Ben Aris in Moscow -
When Maelle Gavet first arrived in Russia in the first days following the fall of the Soviet Union as a student, the shops were empty and the phones didn't work properly. In those days, the internet was just a distant dream for science fiction writers, but two decades on and she heads Russia's leading e-commerce site Ozon.ru - Russia's answer to Amazon.com - that is growing by leaps and bounds.
A French national who took Russian at university, Gavet spent some time in a regional university before returning to work in Russia full time in 1998. Like most of the buccaneers that arrived on the shores of the Russia, she dabbled in business, founding a small regional corporate event company before taking a job at the US consulting firm Boston Consulting Group, where she stayed for six and half years and moved to Ozon after completing a consultancy job as its director for marketing.
Ozon was well ahead of its time, launching only two years after Amazon and at a time when even bricks and mortar retail in Russia was in its infancy. "Ozon was very early into the game, launching even before there was really a functioning internet in Russia," says Gavet. "We are lucky, as we have shareholders with a very long-term horizon."
Shares in the company have changed hands several times, with Pascal Clement, the owner of internet company incubator Fast Lane Ventures being one of the notable early investors. But things got serious after leading private equity firm Barings Vostok bought majority control of Ozon in 2000 for $3m and the company was re-capitalised again with another $18m when Bertelsmann's digital investment arm Holtzbrinck Ventures and Swiss-based information technology specialist Index Ventures both invested into the company in 2007.
It is still very early says for Russia's e-commerce sector, but the development of the sector is following the same path as traditional organised retail, where supermarkets are gradually eating into the market share of the open-air markets that are still the most popular place to shop in Russia.
Starting life as an online bookstore that had half an eye on Russian expats in places like Germany, Ozon has grown into by far the largest e-commerce business in Russia. "Ozon.ru is made up of four businesses," said Gavet, sitting in the company's relatively modest offices in the leafy Sokol district of northern Moscow. "Ozon.ru is an online retailer, O'Courier focuses on shipping, Ozon.Travel, and our most recent acquisition Sapato is the leading online shoe and accessory retailer."
The size of Russia's internet is growing at 30% a year. A VTsIOM survey conducted in September suggests that 60% of the population now uses the internet compared with just 24% in 2006. And the volume of the online business is growing even faster: last year, Russians spent an estimated RUB554bn ($17.8bn) on goods bought from online shops. Consumers also sent RUB167bn through the internet using online payments systems, while advertisers spent RUB24bn on contextual ads and another RUB16bn on media advertising such as banner ads, according to September a survey by the Russian Association of Electronic Communications and the Higher School of Economics.
As the market leader, Ozon is growing even faster. Total sales have grown from $19m in 2005 to top $300m in 2011 and were up 80% in that year alone. Gavel says the goal is to become a billion-dollar-a-year company and that is "not going to take another 10 years to get to that point."
Despite the impressive growth, online retail is still very much in its infancy. As a whole, it only had a 1% share of the RUB660bn ($22bn) that Russian consumers spent in 2011, compared with Europe where online retail already accounts for between 5% and 8% of total retail turnover.
Judging the true size Russia's online retail trade is very difficult, as that 1% share of total retail turnover would imply the total size of the online market was worth $200m in 2011, less than Ozon's own revenues. Other estimates put the value of the total online business much higher at $6bn, which is equivalent to about 25% of the official retail total. Part of the problem is that much of Russia's retail happens in the shadows, making estimating the size of the sector difficult.
But few would disagree that if the sector continues to grow at the current pace, the value of the online retail sector is likely to hit $100bn by 2020, matching bne's estimate of $103bn in our March cover story Russian XXL that argues Russia will become the largest consumer market in Europe by that time.
A race is developing, to an extent, between traditional and online retailing. Due to its vast size, Russia is ideally suited to online retail, as it is the cheapest and easiest way to get goods into the country's far-flung corners. The Russian postal service is one of the few Soviet institutions that work and is about to undergo a huge modernisation programme. "It's possible that Russia will skip over parts of the development of traditional retail like it did with the move from land line phones to mobile phones," says Gavet. "But that was only possible thanks to the massive investment by the mobile phone operators that ran into the billions. The same will have to happen with distribution and logistics for it to happen with e-commerce."
