Consumers are feeling the impact of inflation and high prices. For example, the consumer price index in Europe increased to 113.18 points in February from 112.20 points in January of 2022. At the same time, central banks around the world are putting plans in motion to keep potential inflation under control. That is adding up to the pressure of labor costs. According to Eurostat, Hourly labor costs in the Euro Area rose 2.5 percent year-on-year in the third quarter of 2021, following a 0.1 percent decline in the previous three-month period.

source: tradingeconomics.com

As shown in the chart above, the annual inflation rate in the Euro Area rose to a fresh record high of 5.9% in February of 2022 from 5.1% in January. Energy continues to record the biggest price increase (32% vs 28.8% in January), followed by food, alcohol & tobacco (4.2% vs 3.5%), non-energy industrial goods (3.1% vs 2.1%) and services (2.5% vs 2.3%). The inflation rate is almost three times above the ECB’s target of 2% and is expected to rise even further as the war in Ukraine exacerbated the energy crisis threatening fuel costs to accelerate further.

Moving forwards, inflation has also disrupted the supply chain as one of the biggest perceived risks to growth. Supply chain disruptions have rippled across the global economy in recent months, triggering widespread impacts in both rich countries and emerging markets.

Why are prices going up?

There is no easy answer to this question. After the pandemic shock, and lockdowns, businesses, and consumers have been making up for the lost time. In many industries, manufacturers and businesses were forced to close down production and cancel orders. As a result, car production in Europe has dropped. In the first nine months of 2021, car sales in Europe bounced back, increasing 8 percent, but production rose by only 3.1 percent.

Then there are certain events in the world and Europe in particular that have contributed to inflation. In Europe this winter, energy prices have reached record highs, driven by geopolitical tension. Last year we have experienced challenges with container shipments, as one of them has been wedged in the Suez Canal.

Therefore, macro and micro factors are affecting different businesses in many ways. Geography matters too, especially for products that are costly or difficult to transport between regions. Some exporters may consider partnerships with nearby countries or regions to avoid costly shipping and transport.

With all this in mind, it is extremely difficult to predict when will inflation end. Some argue that the high prices are here for the long term, while others believe that today’s high prices are short-term.

“Inflation will continue to rise and stay elevated for the next several months, though the pace of its growth may start to slow,” said David Frederick, professor of economics at Washington University in St. Louis.

Further pressures could keep pushing prices up. For example, the transition from fossil fuels may mean that next-normal energy prices are higher for decades to come.

How can your business adapt?

We believe that companies can rethink their response to cost increases. Tackling the impact of cost increases across business operations requires a portfolio of solutions. The first and far most common mistake businesses make is rising prices to their customers. If you decide to go down that road, it is very likely your customers will not be happy long term. What can your business do instead? For example, a manufacturing company facing tight supply and productivity conditions had high manufacturing costs and experienced higher demand in a short period than they could supply. Instead of raising prices, they lengthened the lead time on all products to enable more efficient production scheduling. The result was an overall increase in productivity that maintained margins without price increases.

Therefore, instead of raising prices drastically, think strategically. Raise prices slowly in modest increments and choose areas where customers are less likely to notice. Moving forward, depending on your industry and products, customers will react differently according to how price sensitive they are. As an example, your business can adapt by offering multiple products at a higher price point, or offering extended warranties. These are some of the ways that you can justify higher prices. However, your business may need to reconsider its market position. You might want to position your products or services as high-end and target less price-sensitive consumers.

Within larger organizations and businesses, engineers and product designers are rethinking the core products to adjust to inflation. That includes product design, materials, packaging, or even product features. In response to high production and servicing costs while keeping the functionality customers demand.

Navigate inflation

Learn how to coordinate through high prices and inflation. Then, your business will be prepared for what’s to come. Adapt your business operations quickly and precisely to reduce business exposure to rising costs. Either way, if inflation is here to stay or transitory, the focus of your operations will prepare your business. Precise cost models, for example, give teams the tools they need to ensure that the organisation captures its fair share of savings from suppliers when their input costs fall. At the same time, advanced digital solutions and operations help businesses to predict how to improve cost-saving, quality, and supply as the prices change.

