Resetting the e-commerce model to achieve profitable growth in Europe

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For consumer goods companies in Europe, e-commerce has gone from a growth opportunity to an imperative. Success rests on an organization’s ability to push beyond traditional approaches and innovate. Over the past two years, more-advanced players in mature categories (such as fashion and accessories, beauty, consumer durables, and toys) have increasingly explored new formats (such as live commerce and social commerce). At the same time, players in nascent categories, namely food and fastmoving consumer goods (FMCG), started to develop a winning online-first playbook.

In the years ahead, fully unlocking growth in e-commerce will be just as critical. Although offline commerce has begun to bounce back, online channels have enjoyed markedly higher growth in recent years: mature categories grew about 12 percent in 2021 (1.4 times faster than offline), and nascent categories rose 6 percent (seven times faster than offline).1 Given Europe’s heterogeneous landscape, this growth also varies among countries. Beyond the growth potential, the role of e-commerce in building privileged consumer engagement is becoming more important, from generating direct-to-consumer (D2C) first-party data to engaging digitally with consumer segments in the metaverse. In fact, by 2030, we estimate that more than 80 percent of commerce could be affected by consumer activities in the metaverse, from discovering brands to visiting virtual stores.2Value creation in the metaverse: The real business of the virtual world, McKinsey, June 13, 2022.

To understand what it takes to win in Europe, we conducted an in-depth survey of 70 e-commerce decision makers in consumer goods companies (see sidebar “About the research”). This effort identified a set of “e-commerce superstars” that outperform on growth relative to others and generate a higher share of e-commerce sales, all while maintaining the same or higher level of profitability (see sidebar “How we define e-commerce superstars”). These superstars distinguish between offline and online models, navigate the complexity of the European landscape, and focus on specific drivers to capture the e-commerce opportunity. Consumer goods companies can use these superstars as a blueprint for success to capture a greater share of e-commerce growth.

E-commerce in Europe: A complex landscape of regional maturity, category growth, and channel profitability

Europe, like much of the world, saw accelerated digital engagement as a result of COVID-19 lockdowns and social-distancing measures. While the US consumer goods e-commerce market is relatively large and well understood (with 19 percent penetration and approximately 19 percent growth), each European region is at a different level of maturity (Exhibit 1).3 Only Northern Europe’s penetration is similar to that of the United States, seeing a CAGR of 19 percent from 2019 to 2021. Southern and Eastern Europe remain relatively nascent in e-commerce sales; the pandemic unlocked a more dramatic e-commerce CAGR of around 27 percent, although online sales penetration remained at less than 10 percent from 2019 to 2021.

Heterogeneous European consumer goods markets demonstrate varied levels of e-commerce share of sales and growth.

The European retailer landscape is also more fragmented. Of the top five retailers by online presence in the EU5,4 only Amazon, eBay, MediaMarkt, and Zalando are present in more than two countries. Many of the other leading e-commerce retailers are local omnichannel players with a significant brick-and-mortar presence.

Leading categories will continue to grow rapidly

Our research highlights differences in e-commerce growth and maturity for consumer goods not only by market but also by category (Exhibit 2).

High-involvement categories, such as apparel and toys, continue to lead channel growth.
  • Highly digital categories (defined as apparel and accessories, beauty, consumer durables, and toys) continue to lend themselves to e-commerce and to grow at rates in the high double digits. While the past two years of accelerated growth—in excess of 40 percent5—will eventually slow, these categories have yet to plateau and should have meaningful headroom for growth (given that books, the original online category, is now about 65 percent online).
  • Across food, beverage, and FMCG, we observe two distinct groups. A number of ambient, stock-up categories with lower penetration, such as shelf-stable food and consumable household goods, are growing at 15 to 20 percent a year. Meanwhile, beverages and perishable food—which are still heavily dependent on small and less-planned “top-up missions”—remain the least penetrated and slowest to develop online. Still, these product categories are growing at 7 to 15 percent a year.6

Different levels of profitability across channels

Despite abundant growth, consumer goods companies attempting to scale up in e-commerce continue to struggle to increase profitability, especially in business-to-business-to-consumer (B2B2C) marketplaces. Our research demonstrates how e-commerce margins vary by channel (Exhibit 3).

Consumer goods companies are not yet achieving equivalent margins using digital pure players.

Most players still see their lowest margins on pure players. On average, companies that sell directly through Amazon and other pure players face margins that are two percentage points lower than omnichannel e-commerce due to factors such as higher shipping and warehousing costs as well as on-site advertising. Consumer goods companies have yet to become as efficient as traditional retailers in managing the more complex e-commerce supply chain, leading to a difference in cost of 1.5 percent of gross sales. Pure players often require suppliers to follow strict guidelines (such as frustration-free packaging) to enable the quick and efficient delivery that consumers expect, with noncompliance resulting in fines. Pallet configurations also tend to be more expensive, with a lower average order value (for example, mixed-pallet compared with full-pallet orders or less-than-full truckloads). On-site advertising spending (or the marketing budget on Amazon Web Services Media Services) is also higher: an additional 1.5 percent of gross sales. While promotional allowances are critical to secure shelf space in brick-and-mortar stores, purposeful product investment—such as targeted ads—can be a key differentiator on pure-player sites.

