Retail and Growth, Marketing & Sales Practices

How retailers in Europe

can navigate rising
inflation
With inflation at record highs throughout Europe, retailers are under
more pressure than ever. Those that act quickly and follow a holistic
playbook can be well positioned to thrive.
This article is a collaborative effort by Kevin Bright, Gokmen Ciger, Franck Laizet, Karin Lauer, and
Andres Monge, representing views from McKinsey’s Retail Practice.

© Tom Werner/Getty Images

December 2022
 Inflation in Europe reached record heights
this fall, with more than half of the 19 eurozone
countries seeing double-digit growth in consumer
prices. Inflation rates in both Germany and the
United Kingdom soared over 10 percent, while in
Italy it approached 13 percent, its highest level in
four decades.
Across the continent, double-digit inflation has
disrupted people’s lives and livelihoods. Street
demonstrations and strikes in several countries are
just some of the ways that people are protesting
cost-of-living increases. And, of course, there’s pain
for consumers at the cash register.
Unfortunately, there are no indications that things
will improve anytime soon. Although the European
Central Bank has raised interest rates to curb
inflation, it also predicts that consumer prices will
continue to rise. Moreover, devaluation of the euro
and the pound against the US dollar has put further
pressure on manufacturers and retailers that need
to pay their suppliers in US dollars, and several
countries are now facing a potential recession.
What’s a retailer to do amid this growing economic
pressure? Although many have opted to delay major
moves, it’s now clear that companies need to act
quickly to adjust for elevated inflation levels while
preparing themselves for long-term resiliency.
In this article, we examine the current state of
inflation in Europe, take a quick dive into rapidly
Companies need to act quickly
to adjust for elevated inflation
levels while preparing themselves
for long-term resiliency.
2 How retailers in Europe can navigate rising inflation
changing consumer behavior and sentiment, and
draw lessons from previous periods of economic
volatility. Finally, we describe a holistic approach
that can help retailers think about how to
simultaneously tackle inflationary challenges and
build long-term resilience.
Economic winds of change
With the cost of food going up more than
15 percent, gas prices skyrocketing, and wages
increasing by more than 5 percent in the past year,
Europe is seeing prices soar at rates not seen
since the 1970s. The underlying drivers of current
inflation are well documented. The continent is
still feeling the effects of the pandemic; the war in
Ukraine has exacerbated supply disruptions and
resulted in steep price increases in food, fertilizers,
and natural gas; labor is hard to find and costs
continue to rise.
The outlook does not seem promising. For
starters, inflation may not yet have reached its
peak. Economists at the International Monetary
Fund (IMF) predict that global inflation will remain
above 6 percent for at least another year. And
39 percent of economists surveyed by Reuters
in August 2022 said they expected inflation to
stay high beyond 2023. Economists from central
banks, the IMF, and the OECD predict that it will
be another year or two before prices stabilize
(Exhibit 1).
Web <2022>
<EuropeRetail>
Exhibit 1
Exhibit <1> of <5>

Inflation throughout Europe will continue to rise in the near future.

Eurozone and UK inflation rate, 2019–25, %
14 14
UK forecast (A)
12 12

UK (B)
10 10

8 8

6 6

EU (B)
4 4
UK inflation
2 2
EU forecast (A)
EU inflation
0 0

–2 –2

2019 2020 2021 2022 2023 2024 2025

Source: Bank of England; European Central Bank; International Monetary Fund; OECD; UK Office for Budget Responsibility

McKinsey & Company

Also, central banks have raised interest rates, which
will further tighten consumers’ ability to spend
and retailers’ ability to manage costs. In October
2022, the European Central Bank raised rates
by 0.75 percentage points, its third consecutive
interest rate hike. These rate hikes lead to less
disposable income for households with variable-
rate mortgages, car loans, and revolving credit card
debt. They also raise the cost of capital, energy, and
labor for businesses, putting retailers with higher
debt-leverage ratios at particular risk and making
capital improvements more costly to finance.
Additionally, consumer confidence in Europe has
plummeted, falling to levels even lower than those
in the first months of the COVID-19 pandemic
(Exhibit 2). In recent months, consumer confidence
has even fallen below 92 percent in some eurozone
countries. Our latest Europe Consumer Pulse
Survey shows that consumers are pessimistic, with
43 percent expressing doubts about economic
recovery. Fifty-eight percent of respondents cite
inflation as their top worry, overwhelmingly ahead
of other concerns such as the war in Ukraine,
climate change, or unemployment.
As a result, people are reducing or drawing down
on savings. Fifty-five percent of consumers in
Europe say they’ve reduced their savings in recent
months, and one-third say they’ve dipped into
savings to cover living expenses; 80 percent of our
Europe Consumer Pulse Survey respondents say
they have changed their shopping behavior—for
example, by trying private-label brands, switching

