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Price pressures putting the squeeze on retail: How the industry is responding
The inevitable elephant in the room has been the Discounters. Led by Aldi and Lidl, there has been a growing stampede to their stores. For the first time in the last decade, Discounters is the fastest-growing channel (+10.3% growth). This increase sits inside an FMCG industry that has grown as much in the past three years as in the previous eight.
Yet the rise in Discounters has led, at least in part, to a slowing of the online channel. Online growth slowed to +5.6% globally, making it the 3rd fastest growing channel but still ahead of the overall market. The e-commerce slowdown was caused by Western Europe, where the channel lost share, with Great Britain being the main source of loss. E-commerce is still making gains in Asia and the US.
In the midst of rising inflation, Aldi and Lidl have become havens for budget-conscious shoppers. The Discounters, so prevalent in Europe, have seen a significant boost in their market share, swiping it from other retail channels, particularly Hyper & Supermarkets.
As older shoppers who had previously shifted to online during the COVID-19 pandemic return to brick-and-mortar stores, they’re seeking value and, as a result, flocking to these Discounters. It bears repeating that for the first time in the last decade, Discounters have become the fastest-growing channel and show no signs of slowing amidst aggressive store openings.
Both the Discounter and e-commerce channels have seen an increase in shoppers and visit frequency, but the difference in performance boils down to trip spend. If we overlook the spend component, e-commerce continues to win the growth rate race.
One of the big channel winners was traditional trade. Less trendy to talk about but still a massive driver of sales in markets like India (86% of trade) and Indonesia (90% of trade), traditional trade saw value growth of 7.2% in 2022 on a global basis. Some of this can surely be attributed to shoppers making the channel shift as they shopped more locally and more often. The smaller pack sizes typically on offer, such as sachets, have also been in demand as households manage their cash flow more closely.
The pressure on prices in a climate of shrinking take-home wallets forced us to shop differently
Even as country-level inflation numbers begin to ease in 2023 after topping out at double-digit levels in some markets, we can expect food inflation to run higher than broader inflation indices. Food and Dairy have been, and will continue to be, the drivers of that trend.
But we also need to recognise that falling inflation levels, even for groceries, don’t mean a return to lower prices. In medical terms, we will just be stabilising the patient. Shoppers will be forced to live with higher prices, and the changes they make to their buying habits may become permanent.
As humans, we regularly prove how adaptable we can be, when pushed. The pressure on prices in a climate of shrinking take-home wallets (in real terms) for most, forced us to shop differently. That meant down-trading, smaller pack sizes, more private label, and even product or category abandonment. In other words, we adapted. As we move through 2023, it will be crucial for brands and retailers to adapt and innovate to keep pace.
Understanding regional nuances and consumer preferences will be key to maintaining growth in this challenging environment. Brands that can successfully navigate inflationary pressures while delivering value and meeting consumer demands will stand the best chance of thriving in the months and years ahead when we expect supply chain and cost challenges to be the norm.
We can also expect to see further diversification of retail channels and a continued focus on delivering a value-driven shopping experience for savvy consumers. As always, this will involve leveraging technology, data, and insights to better understand customer preferences and tailor offerings accordingly.
