Digital Challengers on the next frontier: Perspective on Romania

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Over the past five years, the digital economy has been a key contributor to the economic development of Central and Eastern Europe (CEE). More than €200 billion in additional GDP could come from growth in this sector by 2030, with the total CEE digital economy reaching €330 billion. Digital commerce, the main driver of growth to date, seems set to continue to develop, while new business building and public-sector digitization could accelerate information and communication technologies (ICT) growth. In Romania, accelerating digital growth may bring the digital economy to almost €52 billion by 2030—a growth equivalent to 14.7 percent of the country’s 2021 GDP.

Digital Challengers are catching up with Northern and Western Europe

A new McKinsey report, “Digital Challengers on the next frontier,” compares the potential of what we’re calling “Digital Challengers” (Bulgaria, Croatia, Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) with two other clusters in Europe: “Digital Frontrunners” (Belgium, Denmark, Estonia, Finland, Ireland, Luxembourg, the Netherlands, Norway, and Sweden) and the “Big 5” economies (France, Germany, Italy, Spain, and the United Kingdom). The report follows on from reports on Digital Challengers from 2018 and 2020.

The three main components of the digital economy considered in the report are digital commerce—online retail spending on goods and services; ICT—the value of IT, telecommunications, and media spend on hardware, software, infrastructure, and related services, across all sectors, by governments and companies; and offline spend on digital equipment—computers, smartphones, IT infrastructure, and cloud technology.

In the past five years, Digital Challengers outperformed their European peers in growth in both the digital economy (10.9 percent, compared to Frontrunners at 7 percent and Big 5 at 6.5 percent) and GDP (3.6 percent versus 2.8 percent and 0.2 percent). Despite these advances, however, Digital Challengers still lag behind the other clusters in terms of digital-commerce penetration (16 percent versus 23 percent and 21 percent), showing there is further potential to accelerate growth.

Romania’s digital economy has a €52 billion potential

Romania’s digital economy could be worth €52 billion by 2030, accounting for almost ten percent of the country’s GDP (Exhibit 1). ICT grew at around eight percent annually in Romania from 2017 to 2021—not strongly enough to close the ICT gap with other Digital Challenger countries. The country, however, is showing signs of a developing ICT infrastructure, which may lead to higher digital literacy among its population. Its ICT fundamentals may catch up with average Digital Challenger levels, with this potentially the main growth driver of Romania’s digital economy in the years to 2030. Offline spending on digital equipment and digital commerce will continue to grow as digital fluency and digital use increase.

Digital commerce in Romania has almost doubled since 2017, while ICT lags behind.

Two significant circumstances provide a big opportunity for ICT growth. First, the largest capital reallocation in history, driven by decarbonization, lies ahead of CEE economies. Second, executives increasingly place new business building in their top three priorities, with new products, services, and businesses expected to deliver, on average, 50 percent of their companies’ revenues in five years.

With decisive actions, Romanian executives could make the most of this opportunity. Such actions include understanding future value pools and technologies and focusing on the “hot spots” where these combine; pursuing ambitious new business building; ringfencing new business investments and resources; setting realistic expectations; and publicly supporting and committing to investing in growth, even at the expense of short-term profitability.

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Romania has the second-largest digital commerce market, but low penetration in total retail

Digital commerce in Romania has grown by 17 percent annually, almost doubling from €5.2 billion in 2017 to €9.8 billion in 2021. It represents around 66 percent of the entire digital economy, estimated at €14.8 billion. The remainder is shared between expenditures on ICT (€3.5 billion) and offline spending of €1.6 billion on digital products such as computers, smartphones, IT infrastructure, and cloud technology.

Romania is the largest digital economy in the Digital Challengers cluster, following Poland (€44.4 billion) and the Czech Republic (€18.1 billion). However, Romania’s average per capita expenditure on digital commerce and its digital-commerce penetration rate are among the lowest in the region (Exhibit 2).

Romania's digital commerce has room for growth.

Our analysis shows that the largest categories for digital commerce in Romania are home goods and electronics (39 percent share), transportation services (31 percent), and apparel (14 percent). However, during the pandemic years, groceries showed the fastest growth, increasing from €123 million (two percent share of digital commerce) in 2019 to €389 million (four percent) in 2021 (Exhibit 3).

Digital commerce growth rate slowed down between 2019-21 versus 2017-19.

Before 2019, there were very few grocery-delivery companies in Romania, while today most hypermarkets have their own delivery service, in addition to attackers like Freshful. Supermarkets and food shops were harder to access during the COVID-19 lockdown, and the growth of the online groceries segment is partly attributed to the development of new services such as Bringo and Glovo. However, the online food-delivery market has become crowded; after enthusiastic expansion in 2019 to 2021, many services have exited the market or sold to competitors.

