AND
PRESENT
NAMO (National Association of Mail Order and Distance Selling)
E-Commerce in Russia
E-COMMERCEWhat brands, entrepreneurs and investorsIN RUSSIA need to know
What internationalto succeed merchants, in one of the service world’ providerss hottest andmarkets entrepreneurs must know to succeed in a fast-changing market
MARKET INSIGHTS – MARCH 2016
R E S E A R C H P A R T N E R S
NAMO National Association of Mail Ordering and Distance Selling E-COMMERCE IN RUSSIA
About this report
This report is offered by East-West Digital News, the international resource on Russian digital industries, in partnership with Yandex. It reflects a monitoring and research effort which has been conducted with dozens of industry players and experts since 2011.
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2 E-COMMERCE IN RUSSIA
Table of contents
Key market trends and figures 4
Market insights 7 1. The Russian Internet market 8 2. The domestic online retail market 11 3. Cross-border sales 19 4. Investments in Russian e-commerce 23 5. Operations 25 6. Legal aspects 27 7. HR: The most painful issue 28
Interviews 30 International e-marketing expert Bas Godska 31 Radius Group Managing Director Chris Van Riet: 33 B2B-Center.ru CEO Alexey Degtyarev 36
Select articles 41 Russian e-commerce in crisis: Molotok shuts down, Mamagazin suspends activities 42 Ulmart sees sales slow down amid the crisis but confirms western IPO plans 45 In 2015, KupiVIP saw its sales revenue increase by 50% and became “fully profitable” 47 Loyalty program, mobile payments, personal data storage: AliExpress to conquer Russian e-commerce on all fronts 49 JD.com launches Russian site as first step to global expansion 52 Russia’s B2B-Center and China’s XBNiao team up in cross-border B2B trade 55 Russians may order embargoed food products through foreign online stores 56 Personal data storage law comes into force as some key players still not ready 57
Select industry events 59
Download EWDN’s free report on Russian e-commerce: E-commerce in Russia (English): http://www.ewdn.com/e-commerce/insights.pdf E-commerce in Russia (Chinese): http://publications.ewdn.com/china-russia Personal data storage in Russia (English): http://publications.ewdn.com/personal-data-storage
3 E-COMMERCE IN RUSSIA
KEY TRENDS & F I G U R E S
To request more detailed data and analysis, or strategic advice, on the Russian e-commerce market, please contact East-West Digital News at [email protected]
4 E-COMMERCE IN RUSSIA
Key trends and figures
About
R U S S I A N 30 million E-COMMERCE online shoppers I N 2 0 1 5 generated an estimated 148 million orders
Sources: Data Insight (domestic market) and NAMO (cross-border) unless otherwise stated
Total market size for physical goods:
Domestic sales of Domestic market: physical goods, not including in rubles cross-border +16% 650bn rub. sales; food deliveries, C2C, – 28% in USD ($10.5bn) MLM, tickets,
coupons, etc.
or of the total Russian approximately 2% retail market
Average Approx. Cross order 4,050 rub. -border sales: value ($65) + $3.4bn from 2014 Up +55% in value
5 E-COMMERCE IN RUSSIA
Key trends and figures
KEY MARKET TRENDS
The domestic market slightly grew in 2015 in real terms 1 with certain segments severely affected by the crisis
Becoming more mature and competitive, and facing a less 2 favorable macroeconomic environment, the industry is now entering a period of optimization and consolidation.
Some pure players are still witnessing fast growth, while 3 others are facing financial difficulties with some even going bankrupt.
Most major offline retailers and manufacturers keep 4 developing online and mobile sales channels and the 4 related infrastructure.
Since 2014, venture investment activity has decreased 5 considerably – but some investors are still interested in e-commerce related services.
Most large and mid-sized cities are served by shipment 6 companies in satisfactory conditions, while the Russian Post is reforming itself to improve service.
Cash-on-delivery is the rule for physical goods and will 7 remain so for a long time, even though the use of electronic payments is increasing slowly.
The lack of qualified human resources appears to be 8 one of the most painful issues, hampering the entire Internet industry.
Cross-border flows from China are increasing dramatically 9 while most western online retailers have seen their sales to Russia fall due to the ruble’s depreciation since 2014.
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MARKET INSIGHTS
To request more detailed data and analysis, or strategic advice, on the Russian e-commerce market, please contact East-West Digital News at [email protected]
7 E-COMMERCE IN RUSSIA
Market insights
1. The Russian Internet market
1.1. Internet penetration
Russia, which lagged far behind most other European countries in terms of Internet penetration in the recent past (with a 37% penetration rate in 2010), has been catching up rapidly over the past few years. In late 2015, according to a GfK poll, Internet penetration exceeded 70%, with 84 million Russians aged 16 or more — up 4 million in one year — declaring that they use the Internet.
Much of the growth can be attributed to mobile connectivity. According to GfK, mobile Internet access in Russia more than doubled during the year. By the end of 2015, 37.5% of users 16 and older went online by way of their phone and 19.5% from tablets (up from 17.6% and 8.4%, respectively, in 2014). Thus approximately 50 million Russian users (42% of the adult population) accessed the Internet from mobile devices as of late 2015.
1.2. Regional contrasts
Russians in bigger cities and primarily Moscow are more practiced Internet users. The Internet penetration in Moscow exceeds the country average and has a significantly higher mobile and tablet uses than other areas. Russians from places with smaller populations are less practiced Internet users but the regions are slowly catching up with larger cities thanks in large part to mobile accessibility. Often the lower costs of mobile connectivity encourage Internet use.1
Among the key factors explaining these regional contrasts are differences in the standard of living, purchasing power and development of broadband and wireless Internet access, as well as computer and Internet literacy.
In 2015 almost three quarters of all Russian Internet users lived in the European part of Russia.
1.3. Russian audience worldwide
Total Russian-speaking audience nears 110 million users, taking into account an approximate 25 million Russian-speaking users in the former Soviet republics, Western Europe, Israel and North America
1. http://russiansearchmarketing.com/everything-mobile-devices-platforms-and-cost-of-connectivity-in-russia-2015/
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Market insights
Internet penetration in Russia (16 y.o. and older), 2008-2015
Types of Internet use by age in 2015
Mobile Internet penetration (16 y.o. and older), 2013-2015
Source: GfK Omnibus survey 2015, all Russia, 16+ 9 E-COMMERCE IN RUSSIA
Market insights
Distribution of Internet users by federal district (spring 2015)
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Market insights
2. The domestic online retail market
2.1. Market size and 2015 trends
With 160 million small packages and parcels sent to online consumers in 2015, up 10% from the previous year, Russia’s domestic online retail market grew in real terms. It also grew in rubles, reaching some 650 billion (+16%), with an average order value amounting to some 4,050 rubles (up from 3,750 rubles in 2014), according to Data Insight.
Given the ruble’s sharp depreciation (from 38.5 rub. per dollar in 2014 to 62 rub. per dollar in 2015 on average), the picture looks darker in dollars: market size fell to $10.5 billion for physical goods, down 28% from 2014. These numbers do not include cross-border orders, deliveries of ready meals as well as corporate, C2C, MLM and group purchases.
The fastest-growing categories were sporting goods and leisure items, pet goods, children’s goods, clothing and footwear, as well as groceries. Meanwhile, electronic devices, home appliances, cosmetics and perfumes were less in demand than during the previous year.
Aggravating their chronic financial issues, the economic crisis led a range of players to suspend their activities. Among them were online auction and marketplace Molotok.ru, one of the country’s most established e-commerce sites, and Mamagazin.ru, a kids goods online store launched in 2014 under a $30 million investment plan.2 Of the three entities of the IQ One holding – Utinet.ru, Sotmarket.ru and e96.ru – only the latter survived, following a failed merger attempt. The two former fell victim to internal weaknesses and the impact of the economic crisis.
However, several major players continued to grow throughout the year. Ozon saw its sales grew 30% year-on-year, with no less five million orders (20 million items) delivered by its main site Ozon.ru. KupiVip, Russia’s leading fashion flash sales site, has reported a 50% growth rate in 2015.3 Lamoda.ru, a leading retailer of foortwear and clothing launched by Rocket Internet in 2011, also recorded strong growth.
In February 2015 KupiVip analyzed the new online consumer behavior that emerged as the economic crisis unfolded. The vast majority (83%) of clothing and footwear buyers were looking primarily for discounted products, while Russian online consumers tended to be more restrictive than previously when spending on gifts.
Amid the crisis, several offline retailers continued to develop online sales channels, as exemplified by H&M,4 Vans5 and Okey, which launched online sales in 2015, as well as Perekrestok (X5 Group), Magnit and Lenta, which were preparing their own e-commerce projects. Demonstrating their faith in the future, some omnichannel players continued to invest in giant fulfilment centers. Thus in 2015 Leroy Merlin started building a 100,000 sq. m. nationwide in Domodedovo on the outskirts of Moscow.
