Transforming the EU retail and wholesale sector

To capitalize on change, companies must invest in sustainability, digitalization, and skills and talent.

The retail and wholesale industry is a key economic sector in the European Union (EU). It comprises nearly five million enterprises, about one-fifth of all companies registered in the EU. Collectively, these companies meet roughly one-third of total household consumption needs in the EU, generating annual revenue close to €7 trillion. 1 The sector is in the midst of an accelerated transformation. Consumer demands are changing, and megatrends such as the growth of e-commerce, the need to decarbonize the economy, and an aging population pose threats to current business models—and provide opportunities for growth. To seize these and other opportunities, retailers and wholesalers should invest in three areas through 2030: sustainability, digitalization, and skills and talent. Bold moves in all three areas will benefit companies, consumers, suppliers, and the overall EU economy.

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Sustainability. The sector needs to play its part in decarbonizing the economy to meet the targets of the Paris Agreement. It contributes about 40 percent of overall EU greenhouse-gas (GHG) emissions, less than 5 percent directly from its own operations and about 95 percent from other activities up and down the value chain (for example, farming, manufacturing, and transportation). The sustainability transformation is an opportunity for retailers to differentiate their assortments, tap into growing green value pools, and develop new circular business models. In many cases, emissions reduction brings cost savings or new revenue streams. It is time for retailers and wholesalers to follow the example of the green pioneers in their midst and switch from playing defence (risk mitigation) to playing offense (value creation). If the sector takes the opportunity, it could reduce Scope 1 and 2 GHG emissions by up to 90 percent by 2030. Making operational changes will require substantial investments, however, most levers have a positive net present value (NPV) or are at least NPV neutral. Working with their value chain partners, retailers and wholesalers can further drive sustainability and scope 3 decarbonization to improve resource efficiency, biodiversity, and fair pay and nudge consumers to healthier, sustainable choices.

Digital. Digital interactions are the norm, and the doubling of the share of e-commerce (from 15 to 30 percent by 2030) is expected to drive 90 percent of the growth of the sector. Increasing digital sales require an expansion of the supply chain and logistics network. Warehouses and fulfillment centers will have to increase to meet the growing demands of e-commerce orders, both in terms of increased volume and service level, as customers demand faster deliveries. Automation can play a central role in warehouse efficiency. Eight hundred billion gigabytes of customer data were generated in 2021 across the world. Using this data for advanced analytics and artificial intelligence, and the high potential for automation, will help companies maximize value creation, and technological advances will make adoption easier. All of this will require the modernization of legacy IT architecture and systems, a shift towards agile IT operating models, and more advanced cybersecurity systems.

Skills and talent. As the largest private-sector employer in the EU, the sector can drive upskilling and reskilling of the current workforce and improve employee productivity.

If they act decisively on the imperatives of this triple transformation, retailers and wholesalers will be able to increase their resilience, fulfill their social and environmental mission, and unlock new business opportunities beyond the traditional trade. They may attract and retain talent more easily, and their employees may benefit from more training and lifelong professional development. Consumers could benefit as well. The transformation could give them more choices and convenience, as well as enable them to take on more responsibility for the planet. Society across the EU and around the world could benefit as the sector curbs GHG emissions and helps protect the land, water, biodiversity, and health and safety of communities. Overall, the triple transformation allows the sector to move toward more efficient, robust, and sustainable business models.

To make the triple transformation happen, retailers and wholesalers will have to substantially increase their annual investments.

According to McKinsey modeling, companies across all retail and wholesale subsectors will need to invest an additional 0.8 to 1.6 percent of their revenue till 2030 on average. That equals an industry total of €315 billion if companies set themselves less ambitious targets (in the conservative scenario) or €600 billion if the sector takes on more commitments (in the ambitious scenario). Small and medium-size enterprises (SMEs) account for about 10 percent (€35 billion to €60 billion) of the total. That equals about one-fourth of the sector’s EBITDA margin, a considerable share of revenues, in a low-margin industry. EBITDA margins are typically 4 to 6 percent in food retail and 4 to 10 percent in nonfood retail. The wholesale sector has even lower EBITDA margins.

