The Continuous Decline in Profit Margins for European Supermarkets: Challenges and Strategies

In recent years, European supermarkets have been facing a continuous decline in profit margins, a phenomenon exacerbated by factors such as high inflation, reduced purchasing power, and increased competition from discounters and online retailers.

A recent McKinsey report predicts that this trend will continue in the coming years, putting additional pressure on food sector retailers, notes RetailDetail.

Significant Industry Differences

Between 2009 and 2023, European supermarkets recorded an average EBITDA margin of 7.1%, significantly lower than other industries.

For instance, non-food retailers had an average margin of 22.9%, consumer goods producers reached 18.5%, and the Euronext 100 index reported a growth of 15.2%.

Causes of Margin Contraction

Food inflation has significantly impacted consumer behavior. In 2022, household costs increased faster than incomes, prompting consumers to opt for cheaper products, private labels, and shop more frequently at discounters.

While total food sales grew by 2.9% in Europe, this growth was driven by a 10.7% increase in prices, while volumes dropped by 3.6%, with a 3.6% "downtrading" effect.

Fierce competition from discounters such as Lidl and Aldi has forced traditional retailers to adjust their pricing strategies to stay competitive.

For example, Lidl saw a sales increase of 22.6% in 2022, reaching €81.8 billion. However, profitability dropped to its lowest level since 2012, with EBIT down by 6.6% to €2.6 billion and a contraction of the margin by 250 basis points to 2.3%. This is partly due to investments in pricing and decreased sales of non-food products.

Adaptation Strategies

To counter these challenges, retailers are adopting various strategies. Some chains, such as Auchan, have implemented cost-reduction and staff-cutting measures, while others, like Ahold Delhaize, have posted strong performances in Europe due to cost control and a focus on local markets.

In the fourth quarter, Ahold Delhaize reported an operational margin of 4.4% in Europe, thanks to strong performances in Belgium and a focus on cost control.

Additionally, some companies are exploring new sales channels and digital innovations.

For example, Lidl became the first supermarket chain in the UK to open a store on TikTok, launching a special promotion for sports and fitness enthusiasts.

Outlook

Despite these efforts, challenges persist. Nestlé, for instance, reported a decline in both revenue and profit in the last year, and the new CEO warns that investments will continue to affect profit margins this year.

Nestlé’s revenue decreased by 1.8% to CHF 91.35 billion (€96.8 billion), and net profit dropped by 2.9% to CHF 10.88 billion (€11.5 billion).

Conclusion

European supermarkets are facing a continuous decline in profit margins, driven by economic and competitive factors. To remain competitive, they must adopt innovative strategies, optimize costs, and adapt to changing consumer behaviors.