AND
PRESENT
NOVEMBER 2012
KEY INSIGHTS I N
P A R T N E R S H I P
The E-Commerce Program of the Volga Region University of Telecommunications and Informatics
W I T H
About this study These are excerpts from a comprehensive research study conducted by East-West Digital News, the international resource on Russian digital industries with the participation of CDEK. The research is based on interviews with over 80 industry executives as well as on the expertise of leading Russian universities. To receive an executive summary at no charge or order the full version (10 chapters, 316 pages), please email us at report@ewdn.com.
About the publisher
East-West Digital News is the first international information company dedicated to Russian digital industries. Its website EWDN.COM provides news, market data, business analysis and updates pertaining to the Internet, e-commerce, mobile and telecom industries, digital TV and satellite systems, software and hardware innovation, as well as to the related investment activity and legal developments. For more information, please contact us at contact@ewdn.com
Foreword
Sergey Egorov
Although the growth of the Russian e-commerce market is still being slowed down by a range of obstacles, at least one of them is being lifted progressively. Logistics were a serious bottleneck not so long ago, especially in the area of delivering goods to regions of the country outside of the major cities. Package deliveries were mainly being handled by the Russian Post, while the services of courier companies remained prohibitively expensive, leaving no space for competition. Now, many courier and logistics companies have stepped up in their ability to compete by decreasing the prices and reducing the time required for express deliveries to these areas and by developing enhanced service offers for both online merchants and shoppers. Today, the merchant's ability to manage the full operation cycle – from online order completion to parcel delivery to cash payment management – has become no less important than delivery time and cost. As the Russian e-commerce market developed over the years, CDEK has grown into a major player on the logistics and delivery market, deploying across the Russian territory and developing its capacity to provide state-of-the-art service. We have opened more than 100 representative offices throughout Russia. We have developed our own IT program, which can be integrated to our clients' IT platforms and which has allowed us to automate business processes. Today. while we provide e-merchants with a full range of courier and logistics services, our delivery costs are competitive compared to those of the Russian Post. We are glad to participate in this large-scale study of the Russian e-commerce market. Foreign industry players should know that logistics and delivery challenges throughout this huge country still do exist, but there are also experienced companies ready to tackle and overcome the challenges.
Sergey Egorov is Commercial Director at CDEK.
Chief Editor’s note
Adrien Henni
We are pleased to offer key insights of a year-long research project on the Russian online retail market, one of the fastest growing but least known (and understood) on the planet. The report provides international audiences with the first reliable and precise data on this market, plus middle and long term forecasts and trends. Beyond capital-centric analysis, the full version also explores the regional e-commerce scene – now nearing the tipping point in a market thus far dominated by Moscow and St. Petersburg. Yet our research is, above all, a practical guide. A large part of it is dedicated to analysis of and recommendations for each of the key issues defining the industry – from marketing to payments, from fulfillment to legal requirements and on to little known HR challenges. Last but not least, entrepreneurs and investors will enjoy a review by Fast Lane Ventures of the e-commerce-related investment deals that have taken place in Russia over the last two years, with an analysis of the financial issues pertaining to Russian e-commerce and the exit perspectives in the industry. We hope you enjoy this groundbreaking collaborative effort and wish you every success in your e-commerce projects.
Adrien Henni is co-founder and Chief Editor of East-West Digital News
18
Russian E-commerce 2011
THE NUMBERS
million Russians
shopped online in a 6-month period, or 14% of the population 18+
Sources: Data Insight and East-West Digital News unless stated otherwise
(or 7 million monthly)
Total market size:
of which
$10.5bn (310bn rub.)
was spent on
$7.8bn (230bn rub.)
physical goods…
…while cross–border sales reached or exceeded $1bn an additional
Online retail accounted for less than
2%
of the total Russian retail market…
…but grew by at least
89
million
+25%
orders
in one year
of which
of physical goods were made during the year (or 245,000 per day)
45
million
(or 125,000 per day)
came from the regions Insales counted
25,000 Internet shops
of which only
up from 16,000 in 2010 or just 268 that same year, according to the Russian official statistics
10
made $100m or more in sales (physical goods only)
while the revenues of the
30 top players totaled less than
$3bn
or 1/3 of the total market size (physical goods only)
Russian
E-commerce
THE TRENDS
1
The market is growing by at least 25% each year; some major online retailers are even seeing their sales double or triple.
2
The regions still lag behind the capitals, but pioneering retailers now generate more than half of their sales from the regions
3
Major offline retailers are now coming to e-commerce while online-offline concepts multiply.
4
Investment activity is growing fast, but exits are still exceptions and are likely to remain so at least in the short term.
5
Logistics and delivery are still bottlenecks for e-commerce in the regions; major retailers overcome this by building their own capacities.
