Europe rethinks e-commerce models for profitable growth

E-commerce is now a necessity for European consumer goods companies rather than merely a potential source of growth. An organization's ability to innovate and go beyond conventional methods determines its success. Advanced players in established categories (like fashion and accessories, beauty, consumer goods, and toys) have been experimenting with new formats more and more over the past two years (such as live commerce and social commerce). Players in emerging categories like fast-moving consumer goods (FMCG) and food began to create a successful online-first playbook simultaneously.

It will be equally important to unlock e-commerce growth in the coming years. Online channels have grown noticeably faster in recent years, although offline commerce has started to recover. In 2021, mature categories grew by about 12 percent (1.4 times faster than offline), and nascent categories increased by 6 percent (seven times faster than offline). This growth differs among nations due to the diversity of Europe. Beyond its growth potential, e-commerce plays a bigger part in creating privileged consumer engagement, from producing direct-to-consumer first-party data to interacting digitally with different consumer segments in the metaverse. McKinsey predicts that consumer activities in the metaverse, such as learning about brands and visiting virtual stores, could influence more than 80% of commerce by 2030.

Europe is a complex market of regional maturity, category growth, and channel profitability

As in most of the world, COVID-19 lockdowns and social-distancing measures led to increased digital engagement in Europe. With 19 percent penetration and roughly 19 percent growth, the US consumer goods e-commerce market is sizable and well understood, but each European region is at a different stage of development (Exhibit 1). Only Northern Europe's penetration, with a CAGR of 19% from 2019 to 2021, is comparable to that of the United States. While the pandemic unlocked a more dramatic e-commerce CAGR of about 27 percent, online sales penetration remained at less than 10 percent from 2019 to 2021 in Southern and Eastern Europe, which are still relatively new to e-commerce.

The retail environment in Europe is dispersed. Only Amazon, eBay, MediaMarkt, and Zalando are present in more than two nations among the top five online retailers in the EU. Numerous other top online merchants are regional omnichannel players with sizable physical locations.

Toys, apparel and accessories, cosmetics, consumer durables, and other highly digital categories continue to flourish in e-commerce and expand at double-digit rates. These categories have not yet reached a plateau, even though the past two years' accelerated growth—more than 40%—will eventually slow. They ought to have substantial room to grow (given that books, the original online category, is now about 65 percent online).

There are two groups in the food, beverage, and FMCG industries. Shelf-stable food and consumable household goods are ambient, stock-up categories with lower penetration that are expanding at a rate of 15 to 20 percent annually. The least penetrated and slowest to develop online are still alcoholic beverages and perishable foods, which rely heavily on quick, unplanned "top-up missions." Nevertheless, the annual growth rate for these product categories ranges from 7 to 15%.

Struggle to increase profitability

Despite rapid growth, consumer goods companies trying to scale up in e-commerce still have trouble raising profitability, particularly in B2B2C marketplaces.

Due to higher shipping and warehousing costs and on-site advertising, companies that sell directly through Amazon and other pure players typically have two percentage points lower margins than omnichannel e-commerce. The more complicated e-commerce supply chain is still not managed by consumer goods companies as effectively as traditional retailers, resulting in a 1.5 percent difference in the cost of gross sales. To ensure the quick and effective delivery that customers demand, pure players frequently demand that suppliers adhere to strict guidelines (such as frustration-free packaging), with noncompliance carrying a penalty. Pallet configurations frequently have higher prices and lower-order average values. An additional 1.5 percent of gross sales is spent on on-site advertising (or the marketing budget on Amazon Web Services Media Services). In-store promotions are essential to securing shelf space, but on pure-player websites, deliberate product investment, such as targeted advertising, can be a key differentiator.

These findings imply that many consumer companies have not yet rebalanced their pure-play profit and loss (P&L). Since e-commerce retailers frequently lack historical internal operating models and growth occurs relatively quickly, P&L decisions may be shared among several owners (such as sales controllers, assistants in digital marketing, and logistics leads) without a clear understanding of where trade-offs should be made. The spending profile of omnichannel e-commerce (within grocers and department stores) is consistent with offline purchases. The percentage of food and FMCG sold on promotion in grocery stores is typically high, and promotional allowances offered in brick-and-mortar stores are likely to be duplicated online. Consumer goods companies are, as a result investing an average of more than 1% of gross sales in catch-all online promotions, a tactic that probably offers better returns.

Presently, emerging platforms have better margins. Quick commerce platforms like Gorillas and delivery platforms like Glovo have successfully drawn sizable capital inflows. More than ten European grocery quick-commerce businesses have raised more than $2 billion in funding and are now concentrating on growing to demonstrate the sustainability of their business models. Some manufacturers of consumer goods have begun selling their goods directly. According to McKinsey research, D2C can help businesses achieve two percentage points and four percentage points higher margins than omnichannel retailers and Amazon. These outcomes are probably a result of businesses' willingness to absorb short-term losses in exchange for gaining new clients, emerging investment opportunities (for instance, on-site advertising or placement), or a combination of the two.

How to achieve profitable e-commerce growth in Europe?

It is essential for consumer goods companies to grow their scale and market share profitably, given the continued expansion of e-commerce throughout Europe as a channel to support both sales and consumer engagement. The insights of e-commerce superstar performers provide a blueprint for success with three distinct priorities.

Businesses must first take the first steps to prioritize scaled markets, define complementary subchannel roles, and promote the online success model. Organizations may need to train leadership teams in digital commerce to implement this strategy. Superstars follow specific strategies for making commercial investments in online channels, avoiding covert price promotions, and spending money on niche marketing. Businesses that continue to use an offline strategy will have trouble seeing results with logistics. Organizations that have switched to data-driven planning and omnichannel inventory management will be better positioned for efficiency as lower-value e-commerce orders become the norm.

Second, companies should create a European e-commerce operating model that promotes cooperation and openness while honoring regional differences. Superstars overcome scale constraints by combining a pan-European strategy, scaled contracts, and shared services while continuing to make operational decisions on a local level. The best structure will vary depending on a company's industry and operational traits.

Lastly, businesses should adopt a mindset that separates their e-commerce strategy from the conventional sales-planning methodology. Superstars concentrate on what it will take to become the business they want to be in two years and invest internally to deliver rather than expecting necessary investments in technology and human capabilities to be financed by existing top-line growth.