashion brands faced inventory shortages; in other cases, hoarding became an issue. And with so much choice available at the click of a button, retaining customer loyalty was paramount: One slip-up could push customers to look elsewhere.
A 2020 retail survey found that 71% of customers wouldn’t return if they’d had a bad experience either in a store or online.4 Moreover, 60% of consumers in a different survey said they had changed their shopping behaviors, and 31% said they had changed the store where they shop. The key reasons cited were better value (especially on price) and convenience – particularly easy accessibility or delivery options.5 With 73% of customers expecting businesses to maintain the flexibility they have shown during lockdowns, this trend looks like it’s here to stay.6
Not surprisingly, online grocery sales accelerated in 2020 as both consumers and retailers pivoted to adapt to the new normal. Homebound office workers shifted their spending to grocery retail from food service, and with most, if not all, family members eating at home, their grocery lists were longer. Online grocery sales jumped 56.1% in 2020 from 19.5% in 2019, while the online share of food and beverage sales rose to 5.3% from 3.4% on average across Western Europe and is forecast to reach 12.6% by 2025.7 As a recent McKinsey report noted, established French and British online grocers took advantage of demand and were rewarded with significant absolute revenue growth. But the trend did not exclude companies from other countries with smaller bases, which also performed well – some even growing their online businesses by 80% or more.8
The resounding rise of online grocery shopping led to a shift in use for the traditional store. During the pandemic, large food retailers appeared able to meet the surge in online demand because of their networks or physical stores, which could be used to fulfill orders. On a more local level, traditional grocery retailers began solving the “last mile” delivery challenge through micro-fulfilment centers and “dark” supermarkets (mini-logistics hubs located in high-density urban centers), as well as by partnering with online food delivery companies.
As established pure players have grown, new e-grocer models have emerged, differentiating themselves by the types of products and services they offer and their method of ordering, fulfilment, and delivery. Although they do not require physical retail stores, these companies depend on near-instant delivery and rely on urban warehouses or dark stores to survive in this competitive market, where several start-ups are jostling for position.
Amid these trends, the grocery sector appears to be attracting capital and emerging as an attractive asset due to its operational resilience. Investments in supermarkets, hypermarkets, and food discount stores last year accounted for 21% of total retail activity, up from a five-year average of 7%.9
Well located, grocery-anchored retail parks have drawn similar interest. In addition to the benefits of easy access (including “click and collect” points or potential last-mile logistics hubs) and free parking, they offer “open air” environments that are deemed safer for consumers relative to enclosed malls. With strong demand from homeware, do-it-yourself (DIY), and convenience shoppers, retailers with these supporting services appear to have performed well throughout the pandemic.
The offline and digital retail worlds are merging closer and closer. In the UK, an analysis by CACI in 2019 revealed the extent to which online and in-store channels work together: According to the report, a physical store increases online sales locally by an average of 106%. Click-and-collect services and digital returns via physical shops further deepened the symbiosis. In addition, 90% of all retail spending in the UK is influenced by a store, which lends support to efforts by some pure online retailers to open up physical storefronts.10 Likewise, pure traditional retailers have invested millions into their digital platforms, using their well-located stores to support this effort.
The merging of the physical and digital realms will likely become ever more critical as retailers leverage technology to inject greater value into stores – for example, by offering extended product ranges, showrooms, the use of augmented reality (AR), and, crucially, online fulfilment of physical orders. Redundant sales space could be repurposed to facilitate online fulfilment, serving as hubs for consolidating deliveries, convenient click-and-collect points, or drop-off destinations for returns. It is, therefore, vital that owners look to continually innovate the way physical space can be used and work more collaboratively with retailers to fully understand their business plans and goals and what their customers are looking for.
As Europe begins to emerge from lockdowns and return to some form of normality, the convenience grocery sector is expected to remain strong, particularly for those that continually evolve their businesses and meet the needs and demands of both existing and prospective customers. Keeping the unprecedented sales they have recently experienced will be a tough ask, particularly as the dust settles and consumer habits evolve in turn.
Businesses will have to be dynamic, respond fast, and ultimately listen to their customers. With some subsectors of retail appearing to fade away and others emerging or re-emerging, one thing is clear: Retail is certainly not dead, but it’s readjusting – and with that comes opportunity.
1 Office of National Statistics, UK as of 31 December 2020, https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j4mc/drsi
2 European Discount Retail Market: Size, Trends & Forecasts (2021-2025 Edition) March 2021, https://www.researchandmarkets.com/reports/5308254
3 “Disruption & Uncertainty: The State of Grocery Retail 2021,” McKinsey, March 2021, https://www.mckinsey.com/~/media/mckinsey/industries/retail/our%20insights/the%20path%20forward%20for%20european%20grocery%20retailers/disruption-and-uncertainty-the-state-of-grocery-retail-2021-europe-final.pdf
4 Adyen Retail Report 2020, https://www.adyen.com/knowledge-hub/reports/retail-report-new-beginnings
5 “Consumer sentiment and behavior continue to reflect the uncertainty of the Covid-19 crisis,” McKinsey, 26 October 2020, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/a-global-view-of-how-consumer-behavior-is-changing-amid-covid-19
6 Adyen Retail Report 2020, https://www.adyen.com/knowledge-hub/reports/retail-report-new-beginnings
7 “Spotlight: European Food and Groceries Sector,” Savills, 29 April 2021, https://www.savills.com/research_articles/255800/313608-0
8 “Disruption & Uncertainty: The State of Grocery Retail 2021,” McKinsey, March 2021, https://www.mckinsey.com/~/media/mckinsey/industries/retail/our%20insights/the%20path%20forward%20for%20european%20grocery%20retailers/disruption-and-uncertainty-the-state-of-grocery-retail-2021-europe-final.pdf
9 “The food and groceries sector is becoming the new core in retail investment” Savills, 29 April 2021, https://www.savills.co.uk/research_articles/229130/313664-0
10 “The Halo Effect,” CACI, July 2019, https://www.caci.co.uk/news/halo-effect
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