May 2022
Navigating the
market headwinds:
The state of grocery
retail 2022
North America
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Cover image:
© Edwin Tan/Getty Images
1
State of Grocery North America
Contents
80
Pushing granular decisions through
analytics
6
The state of grocery in North America
19
The next horizon for
grocery e-commerce: Beyond the
pandemic bump
32
Tech-enabled grocery stores: Lower
costs, better experience
37
Achieving protable online grocery
order fulllment
45
Growing beyond groceries: The
ecosystem expansion
52
Grocers’ sustainability opportunity in
transforming the food system
64
Crisis or opportunity? How grocers
can win the talent war
72
The state of grocery retail in Mexico
3
State of Grocery North America
Foreword
More than two years after the start of the COVID19 pandemic, the grocery industry continues to
face disruption. While some themes shaping the sector—such as the supply chain and the growth of
e-commerce—have resonated throughout this period, additional headwinds are once again testing
the resilience of grocers and the food industry as a whole. Executives at North American grocery
retailers have expressed some uncertainty about market conditions in 2022, pointing to lower profit
margins during the pandemic, increased price sensitivity, greater competition, and rising inflation
that is forcing consumers to grapple with an increased cost of living. These trends, as well as global
events, are likely to only have a greater impact on consumer confidence and spending.
Moving further into 2022 and beyond, grocers will be faced with increased pressure on margins and
pricing as they navigate the need to cater to broader consumer tastes and demands. Omnichannel
complexity will continue to rise, with consumers seeking more seamless experiences and
manageable fulfillment fees.
We recognize the significant uncertainty facing the industry. All grocery executives are grappling
with a series of questions: As consumer behavior continues to evolve, how can grocers best cater to
new trends such as health and wellness and value? E-commerce has become table stakes, but how
can they continue to enhance the omnichannel experience while improving profitability? How much
investment will they need to make in automation, and how can they harness technology to change
the operating model for stores and employees? As sustainability gains traction, what is the right way
to begin the journey or build on existing plans?
This report aims to answer those questions. Its contents are part of McKinsey’s broader global
series The State of Grocery Retail, an annual publication covering three continents (including Asia–
Pacific, the European Union, and North America, with a new article specific to Mexico). Our goal is
to frame major trends and issues for CEOs seeking to stay ahead of market shifts. To offer a holistic
view of industry dynamics, insights and analyses from our colleagues are complemented by surveys
and interviews with grocery executives.
We wish to thank FMI for its collaboration in developing these perspectives and in supporting
the engagement of CEOs from leading North American grocery and consumer packaged goods
companies. We hope the report will offer new insights that can help grocers, and those in the
broader food industry, remain competitive during these unprecedented times.
Becca Coggins
Senior partner
North American leader,
Retail Practice
Sajal Kohli
Senior partner
Global leader,
Retail and Consumer
Packaged Goods Practices
Bill Aull
Partner
North American leader,
Grocery Practice
4 State of Grocery North America
Editors
Operations lead
Bill is a partner in McKinsey’s Charlotte oce and a leader within
the Retail and Consumer Practices for the Americas. He now leads
McKinsey’s North American grocery practice. He has been with McKinsey
for the last 12 years, and his client work has spanned across both retail
and consumer-packaged-goods sectors with a focus on transformation
topics—commercial strategy, organization restructuring, merchandising
(pricing, promotion, assortment, and vendor negotiations), store
operations, and supply chain. He has worked across numerous retail
channels and formats and consumer categories.
Sajal is based in Chicago and leads McKinsey’s global work in the retail
and consumer-goods industries. In more than 25 years of management
consulting, Sajal has counseled leading global retail and packaged-goods
clients as they set growth strategies and face challenges from the changing
international landscape and from domestic-market shifts caused by
digitalization, consolidation, and new entrants. He has served retail and
consumer-goods clients across Asia, Canada, Europe, Latin America, and
North America. He serves retail clients across multiple formats, including
hypermarkets, pure e-commerce players, grocers, restaurant chains,
department stores, and leading consumer-goods companies across food,
consumer-electronics, personal-care, beauty, and other categories. Sajal
focuses on working with senior leaders and their management teams to
drive growth and commercial and operations transformations across both
retail and consumer-goods companies. Over the last few years, he has been
spending a lot of time with organizations on the potential and implications
of tech enablement, including advanced analytics, articial intelligence, and
their implications on the future of work.
Eric Marohn is an expert with McKinsey who has been with the company
for 22 years. He is based in Chicago, IL, focusing his practice on the North
American grocery market. His expertise is in merchandising, marketing,
sales, formats, and consumer research, with extensive knowledge across
North America. He focuses on grocery, food, and consumer trends; corporate
strategy; and growth transformation in international and US-based markets.
Bill Aull
Sajal Kohli
Eric Marohn
5
State of Grocery North America
Contributors
Cara Aiello
Consultant
Boston
Bassel Berjaoui
Associate partner
Paris
Andreas Ess
Partner
Zurich
Tyler Harris
Associate partner
Washington D.C.
Nikola Jakic
Associate Partner
Toronto
Nicholas Landry
Associate partner
Vancouver
Jaya Pandrangi
Partner
Chicago
Patrick Simon
Partner
Munich
Tom Youldon
Partner
London
Manik Aryapadi
Partner
Dallas
Vishwa Chandra
Partner
San Francisco
Ricardo Ferreira
Consultant
Libson
Jake Hart
Director of
Solution Delivery
Cleveland
Jonatan Janmark
Partner
Stockholm
Eric Marohn
Knowledge expert
Chicago
Beatriz Rastrollo
Associate partner
Madrid
Raphaël Speich
Partner
Paris
Sara Bondi
Associate partner
Pittsburgh
Bill Aull
Partner
Charlotte
Gokmen Ciger
Associate partner
Istanbul
Sebastian Gatzer
Partner
Cologne
Jenny Hu
Associate partner
Toronto
Bartosz Jesse
Partner
Zurich
Rahul Mathew
Associate partner
New York
Joshua Reuben
Consultant
Toronto
Sarah Touse
Partner
Boston
Fernando Ayala
Consultant
Mexico City
Becca Coggins
Senior partner
Chicago
Prabh Gill
Associate partner
Vancouver
Karina Huerta
Constultant
Mexico City
Sajal Kohli
Senior partner
Chicago
Varun Mathur
Partner
San Francisco
Daniel Roos
Associate partner
Cologne
Kumar
Venkataraman
Partner
Chicago
Steven Begley
Partner
New York
José Ricardo Cota
Associate partner
Mexico City
Maura Goldrick
Partner
Boston
Holger Hürtgen
Partner
Dusseldorf
Alexandra
Kuzmanovic
Consultant
Chicago
Bill Mutell
Partner
Atlanta
Ricardo Sanromán
Partner
Mexico City
Janice Yoshimura
Consultant
Chicago
Acknowledgments
Special thanks to Janiece Lehmann, Becca Coggins, Daniel Laeubli, and Julia Spielvogel. We would also
like to thank Beatriz Rastrollo and Karin Ringvold for their work in conducting the consumer survey for the
European report and laying the foundation for this one.
Thanks to Leff for providing editorial and design services for this report.
6 State of Grocery North America
The state of grocery in
North America
The emergence of new challenges will force grocery retailers to adapt their
strategies and operations. Executives should focus on five priorities in 2022.
© Jacob Fergus/Getty Images
by Bill Aull, Becca Coggins, Sajal Kohli, and Eric Marohn
7
State of Grocery North America
Over the past two years, grocery
retailers have had to reassess and adapt
nearly every facet of their operations.
Changes to the grocery landscape will
continue, shaped by both macroeconomic
factors (such as supply chain challenges
and ination) and mercurial customer
preferences. To keep pace, retailers should
focus on a handful of trends: the rise of
the value-conscious, healthier-eating
consumer; elevated consumer expectations
for omnichannel; an increased emphasis on
sustainability; strategic workforce planning
and investment in tech and analytics; and
the growing importance of ecosystems
and partnerships.
Looking back on 2021
In our conversations with CEOs, “volatile”
was the word used most frequently to
describe 2021. Since 2019, the market
has grown at an impressive 15 percent,
1
a rise that was the product of increases
to both prices and volumes. But these
top-line numbers belie the roiling retail
landscape beneath. Signicant shifts
in share of stomach, supply and labor
shortages, unprecedented investments in
e-commerce, and rising ination created
widespread disruption for grocers.
Acceleration of pandemic-related
consumer trends
According to recent McKinsey consumer
insights, the trends that took hold at
the start of the pandemic have gained
momentum. Total e-commerce sales
have grown nearly 60 percent since
the beginning of the pandemic, though
penetration rates have leveled o. At the
same time, consumers are making fewer
trips and visiting a smaller number of
stores: they are 20 percent more likely to
go to just one grocery store a week. As
such, consumers are increasingly seeking
out one-stop shops and have expressed an
interest in buying everything in one place
even more frequently in 2022.
Meanwhile, the food-at-home market,
which had been slowly losing share to
food away from home before 2020, has
surged 8.7 percent, four times its historical
growth rate. The move to food at home
coincides with a growing emphasis on
healthier eating.
Together, these trends suggest consumer
behaviors have fundamentally changed—
and grocers should take notice.
A steadying but still-fragile supply chain
Disruptions to supply chains during the
pandemic have increased out-of-stock
rates by upward of 15 percent, compared
with historical rates of 5 to 10 percent.
2
Issues over the past two years have been
attributed to a host of factors, including
bottlenecks at ports, labor shortages, and
huge, unanticipated spikes in consumer
demand. The good news is that some of
these challenges, such as overseas vessel
delays and container shortages, will pass.
Others—such as labor shortages and the
ongoing shift toward automation—have
been a long time in the making and will
require a sustained commitment to resolve.
Signicant shocks to the labor market
The grocery industry employs nearly three
million people in the United States.
3
Every
aspect of the industry’s people model—
1
Total grocery sales across traditional grocery, supercenters, mass market, drug stores, convenience stores,
clubs, discounters, and online channels inclusive of drug spending; Kantar LLC, Copyright 2022. All rights
reserved 2022.
2
Kelly Tyko, “Grocery stores still have empty shelves amid supply chain disruptions, omicron and winter storms,”
USA Today, January 12, 2022.
3
“Supermarkets & grocery stores in the US - Employment statistics 20022027,” IBISWorld, updated December
29, 2021.
8 State of Grocery North America
corporate, in-store, and across every part of
its operation—is experiencing an upheaval
caused by a rise in absenteeism and
attrition as well as by employee demands
for exible labor scheduling. The workforce
participation rate plunged dramatically
during the pandemic; as of August 2021,
it was still 1.6 percentage points below
prepandemic levels. The accelerating
adoption of automation (such as the
increased use of self-checkout, image
technology to perform in-stock checks, and
automated picking in warehouses) is also
changing the workforce dynamic.
Emergence of unprecedented ination
At the beginning of 2022, ination exceeded
7 percent, fueled by historic rises in labor,
freight, and commodities costs during the
latter half of 2021. Today’s inationary
environment continues to stem from a blend
of cyclical, structural, and global supply
chain issues. The recognition of supply chain
1.8%
4.2%
2018–202010–18
1.3x
Capital expenditure CAGR,¹ %
Source: McKinsey analysis of annual reports from grocery retailers
Grocers signicantly increased their capital spending to keep pace with a
changing ecosystem.
 For a collection of 16 publicly traded hypermarkets and super centers, food retailers, and general merchandise stores.
Exhibit 1
Grocers significantly increased their capital spending to keep pace
with a changing ecosystem.
challenges among suppliers, retailers, and
consumers has increased these groups’
receptiveness to higher prices—a fortunate
development for retailers because no
single player can absorb the full magnitude
of price increases and remain protable. In
2021, grocery retailers raised prices even
while doing their best to mitigate costs.
One CEO noted, “Ination is exceeding
customer income growth. If cost increases
are just passed through, it will lead to lower
sales and prots and a greater migration
of customers to EDLP
4
grocers. It will be
critical to balance when to absorb the cost
ination versus passing some or all of it
through to optimize business performance
and retain customers.”
Greatly increased capital investment
The grocery ecosystem has begun to
change dramatically as new partnerships
and entrants have challenged the status
quo. Grocers increased their capital
4
Everyday low pricing.
9
State of Grocery North America
With continued uncertainty
around the COVID-19
pandemic and grocery ination
the highest it has been in ten
years, consumers have become
more focused on shopping for
the best value in an eort to
stretch their dollars.
1. Rise of the value-conscious,
healthier-eating consumer
With continued uncertainty around the
COVID19 pandemic and grocery ination
the highest it has been in ten years,
consumers have become more focused on
shopping for the best value in an eort to
stretch their dollars (Exhibit 2). Moreover,
90 percent of CEOs expect increasing
pricing pressure from consumers to
continue in 2022. When choosing where
to shop in the year ahead, 45 percent of
consumers indicate they plan to explore
more ways to save money, a level virtually
expenditures at an amount 1.3 times their
historical levels thanks in part to an inux of
funding (Exhibit 1). Consider that venture-
capital rms raised $10 billion for grocery
start-ups in the rst six months of 2021
alone. As investments continue to pour in,
we expect these enhanced capabilities to
disrupt the food ecosystem.
What’s ahead for 2022
Grocers will face ve trends that can broadly
be described by changing consumer tastes
and the responses necessary to keep pace
with them.
10 State of Grocery North America
Grocery shopping attitudes
in 2021 vs 2020,
3
% change
+42
+21
+23
+11
–22
0
+38
+21
–7
–6
Grocery shopping attitudes
in 2022 vs 2021,
1
% change
Net intent,
2
%
+42
+17
+21
+13
–19
+1
+35
+22
–7
–4
3
10
8
8
29
16
4
4
27
21
52
63
63
71
61
67
57
70
53
62
45
27
29
21
10
17
39
26
20
17
Buy imported products
Buy groceries in large stores, where
I can buy everything in one place
Focus on healthy eating and nutrition
Buy food from fresh bars and deli
counters in stores
Actively research best promotions
Switch to less expensive products
to save money
Look for ways to save money
when shopping
Buy private-brand products
instead of known brands
Buy groceries online
Pay a higher price to get an
en
vironmentally friendly product
8
7
9
30
18
3
6
26
21
53
63
63
71
62
64
55
67
54
64
45
29
30
20
8
18
42
27
20
15
Buy groceries in large stores, where
I can buy everything in one place
Focus on healthy eating and nutrition
Buy food from fresh bars and deli
counters in stores
Buy private-brand products
instead of known brands
Buy imported products
Actively research best promotions
Look for ways to save money
when shopping
2
Switch to less expensive products
to save money
Buy groceries online
Interact with store employees at
ch
eckout vs self-checkout
Stay the same IncreaseDecrease
Source: State of Grocery Consumer Survey, November 19–December 7, 2021 (n = 3,007) and January 13–25, 2021 (n = 4,691); sampled
and weighted to match the US general population over 18 years old
In 2022, consumers will look for ways to save money while focusing on
healthier eating and nutrition.
 Question: Think about 2022. Are you planning to do more, less, or about the same of the following?
 Question: Which of the following statements best describes your attitudes toward grocery shopping in 2021 as compared with 2020?
 Net intent is calculated by subtracting the percent of respondents stating decrease from the percent of respondents stating increase.
Exhibit 2
In 2022, consumers will look for ways to save money while focusing
on healthier eating and nutrition.
11
State of Grocery North America
unchanged from the year before. In
contrast, 29 percent intend to actively
research the best promotions more
frequently.
Consumers are balancing their emphasis
on value with an interest in healthier
foods. About 40 percent of consumers
expect to increase their focus on healthy
eating and nutrition. Consumers intend
to purchase more regional and local
goods (41 percent), high-protein options
(34 percent), and oerings that are free
from certain ingredients (33 percent),
along with other naturally healthy
options (Exhibit 3). This combination of
saving money and eating healthier, more
nutritious foods is more prevalent among
millennial and Gen Z consumers, in part
because they are still waiting for their
nances to return to normal.
The emergence of this younger, value-
conscious, and healthier eater in 2022
creates opportunities for grocers to tailor
their value-priced private-label products to
include healthier oerings.
2. Elevated consumer expectations
for omnichannel
Online buying is here to stay. Customer
preference for online and delivery orders
increased by around 50 percent during the
pandemic and is expected to rise further
in 2022 (Exhibit 4). Consumers continue to
be drawn to the convenience and relative
safety of online shopping, an attraction that
becomes even more appealing as delivery
costs decline and promotions increase.
The main barriers to online shopping are
consumer preferences for personal contact
in stores and expensive delivery charges,
The emergence of this
younger, value-conscious, and
healthier eater in 2022 creates
opportunities for grocers
to tailor their value-priced
private-label products to
include healthier oerings.
12 State of Grocery North America
though consumers are less concerned
about these issues today than they were
in 2020 (Exhibit 5). Consumers also prefer
home delivery when grocery shopping
online, marking a change from the
preference for click and collect in 2020.
To shift more spending to online,
successful grocers will invest to create a
more seamless, personalized experience.
Here are four key trends to keep in mind:
Spend preference by food type
in 2022 vs 2021,
1
% change
Net intent,
2
%
+39
+30
+27
+26
+25
+24
+23
+22
+22
+31
+20
+20
+16
+16
+16
+10
+9
+9
+9
+6
+3
4
6
6
6
6
5
6
7
5
6
7
11
13
9
14
17
15
17
19
19
57
62
61
62
63
64
67
66
64
59
68
66
62
58
66
62
57
61
57
56
59
41
34
33
32
31
30
28
28
29
36
26
27
27
29
25
24
26
24
26
25
22
Lactose free
Vegetarian
Gluten free
Products with low-emissions
footprint
Meat alternatives
Organic
Low fat
Animal welfare friendly
Packaging-free or
minimized packaging
Low calories
Uses 100% recyclable packaging
Low sugar
"Free from" environmentally
hazardous ingredients or materials
"Free from" articial ing
redients
High protein
Environmentally friendly
2
Dairy alternatives
Regional or local
Naturally healthy
Vegan
Halal products
IncreaseStay the sameDecrease
Source: State of Grocery Consumer Survey, November 19–December 7, 2021 (n = 3,007) and January 13–25, 2021 (n = 4,691); sampled and weighted to match
the US general population over 18 years old
Consumers expect to spend more money on food with specic attributes, such
as high protein and natural ingredients.
 Question: Thinking about 2022, do you expect that you will spend more, the same, or less on following types of food products as compared to 2021?
