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transformation strategy while the others are trying to catch up.”
The noughties saw the end of the Yeltsin-era chaos and wages grew 10% a year for a decade, creating a middle class that went out to get all the gizmos and widgets that are the hallmark of a capitalist society. As the leading player on the consumer electronics and white goods market, the combined M.Video and Eldorado retailer firm has boomed.
The company was hurt by the coronacrisis in 2020 but Izosimov says sales bounced back fast in the early part of 2020 and have been rising strongly in the first quarter of this year too. There was a one-off boost last March when the oil prices collapsed, and Russians resorted to one of their classic wealth protection ruses: buy a nice washing machine to lock up savings
in an easy-to-sell asset. Russians have been doing this since 1991, and it led to a spike in sales at M.Video-Eldorado stores that month.
Another reason for the uptick in sales, says Izosimov, is that not only were Russians happy to sink some of their savings into devaluation-proof washing machines, but Russians also took some of the money they normally spend
on foreign travel and invested it into upgrading home entertainment systems and new phones due to the long periods stuck at home under the quarantine restrictions.
But the pandemic has catalysed and accelerated a major change that Russian retail was already going through. Russia’s e-commerce is booming and that has fundamentally altered the nature of the game. Being the biggest bricks and mortar retailer in your category group does not make you
as unassailable as it used to.
Traditional bricks and mortar outlets have suddenly found themselves in direct competition with several big tech companies that are all trying to become the Russian answer to Amazon and are growing at between five and twenty times faster than the rest of
the economy.
“There are now five well capitalised pure online players, and they have good technological base. The way it could go for all Russian e-commerce is that the winner is the lion and takes most of the business. The number two gets some of the meat as well and players 3-5 probably will not make any money ever,” said Izosimov. “This is now
a high stakes game. You cannot do things halfway.”
Doubling GMV in five years
At a capital markets day in February M.Video-Eldorado set the guidance to double its gross merchandise volume (GMV) in five years, from RUB0.5 trillion ($6.92bn) in 2020 to RUB1 trillion by 2025.
“If we play our cards right we can double the business in five years, earn a good return with a decent margin,” said Izosimov. “We are already working on expanding or deploying a number of technology solutions and choosing which categories to stay in.”
The race is on and it's already clear
that not everyone will survive it. Russia has already been through this in the
90s and 00s, when the game was to open as many stores as possible as fast as possible to capture as much market share as you could. That race came to an end a few years ago, but now a new race has started: to bring in as many users into your app or ecosystem as possible as fast as possible and again capture as much market share as you can.
The new e-commerce rivals have powerful technological systems and millions of registered users, but what they don't have is M.Video-Eldorado’s store network that spans the country. It may be old school, but it’s also the company’s secret weapon.
“The in-store experience remains a
key part of the selling process,” said Izosimov. “And we also use stores as fulfilment centres. Russia is so huge that logistics and distribution are big problems for any retailer. Delivering in Moscow or St Petersburg is easy, but not in a country with 11 times zones with relatively underdeveloped logistics.”
M.Video-Eldorado has about half of its stock in its stores scattered across more than 100 cities and towns, and it often has several stores in a single city which can also deliver stock missing in one to another.
“We believe that our store network gives us a couple of years head start in which time we can develop our system,” said Izosimov. “For the marketplace the logistic costs could be about 15% of the average check. For us they are about 3%... The new competitors will grow, but we can limit their growth. No one is going to become an Amazon here with a 60% market share.”
Izosimov said that M.Video-Eldorado currently has a 26.5% market share, whereas the marketplace e-vendors have about a 5% market share but they are growing very fast and are aggressive.
“At the moment in Russian consumer electronics, sales are about 60% bricks and mortar, 40% online. In five years, that will flip to 40% bricks and mortar and 60% online,” said Izosimov. “The question is: who will own what share?”
Izosimov said it is inevitable that the e-commerce rivals will continue to increase their market share and says they will probably double it to 10% or 12% in the next five years. But M.Video- Eldorado’s strategy is to maintain its leading position thanks to its mobile platform development, store network and its grip on the premium product categories with high service levels, where pure online players will struggle to compete. “They will grow. But they are likely to retain a relatively small part of the Consumer Electronics market,” said Izosimov.
OneRetail and the customer journey
Selling consumer electronics is a little more complicated than selling groceries or plane tickets, which have become retail commodities: the only decision to be made is whether you want a loaf of bread or a weekend in Tbilisi. Once that decision has been made there
is nothing else to think about except ordering online.
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