6
Cash-on-delivery is the rule for physical goods and will remain so for a long time, but merchants find ways to cope with the related issues.
7
The lack of qualified human resources appears to be one of the most painful issues, hampering the entire Internet industry.
8
Cross-border sales have grown considerably over the last few years, but foreign e-merchants still have to pull down two major walls: customs clearance and delivery across Russia.
Russian E-commerce 2011
INTERNATIONAL
COMPARISONS
In 2011, the sales volume of online retail in Russia was similar to that in Italy, Spain or Brazil, while significantly behind the USA and the EU. The share of online retail in total retail amounted to less than 2%, compared to between 7% and 9% in the USA and most West European countries. In the UK, the share has gone beyond 10%. The low penetration of e-commerce in Russia (where in 2011 only around 15% of adult population shopped online) is, however, linked not so much to lack of interest in online retail, but rather with a relatively low Internet penetration. Relevance of Internet retail in Russia is fairly high, as 40% of Internet users shopped online in 2010, which was ahead of Italy, Greece, and new EU members from Central Europe and the Baltics. The share of online shoppers in total Internet users in Spain that year was comparable to that in Russia, while being 1.5-2 times higher in the most developed countries (65-85%).
The fact that Russia ranks fairly high among European countries in share of online shoppers in total Internet users, does not provide evidence of exhausted growth potential. The mid-term potential of Russia’s online shopper base to expand could be higher than that of European countries. This optimistic outlook is based on the fact that many characteristics of Internet use in Russia, such as Internet behavior, is less like other European countries and more like what is seen in Asian and Latin American markets, where the Internet audience is significantly more involved in e-commerce than in Europe. In Europe, only the UK has a share of online shoppers as a percentage of total Internet users that has surpassed the 80% level, whereas the level is well above 80% in such other developed markets as the USA and Japan, and developing ones, such as Brazil and China.
Russian
E-commerce
Source: Data Insight
FORECASTS
We anticipate an at least 2.5-fold market growth between 2010 and 2015. The total ecommerce market could amount to somewhere between 690 bn rubles ($23 bn) and 900 bn rubles ($30 bn) in 2015, at 2010 values. This corresponds to up to 5% of total retail volume in Russia. For reference, the same level of ecommerce existed in the USA in 2008, i.e. Russia is behind approximately 10 years, by this measure. The fastest growth rate, 3.6-fold or more, is expected to be found in the regions, with a considerable flow of new Internet users from there. They will account for the majority of the growth of the e-commerce market – for 87% in terms of number of new online shoppers and for 59% in terms of market value growth between 2010 and 2015.
In a long term perspective, according to moderate forecasts, the market size of Russian e-commerce could reach $50 bn by 2020. In no case should this figure, which represents around 6% of Russia's total retail market, be regarded as a maximum. Further strong growth will be fueled mainly by such structural factors as: • Fulfilment infrastructure reaching maturity: With reduced delivery costs, the scope of e- commerce will extend to cheaper product categories; • E-signature and online payments becoming more popular, with mass demand for non-material products such as insurance and tour package offers. Russian e-commerce could thus represent a market of up to $150 bn within 15 to 20 years.
F U L F I L M E N T E X P E R T ’ S RECOMMENDATION When talking about e-commerce fulfillment, you are not only talking about the typical warehouse processes, such as inbound logistics (goods acceptance with quality and quantity checks), goods storage, and outbound logistics (preparing the goods for delivery). Additional services are also required: • IT integration between the shopping system of the e-commerce site and the warehouse is crucial. This is the main cornerstone when choosing a proper warehouse and fulfillment provider. An ecommerce company needs to make sure that the data exchange regarding incoming orders and the information about their available stock in the warehouse runs smoothly and is scalable. Scalability is very important for all process steps within an e-commerce company, as quantities will ideally increase more than in proportion. • Cross docking is another element of a modern warehousing and fulfillment provider. Cross docking describes the necessity of unpacking the received goods and repacking them to new order units after obtaining the order information from the e-commerce company about the exact composition of the order. Another type of such service, named trans-shipping, provides that you can accept and store the goods without touching their packaging and then send them out exactly as they arrived at the warehouse after a specific time. • Handling of returns also plays a significant role for most e-commerce providers selling goods. A state-of-the-art warehouse and fulfillment provider should also have experience in handling returns. For fashion ecommerce companies, where returns can easily make up 40% of gross sales, a professional treatment of the returned items is vital. The warehouses should have separated zones for returns receipt, checking, and defect identification, if any. Because returns
From IT integration to parcel packaging: A complex range of additional services By Vardan Gasparyan of PwC in Russia processing takes much more time than conventional receiving, it’s best for the warehouse operator to separate these activities within the warehouse, to avoid compromising throughput. So when receiving the returns the provider needs to check not only the quality and quantity of the returned order, but also needs to unpack the items, restore them if possible, and again show them as available for purchase on the e-commerce company’s website. Of course, this is only possible when the IT integration is properly set up. The presence of specific programming for returns management are vital in the IT software managing of your ecommerce business, starting from ERP to WMS to CRM systems. For example, a WMS system should differentiate “normal” receipts of goods from returned receipts from nondelivered returns, since the further processes with these three types of goods at the warehouse are going to be different. Similarly, shipping of the returned goods is very different from “conventional” goods, because your WMS system would have to keep all the details of the shipped “return” order long after it is shipped (because it will return to your warehouse again) – something that is not present in most of the “standard” WMS functionalities. Parcel order sorting and packaging is the major internal process taking place in the warehouse, besides from goods acceptance and storing. Depending from the volumes handled, state-ofthe-art fulfillment centers, like those of Ozon, the Otto Group, or Bertelsmann, utilize automated sorting machines, which automatically sort single items into one order, then sort them by their final geographical destination. Of course, the process is not fully automated: prior to automatically sorting items for a multi-item order, the single order items need to be picked, and even at the most automated fulfillment centers in Russia, this job is done completely manually by warehouse employees going with some containers to the respective shelves in the warehouse and picking the item.