How retailers in Europe can navigate rising inflation 3

 Web <2022>
<EuropeRetail>
Exhibit 2
Exhibit <2> of <5>

Consumer confidence in Europe has fallen to levels below those seen in the
early months of the COVID-19 pandemic.
Eurozone and UK consumer confidence, 2019–221 Italy Germany Spain
France All eurozone UK

104 104

102 102

100 100
104
102
100
98
96
94
92
90

98 98

96 96

94 94

92 92

90 90

2019 2020 2021 2022

Eurozone and UK Dec 2019–Dec 2020 Dec 2020–Dec 2021 Dec 2021–Oct 2022
consumer confidence,
% change 2.3
3.1
2.1
Italy 1.6 1.1 1.7

France
Germany –0.8
–1.7 –1.7
All eurozone –2.2 –2.9
Spain –4.0 –3.6
–5.2 –4.6 –5.1
UK –5.7
–8.2
Indicator >100 indicates a boost in consumer confidence toward future economic outlook; indicator <100 indicates a pessimistic attitude toward future
1

economic outlook.
Source: OECD

McKinsey & Company

stores, or shifting from brick-and-mortar to online History shows that resilient retailers—those that
shopping (Exhibit 3). adopt a through-cycle mindset, as opposed to those
that batten down the hatches and dramatically
Retail resiliency during reduce spending—are much more likely to come out
the last downturn stronger from a crisis.
Amid such economic instability, how can retailers We analyzed aggregate company data of
preserve margins and offset for currency volatility? the 80 largest European retailers by market

4 How retailers in Europe can navigate rising inflation

Web <2022>
<EuropeRetail>
Exhibit 3of <5>
Exhibit <3>

More than 80 percent of consumers in Europe have changed or are planning to

change their shopping behavior.

Eurozone and UK consumer change in shopping for groceries and other essentials,1 % of respondents
Have done in past 3 months Plan to do in next 3 months

Try a private-label brand 50 15

Switch to a different brand from normal 35 13

Shop at a different retailer/store from normal 27 21

Switch from a brick-and-mortar store to online 14 9

Try a new digital shopping method2 11 9

Shop on a different website from normal 11 12

Switch from online to a brick-and-mortar store 10 18

Use a new shopping method3 9 7

Any new shopping behavior,4 % of respondents

Sept 2022 80 9

June 2022 74 10
Apr 2022 68 12

1
Questions: “In the past 3 months, which of the following have you done when purchasing groceries and other essentials (eg, toiletries, cleaning products)? How
likely are you to change your shopping behavior in the next 3 months when purchasing groceries and other essentials (eg, toiletries, cleaning products)?” Rated
from 1, “not likely at all,” to 6, “extremely likely.” “Extremely likely” and “likely” answers are shown in an aggregated view. 2For example, ordered groceries via
app. 3For example, pickup and food delivery subscription. 4Applies if a respondent has chosen ≥1 of other categories.
Source: McKinsey Europe Consumer Pulse Survey, Sept 23–Oct 2, 2022, n = 5,156 (from France, Germany, Italy, Spain, and UK), sampled to match European
general population aged ≥18

McKinsey & Company

capitalization to see how they performed during the
2008 financial crisis and its aftermath. When we
segmented this group into resilient and nonresilient
companies—separating out those in the top quartile
of TSR—we saw that the companies willing to invest
in longer-term growth and market share reaped
a longer-term payoff by the time the economy
recovered (Exhibit 4). By 2017, the TSR performance
gap between resilient and nonresilient retailers was
277 basis points (Exhibit 5).
Resilient retailers built operational and
financial optionality during the downturn cycle.
Specifically, they moved faster and pushed
harder on productivity, which lowered costs while
preserving capacity for growth. Second, they
made strategic divestments during the downturn
that freed up capital for acquisition of distressed
and undervalued assets that were core to driving
growth. Finally, they saw opportunities to win
market share over the medium to long term and
continued to invest in transformation and growth. As
a result, they outperformed peers through the 2008
downturn and saw significant sales growth during
the recovery.

How retailers in Europe can navigate rising inflation 5

 Web <2022>
<EuropeRetail>
Exhibit 4of <5>
Exhibit <4>

Resilient European retailers saw greater revenue and earnings growth than
their peers did in the aftermath of the 2008 global financial crisis.

