Key Trends influencing FMCG in Europe in 2022


2022 is proving to be a year wrought with challenges for the retail industry and FMCG is no exception. Although it finally began to ease off in the last quarter of 2021, the consequences of the pandemic are shaping the trends influencing FMCG in Europe in 2022 and will continue to do so in the years to come. The McKinsey & Company issued the “State of Grocery Retail” report for Europe in 2022 which we have summarised below, this article looks closely at the key trends expected to characterise the market in 2022. It is worth noting that the report was published just before the Russian invasion of Ukraine and, as such, does not fully take into account the scope of the consequences of this conflict. Nonetheless, it is clear that the situation in Ukraine will exacerbate existing negative market conditions, such as inflation and decreasing volumes, and thus reinforce the outcome predicted for the market in the coming years. 


Setting the scene for 2022

In 2020, FMCGs saw some record sales, particularly in food retail, due to hospitality closures and a trend towards stockpiling. In the last three quarters of 2021, restaurants began to reopen and life started to return to normal, causing sales to drop 0.6%, although admittedly to a level still significantly higher than pre-pandemic levels. This, combined with supply chain issues, high inflation and rising energy prices, has set the scene for the market in 2022. 


The CEO perspective

Along with the State of Grocery Retail report, McKinsey conducted market research focused on consumers and CEOs. In the State of Grocery CEO Survey, 57 grocery CEOs were surveyed about their outlook for market conditions in 2022 and 60% predicted the situation to be worse than in 2021. They cited reduced consumer spending power, increased price sensitivity, rising inflation and competition from the flourishing online market as main reasons for this perspective. Other contributing factors include wage increases, labour shortages, supply chain issues and new regulations in certain markets. CEOs identified e-commerce and omnichannel offerings as a top opportunity and therefore key priority. The top 5 market trends for this year identified by CEOs were: high inflationary pressure and increased supplier prices; hiring the right talent; slow but steady transition to a new, postpandemic normal; downtrading and increased consumer price sensitivity; and continued supply chain issues. 


Consumer outlook

From McKinsey’s consumer research detailed in the report, it is clear that saving money is a top priority across the board as well as an increased focus on healthy eating and sustainability. The level of priority, however, is markedly different between high- and low-income consumers, highlighting the need for FMCGs to provide offerings that meet the, at times conflicting, needs of both. For example, 52% of low-income consumers expressed their intention to look for ways to save money in 2022, up 12% from last year, compared to 32% of high-income consumers, up a mere 4% from last year. Meanwhile 15% more high-income consumers expressed the intention to pay a higher price to get a more environmentally friendly product than in 2021 compared to -9% of low-income consumers.


The 10 trends

From the combination of consumer research, the CEO survey and a market analysis, McKinsey & Company has defined ten key trends that will influence European grocery retail in 2022. These trends fall under five key themes, namely: decreasing volumes & rising inflation; widening polarisation between low-income and high-income consumers; slower online growth with more differentiated offers; new profit pools; and a shift in the people model. These themes represent the current situation for grocers, from which the trends moving into 2022 and beyond were born.

Economic headwinds

In 2022, retailer margins are being squeezed tightly. Inflation in the EU was at 5.6% in January 2022 with food prices rising by 3.5%, factors that have been exacerbated by the Ukraine invasion.

Trend 1: Decreasing volumes

As life begins to move to a postpandemic normal, sales volumes are likely to come down from the 2020 and 2021 highs. This is a continuing trend from 2021, the last three quarters of which saw sales volumes decline 2.1% compared with 2020, although levels still remained 5.7% higher than in 2019, leaving substantial room for further decline throughout 2022. McKinsey expects volumes to stabilise to levels a little above those of 2019 with revenues staying significantly higher due to high inflation. Retailers can avoid further volume decreases by delaying price increases and lowering their margins temporarily.


Trend 2: Inflation

Inflation is set to be an unavoidably influential trend for European grocery in 2022 with 63% of CEOs citing it as the top trend for the year. The Ukraine crisis is aggravating the already existing high rates of inflation, reducing consumers’ disposable income in the short term and their confidence in the future. Food and energy prices are on the up and consumers are more price-sensitive, which makes it harder for retailers to pass price increases onto them and therefore puts even more pressure on already tight margins. As a result, many consumers will likely downtrade to cheaper products, meaning discounters and retailers with high quality entry-level price range private-label offerings are well placed to meet their needs. 

Widening polarisation

The polarisation theme for 2022 will manifest itself in low-income consumers showing higher price sensitivity on one end and, on the other, high-income consumers expressing more intent to pay a premium for healthier, more sustainable, higher quality products. McKinsey’s research demonstrates further diversifying of consumer preferences, which will also be differentiated by age and household size. High-income consumers, households with more than three people and younger generations - Gen Z in particular - will drive the growth of products in the healthy, premium and sustainable sectors. On the other hand, there is substantial growth in the number of consumers who plan to spend less money on FMCGs in 2022, both by buying less and downtrading to cheaper products, a trend that is unsurprisingly led by lower income consumers. 

This means grocery retailers should focus their attention simultaneously on their entry-level price offerings and premium products and minimise efforts on mid-range offerings. 


Trend 4: Increasing price sensitivity

Price sensitivity is a strong trend for 2022, having already gained serious traction in 2021 and is driven by inflationary pressure. 52% of low-income consumers and 42% of European consumers on average expressed their intention to look for ways to save money while grocery shopping in 2022, an increase of 12% from last year. 


