E-commerce in Russia is booming, but the race has only just begun

E-commerce in Russia is booming, but the race has only just begun
Russia's online retail business is growing five times faster than the real economy and several market leaders have emerged that are now slugging it out for market share. But despite rapid progress the business remains right at the beginning of its development.
By Ben Aris in Berlin September 8, 2021

E-commerce in Russia is booming and only accelerating. Several factors are driving the business that is growing five times faster than the real economy. But online retailing is still at a very early stage, Mikhail Burmistrov, the CEO of Russia’s leading e-commerce analytical company INFOLine-Analytics told bne IntelliNews in an exclusive interview. The potential for growth remains enormous, and the leading companies are throwing themselves into expanding as fast as they can to capture a slice of what is already a multi-billion-dollar business while it is still up for grabs.

Most important is that real incomes have begun to rise again after about seven years of stagnation, thanks to the economic bounce-back following the coronacrisis of last year.

Nominal wages increased by 11.7% in July and despite the current high rate of inflation of 6.5% that still translates into a gain in real wages of 4.3%. Indeed, real wage growth has been in the black since the start of this year; nominal wages rose to RUB58,782 in June, or $758 per month in dollar terms, up from $666 in January.

The lockdowns of last year have also catalysed e-commerce as millions of Russians were forced to shop online for the first time, but having got the habit are unlikely to stop now the shops are open again. Most of the leading retailers have reported that sales were not badly affected by the pandemic and reported double-digit growth in online sales, with the market leaders like Ozon, Wildberries and the top supermarket changes reporting sales growth breaking into the triple digits. Online sales of food products in Russia in particular tripled in 1H21 to RUB149bn ($2bn).

And the business has received large injections of cash as the top e-commerce plays start to IPO to raise fresh investment capital. The biggest so far was Ozon that IPO’d in December and from the original $500mn it was asking for ended up raising $1.2bn, despite the fact the company was not making a profit. However, with its gross merchandise volume (GMV) growing by 140% in the 4Q20 to RUB74bn ($1bn) the game at the moment is capture market share and the profits will come later.

The other e-commerce ventures are also well funded and like the expansion of the supermarket chains in the 1990s, the race is on to stake out as much territory in the retail market as possible before the e-commerce offerings become saturated and the consolidation of the sector begins.

“The growth in e-commerce is early-stage for sure, as the penetration of e-commerce in all Russian retail in the first half of 2021 grew to 9%, which is still low even after the pandemic has sped this up a great deal (from just 6% in 2019). The share of e-commerce in Russian retail, however, speaks only to its enormous potential; to make it a reality, a lot of investment is still needed,” says Burmistrov.

Russia is characterised by very uneven penetration of online shopping between regions, Burmistrov adds: while the penetration of e-commerce is most likely about 15% in Moscow, it’s in the single digits in many other regions of the country, according to INFOLine’s numbers, the go-to consultant for e-commerce statistics.

“The leading players are going to be able to unlock the potential of Russia’s regions, with online penetration in sales of non-food products reaching 27.3% by 2025, according to our estimates,” says Burmistrov.

But there is a lot of work to do. Russia’s sheer size is the main challenge: how to get the goods to the customers quickly and cheaply; but Russia’s sheer size is also one of the factors driving the fast growth, as e-commerce solutions are far cheaper and easier than going to the expense of building traditional bricks and mortar store networks across 11 time zones in 85 regions.

“The key challenge is distance and underdeveloped infrastructure – both in terms of the warehouses where goods are stored and in the last mile, where customers receive their orders. All of this affects the speed and cost of delivery, as well as convenience for the customer,” says Burmistrov.

In the last two to three years, the biggest players – Ozon and Wildberries – have invested a lot in these areas; they have already opened large logistics hubs in key regions, with Ozon coming to Khabarovsk in Russia’s Far East most recently. Yandex.Market, another of the big players in the e-commerce business, is following them, but most expansion for them is planned for later periods.

“Russia is, of course, very different from many Western countries, where, for example, infrastructure is much more uniform regardless of the size of their cities. As a clear recent example, imagine the village of Gorny Altai, which is home to 3,000 people. Only Russian Post, Wildberries and Ozon deliver parcels there. At the same time, the choice of items in offline stores there is extremely limited, because of the complex logistics involved in operating there, so online shopping has great potential to become a key channel for buying a whole range of non-food product categories in that area,” says Burmistrov.

In the 1990s and the start of the race to become Russia’s leading supermarket chain there were over a dozen players that spent the next two years slugging it out. But the winners eventually established themselves and as bne IntelliNews has reported already, a few years ago the emphasis changed from rolling out more stories and growing revenue to consolidating the networks and focusing on improving profitability.