2. http://www.ewdn.com/2015/08/03/russian-e-commerce-in-crisis-molotok-ru-shuts-down-mamagazin-suspends-activities/ 3. http://www.ewdn.com/2016/02/18/in-2015-kupivip-saw-its-sales-increase-by-50-and-became-a-fully-profitable-business/ 3. http://www.ewdn.com/2015/04/02/kupivip-survey-new-online-consumer-behavior-emerging-in-crisis-times/ 4. http://www.ewdn.com/2015/09/28/hm-to-open-online-store-in-russia/ 5. http://www.ewdn.com/2015/09/25/us-brand-vans-launches-online-retail-store-in-russia/
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Market insights
Russia’s domestic online retail market Physical goods 2011-2015, in billion rubles
Types of Internet use by age in 2015
These numbers concern only physical goods. They do not include cross-border orders, deliveries of ready meals as well as corporate, C2C, MLM and group purchases.
Growth expectations of Russian online retailers as of summer and autumn 2015
Based on interviews with 57 Russian e-commerce companies, including established players and new ones.
Source: Data Insight 12
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Market insights
2.2. Prospects
Due to the current economic downturn, some e-commerce companies have seen their sales volume stagnate or even decrease since mid-2014. The crisis has not affected all segments equally: while consumer electronics have been hit hardly, children’s goods, for instance, seem to go through the crisis without damage.
Important differences can also be noticed depending on site size. According to Data Insight, while the traffic of sites with less than 20,000 monthy visitors fell by 10%, those with more than 200,000 visitors saw their traffic grow by 11% between Oct. 2013 and Oct. 2014. Several large players, e.g. KupiVIP, Lamoda, Ozon, and Umart, still reported strong growth in 2015.
Beyond the current ups and downs, it is clear that the full potential of Russian e-commerce market is far from being tapped. Important growth is likely to resume after the current crisis, fuelled by such structural factors as: • The growing Internet and e-commerce penetration in Russia’s regions; • E-signature and online payments becoming more popular: mass demand for non- material products such as insurance and tour package offers. • Fulfillment infrastructure reaching maturity: With reduced delivery costs, the scope of e-commerce will extend to cheaper product categories and be made available even to small cities and remote areas.
Thus experts believe that the Russian online retail market – which still accounts for just 2% of total retail – keeps considerable growth potential for both domestic and foreign players.
2.3. Number of users; user profiles and behavior
Online shopping has already become a rather common method of consuming for active Russian Internet users, particularly those with upper middle and high incomes living in Moscow, St. Petersburg and large Russian cities. This is why online shopping penetration in Russia, which is still weak compared to some Western European countries, is expected to catch up in the long term with the most advanced countries like the UK, where up to 85% of Internet users are involved in online shopping.
According to Data Insight, e-commerce involved 26 million active Russians in 2014. The figure exceeded 30 million in 2015, and several dozens millions of additional online shoppers are expected by the end of the decade. Three groups drive this growth in the number of online shoppers: individuals in the regions, especially in small towns, individuals with low incomes and individuals newly connected to the Internet.
Significant differences regarding online purchases can be observed between different population groups. For example, men to spend more online than women; they more actively purchase car parts, mobile phones and computers, while women are more attracted by such categories as clothing and children’s goods. Generally speaking, people from younger age groups, with higher revenues and that have completed higher education, tend to consume more online than those from the opposite groups.
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Market insights
In a survey of its customers conducted in February 2015, fashion flash sales site KupiVIP found that a new online consumer behavior is emerging in the current unstable economic context. Only 5% of the respondents said they were going to increase their spending on clothing, footwear and accessories this year, and only 12.6% believe that the crisis will not have any impact on their purchasing power.
No less than 83% of clothing and footwear buyers are looking primarily for discounted products — a proportion 1.5 times higher than in early 2014. As many as 58% have more than half of their clothes bought at discounted prices.
Price has thus become the key factor in purchasing decisions for KupiVIP’s clients. Well- known brands, new collections and exclusiveness tend to be less important, if of any importance at all.
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Market insights
2.4. Russian online retailers
• Number of sites
In 2014, payment aggregator Robokassa and analytics company Openstat identified 1.17 million “commercial sites” (i.e. sites that offer payment functions) in the .ru, .su and .рф domains out of more than 3 million sites on the Russian Internet in total. Of these “commercial sites,” just a small part can actually be considered e-commerce sites as far as physical goods are concerned. In 2014, InSales estimated the number of e-commerce sites (with a shopping cart function) at 43,000. Of these sites, a mere 50 generated more than 4 billion rubles (approximately $100 million) in sales revenues per year, and 950 reached or exceeded 200 million rubles ($5.2 million).
• Market fragmentation
A consequence of the limited size of the market itself Russian online retailers are noticeable for their small sales volumes in comparison with major foreign players. The order of magnitude is simply different: in 2012, the Ozon group's net sales, for example, represented less than 3% of those of its model, Amazon.com, in countries such as Germany ($250 million vs. $8,732 million).
In certain segments, there are no major professional players due to a lack of significant investment, while existing small e-merchants generally offer poor service. This situation particularly affects the fields of construction materials, furniture, plumbing and small niche industries.
• Growing involvement of offline players
Large domestic retail companies began to enter the Russian e-commerce market much later than in western countries, and many are still absent. As for international players several still do not sell online in Russia even though they have strong e-commerce experience in other countries. However, a clear move toward online-offline integration has been noticeable over the last few years. While traditional retailers are developing e- commerce activities, several online players, in a reciprocal move, have gone offline.
The crisis that hit Russian retail in 2014-2015 has not stopped the trend. For several offline retailers, the stagnation of offline sales has made it more difficult to keep developing their offline chain in a financially sustainable way. As a result, these retailers have got more money and management resources available for their e-commerce projects. In certain non- food segments, however, the crisis has led some players to refocus on their offline channel, which appears to be more competitive.
• Gray e-commerce
In certain market segments, a significant part of online retail – anywhere from 20% to 80%, depending on the estimates – goes through unofficial schemes of varying scale. It can even not be ruled out that even some of the largest Russian e-commerce players keep part of their cash revenues undeclared. According to a controversial theory, it is virtually impossible for legitimate e-commerce businesses to be profitable in the current Russian market conditions.6
6. http://www.ewdn.com/?p=35696 16
E-COMMERCE IN RUSSIA
Market insights
2.5. The regional scene
Although still partially true, the traditional view of a ‘digital divide’ between the 'capitals' (Moscow and St. Petersburg) and the regions does not sufficiently take into account new or emerging realities in market geography and delivery conditions. Not only is the division of Russia into two segments, “the capitals vs. the regions,” little accurate in itself, but the macro-economic truth that these two segments represent approximately equal market volumes says little of an e-commerce company’s actual potential in each of them.
As a matter of fact, some nationwide players have already more than two thirds of their sales generated from the regions, while some regional e-commerce companies (e.g. e96.ru) have asserted themselves at major players on the national scene.
Moscow-focused e-commerce companies will probably be surprised by the fact that many nationwide e-commerce companies have recorded higher purchase activity in cities with a population between 300,000 and one million than in Moscow.
For all these reasons, Moscow and St. Petersburg are no longer areas to focus on exclusively. It cannot be ruled out that some cities will appear to be even more appealing than Moscow, taking into account their inhabitants’ online consumption habits, lower local competition as well as newly available delivery conditions.
As a matter of fact, in 2015, demand developed faster in small cities and villages – where e- commerce penetration is still lower than the Russian average – as well as in Russia’s Far East (Primorie, Sakhalin and Khabarovsk region). Growth rates were lower in Moscow, Saint Petersburg and most large cities, with the exception of Voronezh and Novosibirsk, according to a GfK survey.
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Market insights 3. Cross-border sales
3.1. Market size
Foreign retailers’ online sales of physical goods to Russia have grown considerably over the past few years. The market reached around $3.4 billion in 2015, up from some $2.2 billion in 2014 and $1.3 billion in 2013.
Reasons for shopping in Russian vs. foreign online stores (2013)
Source: NAMO 3.2. Growth drivers
Even taking into account delivery costs, many products are still cheaper if bought abroad than on the domestic market. These price differences explain much of the attractiveness of Chinese online retailers, especially in crisis times. Meanwhile, most western retailers lost their competitiveness as the ruble lost half of its value in 2014-2015. This is why cross- border flows from western countries decreased sharply during that period, while sales from China reached ever higher levels.
Another factor behind the popularity of foreign online retailers among Russian consumers is that many products are simply not available, or are hard to find, on the domestic market. This concerns not only obscure collectables, but other items such as a number of spare automobile parts and accessories, which when related to rare or little known car brands are virtually nonexistent in Russia, especially in the regions.
3.3. A favorable tax regime
Orders received by inhabitants of the Customs Union (including Russia) are not subject to customs taxation if they do not exceed 31 kg in weight and 1,000 euros in value per month, for each recipient. If weight or value do exceed these numbers, customs duty amounts to 30% of the value of the part in excess, with a minimum tax fare of 4 euros per kg.7
7. The Russian authorities have considered introducing a less liberal customs regime, but legislation remained unchanged as of early 2016.
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Market insights
3.4. The dominance of Chinese players
Since mid 2014, only Chinese players have benefited from the growth of the Russian cross- border e-commerce market, leaving their western counterparts in the dust. In 2015, deliveries from China accounted for more that 80% of total fullfilled cross-border orders.
