edays russia 2015 eventbook

O R G A N I Z E R S

P R E M I U M P A R T N E R S

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL

MOSCOW – JUNE 4-5, 2015

E V E N T B O O K

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Partners

CERBA

NATIONAL ASSOCIATION OF MAIL ORDERING & DISTANCE SELLING

ELECTRONIC MONEY ASSOCIATION

ORGANIZERS

ASSOCIATED PARTNERS

INTELLECTUAL PARTNERS

INFORMATION PARTNERS

Innovation News

A S S O C I A T I O N O F I N T E R N E T RETAIL COMPANIES

PARTNERS

PARTNERS OF THE EDAYS INNOVATION SHOW

OFFICIAL TRANSPORT PARTNER

Sponsors

PREMIUM PARTNERS

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL

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Contents

Forewords 5

Program 12

Speakers 18

Key facts and figures of Russian e-commerce 24

Market overview 28

Interviews and analysis 43

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FOREWORDS

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Contacts:

Thierry Cellerin Founder and General Manager, Buzzfactory

What does “innovation” really mean in 2015? You probably noticed the buzz around this word and the countless conferences that use it. However, when we decided that the 2015 edition of the Edays conference should cover the innovative dimension of online retail, our intention was to not to jump on a trend but to analyze thoroughly the matter in its various dimensions. The traditional business models we have known for decades or centuries have changed drastically over the past 10 years. And this is just the beginning. Startups like Uber, Airbnb, or Teads, are completely altering the way we see and understand business. The rise of these startups, the falling costs of accessing technology, the development of the sharing economy and the creativity of the digital native generation can reshape virtually any business model in any possible industry. For businesses, innovation is no more just a matter of competitiveness – it is now the only way to survive. Creating better products is just not enough, every company must understand that if they can not adapt to the new business rules, and if they do not transform their activities fast enough, they are doomed (Kodak anyone?). While speaking of a “digital transition,” nobody knows where this transition is leading us. Even for digital professionals, it is hard to anticipate what the future will be like in some three or five years. In such circumstances, isn’t wise to observe and listen to the market through the experience and insights of the greatest industry players and experts? This is what you will be able to do at this conference. Enjoy!

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THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL FOREWORDS

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Pavel Chinsky

Managing Director, Franco-Russian Chamber of Commerce and Industry (CCI France Russie)

Dear friends, One year ago, the Franco-Russian Chamber of commerce of industry (CCI France Russie) and a group of passionate IT analysts and entrepreneurs joined forces to organize the very first international event entirely dedicated to e-commerce in Russia: the e-Days e-Commerce international conference. The project came out of a simple observation: in a few years, Russia has become the leading European country in terms of Internet users, and numbers are still growing, as new and more effective technologies enter the market and reach distant regions. This major shift has brought about a complete revolution in the way goods are sold and bought on the largest territory on the planet. Despite a year of economic turbulences, online retail continues to show great promises for the near future. Yet, adapting to new conditions requires knowledge and vision. The second edition of e-Days e-Commerce conference aims to provide both, through inspiring ideas and analysis put forward by experts and professionals from among the most innovative companies in the world. The first day will be entirely devoted to innovation in retail, with presentations and keynotes addressing the technological dimensions of success in Russia and abroad. The second day will focus more on Russia’s market conditions, the strategies to launch and expand business in times of crisis, with practical panels covering all aspects of online buying and selling, with the participation of top executives and experts from Russian and international firms. No doubt the second e-Days e-Commerce international conference will provide deep insights and countless opportunities! Faithfully,


Digital Russia in English

Daily news • Analysis

International consulting www.ewdn.com

East-West Digital News is the first international information and consulting company dedicated to Russian digital industries. Get in touch with us at c o n t a c t @ e w d n . c o m

