GROCERY retail
Six major
trends for the following years
By Roberto Tamaso & Bruno Furtado
GROCERY RETAIL
Six major trends for the following years
By Roberto Tamaso & Bruno Furtado
The pressure on margins resulting from a challenging economic scenario will continue in the short term and is likely to impact consumer behavior; structural factors will demand grocery retail to rethink its value proposition, accelerate digitization, and drive omnichannel profitability.
Because it is such a prevalent part of our daily lives, grocery retail is a faithful portrayal of Brazilians’ economic situation.
While unemployment dropped in 2021, those who were employed made less money. With 10.1% inflation and a 5.8% drop in average real income, the buying power of the average Brazilian dropped, as did sales in grocery retail, which were 2.4% below what they were in 20201.
1. Real values, 2021 vs 2020, updated to Dec/21
Source: Scanntech, IBGE
Atacarejo
?
Wholesalers who sell to individuals and small businesses.
This belt-tightening was even more severe in the North and Northeast of the country, reinforcing the shift in behavior we had already been witnessing - the increased use of atacarejos and trade-downs. Some behaviors developed during the pandemic, such as less frequent shopping trips, became even more prevalent in 2021.
The demand was pressured by the macroeconomic scenario
The purchasing power of Brazilians deteriorated in 2021...
-5,8%
Variation in average real income of Brazilians
-0,4%
Average real worker wage adjustment
+7,2%
Variation in the basic SELIC rate
-1,8%
Consumer Confidence Index - CCI
...resulting in a decline in retail grocery sales
Variation in grocery retail sales1 in 2021 compared to 2020
-2,4%
Value
-6,9%
Units
1. Supermarkets, hypermarkets and regional atacarejos;
Source: Scanntech
Variation compared to the same month in the previous year, %
2. Veal values for 2021 vs. 2020 (updated using a Dec. 21 base)
This deterioration can be explained by
3 economic factors
that had a significant impact on consumer spending in 2021
Regions and formats were differently impacted
The drop in sales was particularly strong in the Northeast (-8.3%), coinciding with the largest drop in income mass (-10.3%)
Source: Scanntech, IBGE
The average ticket in Brazil experienced a nominal increase of ~8.4%...
Average ticket in Brazil - Supermarkets and hypermarkets
R$, nominal value
Average ticket by region - Supermarkets and hypermarkets
R$, nominal value
Source: Fonte: Scanntech, expert interviews, press clippings
...but buying frequency dropped
Variation in the number of tickets per channel1
2021 vs 2020, %
"
While behaviors such as hunting for lower prices and switching for cheaper goods are normally seen in periods of economic difficulty, less frequent shopping is behavior particular to the epidemic
Bruno Furtado
senior partner, McKinsey, Feb. '22
"
The pandemic changed consumer behavior. With diminished traffic in street B&M stores, but higher turnover, it's possible that 'destination buying' has gradually replaced 'impulse buying'
Valor Investe
Nov. '21
1. Dados ajustados considerando representatividade do atacarejo na receita total do varejo alimentar
Source: Scanntech
Atacarejos capture an increasingly large share of grocery retail
Atacarejos are the only grocery retail format that grew in the period, with a 10% increase in revenue compared to 2020. All other formats experienced a drop in revenue, from -6% in the case of supermarkets, to -20% for hypermarkets. Recent industry moves suggest atacarejos will continue to grow. One of the main retailers that focus on the format recently acquired the right to explore 70 stores of a retail group and plans to convert them into atacarejos. Another Brazilian retail chain made a major acquisition1 in 2021 and announced plans to convert some of the stores acquired into atacarejos under its own brand.
1. This acquisition is still pending approval from CADE, the Brazilian antitrust authority (Conselho Administrativo de Defesa Econômica).
Atacarejo was the most resilient format, growing some 10% in 2021...
%, estimated grocery retail revenue in Brazil1
2. 2020 data are atacarejo estimates from the ABAD Nielsen Ranking, and 2021 data are estimates based in growth between the first and third quarters of 2021, and the share of Atacadão and Assaí
Source: Euromonitor, ABAD, investor relations, press clippings,
Prices of basic groceries and perishables have gone up more and are also more likely to fluctuate
The average basket of goods purchased by Brazilian households has not changed significantly, and the increase in average ticket in 2021 was primarily the result of a major hike in the price of food. The largest increases were in basic groceries such as cooking oil, rice, beans, flour, and coffee, and in perishables - meats, dairy products, and produce. Cooking oil alone increased an average of 49.4% in the year.