These insights suggest that many consumer companies have yet to rebalance their pure-play profit-and-loss (P&L) in a structured way. Since growth happened relatively fast and retailers often lack historical internal operating models for e-commerce, P&L decisions may be distributed across multiple owners (from sales controllers to digital-marketing assistants to logistics leads), without a singular view on where trade-offs should be made.

Omnichannel e-commerce (within grocers and department stores) retains a similar spending profile to offline. Promotional allowances offered in brick-and-mortar stores are likely to be matched online, and the share of food and FMCG in grocery that is sold on promotion is typically high. As a result, consumer goods companies are spending an average of more than 1 percent of gross sales in catch-all promotions online, a strategy that likely leaves better returns on the table.

Emerging platforms currently offer healthier margins. Quick commerce (such as Gorillas) and delivery platforms (such as Glovo) have successfully attracted generous inflows of capital. To date, more than ten European grocery quick-commerce companies have collectively raised more than $2 billion and are now focused on achieving scale to prove the long-term viability of their business models. Some consumer goods companies have started selling their products directly (that is, not through restaurants). Our research shows that companies can achieve margins with D2C that are four percentage points higher than Amazon’s and two percentage points higher than omnichannel retailers’. These results are likely due to the willingness of companies to accept losses in the short term in exchange for adding customers, nascent investment opportunities (for example, on-site advertising or placement), or both.

What e-commerce superstars are doing in Europe

In this increasingly complex landscape, a few companies across the spectrum of consumer categories have achieved superior performance compared with their peers. Our analysis defined these e-commerce superstars based on their scale of e-commerce as a percent of sales, growth outperformance versus other category respondents, and healthy profit margins (Exhibit 4).

Superstars have higher growth, greater scale, and equally healthy margins when compared with other players.

To pinpoint what it takes to lead in e-commerce in Europe, we analyzed these superstars and identified five strategies. Some of these strategies are more prominent in superstars of highly digital categories, reinforcing our conviction that such approaches are part of the path to fully capture the online opportunity.

1. Prioritize markets ripe for profitable growth and define clear channel roles

Superstars are crystal clear in their prioritization of online channels (for example, omnichannel retailers, pure-digital players, and D2C) and markets where they can win online. When they invest, they do so with purpose.

From a regional perspective, superstars navigate the fragmented landscape in Europe with a focused but broad strategy. On third-party channels or B2B2C, they double down in key countries (typically the EU5), optimize their omnichannel relationships across all countries in which they operate, and selectively place bets in marketplaces with increased relevance to boost brand equity. For owned channels, superstars choose a few pilot markets with the strongest brand affinity and the most favorable structural economics (for example, countries with high population density) to develop a minimum viable product (MVP) before expanding to other markets.

From a channel perspective, superstars typically see e-commerce as an ecosystem of interrelated subchannels (and even customers)—including omnichannel retailers, pure-play specialists, marketplaces, and owned commerce such as retailers’ own websites—that play specific complementary roles to support strategy. Superstars may set financial targets, such as revenue or profit; define brand-building objectives, such as reach or affinity; and target shopper roles across experience, choice, and convenience. For instance, Amazon might unlock reach and revenue in most categories and enable maximum convenience—although this option might be slightly less profitable. Conversely, D2C will be key to develop brand affinity, sometimes at lower volumes, and offer the best customer experience and product choice. By clearly defining the complementary role of each subchannel, superstars will minimize conflict, optimize investment, and broaden reach.

Superstars are crystal clear in their prioritization of online channels and markets where they can win online. When they invest, they do so with purpose.

2. Pivot third-party spending toward selected online growth drivers

When we compare superstars with the rest of companies on e-commerce spending with third parties (such as Amazon and omnichannel), we see nuanced trends across food, FMCG, and highly digital categories (Exhibit 5).

Superstars have shifted their spend mix toward online growth drivers.

In food and FMCG, superstars consistently achieve healthier e-commerce margins than others. They are more efficient across all levers in P&L, but the gap is higher across commercial levers (such as promotion, trade, and retail media networks), where they are investing ten percentage points less, on average, compared with nonsuperstars while still achieving above-category growth. Sixty percent of this difference is due to lower spending in promotional allowances, a key lever in traditional brick and mortar that is less of a differentiator in the search-driven e-commerce world.

In highly digital categories, in which online is already the established battleground, outperformance comes at a higher cost. Even though superstars are already achieving at least 30 percent of their sales online, they are investing ahead of demand to continue growing faster than the category. They are also spending differently by consistently focusing their commercial budget on on-site advertising in both pure-play channels and omnichannel partners. These investments can unlock closed-loop media analysis and ultimately help optimize the return on e-commerce investment.