Adrien Henni Chief editor, East-West Digital News

Few companies in Russia today are unaware of the important potential of the online retail market, which is expected to triple by the end of the decade — up from around $20 billion last year. Yet a surprisingly high number of brands and retailers – those domestic as well as foreign – remain absent from the e-commerce scene, or have reached just modest results so far. One of the reasons is that going online – which can imply designing complex multichannel models – may appear particularly challenging in Russia. Among the key issues are fulfilment and delivery across this immense country, as well as payments, which some puzzled foreigners perceive as a jungle. On the other side, a number of successful projects prove that these challenges can and indeed must be addressed by any player attempting to follow – or anticipate – the inevitable evolutions of retail in the world of today and tomorrow. Having followed the Russian e-commerce scene closely for several years, East-West Digital News is a proud organizer of the e-Days E-Commerce Conference. To shed full light on this market, its opportunities and its hurdles, we have brought together the industry’s most prominent players and experts. Not only will they offer reliable and precise information on this market, but beyond business analysis they will also explore the technological, financial and legal dimensions of this market. Above all, the e-Days conference will highlight operational issues – from marketing to payments, to fulfillment, delivery challenges, and cross-channel integration. Last but not least, a section of the event is specially devoted to cross-border sales – a market that increased by nearly 75% in 2014, reaching an estimated $4 billion. We are honored by the presence of speakers and attendees coming from all Europe and as far as from China to hear and meet prominent industry figures. Our special gratitude, finally, goes out to the sponsors behind this event, who provided us with the necessary means to organize it at such a high level. We hope you enjoy this day and wish you every success in your e-commerce projects. Sincerely,

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OUR SERVICES:Key areas of our research and consultancy activity – what we study:

��PayPal

��PayU / Naspers

��Svyaznoy

��Banki.ru

��Fastlane Ventures

��Prostor Capital

��IAB Russia

��SoftKey

��Media3

��Dentsu Aegis

��CityAds

Ad-hoc researches

Standard reports

Consultancy for online projects

News monitoring

We conduct deep researches on indi-vidual requests from online companies and investors. Ask us for examples or come to us with the specific task – we will think about specific solution

The list of available reports on e-commerce and other segments on online industry can be obtained via website or by phone

We provide consulting services on all stages –including strategy, marketing and technology

We create research reports and white papers as infosupport of businesses and new B2B products and services

We track news on e-commerce and interactive advertisement

Public researches

Ecosystem of b2b services for e-commerce: logistics, payments, marketing solutions

Ecosystem of digital advertisement: services, technologies, measurements

E-commerce, including online retail of material goods, e-travel, online services, m-commerce, consumer behavior

Ecosystem of startups and investments

AMONG OUR CLIENTS:DATA INSIGHT. RESEARCH & CONSULTANCY AGENCY

+7 (495) [email protected]

www.datainsight.ru

Established in 2010. Focused on Internet & e-commerce researches.

Our core competence: analysis of non-complete and heterogeneous information, search for non-standard data sources, data comparison and data combination. Any estimates and results we publish are cross-checked by multiple methods to get consistent outcomes.

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PROGRAM

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8:10 – 9:00 - ATTENDEE REGISTRATION

9:00 – Introductive remarks

By Buzzfactory founder Thierry Cellerin, CCIFR President Emmanuel Quidet, and East-West Digital News chief editor Adrien Henni.

9:15 – Visions of the Future

Ivan Mazour, a Russian-born, London-based serial entrepreneur, investor and author, will present the latest trends in the UK and US e-commerce scenes and share his vision of the future of retail marketing.

Nicolas Vedrenne, Managing Director Europe of the Merchant Risk Council, will draw a picture of the future of electronic payments and its impacts on online retail.

9:45 – The digital transition: What does it stand for? What is at stake? What is at risk?

Panel discussion with Oxymore Head of Strategy & Research Jean-Christophe Bonis, UK serial entrepreneur and author Ivan Mazour, and Sanoma Independent Media President Jean-Emmanuel de Witt.

Also participating will be Mikhail Fisher, General Manager of Uber in Saint Petersburg, who will present the way his company has changed consumers’ mentality around the concept of “sharing” versus “owning.” He will also comment on the the disruption of the traditional business models and its consequences.

10:30 – BREAK

11:00 – Mobile commerce: Latest global and Russian trends

Ozon Head of Projects Mikhail Osin will present the mobile history and strategy of his company, which now generates the majority of its revenues via mobile devices.

