The past few years have been an exciting time at Ozon; we are now Russia’s biggest e-commerce company. We’ve gone from 900 staff five years ago to about 2,300, and last year our sales hit $750 million — a 50% increase on 2013.
But while Ozon is often compared with Amazon, there are significant differences. Ozon’s business model is based on being constantly aware of the specific challenges and opportunities of the emerging market economy we operate in. Many of the lessons we have learned in rolling out services for Russia could be applied to Nigeria, India, Malaysia and other emerging markets. You can’t just copy and paste western businesses and expect them to work. Indeed, attempting to create exactly the same business model is doomed to fail.
For example, Russia lacked a reliable, flexible and speedy national delivery infrastructure. There were no nationwide couriers; unlike Amazon, Ozon did not have a FedEx or UPS to deliver for us. So we developed our own logistics operation. This was a huge undertaking, involving shopkeepers who had well-located properties to act as pick-up points, air freight companies for long-haul transportation to hub airports, and hiring and leasing vehicles.
Emerging Markets Can Be A Fantastic Opportunity
We soon realized that this had the potential to be a business in its own right — a source of competitive advantage that could offer delivery services to our independent retailers and could not easily be copied. So in September 2013, we launched delivery services for third parties.
An advantage of having our own delivery company was the ability to handle cash payments. This is another way in which emerging markets differ from the West. Amazon only takes payments on pre-paid cards. But Russia is a cash economy. In 2010, about 82% of payments to Ozon were made in cash. The figure is still 70% despite investment from banks attempting to build customer confidence in online payments. Our ability to handle cash is a barrier to other potential competitors.
Emerging markets can be a fantastic opportunity because Internet use is booming there — their consumers also buy everyday items, flights, travel and want to participate in social forums. Human needs are fairly universal.
Adapting Successful Western Businesses To Developing Markets Is Tough
However, adapting successful Western businesses to developing markets is tough and the challenges are usually underestimated. Potential obstacles include scarcity of specialized intermediaries or partners, weak regulatory systems, unreliable infrastructure, lack of financing/solid banking system, and different costs, structures and customer needs as the result of all of the above.
Rules and regulations can be a major problem. Companies often ignore legislation, or think that an activity is legal, but when they dig deeper they realize there is something they can’t do because the legislation doesn’t allow it. This undermines their fundamental business model.
Would-be market entrants tend to be overly optimistic about a lot of things while ignoring some fundamental issues that change the business model. Even differences in weather and forecasts on how Internet usage will develop within a particular geography can cause problems. There is a need to adapt to constant uncertainty and a lack of available talent.
Success involves identifying the business model you want and adapting it for the target emerging country. This lets you see the opportunities to create innovative businesses that nobody had thought about when you started the company. Among companies that have made this work are Jumia and Konga in West Africa, Zomato worldwide and Rocket Internet, a Berlin-based venture capital company focused on e-commerce.
Lagos-based retailer Jumia has overcome Nigerians’ suspicions of paying online by accepting payment on delivery and offering free returns. To combat fears of online fraud and to educate people about shopping online securely, the company has a team that travels around major cities holding online shopping tutorials.
You Need A Team On The Ground
Like its local rival Konga, Jumia, which sells in Kenya, Morocco, Ivory Coast and South Africa, is building its own fleet of delivery vehicles.
Zomato, which helps people find places to eat, is now in 119 cities across 21 countries.
Rocket Internet applies proven Internet ideas in other countries, especially in emerging markets. So far it has backed about 75 start-ups in more than 50 countries, generating $3 billion in annual revenue and employing about 25,000 people.
So do we worry that Amazon might steal our market? Entrepreneurial businesses are bad at replicating themselves in other countries. They can be reluctant to change a model that has been successful elsewhere, and are resistant to change. And often they just don’t focus on it.
Countless companies develop subsidiaries in India, Russia, and South Africa from Europe. But there is no way you can understand the market by sitting in your head office in London. You need a team on the ground and you need to find the people who’ve been with you in the initial business who are going to be okay to transfer. If you only hire locals it won’t work because they will not understand the business that you created. So while we are not complacent, we see a strong future for Ozon as we seek to meet the many opportunities of the emerging markets we serve.