 Net intent is calculated by subtracting the percent of respondents stating decrease from the percent of respondents stating increase.
Exhibit 3
Consumers expect to spend more money on food with specific
attributes, such as high protein and natural ingredients.
13
State of Grocery North America
Customers expect a consistent value
proposition across online and in-store
channels. Shoppers are engaging in
omnichannel across a variety of shopping
missions—weekly grocery shopping and
midweek top-ups, for example—and they
expect similar assortments, pricing, and
promotions, among other factors, across
channels.
User experience on apps is becoming
more important. Consumers increasingly
value the ability to search for products
quickly and build their baskets while
shopping online. Winning grocers
have responded by investing in their
e-commerce capabilities and forging
partnerships with tech companies (for
example, Albertsons with Google) to
improve user experience.
Loyalty and personalization are more
important than ever. Grocers are improving
their share of wallet with omnichannel
shoppers by expanding their capabilities
in personalized promotions and product
recommendations.
Grocers are also experimenting with
shopper engagement in omnichannel. For
example, some are using mobile product
scanning to get product information.
In addition, scan-and-go commerce is
changing the way shoppers interact with
grocers both in stores and on apps.
Online and delivery orders increased by about 50 percent during the pandemic
and are expected to rise further in 2022.
Source: State of Grocery Consumer Survey, November 19–December 7, 2021 (n = 3,007) and January 13–25, 2021 (n = 4,691); sampled and weighted to match
the US general population over 18 years old
 Question: How did your preference to shop across the following channels change during the COVID-19 outbreak?
 Question: In the next 12 months, do you expect to shop more, less, or the same in the following channels?
 Net intent is calculated by subtracting the percent of respondents stating decrease from the percent of respondents stating increase.
Consumer expectations for
channel change in 2022,
2
% change
+4
+5
+2
0
Consumer channel change during
COVID-19 outbreak,
1
% change
Net intent,
3
% change
+42
+42
+41
–14
10
13
12
29
38
32
35
56
52
55
53
15
In a physical store or food market
Online (scheduled delivery)
Online (click and collect)
Instant delivery
IncreaseStay the sameDecrease
23
20
25
13
50
55
48
74
27
25
27
13
In a physical store or food market
Instant delivery
Online (scheduled delivery)
Online (click and collect)
Exhibit 4
Online and delivery orders increased by about 50 percent during the
pandemic and are expected to rise further in 2022.
14 State of Grocery North America
Grocers are also starting to see the upside
from omnichannel; the omnichannel
shopper spends two to four times more
than the in-store customer. Now the focus
has shifted from protecting in-store sales
to supporting business both online and in
stores through omnichannel excellence.
3. Increased emphasis on sustainability
Several developments—the success of the
UN Climate Change Conference (COP26)
in Glasgow, the dip in emissions at the
beginning of the pandemic, and the uptick
in climate-related natural disasters—have
made many consumers more aware of
the consequences of their purchasing
behaviors. This emergence of socially
conscious consumers is forcing Fortune
500 companies to act.
Companies beyond those known for their
environmental, social, and governance
(ESG) policies—such as Ben & Jerry’s,
FedEx, and LEGO—are increasingly
making more decisions based on social
and environmental issues compared with
2020. In our survey, grocery CEOs largely
expect consumers in 2022 to place a
Cost, quality, and merchandising authority are keys to increasing grocery
e-commerce.
Quality and freshness of food remain obstacles for consumers in online grocery shopping
Source: State of Grocery Consumer Survey, November 19–December 7, 2021 (n = 3,007) and January 13–25, 2021 (n = 4,691); sampled and weighted to match
the US general population over 18 years old
 Question: What prevents you from buying groceries online more frequently? Indicate all applicable reasons.
Factors preventing consumers from buying
groceries online more frequently,
1
%
Change
in
2021, %
–15
–14
–3
–1
+1
–6
0
–1
–4
–1
31
25
21
17
16
14
13
10
10
10
The possible delivery times
are unsuitable for me
The selection is not
large enough
The minimum order values
are too high for me
Too often I receive products that have
not been ordered or that are damaged,
or there are products missing on delivery
My desired products are
not available
Dicult to nd products
I am looking for
I prefer personal contact
in stores
The products are too
expensive for me
Quality and fresh
ness of
fresh foods not sucient
The delivery charges are
too expensive for me
Exhibit 5
Cost, quality, and merchandising authority are keys to increasing
grocery e-commerce.
15
State of Grocery North America
greater emphasis on sustainability across
all dimensions (for example, packaging and
supply chain) and make dierent choices
because of it.
The industry has experienced a
groundswell of interest and activity
(Exhibit 6). Five years ago, Walmart was
the only retailer with ESG targets based
on public science; today, grocers, apparel
manufacturers, quick-service restaurants,
and stores of all formats are seeking
assistance with their ESG strategies. For
example, Kroger aims to end hunger and
eliminate waste in its communities by 2025,
and Albertsons has committed to making
100 percent of its Own Brands packaging
recyclable, reusable, or industrially
compostable by 2025.
5
Many retailers
recognize the connection between Scope
3 emissions (the result of activities from
assets beyond a company’s operations,
such as vendors) and a global supply
chain and are, accordingly, reevaluating
operations and ESG simultaneously to
enhance resilience while decreasing their
carbon footprint.
Global retailers with public science-based
targets, number of retailers
Source: McKinsey analysis
The emergence of socially conscious consumers is compelling Fortune 500
companies to act.
Companies are engaging with the public on environmental, social, and governance (ESG) factors at scale
76%
of consumers buy or boycott
brands based on values
$30 trillion
sustainably invested globally,
up 10 times from 2004
>75%
of global GDP is generated
in countries with net-zero
carbon mandates in law or
policy development
44%
of Fortune 500 companies
are integrating ESG into
core business strategy
1
4
18
41
2020201920182017
Exhibit 6
The emergence of socially conscious consumers is compelling
Fortune 500 companies to act.
5
“Kroger celebrates zero hunger | Zero waste momentum in 2020,” Kroger, April 20, 2021; “Plastics & packaging,”
Albertsons, accessed May 5, 2022.
16 State of Grocery North America
4. Strategic workforce planning and
investment in tech and analytics
Automation and AI will aect millions of
jobs in the coming years, and retail is
one of the most susceptible industries:
for example, 54 percent of current work
activities in retail can be automated. By
2030, estimates suggest retail could
capture 35 percent of this automation
potential, resulting in the displacement
of approximately six million full-time
employees.
6
Leading organizations have already made
bold bets to keep pace with changing
workforce requirements. Several
organizations are leading the way in eorts
to reskill their employees:
Kroger has a tuition reimbursement
program that oers up to $21,000 to
part- and full-time associates. More than
6,000 associates have beneted from this
program.
7
Giant Food Stores partnered with Central
Penn College to oer a $1,000 scholarship
for its employees to attend the college.
Giant also provides $5,250 a year in tuition
reimbursement to full-time associates.
8
Publix oers varying levels of tuition
reimbursement for education options that
enhance an employee’s ability to perform
in a current or future role, ranging from
$4,400 for two-year community colleges
to a total of $16,000 for four-year colleges
and universities.
9
Walmart has invested $5 billion in a range
of upskilling initiatives. For example,
employees can earn college credits online
through the company’s Live Better U
program. Tenured employees can take
part in the Walmart Academy—dedicated
locations near Walmart Supercenters that
oer two to six weeks of training to support
career advancement. In scal year 2021
alone, 95,000 associates were trained via
the Walmart Academy. In addition, Walmart
and the Walmart Foundation have invested
more than $100 million in the broader
“retail opportunity” ecosystem.
10
Amazon provides free education to
employees through its Career Choice
program—part of the company’s $1.2 billion
commitment to upskill more than 300,000
employees for in-demand elds through its
AWS Grow Our Own Talent, Surge2IT, and
the User Experience Design and Research
Apprenticeship programs, for example.
11
5. Growing importance of ecosystems
and partnerships
Margin pressure for grocers will likely
continue through 2022, forcing business
leaders to search for growth beyond the
core. Grocers have signicant loyalty from
their core customers and a treasure trove
of customer data. They can use these
advantages to build broader ecosystems
that improve the overall nancial prole
of their business. We expect grocers to
pursue three main ecosystem strategies
in 2022:
6
McKinsey Global Institute analysis.
7
“The Kroger family of companies to hire 10,000 associates,” Kroger, June 7, 2021.
8
“Giant Food Stores partners with Central Penn College,” Central Penn College, October 7, 2019.
9
“Tuition reimbursement,” Publix, accessed May 5, 2022.
10
PrepScholar blog, “Walmart’s Live Better U: Reviews and requirements,” blog entry by Ashley Robinson,
College Entrance Examination Board, November 14, 2021; “What is a Walmart Academy? How they’re building
confidence and careers,” Walmart, April 17, 2017; 2020 Environmental, social and governance report, Walmart,
2020.
11
“Amazon boosts upskilling opportunities for hourly employees by partnering with more than 140 universities and
colleges to fully fund tuition,” Amazon, March 3, 2022.
17
State of Grocery North America
Partner with tech companies to modernize
operations and enhance capabilities.
For instance, microfulllment center
technology players such as Swisslog and
Takeo Technologies are collaborating
with grocers Ahold Delhaize and HEB,
respectively. Google and Microsoft are
also forging partnerships with grocers
to introduce AI in replenishment and
commerce (for example, implementing
online tools to enable consumers to build
grocery shopping lists).
Join forces with delivery companies for
cost eciencies and e-commerce reach.
Beyond Instacart, Shipt is expanding
its engagements with grocers, while
DoorDash has partnerships with Smart &
Final, Meijer, Fresh Thyme, and Albertsons,
among others.
Create new and innovative value
propositions to customers. In Europe,
Morrisons has partnered with Deliveroo to
oer a ten-minute grocery delivery service
called Deliveroo Hop, while Albert Heijn
is expanding its “to go” format across BP
retail sites. In the United States, Kroger is
doubling down on prepared meals through
its partnership with Kitchen United.
Ecosystems are not only for the largest
grocers to pursue; midsize and regional
grocers can also participate by taking a
nonleading role or nding a niche to own.
Priorities for 2022
The year ahead is already full of challenges.
Leading grocers will be dened by the
dierentiation, innovation, and defensibility
of their strategies. As executives consider
Ecosystems are not only for
the largest grocers to pursue;
midsize and regional grocers
can also participate by taking
a nonleading role or nding a
niche to own.
18 State of Grocery North America
Bill Aull is a partner in McKinsey’s Charlotte office; Becca Coggins and Sajal Kohli are senior
partners in the Chicago office, where Eric Marohn is a consultant.
The authors would like to thank Cara Aiello and Karina Huerta for their contributions to this article.
Copyright © 2022 McKinsey & Company. All rights reserved.
their course and priorities for 2022, they
should address several questions:
1. Changing consumer habits are here
to stay. How will you pivot—and
continue to pivot—to cater to these
evolving needs?
2. Omnichannel is table stakes. How
will you continue to build your digital
and advanced-analytics capabilities
to achieve omnichannel excellence?
3. ESG is gaining importance, and
consumers are voting with their
feet. Where are you with your
commitments?
4. Talent will remain under pressure.
Do you have a model in place to
attract and replace those leaving
the industry?
5. Forward-thinking partnerships are
proliferating. Are you creatively
looking to push capabilities in the
face of new competitors?
Grocery executives that can successfully
navigate these ve issues will be poised for
better performance in the years ahead.
19
State of Grocery North America
The next horizon
for grocery e-commerce:
Beyond the pandemic bump
Consumers will increasingly shop for groceries online in the years ahead.
Retailers must make a series of strategic investments to keep pace.
© Edwin Tan/Getty Images
This article is a collaborative eort by Vishwa Chandra, Prabh Gill, Sajal Kohli, Varun Mathur, Kumar
Venkataraman, and Janice Yoshimura.
20 State of Grocery North America
Over the past 24 months, e-commerce
in the North American grocery industry
has continued to mature and scale. The
pandemic served as an accelerator for
grocery e-commerce, with much of the
sector experiencing the equivalent of
more than ve years of growth in just
ve months.
1
We recently completed extensive research
that included surveys of grocery CEOs,
functional and operations executives,
and consumers (see sidebar, “About
the research”). Our surveys conrmed
that consumers will continue to favor
e-commerce as one of many ways to shop.
However, many grocers don’t believe they
have the necessary capabilities to manage
this channel. In this article, we examine
the actions organizations must take to win
in e-commerce.
E-commerce takes hold
The industry is now on the edge of the next
transformation in e-commerce: grocery
executives expect e-commerce penetration
to more than double for their own
organizations in the next three to ve years,
to an average of 23 percent (Exhibit 1).
Source: Grocery Retail B2B Survey, February 2022, n = 25
Surveyed experts expect grocery e-commerce penetration to double in the
next ve years.
 Question: What was your organization’s level of e-commerce penetration as a percentage of total sales in the last year (2021)?
 Question: What do you think the maximum e-commerce penetration rate as a percentage of total sales for your organization will be in the next 5 years?
 Respondents self-identied as from mass markets, specialty, and small-assortment retailers reporting more than 40% e-commerce penetration today are
expected to skew overly bullish given assortment in nongrocery items. These respondents potentially considered both grocery and nongrocery goods in their
forecasts.
 Question: When do you believe this maximum penetration rate will be achieved in the industry?
Respondent organization e-commerce penetration,
historical
1
and anticipated
2
share of total revenue, %, n = 25
8
12
8
12
20
4
8
24
4
0
26–30%
24
8
21–25%
8
16–20%
28
11–15%
6–10%
0–2%
31–35%
4
12
24
Greater
than 35%
0
3–5%
ForecastHistorical
11%
Reported average
e-commerce
penetration, 2021
3
23%
Average forecast
e-commerce penetration
in 5 years
3
Expected time frame for industry e-commerce peak,
4
number of respondents, n = 25
This year 2–3 years 4–5 years 6–10 years 10+ years
Exhibit 1
Surveyed experts expect grocery e-commerce penetration to double
in the next five years.
1
“Disruption and uncertainty: The state of grocery retail 2021North America,” McKinsey, July 2021.
21
State of Grocery North America
Executives are even more bullish on
e-commerce’s upside potential, noting
that penetration could nearly triple to as
high as 35 percent (nearly $600 billion
versus about $150 billion at 11 percent
penetration). Our research suggests
continued support for e-commerce from
consumers, who indicated a positive net
intent to buy more groceries online (click
and collect as well as delivery) in 2022
(Exhibit 2).
The main drivers of e-commerce’s
growth during COVID19 were safety and
convenience, but our research found
consumers also value the channel’s unique
features—such as product comparisons,
assortment, and personalized promotions.
Source: State of Grocery Consumer Survey, November 19–December 7, 2021, n = 3,007, sampled and weighted to match the US general population 18+ years
Online and delivery orders increased by about 50 percent during the COVID-19
outbreak and are expected to rise further in 2022.
 Question: How did your preference to shop across the following channels change during the COVID-19 outbreak?
 Question: In the next 12 months, do you expect to shop more, less, or the same in the following channels?
 Net intent is calculated by subtracting the percent of respondents stating decrease from the percent of respondents stating increase.
Consumer expectations for
channel change in 2022,
2
% change
+4
+5
+2
0
Consumer channel change during
COVID-19 outbreak,
1
% change
Net intent,
3
% change
+42
+42
+41
–14
10
13
12
29
38
32
35
56
52
55
53
15
In a physical store or food market
Online (scheduled delivery)
Online (click and collect)
Instant delivery
IncreaseStay the sameDecrease
23
20
25
13
50
55
48
74
27
25
27
13
In a physical store or food market
Instant delivery
Online (scheduled delivery)
Online (click and collect)
Exhibit 2
Online and delivery orders increased by about 50 percent during the
COVID-19 outbreak and are expected to rise further in 2022.
About the research
To get a better sense of
e-commerce trends in North
American grocery, McKinsey
conducted research on retailers
and consumers. In January and
February 2022, we surveyed
31 CEOs as well as 25 C-level
executives, directors, and vice
presidents. Our team augmented
these results with extensive
insights from surveys conducted
in 2021 among consumers in the
United States (4,691 respondents),
Mexico (1,005), and Canada (967).
22 State of Grocery North America
In parallel, consumers increasingly prefer
home delivery (a rise from 48 percent in
December 2020 to 63 percent a year
later, which translates to an approximately
$100 billion market today) and appreciate
its product and service enhancements,
including speed, reliability, assortment
breadth, and exibility (Exhibit 3).
We are also seeing consumers
demonstrate dierent preferences for
how their digital orders are lled based
on need and occasion, a shift that reects
continued maturity in consumers’ approach
to online grocery (Exhibit 4). Their use
of dierent options based on occasion
Source: State of Grocery Consumer Survey, November 19–December 7, 2021, n = 3,007; US Online Grocery Consumer Survey, December 10–December 17,
2021, n = 2,007, September 18–23, 2020, n = 1,014 , sampled and weighted to match the US general population 18+ years
Consumers have shifted from click and collect to home delivery.
 Question: Which mode of shopping for food online do you prefer?
 Question: Rank 1 reason for preference of home delivery.
Consumer preferences for online food shopping,
1
%
37
52
50
63
48
50
Sept 2020
Dec 2020
Dec 2021
47
16
12
9
9
7
47
18
12
10
6
7
33
19
16
11
12
10
I have been able to get an appointment
for delivery easier/quicker than for
click and collect
Home delivery is more reliable for on-time
order fulllment/I have experienced
delays in click and collect
Home delivery is more convenient/
I do not need to drive to store
Home delivery gives better products,
especially for my fresh and frozen foods
Home delivery oers me exibility/
I don’t need to be physically presen
t for
the order to be delivered
Home delivery is faster to fulll my order
vs click and collect
Dec 2020 Dec 2021Sept 2020
Top reasons for preferring home delivery,
2
%
Click and collect Home delivery
Exhibit 3
Consumers have shifted from click and collect to home delivery.
23
State of Grocery North America
Source: State of Grocery Consumer Survey, November 19–December 7, 2021, n = 3,007, January 13–25, 2021, n = 4,691, sampled and weighted to match the
US general population 18+ years
Consumers are moving beyond convenience and safety, the primary drivers of
online shopping during COVID-19.
 Question: Why do you shop for groceries online?
 Question: You will now see some factors that might make buying food online more attractive to you. Please select up to 3 most attractive factors.