Automate workflows, free up workers and make each person much more effective at creating value. At retailers, for example, important associates often spend too many hours, days, and weeks manually inputting item and product data (e.g., case size, pack size, dimensions, website images) when they could be working on more strategic activities, such as analyzing data and generating insights.

To sum up, you need to be able to answer these questions in order to start working on a strategy to navigate inflation. What adds the most value to your business? What’s absolutely necessary? Can you automate any of your processes? Reconsider your supplier relationships and contracts, explore your options. If you need help navigating through the current business climate, please contact our team and we will walk you through the next steps.

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The three founders of Infobip have not just proven that global Software companies with thousands of employees can be built on the beautiful coastline of Croatia, but are a symbol for the resilient entrepreneur, as they have silently built a global powerhouse without any funding or help by the institutions which were intended to do so. Infobip’s founders have spotted the need for a Full-stack Communications Platform as a Service (CPaaS), as they describe their product, early on in 2006 when it was far from obvious that billions of SMS would have to be sent daily from Uber, Lyft, and other mobile Apps 14 years later. Today the company operates its direct communication SaaS globally with virtually every major telecom operator, offers a wide range of messaging services, and boasts clients with the likes of Uber, Burger King, and Strava.

The funding comes a bit surprising, as the founders intended to go public without prior fundraising.  In comparison Twilio (NYSE: TWLO), Infobip’s main competitor has raised $263 million from 24 investors, amongst those global leaders such as Salesforce, Fidelity, and T. Rowe Price since its inception 2009 when they first went through the Techstars Accelerator. Today Twilio has a market cap of $38.59 billion, the $1 billion Infobip is valued at seems small compared to its biggest rival, although it is their first-ever funding round and we expect more money to be drawn to the company.

The round’s only investor One Equity Partners, invested in Croatia for the first time, the middle-market private equity firm has $10 billion assets under management and was formed at Bank One in 2001, today it operates under the JP Morgan Chase umbrella after the latter was acquired by JPM. Interestingly One Equity Partners acquired a majority share in Ericsson media solutions in 2018, which is the media business of Ericsson composed of many previous acquisitions, yet a small part of Ericsson, which of course has its roots in the global telecom market, could pave the way for a symbiotic relationship between the two.

The future will show how this Croatian success story will unfold, we at VentureXchange are happy that Silvio Kutic, Roberto Kutic, Izabel Jelenic have shown the world that Croatia can produce Unicorns, and hope that many more will follow their path. Congratulations Infobip.

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Private equity investment in CEE reached €2.7 billion in 2018 to local talents, according to the Invest Europe Association. Furthermore, venture capital investment rose year-on-year by 32% to €160 million. By a number of companies backed in 2018, venture capital registered its second-best year on record.

In recent years, CEE startups in tech-led to huge traction of the market to venture capitals. About 10,000 emerging Eastern European businesses raise their first rounds of funding in the last five years. In the same period, the CEE market has seen more than ten unicorns emerged, with a total valuation of €30 billion.

CEE startups examples in tech

Lots of CEE startups tech companies achieved admirable results in tech space with a huge impact on a global scale. Grammarly Inc. is one of such tech company, founded in Ukraine. The company develops a digital writing tool using natural language processing (NLP) and artificial intelligence for effective writing of the English language. With more than 20 million active daily users, in 2019, the company was able to raise $90 million with a valuation of $1 billion.

We have Russia’s Miro, a digital whiteboard designed to allow distributed teams to work effectively together. The company raised a $50m Series B in April and has five million users worldwide.

Another example is a Lithuanian company, MailerLite that offers advanced automated email marketing campaigns. The company was recognized by SaaS Magazine as the 5th fastest growing SaaS business in the world.

DocPlanner, an emerging Warsaw-based online healthcare platform, is making it effortless for patients to book appointments with the right doctor. In May 2019, it announced raising an amount of $89.8 million series E funding in less than two years after it raised $16.8 million in venture capital.

Warsaw and Tallinn are currently leading the space as the largest tech hub in the CEE region by impressive numbers in venture rounds.