These increases are due to the challenges experienced by supply chains, and the higher cost of inputs. Furthermore, between January 2020 and December 2021 the US Dollar exchange rate went up 36.2%, and natural gas for industry 47.1%. Diesel, essential for the nation's logistics system, which is heavily dependent on trucks, went up 40.7%. The foods more closely linked to imports and global commodity chains are also the ones with the highest price increases. Additionally, sectors that were almost shut down or suffered severe slowdowns during the pandemic, such as hotels and restaurants, were back in business in 2021 impacting demand and creating increased complexity for the supply chains involved.
New habits emerged to get through the crisis
Price increases were largest in basic groceries and perishables...
Average unit price increase - supermarkets and hypermarkets
2020 vs 2021, %
Source: Scanntech
...and may be explained by the challenges facing supply chains and the increase in input prices
Variation in input costs
Jan '20 – Dec '21
+27,7%
Food Commodity Index
+36,2%
Exchange rate (R$/US$)
+47,1%
Natural gas for industry
+40,7%
S10 Diesel
Variation in inflation
Accumulated 12-month IPCA, Dec 2021
+8,2%
Food in the home
Examples of foods that have been impacted by higher input costs
+29,6%
Pears
+18,6%
Corn (kernel)
+14,5%
Wheat flour
+9,3%
Garlic
Source: BACEN, ARSESP, ANP, IMF
To offset these price increases, consumers are switching to more economic brands
In addition to shopping less frequently to maintain social distancing and reduce transportation expenses, many Brazilians are also trading down. This behavior change was seen in 40% of consumers in 2021, compared to just 29% in 2020. The categories most impacted by the switch to more economic brands were rice, and cleaning and laundry products.
Changing behaviors in the standard grocery cart in the past 12 months1
% persons surveyed in Brazil, categories with the highest downtrading ratio , out/20-out/21
Source: McKinsey 2020-22 Global Consumer Sentiment Survey
Online food retail is still small, but grows rapidly
During the pandemic, Brazilians got used to the convenience of online grocery shopping, and this has not changed, despite the return to face-to-face shopping during the course of 2021. Although online grocery shopping is still a small share of food retail, Brazilian retailers experienced over 50% growth in online sales in 2021. Similarly, food delivery apps are found on 83% of Brazilian smartphones.
Recognizing the potential of this type of retail, many companies have invested in online grocery shopping. This is the case of nation-wide food retailers with competitive prices and known for their brand and excellent operations; leading online marketplaces that now see online food retail as a way to keep customers coming back; specialized companies offering specific, niche products and innovative models (such as subscriptions) with a very loyal customer base; and aggregators, mostly delivery apps with a flexible business model offering ultra-convenience.
6
6
major trends
ten
dên
cias
do Varejo de alimentos em 2022
of food retailers in 2022
To stand out in a challenging economic scenario with growing competition, food retailers must prepare for six major trends expected to influence the industry in 2022 and beyond.
1
Price sensitivity due to a challenging economic situation
Economic projections show a stagnated economy in 2022
+0,3%
minimal GDP growth
13%
double-digit Selic rate
R$5,25
high US Dollar exchange rate
Furthermore, inflation will continue pressuring consumer buying power and retailer margins. The Central Bank set the target for the 2022 IPCA to 5.4% (in that regard, in March 2021 the Central Bank's inflation target for the year was 4.6%, but by year-end the annual IPCA reached 10.1%).
Along with these projections, the economic uncertainty indicator remains higher than it was pre-pandemic, and merchant and consumer confidence have been dropping since 2020. To complete this situation, the advancing pandemic reinforces a sense of uncertainty.
With fully 70% of consumers looking for ways to save money, and 40% of them open to more economic alternatives, especially in food retail, there is an opportunity
for private labels and less expensive brands to strengthen their position even more over the short term.
Those who take advantage of the current price sensitivity to redefine their private-label strategy could transform a short-term behavioral change into long-term customer loyalty and profitability.
2
Expanding atacarejo and formats that focus on experience or convenience
Atacarejo remains a promising format. With new stores and more investment, atacarejos in Brazil should grow around 15% in 2022. Regional retailers also continue to expand. Some have already issued IPOs and others plan to do so in the next few years. A trend towards growth and increased competition could pose challenges. Beyond attracting customers away from other formats, atacarejos will soon also have to differentiate themselves from each other.
Meanwhile, companies will continue testing alternative physical and digital convenience formats to meet new buying occasions for Brazilian consumers and maximize value capture.
Examples of such formats include apps that deliver in a matter of minutes for a low or even no fee, with expanded hours of operation and prices similar to those charged by large retailers;
companies that offer scheduled deliveries of goods that require constant replenishment; small convenience markets located inside residential buildings and condominiums that take advantage of being super-close to sell basic items; and new social buying communities, inspired on Chinese models, which connect small entrepreneurs and consumers to deliver goods at atacarejo prices.