Not only do Chinese sites offer unbeatable prices and assortment. Parcels are now delivered to Russia relatively fast, in a couple of weeks on average vs. up to several months in the past.
Also explaining the growth of the e-commerce flows between the two countries is Russian consumers’ growing trust in Chinese e-commerce sites. This is reflected in the rapidly- growing share of electronics goods in these flows (24% according to SPSR Express).
AliExpress, which had become in 2014 the number one e-commerce platform in Russia,8 multiplied initiatives to strengthen its leadership.9 The AliExpress free Android app became number one by the number of downloads on Google Play — ahead of social networks and IM services.
In June 2015, JD.COM launched a Russian version of its platform with the stated goal of conquering a 20% share of the Russian e-commerce market. Six months later, the company already claimed 2 million registered users in Russia, who generated 300,000 orders per day.10
Among other major Chinese players having entered the Russian market over the last couple of years are LightInTheBox.com and DealeXtreme.com. Even more recent Chinese entrants are DHgate.com, TradeEase and Umkamall.com, which began operating in Russia in August and September 2015.11
Estimated share of fulfilled orders from China
Source: NAMO and EWDN
8. http://www.ewdn.com/2014/09/09/chinas-aliexpress-breaches-russias-rankings/ 9. http://www.ewdn.com/2015/04/28/loyalty-program-mobile-payments-personal-data-storage-aliexpress-to-conquer-russian-e-commerce-on-all-fronts/ 10. http://www.ewdn.com/2016/01/27/chinese-and-russian-e-commerce-giants-discuss-cross-border-trends-at-russian-davos/ 11. http://www.ewdn.com/2015/09/15/three-new-chinese-platforms-launched-in-two-weeks-the-invasion-of-russian-e-commerce-continues/
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E-COMMERCE IN RUSSIA
Market insights
3.5. From cross-border sales to market entry
Some foreigners assume that they can start selling significant volumes to Russian consumers by simply extending their existing businesses. This is possible, as shown by the experience of eBay, Aliexpress, Amazon, ASOS and a number of other e-merchants. However, cross-border sales in large volumes are possible only if the foreign e-store or brand is perceived by local consumers as having significant and distinctive advantages (in terms of price and product assortment in particular) and adapted to the specifics of the Russian market and the expectations of local consumers.
At a certain stage, a stronger local presence – or full market entry – may be required to tap the Russian market’s true potential. On the domestic e-commerce scene, four foreign companies – or Russian companies with foreign shareholders and management – are among the top 10 players (Otto Group, Ozon, Lamoda and KupiVIP). These cases show that foreign retailers can succeed on the local market at a significant scale when relying on a strong local team and taking into account local specificities – including, in certain cases, the development of their own local fulfillment capacities.
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Market insights
4. Investments in Russian e-commerce
From 2010 to 2014, according to research studies by Fast Lane Ventures, PwC and RMG Partners, e-commerce in the broad sense was the major destination for venture and private equity investment in Russia. During these four years – if counting only publicly disclosed transactions – the Russian online retail industry attracted nearly $1.7 billion in venture investment, including nearly $390 million for 2014 alone. 12
Thus in June 2013, Lamoda raised $130 million from western investors; in spring 2014, Ozon closed a record $150 million funding deal with Russian investors.
Attracting investor money has become more difficult since the economic crisis and the international tensions broke out in 2014. VC and PE investment in Russian e-commerce fell to $137 million in 2015 – this decrease being attributable in part to the ruble’s sharp depreciation between 2014 (38 rub. per USD on average) and 2015 (62 rub. per USD).
The most important deal announcement of the year was, in January, Bonum Investments’s commitment to invest up to 25 million euros in Aizel.ru over the next few years.13 In December 2015, food delivery startup ChefMarket.ru raised $5 million with the stated goal of reaching a $1 billion valuation.14
12. These figures encompasses "classic" e-commerce, travel services, private sales, daily deals and collective buying as well as classifieds and other startups involved in e-commerce. The amounts invested in these sectors could be significantly higher if undisclosed transactions were included. 13. http://www.ewdn.com/2015/06/10/luxury-fashion-site-aizel-ru-to-receive-up-to-e25-million-from-russian-investors/ 14. http://www.ewdn.com/2015/11/20/chefmarket-ru-raises-5-million-targets-1-billion-valuation-in-7-to-8-years/
Venture and private equity investment in Russian e-commerce
Number of deals
This analysis includes Ozon’s $150 million round in April 2014. It does not include the acquisition of classifieds site Avito in October 2015.
Investment amounts
The decrease in investment amounts year- on-year is attributable partly to the depreciation of the Russian currency.
Source: RMG Partners, Russia Venture Report, 2016
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Market insights 5. Operations
5.1. Logistics
Combined with an ailing road and rail infrastructure and a landscape of professional logistics providers that is just developing or undergoing its modernization, Russia's exceptionally vast geography makes the country challenging for anyone who wants to deliver goods to or within Russia.
However, delivery options have improved significantly over the past few years. While the Russian Post began reforming itself, several new providers emerged with higher quality service and shorter delivery time to large and mid-sized cities across the country. Their tariffs, which used to be significantly higher than those of the Russian Post, now tend to be more competitive.
Meanwhile, pure online players like KupiVIP, Lamoda, Ozon and Ulmart have deployed their own warehousing and delivery processing facilities across the country. Others, like multi-channel (online and offline) retailers Otto and Svyaznoy, have developed existing logistics systems to serve the growing needs of their e-commerce branches.
Much remains to be improved and built, however, for e-commerce infrastructure to meet today’s and tomorrow’s needs.
5.2. Payments
The ever changing Russian payment landscape, which some confused foreigners call a jungle, displays some specific features:
• In Russia, more so than in most developed or emerging countries, cash has remained the predominant payment method to date, although its share is decreasing slowly in retail, both offline and online.
• Various forms of electronic payment are on the rise, even though used only by a minority. In addition to bank cards, the use of which is growing slowly, several new solutions and offers appear each year, and some of them are intended to create a universal means of payment.
• Large segments of the electronic payment market are led by domestic players, from payment terminal operators to mobile carriers to electronic currency companies.
While many online retailers regard payments as an issue, there nevertheless find more or less satisfactory ways to cope with it. As such, the practice of cash on delivery does not always have a negative effect on returns or the financial condition of a company.
The consequences may be more negative in such specific segments such as online travel booking, where some products can be reserved only using bank cards, not to mention business models based on recurring payments or subscriptions, such as online dating services, which so far have not developed in Russia due to the absence of a universal recurring payment solution.
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Market insights
Industry experts and e-commerce executives all predict that the use of electronic payments will continue to rise, with government encouragement, which will favor the development of online retail in Russia. But opinions diverge regarding the specifics of using bank cards online. While some sites, like online travel services and cross-border platforms, already record significant activity and rapid growth in the use of bank cards, others sites, especially those selling physical goods tend to believe today's situation will likely continue for the foreseeable future.
It is safe, however, to expect the following trends to develop in the short- and mid-term: • Cash on delivery – and cash pre-payments to a lesser extent – will remain the main payment method for physical goods; • Cash payment terminals (e.g. Qiwi) will remain popular, especially for services or virtual goods; • Bank cards will be used increasingly for services, virtual goods, and e-content, while integrating further with other systems (e.g. Qiwi+Visa, Yandex.Dengi, and MasterCard); • E-currencies (Yandex.Money, Qiwi Visa Wallet, Webmoney and Paypal), are likely to develop further mainly for goods and services at lower price points; • Mobile payment systems (e.g. RURU from Vimpelcom and Legkiy Platezh from MTS) could develop for goods and services at lower or middle price points; • New payment methods (e.g. recurring, one-click and mobile acquiring), now just emerging, could become an option for for existing players and for the development of new businesses. 5.3. Marketing
Although the whole spectrum of e-marketing instruments is now available, some of them are less developed, or less widely used, in Russia. In the field of display advertising, the shift from CPM to performance-based marketing started recently while the online video advertising and the mobile advertising markets are in their early stages. Affiliate networks, viral, buzz and blog approaches may also lack maturity. While email marketing and CRM have been adopted by major players, state-of-the-art methodologies and tools are still far from being widely used. Another marketing instrument, retargeting, has landed on Russia's shores a mere two years ago. Another difference between Russian Internet marketing and its counterparts in the European or American markets is a relatively low level of local marketing expertise, whereas Internet stores themselves suffer a shortage of qualified professionals in this and other areas. Meanwhile, Russian startups have developed powerful marketing instruments, which deserve attention.
25 E-COMMERCE IN RUSSIA
Market insights Cross-border sales: Adapting payment options to Russian online consumers
Russian payment specifics should be considered carefully by foreign online retailers. So far, not all of them have adapted their approach — which certainly stands as an obstacle to attracting more Russian consumers.
The more adapted payment options you will make available to Russian Internet users, the higher the chance to transform them into your customers. It is not by chance that Russia-focused mail forwarders, as well as large international sites selling a significant fraction of their products to Russia, have all made available one or several localized payment means. Even cash-on-delivery – Russian consumers’ favorite option when it comes to physical goods – may be used in a cross-border context, as shown by several successful cases over the past two years.