Igor Eremin, CEO of Russian mobile ad network iVengo Mobile, will comment on the slow development of mobile commerce in Russia and how retailers’ strategies could evolve in the future.

Serge Korneev, Clickky.biz VP Business Development, will bring our attention to the latest novelties in mobile retargeting, mobile video and mobile programmatic buying.

12:00 – The future of marketing

Participating in this panel discussion will be Thierry Cellerin (Buzzfactory), Emin Aliev (Criteo), Pierric Duthoit (Google) and Bas Godska (Acrobator).

Mr. Berchenko will unveil some of the findings of Google’s internal research on the Future of Retail. In particular, he will tell us how the US search giant envisions the interaction with the so-called”Generation C,” which is key to understand the digital marketing of tomorrow.

12:45 – THE EDAYS FLYING SURPRISE

13:00 – LUNCH

Day 1, morning (June 4) “Online & Offline Retail Technologies”

In partnership with Skolkovo’s IT cluster, La French Tech,

the Merchant Risk Council, and The Untitled investment company

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL PROGRAM

16

14:15 – The drivers of e-commerce performance: High tech and Big Data

Lado Lebanidze of Google will highlight the technological and marketing challenges of advertising buying when complex customer data is involved, and offer his vision of the latest and future trends in this field.

Andrey Sverdlov, regional manager at international analytics solution provider AT Internet, will tell us how best analytics may be used to improve e-commerce performance.

Roman Zykov of Retail Rocket, a Russian startup developing advanced personalization solutions, will show how “Big Data can be transformed into big money.”

Ksenia Yolkina of Yandex Data Factory will share her vision of the growing role of Big Data in the e-commerce industry and comment on the Russian search engine’s plans in this field.

This discussion will be moderated by Efim Aldukhov, founder of E-Commerce Solutions, who will also comment on some of the most interesting technologies currently available to Russian online retailers.

15:00 – Logistics and delivery: New approaches, new technologies

Matthieu Hallouin of Savoye, an international provider of logistics equipment, and Michael Poetschke, General Manager at Arvato Russia, will share their vision of innovation in the field of e-commerce fulfilment in Russia and in Western Europe.

Andrey Krylovich, Executive Director at Russian startup Delivia, will present a new solution allowing retailers to coordinate and optimize operations with several delivery services. Another innovation, presented by Valery Ilyukh of Logistics IT, is intended for delivery services to calculate and optimize shipping routes.

Copter Express CEO Oleg Ponfilenok will comment on the technical, commercial and legal aspects of the use of drones for e-commerce delivery in Russia.

15:45 – THE EDAYS INNOVATION SHOW

16:45 – BREAK

17:00 – The security challenges of today and tomorrow: From payment fraud to data protection

Nicolas Vedrenne, Managing Director Europe of the Merchant Risk Council, will present the key findings of MRC’s latest global research on payment security.

PwC expert Roman Chaplygin present the key findings of PWC’s Global Information Security Survey 2015 and their implications in the retail and consumer sectors.

Intelligent Emails CEO Jean-Stéphane Bagoëe will draw our attention to the theft of email databases in Russia, how e-commerce companies are affected, and how they can protect themselves.

Kaspersky Lab Senior Researcher Yury Namestnikov will comment on the most serious threats affecting online retail, and the ways to reduce them.

17:45 – Payment innovation: From payment experience to profitability

Participating in this panel discussion will be Elena Miroshnikova of LifePay, a leading Russian mobile acquiring solution provider, Polina Dobriyan, PayU Russia’s new CEO, and a representative of Tinkoff Bank, which is offering credit solutions for online purchases.

