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The State of Russian e-commerce

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Russia’s online retail market is headed up by Germany-based trading company Otto Group and the multi-channel banners of its subsidiary Otto Group Russia — general merchandise e-commerce player Ozon and grocery e-commerce retailer Utkonos. Otto Group is a leading mail-order company, focusing mainly on clothing and footwear in Russia. With Russia’s underdeveloped infrastructure, potential also exists for Otto Group’s logistics service provider, Hermes. Otto Group is looking to build a nationwide delivery network, and established a joint venture with logistics company DPD called Hermes-DPD in January 2012. Ozon intends to concentrate on developing a robust delivery and pick-up point network and strengthening its regional IT infrastructure. It is also examining possible mergers with or acquisitions of lesser retailers, as well as entering other Russian-speaking markets like Kazakhstan. Utkonos is focusing on expanding its delivery services beyond Moscow, improving its delivery system and broadening its assortment of fresh products.

Drivers of e-commerce potential According to Russian search engine, from 2010 to 2011 Internet penetration in the country rose 23 percent to 61.5 million users, making Russia the second-largest market in Europe behind Germany. It is predicted that by 2014 Russia will have around 80 million users and be the largest European country for Internet usage. As a consequence, demand for e-commerce is growing substantially year-on-year, presenting a wealth of opportunities for online operators. The majority of these businesses are concentrated in Moscow and St. Petersburg, with regional cities lagging behind. Although consumer spending is lower in the regions, there are still 10 cities with populations over one million and another 25 with more than 500,000 inhabitants. These sizable consumer markets offer considerable potential for ambitious e-commerce concerns looking to expand beyond the two major metro areas.

Factors hindering growth Logistics and deliveries remain bottlenecks for e-commerce. Major online retailers can overcome this by building their own infrastructures; both Ozon and KupiVIP have invested in their own delivery services. For smaller players with limited funding reserves, however, this will greatly hamper future business development. Lack of effective payment methods is another important factor holding back e-commerce growth in the country. Eighty percent of online transactions in Russia are still paid for in cash; debit and credit card penetration remains low, and card use must be authorized before purchase. It will still be several years before Russian consumers are able to make online purchases with a couple of clicks.

International interest Rising Internet penetration and heightened consumer awareness of international online trading companies have led to increasing cross-border sales among Russian consumers in recent years. eBay rolled out its Russian-language website in February 2010 and, by July 2012, had opened operating offices in Russia, reflecting the significance of the market. As with other players, however, eBay faces difficulties in the form of customs fees and postal delays across Russia. How effectively the latter can be overcome could well be a major catalyst for consumer loyalty and company growth. Problems with delivery infrastructure and payment methods are not likely to disappear in the medium term, though enhancements in these areas are coming from the top performers; Ozon and KupiVIP have both introduced electronic payment methods. Furthermore, international players like eBay may be paving the way for increased competition among local companies. This could spur them to greater investment in their operations to stay ahead of their rivals and hasten the process of improving overall market efficiency. Although overall growth in the medium term is unlikely to be as high as in the past few years, Planet Retail still predicts that five-year compound annual growth for the top 10 Russian Internet retailers will be around 35 percent, meaning that Russia’s e-commerce boom will continue for the next few years at least.