Things in e-commerce are going much more quickly as the biggest players already dominate the business, while the leading supermarket chains – Magnit and X5 Retail Group – are also rapidly building up their online offering, although they are focused more specifically on e-groceries, which is the fastest growing of all the sub-categories.

“The market share of the top three players – Wildberries, Ozon and AliExpress – is now around 35%, compared with the top three players accounting for more than 80% of the market in India and more than 75% in China,” says Burmistrov. “This is Russia’s major difference – there is not one clear leader, the market is at the very early stage of development and it is very fragmented. For now, the biggest players are contributing to digital adoption and pushing online penetration upwards, so competition is yet to become more and more pronounced in the coming years.”

Ozon and Wildberries are the largest players of the Russian e-commerce market. Wildberries is larger in terms of turnover, while Ozon is growing much faster. AliExpress, which for a long time was seen as only representing cross-border trade, is now taking steps to develop its local business as well, although its pace of growth is much slower than Ozon’s, says Burmistrov.

The e-commerce division of Russia’s listed Yandex internet powerhouse, Yandex.Market, is showing fast growth, but still from a low base, and its warehouse capacity and last-mile brand network are still a long way behind other major e-commerce players. In addition, the e-commerce division of Russia’s retail bank behemoth Sber has recently rolled out an e-commerce player, part of the Sber ecosystem called SberMegaMarket; it has ambitious plans, and although it is only taking its first steps, it’s probably worth watching this space, Burmistrov believes.

“By 2025, the e-commerce market will grow on average by 25% per year; and sales of food products by 68%, i.e., a growth rate that is more than 2.5x higher than now. The share of food in the e-commerce market is now only about 5% – it’s a small market, but it will increase to almost a quarter (23.3%) by 2025,” says Burmistrov citing INFOLine’s forecasts.

Another obstacle to overcome is the lack of a common logistics infrastructure. In the US e-commerce can chose to rely on companies like FedEx and even the US postal service. While Russia also has a national postal service, Pochta Rossii, which has been making rapid improvements and investing heavily into its own logistics and distribution system, it is still not an option for the e-commerce companies, as it remains too slow. The upshot is that each company is building its own distribution network and needs hundreds of partners to effect the last-mile delivery.

“If you look at fulfilment centres, there are no ready-made facilities suitable for the operations of such companies as Wildberries and Ozon. That’s why building such facilities from scratch is not a whim but a necessity for this market,” says Burmistrov.

Russia’s biggest cities are the most advanced and obvious markets. With an official population of 12mn (and unofficially of some 15mn), The city of Moscow has a larger population than both Czechia and Hungary condensed into one giant urban sprawl, making it an online marketer’s dream. St Petersburg also has a population of several million and altogether there are 11 so called millionki, or cities with more than a million residents.

Russian firms have been a global leader in rolling out the so-called dark stores in these cities to provide ultra-fast delivery, which can get goods to customers in under 10mins in some cases.

“Samokat, one of the leading players in this market, has more dark stores than Germany’s Delivery Hero based in Berlin, and it’s second only to Asian players in terms of the number of dark stores,” says Burmistrov. “Dark stores are located within the city and often in the centre – and this means high rents. This segment of the market is now very investment-intensive, including due to the low average ticket, which forces e-commerce market players to subsidise delivery to customers, but it’s enjoying triple-digit growth, which is why there’s a lot of interest in it, including from traditional offline retailers.”

Russian companies are pioneering this ultra-fast service and have recently started to launch operations overseas in New York and Paris amongst other destinations.

“Russians generally like faster delivery and have gotten more used to it than perhaps people in many other countries. In Russia’s larger cities, 24-hour delivery is already considered the norm. If an online platform doesn’t offer it, that’s a reason to switch to a competitor, and for food products, same-day delivery is already a market norm,” says Burmistrov.

And e-commerce is being helped along by the fact that Russia leads the world in many fintech applications and services. It was the Russian banks that pioneered the idea of sending an SMS message to your phone every time you make a withdrawal from an ATM, and the banks have continued to innovate to the point where Russian fintech provides a better and wider range of services than are available in the US or UK, says Burmistrov.

“Ozon began developing its fintech vertical in early 2019; it has its own branded bank card, of which more than 1,000,000 cards have been issued,” says Burmistrov. “Wildberries bought a bank to expand in fintech, while Ozon got a banking licence by acquiring Oney Bank. Ozon also registered a microfinance organisation to develop its offering for the B2B-audience, e.g. the sellers. Yandex has also acquired its own bank and plans to actively develop fintech products for both the sellers and the buyers.”

 

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