Looking back at 2022
The outlook for 2022 given pandemic-related inflation was rather pessimistic. In the 2022 McKinsey & Company CEO Survey of 57 European grocery leaders, 60 percent foresaw worsening market conditions. Time has proven them right, yet they underestimated the extent of economic challenges, as Russia's invasion of Ukraine intensified negative trends, pushing food and energy inflation beyond expectations, and driving consumer preference for cheaper options. Rising inflation surpassed per capita disposable income growth, squeezing household budgets; Central European disposable income increased 10 percent over four years, while 2022's food inflation hit 15 percent. Grocery sales in major Central European markets grew only 4 percent in 2022, down from 9 percent in 2021 due to Ukraine, with similar trends affecting the wider EU retail market (Exhibit 1).
Both consumers and CEOs remain cautious as they look towards this evolving landscape, taking actions that are shaping the grocery landscape in 2023 and beyond. Some of the trends reinforce patterns highlighted in the State of Grocery Report for Europe in 2023, along with emerging strategies by Central European consumers to adapt to the less favorable market conditions that linger in the CE economy.
In the upcoming months, the grocery sector is expected to continuously be under significant influence of low consumer confidence index. Average consumer confidence in CE has risen by 0.6 percentage points compared to the same period in 2022 (standing at –20.7 percent in March 2023 versus –21.1 percent in March 2022). Despite this increase, confidence has not yet returned to pre-pandemic levels. Consumers are adapting to higher prices after the initial shock, but instead of increasing their grocery spending, they are seeking ways to trade down and alleviate household budget pressures.
2023: Is it time to battle for a new shopper?
McKinsey's research highlights key forces driving market changes in the next year. After surveying 4,500 CE consumers, interviewing regional retail and CPG leaders, and merging insights with additional research, a remarkable transformation in the grocery sector emerges. This shift may alter the way consumers shop, the way grocers build their value propositions, and the way manufacturers build their brands. Consumers prioritize budget-friendly options to ease financial strain, leading to reduced loyalty to brands and grocers when enticed by better prices. That is why we state that it is “time to battle for a new shopper”. The primary insights presented in this report revolve around four key trends: a focus on grocery affordability, crafting value propositions for budget-constrained yet discerning shoppers, the growing significance of Generation Z as a new consumer force, and the margin squeeze faced by retailers and CPG manufacturers (Exhibit 2).
1. Focus on grocery affordability
Trade down at scale – shift to cheaper grocers, switch to own brands and giving up on quality
Consumers are trading down at scale by shifting to cheaper retailers, lower price points, and giving up on product quality. In certain categories, where consumers are less willing to trade down, they will hunt for promotions or stock up on discounted products. Rising inflation compels consumers to allocate more of their disposable income to groceries, with almost 60 percent of CE consumers reporting higher spending on groceries compared to the previous year. At 7 p.p. more than their Western European (WE) counterparts, CE consumers are more inclined to trade down in order to keep spending in check following almost 3 p.p. higher inflation rate in CE vs. WE.
Based on our survey, 54 percent of CE consumers intend to increase shopping at budget-friendly retailers to save money in 2023 and beyond (Exhibit 3). Consumers are also planning to save by favoring private label brands (53 percent), selecting lower-priced options (51 percent), and reducing overall grocery volume (48 percent) (Exhibit 3). Additionally, 58 percent of retail shoppers in Central Europe are stocking up on products when they find attractive prices (Exhibit 3).
The general consumer desire to save money is driving shifts in store formats, with discounters maintaining momentum in Central Europe at the expense of other formats. Discounters have exhibited a compounded annual growth rate (CAGR) of 4 to 12 percent in terms of retail value across analyzed countries, while traditional non-chain stores and hypermarkets have experienced declines (Exhibit 4). The rising importance of discounters is driven by consumers' perception of them offering good value for money.
The rise of discounters is accompanied by a simultaneous boost in private label development. The emphasis on price and value has positioned private labels favorably, with 82 percent of CE consumers considering their value comparable to or even surpassing branded items. Champion grocers in the region have enhanced their value propositions through expanded own-brand offerings and improved product quality, enabling them to compete against mid-tier and mainstream alternatives.
As consumers understand the need to trade down, premiumization is no longer a primary concern. Around 15 percent of surveyed CE consumers have opted to reduce purchases of high-quality premium foods. This trend is even more pronounced in countries such as Czechia (21 percent), Ukraine (24 percent), and Croatia (25 percent). Interestingly, shopping behaviors differ across product categories. Luxuries and indulgence items not integral to daily meals have been most negatively affected. Consequently, 43 percent of CE consumers intend to curtail spending on alcohol, while 50 percent plan to reduce expenditures on snacks and confectionery products.
An active search for promotions and discounts
Switching from branded products to cheaper alternatives or reducing purchasing volume by cutting down on certain categories, are undoubtedly effective ways of saving on groceries. However, some consumers are unwilling to abandon their favorite brands, despite inflationary pressure driving many to hunt for bargains. Research shows that, in certain categories, consumers look for discounts and promotions to keep their budgets in line. The importance of promotions tailored to individual needs was highlighted by 61 percent of respondents as an important factor when selecting a store, coming second only to location, and outweighing assortment, great value for money, or lower prices. This trend is also supported by an increased frequency of store visits per consumer, driven not necessarily by more purchases, but rather by shoppers stopping by to check on prices or available promotions. With more frequent store visits and a desire to hunt for discounts and promotions, our research also confirms that Central European consumers tend to stock up more often when items are cheaper, especially on commodities and categories with a longer shelf life. In order to minimize the 10-15 percent inflation penalty on groceries, 43 percent of CE consumers hunt for discounts in different stores, while 33 percent of them stock up on discounted products.