From a global perspective, European retailers and wholesalers invest less than players in other regions, as shown in Exhibit 1.

European wholesalers and retailers invest less than players in other regions.
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The investment gap (3.6 percent in the EU compared to 6.7 percent in North America for large companies) could become a liability for European players as competition is increasingly global in the digital age.

Further challenges, such as the COVID-19 pandemic, supply chain disruptions, the war in Ukraine, record inflation, and soaring energy prices are causing many players to defer investments to protect profitability. In the current economy, increasing consumer prices to offset the cost of investments is widely considered difficult. Retailers and wholesalers therefore need to find ways to transform the sector in a way that balances short- and long-term goals. Investing in energy-efficient equipment, for example, can help reduce both GHG emissions and operating costs.

While retailers and wholesalers can accomplish a lot on their own, collaboration across the value chain and external support will be key to accelerate the pace of the effort and ensure sufficient scale. If suitable support mechanisms and policy measures are put into place, retailers and wholesalers can make the necessary investments in sustainability, digitalization, and skills and talent and implement the required long-term changes.

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This report, prepared by McKinsey and EuroCommerce, in collaboration with EuroCommerce’s members, outlines the sector’s ambitions for 2030 on sustainability, digitalization, and skills and talent. It presents a consolidated view of the changes retailers and wholesalers could make, including investments that might facilitate the triple transformation. It also discusses the challenges the sector faces and the support it may need.

The analyses and potential paths forward presented in this report are meant to address the needs of all five million of the EU’s registered enterprises, spanning all business models, most of the industry’s subsectors, and companies of all sizes, from large corporations to SMEs (from traditional mom-and-pop stores to franchisee stores). Less than 1 percent of those companies are large, and most operate in one country only, or in a limited number of countries. All of the remaining companies are SMEs, only 8 percent of which have ten or more employees. That said, the required actions will differ, especially between larger and smaller players.

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The sector is competitive and growing slowly, especially in Western Europe, as markets are mature and population growth is stagnating. In most countries, retail and wholesale have been growing roughly in line with inflation. Growth rates in Central and Eastern Europe were slightly higher, due to rising purchasing power in those economies. With the high inflation rates across the EU and soaring energy prices, retailers are seeing declining volumes especially in the nonfood categories, as consumers’ disposable incomes are declining.

Helping all players transform will require a concerted effort from all stakeholders—from farmers and primary manufacturers to suppliers, entrepreneurs, and educational institutions. In the right economic and regulatory environment, retailers and wholesalers could become a driving force for the entire European economy and help the EU achieve the objectives of the Green Deal, Digital Decade, European Skills Agenda, and other initiatives.

Focus of investments through to 2030

Investment will be required in three areas (see Exhibit 2):

The sustainability transformation. An ambitious investment of €335 billion, or a more conservative investment of €135 billion, over eight years will help the sector move toward net-zero operations across its value chains, shift to more sustainable assortments within its range of private-label and branded products, and create more circular business models to reduce waste and costs as well as create new revenue streams. Retailers and wholesalers can help reduce Scope 3 emissions by making sustainable options easily accessible to consumers and providing transparency about GHG emissions and other aspects of sustainability. To move the needle on Scope 3 emissions, retailers and wholesalers can also work closely and in partnership with their supply chain partners, including farmers.

The digital transformation. An ambitious investment of €230 billion, or a more conservative investment of €155 billion, over eight years could enable the sector to evolve into a truly omnichannel industry that provides a seamless experience for customers, boosts automation across the value chain, scales up advanced analytics to drive growth and operational efficiency, and modernizes IT.

The skills and talent transformation. Retailers and wholesalers are already training some ten million people on the job every year. 2 Further investment totaling €25 billion (a conservative scenario) or €35 billion (an ambitious scenario) will enable the other two transformations and help expand apprenticeship programs and implement the Pact for Skills. Smaller enterprises may take advantage of public programs and seek the support of the private sector to augment their investments in skills.

For transformation, the EU retail and wholesale sector will require additional investment in three areas through 2030.
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