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The CEO Imperative series

How European CEOs remain future positive while rising to the AI challenge

Ahmed Reda

EY KSA Assurance Leader

12 minute read 12 Jun 2023

The latest EY European CEO Outlook survey finds country variation in resilience, with strong investment in AI capabilities on the increase.

In brief

  • European CEOs have a positive outlook for their businesses despite headwinds, but they must act if they want to translate revenue growth into profitability.
  • Investment in generative AI (GenAI) is increasing, but challenges remain in embedding it into strategic planning, and buying or building capability.
  • CEO pursuits have temporarily shifted from acquisitions to joint ventures (JVs), strategic alliances and divestments.

This edition of our quarterly study of 390 CEOs across Europe, the latest part of CEO Imperative Series, shows that, while the volatile macroeconomic environment continues, European CEOs are relatively optimistic about the outlook for their company’s financial performance, with around two-thirds expecting higher revenue and profitability growth in 2024 compared with 2023. The positive sentiment is boosted by the European Central Bank’s recent pause on monetary tightening after 10 straight rate hikes, which is expected to provide some cushion to the otherwise slowing economy.

The consumer landscape is changing with the digital era, and establishing relationships based on trust, respect and value has become paramount.

In brief

  • Consumers will quickly adopt tools that save them time or money, but worry about the impact of technology on their lives, according to EY global research.
  • Continued investment in digital innovation is essential to driving business performance in a tight market, but only in ways that consumers value.
  • Companies need to stay ahead of the next wave of technological disruption, which will transform both what consumers want and how to engage with them.

Consumers around the world are trying to remain resilient in the face of continued cost of living pressure, economic worries and social disruption. Increasingly, they’re adopting new technologies to help them shop, live and work differently — often with a focus on making their everyday lives more affordable.

The 12th edition of the EY Future Consumer Index explores the way people around the world are thinking about the personal benefits of technology. Their experiences of using digital tools at home and at work are influencing what and how they consume. There are significant opportunities for brands that understand and shape these changing perceptions, and that anticipate the transformative changes they could lead to.

This isn’t just a question of choosing the right technologies, managing their implementation, and building the infrastructure to support them. It’s crucial that digital innovation protects and nurtures the relationship with the consumer. Three things matter here: trust, respect and value. Can people trust you to use technology responsibly and safely? Do they feel you are using technology to help them, or to take advantage of them? Is the value they get from an innovation fair, considering how much your business benefits?

Get the balance between these three factors wrong and you can quickly do damage that can’t easily be repaired. Get it right and you can strengthen your relationship with consumers now, while securing permission to develop and deepen that relationship in the future, as new technologies become mainstream.

Consumers find technology increasingly embedded into their lives

The pace of digital innovation and adoption is often so rapid now that consumers can quickly become dependent on new tools, without noticing they’ve become part of their daily experience. Consumers are increasingly relying on digital tools to make life easier, save them money and time, enable them to work from home, or reduce their environmental footprint.

They’re using digital to manage their budgets, curate the TV they watch and the music they discover, find alternative brands, stay in touch with friends, track their health, and multiple other reasons. For example, 36% of consumers use facial recognition on their cell phones and 65% use a smart device to track their exercise.

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A chart showing how consumers use mainstream and emerging technology across multiple aspects of their lives — for example, listening to audio streams and ordering groceries online — and how this has increased significantly in less than a year (between June 2022 and April 2023).

Consumers’ use of mainstream and emerging technology across multiple aspects of their lives has increased dramatically in the last year, our global research finds. The increasing dependence on digital tools, both at work and at home, is coming at a time when consumers are more worried about a wide range of economic and personal factors. However, after a period of relatively little movement, this new wave of our Index is tracking a significant pivot toward two concerns: finances and health.

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An interactive line chart showing how the five consumer segments have moved over time starting from June 2020 by country. In April 2023, the consumer segments appear in the following order: Planet first (22%), Health first (21%), Affordability first (20%), Society first (20%) and Experience first (18%).