Factors that would make online grocery shopping more attractive to online shoppers,
2
%
Change vs
2020
–10
–6
+5
–9
+2
+3
+4
Factors driving consumers to online grocery shopping,
1
%
29
26
23
19
18
17
16
13
13
13
12
12
12
11
11
10
7
3
Other
Additional features that make shopping easier
There are always new brands/products to try
I can set up recurring orders/save my favorite items
I nd the quality is better than elsewhere
Products are always in stock
I like being able to read product reviews before I buy
I generally prefer to shop online
The range of products is better
It is easier to nd the items I need
I like the conve
nience of having products delivered
I like that I can get products delivered
The prices are cheaper
It saves me time/eort going into store
I can shop when it is convenient for me (eg, 24/7)
It is easier to compare products
There are more oers/promotions
It is safer than shopping in store during COVID-19
47
42
32
28
20
15
14
More precise delivery windows
Faster delivery
Possibility to receive grocery delivery
without having to be present
Lower delivery costs
Lower minimum order values
Delivery also at o-peak times
More promotions
Exhibit 4
Consumers are moving beyond convenience and safety, the primary
drivers of online shopping during COVID-19.
24 State of Grocery North America
(Exhibit 5) compels retailers to oer a full
portfolio of e-commerce options (such
as same-day delivery, two-hour delivery,
instant delivery, and click and collect). As
demand spreads across dierent trips, the
result is smaller baskets.
This degree of channel shifting within the
grocery sector has precedents. Over the
past couple of decades, the emergence
and adoption of new oerings and
channels have spurred signicant changes
in consumer behavior. For example, the rise
of mass merchants with 150,000-square-
foot stores created a dierent in-store
experience than the one oered by the
traditional neighborhood store. The mass-
merchant category now accounts for
about 26 percent of the market. Similarly,
club retailers encouraged consumers
to buy in bulk, and the rapid growth of
discount and value grocery, featuring a
predominantly private-label oering, deed
the conventional wisdom that consumers
wanted only consumer-packaged-goods
(CPG) brands. Each of these “new”
oerings has been accompanied by
changing consumer behavior.
Source: State of Grocery Consumer Survey, November 19–December 7, 2021, n = 3,007, sampled and weighted to match the US general population 18+
years
Consumers are starting to demonstrate dierent behaviors
by occasion and need.
 Question: What share of your monthly grocery budget is spent on the following types of occasions?
 Question: What do you typically do when you need to get food on the following occasions? Respondents could select up to two options per occasion.
Consumer monthly grocery spend,
1
%
80
79
71
78
15
17
15
18
7
8
17
8
4
2
3 3
Shop for a
specic item
Buy the meal
for that day
Shop for a
few items
Stock up
Order delivery from
online retailer
Order click and collect
Order instant deliveryGo to store or food market
Consumer behavior when making various types of grocery trips,
2
%
24
41
16
19
Stock up
Shop for a specic item
Buy the meal for that day
Shop for
a few items
Exhibit 5
Consumers are starting to demonstrate different behaviors by
occasion and need.
25
State of Grocery North America
Keeping pace with
e-commerce growth
As consumers have shifted toward
e-commerce, two-thirds of retailers
don’t feel well prepared to meet the dual
challenges of delivering on growth while
achieving protability. Our research
revealed that retailers feel some
trepidation. Two-thirds of respondents
expect to lose some share in the shift
to digital, and more than half believe it
will be dicult to attract the necessary
talent to support digital growth (Exhibit 6).
Meanwhile, grocers are considering how
to allocate capital across multiple parallel
eorts, including supply chain resilience,
store remodels, digitalization, and talent
acquisition.
To enhance their capabilities in the
short term, grocers have responded by
implementing three specic strategies.
First, some grocers are building
partnerships with technology companies.
To expand fulllment capabilities, grocers
such as Ahold Delhaize, Wakefern, and
HEB have partnered with microfulllment
center (MFC) technology players like
Dematic, Takeo Technologies, and
Swisslog. Google and Microsoft are
also working with grocers to introduce
Source: Grocery Retail B2B Survey, February 2022, n = 25
Retailers are not prepared for the shift to digital, and they are limited in their
ability to attract the talent needed to capture this opportunity.
Retailer preparedness for the shift to
digital, %, n = 25
How dicult will it be for your organization to attract the
necessary technical talent to support digital capability-
building in the next 5 years?
8
28
64
0
Do you feel that your organization is prepared for the
transition toward more digital commerce?
16
40
44
0
0
Not prepared at allWell prepared
Somewhat well preparedVery well prepared
Somewhat dicult
Very dicult Not at all dicult
My organization already has
the necessary technical talen
t
Dicult
~2 of 3
Respondents expect
to lose some share
in the shift to digital
55%+
Believe it will be
dicult or very
dicult to attract
the necessary talent
Diculty to attract talent, %, n = 25
Exhibit 6
Retailers are not prepared for the shift to digital, and they are limited
in their ability to attract the talent needed to capture this opportunity.
26 State of Grocery North America
articial intelligence in replenishment
and commerce (for example, to enable
consumers to build grocery lists while
shopping online).
Second, grocers continue to rely on third
parties to manage costs and expand their
e-commerce oerings. Instacart became
a leader through its early market entry,
but it has been joined by players such as
Shipt and DoorDash. The latter handles
fulllment for Albertsons, alongside
Instacart and Uber. Grocers are also using
partnerships to provide new and innovative
value propositions to customers. In Europe,
for example, Morrisons has partnered with
Deliveroo to make deliveries in as little as
ten minutes.
Last, the shift to e-commerce is also
challenging how retailers think about
capabilities across the e-commerce value
chain, from in-store digitalization and
pricing and promotion to trade spending
and media and advertising. The role of
the store will continue to be signicant,
with grocers investing in digitalization
to improve the in-store experience for
consumers—for example, through self-
checkout and grab and go.
How grocers can win in
e-commerce—delivering on
both growth and protability
To excel in the next horizon of e-commerce,
grocers need to develop an integrated
value proposition that meets consumer
needs while protecting their own
protability.
Our research found consumers are looking
to save money, be healthier, build on
their (rediscovered) joy of cooking, and
nd the best promotions more easily. For
each of these needs, an evolved digital
presence (both app- and web-based) can
help grocers highlight their assortment,
personalize their promotions, and
engage consumers in a more meaningful
To draw more consumers to
e-commerce, retailers must
oer lower costs, reduce
minimum order requirements,
protect quality and freshness,
and enhance the breadth
and discoverability of their
assortments.
27
State of Grocery North America
manner—something that a purely
brick-and-mortar oering cannot do.
Organizations, especially retailers that
have underinvested in the past, are
planning to make aggressive investments
in their digital capabilities to support
these tasks.
However, simply redening the value
proposition will not be enough. To draw
more consumers to e-commerce, retailers
must oer lower costs, reduce minimum
order requirements, protect quality and
freshness, and enhance the breadth
and discoverability of their assortments
(Exhibit 7).
To deliver on the dual objective of growth
and protability, grocers need to take a
range of simultaneous actions:
Engage customers meaningfully in
their omnichannel journeys and invest
in user experience
Omnichannel has become table stakes.
After spending the past few years building
this core oering, grocers are now
focusing on retention eorts by forging
personal relationships with customers to
increase basket size through upselling
and increased frequency of trips, both
Source: State of Grocery Consumer Survey, November 19–December 7, 2021, n = 3,007, January 13–25, 2021, n = 4,691, sampled and weighted to match the
US general population 18+ years
Cost, quality, and merchandising authority are the keys to increasing
grocery e-commerce.
 Question: What prevents you from buying groceries online more frequently? Indicate all applicable reasons.
Quality and freshness of food remain obstacles for consumers in online grocery shopping.
Factors preventing consumers from buying
groceries online more frequently ,
1
%
Change vs
2020, %
–15
–14
–3
–1
+1
–6
0
–1
–4
–1
31
25
21
17
16
14
13
10
10
10
The possible delivery times
are unsuitable for me
The selection is not
large enough
The minimum order values
are too high for me
Too often I receive products that have
not been ordered or that are damaged,
or there are products missing on delivery
My desired products are
not available
Dicult to nd products
I am looking for
I prefer personal contact
in stores
The products are too
expensive for me
Quality and fresh
ness of
fresh foods not sucient
The delivery charges are
too expensive for me
Exhibit 7
Cost, quality, and merchandising authority are the keys to increasing
grocery e-commerce.
28 State of Grocery North America
online and in store. Grocers are also
experimenting with new ways to engage
shoppers in omnichannel. For example,
mobile scan–based product information
and scan-and-go commerce are changing
the way shoppers interact with grocers
in-store and on apps. Establishing and
maintaining a social connection with
consumers and reaching out daily will
be important for grocers hoping to move
from share of stomach to share of mind. A
social-rst, video-rich capability will also be
a must-have. E-grocer Weee, for example,
which specializes in products for Asian
and Hispanic shoppers, uses gamied,
video-rich social media oerings to nurture
a highly engaged customer base.
The convergence of value propositions
across the industry is raising the bar
on user experience in e-commerce.
Consumers increasingly value the ability
to nd products quickly and build their
baskets while shopping online. Grocers are
responding by investing in e-commerce
capabilities and forming partnerships
with technology companies to improve
the user experience. For example,
Albertsons and Google have partnered
to create in-store shoppable maps with
dynamic hyperlocal features, AI-powered
conversational commerce, and predictive
grocery-list building.
At the same time, retailers must enhance
the in-store experience through continued
investments in store technology. Solutions
include self-checkout, digital shelf tags,
and payments innovation to improve
personalization and eciency.
All of these oerings will have the dual
objective of enabling growth while
increasing protability. However, focused
investments will be needed to build both
the talent bench and the core technology
infrastructure. Successful grocers will
seek to attract the right talent to their
organizations and address the legacy
technology debt from the past couple
of decades.
Successful grocers will seek to
attract the right talent to their
organizations and address the
legacy technology debt from
the past couple of decades.
29
State of Grocery North America
Build a distinct—but connected—
capability in e-commerce category
management
Because e-commerce is set to account
for a signicant share of overall business,
retailers are starting to be more deliberate
about standing up channel-specic
management capabilities and getting
sharper on assortment choices (breadth
and depth, online versus oine), pricing,
and online-only promotions, among other
factors. Grocers need to make investments
in data, analytics, and IT infrastructure to
get a deeper understanding of their online
business performance—for example,
the eectiveness of online promotions
and digital shopping trends by consumer
segment. They must also dedicate
resources to building their organizational
muscle through eorts such as upskilling
merchants. These capabilities should be
integrated into a broader omnichannel
category management strategy, which
can provide a holistic and thoughtful
merchandising experience anchored in a
single view of the customer.
As consumers continue the shift toward
buying through mobile apps, grocers
are starting to use the full suite of
e-merchandising levers—such as product
placement, product recommendations,
personalized promotions, and digital
media—to monetize their digital assets with
consumer goods companies. The launch of
retail media networks (such as Instacart’s
new Carrot Ads platform) allows retailers
to capture a greater share of marketing
spending from brands beyond what they
have traditionally captured. This source will
be a key driver of protability for grocers in
the coming years.
Making this shift will not be easy, and
our survey indicates that retailers
recognize this challenge. Retailers and
CPG companies have deep and complex
ways of optimizing trade promotions
and advertising in the brick-and-mortar
channel. There are dozens of mechanisms
through which CPGs and retailers invest
in advertising and trade, and ROI is often
hard to track and measure. Both retailers
and CPGs will need to lean on digital
capabilities to optimize their investments
for greater impact on revenue
and protability.
Develop a portfolio of fulllment
options that are aligned to individual
markets’ needs
As demand for online grocery continues
to scale, grocers are going to have to
revisit how and where they fulll orders.
The network of the future for grocers will
encompass a mix of automated MFCs,
manual dark stores, and store fulllment.
Matching the right fulllment option to
each specic location based on a market’s
demand prole and service promise will
be critical.
Retailers are conducting pilots with
automated MFCs and manual dark stores.
Many grocers are now locating MFCs
close to their customers to improve
speed at a lower cost. Both aggregate
demand and consistency of demand are
key factors in ensuring ROI. Grocers are
also implementing centralized fulllment
centers to handle larger order volumes
and support next-day delivery in highly
concentrated geographies.
In parallel, grocers are experimenting
with new last-mile models (for example,
autonomous vehicles with precise
delivery slots) and tech-enabled logistics
optimization to lower costs while
maintaining service levels.
30 State of Grocery North America
While automation will be a key lever
for retailers to increase eciency and
speed, grocers will need to make at-scale
investments to build out a comprehensive
network along with a focused eort to drive
volume at each node. Since the benets of
automation will accrue to all participants
in the industry, there is an opportunity for
collaboration among grocers, technology
companies, marketplaces, and CPG
companies to rapidly scale these networks.
Use e-commerce as a way to innovate
and harness the broader ecosystem
Grocers are approaching e-commerce as
an opportunity to push the boundaries of
their current oerings. Some retailers are
deploying e-commerce to strengthen their
current assortments (for example, to push
private brands and prepared meals) and to
promote new oerings (such as meal kits,
partnerships with dark kitchens and local
restaurants, and expansion into catering
services to capture new meal occasions).
In response, grocers need to dene their
operating models to fully harness their
own capabilities while participating in
third-party ecosystems to serve customers
through dierent missions. Retailers should
also seek to engage consumers where they
are spending their time; whether on social
channels, on content sites (for example,
Eater magazine online), or in the metaverse,
grocers need to be there.
Grocers must also quickly determine
which components of their end-to-end
e-commerce value chain they want to
fully own as a core capability and what
partners can provide. The answer will vary
across the value chain as retailers assess
where they can compete with distinctive
oerings and where they have the requisite
capabilities and resources. Eciency and
speed will be critical factors in deciding
whether to invest in in-house solutions or
partner with a third party. The market is
likely to be segmented into large retailers
with the resources to develop ecient in-
house capabilities and smaller companies
that must rely on third parties.
Implications for other
industry players
While many of these recommendations
are applicable to all grocery players,
the rapid growth of e-commerce has
signicant additional implications for
various players within the broader
ecosystem. Besides Amazon, players such
as Cornershop by Uber and DoorDash
also oer marketplaces for shoppers.
Investments continue to pour into instant
delivery, with multiple players including
Instacart, Gopu, Gorillas, and JOKR now
testing and oering delivery in less than
30 minutes. More rst-party services are
also emerging: Gopu and DashMart by
DoorDash are now playing in this space
with their own warehouse-based grocery-
delivery models.
Digital-native third-party marketplaces
have notched signicant growth in the past
few years. They now have an opportunity
to use their technical capabilities to ensure
their retail partners have access to the best
digital technology and user experiences.
Another priority will be improving eciency
and reducing costs to customers through
the accelerated adoption of technology
(such as microfulllment), increased
batching of grocery e-commerce orders on
delivery milk runs, and shared resources
in delivery across vehicles and drivers.
Marketplaces can also unlock additional
value pools (such as advertising) that
used to ow to media players outside the
sector—for example, by luring spending
31
State of Grocery North America
from traditional media channels such as
television ads to grocery marketplace
advertising via retail media networks.
Pure-play, rst-party online grocers
have the opportunity to make headway
by deploying dierent delivery models
(such as a scheduled, milk-run approach),
expanding their oerings to address more
need states and occasions, and further
distinguishing themselves from traditional
competitors (for example, through
subscription models). They can also
dierentiate their oerings by assortment
authority (including breadth, depth, and
brands covered) and experiment with
adopting social-rst, video-rst oerings to
engage consumers.
Despite the substantial growth of online
grocery and the increased number of
players, the market truly is on the verge of
its next transformation. Executives should
recognize that the leaders of today are
not guaranteed to be winners tomorrow.
Retailers that take decisive action and
make strategic investments today will be
well positioned to carve out a protable
position for the future.
Vishwa Chandra is a partner in McKinsey’s San Francisco office, Prabh Gill is an associate
partner in the Vancouver office, Sajal Kohli is a senior partner in the Chicago office, where
Kumar Venkataraman is a partner and Janice Yoshimura is a consultant; Varun Mathur is an
associate partner in the Austin office.
Copyright © 2022 McKinsey & Company. All rights reserved.
32 State of Grocery North America
Tech-enabled grocery
stores: Lower costs,
better experience
Grocers must reimagine physical stores to keep pace with consumer
preferences. Technology will be a critical enabler in this shift.
© SDI Productions/Getty Images
by Tyler Harris, Alexandra Kuzmanovic, and Jaya Pandrangi
33
State of Grocery North America
The past year continued to reveal the
ways in which the pandemic, evolving
customer preferences for grocery, and
macroeconomic trends have converged
to reshape the traditional role of
physical stores. As grocers seek to
adapt, technology can streamline store
operations—from checkout and talent
management to merchandising and
replenishment—and provide a better in-
store environment for customers, all while
helping to manage costs.
Stores under pressure
In many ways, the four-wall operating
model for grocery has changed only
incrementally over the past several
decades. However, four primary forces will
challenge long-held conventional wisdom
and compel grocers to adapt.
Stang shortages and rising labor costs.
About one million roles remain open in
the US retail industry, even with upgraded
incentives and benets such as year-end
bonuses for in-store employees and tuition
assistance.
1
As erce competition for
retail store employees has pushed wages
and benet costs higher, grocers have
responded by investing more in retention
and upskilling eorts.
Increased stockouts. While omnichannel
oerings have increased the complexity
of supply chains, broader shifts in the
economy have had a greater impact on
operational resilience and cost structures.
Logistics carriers continue to operate at
reduced capacity, with a declining supply
of container ships and overall capacity
down by 11 percent from September 2020
to June 2021.
2
These developments are
further squeezing the industry’s already-
tight margins. Our analysis shows that
the pandemic’s impact on retailers could
decrease EBITDA by 20 to 40 percent in
the near term, with 15 to 20 percentage
points of that decrease enduring if these
supply chain shocks go unaddressed.
Fluctuating foot trac. Lockdowns in the
early phases of the pandemic resulted
in a precipitous drop in foot trac, but
the grocery sector has rebounded. After
vaccines became widely available to the
public in spring 2021, foot trac increased,
even eclipsing prepandemic levels at times:
for example, foot trac was 7.6 percent
higher in December 2021 compared
with 2019.
3
Superstores illustrated a
similar trend in the latter half of the year,
although the shopping week that included
Thanksgiving and Black Friday was down
12.5 percent from 2019.