• Main payment methods in a cross-border context
• International PSPs and local aggregators
While some international PSPs have developed a deep relationship with Russian payment operators, not all of them integrate Russia’s local payment methods to a sufficient extent, if at all. So, if you feel that your PSP is not good enough working with Russian specifics, you may deal with a Russian (or Russia-oriented) payment aggregator. This will spare you the task of dealing with each Russian payment operators individually. These aggregators act as subcontractors to process the transactions, regardless of the payment methods chosen by the customers, and manage all technical and administrative issues. Among the main Russian aggregators are: DengiOnline, PayAnyWay, PayU, Robokassa, RBK Money and Yandex.Money.
• Fraud and refusal issues
Russia is commonly associated by foreign operators with a high level of such payment issues as fraud and refusals. The data and expert opinion collected during this research do not support this view. To put it shortly, “the Russian market is not that different than any other market when it comes to the card payments main indicators, be it fraud or the decline rate,” notes the Merchant Risk Council (MRC).
26 E-COMMERCE IN RUSSIA
Market insights
6. Legal aspects
Unlike many other business spheres in Russia, e-commerce is not subject to specific legislation. In most cases, so far, this industry has been subject to rules contained in Russia’s Civil Code and a range of federal laws, which were designed to regulate larger sectors, sometimes even in a non-electronic context.
Since 2011, several important laws have been adopted in the field of personal data and electronic payments. In certain cases, these efforts to improve the legal framework have resulted in significant complications for market players.
In particular, many aspects of the legislation on personal data collection, storage and use have become particularly demanding and its implementation may be fastidious and costly, especially for players operating from abroad.
IN EWDN’S WHITE PAPER ON PERSONAL DATA LEGISLATION:
The EY Intellectual Property Center of Excellence in Russia and CIS as well as experts from key market players discuss the essential rules of personal data collection, storage and use in Russia and explain how online retailers should apply them.
Included are developments on: • How the law defines personal data and whether email addresses and phone numbers are considered personal data; • How personal data can be collected or a database can be acquired, with the data subjects' consent and how the law defines consent; • How personal data can be transferred to, and used in, the Russian territory; • How personal data must be protected, with the list of the legally required technical and organizational measures to assure this protection; • The liability for violation of conditions of personal data processing.
The newest rules, which make personal data storage on Russian servers mandatory, are also discussed in details from legal, organizational and technical points of view.
To download your free copy, please click here: http://publications.ewdn.com/personal-data-storage
27 E-COMMERCE IN RUSSIA
Market insights
7. HR: The most painful issue
The lack of qualified human resources appears to be one of the most difficult issues faced by the fast growing e-commerce industry in Russia. All key positions are affected, from general managers and project managers, to e-marketing specialists to IT and fulfillment teams.
Key positions affected by HR shortages as experienced
by Moscow e-commerce companies Department or position HR availability
Marketing Acute shortage More or less acute shortage, IT depending on specialties
Sales Available, but mainly from offline
Logistics Available, but mainly from offline
Project managers Acute shortage
General managers Acute shortage
Source: EWDN interviews
Due to the shortage of skilled employees, important positions may be filled with insufficiently skilled employees or left vacant for months. Some Moscow companies try to recruit in the regions or abroad.
Whereas positive developments are witnessed year after year in the fields of electronic payments and fulfillment, the acute HR imbalance may even worsen in the foreseeable future. The demand for qualified employees by e-commerce sites, as well as from other categories of Internet sites, fueled by massive investment, is likely to continue growing at the same high speed as the growth of the Internet and e-commerce markets themselves.
On the supply side, it will take a long time for the Russian educational system to solve its problems, most of which are chronic, in order to provide the e-commerce industry with a new generation of adequately trained professionals. Some universities are trying to fill the gap, in Moscow as well as in some cities in the regions. However, these resources remain insufficiently known about or appreciated by market players.
On a positive note, however, the first generation of native Russian e-commerce entrepreneurs already has a strong track record. Among the most impressive figures are Ulmart founder Sergey Fedorinov, KupiVip CEO Vladimir Kholyaznikov, Okotgo founder Maria Kolesnik, Viktor Lysenko and Elena Masolova, who built a leading daily deal site in just six months before selling it to Groupon Inc., and many others.
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Key areas of our research and consultancy OUR SERVICES: activity – what we study: We track news on e-commerce and interactive advertisement E-commerce, including online retail of material News goods, e-travel, online services, m-commerce, monitoring consumer behavior We provide consulting services on all stages –including strategy, Consultancy marketing and technology for online projects Ecosystem of b2b services for e-commerce: We create research reports and logistics, payments, marketing solutions white papers as infosupport of businesses and new B2B Public products and services researches The list of available reports on e-commerce and other segments Ecosystem of startups and investments on online industry can be obtained Standard via website or by phone reports We conduct deep researches on indi- vidual requests from online companies and investors. Ask us for examples or come to us with the specific task – Ecosystem of digital advertisement: Ad-hoc researches we will think about specific solution services, technologies, measurements E-COMMERCE IN RUSSIA
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30 E-COMMERCE IN RUSSIA
Interviews
International e-marketing expert Bas Godska: “Young Russian digital marketing professionals are craving for knowledge”
Dutch online marketing expert Bas Godska came to Russia in 2008, when the Russian e- marketing and e-commerce markets were still embryonic. He helped a range of international and Russian players – from Ozon, to Lamoda, to KupiVIP, to Enter.ru – reach major positions on the market and optimize their budget. Lesser known, but prolific, has been Godska’s activity as a business angel: with more than 30 portfolio companies so far, he became the number one foreign business angel on the Russian startup scene.
Godska shares here his vision of the market, its maturation over the past few years and development prospects in today’s troubled times.
– You started working in Russia in 2008; what was the landscape at that time?
When I came to Russia, I noticed companies were behind in comparison to Europe; behind by approximately five years in technology, the marketing ROI mindset and other important issues. The lack of high-quality management resources was evident. Marketing budgets were lower than in Western companies and money was spent carelessly on customer acquisition – with a focus on gross demand, not profitability.
– What have been the most important changes/trends since then? And how do you think the picture will evolve in the foreseeable future?
Here is my top 10 of the most important changes and current trends: • E-commerce has evolved significantly since 2008, although even now it’s still only 2% of all retail sales, so a lot is still ahead. • Affiliate marketing is a nice example of a mature (yet fragmented) acquisition channel that hardly existed in 2008. • Retargeting and DSPs have become a widespread technology since early 2011, when Mythings was launched in Russia. • The data-driven marketing ROI mindset has evolved well: a lot of analytical and tracking tools are used, maybe we’ll even see proper next-gen attribution tracking become mainstream in the very near future! • E-commerce as a sector is experiencing its second wave; more and more offline companies are embracing the omnichannel business model where a few years ago it was more a case of ticking a box for senior management. They all know that the digital world has become an integral and unavoidable part of our lives and consultancy firms are thriving.
31 E-COMMERCE IN RUSSIA
Interviews
• Many venture funds have abandoned the Russian e-commerce scene, or have at least become more reluctant to accept high company valuations. One thing that hasn’t changed much is the venture climate – it’s still maturing. I haven’t seen many successful exits here, especially if you compare Russia to Silicon Valley. • More foreign companies have begun to operate in Russia/CIS – eBay, Amazon, ASOS, PayPal, AliExpress, Rocket Internet. • Cross-border sales are here to stay and the competition is intense. • Russian young professionals are craving for knowledge as ever, more than their Western colleagues. Russians’ professional skills have improved. Digital marketing is hotter than ever before: marketing master classes, seminars, conferences and webinars can be attended pretty much daily if one wants. • The government has become much more aware of the digital scene. Things have become more regulated. Still – there was more paperwork a few years ago, now some processes have become easier.
– You have served both Western and Russian companies and worked with professionals from both sides. Did you notice significant differences in their approach?
Russians are ready to risk and react faster than, for example, their Dutch counterparts. The speed of business is higher here in general. The gap in knowledge and competences has become much narrower than compared to five years ago. I no longer feel big differences between the Western and Russian management competence level in e-commerce, yet the operational part and the focus on customer satisfaction is often at a lower level than in the West.
– Has corruption spared the Russian online marketing industry?
As the sector is digital there is a lot of transparency, everything is measurable. In e-commerce, ROI-dominated performance marketing is king. So the corruption level seems not overly high for Russian standards. In digital brand marketing, however, there is more room for shady deals, as ROI is less relevant. I remember how a marketing manager of a large firm approached the sales manager of one of my projects at the first meeting with a very professionally outlined corruption offer. We were required to wire funds to an offshore account prior to getting the budget approved. Needless to say, we declined the offer. Certainly such cases are not overwhelming, but may happen.
– Do you feel that the recent international tensions and sanctions have had, or might have in the future, an impact on the Russian online marketing industry?
A lot of foreign companies used to approach me with questions relating to Russian market entry or market intelligence. There are less of those foreign inquiries now, and those who were quite ambitious earlier are watching now to see what’ll happen next. Local demand is on the rise though.