People are prioritizing issues that affect them directly as individuals, rather than those that feel like collective challenges, such as their concerns about the planet. Naturally, many are taking steps to curb spending but how they manage their budget is dependent on where they live. In MENA, consumers are focused on value, with 69% of consumers noticing pack sizes reducing but the price stays the same and 72% believing private label products are just as good as branded ones.

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A chart showing how consumers globally are responding to the cost-of-living crisis as well as country differences by region. For example, 35% of consumers are purchasing only the essentials and 19% plan to spend less on grocery delivery services.

Consumers concerns about price put business behaviors in focus

Retailers and consumer product companies should keep these financial and health worries in mind as they use new technologies to engage the consumer. Digital innovation can play a crucial role in improving performance by managing costs, keeping prices competitive, optimizing marketing and finding efficiencies. But the need to meet these daily business challenges should be balanced against a longer-term strategy that anticipates the opportunities continued technological change will create. We will see very different kinds of consumers, different business models to serve them, and different brand/consumer relationships.

Companies should be careful that they don’t do anything for short-term gain now that locks them out of this future. As consumers ignore or abandon innovations that don’t give them what they want, the risk of digital rejection can also be higher. Brands that disappoint a consumer risk closing the door to a future digital relationship with them. This is why it’s so important to tune in to the way consumers think and feel about the digital innovations that are entering every aspect of their lives today.

Consumers remain wary about the impact of new technologies

Consumers can have paradoxical relationships with new technologies. They can become highly reliant on a tool, while also worrying about its risks to their mental and financial wellbeing.

For example, people take the constant connectivity of their mobile devices for granted, yet they increasingly want to turn off alerts and reminders because they find that persistent connectivity overwhelming.

Familiarity alone does not build trust. While artificial intelligence (AI), for example, is becoming a normal part of brand engagement for many consumers, a significant proportion are worried about how it might be used, with 21% of respondents concerned it may completely replace their role. And people who use AI in the workplace are more worried about its impact on their life outside work.

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A chart showing the concerns and expectations of managers and professionals about AI, and that those who use AI in their job to generate content have stronger views. For example, 25% of managers and professionals who use AI to generate content are concerned that the products and services they get exposed to are restricted, compared with 49% of those who don’t use it.

The availability and accessibility of digital innovation is growing, but trust in technology and its usage of personal data is not. Across each wave of the Index, we’ve seen no significant change in the willingness of consumers to share data with companies or brands. Consumers remain wary:

55% are very concerned about ID theft and fraud.

53% are very concerned about data security/breaches.

47% are very concerned about companies selling their personal information to a third party.

They want to weigh the benefits of sharing data against the risks and the value they receive in exchange.

Innovations in technology must give consumers tangible benefits

Companies are rushing to build data repositories they can mine for insights; consumers are increasingly aware that their data is prized. They expect more in return for sharing it, such as access to better deals. How companies balance this exchange is an important part of consumer engagement.

Companies are using technology and data to protect razor-thin margins and market share. They need to tread carefully, as consumers are already turning toward value, experimenting with new brands and re-evaluating what’s essential. If they feel that participating in new technologies doesn’t benefit them, the business won’t just lose their custom now — it could experience irreparable damage to the kind of consumer relationships that long-term success requires.

This latest wave of the Index shows that the high levels of trust consumers had in many companies after the pandemic are steadily falling. Retailers and consumer products companies have many more interactions with consumers than most companies, which is an opportunity to build trust or to damage it, if the consumer’s needs and context are not considered.

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A chart showing how trust in retailers and consumer products have changed over time. For example, trust in supermarkets and grocery stores was 77% in February 2021 but was 79% in April 2023.

Technology will fundamentally change how people live and work

The rapid pace of technological change is going to transform the way people live and work, and will redefine the future consumer. Small, seemingly unconnected changes in many areas can result in sudden unexpected shifts in behaviors and attitudes. And new technologies can slowly insinuate themselves into a consumer’s daily life before anyone realizes it.

Half of the consumers in our Index say they work for companies that are taking on large technology projects designed to create more value for investors, employees and consumers. One of the most significant drivers of change is AI, which will revolutionize the consumer experience, with new products and services, novel ways of accessing them, and entirely new modes of living and working on the horizon.

