European grocery retailers are on a shopping spree. The results of a McKinsey analysis of the 400 largest acquisitions in the sector show that the volume of corporate takeovers more than quadrupled—rising from $2.9 billion to $12.4 billion—between 1994 and 1998 (Exhibit 1). Yet a comparison with North America’s retail grocery sector suggests that its European counterpart is only at the beginning of a period of consolidation. For, while the top five companies in the United States have a 35 percent share of the US market, the top five in Europe have only a 26 percent share of theirs.

Until recently, grocery retailers in Canada and the United States dominated a region or two at most. Today, the strongest have extended their hegemony to multiple markets, and these super-regional market leaders are earning higher returns than their smaller competitors. At the beginning of the 1990s, European grocery retailers grew mostly at the national level: from 1991 to 1994, the top ten realized almost 90 percent of their growth at home. In the next four years, the tables turned: almost half of the growth recorded then stemmed from European cross-border expansion, mostly by acquisition—a trend that is accelerating.

Consumer tastes...