I’d like to be an optimist about the future. But we are witnessing tough times now, some companies live the market, some startups vanish, revenues and profits of many companies have lowered. I think this year e-commerce in Russia won’t show the same growth dynamics as in previous years, but still I do not lose faith and hope that downturn is temporary. New companies come, technologies arrive still, all of them need to sustain their growth and boost marketing efficiency where possible.
32 E-COMMERCE IN RUSSIA
Interviews
Radius Group Managing Director Chris Van Riet: How e-commerce is reshaping Russia’s warehouse industry
Headed by two American expats, Radius Group designs, builds, finances and operates warehouse and manufacturing real-estate in Russia. The company is responsible for some of the largest warehouse projects in the country, as exemplified by the deal signed with Leroy Merlin this past February to build a giant omnichannel distribution center on the outskirts of Moscow. Radius Group’s founding shareholder and managing director Christopher Van Riet has shared with East-West Digital News his views on the latest developments of the warehousing and e-commerce markets in Russia, and the attitude of US players.
– What are the current trends in the Russian warehousing market?
The market conditions are the most challenging in history. Rental rates are around $75 per sq. m., the lowest rents in modern Russian history, 29% lower than in 2009, the previous worst year. In rubles, however, the rates amount to 4,328 rubles, a historically high level. So it is simultaneously the best of times (in rubles) and the worst of times (in dollars) for warehousing rents!
In the short term, the industrial market is in crisis with over 800,000 sq. m. of vacant warehouse space in the Moscow marketplace – the highest amount of vacancy ever (9.5% vacancy rate). The result will be that strong players will take market share and weak players will exit the market.
In the long term, Russia requires over $30 billion of investment into warehouses to simply have the minimum supply required for a “normal” consumer economy given the wealth level of the Russian people. Radius wants a 20% market share.
– What is the impact of the development of e-commerce?
Three years ago e-commerce was not a factor at all from a demand perspective. Today it is emerging as an important source of demand for warehouse space from which e-fulfillment initiatives can operate. This demand is coming from both traditional retailers, who are moving to an “omnichannel” retail model, and pure-play e-commerce companies.
In a three- to five-year time e-commerce can easily account for 30% of the annual demand for warehousing in Moscow, generating an annual investment need of over $300 million for fully equipped e-fulfillment centers.
33 E-COMMERCE IN RUSSIA
Interviews
– Please tell us a bit about your latest projects in developing multichannel facilities in Russia.
The Leroy Merlin deal (see press release) is for a 100,000 sq. m. national omnichannel distribution center, the largest retail distribution center in the history of the Russian Federation and the largest retail warehouse deal in the world this year.
This company has more than 34 stores in 17 Russian cities providing products and home improvement solutions tailored to specific customer needs. Maximizing efficiency throughout the supply chain strategy is key for them. Moreover, this facility will allow them to regroup their different Moscow activities, thus improving product availability and customer satisfaction.
Leroy Merlin’s facility is being completed in South Gate Industrial Park, our warehousing area close to the Domodedovo international airport in the south of Moscow. The total area of the industrial park is 144 hectares and is master-planned for 650,000 sq. m. The facility has a valid and reliable infrastructure package and necessary permits to minimize cost and time risks associated with the implementation of green field projects.
We are also providing NEXT with a pure-play e-fulfillment center, including automated fulfillment platform, call center, and engaged distribution.
The Decathlon warehouse built by Radius Group in 2013
– You are holding a dialogue with several US retailers about potentially entering the Russian market. What is their attitude towards this market?
From a commercial standpoint the US retailers understand the long-term attractiveness of the Russian marketplace. However, political risk perceptions substantially dampen their enthusiasm and as such they remain hesitant about Russian market entry. Our expectation is that once the political climate improves that US retailers – particularly e-eommerce retailers – will enter the Russian marketplace.
In the meantime, European and Asian players are expanding aggressively in Russia and with each passing year it will take an increasingly large amount of effort and investment for new entrants to acquire sustainable market share.
(November 2015)
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B2B-Center.ru CEO Alexey Degtyarev: "Most of the tender-based procurement operations at large Russian companies are made in electronic form"
With a montly trading volume exceeding $2,2 billion in 2014, B2B-Center.ru, a leading Russian electronic trading platform, serves more than 200,000 clients from 120 countries. CEO Alexey Degtyarev recounted for East-West Digital News how this business started and gained such strong traction in Russia and beyond.
– How does the Russian e-procurement market look – and does it differ from other countries?
Russia’s model of B2B e-commerce is definitely unique: all stages of procurement, from planning to contract award, are conducted online. Ten years ago there were only so-called online boards which stored information about tenders. Some of these have evolved into full- fledged electronic trading platforms, where you can conduct transactions for buying and selling goods and services in real-time. In 2002, when we introduced the idea of b2b e- commerce, we had to evangelize the market. Now e-commerce is an essential business tool widely used by the biggest enterprises and organizations.
In 2014, according to our estimate, the volume of B2B e-commerce market in Russia amounted to $609 billion. This figure includes the volume of electronic purchases in both public and private sectors.
Using these platforms, thousands of new customers and contracts can be found – and millions of dollars saved by vendors. The figures speak for themselves. In 2010, Bashkirenergo saved more than $26 million, Tyumenenergo $81 million and Bashneft over $60 million.
Today, our clients save up to 20% of original contract price by using our procurement marketplace.
Furthermore, B2B e-commerce helps companies improve efficiency by automating processes, among other benefits. Foreign companies enjoy the same benefits. We have users from 120 countries!
While first-generation online boards still exist in foreign countries, some electronic platforms do offer full-fledged online trading procedures. However, these advanced features are less in demand than in Russia, where companies use all bidding functionalities much more actively.
36 E-COMMERCE IN RUSSIA Interviews
– What about e-procurement platforms for the government?
Observing the success of the business, the government eventually decided to transfer purchases for state needs in electronic form – both to save budget resources and combat corruption. Since 2009 procurements for state needs have been conducted through electronic auctions as well as via paper tenders. As a result, the better part of state orders is now carried out in electronic form.
The State Duma is now considering a bill that involves digitization of other trade procedures – tenders, request for quotations and proposals. As a result, state and local government procurement (except for purchases from a single supplier) will be gradually converted into electronic form.
The Federal Law “On the procurement of goods, works and services by individual types of legal persons” came into force on January 1st, 2012 and served as a stimulus. A subsequent resolution from the Russian government defined the types of goods, works and services to be purchased in electronic form. The list includes paper; printing products; office supplies; office equipment; medical devices; equipment and instruments for radio, television and comm- unication equipment; vehicles and accessories; natural water; trading services; maintenance and repair of motor vehicles, motorcycles and office equipment; and the cleaning of buildings.
To date, most of the tender-based procurement operations at large Russian companies are made in electronic form. This process, which has been noticeable in recent years, has greatly simplified their work.
– B2B-Center has been operating for more than 12 years now. What have you achieved over this period of time?
The company was established in 2002 and, in fact, was one of the founders of today’s e- commerce market in Russia. The first electronic trading platform, B2B-Energo, was solely focused on the energy sector. Soon after that UES, Russia’s electricity giant, started operating through our system. According to power engineering specialists, the cost of equipment and services in the first year decreased by 50%, and the price of the products purchased decreased by an average of 17.5%.
Since then, the list of our clients has expanded continuously. Other giants of the Russian economy use our e-procurement platform – from power company IDGC to RusHydro to oil companies and such manufacturers as UralVagonZavod (railway cars and equipment), United Aircraft Corporation (civil and military aircraft and space programs), Russian Helicopters and United Engine Corporation (aircraft). Among our users are also oil companies (Zarubezhneft, Bashneft), metallurgical enterprises (including Mechel) and others.
In short, B2B-Center has asserted itself as one of the largest players in the Russian e- commerce market. Our cumulated trading volume has reached $77 billion since launch. We use advanced technologies, aiming to offer the latest and most functional solutions. We have created a convenient and efficient tool to optimize procurement, which has become the rule for large companies in Russia. The next step is to involve medium-sized players more deeply in our platform. They already use it as supliers, we’d like to see them as buyers as well. services.
37 E-COMMERCE IN RUSSIA Interviews
– By mentioning these large corporations, do you mean that your platform is essentially designed for big businesses and big transactions?
Small and medium-sized businesses participate too, but the volume of their purchases is less significant. The economic advantage of e-procurement increases in proportion to the amount of purchased products. However, small businesses are active too, involved both as buyers and as suppliers of goods, works and services. – What has been the impact of the troubled 2014 year on your business, and what do you see next?
After exceptional growth in 2013, the market slowed down in 2014. This tendency is related not only to the economic situation, it was also affected by the completion of several government-run giant projects, especially the Olympic games in Sochi. The public procurement market in 2014 decreased both in volume and number of procedures.
Meanwhile the volume of transactions in the private sector remained unchanged. Since late 2014, major customers altered their work, keeping in mind the experience gained from the previous recession. They are adjusting investment programs and reducing the volume of individual purchases.
Recession is a time of new opportunities for ETP. Buyers are eager to think about efficiency of activity, while suppliers are looking for new markets and sales methods. ETP can give both sides a great chance to get ahead.
– What about your platforms outside Russia?
Implementing the Russian model of electronic trading in other countries requires a significant investment of time and effort. It took us years to develop and improve the product in the domestic market, and we cannot expect to complete such processes very quickly in new countries.