Poland startup ecosystem

Poland is the largest economy with 30% share of total GDP ($1.59T) in the CEE region. That said, polish technology companies are becoming more sophisticated and many have truly global potential

By invested venture capital, Poland ranks as a second-best in the CEE region. 2019 was record-breaking in terms of the amount of capital invested. As many as 269 transactions totalled over PLN 1.2 billion.

Although the pandemic situation has been trying to thwart our plans, we do believe that 2020 will have also ended with record-breaking results.– said Eliza Kruczkowska &Maciej Ćwikiewicz from Polish Development Fund Group (PFR)

However, the Polish tech startups are facing some challenges. Many great
ideas lie dormant in the universities’ drawers and laboratories. That may be solved with market professionalisation. That said, mature managers with a good track record will be able to find good projects and convince the originators that together they can achieve success.

One of the key challenges is a clear equity financing gap for later and growth-stage companies who are raising B or C rounds. Additionally, the Polish tech companies should improve managerial capabilities in the area of international business.

Key takeaways

What should we expect from the CEE region in the future? The diversified workforce has great potential. Moreover, the region includes about one million developers (50% in Poland, Romania and the Czech Republic), offering highly-skilled and educated tech workers. As mentioned in the article, Poland in 2019 is having the breaking record in venture capital investments. CEE startups certainly don’t lack innovation and highly-skilled and educated tech workers. Finally, the CEE region will likely gain more attention from investors outside of Europe.

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The number of people in Central and Eastern Europe (CEE) who have accessed at least one online service has risen by 15 per cent. According to the new Covid-19 Digital Sentiment Insights survey by McKinsey & Company. Analysis suggests that the 2019 digital economy in CEE is reaching a value of EUR 94 billion.

Business environment in CEE has changed drastically due to the COVID-19, and a sudden change is a digitalization. Furthermore, the number of services in different sectors accessed digitally by CEE consumers has almost doubled since the start of the pandemic.

Digital Challenges in CEE

A survey by McKinsey reveals rapid digital adoption by all age groups and geographies. That goes not just for traditional “early adopters” – young professionals living in large cities. The digital adoption rate also grew significantly during lockdown for consumers aged over 65. This age group showed the strongest growth across the region, with the number of users increasing by 40 per cent.

The most popular online services are banking (accessed by 59% of consumers) and telecommunications (45%).

This is not surprising news, as these two sectors have been investing heavily for the past few years in the digitisation. The number of consumers accessing government services online has more than doubled, but these services received the lowest satisfaction ratings from users.

Even after the COVID-19 crisis passes, policymakers should focus on adding new e-government services. Moreover, with improved existing applications, the business environment in CEE would see a significant improvement for the digital ecosystem.

That said, the public sector should make fewer changes to provide digitisation in CEE. Those include providing telemedicine services to online education and e-government services. In light of the rapid migration of consumers to digital technologies driven by the COVID-19 pandemic, the CEE region has an opportunity to capture the momentum for future growth.

Opportunities for the public sector

Countries across CEE have launched innovative solutions to help tackle the crisis, including COVID-19 tracing apps. They often developed these solutions by cooperating with the private sector. This was the case, for example, with the Croatian Financial Agency’s so-called “COVID score”. That digital scoring mechanism determines, by linking multiple government databases, how vulnerable a company is to the effects of COVID-19.

Many people have started using online channels for services for the first time, and 70 per cent plan to use them to the same degree or more after the pandemic. This is clear proof that the changes brought about by the pandemic are structural and here to stay.

Opportunities for businesses

The COVID-19 has shown the biggest example of the change in customer demand for digital channels witnessed in the last six months is unprecedented.

The ability of businesses and the public sector to envision new ways of operating will be crucial to ensuring long-term sustainability and growth in the next normal.

Some companies innovated, expanding their business models and making strategic decisions at a pace hard to imagine before COVID-19.  A good example is a Poland-based company Booksy – application for finding, scheduling, and managing appointments.

Before the pandemic, the company was focused mostly on the beauty sector. The impact of the lockdowns led to a 90 per cent drop in activity on the application. Within a few weeks, however, the company managed to expand its business model by forming partnerships with numerous banks, an electronics chain, and other businesses. That enabled users to make appointments with them without the need to physically wait in line. This business model was helpful during the pandemic.