3. Coordinate purposeful, pan-European cross-functional teams

Superstars have adapted their organizations to the requirements of e-commerce in Europe. Regardless of company size, they are two times more likely to have dedicated pan-European teams (with ten or more members) in addition to in-market resources. Since Europe is a heterogeneous region, superstars carefully balance locally made and executed decisions with those that are centralized to support scale or the incubation of new capabilities:

  • A single European strategy. Superstars often establish a pan-European center of excellence (CoE) to define the overall strategy and maximize consistency across areas such as pricing corridors, terms and conditions, cross-market product launches, and promotion principles.
  • Regional scale advantages. Companies can centralize contracts and ownership of pricing to increase bargaining power (for example, pan-European retailer rebates or media agency partnerships) or amortize large fixed-cost investments (such as data foundations). This approach helps to remove complexity from markets and minimize cross-border challenges.
  • Flexible local execution. Superstars typically decentralize execution where speed and local relevance are advantages—for example, assortment selection, e-merchandising, demand forecasting, and digital marketing. However, European shared services may also support content creation.
  • Local relationships, regional champions. Although the management of key accounts remains mostly localized, some leading companies are moving pan-European retailer relationships into the CoE, while others have created cross-market “champion” roles to partner with similar buyer structures.

The optimal setup will ultimately depend on the category maturity for key e-retailers, as well as on the organization’s geographic breadth. Consumer goods companies that want to win across subscale European markets benefit from the insight and execution expertise that come with some degree of centralization.

4. Make capital expenditure investments ahead of current demand

Operating a successful e-commerce unit requires investing in the right digital capabilities and technology. Our research found that superstars invest ahead of channel growth, secure capital expenditures to develop a fit-for-purpose tech foundation, and pursue consumer-focused innovation.

The allocation of investment to e-commerce innovation that will create future value—what we call investing ahead of or in line with demand—allows superstars to grow ahead of the category, rather than waiting for revenue generation to unlock spending. To break this chicken-and-egg dynamic, companies must make strategic choices in the shift toward e-commerce. Thinking two years ahead can enable companies to innovate in their own platforms to achieve long-term scale benefits.

Investing ahead of demand is more common in superstars (80 percent) than in other companies (65 percent). Superstars are also investing 1.4 times as much as others into owned e-commerce platforms (D2C sales and beyond). In addition, advanced players are more likely to ensure that their online ecosystems are differentiated and create value—for example, by building active online communities that create an emotional connection with consumers. This strategy requires investment to develop relevant digital content and target the community (rather than just the consumer). Companies are also exploring e-commerce in the metaverse, which could redefine customer experiences by bringing together the convenience of e-commerce with the personalization and atmosphere of an in-person experience.

5. Recruit, train, and promote specialized digital talent

Digital literacy and analytics capabilities are critical enablers to move quickly in e-commerce. Superstars invest to build in-house technical talent in specific capabilities (such as digital marketing), which limits their reliance on third-party agencies or partners and enables agility.

Superstars know that filling the talent gap requires a focus on attracting experienced candidates for specialized e-commerce roles. These companies may routinely hire externally from digital-native companies such as Amazon. Anchor hires in leadership roles can bring disruptive, innovative thinking and the requisite credibility to reset the business for success in e-commerce. This talent strategy helps superstars move toward an online playbook that emphasizes testing and learning through data and analysis.

Investing in the right leadership talent as well as specific capabilities must be done early. Superstars commit the necessary resources in tandem with technology innovation.

How top executives can achieve profitable e-commerce growth in Europe

The continued growth of e-commerce throughout Europe—as a channel to support both sales and consumer engagement—makes it crucial for consumer goods companies to gain scale and share in a profitable way. Insights from e-commerce superstar performers offer a blueprint for success, with three clear priorities.

First, top executives must embed an e-commerce-first strategy that prioritizes scaled markets, sets complementary subchannel roles, and promotes the online-success model. This strategy may require organizations to educate leadership teams in digital commerce. Superstars have distinct playbooks for commercial investment in online channels, keeping away from invisible price promotions and investing in targeted marketing. Companies that stick to an offline approach will struggle to see returns. The same holds for logistics. As lower-value e-commerce orders become the norm, organizations that have pivoted to data-driven planning and omnichannel inventory management will be better positioned for efficiency.

Second, leaders should design a European e-commerce operating model that encourages collaboration and transparency while respecting differences across countries. Superstars overcome scale limitations through a combination of pan-European strategy, scaled contracts, and shared services while still making operational decisions on a local basis. The optimal structure will depend on a company’s category and business characteristics.

Last, executives should adopt an online-investment mindset that decouples e-commerce strategy from the traditional sales-planning approach. Instead of expecting essential investments in both technology and people capabilities to be financed by existing top-line growth, superstars focus on what it will take to become the business they want to be in two years and invest internally to deliver.

E-commerce acceleration is outliving the pandemic and evolving into much more than a sales channel. Consumer goods companies in Europe that make savvy bets on e-commerce now could gain a lasting advantage.

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