We launched B2B-Turkey in 2012. The platform incorporates more than 1,200 local companies from the construction, tourism, woodworking and other industries.
In addition, we launched a pilot project B2B-Export with several African countries involved. This project is potentially strong. Goods delivered by Russian suppliers, primarily in machinery industry, were able to obtain access to foreign markets. This leaves a lot of open questions with regard to logistics, insurance, customs clearance.
– What is your business model and tariff policy?
Our users pay a one-time access fee and a monthly rate based on the options they select. We have no interest in the amount or number of transactions and charge no extra fees for additional services. Transactions and fees must remain independent – this is a matter of principle to us. One of our most appropriate tariff plans, $150 per month, allows you both to organize tenders and participate in an unlimited number of biddings.
38 E-COMMERCE IN RUSSIA Interviews
– Who are your competitors and what are your distinctive advantages?
Many of our competitors are major commercial electronic trading platforms. We have had healthy competition with them and we feel comfortable in this environment. It’s always challenging to search for and develop new solutions.
– Is your platform profitable? How has it been financed so far?
B2B-Center is not only profitable, but also a high-growing company. Over the past five years, the company has grown more than three times. Such performance was achieved due to the development of electronic procurement, an idea which has attracted number of major energy companies. Our solution has helped them improve procurement efficiency while attracting new customers to our platform.
Among B2B-Center’s shareholders is a consortium of foreign or internationally-oriented funds – Da Vinci Capital, Insight Venture Partners, Alfa Associates, Runa Capital – as well as the leading private equity fund in Russia and CIS, Elbrus Capital. B2B-Center’s founder, Alexander Boyko, is chairman of the board of directors.
(March 2015)
• A native of Bryansk, Alexey Degtyarev studied economics and management at the Universities of Bryansk and Orel, from which he graduated in 2003 and 2007, respectively. He also defended a dissertation at Moscow’s Higher School of Economics on the organization of e-procurement to address government needs. He has headed B2B-Center since 2007.
39 When you jump… Land safely
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Russian e-commerce in crisis: Molotok shuts down, Mamagazin suspends activities
By Adrien Henni, East-West Digital News, August 3, 2015
Two notable Russian e-commerce sites are suspending their activities this summer, illustrating the crisis that has been affecting certain segments of this market since last year. While online auction and marketplace Molotok.ru, one of the country’s most established e-commerce sites, has announced it will shut down on August 20, Mamagazin.ru, a kids goods online store launched last year under a $30 million investment plan, has stopped serving customers at least for a few months.
Several other sites are under threat – especially in the segments of consumer electronics and household appliances – even though a range of major players have recently reported continuing growth.
Launched in 1999 as a local analog of eBay, Molotok (“the hammer” in Russian) initially asserted itself as a Russia’s number one auction site. When a controlling stake was acquired by Allegro Group, a property of South Africa’s Naspers, in 2008, the site witnessed a promising growth, and became profitable soon afterwards.
However Molotok failed to generate sufficient income, with $3 million in revenues and $300,000 in operating income last year, according to a source cited by Russian business daily Vedomosti, which would explain Naspers’ decision to shut down the site.
Molotok claims just 250,000 daily users – compared with over 3.8 million (according to TNS) for Avito.ru, the country’s leading classifieds site in which Naspers also owns a stake.
However, Molotok has remained popular among Russian collectors of coins, antiques and some other items. A new site, Auction.ru, which presents itself as being run by the former Molotok team, has called the collectors to resume transactions on its platform.
The Allegro press service declined to answer EWDN’s questions.
$30 million powerless against the crisis
Other bad news came from kids goods online store Mamagazin.ru. Launched just one year ago under a $30 million investment plan, the site was one of the first Russian sites combining e-commerce with strong social features. Designed by international marketing guru Martin Lindstrom, the project got some attention beyond Russia. Just two weeks ago Lindstrom, who was named one of Time magazine’s “World’s 100 Most Influential People” in 2009, posted a video presenting Mamagazin as his brainchild.
42 E-COMMERCE IN RUSSIA Select articles
The site’s general manager Marina Pogodina told Vedomosti that the project is now being “frozen” and “downsized.” The assortment strategy needs to be reviewed since up to 90% of catalog items are imported. “The prices have increased significantly due to the currency variations,” she said.
Several other important Russian e-commerce properties were hit by the crisis in recent months. In January Vasko.ru, a major retailer of household appliances whose sales revenues neared $90 million in 2013, was on the verge of bankruptcy. In March Enter.ru, a multichannel retailer with a diversified assortment, was sued by its suppliers for non-payment of a 462 million ruble (nearly $8 million) debt.
Launched in 2011, Enter relied on its former owner Maxim Nogotkov’s commitment to invest several hundred million dollars – which the Russian businessman could not do due to his own financial difficulties.
The crisis also triggered the fall of Sotmarket.ru and Utinet.ru, two important players in the consumer electronics segment, which merged recently. The owner, IQ One group, is in discussions to sell these assets while keeping afloat its other e-commerce property, e96.ru, which is in better shape.
From current crisis to bright future?
Amid Russia’s economic turmoil, in fact, the online retail market as a whole is far from agony. In 2014, the domestic segment grew by 35% in nominal terms, or some 15% in real terms, to 560 billion rubles ($14.5 billon at the average exchange rate) for physical goods only, according to research agency Data Insight.
This growth rate was lower than that of the preceding years – but still impressive if taking into account the stagnation of the offline retail market.
A much more modest growth is expected this year. While the consumer electronics and some other segments have been particularly exposed to the crisis, several leading market players still claim strong growth rates, as announced by Groupon Russia, KupiVip, Lamoda, Ozon and Ulmart at the eDays conference this past June.
For example, Ozon.ru reported a 40% year-on-year growth in value in Q1 2015, with some product categories nearing or exceeding 100%.
Even stronger is the traction of Chinese e-commerce players, such as the AliExpress platform which last year asserted itself as the number one e-commerce site in Russia at least by traffic and number of fulfilled orders. Last year Russia’s cross-border e-commerce market reached $2.5 billion, up 75% from the previous year.
Industry experts are still confident in the long-term prospects. The Russian e-commerce market could reach or exceed $50 billion in five years, according to a recent report by East- West Digital News.
43 CROSS-BORDER E-COMMERCE THROUGHOUT EUROPE:
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Ulmart sees sales slow down amid the crisis but confirms western IPO plans
By Adrien Henni, East-West Digital News, March 4, 2016
Ulmart, a leading Russian e-commerce player, saw its revenues almost stagnate last year, with sales reaching just 62.7 billion rubles, up from approximately 60 billion rubles in 2014, including VAT ($1 billion and $1.3 billion, respectively).
The company showed a “slightly positive” EBITDA, Ulmart’s chairman and key shareholder Dmitry Kostygin told Kommersant, a leading business daily, earlier this week.
In an email exchange with East-West Digital News, the company’s press service did not provide an explanation for last year’s stagnation. The fall in dollar terms is due to the sharp depreciation of the Russian currency between 2014 and 2015.
Thus Ulmart, which had outperformed the market in 2014 with a 50% growth year-on-year, did not do so well in 2015. As far as physical goods were concerned, Russia’s domestic e- commerce market reached 650 billion rubles ($10.5 billion) in 2015, up 16% in rubles and 3% in real terms from the previous year, according to Data Insight.
The company hopes to resume stronger growth in 2016 – at least in rubles. Kostygin said that he expects the company’s sales to exceed 70 billion rubles in 2016. This would amount to some $950 million at the current rate.
Ulmart initially focused on consumer electronics, but it began aggressive expansion in new categories like DIY, auto, kid’s stuff and home items two years ago. This did not prove sufficient to fully resist the economic crisis, which has hit hardly the consumer electronics segment.
From private equity deal to IPO plans
In spite of the recent slowdown, Ulmart is preparing itself to go public on a Western stock exchange, as announced last year.1 The IPO may take place either later this year or in the spring of 2017, Kostygin told Kommersant.
Ulmart is seeking to deal with private equity investors for a possible capital injection prior to the IPO, Kommersant’s sources also confirmed. However, the company’s intentions regarding the size of the stake to be sold and the final shareholder structure remain unclear.
1. http://www.ewdn.com/?p=34149
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Kostygin said that talks have been held with such potential investors as Rocket Internet, the famous German incubator, as well as Alibaba and JD.COM, the two Chinese e-commerce giants whose sales in Russia have been skyrocketing recently.
JD is said to have considered investing jointly with the Russian Direct Investment Fund (RDIF), but the latter finally declined the offer.
Kostygin also confirmed last year’s discussions with Baring Vostok, a major PE fund operating in Eastern Europe and an early-stage investor in Yandex and Ozon.
Baring considered acquiring an up to 15% stake in Ulmart, while Da Vinci Capital also showed interest in the company, according to Kommersant’s sources.
Right now co-founder Alexey Nikitin is selling his stake in the company — around 20% — to Mikhail Vasinkevich, another early investor in the company. The transaction, still under completion, was revealed by Kommersant based on exchanges with Kostygin and other unnamed sources.