A shift from stores to e-commerce.
While all these factors are putting added
pressure on the role of stores, the capstone
trend is that e-commerce has increasingly
lured shoppers from traditional grocery
stores. The move toward convenience and
safety has fueled the rise of new delivery
models, blurring the strict boundaries of
the traditional store’s four walls. In the
next ve years, we estimate that 20 to 40
percent of grocery e-commerce volume
could be fullled from alternative locations.
Losing this volume will challenge the
economics of many stores. Consumers
who continue to shop in store are already
seeking a dierent experience: self-
checkout adoption has increased by
1
“Table A. Job openings, hires, and total separations by industry, seasonally adjusted,” Job Openings and Labor
Turnover Survey, US Bureau of Labor Statistics, May 3, 2022.
2
“Ten steps retailers can take to shock-proof their supply chains,” McKinsey, November 11, 2021.
3
Brin Snelling, “What 2021 foot traffic trends mean for the future of physical retail,” Forbes, December 22, 2021.
34 State of Grocery North America
almost 20 percent since the beginning of
the COVID19 pandemic, and 75 percent of
respondents who have started or increased
their use of self-checkout said they intend
to continue.
4
Using in-store technology to
improve customer experience
and reset cost structures
In light of these challenges, 2022 will be a
critical year for retailers to use technology
to future-proof their physical stores.
Many grocers and retailers have already
experimented with tech-enabled customer
experiences and store operations. The
combination of increased pressure on
margins and well-tested technologies
means retailers have both the motivation
and the opportunity to make sustained
investments across a set of levers.
According to our analysis, advanced tech-
enabled checkout, talent management,
merchandising and replenishment, and store
environment maintenance can help the
grocery industry create distinctive in-store
experiences for customers and reduce costs
by as much as 15 to 30 percent.
Self-checkout
Gone are the days when consumers
were willing to wait in longer lines so that
a cashier could weigh produce or bag
groceries. Instead, customers increasingly
value the safety, speed, and convenience
oered by self-checkout, which can reduce
friction for consumers and—crucially—free
up employees for other operational tasks
such as stocking and ad hoc customer
assistance. When properly implemented,
tech-enabled self-checkout can improve
in-store productivity by 6 to 12 percent
by reducing the labor hours required for
operation.
Self-checkout is now table stakes for
grocers, with future-facing checkout
technologies such as mobile “scan and
go” not far behind. Several retailers
have already deployed mobile-scanning
technology to help customers save
time by checking out while they shop,
thereby avoiding standing in line as well
as unloading and reloading their carts.
This real-time purchasing information
also allows retailers to dynamically oer
promotions and suggestions. At the same
time, visual analytics, specically AI and
camera vision, can help address nagging
issues such as shrinkage (loss of inventory
through errors and theft) and help retailers
use the analysis of visual data to improve
process eciency.
Talent management
The talent landscape has changed
dramatically over the past two years. Retail
positions were once considered highly
desirable, oering exible hours, product
discounts, and other benets. Now, other
sectors oer the same—if not better—value
proposition. In light of the current labor
shortages, attracting workers requires
far more than a “Now hiring” sign or an ad
online. Employers must instead pursue
a multipronged strategy: smarter and
digitalized hiring, automated management
to lighten the workload, and scaled eorts
to train and retain employees.
These solutions can be useful at every
step of the hiring journey. For instance,
predictive analytics can help automate
resume screening and reduce manual
eort by 55 percent. When automatic
screening is done well, store managers
can spend more time on activities such
as coaching and analysis that more
4
Jérémie Ghandour, Tim Lange, Andreas Seyfert, and Alessandro Turco, “Consumer-goods companies must
transform their planning end to end,” McKinsey, November 24, 2021.
35
State of Grocery North America
directly improve store performance. These
same analytical tools allow retailers to
understand which candidate personas will
help them succeed and to take early action
to retain them.
Once hired, employees can benet from
digital training. One major retailer has
made virtual-reality (VR) training available
to associates and deployed gamied
digital-training sessions to all US locations
to build capabilities and drive engagement
and retention.
Last, in our experience, AI-powered
workforce planning and scheduling can
save stores more than 10 percent in
labor costs. These tools use AI to predict
demand based on variables outside the
store, such as trac and weather patterns,
and store-specic information. Retailers
can use these insights to match stang to
each store’s needs while providing workers
with the desired stability in scheduling.
Merchandising and replenishment
Inventory management, including counting
products, identifying out-of-stock SKUs,
and replenishing store shelves, accounts
for a signicant share of the in-store
workload.
Grocers have been dabbling in robotics
to manage these activities for the past
several years, but two recent developments
have changed the game. First, technology
has evolved to allow robots to start to
double-hat (that is, the same robot can
manage stockout checks and cleaning),
which strengthens the business cases for
automation and makes investments more
palatable. Second, retailers no longer have
the labor resources to be able to cover all
activities, so they must rely on automation
to complete tasks. The use of robotics for
tasks that are especially dicult or labor
intensive, such as price tag validation, can
support sales by improving in-stock rates
and pricing and monitoring planogram
AI-powered workforce
planning and scheduling
can save stores more than 10
percent in labor costs.
36 State of Grocery North America
compliance. In one pilot, robots detected
14 times the addressable out-of-stock
situations compared with manual scans,
reducing out-of-stock facings by 20 to
30 percent.
5
Maintenance and store
environment
To maintain more prevalent in-store
technology and equipment, grocers can
automate monitoring and enable predictive
maintenance. These tech-enabled
tools serve a dual purpose: they help to
minimize the labor required to do routine
maintenance checks, and they increase
food safety in grocery environments by
automating tasks previously open to human
error. By embedding Internet of Things
(IoT) sensors throughout the store’s tech
and standard equipment (such as coolers
and freezers), organizations can remotely
detect and even predict maintenance
events and then deploy remote support
or shared-service teams to address an
issue before it disrupts store operations.
An IoT-enabled approach reduces the time
store teams spend on not only monitoring
in-store tech and equipment but also
troubleshooting and coordinating support.
Collectively, these eorts can boost the
productivity of store teams by 1.5 percent,
a signicant amount when launched
across the whole store eet. Further, using
automatic temperature monitors that send
alerts when temperatures are outside of
acceptable range—for example, in freezers
and at prepared food stations—increases
overall food safety and minimizes time
spent on manual data collection.
Investments in technology used to feel
optional for grocers—an opportunity to
experiment or increase the “wow factor”
in stores rather than to support mission-
critical operations. Today, a wide range of
aordable, eld-tested technologies can
help retailers reduce the cost structure
of their stores while delivering a better
experience for both consumers and
employees. Audacious investments should
be the next step for the industry.
Tyler Harris is an associate partner in McKinsey’s Washington, DC, office, and Alexandra Kuzmanovic
is a consultant in the Chicago office, where Jaya Pandrangi is a partner.
Copyright © 2022 McKinsey & Company. All rights reserved.
5
“Schnuck Markets becomes world’s first grocer to deploy intelligence robots chainwide,” Schnucks, August 26,
2021.
37
State of Grocery North America
Achieving protable online
grocery order fulllment
Investing in the right configuration of picking and handling as well as delivery
capabilities holds the key to upending the current economics in online grocery.
© Thomas Barwick/Getty Images
This article is a collaborative eort by Vishwa Chandra, Prabhjot Gill, Joshua Reuben, Sarah Touse, and
Kumar Venkataraman, representing views from McKinsey’s Retail Practice.
38 State of Grocery North America
The explosive growth in North American
online grocery presents a vexing challenge
for retailers. While the need to serve this
channel is obvious, achieving protability
continues to be a challenge. In the
meantime, consumers have gotten used to
the convenience of delivery—the faster, the
better. Grocers are under rising pressure to
meet these ever-increasing expectations
and mitigate online grocery’s dramatic
impact on order economics.
To serve online demand without
signicantly cutting into margins,
executives must focus their investments on
the two major drivers of online fulllment
cost: handling and delivery. Grocers can
manage these drivers by selecting from a
range of fulllment and delivery models.
The right solution varies depending on
a region’s demographics and population
density and is also shaped by the target
customer value proposition. Organizations
that navigate these options wisely will be
better positioned to grow protably.
Online is here to stay,
and consumers are more
demanding than ever
Online grocery penetration has grown
steadily over the past several years but
was greatly accelerated by COVID19.
According to a recent McKinsey
consumer survey, some trends that took
hold during the pandemic will likely
endure and even deepen
1
:
The online channel continues to show
strong growth. Online and delivery orders
rose by about 50 percent during the
pandemic and are expected to increase
two to ve percentage points in 2022,
depending on the delivery option.
Consumers increasingly want delivery
rather than click and collect. For online
grocery shoppers, click-and-collect
oerings have been supplanted by home
delivery. According to our survey, 63
percent of online grocery shoppers in
December 2021 preferred home delivery
For grocers looking to
design an eective online
oering to complement their
traditional brick-and-mortar
channels, the challenge boils
down to unit economics.
1
The following findings come from the US results of McKinsey’s 2022 State of Grocery Consumer Insights Survey.
39
State of Grocery North America
to click and collect, up from 48 percent a
year earlier. Consumers are particularly
gravitating toward same-day and instant
delivery. The latter increased 41 percent
over the course of the pandemic and is
expected to rise further in 2022, with
a net two percentage points of survey
respondents expecting to increase their use
of instant delivery.
Personal contact continues to decrease
in importance. Before the pandemic, 46
percent of consumers preferred personal
contact in stores. The past two years have
muted its importance: now just 31 percent
value this type of engagement.
Convenience trumps all. Consumers
were drawn to online shopping for its
convenience and relative safety during
the pandemic, and our survey suggests
shoppers have embraced these benets
and aren’t interested in returning to the
prepandemic normal.
As these insights reinforce, even grocers
that rapidly adapted their operations early
in the pandemic have no time to rest; they
must continue to keep pace with evolving
consumer preferences.
Online’s economics problem
For grocers looking to design an
eective online oering to complement
their traditional brick-and-mortar
channels, the challenge boils down to
unit economics. A typical North American
grocer achieves a positive net prot-
and-loss (P&L) margin of about $4 on a
traditional $100 grocery basket when the
customer is walking the aisles in the store
(Exhibit 1). By contrast, when the grocer
has to manually pick from the store and
deliver to the customer, net P&L margin
becomes approximately –$13 for a $100
online grocery basket order (assuming
no additional fees are collected from the
customer). Today, a combination of higher
pricing for online orders and fees collected
from customers for the convenience of
online ordering and fulllment enables
positive unit economics in some cases.
However, we expect to see customer
willingness to pay this “e-commerce tax”
decrease as online oerings come to be
seen as table stakes.
Since the ability of grocers to use fees or
higher prices to drive incremental gross
margin is limited, controlling fulllment
costs is paramount. The negative impact
of online on unit economics is largely
caused by two incremental cost drivers:
picking labor and last-mile delivery
costs. On a $100 online grocery basket,
manual-picking labor costs and associated
overheads would typically amount to about
$8, with the cost of last-mile delivery to the
customer amounting to another $8. Clearly,
the incremental costs of fullling online
grocery orders far outweigh the razor-thin
margins on a traditional grocery basket,
causing online fulllment to fare poorly on
unit economics. The economics get worse
when customers require near-immediate
fulllment; grocers will struggle to optimize
the use of labor and delivery eets to meet
this faster fulllment timeline.
Achieving protable
fulllment
Grocers have been experimenting over
the years with various strategies to reduce
picking and delivery costs. They must
now double down on investments that
will help oset the higher costs of rising
online penetration and be strategic about
where they make these investments across
their networks. Retailers should not keep
waiting for a better solution or attempt a
40 State of Grocery North America
100.0
27.9
4.4
–12.9
–0.5
–8.0
–1.0
–7.8
Overheads for picking
(eg, supervisors)
–12.1
–2.1
Cost of delivery
and last mile
Basket margin
Other SG&A²
Net P&L³ before
order pick and pack
Direct labor
cost for picking
–11.4
Store labor expense
Shrink
Basket size
at store price
Gross margin
Swipe fee for
e-commerce transaction
COGS¹ –70.0
Unit economics for a retailer on a $100 basket with home delivery, $
Source: McKinsey analysis
Costs for home delivery can have a signicant adverse eect on margins.
 Cost of goods sold.
 “Other SG&A” includes a 7.5% occupancy expense, a 1.0% advertising and promotions expense, and a 2.9% logistics expense.
 Prot and loss.
 Assumes 80 items picked per labor hour (ie, 2.2 orders per labor hour) and $17 of direct labor cost per hour.
 Assumes $30 of indirect labor cost per hour across 8 hours per day, 2 shifts, and spread across 890 e-commerce orders per day.
 Assumes an 8% delivery cost.
 Assumes a 1% swipe fee.
Exhibit 1
Costs for home delivery can have a significant adverse effect
on margins.
one-size-ts-all approach. Instead, they
must be prepared to adapt based on
market dynamics.
Grocers that may be inclined to wait for
further technology evolution to save
them will be disappointed. Over the past
few years, several retailers have been
experimenting with dierent models that
can meet rising demand. Many grocers
have yet to fully commit to one model,
instead waiting to see what others do or
expecting a new technology to emerge
that will reduce costs. Those options
are unlikely to materialize anytime soon.
Still, protable online order fulllment
is achievable. Grocers need to start
making strategic long-term investments
that are aligned with their online value
propositions or partner with third-party
logistics providers that have made such
investments.
41
State of Grocery North America
Some retailers are already gaining a rst-
mover advantage. For instance, Walmart
has begun to invest heavily in store
microfulllment centers (MFCs) across its
network. This approach involves setting
aside roughly 15,000 square feet in the
back room of the store for automation.
With the MFC solution, retailers can pick
at more than ve times the typical manual
picking speed of approximately 60 to
70 units per hour (UPH) assuming no
augmentation by technology.
2
The MFC
also halves the typical pick-and-pack
cost per order relative to baseline manual
picking while enabling faster picking and
delivery (for example, a two-hour pickup),
levels that are dicult to achieve at scale
using manual picking.
Retailers can apply the following lenses
to the dierent fulllment options in order
to optimize picking and last-mile delivery
costs:
Picking costs
Picking costs typically represent the
greatest aggregate cost for online
fulllment. The average grocery basket
contains about 30 items. Assuming a pick
speed of 60 UPH, the 30 minutes spent
picking a single order translates to about
$8 to $10 an hour.
3
This total includes the
labor costs associated with picking as well
as order consolidation, staging, customer
contact, and handover.
Grocers can take advantage of a range of
picking options with dierent degrees of
centralization, capacity, and automation.
Grocers need to build a portfolio of
fulllment options by geography, with the
mix varying by the density of current and
projected demand and their fundamental
online value proposition (for example,
cost or speed of delivery). Even within
a geography, grocers need to build the
capabilities to support multispeed delivery,
since customers increasingly prefer
delivery (particularly instant) over click and
collect but have dierent fulllment speed
preferences (especially if they do not pay
for delivery). Each fulllment option oers
dierent features (Exhibit 2):
In-store picking. With little investment,
grocers can stand up a manual in-store
picking operation. This option, which can
handle 800 to 1,000 orders per week,
comes with higher operating costs (due to
the highly manual nature of the activity) and
is best suited for low-volume areas.
Warehouse in store. Retailers can create
a dedicated area within or attached to the
store where pickers can aggregate popular
items for delivery. This low-capacity option
requires a medium level of operating costs
and can handle 1,000 to 1,300 orders per
week at a UPH of 80 to 100. This option
works well for moderate-density suburban
areas.
Robotic MFC. These MFCs require up-
front investments in technology to replace
manual pickers with robots, which lowers
operating costs and increases capacity
(up to 4,000 orders per week with a UPH
of 400 to 500). Typically located close to
consumers, robotic MFCs enable delivery in
two hours or less. This option is best suited
for high-volume, high-density urban areas.
Dark store. These stand-alone facilities
oer an optimized layout to support manual
picking for e-commerce orders. After
an up-front investment, dark stores can
handle 2,400 to 3,000 orders per week.
They are ideal for moderate-volume areas.
2
These are typical MFC and manual picking speeds and are not specific to Walmart.
3
This figure assumes US grocery wages, on average, and will likely be different in other countries.
42 State of Grocery North America
Traditional warehouse. This larger stand-
alone facility features a wider assortment
of products, as well as the potential
to incorporate automation to increase
capacity. Traditional warehouses, which
require a medium up-front investment, are
often located far from the end consumer
and hinder same-day delivery.
Highly automated warehouse. By
deploying automation across several
process steps, this option signicantly
increases capacity to nearly 30,000 orders
per week thanks to a UPH of 600 to 800.
The product assortment is more generic,
making highly automated warehouses
suitable to a broader customer base. The
substantial up-front investment leads to
lower operating costs.
To understand how these options could
be applied, consider a California-based
grocer with a statewide presence. This
grocer might choose to invest in two MFCs
each in Los Angeles and San Francisco to
handle a combined 16,000 orders a week.
Alternatively, it could set up one central
fulllment center (CFC) outside each of
these cities to serve customers within a
100-mile radius. Fresno would not have
the order density to justify an MFC, so the
grocer could choose between a CFC to
serve that city and the surrounding areas or
a traditional grocery store with manual in-
store picking combined with a dark store.
Delivery costs
As more customers shift their preference
from click and collect to delivery, the last
Facility type
Picking
speed (UPH
1
)
Orders per
week
Assortment
breadth
Applicable
areas
Investment
In-store
picking
6080 8001,000 Broad Low volume Low
Warehouse
in store
80100 1,0001,300 Broad
Moderate
volume
Low
Robotic
MFC
2
400500 3,2004,000 Moderate
High volume
and density
Medium
Dark store
120150 2,4003,000
Moder-
ate-broad
Moderate
volume
Medium
Traditional
warehouse
180220 6,0007,300 Broad
Moderate
volume
Medium–high
Highly
automated
warehouse
600800
20,000–
27,000
Broad
High volume
and density
High
Exhibit 2
Features and required investment levels vary from one type of
facility to the next.
1
Units per hour.
2
Microfulllment center.
43
State of Grocery North America
Source: McKinsey analysis
A variety of models have emerged in last-mile delivery, enabled by growth in
the gig economy.