European retailer revenue,1 2007–11, European retailer EBITDA,1 2007–11,

index (100 = 2007 financial year) index (100 = 2007 financial year)

135 135
DOWNTURN RECOVERY DOWNTURN RECOVERY
130 130

125 125
Resilient2
120 120

115 115
Resilient2
110 110
Nonresilient3
105 105

100 135
130
125
120
115
110
105
100
95
90
85

100
Nonresilient3
95 95

90 90

85 85
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

In 80 largest European retailers by revenue.

1

Retail companies in top quartile of TSR by sector.

2

Retail companies in bottom quartile of TSR by sector.

3

Source: MSCI; Corporate Performance Analytics by McKinsey; McKinsey analysis

McKinsey & Company

A holistic inflation playbook communicating pricing, promotions, and product

Building on these lessons, retailers can adopt a
holistic approach to manage the current period
of economic uncertainty. To do this, companies
can set up a centralized “inflation management
office,” bringing in leaders from different functions
such as finance, supply chain, HR, commercial,
and operations to work in an agile way and unify
efforts. By fostering rigorous transparency, this
control tower can function as a facilitator for fast
and decisive actions—and position retailers for
outsize growth following a downturn—by focusing
on the following:
— Commercial effectiveness. Retailers can focus
on value to consumers by resetting and clearly
assortment decisions.
— Resilience in supply chain and sourcing. Quick
fixes aren’t sufficient. Instead, retailers will need
to completely overhaul their relationships and
network of suppliers.
— Productivity in G&A functions. Retailers can
improve efficiency in G&A by running a leaner
organization.
Commercial effectiveness
Commercial effectiveness requires an orchestrated
response that blends a deep understanding of how
the market and customers interact; actions to fine-
tune pricing, promotions, assortment strategy, and

6 How retailers in Europe can navigate rising inflation

Web <2022>
<EuropeRetail>
Exhibit 5of <5>
Exhibit <5>

Resilient European retailers gave far better returns to shareholders than their
peers did in the years following the 2008 global financial crisis.

European retailer TSR,1 2007–17, index (100 = 2007 financial year)

550 550
+277
500 500

450 450
Resilient²
400 400

350 350
+114
300 300

250 250
S&P 500
200 200
+10 basis points
150 150
Nonresilient3
100 100

50 50
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1
In 80 largest European retailers by revenue; TSR defined as combination of share price appreciation and dividends paid.
²Retail companies in top quartile of TSR by sector.
3
Retail companies in bottom quartile of TSR by sector.
Source: MSCI; Corporate Performance Analytics by McKinsey; McKinsey analysis

McKinsey & Company

communications; and an operating model that uses
data to make forward-looking decisions. When
commercial levers are managed well, companies are
more likely to preserve and protect their consumer
base while minimizing negative impact on the
bottom line. Retailers should consider focusing on
the following:
— Pricing. Retailers could decide where to invest
to create more affordable options and greater
price coverage for consumers (for example,
through key-value-item pricing, everyday-value
pricing, and entry-price-point assortment)
and where to gain margins to cater to higher-
end customers, such as by developing super-
premium and sustainable products. Retailers
can also strategically balance investments
and price increases across categories to keep
prices lower and more competitive. They should
regularly track price perception and make the
real-time changes required to protect it, since
customers’ willingness to pay has been distorted
by the rapidly changing economy. Currently, only
15 to 20 percent of retailers have some form of
dynamic pricing capabilities.
— Promotions. Companies could review their
price-to-promotion mix by category to ensure
that investments for specific products and
categories are yielding adequate volume and
margin. To do this, companies might consider
jettisoning complicated multilever promotions
and instead streamlining and simplifying them
into initiatives that more directly influence