We’ve developed over 200 drivers of change and explored their possible impact on every aspect of the future consumer’s world — from how they might shop, play and stay healthy to how they will consume, work, move, and use technology. Using them we can point to how AI could impact and shape multiple aspects of consumer life and business activity.

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An interactive chart showing how AI will impact multiple aspects of consumer life and business activity using relevant drivers of change from the EY bank of over 200 Drivers of change. For consumer lives, they include the products available to consumers, how they access them and how they live and work. For retailers and consumer products companies they include how you run your business operations, the products and services your business offers and how they engage with consumers.

Engaging with consumers to earn respect, give value and build trust

Consumers are retrenching and revisiting their values to address their affordability concerns. Companies must meet these short-term needs but can’t afford to lose sight of the bigger picture. Technology will reshape consumer behavior in the future, and businesses must create value propositions that will remain compelling.

  1. Do your consumers fully understand the value of your brand or product? Is it what they want?

    For retailers and consumer products companies, this is a pivotal opportunity to be part of people’s lives like never before. But it’s important to offer benefits they value. For example, can you offer invisible, time-saving convenience? Do you solve their problems in ways that make you indispensable? Are you creating experiences that are satisfying, rewarding and differentiated? Is technology helping you deliver the ideal mix of these three components?

  2. What are you doing to build consumer trust in your products and touchpoints? How do you know if it’s working?

    Trust is about giving value for money, keeping data safe, behaving in line with corporate values that the consumer shares, taking an ethical approach and being authentic among many other critical issues. If you become part of the consumer’s inner circle of trusted brands, you can benefit from a much deeper and wider relationship with them. But at a time when trust in companies is eroding, relationships like this are hard to build and easy to break. With new channels proliferating, consumer-facing companies are in near constant contact with consumers, so they have lots of opportunities to get this right, and as many to get it wrong.

  3. How are you adapting your strategy to shape the technology-driven revolution in customer engagement? What are you prioritizing?

    Continuing innovation is going to transform the propositions available to consumers, how they access them, and how they live and work. In response, companies will need to evolve the products and services they offer, their business operations, and how they engage the consumer. Businesses also need to identify, implement and integrate technologies that are right today and for the future. This is complex, but the goals are clear: Build trust with the consumer, earn their respect, and give them value they appreciate.

Tech and AI form a pivotal role in a company’s long term success. CEOs are at different stages along their journey to strategize and operationalize AI into business as usual, with a number of challenges emerging for some. Bolstered by a range of government investment initiatives, the urgency for CEOs to get ahead in AI before their competition does, is a subject high on their Board agenda.

CEOs in European economies are focusing major investments across acquisitions, capex, R&D and venture capital to fuel growth and competitive advantage. This is despite, and because of, the continuing volatile macroeconomic environment. There is a clear recognition among CEOs that the new environment requires enhanced investment across verticals. And where needed, CEOs are prepared to make hard choices to fix, sell or close unprofitable parts of the portfolio, or to exit particular markets.

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Chapter

Country-level variation defines a Europe with mixed fortunes

Optimism and resilience shine in some geographies while others struggle.

How EY can Help

While similar challenges face Europe-wide markets, some countries show more resilience and positive outlook in the short term.

 

Optimism is most clearly seen in Germany, where 72% of CEOs (the highest share of all European regions) expect higher revenues in 2024 compared with 2023. EY analysis of the top 100 German companies by market capitalization indicates that nearly 90% have raised their revenue forecasts for FY24 as they align themselves to the new economic dynamics. This is despite a challenging economic backdrop amid cooling global demand, an industrial sector downturn and squeezed consumer purchasing power.

 

Revenue is not the same as profitability, with the latter being adversely impacted by higher costs in supply chain, energy, finance and the workforce. In a fragile economic environment with stubborn inflation, 35% of German CEOs (vs. 23% of European CEOs) believe it is difficult to pass on higher costs to customers who may be able to negotiate better prices or seek out cheaper alternatives. Therefore, optimizing operational efficiencies and reducing their cost base is a priority for German CEOs to maintain competitiveness and market presence.


In comparison, the French economy is proving to be relatively resilient, with GDP in the third quarter of 2023 growing modestly on the strength of household and consumer spending, and inflation easing. Seventy percent of French CEOs are expecting higher profitability growth in 2024, highest among European countries, while only 46% expect higher revenue (the lowest in Europe).

