Strategy& Grocery Retail Outlook 2025

Authors: Harald Dutzler, Stefan Eikelmann, Andreas Spaene, Dr. Marco Tietze, Hannah Hofer, Angela Rosenberger, Tim Bergander

The grocery retail industry in 2025 stands at a crossroads: Retailers must navigate an environment where cost-consciousness dominates despite decreasing inflation, yet consumers demand health, sustainability, and regional authenticity. Technological advancements, especially in AI and automation, are reshaping the concept of competitiveness. At the same time, unpredictable challenges such as extreme weather events and political instability require organizations to remain highly adaptable and vigilant. This dynamic landscape presents not only significant challenges but also unique opportunities for those willing to adapt and lead. From cost leadership to AI-driven transformation, this article explores the strategic imperatives that will define success in grocery retail for the year ahead.

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1. ?Be the one who offers best value for money

Despite a slightly improving economic outlook, the previous years have taken their toll on consumers’ wealth by reducing disposable income and thus shifting consumption priorities, making cost-consciousness a prevailing factor for retailers. Nearly two-thirds of EU countries report fewer middle-class households, driving a large part of shoppers to favor private labels and discount retailers as they make more deliberate purchasing decisions, demanding value without compromising on quality. In a survey conducted in mid-2024, 43% of consumers stated they are spending less on out-of-home dining and aim to cook more at home, while 41% claimed to plan before shopping to manage spend more consciously. Moreover, as 76% of EU consumers indicated "trading down" to cheaper alternatives, retailers can capitalize on shifting spend from out-of-home dining by offering more affordable options that meet high expectations.

To achieve price leadership and address consumer price sensitivity, retailers should focus on strategically expanding private label offerings. Balancing quality and affordability, private labels not only appeal to budget-conscious shoppers but also provide valuable cost insights to enhance supplier negotiations. Complementing this, the introduction of "value lines" — essential staples with minimal packaging at market-leading prices — can further attract price-sensitive consumers and position retailers as a trusted partner for consumers managing tighter budgets, thus reinforcing loyalty and long-term satisfaction. To stay competitive, retailers can also utilize dynamic, AI-based pricing tools like price crawlers and web scraping, coupled with electronic shelf labels, to monitor competitors and adjust prices in real time. Higher-margin items can be utilized to balance the impact of products sold at lower price points, ensuring competitiveness while maintaining overall profitability. Retailers like Amazon demonstrate how this approach can be highly effective, particularly during high-demand periods such as Black Friday, where staying competitive requires precise and responsive pricing strategies. Additionally, in-store promotions and flash sales can encourage larger purchases which cater to the needs of bigger families, while promoting conscious buying to help minimize waste. These strategies aim to balance the customer’s cost-consciousness and engagement with the perception of value, supporting price leadership.

2. Be the one who champions health and regional identity amidst cost-consciousness

While cost-consciousness dominates, selected products fulfilling certain criteria such as health-conscious eating or local heritage are seeing increased consumer investment. Healthier choices are becoming a priority, driven by greater awareness of the link between diet and well-being. Over 50% of EU consumers consider sugar content a critical factor when making purchase decisions, with 30% actively seeking low-sugar claims in food and beverages. Functional foods and low-sugar options are therefore gaining popularity, further fueled by governmental influence through regulation (e.g., sugar-sweetened beverage taxes, imposed in an increasing number of countries). Additionally, GLP-1 medications such as Ozempic and Wegovy which influence appetite are already impacting the market, with a reported 6–9% reduction in grocery spending.

Sustainability has also emerged as a critical factor in grocery shopping decisions. Half of EU shoppers now prioritize sustainably-sourced products, marking a 9% increase from the previous year. Despite inflationary pressures, these consumers are willing to pay an average 9.7% premium for sustainable options. This duality underscores a profound shift in values, as shoppers seek cost-effective products that align with their ethical and environmental priorities. ?Demand for local and heritage products is similarly on the rise, driven by a desire for authenticity and community connection. One in three shoppers considers local sourcing a key factor when deciding where to shop. These shifts reflect a growing recognition of quality and sustainability as worthwhile investments, presenting opportunities for retailers to differentiate through strategic curation and clear value communication.

To align with consumer demand (57.9% expressing the intention to purchase organic products in discount stores), retailers need to integrate health-focused options into their assortments, ensuring accessibility for various consumer segments by balancing premium organic and functional food offerings with value-focused alternatives. Moreover, monitoring regulatory trends, such as sugar taxes, and proactively adjusting the product mix to include affordable healthy options ensures compliance and sustains consumer trust. The growing popularity of sugar-free products further underscores the importance of catering to evolving preferences.

Expanding assortments to include over-the-counter (OTC) supplements, such as Vitamin C during winter months, offers supermarkets an additional revenue stream while addressing the growing consumer focus on health and wellness. This approach is particularly relevant for larger retailers, where tailored health-related products can enhance customer engagement, drive incremental sales, and strengthen the retailer's positioning within the competitive health and wellness market.

