CEE in the spotlight

Necessity is the mother of invention — challenging economic times present growth opportunities for the CEE retail industry

By Mieczysław Gonta, PwC Partner, CEE/Poland Consumer Markets Leader

The old proverb that “necessity is the mother of invention" is true of the innovative ongoing transformations of numerous CEE retailers. Poland’s Żabka Group, for instance, has evolved from its roots as a traditional chain of convenience stores to provide a new type of shop. Żabka Nano, as the concept is called, is based on quick shopping without checkout clerks, queues or cash, adapted to the nature of the location and the profile of customers. Żabka Nano now has over 50 stores across Europe, making it the largest chain of automated stores in Europe.

These times, however, are undoubtedly very challenging for the CEE retail sector. A triple whammy of high inflation, Russia’s full-scale war in Ukraine and the cost of living crisis, cast against the backdrop of the legacy of the global pandemic, combine to create a tough operating environment. Retailers across the region and further afield have been compelled to examine their business plans and offerings to meet these challenges.  

Despite unfavourable macroeconomic and geopolitical conditions, successful innovations such as Żabka Nano show the retail industry in CEE still has significant growth potential. Retail entrepreneurs and companies, however, must be willing to embrace technology, pay close attention to evolving customer behaviour and be willing to adapt to ever-changing market conditions.  

1. The current macroeconomic context for retail in CEE 

The geopolitical shock of the Russian full-scale war in Ukraine interrupted supply chains and influenced rising inflation around Europe and beyond. Inflation has subsequently proven  particularly persistent in CEE. 

According to Eurostat data for the year from June 2022 to June 2023, inflation rates overall eased to varying degrees across CEE-EU countries, with the notable exception of Hungary, where it rose substantially. All 11 CEE-EU states’ inflation rates remained over the EU average of 6.4%, with the three highest annual rates recorded in Hungary (19.9%), Slovakia (11.3%) and Czechia (11.2%). 

Although the retail sector in CEE is currently experiencing an increase in revenue, this growth is being driven mainly by inflation. This is shown by an increase in average sales volumes of only 0.5%, with a simultaneous 10% increase in sales value year-on-year to date from July 2022 to July 2023. The examples below show retail markets demonstrate this pattern. For instance, sales of consumer appliances, home care and staple foods actually fell — but inflationary pressures resulted in rises in retail value.

Inflation in the CEE region, compounded by the Russian full-scale war in Ukraine and macroeconomic volatility, has endured. The findings of the 26th Annual Global CEO Survey, however, show that CEE executives perceived inflation as a primarily transitory issue, with geopolitical risks rated a much bigger long-term threat. 

There is some evidence to support this perspective. Hungary, for instance, had by far the highest rate of inflation of CEE-EU countries in the first half of 2023. The European Commission, however, expects that lower energy prices will trigger a year-on-year fall from 16.4% in 2023 to 4.0% in 2024. At the other end of the CEE-EU inflation rate scale, the country with the lowest inflation rate, Slovenia, is also projected by the Commission to see a fall of almost half, from 7.0% in 2023 to 3.8% in 2024. 

Non-EU CEE countries broadly follow a similar pattern, with inflation peaking in 2022, a recovery in 2023 and a projected significant drop in 2024. Like in the EU countries, trends and projections affect countries to differing extents. For instance, North Macedonia’s 2022 inflation rate of 14.2% is projected to fall to 9.2% in 2023, then significantly to 3.5% in 2024. In Georgia, inflation rates are projected to end up at a similar rate by 2024, 3.21%, compared to 11.9% in 2022 and the projected 5.86% in 2023. Across the Caspian Sea in Kazakhstan, controlling inflation is more challenging but also follows a downward trajectory, with a slight easing from 14.98% in 2022 to 14.83% in 2023 before a more significant recovery projected by 2024 to 8.55%.    

