Ben Aris in Moscow -
This year is being seen as a turning point for Russian e-commerce as institutional money starts to chase the burgeoning online businesses that are sprouting up there and elsewhere in Emerging Europe.
In our 2012 outlook for Russia, bne identified e-commerce as a sector to watch as the number of start-ups proliferate and a few begin to make real money. Despite the crisis (and in several cases because of the crisis), online sales have continued to grow by over 30% and many companies are already making tens of millions of dollars in revenue.
The first round of investors into RuNet start-ups (as the Russian-speaking internet is affectionately known) were mostly e-curious oligarchs, but 2012 saw the arrival of institutional funds and foreign venture capital became more active. The number of funds of any sort investing into Russian e-commerce - by far the largest market in Emerging Europe - can be counted on two hands, but the amounts they are committing runs into tens of millions of dollars. "Russia has one of the world's largest online populations and will soon over take Germany as the largest [online] market in Europe," predicted Morgan Stanley in a research report published in January.
The online population in Russia has been doubling every 18 months or so, resulting in a penetration rate of 67% in the 12-54 age bracket, or 58m users, according to TNS-Gallup at the end of 2012. However, there is still a bit further to go and will increase again to 87m users by 2015, according to Morgan Stanley. For comparison, Spain, Italy and France boasted 67%, 58% and 80% internet penetration respectively by last summer.
At the same time, it is getting easier to pay for goods and services online in Russia. Until recently, the lack of credit cards was a serious bottleneck - and Russians still insist on paying cash on delivery, rather than pre-paying as is usual in the West. But with the number of credit cards in circulation growing exponentially (the volume of credit card transactions was up 60% over the first nine months of 2012, according to the latest data), the payment problem is being solved. Some 40% of Russians used cards to pay for goods online in 2011, according to MasterCard, nearly twice as many as in 2010. And that number dramatically rose further in the last year.
The online shopping business is becoming very serious, very fast. Oskar Hartmann, CEO and founder of KupiVIP, a leading online high fashion discounter, told bne in a recent interview that users typically start to buy things three years after getting hooked up to the internet, and work they way up to expensive items like posh clothes or jewellery after seven years. That means most of the fastest growth is still ahead as a flood of seven-year users hit the market over the next few years.
Total online sales in Russia increased to $12bn in 2012, or 1.9% of the $670bn total consumer spending in the same year. In this sense Russia is not far behind the more developed markets: online retail had reached 2% of the total consumer spending in the US and UK in 2003 and 2005 respectively. Russian e-commerce is expected to hit $36bn by 2015, or 4.5% of total sales, and then $76bn, or 7% of total sales, by 2020, according to Morgan Stanley's experts.
With the volume of sales growing by an average of 30% a year, according to Hartmann, Russia is already one of the biggest internet retail markets in Europe and is on course to overtake Germany to become the biggest in the next couple of years. The total size of Russia's e-commerce market at maturity is estimated to be between $80bn and $130bn, depending on whom you ask.
Domestic companies are now moving rapidly into the new space. Morgan Stanley points to a raft of already successful businesses that have appeared in the last few years, such as Avito (online classified ads), Lamoda (sale of clothes, footwear and accessories), Biglion (collective purchases), Oktogo.ru (online booking of hotels), Game Insight (mobile games), Wikimart (online retailer), and AnywayAnyday (air tickets), in addition to the more established names like KupiVIP and Ozon.ru, Russia's answer to Amazon.
Still, there are many obstacles to overcome, according to Morgan Stanley. Despite the fast growth, credit card use is still far from ubiquitous and punters remain wary of online payment systems. The poor state of Pochta Rossii (Russian Post) has also forced leading retailers to set up their own distribution and logistic systems, although this may change as reform of the post office gets underway (see accompanying piece).
The biggest catalyst behind the swelling interest in RuNet were the IPOs of email service provider Mail.ru in 2010 followed by Yandex.ru, Russia's answer to Google, in 2011.
Mail.ru was Russia's first serious internet IPO and raised $912m on the London Stock Exchange in November 2010. Yandex listed on Nasdaq and raised $1.3bn in May 2011. With a valuation of $6.9bn as of the end of 2012 and revenues of $681m, Yandex is by far the most valuable internet company in all of Europe, let alone Russia. These two IPOs put RuNet on the map for most international investors, who have been forced to bone up on what is happening on the ground in Moscow.
Ozon.ru will probably be the next billion-dollar Russian IPO. The company enjoyed revenues of $300m in 2012 and will float when they reach $1bn, CEO Maelle Gavet told bne in an interview at the end of last year. "It is not going to take another 10 years to get to that point," he said.
Morgan Stanley agrees, calling Ozon.ru the uncontested leader of Russian e-commerce, and says with revenues rising by 91% in the last year alone, the company could reach $1bn as soon as 2014.
While Moscow and St Petersburg are the richest cities in the country, e-commerce was already moving into the regions in 2012, where the bulk of the population live. "The regions were the key driver of online trade in 2012. The share of regional online stores on Yandex.Market increased from 23% to 36% in 2012," says Yandex spokesperson Ochir Mandzhikov. "Many stores are focused on regional sales. They focus advertising on regions, arrange for customer pick-up points and so on."
That move out of the core cities and into the regions and beyond is crucial. While Russia leads the development of e-commerce in Emerging Europe, most companies are looking at the wider former Soviet Union region as a single market of about 300m Russian-speakers.
E-commerce and online shopping are growing equally fast in other countries in the region. Tiny Estonia is probably the most wired country in the world (and has a significant Russian-speaking population), to the point where banks have been forced to closed physical branch offices since so many people bank online. Likewise, online sales in Kazakhstan in the heart of Central Asia has also been enjoying a growth of 15-30% in the last two years and online banking services are growing to help accommodate this. While many Russian e-retailers have set up offices in neighbouring countries, the bulk of regional integration - and the business opportunities this will afford - lies ahead of them.
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