Russia’s Red-Hot E-Commerce Market Will See Explosive Growth In The Next 10 Years

With a skyrocketing number of Internet users, but a still under-developed commercial environment, the opportunity to build phenomenally-successful domestic e-commerce businesses in Russia is huge. Just under half of the Russian population — some 61 million people — were online in Russia in 2012, already the largest online community in Europe and growing rapidly, according to a 2013 study by comScore. And Russians made $13 billion in online purchases in 2012, with such sales expected to grow to $23 billion by 2014 and as much as $50 billion by 2020, according to a June report prepared by East-West Digital News (EWDN).

Barriers to enter Europe’s largest Internet market are high, allowing local players to dominate. But the price tag for succeeding is also high. Just ask Ozon, Russia’s version of Amazon, the largest online retailer in Europe’s biggest and fastest-growing Internet market.

Ozon, which started out in 1998 as an online bookseller, reported revenue of nearly $500 million last year, from sales of everything from home appliances to airline tickets. Most recently it added shoes, buying Sapato, Russia’s version of Zappos. But the company needs to raise more money to fulfill yet another ambition: “to be the e-commerce delivery company,” Ozon CEO Maëlle Gavet, a scheduled speaker at LeWeb Paris, said in an interview with Informilo.

Ozon, which raised $100 million from backers such as Index Ventures in 2011, is looking to raise another $100 million in order to build out its O-Courier distribution network.

The investment will be worth it because “there is going to be a shift from e-commerce being a nice add-on to a key pillar of consumption in Russia,” says Gavet, a native of France who has been living and working in Russia non-stop since 2009.

In 2012, Russian online retail accounted for a total market volume of nearly 400 billion rubles ($13 billion), including 290 billion rubles ($9.5 billion) spent on physical goods, according to Data Insight. This volume represents approximately 2% of total Russian retail sales, meaning 98% of the market is still in play.

Heavy investment in the nuts and bolts of logistics has been key to Ozon’s success to date and significantly more is needed if the company is to double the number of its distribution points to between 4,000 and 5,000, covering every Russian city with more than 50,000 inhabitants, says Gavet.

Ozon’s current fund-raising has become the source of much speculation. The Next Web ran an online article in June predicting that the company would try to go public in the U.S.; in November news that Ozon is looking to raise $100 million was leaked by the Russian press; and on November 26th a Russian newspaper reported that AFK Sistema, a Russian conglomerate owned by one of the oligarchs, was in talks to buy Ozon and that PE firm Baring Vostok Capital Partners was pulling out as an investor.

Gavet, who appeared on a panel in Moscow moderated by Informilo Editor-in-Chief Jennifer L. Schenker on November 26th, the day the Sistema news broke, emphatically denied that Baring had any intention of pulling out. Gavet confirmed that the company is fund-raising but said she was not able to comment on ongoing talks with potential investors and insisted that much of the information in the Russian press article published on November 26th (and later picked up by the Western media) was factually inaccurate.

The need to make heavy investment in logistics as well as marketing and customer service has made e-commerce in Russia more suitable for private equity investors rather than venture capitalists, Dmitry Chikhachev, a managing partner at Runa Capital, a Moscow-based venture firm, said during the November 26th Moscow event, which was sponsored by Pictet, a private Swiss bank, and moderated by Informilo.

It is not yet clear who is going to step up with funding. Ozon needs another large injection of cash because in Russia the battle for the burgeoning e-commerce market is still very much about logistics.

Precision logistics helped Amazon’s sales skyrocket in the late 1990s as it became the world’s largest online retailer. Amazon has been much copied to the point that clever logistics and quick deliveries are now the norm for online retailers in the United States and Western Europe.

But for Russian e-tailers it is less about the perfectly-run warehouses pioneered by Amazon that facilitated quick and cheap deliveries and more about the old-fashioned logistics of trucks, roads, delivery men and pick-up points. What’s more, Russians prefer to pay in cash for goods ordered online, so Ozon has had to build out sales points where online acquisitions can be paid for and picked up. About 75% of’s sales are paid for in cash with the rest split between credit and other payment methods. The percentage varies for other of Ozon’s businesses.

PayPal announced in September that it is making a big push into the Russian market, signing up 13 big Russian e-commerce players, including Ozon and KupiVIP.

It has been possible to open a PayPal account in Russia for several years, but only in U.S. dollars. In May the company was granted a license by the Central Bank of Russia to accept payment in rubles. Many Russians don’t have credit cards and those who do are reluctant to pay upfront for goods they haven’t received. Gavet says she sees services like PayPal having a limited impact on the market over the next 10 years. “I don’t know if these systems are going to be widely used in future; it very much depends on how e-commerce evolves here,” she says. “Why trust PayPal more than Ozon?”

Ozon believes it has an edge not just in payments but also in handling deliveries. Although DHL has operations in Russia it focuses on deliveries for businesses rather than consumers. The Russian post office, which is often criticized for being too slow and losing packages, delivers about 10% of Ozon’s orders. It has 42,000 outlets across Russia so there will always be a need for it to make deliveries in out-of-the-way places. “We are more than welcoming efforts by the Russian Post Office to improve its level of service,” says Gavet. “But we believe there is a need for an alternative delivery system and we believe we are the company that needs to build that.”

While some third-party private companies offer delivery at the regional or national level, “none of them offer delivery nationwide at the level of coverage and quality we expect,” says Gavet. This is what Ozon can offer. We can do it.”

In the future, Ozon expects as much as 30% of orders delivered by its O-Courier delivery infrastructure to be generated by third-party companies.

While e-commerce companies in Russia would appear to be natural customers, some are building their own infrastructure. For example, online fashion retailer KupiVIP is doing so because it wants to control the level of customer service at the point of delivery, says KupiVIP founder and CEO Oskar Hartmann, a speaker on the November 26th Moscow panel moderated by Informilo. The company has said publicly that it is seeking to raise $125 million in an initial public offering in 2014 to fund warehouse construction and expand its own delivery network.

While investing in Russian e-commerce companies is capital intensive, the potential payoff is much bigger. “You can fundamentally enhance the way consumers live their lives by providing them access to goods and services,” says Sonali de Rycker, a partner at Accel Partners in London and a scheduled speaker at LeWeb. “In Russia, which is the largest land mass in the world and has over eight time zones, this is not trivial. E-commerce is really an enabler as it will allow the next generation of consumers to climb up in social economic status. It will change the way people in smaller cities shop. All of the companies that figure out how to do that long term are going to prosper. The barriers to entry in Russia, given the complexity of delivery and cash on delivery payment, are so significant that if a company can get to profitability on the back of these challenges it will most certainly be durable.”

De Rycker, who led Accel’s investment in KupiVIP, says the market is at a tipping point. “Russian consumers are relatively spoiled,” she says. “Given the competition in the market many of them are able to enjoy free delivery and even more, the ability to literally ‘try before they buy,’ while the driver waits at the door. Because it is so painless, the pace of e-commerce adoption is accelerating and once you get this generation of consumers hooked, online will be the dominant way this and the next generation of consumers shop in Russia.”




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