Mikhail Burmistrov of Infoline Analitika has estimated that Nikitin’s stake could be valued at 8-9 billon rubles (from around $110 million to $122 million at the current exchange rate), “taking into account intracorporate discounts.”
In case of an IPO, the company will target a much higher valuation. Last year, Ulmart announced that the valuation would amount to no less than $5 billion to $6 billion should be considered, based on a preliminary estimate by JPMorgan and Morgan Stanley.
Giant fulfilment centers for ambitious targets
Launched in 2008, Ulmart has developed a specific model with its own offline logistics and delivery directly integrated to the online storefront. Based in St. Petersburg, the company operates 400 pickup points in more than 200 Russian cities.
Ulmart also operates “cybermarkets”, where customers make their purchases via computer screens in a super modern environment.
In November 2015, Ulmart opened a 25,500 sq. m. fulfilment center in St. Petersburg. The company plans to open two additional logistics centers in the near future in Mytishchi and Domodedovo on the outskirts of Moscow.
No less than 30 logistics centers will be required to reach the company’s turnover target of 300 to 500 billion rubles (from $4 billion to $6.8 billion at the current exchange rate), Kostygin told Kommersant.
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In 2015, KupiVIP saw its sales revenue increase by 50% and became “fully profitable”
East-West Digital News, February 18, 2016
Last year, amid the crisis that hit hardly some segments of the Russian e-commerce market, KupiVIP Group saw its gross revenue reach 16.5 billion rubles including VAT (approximately $265 million at the average 2015 exchange rate), up 50% in rubles from the previous year.
KupiVIP reports a 45% increase in number of orders in 2015, while the average purchase value varied between 8,500 and 10,000 rubles ($137 and $161, respectively), depending on the season.
During that same year, average market growth reached 16% in rubles (-28% in USD), just above the inflation rate (13%).
The business model of KupiVIP, which was established during the 2008 crisis, consists in buying surplus stocks of goods from global fashion brands at special prices, and selling them via web and mobile platforms with discounts from 30 to 90%.
In crisis periods, traditional fashion retailers need to adjust their warehouse surpluses. KupiVIP comes to their rescue to sell off their collections within a short time, the company explains. Meanwhile, consumers show growing interest in discounted sales. According to a survey conducted in mid-2015 by KupiVIP and FCG, Russians made 46% of their purchases with discounts.
A year of expansion
In 2015, the company expanded its assortment to new product categories (including household appliances) and significantly increased its pool of suppliers. Considerable amounts were invested in the in-house delivery system across Russia’s regions. KupiVIP also made its first steps in offline retail. Its first shop was opened in August 2015 in the Gagarinsky Trade and Amusement Center in Moscow.
KupiVIP also developed actively its mobile sales channel, which accounted to 40% of total sales. The KupiVIP application was downloaded by about 300,000 people, half of which were active buyers.
The company also got its share of the thriving cross-border market, with deliveries from abroad accounting for 25% of the group’s turnover in early 2015. In June, KupiVIP made available this offer to its Kazakhstani customers.2
2. http://www.ewdn.com/?p=36100
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In April 2015, KupiVIP announced the acquisition of footwear retailer Sapato.ru from the Ozon group,3 gaining a 6-million client base.
From marketing excesses to profitability
Launched in 2008 by Oskar Hartmann, a Soviet-born German entrepreneur, KupiVIP was inspired by such successful Western models as Gilt and Venteprivee. As a result of its aggressive marketing strategy, the site quickly asserted itself as the number one flash sales site — but was also criticized for neglecting profitability considerations.
Generously funded by Western venture investors, the site became an important Internet holding with the launch of Kupiluxe.ru, which focused on high-end products, and ShopTime, a more classic e-commerce site. In 2014, the holding consolidated these properties into a single online platform under the KupiVIP brand.4
The holding also includes a business unit for B2B services.
With an EBITDA ratio of +1% in 2015, the group claims to have become “a fully profitable business.”
3. http://www.ewdn.com/?p=35595 4. http://www.ewdn.com/?p=33204
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Loyalty program, mobile payments, personal data storage: AliExpress to conquer Russian e-commerce on all fronts
By Adrien Henni, East-West Digital News, April 28, 2015
Over the past few weeks, AliExpress has multiplied initiatives to strengthen its leadership on the Russian e-commerce scene. The Chinese giant has teamed up with Russian online bank Tinkoff Bank to launch a co-branded loyalty program. Associated with MasterCard credit and debit cards, this program is the first of its kind in the world, said Mark Zavadskiy, AliExpress business development director in Russia.
AliExpress customers in Russia will enjoy bonus points for any purchases made using these cards. The bonuses amount up to 5% of purchase value on AliExpress and 1% for purchases made with any other merchant. Bonus points can be spent on AliExpress. Card holders may benefit from special, up to 30% discounts on AliExpress and from 3% to 9% on Tinkoff’s online travel agency.
“Under this program AliExpress and Tinkoff will leverage and develop their large client bases across Russian regions,” Zavadskiy said.
AliExpress has also made mobile payment methods available to its Russian consumers, Zavadskiy announced. Alibaba’s in-house payment system Alipay has partnered with Russian payment company Rapida and mobile solution provider Soyuztelecom. These payment methods has been made available to subscribers of the four main Russian mobile operators — Beeline (VimpelCom), MegaFon, MTS and Tele2 — with a commission fee of 1% to 3%.
Cheap Chinese stuff paid for by mobile
Mobile payments have been developing fast over the past few years in Russia, with all major mobile carriers launching ambitious mobile payment platforms. So far, however, this payment method has been used essentially to settle utility bills and online services rather than for online purchases of physical goods, as analyzed in EWDN’s e-commerce research. “In a certain sense we’re pioneers in this field,” Zavadskiy commented.
Another announcement concerned personal data storage. Starting from 1 September 2015, according to Russian legislation, businesses will be requested to have Russian citizens ’ personal data stored exclusively on servers located on Russian territory. Following a meeting with state regulator Roskomnadzor on April 13, AliExpress Chinese and Russian executives confirmed their intent to comply with this rule. The statement came just days after a similar announcement by eBay and its subsidiary PayPal.
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The Chinese company also confirmed its intention to open soon a fully fledged representative office in Russia.
Meanwhile, the AliExpress free Android app has become number one by the number of downloads on Google Play — ahead of social networks and IM services, which traditionally lead the ranking. The AliExpress Apple app, however, is not as successful, noted e-commerce publication Oborot.
The Chinese company has even made an educational animation that helps new users get accustomed to purchases on the site. The cartoon is 1.45 minutes long. Posted on Youtube on April 15, the film has got less than 6,000 views as of today.
Earlier this year AliExpress also signed a partnership with SPSR Express to enhance its delivery capacities across Russia. The Russian operator has decided to invest “up to $10 million” in developing a network of hundreds of pick-up points specially dedicated to AliExpress.
Last year, the Chinese e-commerce giant became the number one e-commerce site in Russia by traffic and the number of orders. The marketplace shipped several hundreds of thousands parcels every day to Russian consumers as of late 2014, according to EWDN’s expert pool.
This story is based on reports from various Russian media and industry sources
INDUSTRY ANNOUNCEMENT
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JD.com launches Russian site as first step to global expansion
By Adrien Henni, East-West Digital News, June 26, 2015
Earlier this month JD.com, China’s largest online retailer, launched a Russian version of its platform with the stated goal of conquering a 20% share of the Russian e-commerce market.
JD.com’s English version had already been accessible to Russian customers for two years, but with no marketing effort or adapted logistics to serve them.
Just a fraction of JD’s 50 million SKUs are now accessible to Russian consumers, with a focus on consumer electronics and home appliances.
Among the first Chinese companies seeking to grow sales in Russia through JD’s Russian language site is smartphone maker ZTE, notes Forbes.com. The company plans to sell more than 2 million smartphones in Russia this year out of 100 million units globally. ZTE’s marketing investment in the country will be increased by 350% in 2015, according to Jacky Zhang, chief executive of Asia Pacific and CIS, ZTE mobile device.
JD’s Russian customers can pay using bank cards and via PayPal. In addition, the site will soon introduce the Visa Qiwi and Yandex.Money e-wallets. These two Russian electronic currencies serve dozens of million users, far ahead of PayPal.
To address Russia’s logistics challenges, JD may invest “several dozens and up to one hundred million dollars,” Russian business daily Vedomosti quoted Victor Xu, President of JD.com’s international business group, as saying.
Moreover, the Chinese online retailer has inked deals with several powerful local players. In May, JD signed a cooperation agreement with SPSR-Express, a major e-commerce shipment operator which also started, earlier this year, to serve AliExpress.
JD is also in discussions with the Russian Post, which controls more than 90% of the cross- border e-commerce shipment market.
Another major distribution channel is being created in partnership with Ulmart, Russia’s leading domestic e-commerce company. JD’s products will be promote and sold via the Ulmart website, using its fulfillment centers and pick-up points accross the European part of the country.
The cooperation will help expand Ulmart’s assortment up to one million items, the company announced.
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A global strategy
JD made it clear that Russia is only the first step in a larger strategy. “The company embarks on global expansion today,” Xu told reporters. “At the first stage, we position ourselves as a platform with emphasis on Chinese goods. (…) Later, it will be a platform for global trade.”