Meanwhile, hypermarkets must reinvent themselves to keep their market share and make their sales floor profitable. With increasing online sales, some of the advantages hypermarkets used to offer have diminished value. A consumer looking for white goods, for example, will find it much more convenient to research prices and will find a larger variety of models online than they ever did in hypermarkets. However, hypermarkets are still known for the practicality of the additional services they offer, as well as for having a complete and diverse assortment of quality goods. McKinsey analyses show that almost 41% of consumers go to hypermarkets as a leisure option, and 33% use hypermarkets for the services there offered. To make the most of these advantages, hypermarkets players should explore the potential of their real estate with a few promising options.
McKinsey analyses show that almost 41% of consumers go to hypermarkets as a leisure option, and 33% use hypermarkets for the services there offered.
2.1
Reinforce their assortment variety by partnering with non-food retailers using the "store-in-store" or "one-stop-shop" concept.
2.2
Explore store space, turning stores into service centers to bring in customer traffic. Food courts, post office, banking services, beauty and esthetics services, laundry and dry-cleaning, pet shops, and entertainment for children and adults are just some of the possibilities.
2.3
Optimize store spaces to offer an omnichannel experience, with in-store distribution centers and locations to pick up online purchases, among other options, to meet consumer convenience expectations.
3
Increased interest in categories and products that promote health and well-being
While in some categories consumers prioritize discounts and less expensive options, other categories continue to grow, driven by shifting consumer habits in Brazil. Products associated with health and well-being (e.g. organic, nutritional, functional) will continue to gain importance, and are an opportunity for food retailers to increase sales. More than half (56%) of all consumers are willing to pay more for healthy and organic products. In Brazil, the market for healthy products and those that promote well-being should grow at around 9% a year, and account for one-fifth of packaged foods by 2030.
Penetration of foods that promote health and well-being
2030, % total packaged food
Source: McKinsey 2022 Global Sentiment Survey
4
Distinctive value proposition and focus on execution are essential to win
With margins under pressure and stiff competition, winning in food retail demands a distinctive value proposition and a strategic focus on execution to optimize resources and generate earnings. Looking at what many leading foreign – and some Brazilian – retailers are doing, four promising value propositions are worth mentioning:
5
Digital and advanced analytics will be essential for food retailers desiring to improve their execution and enhance customer experience
More and more, the use of data and analytics can unlock growth, improve operational execution, and better serve food retail consumers. Mastering these capabilities, still considered by some food retailers as mere competitive advantages, will become essential to survive in the market.
To improve consumer buying experience, the use of data enables:
Pricing that is more accurate, efficient, and suited
Know more
Pricing that is more accurate, efficient, and suited to the price sensitivity of the target consumer, and real-time data gathering to track changes in expectations and behavior. This leads to increased store traffic and returns on investments made in specials, resulting in a more profitable business. It also contributes to a perception of fair price by the consumer.
Adjust product assortment to each store
Know more
Adjust product assortment to each store, combining data on buying behavior and consumption patterns using predictive algorithms. It is no longer enough for a retailer to offer what is most available or cheapest. Data and analytics can help set the best combination of goods, formats, variables, and brands that are most suited to the customers of each store.
Ensure a personalized experience and opportunities for loyalty
Know more
Ensure a personalized experience and opportunities for loyalty with focused marketing and loyalty programs, offering consumers advantages and positive buying experiences that are in line with their needs and expectations. This will make that particular retailer top of mind for the consumer, increasing buying frequency, conversion, and average ticket.
When it comes to retailer operations, data also has huge potential, enabling opportunities such as:
Optimize inventories and reduce sales stock-outs
Know more
Optimize inventories and reduce sales stock-outs by refining demand estimates at a granular level, risk of shortages and cost of lost sales, in order to identify and prioritize critical inventories. Such tools proved critical in the early days of the pandemic when demand became much more volatile.
Avoid supply disruptions using a digitally controlled hub
Know more
Avoid supply disruptions using a digitally controlled hub that ensures end-to-end process visibility and potential disruptions. In times like this, where there is major unpredictability and sectors are reopening following the pandemic, this type of tool makes it easier to balance inventory and sales volumes, reducing the time retailers need to react to unexpected changes in supply or demand.
Define the store layout and the size of the operation
Know more
Define the store layout and the size of the operation, exploring advanced customer segmentation and understanding their buying journeys. Using data and analytics enables identifying the ideal location to open stores, the ideal planogram for each store, the size of the teams required, and the support needed to deliver excellent service that is also cost effective.
Nonetheless, integrating digital tools and analytics in retail requires an important cultural transformation, something akin to learning to ride a bike again, but much faster.