Last-mile
delivery model Description Delivery time Nonperishable Perishable
Company
delivery
Owned delivery vans with capacity for
200+ parcels (eg, trucks similar to FedEx or
UPS or Amazon sprinter vans)
Can deliver nonperishable or perishable
(eg, refrigerated trucks to allow scale in
delivery or short trips that can be delivered
in “freshness” windows for perishable
goods)
Same day
Contracted
parcel delivery
service partner
Van or truck delivery service that mirrors
the company delivery model but
outsources to independent entrepreneurs
who run branded vans or trucks (eg,
Amazon “DSP 2.0”)
Same day
In-house gig
network
Retailer-owned gig platforms that hire
independent contractors to deliver products
from stores to customers’ homes
Retailer has direct control of guest
experience
Marketplace vs retailer-specic models
both exist
<2 hours
Traditional gig
network
Delivery-as-a-service platforms that oer
white-glove gig delivery for retailers and
restaurants
<2 hours
Traditional
parcel
Large package-delivery companies
(national or regional) that have a eet of
on-sta drivers (UPS) or contract
operators (FedEx), which work well for
deliveries with xed service-level
agreements (eg, arrive by a certain time)
Next day
Partner
Build
1
2
3
4
5
Traditional delivery Gig delivery Partially applicable
Exhibit 3
A variety of models have emerged in last-mile delivery, enabled by
growth in the gig economy.
mile accounts for a rising share of costs.
Sources include labor and eet costs (for
retailers that have built their own delivery
capabilities) or a share of revenue paid to
a third-party provider (such as Instacart)
for picking and delivery. The total cost of
delivery can vary signicantly by region,
population density, and order perishability.
A variety of models have emerged in last-
mile delivery, enabled by growth in the
gig economy (Exhibit 3). Grocers should
44 State of Grocery North America
assess each transport model based on
its value proposition. The fundamental
trade-o is between speed and cost of
delivery. For example, to enable delivery in
two hours or less, grocers can tap into the
gig economy or use a third-party provider
such as Instacart. Both of these options are
typically more expensive. A less-expensive
model could be to develop an owned eet.
However, the economics work only with an
order density that can support high eet
utilization. In most geographies, grocers
must wait until enough orders come in
to limit the cost per order, which can
signicantly increase delivery times.
Grocers must have a clear idea of what
their customers value. If they care about
quick delivery, are they willing to pay for it?
If so, grocers should use the gig economy
and third-party providers. If customers
care more about costs and wouldn’t switch
grocers for faster delivery (for example,
same day versus two hours), grocers should
consider building their own eet—but
only in regions with the requisite order
density to make this option cheaper than
tapping into the gig economy or third-party
providers.
Grocers can choose from a number of
paths to achieve better online order
economics across large parts of their
network. The rapid evolution of available
technology over the past few years has
helped to clarify the best options to
support picking and delivery. To make
the right bets, grocers should take the
following steps:
• Evaluate their customer promise and
value proposition, and consider what
customers really care about.
• Assess how well their fulllment
strategy ts with the customer value
proposition.
• Look at the big picture to consider
whether they have the right
technology in the right places.
• Make the aggressive investments
required or partner with established
third-party logistics providers.
• Set EBIT and margin targets and
monitor these metrics to track
improvement.
Grocers that design a portfolio of options
tailored to each geography’s order density
and customer preferences can chart their
own path to online protability.
Vishwa Chandra is a partner in McKinsey’s San Francisco office, Prabh Gill is an associate partner in the
Vancouver office, Joshua Reuben is a consultant in the Toronto office, Sarah Touse is a partner in the
Boston office, and Kumar Venkataraman is a partner in the Chicago office.
Copyright © 2022 McKinsey & Company. All rights reserved.
45
State of Grocery North America
Growing beyond groceries:
The ecosystem expansion
Grocers are in a unique position to expand beyond their core retail offerings. It
can be challenging to build an ecosystem—but the rewards could be worth it.
© juststock/Getty Images
This article is a collaborative eort by Steven Begley, Jenny Hu, Jonatan Janmark, Nicholas Landry, and
Tom Youldon, representing views from McKinsey’s Retail Practice.
46 State of Grocery North America
There are few locations more central to
our lives than grocery stores. Whether we
grab items daily or stock up weekly, we
visit them so regularly that no other retail
business has nearly as many consumer
touchpoints or generates as much user
data. And with their vast store networks,
supply chains, and last-mile setups—along
with the trusted relationships they have
with consumers—grocery retailers have
an enviable platform to build on to expand
beyond their core business.
For many decades, grocers have been
actively leveraging their store networks,
frequent transactions, and brand strength
to grow beyond food into areas including
nonfood retail (such as hypermarkets),
pharmacy retail, nancial services, and
more. Yet today, the opportunity to grow
beyond these core services is greater than
ever. Through digitalization, expanding the
grocery business into other domains has
become much more scalable because the
industry is no longer tied to physical stores.
The most ambitious version of leveraging
this platform is to build an ecosystem (see
sidebar, “What is an ecosystem?”). Digital-
rst retailers such as Amazon and Alibaba
have led the way, building what many
consider the most successful ecosystems
in the world. Leading traditional grocers
such as Walmart, Loblaws, and Ahold
Delhaize have followed, moving in the
ecosystem direction. Still, many grocery
retailers have yet to take full advantage of
today’s digital technology. These grocers
could unlock opportunities for both
additional revenue streams and higher
valuations by thinking through whether
their unique assets—their customers and
trac, brand, physical assets, and so on—
can provide attractive growth opportunities
beyond the core.
How leading grocers are
building ecosystems
The pattern is clear: grocers venturing
beyond grocery generate higher returns for
shareholders. In fact, the world’s top eight
What is an ecosystem?
An ecosystem is an interconnected set of products and services through which customers can
fulll a variety of needs in one integrated experience. In grocery, that could include being able to
buy not only food but also alcohol, pharmaceuticals, and home goods. It could mean being able to
bank at the grocery store or use its distribution network to receive at-home meal-kit deliveries. At
the core of everything, though, is the customer connection, which creates additional value for all
stakeholders. A successful ecosystem typically builds on several pillars:
• frequent usage and engagement with stakeholders beyond pure commerce
• a network of services provided through expansive partnerships
• strong network eects that compound value for customers and participants—the larger the
ecosystem, the more value to each participant
• rich, data-enabled experiences
47
State of Grocery North America
retailers by revenue market share, ve of
which are grocers (Amazon, Costco, Kroger,
Schwarz Group’s Lidl, and Walmart), are
all experimenting with such expansions.
Our analysis nds publicly traded grocers
pursuing some form of ecosystem strategy
have been rewarded with higher enterprise
values (EV) relative to the broader grocery
sector. We have identied about 15 grocers
with some ecosystem activity that have
an average EV to EBITDA multiple of
15.3, compared with an overall average
multiple of 10.7 for the grocery companies
in our data set. Even if some expansion
activities may dilute earnings margins in
the short term, they can still drive value for
shareholders as a business is repositioned
toward investors.
In essence, the value creation from
ecosystem activities is delivered in three
ways:
• driving more revenue in the core
grocery business in stores and
online thanks to increased loyalty
(from the value of participating
in the ecosystem) and a boost in
adding new customers (from the
large set of touchpoints in the
ecosystem)
• adding new revenue pools, including
by monetizing loyalty data, creating
new media platforms, tapping into
categories adjacent to groceries, and
delivering new fee-based services
• market repositioning from traditional
grocery to a technology- and
data-enabled platform with many
potential growth vectors, increasing
the valuation multiple
Consider the US-based grocer Walmart.
It has a vast, integrated, compounding
ecosystem intended to engage and deepen
its share of wallet beyond retail for its
150 million weekly customers. Walmart
provides healthcare services through a
network of primary health clinics, oers
in-store lab testing in partnership with
Quest Diagnostics, and works with insurer
Humana to sell Medicare drug plans.
1
In
nancial services, it provides prepaid cards
in partnership with Green Dot, money-
transfer services through MoneyGram, and
tax services through Jackson Hewitt. Its
Walmart+ membership program includes
benets such as free shipping and cheaper
prescriptions, while Walmart Marketplace
competes with Amazon and is growing
rapidly through its expanding network of
third-party sellers.
Similarly, Netherlands-based Ahold
Delhaize has built an ecosystem that
includes dierent business models in food,
such as food service through FreshDirect
and partnerships in Europe, e-commerce
full-basket delivery, and a variety of store
formats, including supermarkets and
convenience. Ahold Delhaize has also
scaled bol.com, its nonfood marketplace,
and is making steps in media monetization
and personalization across its food and
nonfood propositions, leveraging its
consumer data and insights.
Two primary ways to grow:
B2C and B2B
There are two major routes for ecosystem
expansion: entering new business-to-
consumer (B2C) verticals and touchpoints,
or externalizing and monetizing internal
capabilities and oering them as business-
1
The ability to extend services into pharmacy and healthcare is dependent on national regulations.
48 State of Grocery North America
to-business (B2B) services (Amazon’s AWS
arguably being the most famous example).
Broadening into B2C markets
When we examined the 24 largest global
grocers to see the most prevalent B2C
expansions, we found (unsurprisingly)
that all of them had ventured into online
grocery. In addition, the vast majority had
built loyalty programs, expanded into retail
categories beyond grocery, and offered
financial services (exhibit).
Next on the list after these common (and
fairly traditional) expansion verticals
comes a rapidly growing expansion play:
marketplaces. In essence, marketplace
platforms facilitate retail by allowing third-
party sellers that own inventory to sell
to consumers through the marketplace
interface. This has proved to be a
tremendously successful business model
that has shaped some of the most valuable
companies in the world, notably Amazon
and Alibaba. The (not so) secret sauce
behind the success of the marketplace
model is anchored in the ability to oer an
expansive range at the best prices without
the associated inventory risk and capital
requirements.
While early marketplace activity was
driven by online-only players and nonfood
retailers, grocers are increasingly
exploring the model. This enables
retailers to broaden their food oerings
Strategic
paths
United
States Europe Asia
Total # of
retailers
B2C extension
E-grocery
Loyalty programs
Other B2C services¹
Financial solutions
Other retail categories
Marketplace
Restaurants and food services
Entertainment
B2B internalization and marketing
Insights, digital services, andmedia
Real estate and energy
Active investments
Logistics services
Waste management and recycling
Verticalization and manufacturing
20
19
19
19
16
14
24
21
21
20
19
18
16
11
High Medium Low
¹ Services oered outside traditional grocery retailing (travel, picture services, pharmacy, laundry, ower shop, etc).
Source: McKinsey analysis
1 column = 1 retailerDegree of activity None
Global grocers are making signicant ecosystem plays.
Exhibit
Global grocers are making significant ecosystem plays.
49
State of Grocery North America
(for example, with local or niche ethnic
brands) and to quickly expand into more
nonfood oerings. For example, Kroger
announced an expansion of its Kroger
Ship program to add 50,000 items to its
oerings, including natural and organic
food, international food, specialty items,
houseware, and toys.
2
The move was
intended to increase convenience to the
customer and to oer an augmented one-
stop-shop experience to compete against
more diverse retail marketplaces such as
Amazon and Walmart.
The marketplace model carries
risks, such as the diculty of vetting
product assortments and of providing
a consistent customer experience.
But the benets of a well-developed
marketplace can be immense in terms
of better serving customers, expanding
online trac, and gaining additional data
and insights on customers, as well as
through the nancial benets from seller
commissions and monetizable services to
the seller community.
Deepening within B2B services
For B2B services, the most common areas
of expansion were insights, digital services
and media, real estate and energy,
logistics, and active investments. One of
the most extreme examples within grocery
is Ocado. What started as an online
grocery business in the United Kingdom
evolved into a B2B technology business
with customers such as Groupe Casino
in France, ICA in Sweden, Kroger in the
United States, and Sobeys in Canada.
The current blockbuster use case for
expanding into B2B services is retail
media networks. Grocery retailers have
historically been good at monetizing their
substantial exposure to consumers—
either in-store or through leaets and
magazines—by selling space to consumer-
packaged-goods companies. Retail media
networks (RMNs) are the digital equivalent
of this. When done well, they can unlock
approximately 2 to 4 percent of online sales
in positive EBIT contribution.
Grocers are in a unique position to build
RMNs: the high shopping frequency
they enjoy provides ample advertising
opportunities across assets such as
websites, apps, and email; the vast amount
of data enables accurate personalization;
and the fact that advertisements appear
when consumers are in a shopping mode
enables very high—and, importantly,
measurable—conversion. To capture this
opportunity, grocers are increasingly
developing in-house teams that engage
directly with their brands on marketing
opportunities and eectively operate as
advertising agencies.
While North American grocers such as
Walmart and Kroger were early adopters
of this approach, we’re seeing European
players such as Tesco and Sainsbury’s
take meaningful steps into this area.
To date, it’s mainly large retailers with
the technology requirements and new
capabilities that are set to pursue the
retail media network opportunity. But we
expect that smaller and regional players
2
Jeff Wells, “Kroger goes for endless aisles with new marketplace strategy,” Grocery Dive, August 11, 2020.
50 State of Grocery North America
will increasingly be able to use plug-and-
play solutions and that third parties will
provide the same services to vendors and
monetize accordingly.
The keys to growing beyond
retail
We see several grocery retailers
expanding beyond the core and building
ecosystems that generate additional
value for stakeholders. But pursuing an
ecosystem strategy does not necessarily
lead to success; the reality is that many
more companies have experimented with
ecosystem strategies than have succeeded
in using them to create substantial value.
Based on what we’ve learned from
examples of both success and failure, the
fundamentals for success are clear (and
similar to other endeavors): ambitious
senior leadership with willingness to pursue
big bets and accept risk, a vision and
strategy with rigorous prioritization, and
an organizational model that fosters the
right collaborations and agility. Once these
fundamentals are in place, it comes down
to execution. Key actions will then include
the following:
• Cultivate a relevant portfolio of
partners. This portfolio must
include capabilities along the whole
partnership life cycle, from aligning
strategically to scanning partners,
structuring deals, onboarding them,
and eventually managing partner
relationships. Engaging not only
with large companies but also with
start-ups is important to build a
thriving partner portfolio.
• Develop technology capabilities
that ensure scalability, security,
and responsiveness to customer
needs—with business use cases
guiding data and technology eorts.
• Implement relevant principles for
capital allocation (for example, a
dedicated fund to support rapid
growth), undertake continuous
performance measurement and
evaluation, and ensure timely
stakeholder communication.
The benets of a well-developed
marketplace can be immense in
terms of better serving customers,
expanding online trac, and
gaining additional data and
insights on customers.
51
State of Grocery North America
The world’s largest grocery retailers are
making moves, but that doesn’t mean
midsize or regional grocers can’t develop
ecosystems. First, it’s not necessary
to take a leading role. Grocers can
partner with others that have the capital
or capabilities to orchestrate a robust
ecosystem approach while still reaping
the benets that come with stickier,
more cost-eective customers. Second,
grocers can nd a niche to own. Is there a
segment of customers that can be uniquely
served? For instance, regional and smaller
banks target specic segments—such as
newcomers to a country—with tailored
services to meet their needs. Similarly,
pet ownership and care have emerged
as powerful niche ecosystems within the
consumer-packaged-goods sector. What
we’re saying is that grocers don’t need to
seek to replicate the Walmart playbook—
there may be sizable, underserved groups
to service and own.
Steven Begley is a partner in McKinsey’s New York office, Jenny Hu is an associate partner in the
Toronto office, Jonatan Janmark is a partner in the Stockholm office, Nicholas Landry is an associate
partner in the Vancouver office, and Tom Youldon is a partner in the London office.
Copyright © 2022 McKinsey & Company. All rights reserved.
52 State of Grocery North America
Grocers’ sustainability
opportunity in transforming
the food system
Now is the time for grocers to develop strategic sustainability transition plans
focused on value creation and think more broadly about the role they can play
in encouraging change across the full value chain.
© Alexander Spatari/Getty Images
This article is a collaborative eort by Sebastian Gatzer, Steve Homan, Nikola Jakic, Bartosz Jesse,
Bill Mutell, and Daniel Roos, representing views from McKinsey’s Retail Practice.
53
State of Grocery North America
Increasingly severe global weather
events and the urgent tone of the 2021
UN Climate Change Conference (COP26)
have made it crystal clear: now is the
time to truly prioritize sustainability. And
while climate may be top of mind, it can no
longer be separated from other concerns
about how we live and make supporting
economies more sustainable. To address
these problems, it is crucial to consider
the food system, which accounts for 34
percent of global greenhouse-gas
(GHG) emissions.
It’s not simple to reform a system relied
on by more than 500 million farmers,
workers, and employees around the world
that also plays a critical role in people’s
health. Yet pressure from stakeholders
has never been stronger: consumers
are demanding sustainable products
and services, investors are shifting to
sustainable investments, regulators
are implementing new and tighter
sustainability regulations, and pressure
from nongovernmental organizations
(NGOs) is increasing.
We believe grocers are in a unique
position to be a driving force in this much-
needed sustainability transformation.
They’re ubiquitous—even the smallest
town has a grocer. They’re integral to
local and national economies, often being
the largest private employer in an area.
They have the power to both inuence
consumer choices and collaborate
with farmers, suppliers, and even other
grocers. And, nally, they can benet
from the transition, because sustainability
can go hand in hand with value creation.
In fact, our analyses show that while
sustainability presents potential risks,
it also oers opportunities for grocers’
top lines, margins, and costs—adding up
to around 25 to 30 percent for a typical
North American grocer.
Making sustainability a
strategic imperative
Many food retailers have already kick-
started their sustainability eorts with
portfolios of initiatives that typically span
decarbonization, packaging, assortment,
and social sustainability. A recent survey of
sustainability leaders from North American
and European grocers suggests two-thirds
of grocers have quantied their starting
point (baseline) and dened concrete
actions to address sustainability topics,
and 50 percent have dened concrete
targets. Yet only half the respondents
were condent they could achieve their
sustainability targets.
We believe grocers are in a
unique position to be a driving
force in this much-needed
sustainability transformation.
54 State of Grocery North America
The problem? Grocers associate
sustainability with signicant costs and
have not solved the challenge of creating
value through “commercialization” of
green activities, which has slowed
progress. They are simultaneously juggling
other critical strategic transitions, such as
digitalization. And it is dicult to set up
much-needed upstream collaboration with
farmers and suppliers.