The differential between higher profitability and more static revenue overall lies in actively deploying cost management techniques, including process optimization and leveraging technology, to drive efficiency and enhance profitability. Only one-fifth (22%) of French CEOs believe cost constraints to be a barrier to growth, with nearly half of respondents reducing costs by shifting their talent strategy toward contract or hourly workers to avoid full-time employee expenses such as benefits and taxes.


CEOs in the UK expect higher revenue growth but moderate profit in 2024 as the UK economy continues to navigate multiple headwinds such as stubborn inflation, volatile consumer spending and industrial output. Of all the regions, the UK CEOs (30%) consider slower economic growth in key markets to be the biggest barrier to growth in 2024, followed by 26% citing increased costs of doing business as another top barrier to maximizing revenue and profitability.

In the Nordics, nearly three-fifths of CEOs have high revenue and profitability expectations in 2024. Compared to most other European countries, the Nordics countries have recovered more quickly after COVID-19. However, the high cost of capital (22% in the Nordics versus 15% in Europe overall) is the biggest growth barrier, as high interest rates and taxes make it challenging for businesses to grow and compete.

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Chapter

Setting up the AI agenda tops priority list

CEOs around Europe try to harness the power and promise of AI.

Almost all European CEOs (98%) are making or planning significant investments in generative AI (GenAI), according to the latest findings. Despite accelerating GenAI investments to maintain a competitive edge, almost two-thirds of European CEOs (66%) feel the uncertainty around GenAI is creating challenges in the development and implementation of an AI strategy.

Italian CEOs bet big on GenAI

At a country level, Italian CEOs acknowledge the urgency to understand the implications of GenAI on their business, with nearly 80% of CEOs (highest in all European regions) agreeing that they must act now on GenAI to avoid giving competitors a strategic advantage. More than four-fifths (88%) — again the highest across European regions — of Italian CEOs also acknowledge the fact that GenAI will challenge them to disrupt their own business model.

As part of Italy’s plan to become a “globally competitive center” for AI, the government has launched a €150m fund¹ to promote startup investments in AI. Italy had previously adopted the Strategic Program for AI 2022-2024, which outlined policies to promote science, technology, engineering and math (STEM) subjects and increase the number of doctorates to attract international researchers.

A majority of Italian CEOs have already completed certain aspects of AI deployment in their organization, with nearly half assessing how to effectively govern the risks unique to AI, tracking AI regulations to understand their implications and determining what proprietary data will create competitive advantage through AI.


The UK remains one of Europe’s AI leaders

The UK closely follows Italy, with nearly three-fourth (74%) of CEOs signaling the need to push their companies to act quickly on GenAI. However, the current market for dealmaking is becoming more complex amid a volatile macroeconomic environment across Europe, increased competition and the need to adapt to new technologies and business models. More than three-quarters of UK CEOs (77%) — the highest in Europe — agree there has been a sharp increase in companies claiming to have AI expertise, making it harder to identify credible suppliers, partners or merger and acquisition (M&A) targets.

In response, the UK government plans to invest £300m² to boost funding for two supercomputers that will support research into making advanced AI models safe. At the same time, there are numerous government initiatives to help companies fund solutions around AI development. For example, the Fairness Innovation Challenge allows companies to apply for up to £400,000 in incentives to produce solutions to combat bias and discrimination in AI systems.

Companies in the UK are also front-runners in terms of capabilities developed to accelerate progress on GenAI, with nearly 90% of CEOs stating that they are able to identify and prioritize GenAI use cases. This is closely followed by the 84% of CEOs who say they have a vision for how their business model might be disrupted in the long term. At the same time, more than half of UK CEOs (54%) have already hired new talent with relevant AI skills.

German CEOs are less urgent in their AI investment

While 97% of German CEOs are making or planning significant investments in AI, only 64% (vs 82% in Italy and 69% in Europe) agree that they must act now on GenAI. Their urgency to act is affected by the prevailing uncertainty around benefits versus risks, making it difficult for them to implement an AI strategy (60% in Germany vs. 66% in Europe), compounded by a lack of sufficient technical knowledge to guide their AI strategy (62% of German CEOs vs. 69% of European CEOs).