18:30-20:30 – NETWORKING COCKTAIL

Day 1, afternoon (June 4) “Online & Offline Retail Technologies”


Day 1 (June 4) at 15:45

The eDays Innovation Show

Five Russian innovations which could change your retail business

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AddReality will allow you to organize interactive communications with your customers on points of sales – with a variety of analytics and advertising instruments. www.addreality.com

The BonusMall online auction technology will make your site’s purchase experience even more attractive with its irresistible gaming features! https://bonusmall.ru

Delivia will change the way you manage your delivery service providers – and reveal considerable optimization possibilities. www.delivia.ru

The Giftoman SaaS platform will allow retailers to manage your loyalty programs, monitor customer satisfaction, and enhance employee motivation. http://partner.giftoman.ru/

Logistics IT’s solutions will allow you to optimize shipping routes and a variety of other logistics processes, reducing cost and improving service quality. http://nplab.ru/


The winner will participate in the finale of the Retail Big Challenge contest, which will take place on June 16. East-West Digital News is glad to offer a

free marketing campaign during up to 6 months via its publications and events!

★ ★

YOU are the judge!

Vote online for your

favorite innovation!

IN PARTNERSHIP WITH

18

8:10 – 9:00 - ATTENDEE REGISTRATION

9:15 – Russian e-commerce in crisis times

Fedor Virin, co-founder of Data Insight, will present the latest trends in the domestic market and offer forecasts about the future.

9:45 – Key players - Situation & strategies in the domestic e-commerce scene

This panel discussion will gather the CEOs or top executives of some of the leading Russian online retail companies, including: Vadim Fedotov of Groupon Russia, Oskar Hartmann of KupiVIP, Danny Perekalsky of Ozon Holdings, Alexandra Savina of Ulmart.ru, Martin Schierer of Otto Group Russia, and Niels Tonsen of Lamoda.ru. They will comment on their companies’ reaction to the crisis and further development plans.

10:30 – BREAK

11:00 – From offline to online, the transition accelerates

Martijn Peeters of PwC Russia will present the key offline-to-online trends in Russia with significant cases of new online projects. International comparison points will be offered by highlighting global retailers’ best practice.

Retail Rocket’s CEO Nikolay Khlebinsky will present a customer personalization case at Korablik, a Russian offline retailer.

Pavel Kashcheev, who served a variety of Russian and international offline companies as e-commerce project director or consultant, will comment on the complexities of the online to offline transitions, with cases of success and failure.

Olga Kuznetsova, Digital Solutions Manager at Saint Gobain Russia, will present her group’s current and future e-commerce projects and comment on the related distribution strategies.

11:45 – Latest online marketing trends and challenges in the Russian market

International marketing expert Bas Godska, who served leading Russian e-commerce companies during several years, will offer a presentation on the latest evolutions in the industry.

Flocktory founder Ilja Eisen will comment on the growing role of social media and personalization in the marketing strategies of Russian online retailers.

Nikolai Khlebinsky of Retail Rocket will provide his analysis on how customer data is actually used for personalization purposes by Russian retailers.

Jean-Noël Rivasseau of Kameleoon will comment on the conversion challenges of e-commerce sites.

12:30 – Russia’s new payment regulations and their business impact

Electronic payments expert Elena Orlova will offer an overview of Russia’s new regulatory environment and its business impact. Her presentation will be followed by a discussion with market players and experts.

13:00 – LUNCH

Day 2, morning (June 5) “Market trends & perspectives”

in partnership with research companies Data Insight and Esper Group,

industry associations Electronic Money and NAMO


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TRACK 1 14:15 – CROSS-BORDER SALES: Key trends; Legal and tax environment; Delivery and customs issues

Adrien Henni of East-West Digital News and Alexander Ivanov of the NAMO industry association will present the key findings of their latest research on the Russian cross-border sales market.

Darya Bobrovskaya of the German trade industry association BGA will offer specific insights on the Germany-to-Russia segment.

These expert presentations will be followed by a discussion with Charles Bellissen of VisualMeta, Artem Pereslavtsev, Commercial Director of Russian Post, and Alex Vassiliev, International Development Director at SPSR Express.

15:00 – CROSS-BORDER SALES: The new Chinese kings of Russian e-commerce

After a presentation of the key trends and figures in the China-to-Russia segment, EWDN chief editor Adrien Henni will moderate a discussion involving Alexander Ivanov of industry association NAMO, Artem Pereslavtsev of the Russian Post, and AliExpress’s Russia representative Mark Zavadskiy.

