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2014: a gloomy year that continued in much the same way as 2013. Despite signs consumer confidence is returning with value sales rising by 3% for FMCG across Europe, manufacturers remain challenged by intense pressure on price across the region, impacting unit sales that were down by 2% across Europe. In Greece, FMCG sales remain in decline but at a slower pace, while in the UK the decrease has accelerated. France is the only country with growth in unit sales.

Retailers are reliant on manufacturers to achieve their lowest-price goals, which are now so embedded that in the UK, France and the Netherlands they are being called ‘price wars’. However, retailers will need to be more sensitive to the price pressures facing manufacturers in the coming year.

Discounters, such as Aldi and Lidl, continue to lure shoppers away from the traditional heartland of the family shop in the UK and Greece, clearly marking shoppers’ need to budget.

Continuing the downward spiral of price promotions is unlikely to keep shoppers loyal to a single store and makes them more price-sensitive than they were previously.

In this price-focused environment, manufacturers will need to find innovative ways to grow anything (volumes, value or profits) in 2015. They will need to work with retailers to mine the huge volume of data that exists on shopper behaviour and the mechanics of price and promotional effectiveness in order to find a path to growth.

The right product mix on the shelf

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By GlobalData

Meeting shoppers’ needs is the centre of the retail battleground and the supermarkets have never faced a fiercer battle to get their product mix right without damaging customer loyalty.

They know they must optimise the number of SKUs in their stores and the assortment, finding the right balance between fulfilling shoppers’ needs, clarity of the offer on the shelf and cost control, and to stop the slump in their market share as competition across retailers heats up.

Traditionally, range optimization and assortment decisions have been based on lists of best-selling lines which strip out the short-term effects of promotions.

With the availability of loyalty card data, it’s now possible to link EPOS sales trends with basket analysis and socio-demographic data to find out which products punch above their weight for particular segments of shoppers and which just need re-stocking. This will help retailers to avoid delisting shoppers’ favourite products (your brands) and assist in their goals for keeping shoppers loyal to their stores. Manufacturers can support retailers here by doing their own category analyses, ideally using the same solution as the retailer. We expect more will do this in 2015.

Enhanced experiences

The store experience should not be underestimated as a way for all retailers to provide consumers with additional value – easier and faster shopping, helpful staff, the right products on the shelf, themed events and superior service can all make a difference to shoppers’ daily lives and keep them returning to a store.

In France, the tired hypermarket format is undergoing a redesign. After the Carrefour Planet concept failure, some banners are rethinking the shopping path according to the different types of shoppers’ needs: a mini-mall that is focused entirely on an end-to-end, buy anything format. However, since shoppers do not want to spend their time in a giant vending machine, the retailer is also creating sections that cater for specific shopping trips so that it’s easy for shoppers to quickly and conveniently top up on fresh produce.

Understanding and responding to multichannel shopping

But people do not only shop in big stores any more. They are increasingly shopping across multiple formats (supermarket, hypermarket, convenience store, online or using click-and-collect services for example). Manufacturers will need to adapt their supply chains and merchandising to reach them with the most appropriate packaging format for the retail environment.

Click-and-collect services that have probably reached the ceiling in terms of expansion in France and are being introduced in the UK would be more likely to stock larger products, whereas smaller packages will be more convenient for the people who shop in the smaller format supermarkets and convenience stores, which are particularly popular in the UK.

The future for private label

Traditionally, own label has been profitable for retailers, but it is evolving. Our report Private Label in Western Economies will reveal when it is launched this month that private label does not always provide the cheapest option for shoppers. As food manufacturers continue to compete with retailers on price, the gap between the price of national brands and a retailer’s own label equivalent product is closing.

This is because more premium private label is being sold than ever before. With the three-tier private label model that exists, retailers are increasingly moving away from aggressive promotions and discounting to offering better quality for their products while keeping their prices low.

Small is the new big

But it is not all doom and gloom. Across Europe, retailers like Système U in France, Mercadona and Eroski in Spain and Coop in Italy are connecting with shoppers who care about supporting local jobs, quality produce and lowering the environmental impact of food distribution by offering local ranges in stores.

These are proving popular with shoppers. We can see some local brands, like Malo yogurts from the Brittany region of France, are extending geographical distribution to whole countries. Moreover, a recent report conducted by IRI and the Boston Consulting Group showed smaller producers are growing faster than their larger competitors. Carrefour in France is replacing private label with challenger national brands.

Manufacturers are also tapping into this trend and some already include smaller, local producers into their portfolios. Expect to see more acquisitions of smaller and local producers in the coming years as consumer goods firms recognise that shoppers in Europe do not always want blockbuster brands when it comes to food.

This could be a strategy to overcome the fierce price war; retailers differentiate themselves with different providers and shoppers cannot compare the prices. It enables retailers to have a high margin on these products. But it is a challenge for these local brands that remain challengers versus the blockbuster national brands – and they tend to have problems growing their volume sales.

The value of the shopping environment

Competing retailers in France made retail history by merging their purchasing divisions this year. Casino with Intermarché, as well as Auchan with Système U will work together to improve their ability to negotiate with suppliers. This will put new pressure on manufacturers to protect their own margins.

Retailers will want to claim their share of this repertoire shop that previously loyal customers created for themselves. They will recognise the value of their shopping environment and put new energy into providing shoppers with the most appealing mix of brands (big, small and local) and own labels, in addition to balancing premium and value offers and creating a store environment that saves shoppers’ time, including stocking products on the shelf according to the meal occasion.

Stopping the promotion escalation

Promotion is not driving volume sales any more. Despite high trade promotion pressure in most European countries, with the UK at a very high level at 54.5% of sales, volume sales are decreasing. Promotion is here to stay, but will need to be revisited: it has to be fully integrated with category management, and adapted to point of sales according to the different shoppers’ profiles. Mass promotion programs are not efficient any more. Promotions need to be local and planned in a joint business planning approach.

Working together

In an economic context where consumption growth is expected to be flat, retailers and manufacturers need to work together to find pockets of growth.

They must find a better balance between different types of shoppers, according to their needs and stores. Mass market is no longer the key for success, but will come from a ‘micro surgery’ approach. Retailers and manufacturers must work together for smart category management according to stores and banners market specifics.

By applying advanced analytics to the vast amounts of data that exist in the retail world, food manufacturers will be able to command a stronger position working alongside retailers to understand the true value of each product in a category.