Food inflation has peaked in Europe and a new report by consultants McKinsey expects inflationary pressures to ease this calendar year.
The report which looks at grocery retail trends for this year, warns shoppers are currently focused on cost, sourcing cheaper food bought through private labels and discounters.
Trends for the year are ongoing margin and cost pressures, growth in online shopping, investment in automation and technology and suppliers collaborating to improve supply chain sustainability.
Inflation in the European Union increased from 2.9% in 2021 to 9.2% in 2022, peaking at 11.5% in October, but food inflation in some countries was twice as high, prompting many consumers to trade down the quality of products bought.
This saw EU discounters grow their market share 1.4% relative to 2021.
As inflation eases, the report found consumer confidence is returning but is still below pre-pandemic levels.
The authors questioned 47 EU grocery company chief executives and found 44% expect 2023 to be worse than 2022,.
A third thought it will be just as challenging and only 23% expect the coming year to improve.
“Respondents agree that the key themes for 2023 are rising costs and margin pressure, downtrading, and an increased focus on private labels.”
Saving money on food remains a top priority for both high and low-income consumers in 2023, with many planning to spend less on premium, healthy, and sustainable products.
“According to our survey, 53% of consumers say they want to save more money on food and 36% want to buy more private labels than they did in 2022.”
Grocer profitability was hit hard in 2022 as were margins, cash flows and the expectation is that the cost of capital will remain high in 2023, the survey found.
Retailers are having to manage costs, but economies of scale are likely to be needed for smaller grocery retailers to survive.
McKinsey expects the e-grocery sector to return to moderate growth after stagnating in 2022, with meal deliveries likely to dominate.
Retail media spending, marketing to consumers at or near their point of purchase, is increasing in the EU and expected to double by 2025.
Investing in the automation of stores and warehouses is expected to grow 13% a year in areas such as automated picking and depalletising.
While there is currently a dip in consumer demand for sustainable products, the report says decarbonisation of grocery lines is picking up speed, driven by Government legislation, the expectations of investors, and a shift to green debt financing.
For example, Carrefour is seeking supplier commitment to reduce their carbon emissions by 20 megatons by 2030 and Tesco is partnering with a bank to offer preferential borrowing rates to suppliers that disclose carbon data.
Kesko recently launched an app through which consumers can set and monitor climate targets for their shopping baskets.