Key Takeaways from McKinsey's "The State of Grocery in North America 2023" Report

McKinsey's latest research has identified five key themes and trends that hold the key for Grocery executives to thrive in 2023 and beyond. The article also offer insights into how leading retailers like Kroger are navigating the industry challenges and opportunities.

Here are five (food for thought) themes for 2023:

• Increased economic pressure driven by inflation – The good news for grocery retailers is that inflation fell to 3.2% in July, well below its 2022 peak of 9.1%. Still, the threat hasn’t gone away entirely: food prices still rose 4.9% year over year through July 2023, fueled by a 7.1% increase in food-away-from-home costs during this period. According to McKinsey’s Consumer Pulse Survey 2023, 66% of consumers have sought out less-expensive goods, an increase of four percentage points from 2022.
• Resilient e-commerce leads to increased digital engagement – In May 2023, e-commerce stood at 7.2% of all grocery spending, more than 35% above pre-pandemic levels. Consumers were initially drawn to online grocery out of necessity, but as they have become more familiar with these channels, their preferences have shifted toward e-commerce.
• Accelerating pressures on profitability – Rising capital expenditures have also contributed to margin pressure for both grocery retailers and consumer packaged goods (CPG) companies. Over the past decade, this increased spending has outpaced revenue growth. The capital expenditure–revenue ratio was 23% lower in 2022 than in 2012, highlighting the divergent paths of these metrics. From 2018 to 2022, EBITDA margins for grocery retailers and CPG companies decreased 0.4 and 1.5% points, respectively.
• Upheaval in the labor market – While the overall workforce has largely rebounded, grocery retailers continue to struggle with talent attraction and retention. In early 2023, 44% of frontline retail workers were considering leaving their jobs in the next three to six months. Even though the quit rate has fallen sharply since then, CEO survey respondents cited labor shortages as the biggest challenge (along with inflation) for the grocery industry in 2023. Today, the retail industry has approximately four million more open positions than candidates searching for work.
• Sustainability as part of core business operations – McKinsey 2022 survey found that grocery retail CEOs expected consumers to prioritize sustainability in their purchasing behavior. Other stakeholders—regulators, investors, and nongovernmental organizations (NGOs)—are also elevating sustainability in grocery. For instance, the regulatory environment for grocers is set to become more complex: by 2030, more than 15 sustainability-related regulations are expected to go into effect, and they will complicate the business and operating environment. The majority of the regulations are related to food waste (for example, ensuring food waste doesn’t end up in landfills), packaging (such as the phaseout of single-use plastics), and increased restrictions on labeling.

Here are five (food for thought) trends along with key strategic alignment questions:

• Ongoing pressure to deliver value to consumers – What steps can retailers take to enhance the focus on value perception, including the role of private brands in increasing value to the consumer?
• Elevated personalized experience across channels – How can retailers create a seamless omnichannel experience to deliver a personalized offer and messaging at the right time and in the right place?
• Broader business diversification through ecosystems – What growth areas beyond the core can broaden the retailer ecosystem of services and offerings to provide more value to customers and build capabilities for the business, and how can they reimagine the operating model for long-term profitability?
• Acceleration of generative AI – Which generative AI use cases should retailers prioritize, and how do they create a test-and-learn culture to get the most out of this technology?
• Sustainability as a driver of top and bottom-line results – What actions do retailers need to take to accelerate transition to renewable power, establish recycling solution coalitions with other grocers, and amplify messaging around ESG-related claims?

In summary, grocery retailers that address these trends would be better positioned to meet consumers where they are and provide offerings that deepen loyalty—all while keeping pace with an ever-changing industry.