6
The return to in-store shopping and new behaviors increasingly demand that retailers be omnichannel, but making omnichannel profitable remains a challenge
In-store presence still fluctuates as new Coronavirus variants emerge; furthermore, the old normal is definitely in the past, and consumers expect more and more convenience. Integrating online and offline sales will continue to grow.
In-store presence still fluctuates as new Coronavirus variants emerge; furthermore, the old normal is definitely in the past, and consumers expect more and more convenience. Integrating online and offline sales will continue to grow. About 47% of consumers are using digital channels to purchase food. Omnichannel consumers increased their online frequency 1.5 times in 2021 compared to 2020, and their annual spending grew two- to three-fold. It is no wonder omnichannel has become a common term among retailers.
Although shopping in a B&M stores remains the most often used option to buying and delivering food and household goods (the choice of 84% of consumers), online purchases with home delivery are catching up (already used by 76% of consumers), and just over a quarter of all consumers have tested online purchases with collection points or in-store pick up (27% and 24% respectively).
~47%
of consumers are using digital channels to purchase food
1,5X
Omnichannel consumers increased their online frequency in 2021 compared to 2020
2-3X
annual spending grew
Methods to purchase food and home goods
% individuals surveyed - Brazil , Oct/20-Oct/21
Source: McKinsey 2022 Global Sentiment Survey, Pulse Survey of Brazilian consumers during the COVID-19 pandemic, Jan-Feb 2021, expert interviews, company websites, news clippings
However, making omnichannel profitable remains a challenge for many. The increased volume of online grocery sales, with mostly low-cost items, have been followed by increasingly higher costs, especially on logistics, which can amount to 12-20% of e-commerce revenue. This has pressured margins and pushed profitability further and further away.
Online, customers can easily and quickly compare prices, driving up competition and making it even more challenging for retailers to achieve a margin. Large delivery apps and marketplaces are investing to grow in food retail. These companies have a lot of investment capacity and can offer competitive prices, as they aim to keep recurring customers (encouraging them to buy non-food products, with better margins) and capture customer loyalty in a new and growing market.
To find the equilibrium point between omnichannel and profitability, traditional grocery retailers must recognize their
competitive advantages and use them as levers for their own good
Leverage existing real-estate assets
Know more
Leverage existing real-estate assets: stores can be fully or partly converted into mini-distribution centers or dark stores, both for the retailer's own brand or for partners seeking pick-up points for online purchases; they can even be used as dark kitchens for partner restaurants.
Leverage their digital assets
Know more
Leverage their digital assets: choosing one item to promote among the weekly deals in the digital stores, creating digital inserts and banners for app and social media publications to improve preference in category searches are just some of the ways retailers might consider to make digital space profitable for food e-commerce.
Take advantage of industry knowledge and the relationship with suppliers
Know more
Take advantage of industry knowledge and the relationship with suppliers to create scale: a long tradition in food retail is built by cultivating trust and good relationships with a number of small, mid-sized, and large suppliers. Retailers with a long-established history and know-how can generate scale and offer their customers more competitive prices.
Highlight the assured quality and expertise that are the base for the brand strength
Know more
Highlight the assured quality and expertise that are the base for the brand strength: traditional food retail brands are recognized for the quality and safety of the food products in their stores, an advantage that new entrants and non-traditional players don’t have. Traditional retailers can highlight the work done behind the scenes that ensures the safety of the goods displayed, showing how their story is connected to the story of the consumer, the city, or the country. By reminding people of their tradition in the segment, food retailers stimulate an emotional connection between consumers and their brand.
In summary, several challenges faced by grocery retailers in 2021 should continue over the coming years and are bound to test sector resilience. In 2021, deteriorated purchasing power changed consumer behavior in Brazil and had a negative impact on grocery retail, which was uneven across channels and regions. In the meantime, online sales became more important and should continue in uptrend.
Margins will remain pressured in 2022, given the expectation that the economic scenario will remain challenging over the short term, impacting consumer behavior and growth dynamics across sales channels. Structural forces at work will demand that retail reinvent how its value is created, accelerate digitalization and address the challenge of making online and omnichannel profitable.
The resilience of Brazilian retail will be tested in the coming years. To preserve sales profitability, industry players must start acting effectively right now.
6
Im
pera
tives
6
Im
pera
tivos
para que o varejo alimentar possa capturar valor
for retail grocers to capture value
Authors
Roberto Tamaso
Partner - São Paulo
McKinsey & Company
Bruno Furtado
Senior Partner - São Paulo
McKinsey & Company
The authors would like to thank:
Fernanda Hoefel, Andre Luna, Fernanda Dalbem, Juliana Paolucci, Mariana Guimarães,
Priscila Ariani (Scanntech), Rafael Lopes, Raul Polakof (Scanntech) e Tiago Vavassori (Scanntech)
for the contribution on this article.