3. Be the one who builds resilience through cost leadership and local strength

In 2025, grocery retailers are under immense pressure as energy prices remain volatile, labor costs rise, and raw material prices fluctuate due to geopolitical instability and extreme weather events. Stricter EU regulations, coupled with proposed US tariffs on imports, are further increasing operational costs and squeezing profit margins. Meanwhile, consumer expectations for quality, sustainability, and affordability remain high, forcing retailers to navigate a complex landscape where cost efficiency and resilience are paramount. The strain on supply chains, driven by climate-related disruptions, has caused price surges in key commodities such as butter (+83%), olive oil (+50%), and Arabica coffee (+75%). These challenges necessitate a dual focus on building local strength and mastering cost leadership to remain competitive.

To address these challenges, retailers have several levers available, each designed to mitigate risks and improve resilience:

Local sourcing is emerging as a cornerstone of supply chain strategy, allowing retailers to reduce exposure to global market volatility and tariffs while meeting consumer demands for sustainable and culturally authentic products, which strengthens brand loyalty. However, this shift requires a deliberate and analytical sourcing strategy. Retailers must adopt a portfolio view to prioritize nearshoring for products most affected by disruptions, ensuring efforts are targeted and effective. At the same time, operational efficiencies and economies of scale are critical to offset the higher costs of local sourcing, ensuring affordability for price-sensitive consumers.

In addition to sourcing strategies, financial tools like hedging can help retailers to protect margins and manage raw material cost volatility. Instruments such as futures, options, and swaps provide price stability for key commodities. While futures provide certainty by locking in fixed prices, options provide flexibility to purchase at favorable rates, and swaps exchange floating prices for fixed rates over time, mitigating risks and safeguarding profitability.

Consolidation and acquisitions are another way to strengthen supply chains and enhance efficiency. For example, ALDI SOUTH’s acquisition of 400 Southeastern Grocers stores expanded its US presence while streamlining regional distribution. Similarly, SpartanNash’s acquisition of 49 Fresh Encounter stores strengthened localized supply chains. Beyond expanding footprint and control, retailers are leveraging operating model efficiencies like automation and Global Business Services (GBS) to reduce costs and improve productivity. Automation in logistics and shared services in finance and procurement are key enablers, ensuring that consolidation efforts yield not just growth but sustainable, long-term cost leadership. Advances in energy efficiency, such as smart energy management systems, on-site renewable energy, and next-generation refrigeration technologies, further reduce operating expenses and support sustainability goals, offering a competitive edge as energy costs remain volatile.

Vertical and horizontal integration offers further opportunities to stabilize operations and optimize costs. The Schwarz Group (LIDL and Kaufland) serves as a prime example, advancing its vertical integration strategy through its subsidiary, Schwarz Produktion KG. The acquisition of ARTiBack (now Bonback) in 2024 further expands the reach of Schwarz Produktion KG, which already includes assets such as the Erfurter Teigwaren pasta factory (now Bon Pasta)—Germany’s largest pasta factory, acquired in 2022—along with other companies specializing in packaging, coffee, and ice cream production. These strategic initiatives provide the group with greater control over production and distribution processes, enabling its retailers to respond more effectively to evolving market conditions.

4. Be the one who wins in non-food

The European non-food retail sector faces intense pressure from ultra-low-cost online platforms like Shein and Temu, as well as physical discount retailers like Action. These players are reshaping the market through aggressive pricing, rapid market penetration and trend-driven assortments that capture customer attention. Platforms like TikTok amplify their success by creating hype and making non-food categories exciting and accessible. Action’s 27.8% sales growth in 2023 (€11.3 billion in Europe) and Shein's 68% sales growth (€7.7 billion in Europe) demonstrate their market impact. Meanwhile, chains like Lidl have fallen short of their non-food sales targets of 15%, highlighting the growing gap. Between 2022 and 2024, consumer spending at non-food discounters rose 23%, while food discounters experienced a 13% decline in non-food sales.

However, the competitive landscape is beginning to shift. The EU has removed the €150 duty-free customs exemption for non-EU goods which previously allowed platforms like Shein and Temu to bypass import duties on low-value shipments, and thus systematically exploit tax exemptions by packing items into multiple smaller shipments. Together with stricter compliance measures under the Digital Service Act (DSA), this is expected to slow Shein and Temu’s growth by 2–5% annually, creating opportunities for European retailers to reclaim market share.

Regaining market share requires grocery retailers to rethink their approach. The first step is understanding the customer base. It is not enough simply to offer non-food products—retailers need to identify what motivates existing food shoppers to additionally purchase non-food, and tailor their assortments accordingly. This could include offering seasonal homeware, affordable on-trend apparel, or cookware that ties into existing grocery offerings. Creating convenience and relevance for these shoppers can help integrate non-food purchases into their regular habits. At the same time, grocery retailers also need to inject energy into their non-food offerings. Shein and Temu succeed by creating buzz through fast product cycles and social media hype. European players should adopt similar tactics, leveraging trends, accelerating time-to-market, and using platforms like TikTok and partnerships to reposition non-food as vibrant and desirable, thus attracting new customers who might not otherwise visit their stores. A recent example of this is Lidl and Netto's introduction of the viral Stanley Cup as a limited-time promotion. The campaign generated significant buzz, with long queues forming outside stores on the promotion's launch day as customers eagerly awaited the doors opening.

