04/01/2021 The $2.

5 Trillion Opportunity for Grocers That Are First to the Future | BCG

The $2.5 Trillion Opportunity for Grocers That Are

First to the Future
MAY 19, 2020
By Chris Biggs, Khaled Tawfik, Ameya Avasare, Henry Fovargue, Dewang Shavdia, and Gavin Parker

One thing is certain in this period of uncertainty: the coronavirus outbreak will
permanently transform the grocery retail landscape. Consumer behavior is changing
radically. In the wake of the pandemic, first-time users make up 41% of US online
grocery shoppers. And about 35% of food expenditures—more than $2.5 trillion
globally—is up for grabs as consumers shift to dining at home, experimenting with
new buying channels and formats and trying out new products. The competitive
balance is fluid as well because weaker retailers are struggling to maintain their
positions in this unprecedented economic tsunami.

To come out as winners, grocery retailers need to make bold moves now. But doing so
requires understanding how today’s crisis will impact the future—and being first to
that future by distinguishing the trends that will persist from those that are transient.
If past disruptions are a guide, certain shifts in consumer behavior become
permanent or at least endure well after a crisis has passed. For instance, in the wake
of the 2003 severe acute respiratory syndrome (SARS) contagion, the rate at which
new users signed up for online shopping in China increased fivefold, ultimately

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resulting in the world’s largest e-commerce ecosystem. And after World War II, the
number of companies producing canned goods increased by 230%; consumer demand
for food with a longer shelf life grew in the wake of civilian food shortages, which
resulted from the massive needs of the military. Many of these products and dozens
of offshoots remain popular today.

Shifts that we thought would take as many as five

years are occurring in five months.

To accurately predict what the future holds, grocers and other essential retailers need
to discard many of their prior assumptions. Shifts in the business environment that
we thought would take as many as five years—such as the rapid rise of grocery e-
commerce into more than a relatively small channel—are instead occurring in five
months. Other trends that could not have been predicted are presenting unexpected
opportunities. And all these changes are happening against the backdrop of
potentially the largest recession in several generations.

A BIG SHIFT IN FOOD SPENDING

An outsized opportunity has arisen from the drop in spending on prepared food, a
result of the emergence of COVID-19. Significantly, 35% of food expenditures is in
flux, a percentage that is likely to change a few times during the stages of the
outbreak. Restaurants have been closed, and takeout has declined. Almost no one has
been eating at their jobs because many people have been working remotely. And
with money tight and fears about leaving home rampant, consumers have been
cooking their own meals to a greater degree. Meal kit sales are up since the outbreak
—as much as 40% to 60% over 2019 sales in developed markets.

The new eating habits forged during this period are expected to outlast the pandemic
because it will probably be some time before consumers feel safe or economically
secure enough to frequent restaurants and takeout providers. In fact, 60% of
consumers in recent surveys said that they plan to reduce spending at restaurants and
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increase at-home eating even as COVID-19 restrictions are lifted. Grocery retailers
with the vision to capitalize on consumers’ changed behavior have an opportunity to
build a lasting presence in the profitable in-store or at-home dining market.

FUTURE TRENDS

To survive this uncertain period and succeed long term, grocers must proactively
design strategies around the trends and behavior that are expected to outlive COVID-
19. (See the sidebar “How the Grocery Market Will Evolve in the Wake of COVID-19.”)
Being proactive could make the difference between riding out the next few years and
emerging stronger—or failing.


HOW THE GROCERY MARKET WILL EVOLVE IN THE WAKE OF
COVID-19

Although these past few months have been a boon for essential retailers, with
sales growing by as much as 100%, the windfall will almost certainly be short-
lived. In fact, most countries are already seeing grocery growth stabilizing at
about 5% to 15% because consumers have shifted away from stockpiling. (See
the exhibit.)

the-$2.5-trillion-opportunity-grocers-first-future-exhibit-sidebar-580

The identification of coronavirus cases followed by the global lockdown

frightened consumers into panic buying, stockpiling food and other essential
items. But as the adaptation stage drags on—with the curve of new cases
flattening and isolation rules slightly relaxing, yet virus fears remaining and the
economic consequences worsening—grocery sales will decline, reflecting
sluggish consumer confidence and decreasing disposable income. Lower sales
volumes will mostly negate gains in areas such as prepared foods for at-home
dining, and overall grocery results will be constrained.

Only when COVID-19 is no longer viewed as a real threat—perhaps at a point in

the future when hoped-for virus treatments and vaccines are available—can we
expect to return to something resembling normal activities and an economic

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rebound. At that point, grocers that have already begun to implement growth
strategies consistent with new consumer behavior will be in a privileged
position.

Forecasting the future is not easy, and consumer behavior, preferences,

demographics, and the competitive landscape will differ in each market. But many
trends that grocers will have to navigate over the coming years (in addition to the
shift in food expenditures) are already emerging. They include:

• The Ascendance of Online Channels. Since the COVID-19 crisis began, e-

commerce gains for essential retailers across the world are stunning—more than
100% year-over-year growth in many regions. Grocery retailers need a strategic,
well-thought-out plan for a compelling online presence and offering that is based
on an operating model that will deliver profits as well as growth. The plan must
include a high-quality website or app, dependable logistics, fine-tuned inventory
management (to ensure availability), and reliable multichannel convenience.
Shortcuts for the sake of speed could backfire and result in consumer
dissatisfaction.