2. More for less – lookout for proposition that addresses customer needs at no price premium
Commoditization of health and locality in grocery
Consumers want progress on healthy food offerings and sustainability but are also becoming more reluctant to pay a premium for them. Raising prices on items boasting sustainability and good nutrition during a time of already-inflated prices puts consumer demand for such products into doubt. Some 20 percent of surveyed CE consumers said they would focus on healthy eating and nutrition from 2023, which is 11 p.p. less than their WE peers, while 16 percent said they would focus on sustainability, which is on par with WE sentiment (Exhibit 5). However, with price cited as a top concern by 54 percent of consumers, they are more likely to cut back spending on sustainable and healthy choices that surpass their budget, slowing the shift towards green choices (Exhibit 5)
Local one-stop shopping reinvented
While inflationary pressure has shifted consumer behavior towards a relentless search for attractive pricing, promotions, and discounts, there is one constant: the importance of a convenient location, which still tops the consumer list of a store’s most desirable attributes. Research demonstrates that while consumers can deprioritize the availability of a wide assortment, they expect stores to be located nearby, to offer suitable discounts and offers, and to provide a pleasant and streamlined shopping experience. In Poland, Czechia, Croatia, and Ukraine, only around 30 percent of survey respondents were willing to drive further or go out of their way to save on groceries. Romania was an exception, where about half of consumers said they would do so, which is still a relatively low rate given the rate of inflation.
Search for competitive edge in online
Online grocery shopping continues to gain market share across Central Europe, having added approximately 0.2 p.p. of market share in 2022, versus 2021. Unlike several Western European markets, where the booming online market experienced a post-pandemic correction in 2022 (Sweden and the UK each lost more than 1 p.p. in market share), the boom shows no signs of subsiding in Central Europe. Online grocery growth was especially strong in Czechia (+0.4 p.p. in 2022 vs 2021), which also leads the region in online market penetration, at 5.1 percent. Sustaining this online grocery growth, however, remains uncertain as consumers across Central Europe expressed a negative net intent to increase their online spending as 8 percent of consumers is planning to limit their spend in online (Exhibit 5). Driven by the paramount importance of price to Central Europeans, consumers often optimize purchases across channels. The large share of respondents claiming online prices are lower than in-store ones (which in reality may not be the case), can be explained by deal hunting. Due to inflation and tightened household budgets, consumers increasingly compare prices and promotions among online retailers (including online marketplaces such as Poland’s Allegro), cherry-picking the most attractive price points and stocking up on good deals. The future of online grocery hinges largely on sustaining attractive pricing as consumers choose the best offline and online deals during their respective journeys, retailers need to make enticing offers per channel.
3. Gen Z driving market shift going forward and to win—their needs must be met
Most of the trends discussed are true for a majority of consumers; however, our study reveals specific behaviors among Generation Z, comprising 17 percent of the population. This group values different shopping attributes and require tailored value proposition to attract them. Gen Z shoppers are highly comfortable with omnichannel and expect brands to deliver seamless experiences across virtual and offline worlds. Since they exhibit very different shopping behaviors than other generations, Gen Zers challenge existing assumptions, and are sometimes referred to as the “Consumers of Tomorrow”. Gen Z consumers are adjusting their grocery habits by reducing store visits, with a growing preference for weekly visits due to lifestyle shifts such as eating out, quick commerce, smaller households, and increased online shopping.
While convenience is the primary online shopping trigger for Millennials, Gen Z takes it for granted. A greater proportion of Gen Z shoppers plan to buy groceries online next year, considering multiple factors in their decision-making process. They find convenience less relevant (or treat it as a given), are as price sensitive as older generations, and prioritize features that shopping easier.
The economic climate that helped shape Gen Z shopping habits made them more price-conscious and cautious consumers. Yet they do not merely settle for cheaper products alternatives. Gen Zers are less skeptical toward private-label items due to their lack of exposure to the generic products these brands replaced. Some 18 percent of surveyed Gen Z consumers choose store brands due to their quality, 6 p.p. more than older generations (Exhibit 6). Furthermore, 38 percent of Gen Z shoppers believe private-label products offer superior value for money versus branded goods, 8 p.p. more than older consumers.
4. Double trouble: price sensitivity and cost pressures
Declining consumer index and the intention to limit grocery spending pose a dual threat to the top lines of both retailers and CPG manufacturers, while rising cost pressures erode their profit margins. For the purpose of the State of Grocery report, we termed this situation “double trouble” to express that already slim margins in consumer industry could experience a serious dent in profitability. Comparing the performance of retailers and food processors (consumer–packaged–goods companies) between 2019 and 2022, it’s evident that EBITDA margin decreased for 53% companies out of ca. 140 in CE region. About 14% of companies experienced no change to EBITDA (neutral performance with change between -0.5 to 0.5 EBITDA margin), while 33% saw uplifts (Exhibit 7). The extent to which retailers and CPG manufactures are impacted by declining profitability depends largely on their ability to pass all or part of the costs to the customer. Nonetheless, the pressures on margins and costs are expected to persist. Based on our CEO survey, responding to the heightened recession is on the top of companies’ agenda.
In conclusion, we see several recommendations for Grocers and CPGs on the necessary next steps they should take to successfully attract and engage the new shopper:
Download State of Grocery in Central Europe 2023, the full report on which this article is based (PDF–6MB).