We believe grocers need to make
sustainability an integral part of their
businesses with a strategic perspective
based on value creation and tailored to
their circumstances. We have identied
three areas of focus that will help
grocers succeed:
1. the ve key sustainability themes for
holistic impact
2. levers grocers can use to capture
eciency, growth, and margin
improvement opportunities while
managing potential downsides
3. an operating model enabling
grocers to successfully manage the
sustainability transformation
1. Focusing on the
ve sustainability topics
that matter
While looking at the food system’s
sustainability from an environmental,
social, and governance (ESG) perspective
is a good start, grocers can go further.
We sought to create a framework for
grocers to provide insights about the most
important dimensions. Our research into
stakeholder requirements and external
costs of the food system suggests grocers
focus on ve explicit dimensions: health,
the environment, the economy, animal
welfare, and livelihoods (HE
2
AL). Within this
framework, we further identied 15 topics
that should matter most to grocers
(Exhibit 1).
Retailers should focus on all HE
2
AL
dimensions and look at the full value
chain to maximize value creation and
sustainability impact. Looking at the full
value chain is important because many
value creation opportunities and much
of the sustainability impact come from
interactions with suppliers and customers.
Retailers should focus on
all HE
2
AL dimensions and
look at the full value chain to
maximize value creation and
sustainability impact.
55
State of Grocery North America
Grocers can help mitigate the external costs to society from food through
15 sustainability levers.
Source: Food and Land Use Coalition; Perotti; Rockefeller Foundation; Sustainable Food Trust
Cost to society per $ spent on food, $
~0.005
0.40–1.10
Animal welfare
0.30–0.90
0.05–0.10
Health Environment Economy Livelihoods
0.80–2.10
Cross-cutting
0.05–0.15
For every dollar spent on
food, an estimated 0.8-2.1
dollars of external costs
are caused
Sustainability levers for retailers
Health
Enable healthy lives through
healthier assortment
(incl private labels)
Ensure food safety
Economy
Secure food access and
aordability
Increase supply chain
resilience
Livelihoods
Protect human rights
Ensure fair pay
Environment
Decarbonize own operations
and value chain
Achieve plastic waste and
packaging circularity
Eliminate or reduce food waste
Reduce biodiversity impact,
incl deforestation
Increase resource eciency
(eg, water)
Animal welfare
Strengthen animal welfare
Cross-cutting
Create product transparency and
traceability
Champion standards, certications,
and sustainable policies
Market sustainability activities
1
2
8
9
11
12
3 10
4
5
13
14
15
6
7
Exhibit 1
Grocers can help mitigate the external costs to society from food
through 15 sustainability levers.
56 State of Grocery North America
Let’s take decarbonization as an example.
While the food system accounts for more
than a third of global GHG emissions,
only about 4 percent of grocers’ direct
contribution is from grocers’ own
operations (Scope 1 emissions) and from
purchased electricity and heat (Scope 2
emissions). Most emissions are generated
along the value chain (Scope 3), with
about 80 percent stemming from land use,
agricultural production, food processing,
and packaging (Exhibit 2).
This means grocers need to focus on
two elements. First and foremost, they
should work on their own footprints and
optimize their own operations. This can be
a signicant—and expensive—investment
of time and resources, requiring anything
from making thousands of stores energy
ecient to sourcing green energy and
reshaping cooling technologies and
logistics. But it holds the potential for
grocers to both make a sizable contribution
to sustainability and create value.
Note: Global top-down perspective; gures may not sum to 100%, because of rounding.
¹ Consumer packaged goods.
² CO equivalent.
Source: Crippa et al., “Food systems are responsible for a third of global anthropogenic GHG emissions,” Nature Food, March 8, 2021, Volume 2
9
3
4
5
6
4
39
32
Agricultural production
Food
processing
Retail
Packaging
Land use
Transport
Use of products
Waste/end of life
34
66
Stakeholder with direct inuence
The global food system is a key
contributor to global greenhouse-
gas (GHG) emissions, accounting
for 34% of emissions.
While grocers directly contribute only 4% of food-related GHG
emissions, they are uniquely positioned to inuence and support the
decarbonization of suppliers and farmers upstream and enable
sustainable consumption choices of consumers downstream.
Food-related
GHG emissions,²
%
Global GHG
emissions,²
%
Farmer
CPG¹Grocer
Consumer
FoodNonfood
Food systems account for more than a third of global greenhouse-gas emissions.
Exhibit 2
Food systems account for more than a third of global greenhouse-
gas emissions.
57
State of Grocery North America
Second, grocers should take a holistic
view of GHG emissions created along the
entire value chain, reviewing how their
assortment and sourcing choices and
policies contribute to them. Reducing
Scope 3 emissions while creating value
can include actions such as introducing
transparency requirements for all
products, changing product assortment
(for example, introducing lower-emissions
alternatives), adjusting specications (such
as specications on shape or size that
can cause farmers to waste “nontting”
produce), supporting farmers who want to
develop emissions-reducing agricultural
production, or improving supply chain
nancing based on the GHG footprint of
the supplier. Tackling Scope 3 emissions
can be quite complex, because grocers
need to collaborate with their partners in
the value chain. However, given the large
share of total emissions and grocers’
central position in the value chain, this step
is required to decarbonize the food system.
Along the ve HE
2
AL dimensions,
grocers should identify opportunities to
fundamentally—and credibly—dierentiate
themselves and create competitive
advantages, allowing them to maximize
sustainability impact and value creation.
This does not imply grocers need to be
sustainability leaders across all 15 topics, but
they should make conscious choices about
where they want to lead, where they want
to benet from resource productivity gains,
and where they just want to comply with
regulations. The following ve factors can
help grocers prioritize their eorts:
• the company’s starting point
(baseline)
• the position of competitors
• stakeholder expectations, especially
those of (future) consumers and
regulators
• the company’s “appetite to do good,”
reecting its purpose
• the overall resulting potential for
value creation, including upsides and
downsides
Grocers can generate
signicant value from a well-
positioned sustainability
transformation.
58 State of Grocery North America
These opportunities then need to be
translated into concrete targets that can be
communicated internally and externally.
2. Creating value from the
sustainability transformation
Grocers can generate signicant value
from a well-positioned sustainability
transformation. The value generated can
come from ve types of value creation levers,
which can be further grouped into reducing
downside risks and seizing the opportunities
sustainability oers. (Exhibit 3).
Managing risks
A strong sustainability strategy reduces
several downside risks companies might
otherwise face, meaning it can provide
an important source of value. Companies
with a low ESG rating will face increasingly
higher costs of capital as capital is moved
to sustainable companies. By improving
their ESG ratings, grocers can ensure
access to capital at better rates. Several
NGOs are also lobbying regulators to
extend the carbon tax to food, increasing
the cost of these products. By proactively
working across the supply chain to reduce
Source: McKinsey analysis
Illustrative economic prot, modeled with top-down assumptions, baseline = 100
100
150
Baseline
economic
prot
Market
share and
margin
gain
Green-
business
building
Portfolio
strategy
Full
potential
Market
share loss
Higher
cost of
capital
Lower
cost
through
green
operations
+50%
(potent
ial
prot)
Reducing risks
Capture opportunities
Sustainability value-creation levers can drive economic prot.
Exhibit 3
Sustainability value-creation levers can drive economic profit.
59
State of Grocery North America
GHG emissions, grocers can avoid these
additional costs. In addition, as consumers
increasingly patronize more sustainable
companies, there is a risk of losing
market share to sustainability leaders.
By oering a wider range of healthy and
sustainable options and by decarbonizing
their own operations and the value chain,
for example, grocers can gain market
share. Although there is still considerable
uncertainty around how sustainability will
play out, there’s a clear business case for
acting to mitigate downsides.
Capturing opportunities
Sustainability strategies can do more than
mitigate risk and reduce downsides; they
can also give grocers a competitive edge
and allow them to take advantage of new
opportunities. We outline some potential
strategies for grocers below.
Portfolio strategy: Grocers can begin
reorienting portfolios toward sustainability
at the level of their broader ecosystems.
They can rigorously allocate capital—for
example, by investing in sustainable parts
of the business, managing unsustainable
parts through cash ow, or scaling down
and divesting—and think about organic and
inorganic moves. There are many attractive
sustainability value pools beyond grocery,
often with signicantly higher growth and
margin potential. Grocers can evaluate
their potential to extend beyond their core
business, whether by focusing on adjacent
segments that strengthen the core
business (such as Walmart’s expansion
into Walmart Health, which was launched
in 2019 and now oers low-cost, doctor-
staed healthcare services in four US
states
1
) or by leveraging consumer data as
an ecosystem backbone to provide highly
valuable services.
Sustainable business building: Disruptive
sustainable innovators are emerging in
the food system, from vertical farming
(such as AeroFarms and Infarm) to protein
alternatives (Planted or Beyond Meat) to
packaging circularity (TerraCycle’s Loop).
Yet established grocers typically struggle
to build new sustainable businesses
successfully. While they face real
challenges, such as brand credibility and
incubating agile new ventures within larger
corporate structures, established grocers
are also held back by a lack of ambition
and an unwillingness to disrupt themselves
before someone else does. These are
missed opportunities. Established
grocers have signicant advantages that
should make them the natural owners of
sustainable-business building.
Grocers can begin
reorienting portfolios toward
sustainability at the level of
their broader ecosystems.
1
“Introducing Walmart Health,” Walmart Health.
60 State of Grocery North America
Market share and margin gain:
Consumer companies are increasingly
gaining market share and margins by
dierentiating through sustainability. The
three principal levers are branding and
marketing, sustainable value propositions
and dierentiation, and green pricing—
especially as sustainability premiums begin
to materialize. For example, sustainability
leaders disproportionately allocate shelf
space and resources to sustainable
products, which are outgrowing
conventional products by a factor of
seven.
2
California-based grocer Raley’s,
for example, seeks to further propel
competitive dierentiation by promoting
shelf guides to help shoppers navigate
sustainable products.
3
Sustainable operations and supply: More
sustainable operations can be value
accretive and signicant drivers of better
performance. Often, we nd up to 50
percent of operational levers can be net
present value–positive (NPV-positive) or
NPV-neutral and can improve nancial
performance through cost reductions.
Grocers should therefore approach
sustainability investments as they
approach other investments: by prioritizing
the most economically ecient options.
Grocers can use marginal abatement cost
curves to prioritize NPV-positive or NPV-
neutral levers (Exhibit 4). Such cost curves
show the cost of each investment and rank
them by their return on capital.
Consumer companies
are increasingly gaining
market share and margins
by dierentiating through
sustainability.
2
“Sustainable Market Share Index,” NYU Stern Center for Sustainable Business, March 2021.
3
“Shelf Guide: Find your healthy,” Raley’s.”
61
State of Grocery North America
3. Setting up the
sustainability transformation
for success
Maximizing sustainability impact
and value creation requires a holistic
transformation approach with the right
operating model. Like any business
transformation, sustainability is hard
to do because it requires a substantial
number of changes to the business and
to cross-functional collaboration. As
mentioned above, only half of retailers
that set a sustainability target are
condent they will reach these targets.
Note: Additional potential from Scope 3 downstream levers not included.
¹ Net present value.
Source: McKinsey Decarbonization Lever Library; McKinsey GreenGauge; McKinsey analysis
Exemplary marginal abatement cost curve (MACC) for grocery retailers
Levers to abate CO-equivalent (COe) emissions, 2030 view
Levers with negative
values are considered
NPV¹-positive
Levers with
cost = 0 are
considered
NPV-neutral
Levers with positive
values are considered
NPV-negative
100
-700
–600
-500
0
200
-300
–800
-100
–400
–200
Cost in $
per ton
COe
reduced
by 2030
Scope 2 Scope 3Scope 1
Reduce
materials used
in packaging
Switch logistics eet
to electric vehicles
and clean fuels
Optimize cattle breeding
to reduce methane (eg,
feed, genetic selection)
Key levers
Reduction potential in ton COe
Every box is one CO reduction lever.
The chart shows the cost of this lever
and the CO reduction potential
Carbon-abatement cost curves can support decisions about the sequence of implementation.
Exhibit 4
Carbon-abatement cost curves can support decisions about the
sequence of implementation.
62 State of Grocery North America
Role of leaders
The CEO and board of directors establish sustainability as business priority, set the
ambition, and sponsor and model the sustainability agenda. The chief strategy ocer
is the orchestrator across functions and business units (BUs).
Structure 1
Activity scope
Centrally led activities embed sustainability in the core of the business (eg,
sustainability strategy, reporting). Initiative-based activities across the HE²AL
dimensions must be business-led.
2
Teams
BUs have ownership of initiative delivery and collaborate with a dedicated central
sustainability team, which leads and coordinates activities across the organization.
3
Governance
Executive committees and steering committees enable C-level alignment
and oversight.
4
Performance management
Sustainability ambition and targets are set and translated into specic
KPIs per initiative.
Internal incentives—specically variable compensation—are tied to sustainability
performance.
Data collection and reporting must be established as key enablers, with a focus on
product traceability and transparency.
Processes
People
5
Linkages and collaboration
Central team ensures rigor and discipline, with BU leaders taking business
ownership from the start.
Cross-functional and cross-BU teams, governance, and processes enable and
steer delivery.
6
Capabilities
Key sustainability skills and knowledge on environmental science, climate change,
and specic domain knowledge across HE²AL dimensions are considered
foundational.
Core enabling skills are required: strong leadership, ability to inuence, eective
communication, and data collection, integration, and analysis.
7
Culture
A proactive and holistic view is shared across the organization, with sustainability
serving as an integral part of company vision and strategy, as modeled by board of
directors, CEO, and executives.
8
When they have the right focus, key elements of the operating model can improve the overall sustainabil-
ity of an organization.
Exhibit 5
When they have the right focus, key elements of the operating model
can improve the overall sustainability of an organization.
63
State of Grocery North America
Sustainability eorts should therefore
be anchored by the CEO and board, who
should model a green culture. They should
be supported by a central team led by a
chief sustainability ocer who reports to
the CEO and acts as the main orchestrator
and know-how provider across the
organization. Business units should take
the lead in developing and executing
specic sustainability initiatives, with
sustainability embedded in performance
management as a measure of progress that
can ensure accountability both internally
and externally. Moreover, grocers should
invest in data collection and reporting
across the value chain to be able to
manage upstream and downstream impact
(Exhibit 5).
The food system requires fast, systemic
change to become sustainable. Grocers
can be a driving force and create
signicant additional value, but this is a
multiyear challenge requiring leadership
and focus throughout the organization, as
well as investments. We recommend three
steps leaders should take now:
• Assess your sustainability baseline
and dene your sustainability
ambition with concrete impact
targets (such as nancial, carbon
abatement, waste diversion, and
supplier engagement). These
should be based on your starting
point, your purpose and internal
“appetite to do good,” the behavior
of competitors, your stakeholders’
expectations, and, last, the resulting
potential for value creation.
• Implement a well-dened and
prioritized set of sustainability
initiatives that maximize your
sustainability impact across the
HE
2
AL dimensions and generate
value for your business across all
ve types of value creation levers.
Think strategically about how to
involve suppliers, dierentiate
through sustainable own brands,
and invest in transparency.
• Adapt your operating model to
anchor sustainability in the day-
to-day business decisions most
relevant to your articulated ambition
across the value chain. This enables
consumers to make sustainable
choices, optimizes your operations,
and allows you to collaborate with
farmers, suppliers, and peers.
Sebastian Gatzer is a partner in McKinsey’s Cologne office, where Daniel Roos is an associate
partner; Steve Hoffman is a partner in the Chicago office; Nikola Jakic is an associate partner in
the Toronto office; Bartosz Jesse is a partner in the Zurich office; and Bill Mutell is a partner in
the Atlanta office.
Copyright © 2022 McKinsey & Company. All rights reserved.
64 State of Grocery North America
Crisis or opportunity?
How grocers can win the
talent war
Grocery retailers can’t find the people they want for the jobs they need. In a
competitive labor market, evolving the talent model can provide an advantage.
© Hispanolistic/Getty Images
by Rahul Mathew, Beatriz Rastrollo, Patrick Simon, and Raphaël Speich
65
State of Grocery North America
Anyone searching for the front line in the
war for talent should consider the grocery
sector. Grocery retailers employ more than
8.5 million people in the United States and
European Union,
1
yet they face two critical
problems: high demand for new skills
and roles that are dicult to cover amid
a shortage of available talent, and high
attrition rates for existing employees. It’s a
labor spiral that presents a huge challenge
but also an enormous opportunity to create
value—if grocers evolve their talent models
to the new reality.
Some of the factors behind the tight labor
market are well documented: pressure
for wage increases amid ination; talent
shortages; increased competition; the rise
of absenteeism and attrition in the wake of
COVID19; and the need for more exible
labor scheduling. Yet the grocery sector
also faces longer-term challenges on
three fronts:
• Its value model is shifting. The
way value is created in grocery
retail is being transformed by
analytics, the rise of digital (notably
e-commerce and new propositions
such as instant delivery), demand
for sustainability (requiring higher
collaboration with suppliers and
skills related to new products),
partnerships and ecosystem
collaboration, and other dynamics.
It’s forcing employees to learn new
skills as roles evolve and pushing
companies to adapt their operating
model.
• Automation opportunity is high
compared with other industries.
Research suggests one third
of grocery retail tasks could be
automated over the next eight
years.
2
Yet very few jobs can be
fully automated, meaning the
challenge is not about eliminating
jobs but about determining how
much they will change—and how
workers can change with them. As
some tasks become increasingly
automated, workers will need to
adapt, taking on additional—often
more rewarding—tasks, such
as increased interaction with
customers, while acquiring new skill
sets.
• Cost pressures are increasing.
A need for greater eciency and
productivity is being driven by
lower market growth, ination,
pressure to increase wages, the rise
of competition, and (even higher)
attrition rates.
1
“Annual detailed enterprise statistics for trade (NACE Rev. 2 G),” Eurostat Data Browser, European Union,
February 28, 2022; “Supermarkets & Grocery Stores in the US - Employment Statistics 20022027,” IBISWorld,
updated December 29, 2021.
2
Patrick Simon, Caroline Tufft, and Pierpaolo Zampella, “Closing the skills gap in retail with people analytics,”
McKinsey, August 28, 2020.
66 State of Grocery North America
The pandemic has dramatically
accelerated these trends, leaving
grocery retailers with little choice
but to transform their people model.
The upside? The sector can not only
address these challenges but also drive
sustainable competitive advantage with
talent.