Looking beyond Europe, the US market also presents compelling opportunities. Proposed 100% tariffs on Chinese imports threaten Shein and Temu’s price advantage, opening the door for European brands positioning themselves as high-quality, reliable alternatives. Companies like Inditex have shown how to succeed in this space by emphasizing craftsmanship and quality. Collaborating with US distributors can help European retailers establish themselves quickly and capitalize on the shifting landscape. By acting decisively and embracing innovation, European grocery retailers can reclaim their place in the non-food sector, transforming a challenge into a growth opportunity.

5. Be the one who leads the AI-driven transformation

The rapid adoption of AI, automation, and digital solutions is transforming grocery retail, making technology essential for operational efficiency and enhanced customer experience. Retailers that fail to embrace these innovations risk falling behind as competitors leverage AI-driven strategies to gain a competitive edge. Currently, 42% of global retailers and 64% of large retailers are already using AI across various functions, with adoption accelerating as 80% of retail executives plan to implement AI within three years. AI’s impact is evident in both operational and financial results. Walmart’s automation of 15 out of its 42 distribution centers is projected to drive $130 billion in sales over five years without increasing headcount, underscoring the financial advantages of AI-powered automation. AI is also revolutionizing customer experience through hyper-personalization, which uses data to tailor shopping experiences. Personalized strategies have been shown to increase conversion rates by 20–30%, offering a significant competitive advantage. Meanwhile, Generative AI is enhancing supply chain management, as demonstrated by Tesco’s use of Roambee’s tools to improve inventory accuracy, optimize deliveries across 3,000 locations, and reduce dwell times.

To thrive in this rapidly evolving market, retailers must prioritize AI-driven innovation across operations, customer engagement, and supply chains. Strategic partnerships with tech giants like Microsoft or Google can help retailers integrate advanced AI capabilities, transforming core business functions. Scaling AI investments is critical and should be supported by company-wide task forces, along with workforce reskilling programs to foster collaboration between human teams and AI systems.

AI-powered automation and supply chain optimization offer further significant opportunities to streamline operations and enhance efficiency. Advanced inventory management systems can monitor shelves in real time and trigger automated replenishment alerts, ensuring optimal stock levels while reducing out-of-stock situations. Building on this, dynamic pricing systems leverage AI to analyze demand patterns, competitor activity, and inventory levels, enabling retailers to adjust prices in real time. This not only cuts food waste by up to 21% but also delivers significant cost savings and enhances sustainability efforts.

Predictive analytics further amplifies these benefits by improving demand forecasting, helping retailers minimize waste and reduce costs through more accurate inventory planning. Generative AI adds another dimension by enabling the creation of products that align with emerging consumer trends, keeping retailers ahead of the curve in innovation. Together, these AI-driven tools ensure operational efficiency, sustainability, and agility, positioning retailers to thrive in an increasingly competitive market.

AI-driven personalization is another key strategy to build customer loyalty and engagement. Loyalty programs and recommendation engines that deliver tailored promotions and rewards can meet individual preferences, fostering deeper customer relationships and increasing retention. Personalized shopping experiences also set brands apart in an increasingly competitive market.

Conclusion

In 2025, grocery retail success will be defined by adaptability, resilience, and a willingness to embrace transformation. Retailers must strike a delicate balance: offering affordability without sacrificing quality, championing health and sustainability, and leveraging local strength to mitigate global uncertainties. At the same time, integrating AI and automation is no longer optional, but essential to maintain efficiency and competitiveness.

The challenges ahead are significant, but so are the opportunities for those ready to lead. By aligning strategies with shifting consumer priorities and investing in innovation, retailers can secure a competitive edge in a rapidly evolving market.

Are you ready to be a transformation leader in 2025? Connect with us to explore tailored solutions and gain insights to shape your path to success.

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Sources: Brandwell (2024), Business Insider (2024), Consumerwise (2024), Deliverect (2024), Echo24 (2022), Eurofound (2024), European Agriculture (2024), Financial Times (2024), Grocery Dive (2024), HDE (Konsummonitor Nachhaltigkeit, 2024, survey of 1,500 consumers), La Palette Rouge (2023), NielsenIQ (2024), NVIDIA (State of AI in Retail and CPG, 2024), PwC (Voice of the Consumer Survey, 2024), PYMNTS Intelligence (2024), Reuters (2024), Stuttgarter Nachrichten (2024), Süddeutsche Zeitung (2024), Supply Chain Brain (2024), Supply Chain Magazine (2024), The Irish Sun (2024), UC San Diego, Rady School of Management (2024)

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