European grocery retailers will continue to experience challenges in the operating environment over the next 12-18 months, due to low sales volumes and weak consumer confidence, according to new research from Moody's.
The study also noted that larger European grocers will be able to preserve their credit quality better than their smaller counterparts.
However, smaller retailers can focus on quality and fresh food as dominant grocery chains find it harder to compete on those parameters due to complex logistics and extensive geographic reach.
The combination of falling prices and low consumer confidence will make it hard for European grocery retailers to maintain sales volumes and margins in 2024, the study noted.
Pricing And Market Share
Retailers are likely to continue to compete on price to preserve market share.
Commodity prices have continued to decline after spiking in 2022, but are still much higher than before the pandemic.
As inflation erodes disposable income, price has become increasingly important for shoppers.
The trend has resulted in the expansion of German discounters Aldi and Lidl across Europe.
Competition is particularly intense in markets like France and the UK, where large chains dominate and the market is saturated with limited potential for organic growth, the study noted.
The study found that the largest European grocery chains have been increasing their market share rapidly and are likely continue doing so in the next 12-18 months.
In addition to large retailers, grocers that have their own extensive private-label offerings, such as Mercadona in Spain, Leclerc in France and the Portugal's MC Retail Ltd, also have an advantage when negotiating with big brands because they have low-cost own brands which they can offer their customers as alternatives.
Hypermarkets will continue to lose ground, while convenience stores and the online channel witness growth, according to the report.
Companies with substantial hypermarket exposure, like Carrefour and Auchan, have lower profit margins despite their strong market positions and may struggle to retain their market share.
Environmental Regulations
New environmental regulations in the EU will drive up costs for retailers, making it possible for only big retailers to meet these requirements while also improving their environmental, social and governance (ESG) credentials, Moody's added.
The EU Deforestation Regulation, which bans certain goods from entering or leaving the EU will increase costs for companies which are part of the supply chain.
Retailers may also see added costs as a result of supply chain changes and increased scrutiny from consumers, investors and regulators, Moody's noted.
Rising green debt financing and demand from investors and consumers are pushing retailers to cut their emissions.
Close to half of food retail consumers (47%) consider a company's carbon footprint when shopping, according to a survey in 2023.
The European grocery retail industry is estimated to spend between €25 billion-€65 billion by 2030 to meet Scope 1 and 2 net zero targets, which includes, among others, costs for energy-efficient freezers and solar panels on store rooftops, according to McKinsey.
Large European grocers like Carrefour, Ahold Delhaize and Tesco have the resources to invest in the tools needed to trace their products and reduce GHG emissions.
Investment In Technology
Grocers will continue to accelerate investment in technology, including artificial intelligence (AI) for online sales as well as to manage the data they collect to stay ahead of competitors.
As AI increases the usability and value of customer data, retailers can also generate larger and highly profitable advertising revenue streams from their online platforms.
