Changing consumer behaviors, labor shortages, and pressures to be profitable as costs remain elevated have led to a pessimistic outlook for the grocery industry — two out of three grocery and consumer packaged goods (CPG) executives expect that their growth will be slower this year than in 2022, according to nclick="javascript:window.open('https://www.mckinsey.com/industries/retail/our-insights/the-state-of-grocery-in-north-america-2023', '_blank', 'noopener'); return false;">a new report from McKinsey.

based on responses from multiple consumer surveys and interviews with 30 grocery and CPG CEOs, McKinsey’s latest report identifies some of the biggest trends shaping the present and future of the industry.

Creating products for value-seeking consumers

Though inflation is now well below its 2022 peak, consumers are cutting costs regardless of their income level. Six in 10 consumers said they’re trying to find ways to save money, a 13% jump from 2022, and the percentage of those who traded down to less-expensive products rose 4% this year to 66%.

This shift has driven growth for private label brands over the past two years. One of those ways is switching to private brands — 44% of consumers say they plan to buy more private label products this year, which is almost double last year’s percentage. And many consumers believe products from private brands are equal to or better than those of big-name brands in terms of quality (83%) and value (89%), suggesting that this preference for private label will likely outlive challenging market conditions.

To keep up this momentum, it falls on food retailers and manufacturers to deliver private label products that can compete with national brands on price while appealing to current customer values.

Meeting expectations for sustainability

McKinsey’s research uncovered a connection between consumer spending and a brand’s environmental, social, and governance (ESG) initiatives — products that boast ESG-related claims have a 1.7% sales growth edge over products that don’t. 

Overall, 28% of consumers say they’re willing to pay more for environmentally friendly products, with Gen Z (49%) and Millennial (48%) consumers even more likely to do so. Being able to recycle the goods they purchase is the most important sustainability factor to shoppers. However, demand for recycled plastic well surpasses supply, and McKinsey notes that the amount of recycled plastic in the market has remained stagnant for the last 20 years. 

In response to sustainability demands, 87% of food retailers and 91% of food suppliers have made ESG a priority for their organization. And grocers are addressing packaging waste through initiatives like nclick="javascript:window.open('https://www.closedlooppartners.com/beyond-the-bag/', '_blank', 'noopener'); return false;">Beyond the Bag. 

For more insights into the state of grocery this year, see nclick="javascript:window.open('https://www.mckinsey.com/industries/retail/our-insights/the-state-of-grocery-in-north-america-2023', '_blank', 'noopener'); return false;">McKinsey’s full report.