Online retail starts to take off in Kazakhstan

By bne IntelliNews October 29, 2012

Clare Nuttall in Astana -

As a country with steadily rising incomes and low population density, Kazakhstan is an obvious location for online retail. So far, the sector has been slow to develop, but a handful of early movers are investing, confident of the future growth potential.

Staking its claim in the Kazakh market, Russian online clothing retailer Lamoda, one of the Rocket Internet sites, entered Kazakhstan in March. Six months later, the company secured an investment - said to be between $50 and $80m - from JP Morgan, which will be used to grow its business in Kazakhstan and other Commonwealth of Independent States countries.

According to Lamoda's Kazakhstan country manager, Alexios Shaw, the company was looking to benefit from the lack of competition in Kazakhstan's online retail market and the appetite for international brands not yet available in the country. "Retail is waking up with international players such as Saks Fifth Avenue entering in the market, but internet retail is primitive. Low competition was an obvious reason why the market was attractive for us," Shaw tells bne. "E-commerce also has a natural advantage in a country like Kazakhstan, provided you have on the ground infrastructure or a good delivery partner."

Almaty-based Chocolife, which at present mainly offers discounts on events, is increasingly active in retail, with sales of goods now accounting for around 25% of transactions. Chocolife plans to transform itself into a fully-fledged online retailer and is set to launch an online store, Choco-Mart, by the end of 2012. The company is also mulling expansion into Azerbaijan and Ukraine. "The market potential is significant. Now that internet penetration has passed the 50% threshold, we expect an e-commerce boom. We expect that by 2015, the volume of e-commerce transactions will reach 10-times their current level," Chocolife spokesperson Latina Satarova tells bne.

Splash the cash

Drivers for Kazakhstan's online retail market include the steady growth in incomes. By 2010, income per capita had reached $10,000, 15 times higher than in 1994, and Astana is targeting $15,000 by 2015, putting Kazakhstan among the world's high-income countries.

Kazakhstan's membership of the Customs Union (together with Russia and Belarus) is also helpful. "Since the launch of the Customs Union, we almost think of Russia and Kazakhstan as a single market," says Shaw. "We hope to turn the Kazakhstan market into a mini Russia for Lamoda."

Despite the crisis, the last five years have been a period of dramatic growth for Kazakhstani retail, with international mass-market brands including Zara, Monsoon and Gap entering the market. However, as Shaw points out, international retailers are mostly just active in Almaty and Astana, and many brands are still not available in Kazakhstan. Other regional centres including the western oil towns of Aktau and Atyrau and industrial towns such as Karaganda, have relatively high incomes, but are too far off the beaten track for foreign retailers.

Internet penetration has advanced rapidly. Back in 2007, the country held the dubious honour of having the world's most expensive internet; today with a larger number of fixed-line providers and the launch of mobile broadband, getting online is much more affordable. About 53% of the population are internet users.

According to Yandex, the operator of Russia's largest search engine, Kazakhstanis are increasingly active online. "In our view, the potential of e-commerce in Kazakhstan is great, and it is gradually being realised - more and more people carry out everyday tasks through the internet, including purchases. Our data shows that around 1% of requests to Yandex from Almaty and Astana are associated with the desire to buy or sell something," Vladimir Isaev, manager of international media relations at Yandex, says.

However, the Kazakhstani online retail market is still tiny compared to that in Russia, which is worth over $10bn, according to East-West Digital News. Chocolife's research shows that as of 2011, e-commerce transactions worth $133m were carried out in Kazakhstan. The survey shows a steady increase in online trading volumes, with the number of transactions almost tripling from 115,952 in 2010 to 330,602 in 2011; this continued in the first half of 2012, when a total of 204,237 transactions were completed.

However, the lion's share of transactions in Kazakhstan, some $95m, were in the transport sector, in particular airline tickets, whose customers are mainly well-off Kazakhstanis and foreigners. By contrast, Kazakhstan's railways are far less hi-tech; in 2009, when national railways operator Kazakhstan Temir Zholy launched its online ticket sales site, just 500 of approximately 12m tickets sold during the year were purchased online, Assylkhan Kaldykozov, executive director, strategic development and new technology implementation at KTZ, told the Digital Communications Kazakhstan conference in Astana. While there has been a steady increase since then, the government's target of bringing 40% of railway ticket sales online is looking over-optimistic.

According to Satarova, the main problem for the market is the lack of e-commerce entrepreneurs, with other barriers including service standards and the low level of credit card usage. Unlike Russia, which has spawned numerous domestic e-tailers - including the "Russian Amazon" Ozon.ru and KupiVIP, many of which have gown with venture capital backing - Kazakhstan has not yet seen a similar phenomenon.

Cash on delivery

Kazakhstan, like Russia, requires a much higher level of investment than markets such as the US or Western Europe, due to a combination of the lack of courier services and the continuing preference for cash payments. Lamoda's Shaw says the company has had to invest in substantial on the ground infrastructure. "Entering the market properly requires a huge amount of effort and investment, and as a result we are easily the market leader," says Shaw. "Logistics - getting goods into Kazakhstan and around Kazakhstan - are a huge challenge for e-commerce, and in some ways it's as difficult for us as for an on-the-ground retailer. The big issue is online payment, which has not really taken off in the CIS because of low penetration of credit and debit cards, and high levels of credit card fraud. We therefore do cash on delivery."

But this investment is already yielding results, according to Shaw, who points out that while some Kazakhs buy from Russian and international retailers, the long delivery times (usually around three weeks for European retailers) and the inability of buyers to try and send back goods, make this problematic. While the market is lagging behind that of Russia - and even further behind Europe - for early investors, it has the potential to pay off big time.

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