Online retailers in Central and Southeast Europe got a strong boost from the pandemic, but that proved to be short-lived. Once shops reopened and the risk of infection diminished shoppers went back to bricks and mortar stores; online retailers are now doing better than in 2019, but not nearly as well as during the height of the pandemic. On top of that they now face a squeeze on consumer spending from the sharply rising cost of living.
That has led to a series of announcements by the leading online retailers from the region reporting declines in profits or warning that tougher times are coming.
It’s a stark contrast to the picture in the industry in the previous couple of years, when it looked as if online retailers from the eastern EU members and aspiring members in Southeast Europe were making strong progress in catching up with the more advanced e-commerce markets in the west and north of the continent.
With a few exceptions, notably tech-focused Estonia, e-commerce adoption in Central and Southeast Europe lags behind Western and Northern Europe. There are a variety of reasons for this, from lower spending power to lack of trust in online vendors to cash-focused economies. There are divisions within the region too, with online retail sales accounting for a larger share of total sales in Central Europe than in Southeast Europe.
Rise and fall
When all but non-essential shops closed in spring 2020 – and again in further lockdowns later in 2020 and 2021 – and people sought to avoid the risk of infection in public places, online purchasing suddenly spiked. However, as shops have reopened, people quickly started heading back to bricks and mortar shops and malls again.
Research from the International Monetary Fund (IMF) based on Mastercard data shows that for the most part online sales are above the pre-pandemic level but have fallen from peaks achieved in 2020. That raises the question of how permanent the growth in online sales will be – especially as sales both online and in person are now affected by soaring inflation.
“There’s no doubt that e-commerce helped many navigate the pandemic, from online shopping to curbside pickup to food delivery. But as we slowly emerge from lockdowns and other restrictions, it’s less clear how this shift to digital commerce may evolve across economies and industries,” says the IMF report published earlier this year (before the current acceleration in inflation).
IMF researchers’ survey of 47 countries found that on average the online share of total spending shot up from 10.3% in 2019 to 14.9% at the peak of the pandemic, before dropping back to 12.2% in 2021. According to the IMF, by 2021, the share of online spending was “only 0.6 percentage points above the growth trend for e-commerce had the crisis not happened”.
The picture from the 12 Emerging Europe countries included in the survey was broadly in line with this, as it showed an initial pandemic-related increase that had declined by the time the latest data was compiled.
Worsening performance in Romania
Sales by online retailers in Romania gained a big boost from the coronavirus pandemic in 2020. Since then, however, several Romanian online retailers have already reported worsening results over the last few months. They include the country’s top online retailer eMAG, which is also active in neighbouring Hungary and Bulgaria. The company ended the 2022 financial year on March 31 with a loss from operations of $34mn against a profit of $80mn in the previous year. This was attributed to its investment spending, while revenues edged up by 3% to $2.3bn and profit from operations stood at $17mn. However, the annual report from its majority shareholder Prosus group also noted the “strong recovery of the offline stores and problems in global distribution chains”.
More recently, the bonds of Elefant Online, listed on the Bucharest Stock Exchange, fell sharply at the beginning of October after it reported H1 losses of RON12.4mn (€2.5mn), more than double compared to the RON4.6mn losses in H1 2021.
The financial results came against the background of the decrease in the purchasing power of customers and the change in consumer preferences, from online to physical bookstores, according to the company’s financial report.
The previous month, Romanian online furniture and home decorations retailer Vivre Deco announced that it had agreed to initiate preventive conciliation procedures asked for by two of its creditors. Vivre reported losses of RON18.6mn in H1 after RON84mn losses in 2021. Vivre’s bonds listed on the Bucharest Stock exchange were traded at one-third of their face value – a 10% daily decline – after the company’s statement.
Tougher times ahead
Two of Poland’s main online retailers – Allegro and Answear, both listed on the Warsaw Stock Exchange – recently issued warnings about the “challenging” market environment, despite reporting positive results.
Allegro, which Poles turned to in large numbers during lockdown, said on September 22 its growth for gross merchandise value (GMV) accelerated to 16% y/y at its Polish based business in Q2, reaching PLN12.1bn. It updated full-year expectations for its core Polish-based business, now targeting GMV growth between 15-17% and revenue growth of 23-26%. Aside from its Polish business, it has also been on an acquisition spree in the region.
The company commented that its "focus on ever widening selection and keeping prices in check raises its appeal among customers and shows resilience amid worsening macro conditions”.
The company added that its mid-term expectations are now under review, as it “wants to reflect the changing business environment in its cost structure and focus on boosting efficiency going forward”.
“With the prospect of a significantly more challenging environment driven by high inflation and the rising costs of living, we are putting increasingly more focus on cost efficiency on our side, while we continue to drive growth through strong trading performance in Poland and international expansion,” said Allegro CEO Roy Perticucci.
Answear.com said on October 5 that despite what it called a “challenging market environment”, it had achieved online sales growth of 51% y/y in Q3.
“We are pleased with the preliminary sales figures for Q3 2022. Despite the difficult market environment in the form of, above all, high inflation and the spectre of recession, our business continues to grow rapidly in contrast to our competitors, who are experiencing sales declines,” said Krzysztof Bajołek, CEO of Answear.com.
“This confirms the validity of our strategy to diversify geographically and steadily increase the average order value. In addition, the past quarter was the first full period this year that included the relaunched Ukrainian market. Here we remain optimistic as well, we see a steady recovery of this market, which should translate into even better sales in the future.”
Czech online grocery retailer Rohlik also performed strongly as people kept up spending on essentials. In April, Rohlik posted a 53% y/y rise in net revenues to €490mn, Reuters reported. The company has already expanded in Germany and Central Europe and is planning further expansion following a €100mn funding round led by Index Ventures in 2021.
“We are pleased not to see a post-pandemic softening or a slowdown in growth,” said founder Tomas Cupr as quoted by Reuters.
This is not limited to online retailers in Emerging Europe. Europe’s largest online fashion retailer Zalando – which recently expanded in CEE markets – returned to profit in the second quarter of 2022. However, the profitability was driven by cost cutting, which offset a fall in sales. The company previously reported its first ever sales decline in May and a first quarter loss.
“Life is becoming more expensive and consumers are reluctant to consume. We feel that,” co-CEO Robert Gentz said as reported by Euronews.
Among other international retailers, UK-based Asos just announced an increase of sales of 1% y/y to GBP3.94bn in the year to August 21, when it also made a pre-tax loss of GBP32mn. The retailer plans to write off €100mn of stock and cut costs as shoppers pare back spending on clothes amid rising living costs.