European Nongrocery Retail: Navigating Challenges and Unlocking Growth in a Transforming Landscape
The last five years have brought about an era of economic turmoil and further accentuated European competition for nongrocery retailers. In most key markets, inflation-adjusted sales remain below their 2019 levels. Furthermore, the margins have been additionally squeezed due to price wars induced by generalist marketplaces and discounters. In addition, there were now more selective consumers who insisted on frictionless omnichannel experiences and much higher sustainability standards. This two-edged sword-force of economic headwinds and changing consumer tastes has driven nongrocery retailers to innovate, transform, and find new areas of growth.
The State of European Nongrocery Retail
The nongrocery retail sector in Europe has not yet recovered from the macroeconomic uncertainty of the last five years. The nominal turnover of the sector grew 2.3% yearly between 2019 and 2023, whereas sales deflated with inflation declined by -1.8%. Sales declines were highly concentrated in some categories, such as furniture and DIY, but more resilient in others, such as pet care. Most European markets are expected to grow at a modest 0.6% per year adjusted for inflation through 2028, although category and geographic dispersion will be significant.
Countries with high disposable incomes, such as Germany and the United Kingdom, have a larger share of expenditure on nongrocery items. In other countries, however, notably France, where grocery purchases take up a disproportionate share of household budgets-discretionary spending is slighter. And even within product categories, behavior varies. German households disproportionately spend on furniture, Polish consumers on electronics, and Italians on fashion.
Three Key Trends Shaping the Industry
Despite the uneven recovery, four persistent trends are reordering the landscape for European nongrocery retailers:
1. Macroeconomic Challenges
These pressures-including persistent inflation, geopolitical tensions, and the aftershocks of the COVID-19 pandemic-drive up costs and cause supply chain disruptions. Such high prices have forced consumers to trade down, delay discretionary purchases, and buy only necessary items. This prudent behavior has whacked categories such as electronics, furniture, and sporting goods particularly hard, while pet care and beauty perform moderately better.
2. Omnichannel Strategies
The pandemic accelerated online adoption, and although it has decreased at the end of the pandemic, online channels remain an important growth driver: in 2023, online retail as a whole grew by 3.3%, driven by sporting goods and pet care. More than half of European consumers now browse and buy nongrocery items through a combination of online and in-store channels. The growth of omnichannel shopping has set high expectations for convenience and seamless integration across digital and physical touchpoints.
3. Evolution of Consumer Preferences
The European consumer continues to be stingy with spending, especially on discretionary categories. Consumers are looking for value for money- promotions, discounts, and trustworthiness-and show a low degree of loyalty to specific retailers. At the same time, sustainability, a trend of growing interest, is watched by more than one-third of consumers when it comes to the environmental impact of their purchases. However, sustainability remains a secondary driver compared to price and convenience.
Six Value Themes for Nongrocery Retailers
To succeed amidst this shifting landscape, European non-food retailers will need to be visionary regarding revenue growth, profit improvement, and business model renewal. There are half a dozen themes that are specifically key enablers of both growth and transformation:
1. Diversification of Revenue Streams: Additional revenue can be captured by targeting underserved markets, entering adjacent categories, and offering complementary services. For example, beauty retailers can expand into wellness services, while sports retailers might extend into rental and repair services.
2. Online Development: A strong digital presence is no longer a choice. The leading retailers go on to invest in digital capabilities such as AI-driven personalization and inventory visibility for a better customer experience. They also make their supply chains efficient enough to enable speedy delivery and click-and-collect options.
3. Improvement in Customer Loyalty: In such a market, with low loyalty, retailers would have to create a value proposition differentiated enough to retain customers. The retailers can focus on enhancing convenience, offering proprietary products, and use data-driven insights to customize the promotions and recommendations.
4. Emphasizing Sustainability: Sustainability is a growing differentiator. Retailers that move toward circular business models, reducing their environmental footprint and increasing transparency about their sustainability, will be better positioned to capture a growing segment of ecologically aware consumers.
5. Enhancing Cost Efficiency: Most nongrocery retailers still struggle with profitability. This can be accomplished by streamlining processes, renegotiating supplier contracts, and embracing automation to cut costs without sacrificing quality of service. Open-to-buy systems and other contemporary planning technologies can improve inventory levels and reduce markdowns.
6. Operating Model Modernization: Finally, retailers must modernize their operating models to remain agile and competitive. This includes investing in digital transformation, fostering cross-functional collaboration, and aligning organizational structures with strategic priorities.
Opportunities in Nongrocery Retail
Despite the challenges, the European nongrocery sector offers pockets of growth. In real terms, pet care has been the only category to outsell the 2019 sales levels, attributed to the strong attachment of consumers to their pets. Beauty and personal care is another segment where renewed growth is supported by increased spending on self-care.
E-commerce and discounters continue to outpace the overall market, with Allegro-like platforms and retailers such as Action continuing to see double-digit growth in certain categories. The rise of circular offerings in electronics and sporting goods also allows retailers to differentiate themselves further and attract cost-conscious, sustainability-minded consumers.
The Way Forward
For European nongrocery retailers, the route to growth is via a complicated and competitive balancing of short-term pressures with long-term transformation. The road to growth can be plotted by considering questions such as: Are we fully leveraging omnichannel capabilities to meet evolving customer expectations? How do we expand into adjacent categories or services to further diversify our sources of revenue? Are we making meaningful progress toward sustainability while ensuring cost competitiveness?
So, what does a path toward operational efficiency and funding for future investments look like?
The road ahead will be bumpy, but innovation, alignment with the priorities of consumers, and optimization of their operations will position European nongrocery retailers for success. As the industry continues to change, bold decision-makers will find themselves in the best positions to capture new opportunities.