While the share of online shoppers increased during the pandemic, the portion of people aged 16 to 74 who shopped online in 2021 was 44 percent, considerably lower than the EU average of 74 percent. In 2021, there was a move to fully digital shopping across industries—except for groceries, where almost 60 percent of consumers preferred to shop in person; this was the only sector to see digital usage fall compared to 2020. Groceries also had the highest rate of new digital users aged 35 to 44. The highest rate of digital adoption overall was in entertainment, followed by travel (Exhibit 4).

Fully digital is the most used channel across industries expect for groceries.

The highest share of new digital users in Romania is in the age group 45 to 54—not an early-adopter group. Businesses therefore need to digitize thoroughly and provide seamless customer experiences, particularly as these new users may be harder to satisfy, with less tolerance for poor digital experiences such as lack of information or payment errors.

Digital commerce in Romania and CEE can grow further

Digital-commerce penetration in Romania, and CEE more broadly, would need to increase by almost half to reach the level of the Digital Frontrunners (23 percent), and double to reach global leaders like the UK or China (around 30 percent). Several trends could fuel this growth:

  • Customers seek convenience. Even during COVID-19, convenience was on a par with pandemic-related issues as a top reason for switching services. Customers mainly want full product and service availability, better prices, and convenient payment and delivery.
  • Marketplaces win on availability, prices, trust and innovation. Some CEE marketplaces are enjoying great success stories, offering regional alternatives to global players.
  • Innovations deliver ultra-convenience and are on the increase in payments, omnichannel, fast delivery and returns, and data-driven individualization. Expected usage change is positively correlated to digital innovation.
Woman sitting on rock with laptop, night sky making constellation of globe in the stars

Digital challengers on the next frontier in Central and Eastern Europe

Exports can contribute to digital-commerce growth

Retail export sales for Digital Challengers via digital channels were worth more than €12 billion in 2021, equivalent to approximately ten percent of total domestic consumption. Increasingly, this is becoming an important focus area.

Within the cluster, Romania stands out with the largest share of exports in digital commerce (24 percent), followed by the Czech Republic (Exhibit 5). This is mainly driven by two marketplaces based in these countries that have a presence elsewhere: eMAG (operating in Bulgaria and Hungary) and Alza (operating in Austria, Germany, Hungary, and Slovakia). Of the countries in the cluster, only Romania and the Czech Republic have positive trade balances, due to their high share of exports; for all others, imports account for at least 25 percent of total digital spend—56 percent in Croatia, the highest.

Romania, Czech Republic, and Slovenia have the highest digital commerce goods export share.

While expanding e-commerce exports come with challenges such as localization of product portfolio, logistics costs, and foreign taxation, opportunities exist for companies in Digital Challenger countries to tap into the value of exports. For example, digital services that are delivered either online or within the home country do not need extended logistics networks. Products that are developed by sellers who own the intellectual property (IP) rights are not subject to copyright or supplier-side restrictions. Localization and complaint resolution are also significantly easier in niches where customers do not expect localized information—for example, where English is used. Areas that are thus less impacted include gaming, other software, digital media subscriptions, aggregators, and tourism and experiences.

Public-sector digitization will boost growth

While public-sector digitization is progressing, CEE still lags behind both the Digital Frontrunners and the Big 5 on services available digitally (scores of 65 versus 74 and 88 respectively) and e-government penetration (reaching 59 percent versus 63 percent and 81 percent of individuals). Romania’s e-government penetration sits at 15 percent, the lowest among all European countries.

Successful examples of public-sector digitization highlight opportunities for the public sector to engage with private businesses. For example, the DubaiNow app provides more than 130 services from over 34 government and private-sector entities, ranging from simple ones like payments for telecommunications, utility, and petrol, to more complex ones like property management, moving, and cleaning. Smart Nation Singapore digitized the public sector while developing ICT. Notable successes in this area incorporate open data and application programming interfaces (APIs), industry, and the start-up ecosystem, as well as re-skilling to foster computational capabilities and digital inclusion.

More advanced digitization creates more resilience

One clear lesson from the pandemic is that digitization not only enables economic growth, but also provides resilience in times of crisis. Analysis shows that countries with higher digitization, on average, recorded less-severe economic slowdown during the first waves of the COVID-19 pandemic: –2.3 percent GDP growth for Digital Frontrunners compared to –3.9 percent for Digital Challengers.

Countries with strong digital economies are more agile, adapting quickly to new requirements and opportunities. By investing in digitizing enterprises and government, wide communication networks, data analytics, and digital fluency across their populations, countries can better respond to crises and dampen the impact on their economies.

As the Digital Challengers start to catch up with the Digital Frontrunners, Romania has the potential to grow a €52 billion digital economy. By focusing on areas like new business build, exports, and public-sector digitization, Romania is well placed to see significant digital economic growth in the near future.

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