Building Resilience During Economic Uncertainty in CEE

Consumers’ purchasing power erodes under inflationary pressure

Slower economic growth, volatility in commodity markets, tight labour markets and high inflation are among the key risk factors that are impacting the business environment and consumer behaviour in the Central and Eastern Europe (CEE) region. Real GDP in the region is forecast to contract by 3% in 2022 and show moderate growth of 0.2% in 2023, as a result of the war in Ukraine and weaker global economic growth, which are hurting exports. The inflation rate in CEE is forecast to stand at 7.7% in 2022 and 7.9% in 2023, due to higher energy prices, ongoing supply chain issues and rising labour costs.

At the same time, consumers in CEE countries are feeling the impact of inflation, as it is eroding their purchasing power. Real consumer expenditure is forecast to slow down significantly in 2022, and contract in some countries in 2023. Such a situation is very challenging to companies, as rising costs inflate production prices; however, companies cannot fully pass on the price increases to end consumers, who are increasingly cost-conscious. Declining consumer expenditure and purchasing power are also affecting the retail sector, and retailers will need to find new ways to navigate this situation.

Fmcg markets reshape under deteriorating consumer purchasing power

The fmcg environment in the region has been shaped by deteriorating consumer purchasing power in 2022, as the disposable incomes of the population are not keeping up with growing retail prices. With prices of essentials rising by 2-15% across the biggest markets, such as Poland and the Czech Republic, consumers are becoming increasingly rational about their spending. According to recent findings by Euromonitor International’s Voice of the Consumer: Lifestyles survey, fielded in February 2022, over 40% of consumers are looking for the best deals in daily shopping, and over 20% plan to increase visits to discounters. Notably, only 31% of consumers prioritise quality over quantity, while the rest are leaning towards more affordable products. The performances of different fmcg in the region support these trends of rationality and thriftiness, with essential categories such as packaged food and beverages enjoying better performances, while non-essentials such as luxury goods, personal accessories and electronics are on a steep decline in 2022.

Growth in fmcg Categories in CEE, 2021-2027, in Constant Value Terms (Inflation   Excluded)

With overall fmcg sales in the region suffering depressed demand, some local markets have fared better than others. CEE markets that have accepted the highest number of refugees from Ukraine (on a per capita basis), such as the Czech Republic, Estonia, Poland, Moldova and Lithuania, have received an extra push to consumption in certain categories – beverages, packaged food, personal accessories, footwear and hygiene products – and are exhibiting performances above the regional average.

Thriftier consumer behaviour has pushed fmcg markets to more intense promotional activities in 2022, as producers have struggled to support volume sales. The acceleration of promotions has eroded brand loyalty and resulted in volatile market shares throughout the year, with brand shares directly dependent on the number of promotional campaigns conducted in a given month.

Meanwhile, logistical constraints arising due to the war in Ukraine are undermining the stability of product supply and giving another push to price increases. Damaged supply chains have caused disruptions in product availability, which hit the hardest in Q1 2022. Despite some recovery in Q2, the situation has remained volatile throughout the year.

Retailers adapt to changing consumer needs and challenging economic environment

The war in Ukraine has not only caused a humanitarian crisis in Europe, but the economic damage has created challenges for the majority of industries. Based on Euromonitor International’s Voice of the Industry: Retailing survey 2022, almost 90% of retail professionals have already seen the impact of the rising cost of raw materials and other factors caused by the war impacting their company’s performance. Inflation has led to profitability questions for many retailers across the globe; at the same time, it has brought the opportunity to rethink strategy and implement cost-saving solutions. Retailers can review their product assortments and invest in private label, as during crises consumers tend to become less brand-loyal and look for offers. Retailers can re-evaluate in-store and supply chain processes and look for opportunities to reset their operating model by implementing technology and analytics, resetting labour allocation and scheduling, and taking a view of all costs. Retailers in the region have also introduced solutions to attract consumers, such as buy now pay later (BNPL), which allows them to target a broader audience. For example, 10% of total revenues of the biggest e-commerce player in Poland, Allegro, are generated by BNPL. Also, one of the leading apparel retailers, H&M, in partnership with Klarna, has launched BNPL not only online, but also offline, with the possibility to postpone payment for one month in-store. Click-and-collect allows both consumers and companies to save on delivery, as well as increasing traffic to outlets, which can result in an increasing number of impulse purchases. As the emergence of more cost-conscious consumers requires a strong value proposition built around value for money, retailers must be flexible enough to react quickly in order to stay relevant and profitable.

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