Digital challengers on the next frontier in Central and Eastern Europe

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The digital economy has historically been a key growth driver for the ten Central and Eastern European (CEE) countries that we call Digital Challengers: Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia (Exhibit 1). This trend has continued for the past five years (2017–21), during which the Digital Challengers’ digital economy has grown by €42 billion (+51 percent), with annual growth rates of 9 percent in 2017–19 and 13 percent in 2019–21. This outpaced the region’s annual growth in GDP, which was 4 percent in 2017–19 and 3 percent in 2019–21.

The three main components of the digital economy are digital commerce, ICT, and offline spending on digital.

In the five years 2017–21, Digital Challengers outperformed their European peers in two key areas. We cluster those European peers into two groups: Digital Frontrunners (Belgium, Denmark, Estonia, Finland, Ireland, Luxembourg, the Netherlands, Norway, and Sweden) and the Big 5 (France, Germany, Italy, Spain, and the United Kingdom). The two areas where Digital Challengers outperformed these two groups were growth of the digital economy (Digital Challengers, 10.9 percent; Digital Frontrunners, 7.0 percent; Big 5, 6.5 percent) and GDP growth (Digital Challengers, 3.6 percent; Digital Frontrunners, 2.8 percent; Big 5, 0.2 percent) (Exhibit 2).

Digital Challengers have lower GDP than the Big Five and Digital Frontrunners, but higher GDP growth.

This development confirms the trend outlined in our previous report, Digital Challengers in the next normal, namely that Digital Challengers are catching up with the leading European countries. Clearly, they have been successfully tapping into the growth potential identified in our 2018 report, The rise of Digital Challengers.

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Digital commerce exceeded expectations during the COVID-19 pandemic and is likely to continue as a growth engine

Digital commerce in the Digital Challengers cluster grew by more than €21 billion in 2019–21, accounting for more than 80 percent of growth in the region’s digital economy in the period. Digital commerce outperformed predictions in both our business-as-usual and aspirational scenarios, reaching €68 billion in value in 2021 (Exhibit 3). The COVID-19 pandemic sped up the growth rate of digital commerce to 21 percent a year in 2019–21, as in-store shopping was halted by lockdowns across the region. This accelerated development of online channels by two to five years.

Growth of the digital economy was driven by digital commerce outperforming all predictions.

However, even before the boost provided by the COVID-19 pandemic, digital commerce in the region was on a strong growth trajectory, experiencing a 14 percent annual growth rate in 2017–19. Driving this expansion was GDP growth and greater levels of disposable income, combined with an increased level of digitization. As a result, Digital Challengers grew twice as fast in 2017–19 as the Big 5 and Digital Frontrunners, which each grew by just 7 percent.

Despite these advances, Digital Challengers are still behind the other clusters in terms of digital commerce penetration per capita, which was 16 percent in 2021, compared with 23 percent for Digital Frontrunners and 21 percent for the Big 5. Clearly, there is further growth potential among the Digital Challengers.

The Digital Challengers could capture more than €200 billion in value by 2030

According to our updated analysis, the Digital Challengers’ digital economy could secure up to €206 billion in growth by 2030, fueled by the home goods and electronics sectors (€19 billion potential) and the apparel sector (€9 billion), with the highest compound annual growth rates (CAGRs) expected in activities (8 percent), apparel (7 percent), and groceries (7 percent). However, unlocking this potential will require an increased focus by governments and businesses on upgrading their information and communications technology (ICT). In our 2018 report, we developed an aspirational scenario for ICT growth of €42 billion in 2017–21, but the actual growth achieved by Digital Challengers in the period was ultimately only around €10 billion.

The digital economy also improves resilience in crises

Countries with a higher level of digitization on average experienced a less severe economic slowdown during the first waves of the COVID-19 pandemic: GDP growth declined 2.3 percent for Digital Frontrunners compared with a decline of 3.9 percent for Digital Challengers. Countries that invest in digitizing business and government operations and in promoting broad communications networks, data analytics, and digital fluency across their populations are better able to respond to crises and minimize their impact on their economy (Exhibit 4).

