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22 I Companies & Markets bne October 2021
And the business has received large injections of cash as the top e-commerce plays start to IPO to raise fresh investment capital. The biggest so far was Ozon that IPO’d in December and from the original $500mn it was asking for ended up raising $1.2bn, despite the fact the company was not making a profit. However, with its gross merchandise volume (GMV) growing by 140% in the 4Q20 to RUB74bn ($1bn) the game at the moment is capture market share and the profits will come later.
The other e-commerce ventures are also well funded and like the expansion of the supermarket chains in the 1990s, the race is on to stake out as much territory in the retail market as possible before the e-commerce offerings become saturated and the consolidation of the sector begins.
“The growth in e-commerce is early-stage for sure, as the penetration of e-commerce in all Russian retail in the first half of 2021 grew to 9%, which is still low even after the pandemic has sped this up a great deal (from just 6% in 2019). The share of e-commerce in Russian retail, however, speaks only to its enormous potential; to make it a reality, a lot of investment is still needed,” says Burmistrov.
Russia is characterised by very uneven penetration of online shopping between regions, Burmistrov adds: while the penetration of e-commerce is most likely about 15% in Moscow, it’s in the single digits in many other regions of the country, according to INFOLine’s numbers, the go-to consultant for e-commerce statistics.
“The leading players are going to be able to unlock the potential of Russia’s regions, with online penetration in sales of non-food products reaching 27.3% by 2025, according to our estimates,” says Burmistrov.
But there is a lot of work to do. Russia’s sheer size is the main challenge: how to get the goods to the customers quickly and cheaply; but Russia’s sheer size is also one of the factors driving the fast growth, as e-commerce solutions are far cheaper and easier than going to the expense of building traditional bricks and mortar store networks across 11 time zones in 85 regions.
“The key challenge is distance and underdeveloped infrastructure – both in terms of the warehouses where goods are stored and in the last mile, where customers receive their orders. All of this affects the speed and cost of delivery, as well as convenience for the customer,” says Burmistrov.
In the last two to three years, the biggest players – Ozon and Wildberries – have invested a lot in these areas; they have already opened large logistics hubs in key regions, with Ozon coming to Khabarovsk in Russia’s Far East most recently. Yandex.Market, another of the big players in the e-commerce business, is following them, but most expansion for them is planned for later periods.
“Russia is, of course, very different from many Western countries, where, for example, infrastructure is much more uniform
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regardless of the size of their cities. As a clear recent example, imagine the village of Gorny Altai, which is home to 3,000 people. Only Russian Post, Wildberries and Ozon deliver parcels there. At the same time, the choice of items in offline stores there is extremely limited, because of the complex logistics involved in operating there, so online shopping has great potential to become a key channel for buying a whole range of non-food product categories in that area,” says Burmistrov.
In the 1990s and the start of the race to become Russia’s leading supermarket chain there were over a dozen players that spent the next two years slugging it out. But the winners eventually established themselves and as bne IntelliNews has reported already, a few years ago the emphasis changed from rolling out more stories and growing revenue to consolidating the networks and focusing on improving profitability.
Things in e-commerce are going much more quickly as the biggest players already dominate the business, while the leading supermarket chains – Magnit and X5 Retail Group – are also rapidly building up their online offering, although they are focused more specifically on e-groceries, which is the fastest growing of all the sub-categories.
“The market share of the top three players – Wildberries, Ozon and AliExpress – is now around 35%, compared with the top three players accounting for more than 80% of the market in India and more than 75% in China,” says Burmistrov. “This is Russia’s major difference – there is not one clear leader, the market is at the very early stage of development and it is very fragmented. For now, the biggest players are contributing to digital adoption and pushing online penetration upwards, so competition is yet to become more and more pronounced in the coming years.”
Ozon and Wildberries are the largest players of the Russian e-commerce market. Wildberries is larger in terms of turnover, while Ozon is growing much faster. AliExpress, which for
a long time was seen as only representing cross-border
trade, is now taking steps to develop its local business as well, although its pace of growth is much slower than Ozon’s, says Burmistrov.
The e-commerce division of Russia’s listed Yandex internet powerhouse, Yandex.Market, is showing fast growth, but still from a low base, and its warehouse capacity and last- mile brand network are still a long way behind other major e-commerce players. In addition, the e-commerce division of Russia’s retail bank behemoth Sber has recently rolled out an e-commerce player, part of the Sber ecosystem called SberMegaMarket; it has ambitious plans, and although it is only taking its first steps, it’s probably worth watching this space, Burmistrov believes.
“By 2025, the e-commerce market will grow on average by 25% per year; and sales of food products by 68%, i.e., a growth rate that is more than 2.5x higher than now. The share of food in the e-commerce market is now only about