Navigating Uncertainties in Nongrocery Retail

Macroeconomic Headwinds

Over the past five years, surging input price inflation, the COVID-19 pandemic, and geopolitical tensions have had a profound impact on retailers' costs and global supply chains. From 2019 to 2023, the sector's nominal turnover grew by 2.3 percent annually, but when adjusted for inflation, it declined by 1.8 percent. Categories like furniture and DIY were particularly hard-hit. Adjusted for inflation, nongrocery sales in all geographies remain below 2019 levels. The persistence of these macroeconomic headwinds, such as elevated prices, has led consumers to prioritize grocery purchases, trade down, and delay spending on household goods. According to our latest consumer survey, more than half of low-income households have saved as much as possible in the past 12 months instead of spending.

Amid this environment, most top European markets are expected to grow by 0.6 percent through 2028, adjusted for inflation. However, the dynamics vary by country and category.

Demand on Nongrocery Categories Tied to Local Purchasing Power

Consumer demand for discretionary items is closely tied to purchasing power, which varies significantly across European markets. In countries with higher incomes, such as Germany and the United Kingdom, nongrocery items account for more than half of retail sales. French consumers, on the other hand, have lower spending per capita on nongrocery goods and tend to allocate close to 60 percent of their budget to grocery shopping. A deeper analysis of consumer purchases reveals differences in category appeal across countries. German household spending on furniture exceeds that of other European households by approximately five to ten percentage points. Polish consumers have the largest share dedicated to electronics, and fashion accounts for the largest share of Italians' nongrocery budget.

Rise of Omnichannel Journeys

E-commerce penetration increased rapidly during the pandemic, and although some of these gains were recaptured by brick-and-mortar retail post-pandemic, e-commerce started growing again recently. It remains below 2019 levels, but it was the fastest-growing channel in 2023, with a 3.3 percent overall growth. Online penetration is expected to progress steadily across nongrocery retail categories. This growth is driven by the greater presence of omnichannel journeys in consumers' shopping habits. More than 50 percent of consumers reported using both online and in-store options to research and purchase nongrocery items. This figure rises to more than 60 percent in retail categories like sporting goods, leisure, consumer electronics, and furniture. Although nongrocery retailers seem to be maintaining their position regarding consumers' future spending intentions, department stores are increasingly challenged by online resellers, which are gaining ground across all geographies.

The Winners of 2023

Retailers that were able to capitalize on the market forces, such as having a strong online presence, higher convenience, a broader range, lower prices, or sustainable or circular offerings, emerged as the winners of 2023. From a channel perspective, a strong online presence was a clear asset. Compared to 2022, online was the fastest-growing channel in 2023, with a 3.3 percent overall growth across categories, except for pet care and beauty and personal care where other channels grew more rapidly. Growth of online sales was particularly strong for sporting goods (around 7 percent) and pet care (around 12 percent). Discounters like Action and B&M also gained market share, though not in all categories. In pet care, discounters were the fastest-growing channel, increasing by 14 percent. Discounters and everyday-low-price players also saw double-digit or high-single-digit growth in beauty and personal care (10 percent) and sporting goods (6 percent). However, the appeal of discounters seems to vary by geography. Compared with 2022, discounters and everyday-low-price retailers achieved the highest growth in Poland (15 percent) and Spain (10 percent). Retailers with sustainable or circular offerings in certain categories also experienced strong growth, especially in consumer electronics and appliances where refurbished items allow consumers to get more value for their money, and in sporting goods where equipment rental and secondhand purchases are on the rise. Finally, despite the competition from online players and discounters, there are many pockets of growth in the nongrocery retail industry. Pet care is the only category to have recovered beyond 2019 levels in real terms, and beauty and personal care, although below 2019 levels in real terms, is also seeing growth more recently (8 percent).

