Romania, the third-largest digital economy in CEE and the second-largest digital commerce market

Romania’s digital economy could grow 3.5 times to around 52 billion euros in 2030 compared to 14.8 billion euros last year, ICT and digital commerce being the main growth drivers, according to the new McKinsey&Company report titled Digital Challengers on the Next Frontier.

Thus, Romania’s digital economy may account for almost 9.6 % of the GDP in 2030, compared to around 6% of GDP in 2021.

The report is the third edition in a series on the digital economy, following The Rise of Digital Challengers in 2018 and Digital Challengers in the Next Normal in 2020, comparing the potential of Digital Challengers (Bulgaria, Croatia, Czechia, 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 Big 5 European economies (France, Germany, Italy, Spain, and the United Kingdom).

The report analyzes the opportunities presented by the digital economy in ten economies of Central and Eastern Europe – small and medium-sized countries with strong potential for fast digitization. The three main components of the digital economy considered in the report are: digital commerce (online retail spendings on goods & services), ICT (the value of spends of governments and companies across all sectors on hardware, software, infrastructure, and related services) and offline spend on digital equipment (e.g., PC, smartphones, IT infrastructure, Cloud, etc.).

The digital economy of these ten countries in CEE is estimated at 124 billion euros in 2021, with digital commerce representing 68 billion euros, ICT – 49 billion euros and offline spend on digital – 8 billion euros. The digital economy of these ten countries in CEE could reach €330 billion in 2030 as digital commerce, the main driver of growth to date, will continue to develop, while new business building and public sector digitization can accelerate Information and Communication Technologies (ICT) growth.

Romania’s digital economy was estimated at 14.8 billion Euros in 2021 – around 6% of GDP, according to McKinsey research, If it reaches the estimated value of 52 billion euros by 2030 – Romania’s digital economy could account for almost 9.6 % of the GDP in 2030.

Currently, Romania is the third-largest digital economy in the Digital Challengers cluster after Poland (44 billion euros) and Czechia (18 billion euros). The value is shared between digital commerce (9.8 billion euros), expenditures on ICT (3.5 billion euros) and the 1.6 billion euros offline spending on digital products (e.g., PC, smartphones, IT infrastructure, cloud).

Digital commerce represents 66% of Romania’s digital economy. ICT may be the main growth driver by 2030

In Romania, ICT grew at around 8% annually in 2017-2021 to 3.5 billion euros. However, investments in this sector are still low compared to countries such as Poland (14 billion euros), Czechia (9 billion euros), or Lithuania (7 billion euros). Romania is showing signs of a developing ICT infrastructure, which may lead to higher digital literacy among the population. As a result, ICT may be the main growth driver of the digital economy until 2030.

Thus, digital commerce represents around 66% of the entire digital economy – this segment grew by 17% annually, almost doubling from EUR 5.2 billion in 2017 to EUR 9.8 billion in 2021. The widespread growth can be seen considering the share of SMEs selling online, for instance, which more than doubled from 7 percent in 2017 to 17 percent in 2021.

Romania is the second largest digital commerce market in CEE, after Poland (26.7 billion euros) and before Czechia (9.1 billion euros).

However, the average expenditure on digital commerce per capita and the digital commerce penetration rate are some of the lowest in the region.

Romania’s digital commerce per capita was around 506 euros in 2021 – while the Digital Challengers’ average was 673. The highest levels of digital commerce per capita are in Lithuania (1,064 euros in 2021), followed by Slovenia (866 euros) and Czechia (849 euros)

In Romania, digital represents just 14% of the total retail segment (68.9 billion euros), the rest being represented by offline commerce (59.1 billion euros). With 14% penetration, Romania has one of the lowest rates of digital commerce in total retail in CEE, the average for Digital Challengers being 16%.

“Romania is the second largest digital commerce market in CEE after Poland, with Romanians spending on average ~500 euro per capita (~25% lower digital spending compared to peer countries). The COVID-19 pandemic accelerated the uptake of digital commerce significantly. It also led to a significant shift from pay-on-delivery to online card payments. We’ve experienced an increased volume of card transactions by over 60 percent from 2019 to 2021. Bucharest remains the national outlier, accounting for 45% of such transactions. Romania’s digital commerce penetration still needs to increase by more than half to reach today’s level of Digital Frontrunners (23%) and double to reach that of global leaders like the UK or China (~30%)”, says Ovidiu Tisler, Associate Partner McKinsey&Company Bucharest.

The usage of innovations delivering ultra-convenience (payments, omnichannel, fast delivery and returns, and data-driven individualization) could help Romania double its digital commerce market size, reaching 19.6 billion euros in 2030.

The report shows that the most significant categories for digital commerce in Romania are home goods and electronics (39% share of digital commerce), transportation services (31%), and apparel (14%). However, during the pandemic years, the fastest category growth was seen in groceries, which grew from EUR 123 million (2% share of digital commerce) in 2019 to EUR 389 million in 2021 (4% share of digital commerce). The highest rate of digital usage is in entertainment, followed by travel.

Export as a contributor to the growth of digital commerce

Retail export sales for Digital Challengers via digital channels were worth more than EUR 12 billion in 2021, equivalent to approximately 10% of total domestic consumption.

Within the cluster, Romania and the Czechia have the highest share of exports in total digital commerce sales of goods. This is mainly driven by two marketplaces from these countries that have a presence in other countries: eMag (operating in Hungary and Bulgaria) and Alza (operating in Germany, Austria, Slovakia, and Hungary.

“Romania stands out in the Digital Challengers cluster as the country with the largest share of exports in digital commerce (24 %, based on our analysis) and a positive trade balance. This is significantly due to eMAG’s operations in Bulgaria and Hungary. When services sold via digital commerce are included, the estimated total export market for Digital Challengers is around EUR 12 billion (goods and services combined). As a result, tapping into exporting digital services, such as gaming, media, aggregators and tourism, could help Romania further capture export value”, says Ovidiu Tisler, Associate Partner McKinsey&Company Bucharest.

More advanced digitization creates more economic resilience

While public sector digitization is progressing, CEE still lags behind Digital Frontrunners and the Big 5 European Countries on e-government penetration (59% vs. 63% vs. 81% of individuals). Romania’s e-government penetration is 15%, the lowest amongst all European countries.

The 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% GDP’s decrease for Digital Frontrunners compared to 3.9% decrease in GDP  for Digital Challengers. By investing in digitizing enterprises and government, countries can better respond to crises and dampen the impact on their economies.

“One clear lesson from the pandemic is that digitization enables economic growth and provides resilience in times of crisis. Countries with a strong digital economy are more agile to adapt quickly to changes and new requirements and thus can capture the opportunities that arise,” adds Ovidiu Tisler.