Retailers and manufacturers in Central and Eastern Europe need to reevaluate their offerings to effectively meet customer demands and shrinking budgets, according to a new study by McKinsey & Company.

The study, which surveyed around 4,500 consumers in Central Europe and interviewed regional retail and CPG leaders, highlights key factors driving market changes this year.

Based on the study's findings, McKinsey has identified four key factors that could help retailers and manufacturers attract and engage new customers in the region. These include:

1. Affordable Products

Rising inflation has forced consumers to allocate more of their disposable income to food, with nearly 60% of consumers in Central Europe (CE) reporting higher spending on food compared to the previous year.

At 7 percentage points more than their Western European (WE) counterparts, CE consumers are more inclined to trade down to keep expenses in check due to nearly 3 percentage points higher inflation rate in CE compared to WE, the study shows.

More than half of CE consumers (54%) intend to increase their shopping at retailers that allow budget-friendly options to save money this year and beyond.

The survey also found that 53% of shoppers plan to save money by opting for private-label brands, 51% by choosing lower-priced options, and 48% by reducing the overall volume of food products.

Additionally, 58% of Central European shoppers stock up on products when they find attractive prices.

Consumer trends of saving money are driving changes in store formats, with discounters maintaining momentum in Central Europe at the expense of other formats.

Retailers in the region have seen a Compound Annual Growth Rate (CAGR) of 4% to 12% in terms of retail value in surveyed countries, while traditional independent stores and hypermarkets have seen declines.

Moreover, premiumization is no longer a top concern, with 15% of CE consumers intending to reduce purchases of high-quality premium foods, with the Czech Republic (21%), Ukraine (24%), and Croatia (25%) leading the way.

The survey also showed that 43% of CE consumers plan to cut alcohol expenses, while 50% plan to reduce spending on snacks and confectionery products.

2. More for less

Approximately 20% of CE shoppers said they would focus on healthy eating and nutrition starting in 2023, which is 11 percentage points less than their WE counterparts.

Shoppers are more inclined to cut expenses for sustainable and healthy choices that exceed their budgets, as 54% of consumers mentioned price as their top concern.

Among the most desired attributes of a store, convenient location tops the list, with research showing that consumers expect stores to be situated nearby, offer appropriate discounts and promotions, and provide a pleasant and streamlined shopping experience.

In Poland, the Czech Republic, Croatia, and Ukraine, only about 30% of respondents said they were willing to drive further or go out of their way to save on groceries.

Online food products continue to gain market share in Central Europe, but the sustainability of this growth remains uncertain, as consumers have expressed a net negative intent to increase online spending, with 8% planning to limit spending on the channel.

Focusing on price, Central European consumers often optimize purchases across channels.

3. The Growing Significance of Generation Z Shoppers

Comprising 17% of the population, Generation Z shoppers value different shopping attributes. As a result, retailers must provide personalized value propositions to attract them.

They are comfortable with omnichannel and expect brands to offer seamless experiences in virtual and offline worlds.

Generation Z consumers adjust their eating habits by reducing store visits, with an increasing preference for weekly visits due to lifestyle changes such as dining out, fast commerce, smaller households, and increased online shopping, according to the report.

In addition to being more price-conscious and cautious, this consumer group does not settle for cheaper product alternatives.

They are less skeptical of private-label items due to limited exposure to the generic products they have replaced, the report said.

Approximately 18% of Generation Z consumers interviewed said they choose store brands because of their quality, which is 6 percentage points higher than older generations. Additionally, 38% believe private-label products offer better value for money compared to branded products, 8 percentage points higher than older consumers.

4. Margin squeeze

Top-line growth for retailers and CPG manufacturers faces a dual threat due to declining consumer sentiment and their intent to limit spending on food products.

Between 2019 and 2022, EBITDA margins decreased for 53% of retail and CPG companies in around 140 companies in the CE region, according to the data.

About 14% of companies showed no change in EBITDA (performance neutral with change between -0.5 and 0.5 EBITDA margin), while 33% reported growth.

The extent to which these companies are directly impacted by reduced profitability largely depends on their ability to pass on some or all of the costs to the customer, according to the report.