Xu thus considers selling Russian goods to Chinese online shoppers. Currently in the air in Russian business and government circles, this idea was voiced by Alibaba President Jack Ma on June 19 at the St. Petersburg International Economic Forum.
With an estimated 49% share of the Chinese online retail market, JD generated $14.2 billion in sales volume and $5.9 billion in net revenues in Q1 2015. The company – which until 2013 was known as 360buy – went public in May 2014, attracting $1.78 billion from NASDAQ investors.
Among JD’s shareholders are Russian billionnaire Alisher Usmanov, who also owns a significant stake in the Mail.ru Group, and DST, a leading global investment fund founded by Yuri Milner.
Last year, Russia’s domestic e-commerce market neared $15 billion for physical goods only, not including up to $3 billion for the cross-border segment. The latter is dominated by Chinese players, which accounted for around 50% of the market in value and at least two thirds in number of fulfilled orders. AliExpress alone sends hundreds of thousand parcels to Russian consumers daily.
This story is based on reports from various Russian and international media and industry sources
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Russia’s B2B-Center and China’s XBNiao team up to develop cross- border B2B trade
East-West Digital News, December 2, 2015
Last month B2B-Center, the leading B2B e-commerce platform in Russia, and XBNiao, a major Chinese e-commerce company, signed an exclusive strategic partnership to develop cross-border transactions. The partners underlined that their partnership has received “political support from the government of the People’s Republic of China.”
Chinese suppliers of certified industrial products and equipment will access the Russian marketplace, while Russian exporters will be able to use XBNiao to promote and sell their products in China.
“There are only reliable and internationally-recognized suppliers on XBNiao.com. The platform provides multi-level assurances, from independent testing of product samples, to security deposits and solid bank guarantees for the suppliers,” B2B-Center Chairman Alexander Boyko stated.
Chinese suppliers have already been active on B2B-Center for several years, accounting for about 40% of the platform’s foreign suppliers. “These Chinese suppliers participate in procurement procedures through their Russian registered legal entities. Our partnership with XBNiao aims to change this model. Chinese suppliers will gain direct access to our Goods and Services catalog. Our partner will enforce strict quality control of their goods, as well as professional translation of offer details and characteristics,” the B2B-Center press-service told East-West Digital News.
Three months ago a similar move was announced by Gazprombank. The Russian company — a subsidiary of the Russian gas monopoly — inked a deal with Alibaba in a bid to connect its B2B marketplace with the Chinese platform. The agreement — which does not seem to have brought concrete results yet — will allow thousands of Alibaba sellers or buyers to deal with Russian players.
B2B-Center believes it will stand out from this competition thanks to its vast client base: “We are the largest e-procurement platform in Russia,” the company’s press service reminded.
With a montly trading volume exceeding $2.2 billion in 2014, B2B-Center.ru serves more than 200,000 clients from 120 countries. In a recent interview with East-West Digital News, its CEO Alexey Degtyarev recounted how this business started in 2002 and gained such strong traction.
XBNiao.com was established three years ago. Last year the company’s revenue amounted to $300 million. Operating in 45 countries, its seven online platforms serve nearly 7,800 certified Chinese companies. The company operates its own logistics hubs in the USA and Germany. Additional hubs are being planned or under completion in Australia and Bahrain.
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Russians may order embargoed food products through foreign online stores, say customs authorities
East-West Digital News, October 21, 2015
Russian citizens are allowed to buy embargoed products from foreign online stores, the Federal Customs Service (FCS) has stated in a written answer to an inquiry from customs broker Unitrade on behalf of cross-border e-commerce platform Shopfans.
In 2014, following the sanctions applied by western countries against a number of Russian individuals and businesses, Russia banned food imports from the EU, the United States, Norway, Canada and Australia.
While reiterating the principles of this ban, the FCS stated that the embargo does not apply to individuals ordering such products for their personal use.
Announcement of the customs’ decision did not go without with some confusion. On Wednesday last week, soon after Shopfans published their official response, an official FCS representative denied that Russian citizens were allowed to buy embargoed products online.
In a second U-turn on Friday, the customs service reverted to its initial position, finally confirming that such online orders were authorized.
Shopfans will experiment with sales of non-perishable products from the USA, but does not expect to generate significant business in this segment in the foreseeable future. Orders of electronics or clothing are much more considerable, according to the company.
Founded in 2010, Shopfans makes purchases on US online stores easier for shoppers from Russia and neighbouring Russian-speaking countries. Orders are sent to the Shopfans warehouse in the USA before being grouped and sent to the customers. Shopfans’ turnover, like that of its competitors, has dropped significantly over the past year and a half, with the ruble’s fall and the domestic economic turmoil having made purchases on western sites more difficult for Russian consumers.
Shopfans claims 100,000 regular customers in Russia out of more than 300,000 registered users. The company is expanding activities to such new markets as Brazil, Australia and China. “US goods are popular there too. In many cases, US prices are lower than elsewhere in the world. In this sense, this business has good prospects,” its CEO Petr Sharapov believes.
Another Russian mail forwarder expanding internationally is Shopotam.ru. The site facilitates Russian consumers’ online purchases through international sites, including those based in America, Europe and China. But the company has also launched recently an international mail forwarding system, christened LiteMF.com, to serve consumers from all countries.
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Personal data storage law comes into force as some key players still not ready to comply
By East-West Digital News, September 1, 2015
Starting from September 2015, the personal data of Russian citizens must be stored on servers located physically on the Russian territory. Adopted last year in a bid to affirm Russia’s digital sovereignty, this new law has provided many players with challenges due both to its demanding requirements and the ambiguity of some of its key provisions (see details in EWDN’s free white paper).
A huge number of foreign and domestic players, who either store or used to store their users ’ data outside Russia or in borderless clouds, are concerned. Theoretically, even a hotel in the French riviera with names of Russian clients in its computers is supposed to store this data in Russia.
Those failing to meet the new requirements will face fines. Ultimately, access to their site may be blocked by the Russian telecom regulator Roskomnadzor.
In practice, the challenges differ considerably depending on the type of business and database architecture of each. Many companies have worked hard to meet the law’s requirements in time, as illustrated by the public announcements made by Booking.com, eBay, PayPal, Alibaba’s subsidiary AliExpress, as well as international PSP PayU in the past few months.
Some e-commerce players, such as KupiVip and La Redoute, had even anticipated the law by transferring their data away from foreign servers several years ago.
In July, 53% of the French, Russian and international companies surveyed by the French Russian chamber of commerce (CCIFR) stated that they will meet the deadline to comply with the law on September 1, while 39% said that they will comply but with some delay. Another 8% stated that they were not ready to comply at all.
What have been the difficulties in complying with the law?
Survey of 50 French, Russian and international companies in a variety of sectors, from late July 2015.
Source: CCIFR
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But many international businesses have not been able to meet the Sept. 1 deadline. This seems to be true in the cases of several international Internet giants, if judging by media reports and the “no comment” or otherwise vague statements of their press services. However, Google has already signed a contract to deploy its equipment in Russia at Rostelecom data centers, while Apple has pledged to move its data by Jan. 1, 2016, reports RBTH. Announcements about work in progress to transfer data to Russia have also been made by SAP, Samsung, Lenovo, and IBM.
Whether or not Facebook intends to transfer Russian personal data to Russia remains unclear, with the company insisting that user information does not constitute personal data.
Telecom regulator Roskomnadzor has announced that no sanctions for failure to comply with the law on storing Russians’ personal data will be applied till the end of the year. Thus, foreign companies have been given a deferral till Jan. 1, 2016, notes RBTH.
Meanwhile some other players, including some important international companies, are considering leaving the Russian market due to the complexities of the new rules and the unfavorable economic context of the present time.
Much-needed clarifications
Until just weeks before the Sept. 1 deadline, implementing the new rules was difficult due to the lack of clarity and precision of the law in several important respects. Ambiguities remained regarding the scope of the law, whether it was permitted to store copies of personal data outside of Russia, how to identify Russian citizens, and many other issues brought before the Russian authorities by the business community. Some statements from the authorities did concern some of these points, but they had no formal value.
Over the past few months, meetings with the regulator helped businesses clarify the situation. In August 2015, as a result of these meetings and of numerous requests from personal data operators, the Ministry of Telecom and Mass Communications expressed its interpretation of the law on its official website. These statements are not legally binding, but may be regarded as guidelines provided to businesses to comply with the law in good faith.
According to these official interpretations, personal data initially collected and stored in Russia can be transferred to or processed in databases located abroad. Key here, in order to protect the subject of personal data, is the initial location.
The questions of whether or not the law would apply to data collected before Sept. 1, 2015, has also been clarified. The rules are not retroactive; only personal data collected from Sept. 1, 2015, must be stored in Russia.
The Ministry also confirmed that certain businesses, whose activity is regulated by an international agreement or specific legislation, would not be affected by the law. This is the case of airlines and air ticket booking systems.
Full information on the Russian personal data legislation and its practical implications is offered in a recent white paper by EWDN and EY. To get your free copy please use this link: http://publications.ewdn.com/personal-data-storage
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