How the grocery workforce
is changing
These trends have upended the grocery
retail industry. Companies are being
forced to reimagine and redesign grocery
roles as physical and manual tasks
have declined in importance and the
need for technological and social skills,
adaptability, and the ability to master
various tasks continues to rise (Exhibit 1).
Retail hours worked by activity, US and Western Europe,
1
billions
Sample skills
Sample retail
activities
Physical and
manual skills
• General
equipment
operations
• Basic data input
• Basic data
processing
• Restock
shelves
• Scan items at
checkout
• Take phone
orders
• Keep sales
record
• Interpret
performance
dashboards
• Create custom
sta scheduling
• Serve
customers
• Coach
personnel
• Consolidate
customer info
on a tablet
• Complete
e-learning
trainings
• Creativity • Leadership
• Empathy
• Programming
Basic cognitive
skills
Higher-level
cognitive skills
Social and
emotional skills
Technological
skills
Social and technological skills are becoming more important in retail.
¹ Western Europe includes Austria, Belgium, Denmark, Finland, France, Greece, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, and
United Kingdom.
Source: McKinsey Global Institute
0
2016 2030 2016 2030 2016 2030 2016 2030 2016 2030
5
10
15
20
–17%
–3%
+8%
+32%
+64%
Exhibit 1
Social and technological skills are becoming more important in retail.
These skills are central to how grocery
workers’ responsibilities are changing,
and how companies equip and empower
employees will determine their success in
attracting and retaining talent:
• New and changing roles. Entirely
new roles are being created as the
grocery sector evolves, expands
into adjacent business areas,
and introduces technology and
automation. About 280,000 jobs
were created in retail trade in the
United States between February
2020 and March of this year.
For example, the acceleration of
online sales and instant delivery
brings with it a need for in-store
logisticians and last-mile delivery
67
State of Grocery North America
workers. At the same time, some
roles are growing or evolving,
requiring dierent skills from those
required in the past. In the areas of
commercial, digital, and logistics,
there’s an increased demand for
more advanced technical and
analytics skills in certain roles, such
as pricing, digital marketing, and
planning. Cashiers, long believed
to be a talent pool with declining
demand due to increased adoption
of self-checkout, are required to
have more social-emotional skills
to bring a human touch to customer
service and be more tech savvy to
take on new tasks like online order
fulllment. In addition, physical work
will still be very relevant.
• Workforce retention. Attrition in
grocery retail globally jumped to
about 60 percent in 2020 from 40
percent the previous year, according
to the Food Industry Association—
despite an increase in average wages
and benets for full-time employees.
While the industry has spent upwards
of $15 billion to keep workers, it’s
clear that transactional pay is not
sucient: workers are looking for
deeper relational elements and
are placing signicant emphasis
on feeling valued by managers and
organizations, schedule exibility,
and greater potential for
career advancement.
• A war for attracting talent. All
industries are seeking new roles and
skills, sparking a tight labor market
that is challenging for grocery
retailers already battling margin
pressure. The sector has responded
with signicant salary increases—
Lidl, for example, announced it was
allocating more than €20 million for
pay raises in the United Kingdom
as part of its investment strategy
on talent attraction and retention,
while Mercadona announced a
5 percent salary increase for its
workforce. In the United States,
some 300,000 employees left
wholesale trade industries between
February and September last year.
While this presents a challenge for
grocery retailers, it also validates
the experience and training of the
sector’s people. Other sectors often
value the skills of grocery workers,
including customer service, people
management, and social-emotional
intelligence.
What grocery retailers can do
Against this backdrop of short- and long-
term challenges spanning the industry,
it’s no wonder that about 40 percent of
grocery CEOs today identify people as
a priority topic, compared with around
25 percent last year. We said earlier that
grocery retailers have no choice but to
transform their approach to talent, and
we’ve identied six strategic moves they
can take to navigate the transition to a new
people model:
• Reduce short-term attrition
by addressing the employee
experience. There’s a disconnect
between the factors employees
regard as important and those
employers think are important
(Exhibit 2). If the past 18 months
have taught us anything, it’s
that employees are craving
investment in the human aspects
of work. Better pay, benets,
and perks have become table
68 State of Grocery North America
Factors important to employees versus what employers think is important
Employers do not fully understand why employees are leaving.
Note: Standardized scores are reported for both employee and employer perspectives. Employees were asked to respond to the following question:
“To what extent did the following factors impact your decision to leave your last job?” (Possible responses: “not at all,” “slightly,” “moderately,” “very much,”
“extremely.”) Employers were asked to respond to the following question: “Why do you think employees are choosing to leave your organization now? (Select
all that apply.)”
¹ Includes interactions with clients, customers, patients, and students.
Source: “‘Great Attrition’ or ‘Great Attraction’? The choice is yours,” McKinsey, September 2021
0–1–2
+1
+1
–1
–2
0
+2
+2
Having caring
and trusting
teammates
Development
opportunities
Potential for
advancement
Feeling
engaged
by work
Work-life
balance
Starting a
business
Valued
by manager
Negative
interactions
1
Sense of belonging
Poor
health
Safe environment
Poached
by another
company
Unmanageable
workload
Living in a
desirable location
Ability
to work
remotely
Flexible work schedule
Ability to work
autonomously
Doing meaningful work
Care for family
Inadequate
compensation
Access to
technology
Valued
by organization
L
ooking for
a better job
Most
important
Somewhat
important
Less
important
More important to employees
than employers appreciate
As important to employees
as employers think
Most
important
Somewhat
important
Less
important
Employers
Employees
Employers seem to overlook relational elements that are key factors in why employees are leaving,
such as lack of belonging or feeling valued at work
Exhibit 2
Employers do not fully understand why employees are leaving.
69
State of Grocery North America
stakes. What employees are really
seeking is to feel valued by their
organizations and to have social
and interpersonal connections
with colleagues and managers.
To achieve this, onboarding and
ongoing motivation for in-store
personnel are critical. Leaders
should take note: you can’t x what
you don’t understand, and truly
investing in the relational elements
that ensure employees feel valued
and belong at work is the key to
arresting the slide.
• Anticipate future talent demand
and invest accordingly. The nature
of all grocery roles is shifting, due
not only to elements within the
control of companies—such as the
degree of automation—but also
to changes largely beyond their
control, such as consumer behavior.
For example, few grocers would
have anticipated such rapid growth
in e-commerce channels, and most
are still trying to understand how
to attract and retain talent with this
experience. It’s critical to invest
early in quantifying and planning for
talent needs over a three- to ve-
year time horizon because it’s easier
to be proactive and adjust if needed
than to be reactive and always
play catch-up. For example, one of
the largest retailers in the United
States anticipated growing demand
from customers for COVID19
healthcare needs. Instead of
focusing on growing its on-premises
services—which would have been
dicult because of high demand
for healthcare workers during the
peak of the pandemic—the retailer
experimented with virtual-provider
visits and accelerated the hiring of
remote healthcare professionals in
work-from-home roles.
• Dierentiate your investments
in attracting and retaining core
digital talent. Grocers able to
attract and retain digital talent
such as data engineers, data
scientists, and full-stack developers
have realized that the needs and
expectations of digital talent are
unique and specic. Organizations
that win in this space focus on
anticipating digital talent needs,
linking compensation and benets
to the value that digital roles bring
to the organization, developing
communities of practice with
eective technology talent
functions, and investing in digital-
specic career paths to highlight
growth opportunities.
For example, one retailer in
the United States created a
dierentiated employee value
proposition for digital roles. The
digital-employee value proposition
was focused on three pillars: a
renewed company culture (“a great
company” that fosters agile ways
of working and develops digital
communities), digital-specic
learning and career development
(“great opportunities” built on the
foundations of an exciting and
future-oriented technology stack),
and tailored incentives (“great
benets,” including nonnancial
benets such as participating in
external digital events and forums
and exible location rules).
70 State of Grocery North America
• Reskilling and upskilling as a key
value creation lever. There are
dierent levers to manage the
transition to the future workforce,
including talent acquisition,
redeployment, and partnerships.
Organizations today are increasingly
investing in upskilling and reskilling
talent, given that it can be about 20
to 30 percent more cost-eective in
the long term compared with layos
and hiring (and also strengthens
employee engagement and overall
productivity). For example, one
Southern European grocery retailer
conducted a strategic workforce
transition eort to ensure availability
of resources and skills to deliver
on its business priorities. It created
an at-scale reskilling program
(around 50 percent of its total
workforce required upskilling,
rising to around 60 percent in
functions such as commercial or
in-store), complementing it with a
talent acquisition initiative for key
areas such as logistics. Successful
reskilling and upskilling programs
include the following:
1. a well-dened long-term
strategic workforce plan
anchored on the business
strategy that outlines the
demand for existing and new
roles and skills
2. investment in redesigning
the roles for the future, in
understanding how automation
and other trends will aect each
position’s key activities, and in
aiming to reduce time spent on
non-value-added tasks
3. focused capability building
for talent in low-demand,
high-supply roles to transition
employees to high-demand, low-
supply roles
4. mechanisms to deploy talent
and support the professional
development of talent over the
long term
5. partnerships with external
skilling organizations to
signicantly accelerate these
eorts and provide more scale
and cost eciencies
For example, Walmart invested
$4 billion in a reskilling program
over four years, with frontline
hires required to start with a
certicate program in basic retail
and emotional skills. In addition,
tenured employees can take part in
Walmart Academy and the “dollar
per day” which allows associates
to earn college degrees in retail
management. There has also been
a shift in the past few years from
hourly wage roles to more full-time
roles in Walmart’s retail stores,
improving work-life balance for
associates, building more team-
based ways of working in stores,
and providing opportunities for
better mentorship. These moves
are intended to signal to the
labor market that Walmart cares
about growing and developing
its workforce, making it a “career
building destination.”
71
State of Grocery North America
• ‘Acqui-hiring’ to accelerate the
time to impact. Partnering with
or acquiring companies with key
capabilities is one of the fastest
ways to accelerate talent acquisition
at scale, although it has certain risks
that need to be managed, including
cultural integration. Building on the
success of Walmart’s acquisition
of Jet.com in 2016, which helped
accelerate Walmart’s 25 percent
share of US online grocery sales,
retailers have made a number of
other acqui-hiring investments in
the United States to expand their
omnichannel competitiveness.
• Make people a strategic priority
for the C-suite. When talent
management becomes a strategic
priority that aects value creation
and the long-term sustainability of
business models, it’s no longer just
an HR responsibility. It should be a
priority for the C-suite, with input
from leadership at the very top.
Companies have increasingly focused on
people since the outset of the pandemic,
and grocery retailers are no exception. Yet,
as an essential industry, the sector is under
particular scrutiny. Transforming the people
model is challenging but necessary—and
getting it right can deliver sustainable
competitive advantage.
Rahul Mathew is an associate partner in McKinsey’s New York office, Beatriz Rastrollo is an
associate partner in the Madrid office, Patrick Simon is a partner in the Munich office, and
Raphaël Speich is a partner in the Paris office.
The authors wish to thank Ricardo Ferreira and Bassel Berjaoui for their contributions to
this article.
Copyright © 2022 McKinsey & Company. All rights reserved.
72 State of Grocery North America
The state of grocery retail
in Mexico
The COVID19 pandemic drastically changed shopper behavior, forcing
Mexican grocers to change their online commerce game. Can they create a
lasting competitive advantage?
© andresr/Getty Images
by José Ricardo Cota and Ricardo Sanromán
73
State of Grocery North America
The COVID19 pandemic changed the
behavior of consumers in Mexico as it did
in other markets around the world. Limited
access and mobility restrictions throughout
2021 and into 2022 prompted consumers
to test and adopt digital channels while
reinforcing the importance of grocery
retail as a primary source of basic food,
beverages, and personal- and home-care
supplies for households across the country.
Today, with coronavirus variants still
preventing a full return to past shopping
behavior, Mexican grocery retailers
are racing to build lasting e-commerce
solutions and capabilities. In 2021, the
gross merchandise value of modern
trade (hypermarkets, supermarkets, and
convenience stores) was estimated at more
than $20 billion, with online sales claiming
a growing share. Pure-play digital grocery
companies have emerged, incumbents
are strengthening eorts to become
true omnichannel players, and last-mile
solutions are transforming customer
expectations of delivery times for staple
grocery and convenience items.
Even traditional retailers such as mom-
and-pop stores are changing. These
smaller, nonorganized retail players are
using their key consumer product–supplier
capabilities to build or adopt e-commerce
solutions, blurring the lines of who does
what in the industry. This shift has also
opened the door to digital-native retail
players that have already disrupted other
markets globally.
Given the continued evolution of the
grocery landscape, Mexican grocers must
invest to understand the new industry
baseline, the consumer shifts observed
over the past two years, and the behaviors
and preferences that will last once the
pandemic recedes. Here, we look at the
factors shaping Mexican grocery retail and
what players can do to respond to these
underlying trends.
What will shape Mexican
grocery in 2022 and beyond
In 2020 and early 2021, the COVID19
pandemic limited access to grocery stores
and hurt the pocketbooks of shoppers,
many of whom found themselves out of
work. The second half of 2021 saw some
nancial recovery and a gradual easing of
restrictions on access to physical shopping
channels. Today, grocery shopping
continues to evolve, reshaping consumer
expectations and grocery retailer value
propositions. Our research suggests the
Mexican grocery landscape will be shaped
by ve factors in 2022 and beyond:
Grocery shopping continues
to evolve, reshaping consumer
expectations and grocery
retailer value propositions.
74 State of Grocery North America
Aordability
Aordability will continue to be the
priority for shoppers. While consumer
spending fell sharply in Mexico in 2020
but stabilized in 2021—and Mexicans are
relatively optimistic about a post-COVID19
economic recovery—about 78 percent
of all consumers still feel some economic
pressure. This sentiment is especially
prevalent among low- and middle-income
shoppers, with almost 60 percent of low-
income consumers saying they are having a
hard time making ends meet or are in crisis.
1
And while the number of consumers who
said they were trying to nd ways to save
money dropped from 71 percent in 2020
to 59 percent in 2021, shoppers across
dierent social and economic classes
continue to pursue multiple strategies
to save money. Notably, 20 percent of
consumers changing their shopping
behavior are trading down to private-label
products, especially in categories such as
household cleaning supplies, pasta, hair
care, and dairy (Exhibit 1).
2
Physical stores in an omnichannel world
Brick-and-mortar stores will regain
their importance—but as part of a new
omnichannel reality. Consumers were
drawn to the convenience and relative
safety of online grocery shopping during
the pandemic, but about 29 percent of
shoppers still prefer personal contact in
stores. Other reasons physical stores will
retain appeal are high delivery costs and
lack of trust in the quality of products
received when ordering online.
Notably, 20 percent of
consumers changing their
shopping behavior are trading
down to private-label products,
especially in categories such
as household cleaning supplies,
pasta, hair care, and dairy.
1
McKinsey 2022 Global Sentiment Survey.
2
Ibid.
75
State of Grocery North America
Source: McKinsey 2020–22 Global Sentiment Surveys
Among consumers who changed their shopping behavior in 2021, 20 percent
traded down and only 8 percent traded up.
 Among consumers who changed their buying behavior. Question: Please indicate how your buying behavior has changed in a standard shopping basket for the
items shown in the past 12 months (since Sept 2019). Possible mutually exclusive answers: “Switching to less expensive brands”; “Buying the same brand as I
bought 12 months ago, but at stores with lower prices”; “Buying only when on sale or with coupon”; “Buying less frequently of lower quantity of the same
brand”; “Switching to more expensive/premium brands”; “Have made some other change in how I buy these products”; “Have not made changes in how I buy
these products.” Base for trade-o behavior is consumers who have changed their behavior.
Annual trade-o behavior in a standard shopping basket,
1
Annual Mexican household income tiers,
% of respondents who traded up or down for 2019–21
% of respondents
High
Middle
Low
2019 2020 2021
15
27
20
1.3x
8
5
8
22
35
30
3
4
3
16
28
21
7
4
7
11
19
13
12
6
17
Trade down Trade up
Exhibit 1
Among consumers who changed their shopping behavior in 2021,
20 percent traded down and only 8 percent traded up.
76 State of Grocery North America
The growth of online shopping
Even as a segment of consumers remain
resistant to online shopping, e-commerce
will continue to grow, especially in
instant-delivery oerings. The number of
Mexican consumers who shopped online
on a weekly basis increased by 7 percent
in 2021 compared with prepandemic
levels of 2020, with weekly visits to
grocery stores decreasing by 6 percent.
3
And the number of shoppers who bought
groceries only by delivery increased by
15 percent during COVID19.
4
In addition,
online shoppers have a strong preference
for home delivery (80 percent) over click
and collect (29 percent).
5
Online sales of consumer electronics and
books increased strongly compared to
prepandemic levels, and a wide range
of consumer products saw sales shift to
e-commerce channels because of the
pandemic—even though overall demand
was at (Exhibit 2).
The rise of discounters
Discounters are gaining attention as
they ne-tune their value propositions.
In particular, hard-discount stores are
gaining in popularity, with consumers’
purchase intent growing by double digits
compared with prepandemic levels.
6
Hard discounters are well positioned to
Source: McKinsey 2022 Global Sentiment Survey
In Mexico, online has accelerated as a sales channel for consumer electronics
and books.
 Consumer packaged goods.
 Over the counter.
 Online growth reects the increase in consumers buying online most of the time or always now vs pre-COVID-19.
11
1 2 95
16
643 7
12
0
10
18
8
17
13
14
15
Online growth vs pre-COVID-19
3
Toys and baby supplies
Jewelry
New online customers vs pre-COVID-19
Home decor
and furnishing
Footwear
Pet supplies
Total CPG
shopping
Apparel
Consumer
electronics
Sports and outdoor
equipment
Books
Vitamins, supplements,
and OTC² medicines
Stated purchase behavior by category,
% of respondents, 2021
Low onlinegrowthand fewer new customers
High onlinegrowthand morenewcustomers
Select discretionary and nondiscretionary categories
Total CPG
1
shopping basket
#
Percent who buy online today most of the time or always
16
18
19
19
19
19
20
22
19
28
28
Exhibit 2
In Mexico, online has accelerated as a sales channel for consumer
electronics and books.
3
Ibid.
4
World Food Programme and Salud Pública de México survey, January 2021.
5
McKinsey 2022 Global Sentiment Survey.
6
Ibid.
77
State of Grocery North America
capitalize on consumers’ strong interest in
more aordable products and increasing
openness to buying private-label goods.
