INTERVIEW: An Ozon layer in Russian cities

By bne IntelliNews November 29, 2010

Rachel Morarjee in Moscow -

Twelve years ago, a group of science fiction enthusiasts in St Petersburg decided there was nowhere to buy their favourite books. So they set up Ozon.ru, which over the following decade went from selling sci-fi novels to everything from DVDs to knives and forks, becoming Russia's answer to US giant Amazon.

The secret of Ozon's success offers valuable lessons to entrepreneurs in bricks and mortar companies who are hoping to tap the country's growing consumer market. "Because Russia is so big, the delivery challenges are extremely complex," says Ozon CEO Bernard Lukey.

Despite the financial crisis, Ozon's orders grew by 21% in 2009 as increasing numbers of Russian shoppers decided to shun the country's glittering malls and search for bargains from the comfort of their homes. Russia's biggest markets remain its two largest cities, Moscow and St Petersburg, but demand in Russia's regions has exploded, with Ozon's business there surging 200% in 2009.

About one-third of Russia's increasingly wealthy 143m consumers are online and that number is growing fast. Russia's internet market is growing at a double-digit clip, with numbers of users in spring this year up 23% on 2009, according to Russia's Public Opinion foundation.

Those numbers have really excited foreign investors. The successful London stock market debut of Russian internet group Mail.ru, which dominates the country's online gaming and social media, showed how strong appetite is for Russian internet companies. Mail.ru's IPO was 20x oversubscribed as punters rushed to get a slice of Russia's growing online pie.

Into the regions

Ozon is one of a growing network of Russian internet businesses that have proved it is possible to run a successful company in a country with a reputation for being tough on entrepreneurs. Unlike oil, gas and many other formerly state-owned sectors, the online businesses which have sprung up over the last 10 years have been able to set their own rules for doing business, free from the corruption and vested interests that have dogged players in other sectors.

So far, around 37% of Russians have internet access, many at their place of work rather than home, but a disproportionate number of people online live in Moscow or St Petersburg, with over 70% online in the former and only slightly less in the latter.

However, Ozon's numbers show that internet penetration in Russian second-tier cities and rural areas is likely to be the next frontier for growth, and Ozon should be well placed to capture regional demand for the latest products. Ozon's Lukey expects internet shopping to rise sharply in the regions as broadband becomes more available there. "It will be a very big market and it is growing all the time" he says.

The company has continued to grow briskly by surmounting delivery challenges to reach customers across Russia's vast landmass. "When people order online, because the ordering process is quick, they also expect their goods to arrive very quickly," says Lukey.

In order to offer speedy service, Ozon has had to pioneer a variety of different delivery options, including setting up its own courier service O-courier so that orders can reach customers in major cities at much lower cost than using Fedex or DHL. "The price of a book doesn't justify paying for a private courier, but customers still want their orders swiftly," says Lukey.

Collecting payments is a further challenge. Few Russians own credit cards, and those who do are wary of using them online, fearing cyber crime. Door-to-door cash collections do not work for all consumers because of distrust of strangers. Meanwhile, the antiquated postal service admits it cannot handle the surging number of parcels dispatched by web retailers. As such, Ozon has set up a network of collection kiosks in Moscow and St Petersburg where customers can collect their orders and pay in cash if they want a faster service than the Russian post can offer. The company operates five of its own kiosks in Moscow and St Petersburg and also works with partner kiosks in the cities. Ozon also operates its own courier service with 100 couriers delivering 3,000 orders a day in the country's capital city and another 1,000 orders a day delivered in St Petersburg.

The company has a sizable market in the second-tier city of Tver, where its warehousing operation is situated and is focussing on building its business in the pacific port city of Vladivostock not far from Russia's border with China and North Korea, to test the reach of its logistics.

Regional consumers are coming of age. Over the coming year, Russia's regions will be the place to watch.

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