Ozon is already a big company by any standard, but it has pulled off the difficult trick in Russia of raising serious cash. With more billionaires per square metre in Moscow than anywhere other city in the world, raising $100,000 to $1m is relatively easy for a Russian start-up. But raising the second round of financing, from $5m to $25m, is a lot more difficult and few Russian companies have managed it.
In 2011, Gavet managed to bring in $100m of fresh investment and her life was made easier by first the Mail.ru IPO in London and then the Yandex IPO, which valued both companies in the billions of dollars. "We spent nine months meeting with investors when Mail.ru floated. The reaction and the level of knowledge of the Russian market changed dramatically as a result and significantly increased awareness of RuNet," says Gavel. "Before the Mail.ru IPO, investors were mainly looking at China and India amongst the emerging markets, and little else."
Although Gavet says the money was raised with no particular purpose in mind, most of it was spent on buying the shoe retailer Sapato.ru. Acquisitions are part of Ozon's strategy, but at this point they are mostly opportunistic, as the quality of targets on offer are very mixed. "There are a lot of 'cookie cutter' companies out there - that are simply trying to copy an idea from the West and they are not always good copies," says Gavet.
Most of the development will come from building up the services that the company already offers. Like Amazon, Ozon has moved away from selling just books to transform itself into a general store carrying thousands of different products. The next stage will be to metamorphosize again to become simply a sales platform that other companies can use to sell to the general public. "Ozon is on its way to becoming the biggest online platform in Russia. We have all the key logistics and marketing piece in place, but there is still a lot of work to do," says Gavet. "The plan is to build up direct sales, where we will buy goods from suppliers and sell them on to customers. This is already happening on ozon.ru."
Distribution and fulfilment are the key parts in the puzzle where the economies of scale come into play. Already Ozon's distribution can handle 90% of its own deliveries, reaching every major city and town in the country. In addition, Ozon has set up a string of "pick-up points" where customers can come to collect their goods. A quirk of Russia's internet is that e-commerce appeared before credit cards, so customers are used to being able to pay cash-on-delivery (COD), which is unusual in the West. "It was very strange when you first meet it, but in the West customers were never given a choice: they had to prepay and wait for the delivery," says Gavet. "If they don't like the goods, they can return them and get a refund. In Russia, no one wants to prepay and everyone expects to pay in cash after they have actually seen the goods."
The COD system adds heavily to costs, as customers are not always home and can refuse to buy the goods once they have seen them. By contrast, the pick-up points not only cut costs (some of which is passed to the consumer), but they also act as shops and earn extra revenue.
The front end of the business is to develop the platform function. In a recent experiment, Ozon wanted to try out the coupon business, which is already well developed in Russia. Rather than trying to compete with the existing companies, it organised a tender that was won by Kupikupon, who are providing a white label service called "Ozon Bonus". "The site is already running and in just a few weeks we have seen the number of users up several hundred percent. It is early days now, but for us it is very interesting, as this is just another channel for us to sell our services and tap into a much wider audience offered by Ozon," says Iskander Khanbaev, head of marketing and development at KupiKupon.
Well established as the leading e-commerce company in a country that is well on its way to becoming the largest consumer market in Europe, Ozon is destined to become the third big RuNet IPO. Gavet says it is the dream of every internet entrepreneur to IPO from day one, but there are no specific plans yet. "We have no calendar for an IPO, as we are still very early in our development. We want to reach a billion dollars of turnover first. There is still a lot of work to do," says Gavet. "About half the population is already online and of that some 20% have bought something using the internet. In 2011, there were about 10m to 15m buyers online, but this is still growing very fast and expect this to rise to 20m this year. E-commerce companies are all looking for that famous scale effect and this is still not happening."
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