Part II of our E-commerce Challenges in the BRIC series brings us to Russia, a market with significant growth opportunities which are impacted by customer’s traditional retail perceptions and infrastructure woes.
With a share of only 1.9% held by online sales in total retail sales, it would appear that Russian e-commerce market is almost irrelevant. However, the strong growth dynamics promising an average annual growth rate of 35% and a market size of US$36 billion by 2015, give a good context of the scale of opportunities. International online retailers are increasingly eyeing the Russian market with a view of capturing the growing e-commerce consumer base; however, some of the global giants, such as eBay or Amazon, still lag behind strong local competitors, such as Ozon.ru.
Opportunities are many, considering that already in 2011, Russia overtook Germany to become the market with the highest number of internet users, as well as the fact that it is Russia that prides the highest per capita income amongst all BRIC countries (with per capita income at PPP of US$17,700, compared with Brazil’s US$12,200, India’s US$3,900, and China’s US$9,100). However, as many e-commerce entities operating in this market have already discovered, Russian market is challenged by its own set of issues that hold back the market to expand even faster.
Inadequate infrastructure – similar to many other developing countries with vast territories, Russia has by far insufficient and inadequate infrastructure, a fact that negatively affects delivery times, safety of cargo, and generally prevents the e-commerce market from developing to its full potential. Russia’s major transportation method is railway and road. With insufficient and outdated rail infrastructure, as well as bad or non-existent road network, paired with long distances required to cover in this large country, deliveries outside metropolises such as Moscow or Saint Petersburg often take a week to reach the online shopper. Also, on the online retailer side, delivering orders to customers across this huge country, particularly without a reliable national post system, generates significant costs and considerable time issues. Several larger players that have sufficient financial resources at hand need to invest in building own delivery networks and infrastructure wherever possible, as such services are not commonly available due to lack of specialized, reliable third party providers. This is, however, often impossible for smaller players or newcomers to the market, as it requires substantial investment.
Try-it shopping attitude – Russian shoppers often like to treat online shopping as ‘try-at-home’ service. They order many products, try them out at home, with the assumption that they might keep just few or even none of them. This requires online retailers to be rather flexible with product return options, and create process that allow for quick and efficient dealing with rejected products and cash refunds. This shopping attitude also results in retailers having relatively high inventory level, as well as devoting considerable time and resources to deal with orders that will eventually not generate revenue for them, as it is estimated that one in four deliveries of online purchases in Russia is refused and returned by the customer. Further, the infrastructure problems and lack of reliable public postal system clash with the try-it shopping attitude, as it makes it difficult for online customers to return purchased products, making them hesitant to shop online.
Cash payment shopping culture – credit and debit cards are not widely used by Russian shoppers, on the back of distrust towards safety of advance online payments and honesty of online retailers, as well as requirement for special card authorization before a purchase (online payment cannot be completed within a few clicks). This has led to high dominance of cash-on-delivery payment, which currently accounts for about 80% of online sales of products such as clothes, shoes, and electronics. Online retailers must cater to this demand, which requires them to finance product delivery while receiving payment later, leading to problems with cash flow and returns/rejects. Further, online retailers often incur additional costs of employing own team of cash couriers. While the use of debit and credit cards will increase, the process will be rather slow and long, as apart from developing reliable and safe online payment systems, a considerable cultural change to cash-oriented mindset in customers must occur.
Strong local competition – this is a challenge for newcomers to the Russian e-commerce market, especially foreign players. While it is still in early stages of development, there are several strong and successful local players (e.g. Ozon.ru, KupiVIP, Lamoda, Utkonos, Svyaznoy, X5, Wildberries.ru), who know how to navigate through nuances of online retail in the country, and enjoy strong, often loyal customer base. Ozon.ro is the unquestionable market leader, with grounded position, large customer base, own logistics arm, and wide offering, resulting in its extremely good performance (revenue hike of 91% in H1 2012 to US$232 million, expected to reach US$1 billion in 2014). Local competitive landscape is also infused with a number of smaller retailers that focus on narrower product categories, providing broad offering with a given category, e.g. consumer electronics provider Citilink or car spare parts store Exist.ru.
Consumer nationalist inclinations demanding localization – while many Russians appreciate foreign trends, there is a strong sense of nationalism that makes Russian shoppers less accepting and more likely to reject foreign influences and brands, if they do not localize their offering and do not provide fully Russian-language experience. This might pose a challenge for foreign e-commerce entities, expecting to transplant their business and operating models directly to the Russian market.
Russia’s e-commerce market is heavily influenced by customer mindsets and attitudes, which are still based on traditional shopping experiences, thus acting as hindrance to the pace of online retail growth. Inadequate and inefficient infrastructure has also played its part in creating challenges that result in cost and operational losses to existing players, and scares new entrants from investing in this space.
E-commerce in Brazil – Marred By Political and Social Influences – read the first part of our E-commerce Challenges in the BRIC series.