Pitney Bowes.

Global Ecommerce Solutions

Ecommerce in Russia: Seizing the Opportunity Part 1

by Ken Walsh | April 16, 2013 | Comments Off on Ecommerce in Russia: Seizing the Opportunity Part 1

The State of Russian Ecommerce and the Potential for Growth

co-author Peter Prabhu, Partner and Head of Russia & CIS with Interstice Consulting – Moscow

 

As noted elsewhere in this blog, Russia presents a potentially lucrative ecommerce market opportunity for foreign companies. At the same time, Russia presents numerous challenges due to its distinct language, consumer behavior, media properties, climate and sheer size.

This post will focus on the current state of ecommerce in Russia and identify the challenges a foreign company will most likely face. The second post will explore specific strategies to help penetrate the Russian ecommerce market and how they differ from the US and other established ecommerce markets.

 

The Case For Entering the Market Now

Although growing from a rather small base — online sales made up 1.9% of total retail sales in 2012 — recent projections from the brokerage Morgan Stanley estimate that this figure will rise to 4.5% by 2015, yielding an average annual growth rate of 35% and a market size of $36 billion. As a result, the Russian ecommerce market is increasingly on the radar screen of international companies seeking growth markets. UK-based ASOS (clothing retailer) is the latest foreign ecommerce company to establish a specific Russian branch.

RussianMarket-pic1The current wave of US-based internet companies are also looking to go global earlier. They learned from recent examples of companies like Facebook, which ignored the Russian market until it was too late, allowing local rival VK to build up a dominant following. Today, Facebook is the fourth most popular social network in Russia, and it isn’t making up much ground.

The earlier generation of online companies like Google and eBay lag far behind their Russian competitors. Amazon still does not have a physical presence in the country, while its local counterpart Ozon.ru is approaching $1 billion in annual sales.

 

Russian Demand

While it’s grouped with the BRIC (Brazil, Russia, India and China) emerging markets, Russia is quite distinct due to the country’s higher per capita income and Internet penetration, which places it squarely as a middle-income country. In fact, Russia’s per capita income of $17,700 (purchasing power parity) is the highest of the other three BRIC countries (Brazil, $12,200; India, $3,900; China, $9,100).

RussianMarket-pic2Moreover, conspicuous consumption is de rigueur amongst Russian consumers, which makes it one of the most attractive retail markets in the world. Most of the world’s top luxury brands have established themselves in Russia and generally find that their Russian operations outperform other markets in terms of overall profitability and growth.

This is evident in the strong demand for physical retail locations in Moscow. Shopping centers in Moscow have a vacancy rate of 2.5%, which is well below the European average of 6%. Low vacancies — in conjunction with the highest European rental rates per square meter outside of London — demonstrate how lucrative this market can be.  High rents for physical locations also provide an incentive to look for alternative sales methods, such as online sales, even if they have higher set-up and distribution costs than one might find in other countries where you have an online presence.

 

Distrust of Credit Cards

Although Russia’s retail marketplace is rapidly developing, it has a fairly immature consumer ecommerce market. Credit card use is growing quickly, but cards are still not widely used for retail purchases, let alone online purchases. In the Russian ecommerce realm, cash-on-delivery accounts for up to 80% of sales of physical products like clothes, shoes and electronics. The basic issue is a lack of trust in the integrity and reliability of online retailers, and in the safety of credit card issuers and banks. Russians have little faith that their banks would absolve them of liability in the case of online fraud. It’s very common for ecommerce retailers to employ a team of cash couriers. Having a team of cash couriers presents an opportunity for your company to have a personal interaction with potential customers, which could be a major benefit for ecommerce companies.

 

The Importance of Offline Contact

Offline contact is quite important in Russia. All of the major Russian ecommerce websites display their toll-free numbers prominently and most offer an online, real-time chat service.

There is also a trend towards converging online and offline customer experiences, as elsewhere in the world. Large retailers like Svyaznoy (electronics) and X5 (groceries) have started ecommerce projects that leverage their physical locations and existing distribution networks. Pure-play ecommerce company Ozon.ru has a network of distribution centers where customers can pick up and pay for their orders.  Wildberries.ru, which specializes in fashion, has a network of 140 physical locations throughout Russia where customers can try on clothes, pay for their merchandise, and return items.

 

Localization

Another important point is that Russians, in many ways, remain inwardly focused. Less than 10% of Russians speak any foreign language, and there is a sizable undercurrent of nationalism and some resentment of foreign influence. Most foreign brands need to undertake full localization of their operations in order to stand a chance to succeed in Russia.

When Russians look abroad for trends and styles, they are inclined towards France, Italy or the United Kingdom (and even Asia), rather than the United States. However, U.S. brands, culture and lifestyle still have a positive reputation in Russia that can be leveraged to the benefit of your sales.

 

Try-before-you-buy Attitude

Typically, Russian customers will order several items and consider the delivery as a “try-at-home” service, accepting only a few (or even no) items for final purchase.

The try-it attitude translates into the two needs for ecommerce companies in Russia:

1. They should maintain a relatively higher level of physical inventory.

2. They must be efficient in terms of processing rejected items.

 

Where Do You Fit In?

In light of these specific aspects of Russian consumer behavior, the first assessment to make is whether your product or service is a good fit with the Russian market. If so, there are strategies and solutions available to assist you, some of which we’ll discuss in the next post.

 

Peter Prabhu is a Partner and Head of Russia & CIS with Interstice Consulting – Moscow

Ken Walsh is the Commercial Attaché, U.S. Commercial Service – Moscow

Please observe our community guidelines when posting comments.

This blog is hosted by Pitney Bowes Inc. By using this blog you agree that you are solely responsible for any comment you post to the Blog and you agree to abide and be bound by the Pitney Bowes TERMS OF USE.

Please stay on topic. We may redirect certain submissions if they are better handled through another channel such as customer service. With regard to the content of any submissions you make through this Blog, you agree to remain solely responsible and agree to not submit materials that are unlawful, defamatory, abusive or obscene. You also agree that you will not submit anything to this Blog that violates any right of a third party, including copyright, trademark, privacy or other personal or proprietary rights.

Pitney Bowes reserves the right to terminate your ability to use and/or submit posts to this Blog. Pitney Bowes may not review all postings and is not responsible for comments posted on this Blog. Pitney Bowes nevertheless retains the right to not post, edit a posting or to remove any postings in its sole and absolute discretion.

Comments are closed.