As well as being a contributory factor to inflationary pressures, Russia’s ongoing full-scale war in Ukraine affects retailers and their profitability in numerous ways. In the case of grocery retailers, Russia’s withdrawal from the Black Sea grain initiative, which allowed Ukrainian grain to leave the country’s southern ports via the Bosphorus has potentially dire consequences for global grain supply. The withdrawal has ominous consequences for food supply worldwide — with the CEE region at the forefront. The main effects, which have probably not been fully felt yet in the region and beyond, may lead to reduced exports and increased stockpiles in Ukraine, which could in turn force farmers to reduce production, all of which could severely affect grain supply.  

Such supply chain issues persist across the entire retail industry, with businesses of all sizes affected. According to a study conducted by the Polish Economic Institute, 73% of surveyed entrepreneurs reported that the war contributed to an increase in payment backlogs. Also, 70% said the war has resulted in disruption and interruption of supply chains. Supply chain issues have inherently negative implications for all businesses, including retailers. A lack of supply can lead to problems in production and getting products to market, which in turn can have ominous consequences for a company's liquidity. 

2. Changing customer habits and expectations — and an evolving CEE marketplace

Related to inflationary pressures, the cost of living crisis looms large for CEE retailers’ customers and consumers around the world. PwC’s CEE edition of PwC’s Global Workforce Hopes and Fears Survey 2023 shows that over half of CEE employees have little or nothing left once they pay their monthly bills. Also, the June 2023 PwC Global Consumer Insights Pulse Survey findings make clear concerns about the cost of living crisis. For instance, over 50% of consumers are either very or extremely concerned about their financial situation and 96% of consumers plan to adopt cost-saving behaviours in the remainder of 2023. 

Clearly, inflation, Russia’s full-scale war in Ukraine and the cost of living crisis have had, and continue to have, significant implications for retailers. Significant pressure is also being placed on the purchasing power of current and potential customers. It is important to note, however, that transformation in the retail sector was already well underway before the war and the pandemic. This transformation is driven by technology — and by changing customer habits and expectations. 

Customer habits have been evolving, and have been accelerated by the pandemic and the economic and geopolitical conditions above. The retail industry already exists in the “phygital” world. There has been much research and discussion about the role of shops and physical retail outlets in a digital age. Physical shops and retail outlets are increasingly becoming marketing and customer service hubs, almost showrooms, rather than places of transaction. As noted in the PwC Global Consumer Insights Pulse Survey, customers are looking for “frictionless” shopping experiences across physical and digital channels. 

It is vital that retailers continue to embrace technology to get to know existing and potential customers better. The Consumer Insights Pulse Survey shows that consumers already use technology throughout the purchasing process. For instance, 55% of customers rank search engines as their principal source for garnering pre-purchase information. Additionally, 32% do initial research via online customer reviews, 31% of consumers get information mostly from social media and 29% initially look at price comparison websites. As the Survey also finds, consumers show a willingness to adopt generative AI, particularly in using chatbots as digital assistants. Retailers should get to know their customers better — and use this knowledge to sharpen the pre-purchase consumer experience earlier in the decision-making process.

To do this, retailers should place more emphasis on the importance of investment in digital services and embracing the metaverse — as their customers are already there. One way the retail industry can do this is to work on search engine optimisation (SEO) beyond a simple keywords strategy. High-quality, unique and focused content can help retailers get targeted messaging directly to customers. 

Retailers also should invest in the power of data and use AI applications to optimise what they offer, pricing strategy and supply chains. Consumers are increasingly tech-enabled in their decision making, with the Survey finding that 79% are either “tech embracers”, “tech enthusiasts”, or “tech acceptors” — with only 22% seeing themselves as “tech avoiders.” Retailers, therefore, should adopt a “launch and learn” approach to generative AI — involving the likes of data-driven bespoke intelligent product recommendations, chatbots and virtual try-on. 

3. Developing a business in times of uncertainty — CEE success stories

Even before the pandemic and Russia’s catastrophic full-scale invasion of Ukraine, retail companies were responding to changing consumer tastes, expectations and global market conditions by restructuring and repositioning. In 2020, UK retailer Tesco, for instance, withdrew from a major CEE market completely, selling their Polish supermarket division and focusing scaled-down regional operations on the Czech, Slovak and Hungarian markets. 