15:45 – The realities and challenges of Russian logistics and delivery

DHL Russia General Manager Tatyana Lyubimova, Arvato Russia General Manager Michael Poetschke, Hermes-DPD Deputy CEO Joseph Saary will share their views on the matter.

Also participating in the discussion will be Alexander Ivanov, President of the NAMO industry association, who will express the retailer point of view.

Day 2, afternoon (June 5) “Market trends & perspectives”


TRACK 2

14:15 – Featured segments: Fashion, Home Decor and DIY

Darya Yadernaya of Esper Group will unveil her company’s most recent research on fashion online consumers. Data Insight co-founder Fedor Virin will present his analysis of the current trends in the Home Decor and DIY segments.

15:00 – Alternative marketplaces

Less visible at first glance than AliExpress, eBay or Yandex.Market, some marketplaces nevertheless develop or even thrive on their segment or niche market. What are their strengths and weaknesses compared to the market giants? Which types of merchants and consumers do they attract

Representatives of Russia’s Price.ru, Germany’s Shopalike and China’s Osell will comment on these and other questions.

15:45 – The financing of Russian e-commerce: From venture investment to profitability – or bankruptcy?

The financial question is particularly acute as many Russian e-commerce companies of all sizes remain unprofitable, or even go bankrupt. Still, some Russian e-commerce entrepreneurs manage to raise money, as witnessed earlier this year by Bonum’s commitment to invest up to 25 million euros in Aizel.ru.

These and other matters will be discussed by Arseny Dabbakh of RMG Partners, Alexey Kaurov of AFK Sistema, Igor Karpovich of Sberbank, Konstantin Siniushin of venture fund TheUntitled, and David Waroquier of Mangrove Capital Partners.

Also participating will be Juliana Gordon, General Manager at Aizel.ru.

16:30 – BREAK 17:00 – ONE-TO-ONE MEETINGS

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SPEAKERS

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Amin Aliev General Manager Criteo Russia

Jean-Stéphane Bagoëe Founder Intelligent Emails

Efim Aldukhov Founder E-Commerce Solutions

Yuri Berchenko Industry Manager, Retail Google

Jean-Christophe Bonis Founder Oxymore

Charles Bellissen Global Head of Sales Shopalike / VisualMeta

Roman Chaplygin Director Risk Assurance & Information Security Services, PWC Russia

Polina Dobriyan General Manager PayU Russia

Arseny Dabbakh Managing Partner RMG Partners

Thierry Cellerin Founder Buzzfactory

Igor Eremin CEO iVengo Mobile

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL SPEAKERS

Martin Avetisyan General Director Russia, CIS & Baltics Farfetch

Darya Bobrovskaya External researcher German Association for International Trade (BGA)

Ilja Eisen Founder Flocktory

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Mikhail Fisher General Manager Uber Saint Petersburg

Juliana Gordon General Manager Aizel.ru

Vadim Fedotov General Manager Groupon Russia

Oskar Hartmann Founder KupiVIP

Valeryi Ilyukh Project Manager Logistics IT

Matthieu Hallouin Head of Business Development Russia & CIS, Savoye

Igor Karpovich Head of Strategic Business Development Sberbank

Alexey Kaurov Executive VP Corporate Finance AFK Sistema

Pavel Kashcheev Independent e-commerce expert

Alexander Ivanov President NAMO

Alexey Kibkalo International IT architect


Bas Godska Founder Acrobator

Adrien Henni Co-founder and Chief editor East-West Digital News

Nikolay Khlebinsky CEO Retail Rocket

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Olga Kuznetsova Digital Solutions Manager, Saint Gobain

Lado Lebanidze Principal Analytical Lead Google

Sergey Korneev VP Business Development Clickky.biz

Ivan Mazour Founder Ometria.com

Yury Namestnikov Senior Security Researcher Kaspersky Lab

Tatyana Lyubimova Managing Director DHL Russia

Mikhail Osin Head of Projects Ozon.ru

Danny Perekalsky General Manager Ozon Holdings

Martijn Peeters Partner, Strategy PWC

Elena Orlova Independent electronic payments expert

Alexey Petrovsky Chief Analyst Price.ru (Rambler & Co group)


