Miroslav Zubachevsky, managing director KupiVIP E-Commerce Services, which operates discount e-retailer KupiVIP.ru and develops e-commerce sites for other companies, argues that Western brands can succeed selling online in Russia today. He explains why, in an exchange with Internet Retailer.
1. Why would a Western retailer or brand want to sell online in Russia?
The main reason is that Russia has the most Internet users of any country in Europe: 68.7 million, according to 2014 data from RBK Media Holding Research, a Russian market research and media firm. By 2021 that number will reach 100 million people.
There are already 30 million online shoppers in Russia today, according to October 2014 data from Data Insight, a Russian search firm. That’s more than the 27 million online shoppers in France and a little less than the 34.8 million in the United Kingdom, according to U.S. market research firm eMarketer. And there is more room for growth in Russia, where only 48% of the population now uses the Internet, versus 80% in France and 84% in the U.K.
In terms of online sales growth, Russia was third among the top 10 countries in the world in 2013, behind only China and Brazil, according to eMarketer. However, eMarketer projects slower growth in 2014 and the years ahead. Nonetheless, Russia remains a large and growing e-commerce market that is geographically more accessible to European brands than other large and fast-growing markets in Asia and Latin America.
Today, the Russian e-commerce market volume is $19 billion and the annual growth is 25%, according to a 2013 projection from U.S. investment firm Morgan Stanley. By comparison, India’s projected e-retail market is $18 billion and Brazil’s $12 billion.
One of the factors driving e-commerce growth in Russia is the growth in the country’s economy, which has created a growing middle class. What’s more, outside of Moscow and Saint Petersburg, bricks-and-mortar retailers cannot provide the selection consumers want, particularly when it comes to trendy apparel and the latest electronic gadgets.
2. What are the big obstacles Western retailers and brands should be aware of?
In each country online retailers face specific obstacles, and that’s true in Russia as well. One feature that Western retailers must recognize is that the Russian customer is used to paying in cash. Up to 95% of online buyers of clothes, shoes and accessories prefer to pay in cash on delivery—and after trying on what they’ve purchased from a web merchant, according to data from our clients.
While 90% of Russian have bank accounts, and those accounts typically include debit cards that are used in stores, Russian have been slow to move to online financial services. Only 5% use online banking, and even in the two largest cities Saint Petersburg and Moscow, it’s only 9.5%. This conservative pattern of behavior includes most consumers paying cash when buying online or through other remote methods.
What this means is that any Western company selling online in Russia must develop a reliable system for collecting cash and auditing the courier services making deliveries. It’s not unusual for a retailer in Moscow to wait 5 or 6 weeks to get paid for an order delivered to Vladivostok. To minimize the time it takes to receive payment, any company selling online in Russia must create an efficient system for delivering outside of Saint Petersburg and Moscow.
Western companies also must take into account the fact that the Russian customs service is unpredictable. Cargo may clear customs in 5 days or take 2 months. From the very moment of its creation in the beginning of the 1990s, Russian customs has never made fast and cheap service is the top priority.
To address this reality, foreign companies will need to engage a Russian service that specializes in expediting goods through customs. There are a handful of top players providing this service.
Another problem that affected Russian as well as foreign retailers in 2014 was the unpredictable changes in the exchange rate of the ruble against the U.S. dollar and euro. The Russian economy will be more dependent than ever on political decisions in 2015-2016. But it is difficult make any prognosis at this time about how the currency situation will play out.
Despite these obstacles, it’s worth noting that 39 foreign brands launched online retail shops in Russia in 2014, an increase from 33 in 2013, according to CBRE Group, a global commercial real estate research firm.
3. What are some of the biggest mistakes you have seen from Western retailers or brands that have tried to sell online Russia?
There are two types of mistakes: strategic mistakes a company may make in any new market, and mistakes related to the specific situation in Russia.
One strategic mistake has been to delay entry in Russia, which can allow other brands to establish a foothold. One example of a European company that moved aggressively into Russia is the footwear brand Adidas. Adidas announced last fall record profit in Russia in 2014, which will exceed 1 billion euros. There is no doubt that the brand’s own Internet store made a significant contribution to that success.
Another common strategic mistake Western brands has made is to sell through big retailers that sell many other brands. While this approach can quickly increase gross sales, Western retailers often overlook one extremely important detail: only its own Internet shop allows a brand to create high awareness among customers. 48% of Russians say that they prefer shopping directly in a brand’s shop. To succeed, any official brand Internet shop needs a broad and exclusive assortment, an efficient loyalty program, unique packaging, attractive sales campaigns and advanced mobile applications.
The main “national” mistakes of the new Western players in Russia include:
A. Prepayment as the only type of purchasing
I’ve already mentioned above about this common mistake connected with the lack of understanding of Russian habits. The main point is: Offer the option of cash on delivery in your Internet shop.
In 2013 35% of Russian online said they would refuse to purchase in an Internet store if the retailer insisted on prepayment.
Real-life story: In 2012 KupiVIP E-Commerce Services brand portfolio included one of the biggest fashion players in Russia. The brand had accepted cash on delivery, but changed to requiring prepayment in its online store. The result: Web sales decreased by 80%.
B. Insufficient investment in attracting online shoppers and building attractive web sites
A successful online store most offer an up-to-date and user-friendly interface, attractive graphics, pleasant call-center operators, and it must deliver goods when promised. 41% of Russian customers say they will go to another retailer if the merchandise cannot be delivered quickly, compared with 26% in Germany, according to September 2014 research from Oracle Corp.
C. Lack of synchronization of prices and marketing campaigns between online and offline shops
A consumer who buys a shirt online will be upset if he walks by that brand’s offline shop the next day and finds it is offering a deal like buy one, get one free. Consistency in price will increase consumer confidence in a brand.
4. How is the current political tension between Russia and the West impacting e-commerce? Are Western brands more reluctant to enter Russia? Are Russian consumers less interested in buying from Western brands?
The situation has not changed the everyday activities of the Russian e-commerce market. The current situation between Russia and the West is more emotional than rational or informational, in my opinion.
Russian consumers continue to buy from foreign online shops. In fact, they buy more. When a Russian consumer buys at a foreign online shop the average ticket is $66, compared to $42 at a Russian e-commerce site, according to Data Insight.
What’s more, Russians spent $1.4 billion at foreign e-commerce sites in 2013, double what they spent in 2012, according to another research firm, Enter Vision, a research arm of Moscow-based retailer Enter.
We don’t have 2014 data yet, but it’s absolutely clear that this segment will only increase in the next 2 to 3 years. The political situation has slowed down the development of the e-commerce market. Nevertheless, as I have written earlier, 39 online shops of international network retailers were opened in 2014, against 33 opened shops in 2013.
5. How do you think the economic and political situation will impact the Russian e-retail landscape and the opportunities for Western companies over the next few years?
The hysterics about the political situation will pass, I believe, and by the second half of 2015 the Russian retail market will become stable. That would allow Russians to spend more, including at Western Internet shops.
There are other developments to watch, including the value of the ruble and the possibility that customs fees may increase. The government has discussed such increases over the last two years, although for the moment all is quiet on that front.
If these political questions can be resolved, sales by foreign brands in Russia would only increase.
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