This type of refocusing and repositioning was expedited by the pandemic. French retailer Camaieu, for instance, closed over 50 stores in the Czech Republic and Poland, as it refocused its domestic market. Inditex, owner of Zara and Pull&Bear outlets, also closed numerous outlets across the region in order to refocus on online sales and larger stores in prime shopping areas.

This changing retail market, while meaning that some major foreign companies left or scaled down in the regions, left gaps in the market for local retailers to exploit and some companies in the region are thriving in challenging market conditions. It isn’t a coincidence that three success stories profiled below  are “all-in” on being tech-focused, specifically cloud technology.   

• Żabka Nano, as noted above, is a Polish example of the effective use of technology in responding to changing customer needs. Fully automated stores, of which there are 25 already in operation across Poland. Similar solutions have been introduced in Western Europe, such as Amazon Go stores in the United Kingdom since 2021 (although the flagship store subsequently closed). In Portugal, Sensei, a local tech start-up, launched Dojo — a supermarket-scale autonomous store. Żabka Nano, however, is a true pioneer and European market leader, having successfully opened so many outlets in a short period of time. 

• Rohlik (named after the beloved local rohlík bread roll) is a Czech online platform that facilitates grocery shopping without leaving home. As well as the Czech Republic, Rohlik is active in Hungary, Austria, Germany and Romania. Rohlik’s year-on-year growth since its formation in the mid-2010s sky-rocketed during the pandemic and saw the company attain unicorn status in 2021. Rohlik’s success is based on the digitisation of the purchasing process and the convenience of fast delivery — a model that has seen it cultivate partnerships with major retailers like M&S and Benu pharmacies and made the company one of Europe’s leading e-grocery retailers. 

• Allegro Pay, a product offered by Polish retail and e-commerce company Allegro is well-placed to offer consumers alternative payment options in challenging economic times. This product allows customers to pay for products 30 days after purchase or in monthly instalments. This transaction model has proven very successful, with the deferred payment model generating almost 10% of Allegro's revenue. Such innovations have helped Allegro to expand into a truly CEE player through acquisitions, be active in six regional markets employing more than 7000 people and consistently be in the top ten of e-commerce websites in the world.  

4. Successful companies are tech-enabled, cloud-powered companies  

Being tech-enabled, as demonstrated in the above success stories, can enable retailers to be more agile, responsive and innovative in a rapidly changing market. As the CEE edition of PwC’s Cloud Business Survey, which brought together the views of almost 400 technology and business leaders from seven CEE countries across a range of industries, including retail, made clear — cloud transformation brings a range of business benefits. 

Becoming cloud-powered allows retailers to use data to understand their customers better and crucially, connect with them earlier in the purchase process to influence the point of decision. Cloud-powered data analytics on customers offer a fast pace, accuracy and security which can speed up business decisions and help retailers maintain a competitive edge. 

Cloud technologies can allow access to technologies to smaller retailers which would have been available to large-scale retailers, such as AI and machine learning. Retailers of all sizes, therefore, should focus on developing bespoke tech strategies that can use the myriad ways — data storage and analytics, omnichannel, frictionless  retailing, scalability and flexibility, cost savings, faster innovation and deployment, improved customer experience, remote collaboration, global expansion, security and compliance and business continuity — cloud adoption can drive their businesses. 

There is no singular way or “magic bullet” that can facilitate retail businesses to grow and be profitable. What is clear, however, is the current macroeconomic environment, and patterns of changing consumer habits and expectations have compelled retailers to examine their offerings and how they conduct business. Also clear, is that technology is now an essential component of the future of retail. After all, as the PwC Global Consumer Insights Pulse Survey finds, if customers are already embracing technology — then retailers should meet their customers where they are — and create frictionless, “phygital” experiences.  

CEE retailers need the ability to adapt to new conditions and uncertain times. In order to build a stable and resilient business, technology is now an essential means of achieving long-term business viability and profitability. The question for retailers should not be whether to invest in technology. Instead, the question should be which technologies — such as the cloud, AI, automation, augmented and virtual reality and data analytics — to invest in, and how to make sure their investment is aimed at growing their business.