Characteristics of European Nongrocery Retail Consumers

In addition to conducting country and industry analyses, our research explored the preferences and behaviors of consumers. Five characteristics stood out. First, consumer optimism is returning, but European households remain cautious about future spending. Consumers are expected to reduce spending in the short term on furniture, DIY, electronics, and sporting goods items, while travel is favored. Looking ahead, one in five consumers plan to increase nongrocery spending, with pet care being the only category showing positive purchasing intent two years from now. Second, consumers are more likely to trade down on discretionary categories than on grocery or pet care. Although more than 60 percent of consumers actively seek opportunities to trade down, they do it selectively. They opt for lower-priced retailers and discounters, especially for sporting goods, leisure, and furniture. Sometimes they delay their purchases altogether or reduce their basket size. Consumers are looking for more than just low prices. One in three shoppers prioritize good value for money when shopping, which includes great promotions and discounts, a wide product range, trustworthiness, and a fun shopping experience. Third, our survey found that consumers don't have strong loyalty to nongrocery retailers and are inclined to explore a wide range of retailers and channels. Each quarter, approximately 20 percent of consumers switch retailers or brands for their purchases. Moreover, about 80 percent reported considering more than three retailers for their most recent purchase and buying from two to three companies in each category over the past year. Fourth, climate change and sustainability are still on the minds of European consumers. Thirty percent of survey respondents cited sustainability as their second-greatest concern, right behind rising prices and inflation. Sustainability is also an expectation, as more than one-third of consumers across all segments reported paying close attention to environmental friendliness when shopping for nongrocery goods. However, this awareness of sustainability has not yet influenced buying decisions. When asked whether retailers offering a broad range of sustainable products is important in purchasing decisions, consumers ranked this driver at just 32 out of 40, on average. Last, more than one-third of consumers cite convenience as the dominant factor in their in-store and online purchasing decisions. Still, more than one-quarter of European consumers prefer to buy goods at physical locations to touch and feel items, highlighting the value of the in-store experience.

Six Value Themes for Nongrocery Retailers

Collectively, these trends and consumer behaviors present numerous challenges to the business models of nongrocery retailers. To thrive in this environment, they must excel in all aspects. Enhancing both revenue and profitability will be crucial to finance their transformation. Six value themes hold the key; the first four aim to boost revenues, while the last two aim to improve margins.

The full report provides a detailed examination of the steps nongrocery retailers can take in each theme, examples highlighting industry leaders, insights from EU executives, and deep dives into six nongrocery categories.

The years ahead will present many obstacles for nongrocery retailers. While growth across Europe may be modest, opportunities can be found in specific markets and categories. Leading retailers will likely monitor consumer patterns, tailor their product offerings accordingly, and expand their reach by embracing adjacent services and innovation. The insights in the full report provide a valuable reference for retailers as they chart their own path to growth.

Unlock the Potential of Gen AI in Modernizing Legacy Tech

Improving Business Outcomes

Companies have often used gen AI in a simplistic way by directly translating legacy code into modern language. This "code and load" approach simply shifts the tech debt to a new context. The true goal should be to improve systems and processes to generate more value. Gen AI can help understand existing code, determine business needs, and modernize necessary processes. For instance, at one financial-services company, experts' transcripts were fed into the gen AI model to provide better guidance, enabling business and engineering experts to work together.

By using gen AI, engineers can gain clarity on system operations and allow business experts to make more informed decisions. This leads to a more efficient use of resources and a better alignment of technology with business goals.

Enabling Autonomous Gen AI Agents

In software development, using gen AI agents to assist developers can increase productivity. The next level of acceleration involves deploying hundreds of autonomous gen AI agents with human oversight. These agents have distinct roles and expertise, collaborating on complex tasks such as data analysis, integration, testing, and outcome refinement.

For example, at a banking company, the deployment of gen AI agents allowed for a 40 percent reduction in the estimated time to migrate mainframe components. Data mapping and storage agents worked with other specialized agents to ensure safe and secure code development. Implementing controls like feedback loops and ID assignment helps ensure the agents deliver the right outcomes.

Focusing on Scaling Value

The excitement around gen AI has led companies to focus on tool evaluation. However, the bigger issue is how to scale gen AI. Technology leadership should develop a central, autonomous gen AI capability with two components - a factory and a platform.

A factory is a group of people who develop and manage gen AI agents for specific end-to-end processes. It standardizes and simplifies agent development and management. A platform provides reusable services and capabilities that factories can access. It includes a user interface, APIs, supporting services, and a library of gen AI agents.

By focusing on scaling value, companies can build sophisticated multiagent workflows and drive innovation and value.

Next Steps

Companies looking to adopt the multiagent orchestration model should take four steps. First, question any technology proposal with a long timeline and many people. Second, focus gen AI on the biggest problems. Third, tie the business plan explicitly to value and track it closely. Fourth, get ahead of talent, technology, and operating-model implications.

Companies have only begun to scratch the surface in applying gen AI to modernize legacy technology. By focusing on orchestrating gen AI agents on meaningful business opportunities, they can cut tech debt and drive innovation.