Food retail sector sees first signs of recovery after years of tight spending, report says

The European food retail sector is showing early signs of recovery after years of tight spending due to inflation, though consumer behaviour remains divided, according to a report by McKinsey released on Wednesday (10 April).

The analysis, done in collaboration with EuroCommerce, the organisation representing the European retail and wholesale sector, delves into the latest trends in grocery retail across the continent.

Despite the challenging market conditions in 2023 leading to a drop in grocery sales in real terms (adjusted for inflation), the report hints at a “cause for hope” for 2024.

“Grocery volume stopped decreasing towards the end of 2023 and even started to increase in some markets,” the text said.

Additionally, McKinsey’s analysis reveals that consumer confidence is returning, driven by initial signs of economic recovery and wage increases in certain European countries.

For instance, the share of European consumers looking for ways to save money when grocery shopping has declined from 51% in 2023 to 45% in 2024, while higher-income expressed intentions to purchase more organic or premium food this year.

“The net intent of high-income households to buy more high-quality or organic products further increased at the beginning of 2024 and is now clearly positive,” the report stated.

This trend could ease pressure on the EU’s organic farming sector, one of the hardest hit by Europe’s cost of living crisis and declining consumer purchasing power. Sales of organic products in the EU started to fall in 2021 after a decade of steady growth and have not recovered since.

Two-speed pricing

Commenting on these findings, Camille Perrin, head of food policy at BEUC, the organisation representing European consumers, told Euractiv that McKinsey’s report confirms consumers’ willingness to buy sustainable food options when they can afford it.

However, Perrin emphasised that supermarkets “must do more” to make these products more affordable through promotions and pricing strategies.

“The EU must do more too, starting by using its farm subsidies in a more efficient way than what we are witnessing today,” added Perrin.

Nevertheless, McKinsey predicted that consumer behaviour will remain “very polarised” in 2024, largely influenced by disparities in the economic situation of European countries.

For instance, consumers in Germany reported a clear intention to purchase more expensive products again in a “selective way,” while buyers in Italy and Switzerland were less optimistic about the economic situation.

“There is a growing variation across European countries due to diverging demographics and different recovery rates of purchasing power,” the report underlined.

Supply chain transparency

The report anticipated that grocery retailers will continue to face “margin pressure,” identified as a top priority for 70% of the retail CEOs surveyed by McKinsey.

It noted that retailers will “continue shielding consumers from price increases” through negotiations with suppliers, including participating in buying alliances – a practice that may potentially disadvantage farmers against stronger purchasing actors.

Christel Delberghe, EuroCommerce’s director general, underscored that consumers had “worked hard in 2023” to “protect consumers from the worst of inflation, despite grappling with higher costs and reduced consumer spending on products”.

However, Camille Perrin pointed out that while energy and raw material prices continue to decline, this is yet to be fully reflected in final prices for food products.

“We keep wondering about the distribution of costs and margins across the food supply chain,” added Perrin.

She hoped that the creation of a new EU observatory on agri-food trading practices would bring “more transparency”.

The launch of the observatory is part of a series of measures announced by the European Commission to strengthen the position of farmers in the food supply chain, in response to demands for fairer compensation voiced by the sector during recent protests.

[Edited by Angelo Di Mambro and Zoran Radosavljevic]

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