We identified four core digital levers that helped build resilience to the challenges of COVID-19 during the pandemic.

Of course, resilience is important not only for governments but also for companies. Digitally resilient companies have outperformed their less resilient peers during previous crises, as indicated by the evolution of total shareholder returns during the 2008 financial crisis. Companies thus need to improve their resilience by investing in digital capabilities.

photo woman looking at mobile device

Opportunity knocks for Europe’s digital consumer: Digital trends show big gains and new opportunities

Businesses can unlock value by using digital and data solutions to meet evolving customer needs

Rising consumer-centricity is a defining force in the digital-commerce landscape. The consumer needs that are gaining importance revolve around availability of products, convenience across the end-to-end customer journey, and innovation and personalization. This is reflected in trends such as the omnichannel experience, the leveraging of customer data, and innovative payment methods. Local enterprises in individual Digital Challenger countries are competitive at devising solutions suited to customer needs—for example, Allegro, Alza, and Vinted have responded effectively to customer demands for wide product availability, InPost and Rohlik have developed exemplary solutions for convenience, and traditional leaders such as CCC Group are investing strongly in innovation. Businesses can unlock further value by improving digital customer-centricity with a focus on innovation and personalization, investing in data capabilities, developing ecosystem solutions, ensuring seamless fulfillment, and strengthening customer trust.

Policy makers can strengthen the digital potential of the CEE region

Policy makers can unlock growth in the region’s digital economy by supporting digitization in the public and private sectors, developing digital talent, strengthening digital infrastructure, and enabling export and cross-border trade and cooperation. To scale these efforts and realize the full value potential of technological change, they would do well to clearly articulate a vision for digital transformation and keep it alive over time. Although the process of establishing user-friendly digital public services may be challenging, policy makers who take it on can increase efficiency, reduce the burden on all groups involved in interactions, and contribute to greater productivity.

In the private sector, digitization can improve operational efficiency by automating processes, allowing remote servicing, or replacing front-end work, all of which allow humans to invest more time and energy in acting on the insights provided by the data. Digitization also enables businesses to grow their domestic and foreign markets by increasing access to additional financing solutions and providing a deeper understanding of customers, allowing better-targeted offerings. To achieve this, however, the private sector needs a supportive regulatory environment that provides both basic regulatory measures, such as e-documents and e-signatures, and more advanced measures, such as trust-building regulation and revisions to the limitations on digital trade.

Digital talent and skills are a further foundation of growth for all components of the digital economy, and digital fluency among citizens fuels the development of solutions and enables their wider implementation. Policy makers can support the post-COVID-19 recovery by continuing to support the virtual delivery of teaching, online education, and platforms. They can also consider providing funds for open educational resources, personalized adaptive learning, and experiential or immersive education to promote lifelong digital learning. The latter is particularly important given the rising demand for digital and technical skills on the labor market.

Room for improvement in exports, requiring learning from regional success stories

Overall, Digital Challengers have a negative digital-commerce trade balance of €21 billion. Only the Czech Republic and Romania show positive balances, due to the wide expansion of marketplace companies such as Alza and eMag within CEE. Approximately €25 billion worth of goods and services are imported into the region, mainly from global players such as Amazon and AliExpress.

Digital commerce is still a regional game in CEE, with around 70 percent of total exports staying within the region. Key barriers to increasing exposure outside CEE include logistics costs, product localization, difficulties with multilanguage complaint resolution, and the up-front investment needed for customer acquisition. Gaming and other software, digital-media subscription services, aggregators and digital-tourism service providers are examples of digital-services verticals where Digital Challengers can potentially capture further export value. Raising exports to the levels of Romania and the Czech Republic could unlock around €8 billion. To do so, companies will need to develop appropriate capabilities and infrastructure—another area where policy makers can provide support.

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