Trend 5: Higher quality entry-price tier

As the number of consumers shopping at entre-price levels is expected to increase, as is the quality expectations of these consumers when it comes to the quality of those products. 30% of grocery CEOs surveyed identified a need for increased quality in the entry-price tier and the reinvention of private labels as two important trends for 2022. Across many markets and product types, the entry-price grocery tier is already equal to the quality of the leading national brands. As such, grocery retail will be presented with the challenge of differentiating between entry-level price range products and mainprice products, likely causing more pressure for reducing margins. 


Trend 6: increased focus on health and the environment


2021 saw a strengthening of the health and sustainability trend with the pandemic driving consumers to be more aware of what they eat and how it affects them and the planet. High-income groups and younger generations are driving the trend; more than a third of high-income consumers intend to eat more healthily in 2022. And consumers are not the only ones pushing the sustainability movement: investors, regulators and NGOs are putting increasing pressure on FMCG players to take initiative in mitigating the effects of climate change. 


Food systems contribute to 34% of global greenhouse gas emissions and, as a crucial link in the chain, grocery has a big role to play in the sustainability transformation. It is time for grocery retail to exercise its enormous influence to bring about real change; its unique position gives it the opportunity not only to inform consumer choices but also collaborate with farmers and suppliers. And there is value to be gained from a drive towards better sustainability. McKinsey found that, while the trend does present some potential risks, it represents a great opportunity to increase margins on top lines, adding up to 35% of EBITDA until 2030 for the average grocer in Europe.   

Trend 7: Growth in premium

The gap between high- and low-income consumers is nowhere more apparent than in the premium products category.While 20% of high-income consumers intend to buy more premium products in 2022, low-income consumers show a negative net intent in that regard. This trend is accompanied by an increased consumer interest in farmers’ markets, independent bakeries and delis - markets which are all expected to experience further attention in 2022. 

The future of online 

McKinsey’s research points to a slowdown in growth in online grocery while the market develops into more differentiated offerings and matures in some areas, such as instant grocery. This is expected to manifest itself as a yearlong pause in which consumers will gradually increase their spending. E-grocery is expected to gain more than 20% market share by 2030 in certain regions but is dependent on the diversification of online offerings, which should become more tailored to specific consumer needs. McKinsey found that one-third of consumers who shop online weekly shop at three or more different online grocery stores and it is becoming increasingly evident that the more consumers shop online, the more online grocers they use. 

Trend 8: Slower online growth with more differeniated offerings

The most important new trend in online grocery for 2022 is instant delivery, an online experience that aims to mimic that of offline convenience store shopping. In 2021, this segment saw huge influxes of investment and the top 15 European players had opened more than 800 dark stores by the end of last year. Although the industry is still in the very early stages and is still largely unprofitable, it is expected to see three-digit percent annual growth in the mid-term. Differentiation of online offerings is also being seen through shops like Ocado, which offers a large assortment of premium products, or Farmy, which focuses on local, organic produce. To benefit from this trend and compete with disruptive online-only players, grocery retailers should define their value propositions, strategise scalability and consider partnering with existing players, such as those in instant grocery. 

The search for new profit pools 

With traditional margins being tightly squeezed, many grocers are looking to benefit from new profit pools, either within their core business through Artificial Intelligence (AI) and Advanced Analytics (AA) or outwith it, by entering new revenue streams. 

Trend 8: New revenue streams 

Many grocery retailers are looking to benefit from previously untapped profit pools. One revenue stream with high potential that is already being used by US grocers as well as some leading European players is the creation of retail media networks. This involves selling advertising space to consumerpackaged-goods companies that use data from loyalty cards to target specific segments. McKinsey found that as much as 8% of online sales from US players are coming from these retail media networks and margins are upwards of 50%.   

Trend 9: Personalised, localised AA applications 

Leveraging AA is becoming increasingly influential in the success of leading retailers, particularly when it comes to assortment, price and promotions. McKinsey found there is significant room for growth in this area, with almost one-quarter of CEOs reporting that the adoption of AA applications is a key priority for 2022. The future of personalised, localised shopping looks like hyper-specificity in customer targeting: the right offer at the right time with the right message and the right discount through the right channel. The potential value for improving sales and profitablity is big: gains of 2-3% in EBITDA. 

A shift in the people model 

Increased competition for talent is a key challenge for retailers in 2022 as unemployment levels have fallen post-pandemic. To add to the talent bottleneck, there is high demand for different skills, such as AA application and social-emotional capabilities. McKinsey found that 39% of CEOs are concered about attracting the right talent. 

Trend 10: Attracting the right talent

To meet this challenge, it’s important for grocery retailers to be clear on the new skills needed from their employees in a future characterised by analytics, personalisation and increased online importance - and redesign roles accordingly. This means prioritising technological and social skills over the ability to perform manual tasks. Lower unemployment also makes retention a concern; companies can respond by creating value through investment in reskilling and upskilling. 


It is evident that grocery retailers and FMCGs are facing a myriad of challenges in the coming year, many of which will only be exacerbated as the situation in Ukraine develops. CEOs must tread a thin line between satisfying increasingly diversified customer needs and combatting the negative effects of decreasing volumes, rising inflation and competition for talent. Leveraging new revenue sources will be key to increasing sales and value can be created through an increased focus on sustainability and advanced analytics. Whatever the obstacles ahead, this is undeniably an exciting period for grocery as the world transitions into a new postpandemic normal and those retailers who are bold enough to seize the emerging opportunities should reap the rewards. 


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