European Retail in 2023 – A Year of Private Label & Consolidation

Numbers don’t lie.

A series of recent press releases from retailers, market research agencies, and investor advisory institutions tell a consistent story of two parts.

Part 1:  Consumer purchases of private label in Europe’s grocery stores grew faster in 2023 than any other year on record AND are now at higher overall levels than at any point in history.

Part 2: The number of medium-to-large grocery retailers operating in Europe’s largest markets has fallen to record lows. In some instances, there are only two or three large-scale operators in business, who are not ‘hard discounters.’

For instance, the Private Label Manufacturers’ Association (PLMA), publishes an annual yearbook using exclusive data supplied by Nielsen – LINK. In this year’s update of 17 Western and Eastern European countries, private label share of value surged from 37.0% to 38.1% in 2023. PLMA - Private Label Manufacturers Association

Similarly, Europanel, in their weekly newsletter, published data on six Western European countries which indicated that private label share of value surged from 36.0%, at the start of the recent inflationary period, to 40.9% as we approach the 2nd quarter of 2024. Europanel

We at Retail Cities regularly review investment statements given by leading grocery multiples in key countries – such as in France, Germany, or Poland. This year, our work is moving much faster as a result of having fewer retailers to review. The most obvious example is in France, where over the course of 2023 we saw two multiples split into pieces and taken over by new investors – the Casino Group and Cora (Louis Delhaize). Yes, France went from seven major multiples to just five.

What Does this Mean for 2024?

This rapid surge in the success of private label comes with consequences.

On the one hand, leading private label manufacturers will have had to cope with an unpredicted surge in demand, requiring them to ramp up production levels to full capacity, or beyond. In plain language, they would have been working their teams to the bone to get orders filled at the right quantities and then produce more for the next order cycle.

On the other hand, leading retailers will have had to cope with a rapid change in consumer habits. Consumers that might normally enter the store looking for ‘treasure hunt’ promotions on A-brands suddenly skipped past and went straight for the economy products. Many leading retailers took space allocated for secondary placements – manager’s aisle, gondola ends (end caps), and seasonal spaces – and stuffed them full of economy-oriented private label.

The result of these two changes, in our view, is that Western European retailers will be looking to source Private Label from new locations in 2024/25 – and will invest to get both the quality and quantity of products required to deliver.

For instance, if you can source coffee or cooking oil directly from Ethiopia; hazelnuts or lemons directly from Turkey; and then turn them into consumer products at the source, you just might be able to hit the quality standards Western European consumer expect AND do so at lower shelf prices than before.

Looking at instore spaces, leading grocery multiples will understand that when reallocating valuable promotional spaces to private label, that valuable funds will also be reallocated. At a general level, A-brands regularly allocate promotional funds to run big & bold campaigns with grocers – lending the grocers their teams to make sure each promotion is a success. Most private label brands do not have teams who could support a promotion in a similar way.

Cynics Step Aside

When looking at the facts, most people will take a cynical view of the current dilemma facing major European grocery multiples. They will say that Western European grocers will not succeed if they source private label from Ethiopia or Turkey while at the same time giving those products prominent instore positions at the expense of moving A-brands to less visible spaces.

We at Retail Cities say, ‘cynics step aside.’

The cynical view presumes two things that are no longer true.

First, it presumes that the quality of manufacturing in Turkey is below that of production in the EU – say in Italy or Romania.

Second, it presumes that consumers are entering stores without a clue on what they might find in terms of promotions prior to arrival.

The reality is quite different.

After a decade of growth, Turkey’s three largest retailers are private-label first grocery stores – Bim, A101, and Sok. Each has over 10,000 stores servicing a population of over 85 million mouths who care about quality foods. The quality of private label food production has leapfrogged in this decade of growth. Equally, major consumer brands have spent a decade building production facilities in emerging markets, and are now rationalizing those assets, selling back the production to local investors who might decide to convert the facilities to private label export businesses.

Likewise, consumers locked down at home in 2020/2021 have learned to look before they leap. Consumer behavioral studies indicate record numbers of consumers using their mobile phones as the number one tool to discover what’s on sale before they get to store.

Full Steam Ahead

Our advice to both A-brand and private label manufacturers is to prepare for a new age of strategic partnership in Western Europe. Just as in North American and Northeast Asia, the age of digital communication has arrived in Western Europe which means that Retail Media Networks will soon sit at the heart of any Joint Business Plan.

The transition to this new form of collaboration with leading retailers will be rockier in Europe than what we saw in North America or Northeast Asia. Europe is the home of back margin negotiations and multi-country deal making – unlike elsewhere.

Also, so much energy has been given by retailers to having ‘local’ assortment, mainly as part of a branding campaign. Right now, the race is on to find essentials at good or better quality. Often times this means working internationally – especially when coffee and cooking oil are in short supply and the main reason why a consumer picks one store over another.

Here at Retail Cities we have a simple message to the cynics:  Retail change is moving at full steam ahead.

Good luck in 2024/25 planning and keep in touch. We’re here to help.