Furthermore, the business environment in CEE shows a great opportunity for businesses to focus on these strategic areas. Businesses should accelerate the adoption of digital solutions, especially in light of increased customer expectations.

Business environment in CEE has changed drastically due to the COVID-19, and a sudden change is a digitalization. Furthermore, the number of services in different sectors accessed digitally by CEE consumers has almost doubled since the start of the pandemic.

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Croatia

The European Commission recently approved the proposed acquisition of Slovenian retailer Mercator by Croatia’s Fortenova Group, the successor to the collapsed food-to-retail concern Agrokor. The Commission said in a statement that the transaction will not harm competition in the European Economic Area. Fortenova and Mercator are both active in the supply of daily consumer goods, with the former currently active in Croatia and Slovenia, and the latter primarily located in Slovenia, with a significant presence at the retail level where Fortenova is not active.

There have been more new acquisitions in Croatia. A Digital Realty Company and a leading European provider of carrier- and cloud-neutral colocation data centre solutions, has acquired Altus IT, the leading carrier-neutral data centre provider in Croatia, offering a gateway for interconnection and peering with a number of prominent service providers in South-East Europe.

Romania

Resolution Property and Zeus Capital Management have recently acquired Floreasca Park, a ca. 40,000 sqm office campus in the heart of Bucharest. The property was sold to the joint venture by a fund managed by GLL Real Estate Partners.

“We are very pleased to conclude the acquisition of a landmark prime office building and progress with our investment program in Central East and South East Europe. This is the fifth transaction of our investment platform that is focused on prime commercial real estate properties in the region. We are confident that this market-leading asset in Bucharest’s promising office market will perform exceptionally well for our investors. ”Stelios Zavvos, Chairman and CEO at Zeus Capital Management for Warsaw Business Journal

Bulgaria

Cyprus-based company Potamiro has completed the acquisition of the owner of Bulgarian hotel operator Sofia Hotel Balkan. The transaction, in which Potamiro acquired indirect sole control of Sofia Hotel Balkan – the company running the five-star hotel of the same name in central Sofia, was concluded on September 3. Following the transaction, Potamiro now controls 100% of Naranjilla Company, which holds 87.49% interest in Sofia Hotel Balkan through its wholly-owned subsidiary Bandola Properties.

Austria’s Energy Development has completed the acquisition of Bulgaria-based ACWA Power CF Karad PV Park, the owner of Karadzhalovo solar power plant, and plant operator NOMAC Bulgaria from Saudi-based ACWA Power. According to SEE News, ACWA Power, a developer, investor and operator of power generation and desalinated water plants, was the end-owner of the Bulgarian companies through two of its subsidiaries – Malta-registered ACF Renewable Energy Ltd, which controlled ACWA Power CF Karad PV Park and Saudi-based NOMAC Ltd., which was the owner of NOMAC Bulgaria.

Slovenia

Italy-based investment company META Ventures said it acquired the remaining 49% stake in Slovenian fund manager META Ingenium from Slovenia’s sovereign holding company, SDH. The acquisition is a result of a public tender opened by SDH at the end of February, META Ventures said in a statement earlier this month. META Ventures was established in Italy more than 27 years ago, specialising in early-stage equity financing, advisory and academic activities. It has so far invested more than 100 million euro ($116 million) in over 100 high-growth startups across Europe.

For more information on M&A deals in South-East Europe and news, please visit SEE News and Emerging Europe.

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PitchBook’s European Venture Report Q1 2020 states VCs poured an impressive €8.2 billion into European companies during the first quarter of 2020. The report states that COVID-19 could threaten the flow of US capital into startups in Europe. European startups brought in a total of €8.58 billion across 40 deals of €100 million or more in 2019. The number of VC-backed transactions, however, has been on the decline—sliding from 5,929 deals in 2018 to 5,017 last year—showing that the ever-increasing pool of money is being distributed across fewer transactions.