To help build out a broader AI strategy, CEOs should pursue several key initiatives such as addressing talent gaps and developing robust governance frameworks in the near term to establish foundational AI capabilities.

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Chapter

Wide-ranging investments continue to drive competitive advantage

CEOs in major European economies are planning major investments to fuel growth.

There continues to be clear recognition among European CEOs that the volatile macroeconomic environment requires enhanced investment across the board, not just in tech and AI capabilities. Most of the respondents across Europe (nearly 70%) are planning to increase investment across research and development (R&D), capex, M&A and through corporate venture capital.


How EY can Help

At a country level, France is leading other European regions, with four-fifths (80%) of CEOs planning to improve their investment in R&D and capex in 2024 as they look to channel their companies’ profits back into the business. EY analysis of the top 100 French companies by market capitalization shows that nearly 80% have increased their estimated investments in capex as a percentage of sales over the last year. Investment varies across sectors, with major activity happening in sectors such as life sciences, industrials and consumer as companies continue to invest in new products, services and process technologies.

 

The government’s France 2030 investment plan³ provides support for industrials and deep-tech startups in terms of innovation, employment and strategic independence on innovative products. In addition, Innovation Santé 2030, the health component of the investment plan, aims to provide companies with a strategy to help France become the leading European nation in terms of innovation and sovereignty in health.

 

In the UK, three-quarters (75%) of CEOs are signaling a return to higher levels of investment across the board as uncertainties around monetary policy decrease. The Bank of England recently paused its rate hike cycle, leaving interest rates at a 15-year peak, and has hinted it will maintain the statusquo. With markets now accepting a higher-for-longer rate environment, inflation pressures recede and the growth outlook becomes clearer, even if at lower levels.

 

Transactions remain stable, with potential for an uptick

M&A activity is expected to continue at a stable, albeit lower, path. Heading into 2024, there could also be an uptick in more significant deals, as CEOs become more comfortable with the new macroeconomic environment. A clear majority of European CEOs (87%) plan some form of transaction over the next 12 months. However, there has been a sharp contraction in intentions to actively pursue acquisitions in that timeframe, dropping from 56% (vs. 59% globally) in July to 29% (vs. 35% globally) in October. The focus is now on joint ventures (JVs), strategic alliances and divestments, with more than two-fifths of European CEOs indicating a desire to reassess portfolios, boosted by the reopening of initial public offering (IPO) markets.

 

Despite interconnected issues creating an uncertain near-term environment, CEOs remain keen to invest to reshape their business. There is a clear recognition among CEOs that the new environment requires enhanced investment across verticals, in addition to tech and AI capabilities. To stay ahead of the competition, CEOs need to make hard choices to fix, sell or close unprofitable parts of the portfolio, or to exit particular markets. In addition, while businesses recognize the challenges and issues associated with the adoption of AI, it is essential for CEOs to make sure they have a sound AI strategy that caters to all aspects related to talent, science, tech and regulation.


Summary

With dynamic and multipronged macroeconomic impacts across Europe, CEOs’ approach to transactions is evolving. The new environment requires enhanced investment across verticals, particularly in tech and AI capabilities. CEOs are transforming portfolios through divestments, joint ventures and alliances as well as M&A, while at the same time trying to build a sound AI strategy that caters to all aspects of talent, science, tech, and regulation.

 

Summary

In order to succeed in the rapidly evolving market, companies that directly interact with consumers must prioritize innovation that fosters consumer trust, addresses their concerns, and delivers tangible value. By effectively executing these principles, businesses can enhance their current performance and establish a solid foundation for the future, where technology will significantly reshape the consumption patterns, work dynamics, and lifestyles of individuals. This transformation will present abundant opportunities for companies to actively engage and cater to the evolving needs of their consumers.

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    About this article

    Ahmed Reda
    EY KSA Assurance Leader
    Leader in Assurance services in Saudi Arabia, focused on advising clients in the digital age. Father of three angels. Passionate about supporting future leaders. Enjoys travel.

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.