TOP RUSSIAN
E-COMMERCE PROPERTIES O N L I N E
S A L E S
An exclusive ranking by East-West Digital News and Data Insight
2 0 1 1
PHYSICAL GOODS
SERVICES & VIRTUAL GOODS
Methodological Note In the absence of officially disclosed figures for most players, establishing a ranking of the top Russian online retailers is a daunting exercise. Several rankings do exist, based on a variety of online measurements, information from industry sources and/ or other unspecified methodology; none of these can be considered completely reliable. For certain sites, 2011 sales estimates may vary up to eight-fold between two rankings. In particular, the turnover of Citylink.ru, a major site offering consumer electronics, was estimated at $310 million by Online Retailer – a far cry from Insales' more modest estimate of $37 million. An internal source assured us that Online Retailer's figure was close to reality, but Data Insight's experts remained skeptical. Due to these uncertainties, and in the absence of an official answer from the site, Citylink.ru has not been included – perhaps unfairly – in our ranking. While KupiVip.ru's turnover "varies" from $77 milllion, according to Insales, to $193 million, according to Online Retailer, a well informed source told us that the site's gross merchandise value was actually close to $160 million. It is very likely that Amazon and eBay should be included in our ranking, based on the assumption that crossborder sales may have exceeded $1 billion in 2011, and that these two sites account for a significant part of this volume. However, neither site agreed to disclose data on their sales to Russia.
Vseinstrumenti.ru, a site offering tools and appliances for the home and garden, had remained under the radars until recently. Its importance on the Russian e-commerce scene is revealed for the first time in this ranking.
* Our methodology for estimating turnovers has been the following: • We systematically requested figures and sometimes obtained them, either officially or unofficially; • For some other sites, we received information from reliable insiders or industry sources; • In still other cases, we relied on the expertise of Data Insight, whose analysts are among the best on the market; • In the absence of official or unofficial figures, reliable sources or an estimate from Data Insight, we averaged the figures from existing rankings – or did not include the site in the ranking when the latter seemed unreliable. In the absence of official figures, we felt we reached a high degree of certainty whenever at least two reliable industry sources, or experts, converged in their estimates; or when the three main existing rankings offered similar figures. In other cases, the figures should not be considered more than approximations, with a much lower degree of certainty.
About the full version
10 CHAPTERS
316 PAGES
12 CASE STUDIES & INTERVIEWS 9 8
I L L U S T R A T I O N S
Contents of the full version
10 CHAPTERS
316 PAGES
12 CASE STUDIES & INTERVIEWS 9 8
I L L U S T R A T I O N S
Forewords By Ozon CEO Maëlle Gavet, Acrobator founder Bas Godska, and David Waroquier of Mangrove Capital Partners
Key figures and trends Top 40 Russian e-commerce properties Part 1. Main market trends Part 2. Demand side: Online consumers Part 3. Supply side: Merchants Part 4. Fulfillment Part 5. The "Russian payment jungle" Part 6. Marketing and sales channels Part 7. Legal aspects Part 8. HR: The most painful issue? Part 9. E-commerce in the Samara region: A monograph Part 10. Serving Russian customers from abroad: From cross-border sales to market entry Twelve case studies and interviews eBay – KupiVip.ru – The Otto Group – Ozon.ru – Sapato.ru – Shoesofprey.ru – Svyaznoy.ru – Travelmenu.ru – Utinet.ru – Vseinstrumenti.ru – VTB Capital – Daily deal sites
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