And small regional chains are building a
positive perception of hard discounters by
enhancing the customer value proposition.
Healthier eating habits
Healthier eating habits, local-rst
purchasing, and environmental
consciousness will continue gaining
relevance in the Mexican marketplace.
Consumers expect to spend more money
on food that is naturally healthy (such as
organic foods, those free of synthetics or
additives, and products that are minimally
processed). More than 50 percent of
consumers say buying locally sourced
products is important—the greatest
change in buying habits—which is up from
7 percent from prepandemic levels.
7
And
65 percent of consumers are willing to
pay more for healthier, more nutritious
products, with particular interest in
nutritionally enriched and low-sugar or
sugar-free products.
Key considerations for 2022
and beyond
The continuing global pandemic and a
high ination rate are having a big impact
on Mexico’s grocery sector today. Online,
retailers remain busier than ever, meeting
the challenge of fullling orders and
updating inventory with agility. In physical
stores, retailers face shrinking customer
trac and strong online competition on
convenience and price.
As Mexican consumers prepare for a
postpandemic world, we anticipate the
winners and losers in grocery will be
determined by more than sheer physical
scale and foot trac. The players will also
be dened by competitive dierentiation,
innovation, and defensibility in six
main areas:
Better pricing and more value
Given current inationary conditions,
customers will keep looking to save
money, making value a primary motivator
in decisions about where to shop. This
behavior will underpin how grocers respond,
with pricing and promotional eectiveness
dierentiators to direct trac to stores and
online. Building pricing and promotional
capabilities, including harnessing their vast
amount of customer-generated data, will
give grocers the ability to achieve protable
growth while providing value to customers.
Grocers should also rethink the role of
private brands in their product portfolios.
Expanding the selection of private-label
brands could oer customers products equal
in quality to branded goods but at lower
prices. This move could attract customers
seeking to trade down.
Credibly competing in omnichannel
Building an omnichannel experience will
become essential, and we see lines blurring
even further between dierent channels of
the retail value chain. Retailers will continue
testing, learning, and rening models
that solidify customer relationships and
increase lifetime customer value. New ways
of engaging customers in the digital and
physical space and ensuring a seamless
experience across channels will become the
norm. Retailers able to quickly redene how
they interact with customers will win their
loyalty and an increased share of wallet.
Grocers will need to rapidly scale their
nascent e-commerce capabilities to meet
growing consumer expectations of factors
7
McKinsey 2022 Global Sentiment Survey; McKinsey State of Grocery Consumer Survey.
78 State of Grocery North America
such as website usability, transparency
into in-stock products, and better-picked
fresh produce, all while grocers work
to improve their operating capabilities
to ensure protability. An ecient
supply chain, including last-mile delivery
capabilities, will be essential for players
trying to win in this space.
Personalized shopping experience
In addition to a winning omnichannel
value proposition, grocers will need to
rapidly build personalization capabilities
to capture and retain the growing digital
customer base. Ensuring a personalized
experience that seeks to maximize
customer engagement may be a key
dierentiator in the market. Success
requires grocers to work in agile ways,
where commercial, operations, and
support functions join to delight the
customer and solve for issues across the
most relevant customer journeys.
Faster and leaner operating models
Fully embedding new digital and
e-commerce capabilities with traditional
retail operations will require grocers to
recongure their organizations, processes,
talent, and technology to support new and
changing priorities. For example, adopting
agile ways of working enables grocers to
rapidly respond to customer needs while
reallocating internal resources to areas
creating the most value. The traditional
retail organization will no longer be an
option for players hoping to thrive in this
new marketplace.
A leaner organization that frees up
resources for top priorities will be critical,
as will automation and digitalization
approaches that ensure the availability of
products at the point of sale. This capability
will allow for more accurate commercial
decisions based on data, context, and
consumer behavior. The use of the Internet
of Things and devices such as radio
frequency identication (RFID) for product
tracking will remain important tools,
providing decision makers with real-time
data to inform commercial and
operational strategies.
A leaner organization that
frees up resources for top
priorities will be critical, as will
automation and digitalization
approaches that ensure the
availability of products at the
point of sale.
79
State of Grocery North America
Business models beyond the core
The race to build ecosystems around the
conventional retail value chain will intensify,
with players from multiple sectors jumping
in. Payment and logistics solutions will
lead the pack, quickly becoming the norm
and dictating expectations across physical
and online channels. Grocers that build
a powerful ecosystem will facilitate the
expansion of products and services to
engage and retain consumers while driving
new revenue streams.
Attracting and retaining talent
The battle for talent will intensify in Mexico,
particularly the competition for employees
who can build digital capabilities for
traditional grocer operations. Other
sectors, including banking and ntech,
are also rapidly building digital capabilities
and will draw from the same talent pool.
Developers, designers, and product
owners, among others, are all in demand.
Digital winners will need to attract and
retain this top talent. A redened employee
value proposition—including compensation;
career plans; work space and exibility; and
diversity, equity, and inclusion policies—will
be dierentiators for players upgrading
their talent bench.
The Mexican grocery sector is at a critical
moment in its history. The pandemic
and economic uncertainty are forcing
grocers to revisit their commercial and
operational strategies and to accelerate
their digital transformations. To succeed
in a tumultuous marketplace, companies
must focus on competitive dierentiation,
innovation, and defensibility.
José Ricardo Cota is an associate partner in McKinsey’s Mexico City office, where Ricardo Sanromán
is a partner.
The authors wish to thank Fernando Ayala for his contributions to this article.
Copyright © 2022 McKinsey & Company. All rights reserved.
80 State of Grocery North America
Pushing granular decisions
through analytics
The potential effect of advanced analytics on grocery retail is great, but
retailers will need to seize the opportunity.
© andreswd/Getty Images
This article is a collaborative eort by Gokmen Ciger, Andreas Ess, Jake Hart, Holger Hürtgen, and Maura
Goldrick, representing views from McKinsey’s Retail Practice.
81
State of Grocery North America
Abstract
Every facet of grocery retail is becoming
more personalized, a trend that is
jeopardizing established operating models
rooted in a one-to-many mass approach.
Advanced analytics has the potential
to transform grocery operations, but
many retailers struggle to harness these
capabilities to improve performance. Out of
at least a hundred documented use cases,
just a small number generate a signicant
impact. In our discussions with grocery
executives, two emerging use cases—
personalized promotions and store-specic
SKU selection—reinforce the value at stake
and could enable grocery retailers to truly
dierentiate themselves in the market.
Introduction
Grocery seems to be in an ideal position to
harness analytics: it boasts high purchase
frequency, rich customer data, and a
focus on eciency. Yet with at least 100
documented analytics use cases in grocery,
retailers can have diculty determining
which pockets of innovation matter most. In
our experience with leading grocers, just a
fraction of use cases represent most of the
value (Exhibit 1). In this article, we examine
two of the highest-potential use cases:
personalized promotions and store-specic
SKU selection. For both, we will examine
how to unlock the full value through four
elements: strategic t, data and analytics,
execution, and continuous evolution.
¹
Key value items.
²
Out of stock.
Source: McKinsey analysis
Across more than 100 use cases, ten opportunities account for just over 80 percent of the value at stake.
Value of analytics by domain,
% of total EBIT impact from analytics
Use cases that make up 80% of value
Existing pilots
and tests
Pricing (KVI
1
identication, clustering, and price
recommendation)
Store-specic SKU selection
Macrospace allocation (especially small formats)
Vendor negotiation support
Mass promotions optimization
Demand and replenishment planning (shrink
avoidance, OOS
2
)
Warehouse digital twin
Store labor scheduling
Store cockpit—automated identication
of improvement levers
Personalized promotions and oerings
In use at a
few players
Becoming
standard
Category
management
50
20
15
10
5
Supply chain
management
Store
operations
Marketing
Support
functions
Exhibit 1
Across more than 100 use cases, ten opportunities account for just
over 80 percent of the value at stake.
82 State of Grocery North America
Personalized promotions
Leading grocers recognized long ago the
need to reevaluate the true incremental
impact of mass promotions. Analytics
now enables complex views of mass
promotions, controlling for stock-up,
cannibalization, and even the halo eect
that promotions have on other products.
When taking these factors into account,
even the best grocers can expect 10 to
15 percent of promotions to dilute sales
and margins.
Personalized promotions have become
more relevant and higher priority.
Retailers can operate these at scale
because technology has evolved, and
customer touchpoints for data collection
and communication (especially through
e-grocery and loyalty apps) have
increased in recent years. When done
right, promotions can provide a substantial
benet of 4 to 8 percent sales increase and
2 to 3 percent net income and EBIT uplift.
Consumers, especially younger segments,
have started to accept and even expect
personalized discounts based on their
shopping habits. Recognizing this
trend, many grocers now oer simple
personalization—either through segmented
promotions (selected campaigns targeted
to segments with similar preferences) or
by matching predened oers with the
customers who have the highest propensity
to buy. These eorts typically increase
sales by less than 1 percent.
To achieve the next level, grocers should
take a true “customer lifetime value”
approach, in which customers are
notied of the right oer at the right time,
with the right message, and through the
right channel.
Strategic t
Personalized promotions can increase
customer lifetime value by tailoring
campaigns that shift customer behaviors.
For example, some campaigns are geared
to win customers back, others encourage
more top-up sales, and others aim to
increase store visit frequency. Optimizing
discounts alone will not be sucient.
Instead, best-in-class players choose
the best timing, the most appropriate
channel, and even the most appealing
communication to increase the likelihood
of changing customer behavior over time.
Recurring interactions generate more data,
which grocery retailers can use to design
increasingly relevant promotions that
generate long-term customer lifetime value
and loyalty.
In addition, collaboration and
negotiations with consumer-packaged-
goods (CPG) partners will be critical—not
only to maintain overall funding levels
(which requires careful tracking of
granular promotion redemptions) but
also to increase overall eectiveness.
When done well, collaboration results
in a mutually benecial arrangement for
CPGs and grocers.
Data and analytics
To support high-quality mass promotions,
grocers needed a robust data lake
(containing data on oers, transactions,
and products), an analytics environment,
and executional tools. For personalized
promotions, these elements need to
be combined with permitted data from
customer-relationship-management (CRM)
and loyalty systems, including customer
purchase behavior, app interactions, and
prole information. Supporting mass
83
State of Grocery North America
promotions also requires navigating
compliance issues around the use of
personally identiable information (PII)
data: depending on the geography,
consumers need to be presented with an
explicit opt-in feature. Our research has
revealed that consumers are becoming
increasingly intentional about the types
of data they share and with whom.
The way companies handle consumer
data and privacy can become a point
of dierentiation and even a source of
competitive business advantage.
1
Next to data, assessing the impact of
personalized promotions on customer
lifetime value calls for a wider set of
models. For example, there will be two
models to increase store visit frequency:
one model pinpoints the potential for
increasing a customer’s frequency, while
the other recommends the best product to
drive that customer to a store. Yet another
model could help in selecting the right
channel or message.
Execution
To properly execute personalized
promotions and gain better access to
cheap channels, retailers will need to
augment their analytics capabilities with
appropriate technologies and a suitable
operating model.
Channels: To reach digitally adept
customers, grocers will need to use a wider
variety of distribution channels, including
point-of-sale coupons, loyalty apps, email,
and SMS messages, along with third-party
apps such as Instacart. Retailers can
launch separate initiatives (for example,
gamication) to increase reach, particularly
in cheaper channels. Connecting with
digital-averse customers could require
collaboration with direct-marketing
agencies for a more tailored set of mail
oers. To nance these investments,
grocers could scale back spending on
traditional circulars and other mass-
promotion items over time.
Technology: To run thousands of individual
campaigns, grocers need to implement
an appropriate marketing-technology
stack and potentially make changes to the
underlying infrastructure—for example,
allowing traditional point-of-sale (POS)
systems to print individual coupons.
Operating model: Personalized promotions
create a level of complexity that strains
the management capabilities of traditional
merchants. To be successful, retailers
must encourage collaboration among
marketing, category managers, analytics,
and sometimes representatives of vendors.
They should also establish dedicated
centers of excellence (CoEs)—for example,
to design and target oers. Grocers might
also need to reevaluate the decision-
making process around promotions (for
example, CoEs could assume decision
rights for specic campaigns while
category managers maintain decision
rights on the overall budget).
Continuous evolution
One shortcoming of mass promotions is
the inability to conduct anything beyond
high-level experiments. By adopting
personalized promotions, grocers can
massively increase the robustness
of tests (using A/B tests on specic
customer holdouts or multi-armed bandit
1
Venky Anant, Lisa Donchak, James Kaplan, and Henning Soller, “The consumer-data opportunity and the privacy
imperative,” McKinsey, April 27, 2020.
84 State of Grocery North America
testing
2
across customer segments).
This approach can be used to improve
statistical models, eliminate unprotable
promotion types, and create a test-and-
learn mentality throughout the commercial
functions of the grocer.
Store-specic SKU selection
Consumers increasingly favor stores that
are nearby, a trend that spawned many
small-format stores in recent years. In turn,
the limited store size has made store-
specic assortments a higher priority and
more relevant for small-format retailers.
With advances in data and analytics,
retailers can now provide consumers with
an assortment tailored to their unique
needs. The result could be sales gains of
2 to 4 percent, presenting grocers with
another substantial EBIT opportunity.
Recognizing this, many grocers take
an approach based on optimizing
assortment modules by store cluster
(that is, one assortment module for all
stores in a cluster) mostly based on price
tiers (premium versus entry) and store
size. However, the many dimensions of
local customer preferences cannot be
addressed by simple clusters.
There are three steps to achieve store-
specic assortment: space allocation,
SKU selection, and planogramming
(Exhibit 2). Today, many grocers have
already customized space allocation
to local customer demand, but only a
few players have achieved automated
store-specic SKU selection and
planograms to date. For example, in
2020, German grocer REWE announced
the implementation of automated,
optimized planograms to support localized
assortment at the store level. Similarly,
Zabka, a Polish convenience-store chain,
perfected store-specic assortment for
the chain’s 8,000 existing stores and all
stores in development. For each address
in the country, Zabka can identify the
right store-specic SKU selection for the
Store-specic assortment requires sophistication for all elements.
Levels of
sophistication
Most common model in Europe
Space allocation
Store-specic, based on
space elasticities
Store-specic on
consumer need-state
level (eg, a small module
for large organic
tomatoes)
Store-specic, based on
sales
With granular, automated
clusters per category
(eg, small value assortment
for tomatoes, tourist
chocolate)
Automated store-specic
planograms (eg, adjusted
number of facings)
Based on clusters (size or
customer prole)
Based on store clusters
(size or customer prole,
such as a small city store)
One planogram for all
stores in a cluster
SKU selection Planogramming
Exhibit 2
Store-specific assortment requires sophistication for all elements.
2
This variation on traditional A/B testing uses machine learning to allocate traffic to offers that are performing
well and away from lower-performing options.
85
State of Grocery North America
nearest location and—at extremely high
condence levels—how much sales and
margin it would drive. This has allowed
Zabka to grow substantially over the past
few years.
In the future, we expect many players to
adopt such approaches to tailor store-level
assortment to unique community tastes.
Strategic t
A major risk when localizing assortment is
introducing additional complexity without
a clear benet. Grocers should aim to
develop targeted, specic visions for how
localization will generate value for their
business—especially when there’s a high
share of small-format stores.
For many brands, localization involves
changes to distribution, so grocers need
to ensure their terms with CPG companies
are exible enough to allow for regular
assortment changes on the local level.
Many players already have a combination
of general terms and existing exibility to
accommodate store dierences and varied
planogram sizes.
Data and analytics
Entirely localized assortment down to
the store level requires more complex
models; these have been conceptually and
technically dened but not yet tested at
scale. Grocery retailers need a wider set of
algorithms to develop sophistication across
the three elements.
For space allocation, a combination of
category elasticities given targets (sales or
margin) and a set of business rules (such as
available space and refrigeration) helps to
automatically nd the optimal shelf space
per store and category. Store-specic
SKU selection requires an understanding
of customer needs, which can be gained
through customer decision trees. After
dening the full assortment per customer
need, retailers can calculate sales potential
and rank SKUs per store. Similarly,
planogramming can be automated to select
the best number of facings and order on
the shelf.
Execution
To oer an automated SKU selection
per store, grocery retailers will need
to enhance operating-model and
technological capabilities.
Operating model: The complexity of store-
specic SKU selection can outstrip the
ability of a typical merchant or category
manager to manage it eectively. Currently,
category managers have clear visibility for
how to optimize assortment modules per
store cluster. However, in a store-specic
SKU selection, category managers lose
sight of local demands, which limits their
steering capability. Organizations will
need to adapt the way analytics CoEs and
category managers work together, moving
from actual selection to setting guidelines.
Technology: Grocers should also pursue
planogram localization, which requires
them to manage a larger number of designs
and versions. This will require enhancement
of enterprise-resource-planning (ERP)
systems and new planogram software
solutions.
Store-level execution: Once a retailer
settles on an assortment and creates a
planogram, individual stores will need to be
given directions to design the planograms
in their stores. In a tight labor market, care
must be taken to send modular instructions
to in-store employees.
86 State of Grocery North America
Continuous evolvement
One of the most challenging aspects
of localizing assortment is accurately
measuring the impact. Moving to full store-
specic localization will require retailers
to embrace more advanced statistical
techniques for gauging impact rather than
relying solely on one-o tests or same-
store sales comparisons. Even at the store
level, A/B testing is crucial to learn and
continuously improve. There are challenges
to conducting these tests—including
operational diculty in setting up test-
and-control stores and the additional need
for statistical variability to measure results
with fairly small samples—but the results
are worth it.
Advanced analytics is perhaps the largest
emerging source of net value creation for
grocers; when done right, it can generate
benets of up to one percentage point
of EBIT for the next three to ve years.
While there are more than 100 use cases
for advanced analytics, just ten of them
account for 80 percent of the value at
stake. As technology has evolved over the
years, the next wave of use cases will be
personalized promotions and store-specic
SKU selection, and each can bring more
than 5 percent uplift in sales.
Gokmen Ciger is an associate partner in McKinsey’s Istanbul office, Andreas Ess is an associate
partner in the Zurich office, Jake Hart is an associate partner in the Cleveland office, Holger Hürtgen
is a partner in the Düsseldorf office, and Maura Goldrick is a partner in the Boston office.
The authors wish to thank Alexander Gromov and Hannah Mayer for their contributions to this article.
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