How retailers in Europe can navigate rising inflation 7

 prices. For example, retailers can use data
science to identify the promotions—typically
half of them—that truly create value. Another
approach might be to use customer data to
offer personalized promotions for loyalty
program members.
— Assortment. Retailers could drive more value by
ensuring availability of the right mix of products,
simplifying choices for consumers, accelerating
product rotation at point of sale, and protecting
margins by offering more premium offerings.
They can invest where the customer is headed,
with optimal entry price points for lower-ticket
items and higher-margin offerings, all while
reducing assortment and duplication in the
middle. This will have a strong impact on end-to-
end cost efficiency.
— Communication. Retailers could benefit from
a strong focus on value in their customer
communications. Simple, straightforward
marketing campaigns that articulate product
benefits in relation to price are critical to
earning shoppers’ trust. Companies that
ensure their messages are consistent across
both online and offline channels and that
launch well-integrated campaigns all the way to
the point of sale will be more likely to earn trust.
For example, grocery chain Lidl Switzerland
launched its “Typical Lidl” media campaign this
year with a series of humorous ads to educate
and update customers on price comparisons
and value versus competition.
Resilience in supply chains and sourcing
Nearly three years into the pandemic, supply
chain disruptions and distribution network
bottlenecks are still affecting product availability.
Additionally, the latest round of price increases
has created tensions between retailers and
consumer-packaged-goods suppliers—in some
cases, stopping supply altogether. In July 2022,
for example, one company temporarily stopped
supplying certain products to Tesco after the
two companies could not come to an agreement
over pricing. But properly managed and derisked
8 How retailers in Europe can navigate rising inflation
supply chains and sourcing could enable retailers
to achieve 5 to 10 percent cost savings. Retailers
can focus on the following:
— Sourcing strategy. Retailers can diversify
sources of supply to become more resilient.
For example, they can consider resetting
the countries of origin for their products,
increasing nearshoring, or becoming more
climate resilient. Some retailers have joined
sourcing alliances to partner for growth.
A recent study from INSEAD found that
buying alliances in the retail sector can help
meaningfully lower consumer prices.
— Supply chain automation. By exploring digital
solutions and automation in warehouses and
stores, retailers can alleviate labor challenges,
redeploy employees to higher-value activities,
and avoid unnecessary product touches to
optimize for greater speed and efficiency.
For example, earlier this year, UK grocer
Ocado Retail deployed 2,000 robots able to
pick two million food items a day in a London
fulfillment center. Enhanced analytics can
enable companies to make better and faster
inventory decisions and create a leaner
operating model.
— Fact-based negotiation. Retailers can be more
methodical in negotiating with vendors. By
understanding the impact of price increases
for raw materials on actual cost, companies
can have more fact-based discussions with
suppliers. Retailers can also use advanced
analytics to understand the financial trade-offs
of commercial decisions across assortment,
price, promotions, and assets in a more granular
way, and deploy sophisticated databases to
better track supplier capacity. For example,
Ocado launched Crunch Grocery Insights, a
service that enables a single, shared, real-
time view of retail performance between
Ocado and more than four hundred suppliers,
offering primary sales data, product availability,
promotions, and web analytics. This platform
enables far richer and data-driven negotiations.
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Productivity in G&A functions
With targeted efforts to increase productivity
in G&A areas such as procurement and finance,
retailers can better navigate inflation. Our analysis
shows that companies that activate the following
productivity improvement initiatives could achieve a
4 to 5 percent cost reduction:
— Zero-based organization. Many organizations
have room for overhead improvements
through elimination, outsourcing, reduction,
or simplification of both core and noncore
operations. Taking a true zero-based
organizational approach—starting from first
principles—can yield a shift in mindset to
prioritize strategic optimums and survival
minimums. Companies can create a model to
move quickly between these two structures,
based on their needs, with the support of
technology. To do this, retail leaders can
adopt a zero-based budgeting mindset,
rethinking budgets based on incentives to
keep costs contained.
— Indirect procurement. Procurement should
be viewed more expansively, extending far
beyond driving down costs and becoming
instead a true strategic partner to enhance a
company’s operations. Ambitious companies
might consider elevating the role of the chief
procurement officer to provide more visibility
and tighter collaboration with a retailer’s
management team.
— Process automation. Instead of leaning
into distributed functions and separate
teams managing digital and physical retail,
companies could consider options like shared
services, offshoring, or nearshoring. Retailers
could tighten up their processes by viewing
customers through an integrated, omnichannel
lens, with teams managing commercial
processes across channels in tandem. For
example, consumer electronics retailer
CECONOMY is syncing logistics through new
IT systems to improve omnichannel service
levels, optimize stock, and improve last-mile
costs. This way, the company can quickly
redirect capacity and resources to better
serve physical and e-commerce consumers
simultaneously at optimal service levels based
on their individual needs.
With inflation likely to persist for some time,
retailers need to prepare a longer-term action plan
to offset the negative effects of rising prices while
proactively preserving their balance sheets. As in
the past, companies that prepare adequately are
more likely to come out stronger from the economic
downturn. Although responding to inflation won’t be
easy, taking a structured and holistic approach can
maximize the likelihood of resiliency, growth, and
long-term success.

Kevin Bright is a partner in McKinsey’s London office, Gokmen Ciger is an associate partner in the Istanbul office, Franck
Laizet is a senior partner in the Paris office, Karin Lauer is a consultant in the Frankfurt office, and Andres Monge is a
capabilities and insights specialist in the Lisbon office.
The authors wish to thank Claus Heintzeler, Steve Hoffman, Richard Mayfield, Maria Miralles, and Alessandro Turco for their
contributions to this article.

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How retailers in Europe can navigate rising inflation 9