Attracting and retaining talent is indeed challenging — both for companies in Europe and elsewhere — but hiring is typically cheaper outside the US. This, of course, is a double-edged sword in that European tech is at risk of brain drain — the mass exodus of talented, and experienced, individuals seeking higher salaries on the other side of the Atlantic. Even though European tech has overcome challenges before the pandemic, there’s very little doubt that it still lags behind the US and parts of Asia.

European Unicorns Analysis

While Europe generates 36 per cent of all formally funded start-ups, it creates only 14 per cent of the world’s unicorns. Adjusted for population and GDP, the number of seed-stage start-ups that Europe generates is only 40 per cent of that generated by the United States, reports McKinsey.

Europe’s ecosystem has been less effective than that of the United States at turning start-ups into late-stage successes.

To analyze the steps between the seed stage and success, McKinsey looks at start-ups that received seed or angel funding between 2009 and 2014. For example, European start-ups were 30 per cent less likely to progress from seed to a successful outcome, as compared to start-ups that raised seed funding during that time in the United States.

The analysis also showed that most European unicorns have had to expand not just beyond their individual countries but beyond Europe as well, whereas only half of US unicorns have expanded outside the continental United States. That said, European start-ups have to focus on wider internationalization earlier in their journey than do US start-ups.

There is also a cultural difference taken into the account as the reason why European startups should perform faster in early stage than the US startups. Cultural differences and language barriers keep Europe behind the US startups that grow on a much faster pace. However, an increasing number of recent European success stories, such as Delivery Hero, Auto1, or N26, that focused on hypergrowth at the expense of short-term profitability, has shifted cultural differences.

Meanwhile, the startup ecosystem in Southeast Europe (SEE) has startups, supporting institutions, interesting technology, and founders with an ambitious mindset. Globally successful companies can be created even in this part of Europe. That being said, unicorns potential exists in South East Europe as well. Outfit7, a family-entertainment company with Slovenian founders and pioneer in the field of digital entertainment, has been sold for 1 billion USD to a Chinese investor in January, thus becoming the first unicorn in the region.

Overcoming challenges

Europe could look at how to support the culture and capital needed to further grow its start-up ecosystem. Entrepreneurs could take advantage of the improving conditions for startups in Europe and aim for global leadership. Governments could further this through more risk-willing capital, and considering allocating more semi-public funds toward growing the ecosystem, as well as fostering collaboration between ventures, academia, and industry.

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The report Digital Challengers in the next normal in Central and Eastern Europe has revealed the ten CEE countries analyzed —Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia—increased per capita GDP by 115 per cent in the period 2004–2019. With the digital economy reaching €94 billion in 2019, it is clear that CEE exceeded the “business as usual” scenario from the year before.

The engines driving the digital economy in the CEE

The lockdown has drastically transformed the way people interact, travel, spend their leisure time, and use public services. As the McKinsey COVID-19 Digital Sentiment Insights survey shows, almost 12 million new users of online services appeared in CEE—more than the population of Slovakia, Croatia, and Slovenia put together.

Given the data from the McKinsey report, consumers are getting used to new digital channels and therefore drive digital economy change. Although consumers habits are changing now, they may stay changes for good as the COVID-19 safety measures will not disappear anytime soon.

The situation has changed for SMEs, and the pressure is becoming more severe as organizations lag behind digital adoption.

Many CEE startups tech companies achieved admirable results in tech space with a huge impact on a global scale. CEE’s unicorns are worth around €30 billion according to Dealroom. In recent years, CEE startups in tech-led to huge traction of the market to venture capitals. About 10,000 emerging Eastern European businesses raise their first rounds of funding in the last five years. In the same period, the CEE market has seen more than ten unicorns emerged, with a total valuation of €30 billion.

To move the engines for the digital economy in CEE, the action is required by all stakeholders in Digital Challenger countries. Restrictions imposed during the pandemic are an incentive for digital transformation. That said, the restrictions have made the solution all the more important. Now, businesses need an e-commerce website, online customer service and cloud and automation technologies in order to survive.

Lastly, CEE markets need to move with more dynamism. Today Big Tech must provide commanding benefits to consumers and other users while looking to other mechanisms, such as advertising, to support good margins. The digital economy usually reflects innovation and dynamic efficiency. In CEE markets, organizations will have to embrace the change and explore new business opportunities through digital transformation.

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