• Fluid Formats. Successful store formats will need both a superior customer
proposition and better economics. Grocers that are dependent on larger stores
may find that short-term like-for-like sales gains in bigger outlets are temporarily
covering up a longer-term decline in such stores. In addition, the increasing
popularity of online channels may further cut into the viability of larger stores. A
smart retailer strategy could be to repurpose larger stores as outlets that better fit
local customers’ needs and to develop or acquire distinctive smaller formats.
Regardless of the format, grocers will have to integrate features that reflect
changing consumer preferences, especially around safety. For instance, grocers
will have to implement hygienic practices at counters and temporarily remove
salad bars.

• Revised Consumer Attitudes Toward Brands and Products. With

pocketbooks tight and health worries a lingering shadow, retailers can gain
significant market share through differentiated private labels that target a new
consumer emphasis on value, nutrition, and health. Retailers should consider

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developing or acquiring private labels that dovetail with these new consumer
preferences.

• A Shift from Mass Promotions to Targeted Ones. In order to cope with spikes
in demand and make sure that stock is available, many grocers have simplified
their product categories and reduced their promotional intensity. By continuing
this strategy, grocers will have an opportunity to reset promotional programs,
rather than let complexity creep back in. The outcome would be more-targeted
promotions, perhaps geared toward online channels, that consider purchases and
shopping behavior.

• Supply Chain Shocks. In this crisis, most grocers’ supply chains struggled to
cope with huge fluctuations in demand. Forecasts were inadequate, leading to
stockouts of staples and inconsistent product deliveries. But despite the
significant demand shifts, retailers have done relatively well in adjusting their
supply chains and expanding capacity as the crisis progressed. Over the longer
term, grocers must fortify their supply chains even further to better withstand
the next pandemic or any other global crisis. Retailers should remap their
supplier networks, adding sufficient backups and redundancy to secure smooth
product flows no matter the conditions. Forecasts must also become more precise
by using artificial intelligence and other data management systems to analyze
internal and external demand drivers that could influence changes in customer
trends as they happen in real time.

Grocers have adjusted their supply chains, but they

must fortify them further to better withstand the
next crisis.

• Increased M&A Activities. Grocers are one of the few retailers that will have
relatively strong balance sheets in the near term, giving them the opportunity to
acquire skills, new store formats, online capabilities, and customer pools by
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purchasing undervalued assets. This has already begun to occur; global M&A
volume has declined 20% to 30% across all industries, but it is flat in the retail
segment. For most grocers, the competitive environment in the future will be
altered by consolidation and the emergence of new digital rivals.

• A Bigger Role for Societal Impact. Grocers have been pivotal in serving
communities during the crisis, leading the way in protecting their employees and
shoppers. They have provided desperately needed products and food to
consumers through safety-proofed physical outlets, home deliveries, and
contributions to food banks. Grocers should build on the momentum toward
greater community involvement by permanently embedding total societal
impact policies into local and global activities, an approach that has been shown
to deliver tangible gains for both communities at large and long-term business.
Grocers also have the opportunity to differentiate themselves and gain
competitive advantage by embedding sustainability precepts (such as low waste,
low plastic) into their operating models.

MAKE BOLD MOVES NOW

With so much at stake for grocery retailers, and with a high level of uncertainty for
the next few years, long-term success stories will come from grocers that make bold
moves now to be first to the future. Past crises have taught us that early actors win.
The relative return on investment from a major retail transformation when started
preemptively in a downturn can be as high as 50%. And companies that expanded
business opportunities during a downturn often report purposeful growth that is 8%
above those that retrenched.

Retailers need to proactively take actions across three priorities to win the future:

• Reshape channels. Build an attractive e-commerce model that can operate at

scale, with the assumption that online sales could grow to as much as 10% to 15%
of revenue, compared with their low single-digit precrisis share. Innovate in
physical spaces because the unit economics of stores will undoubtedly change.
Think through how to reallocate space, downsize large stores, and develop new
formats.

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• Reimagine offerings. Make changes to the value proposition to better suit

customers’ changing needs. This action requires understanding new behavior,
such as more at-home dining, and building stronger customer relationships
through targeted personalized marketing and differentiated private labels. Stay
ahead of shifting trends on an ongoing basis by better monitoring customers’
preferences and needs, rather than view this crisis as a one-off reset.

• Reposition the business. Fuel growth by reallocating resources in ways that

reflect future customer behavior and trends; reset costs using a blank-page
approach. Build digital capabilities to support business decisions using advanced
analytics. Pursue strategic M&A, improve supply chain resilience, and embrace
social impact and sustainability policies.

When faced with the need to take such significant action, many retailers pursue what
appears to be the easiest, most logical path: they sequence their crisis response. (See
the exhibit.)

But for grocery retailers this type of strategy would be unwise. The landscape is
changing too rapidly, and customers are realigning their behavior too radically to be
reactive. The dynamics of the industry, buffeted so violently by the COVID-19
pandemic, require retailers to be aggressive. In today’s world, and the one to come as
the virus ebbs, only parallel decisive actions will produce winning results. In other
words, if a retailer is solely focused on stabilization now and plans to prepare for the
rebound later, it will likely be too late.

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Authors

Chris Biggs
Managing Director & Senior Partner; Global Leader, Retail Sector
London

Khaled Tawfik
Managing Director & Partner
London

Ameya Avasare
Project Leader
Chicago

Henry Fovargue
Principal
Chicago

Dewang Shavdia
Managing Director & Partner
Boston

Gavin Parker
Managing Director & Senior Partner
Sydney

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