Andrey Krylovich Executive Director Delivia

Elena Miroshnikova Director Corporate Sales LifePay

Artem Pereslavtsev Commercial Director Russian Post

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Oleg Ponfilenok General Manager Copter Express

Jozeph Saary Sales Director & Deputy CEO Hermes-DPD

Michael Poetschke General Manager Arvato Russia

Martin Schierer General Manager Otto Group Russia

Andrey Sverdlov Regional Manager AT Internet

Aleksandra Savina Chief Marketing Officer Ulmart

Alex Vassiliev International Development Director SPSR Express

Fedor Virin Co-founder Data Insight

Nicolas Vedrenne Managing Director Europe Merchant Risk Council

Niels Tonsen CEO Lamoda.ru

Jean-Emmanuel de Witt President Sanoma Independant Media


Jean-Noël Rivasseau Founder Kameleoon

Konstantin Siniushin Managing Partner The Untitled

David Waroquier Partner Mangrove Capital Partners

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Darya Yadernaya General Manager Esper Group

Mark Zavadskiy Russia representative AliExpress

Lawrence Wright Co-founder and Chairman GVA LaunchGurus

Roman Zykov Analytics Director Retail Rocket


Ksenia Yolkina VP Marketing & Business development Yandex Data Factory

A D V E R T I S E M E N T

KEY FACTS & F I G U R E S O F R U S S I A N E - C O M M E R C E

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These are excerpts from a research study conducted by East-West Digital News in partnership with leading universities and consultancies. To order this study (10 chapters, 300 pages),

please contact us at [email protected]

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3

4

5

6

7

8

4

2

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RUSSIAN E-COMMERCE

THE TRENDS

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The domestic market is still growing (+35% in rubles in 2014, +15% in USD), but the crisis has affected severely some segments (e.g. consumer electronics).

Since mid 2014, venture investment activity has decreased considerably – but some investors are still active.

While pure players are facing financial difficulties and some even go bankrupt, most major offline retailers and manufacturers keep investing in e-commerce.

Most large and mid-sized cities are served by shipment companies in satisfactory conditions, while the Russian Post is reforming itself to improve service.

Cash-on-delivery is the rule for physical goods and will remain so for a long time, even though the use of electronic payments is increasing slowly.

The lack of qualified human resources appears to be one of the most painful issues, hampering the entire Internet industry.

The regions are catching up fast, with some pioneering retailers already generating more than two thirds of their sales in the regions.

Becoming more mature and competitive, and facing less favorable macroeconomic environment, the industry is now entering a period of optimization and consolidation.

Cross-border sales are growing dramatically – especially from China – but foreign e-merchants have to carefully localize their site, adapt their marketing approach and deal with customs clearance and delivery issues.

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL KEY TRENDS AND FIGURES

D O M E S T I C E-COMMERCE 2014 THE NUMBERS

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Source: Data Insight unless stated otherwise

30% in rubles in nominal terms

$14.5bn (560bn rub.)

or approximately

Total domestic market size for physical goods:

of the total Russian retail market 2%

In 2014, the market grew by at least

43,000 e-commerce sites with a shopping cart function

Insales counted of which around

made $100m or more in sales (physical goods only)

50

Approx.

$86 (3,300 rub.)

Average order value or up to 15% in real terms

or in USD

Russians shopped online at least once per year

26 million About

Domestic sales of physical goods,

not including cross-border sales; food

deliveries, C2C, MLM, tickets, coupons, etc.

generating an estimated 148 million orders


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+75%

15 million Russians shopped

in foreign online stores

Approximately $4bn

Total market

size:

generating from 50 to 70 million orders

Up to

Up from 2013 in value

Of

of which Chinese retailers generated around

In value

In volume of fulfilled orders 70%

50%

C R O S S - B O R D E R S A L E S 2 0 1 4 THE NUMBERS

Source: EWDN unless stated otherwise


M A R K E T O V E R V I E W

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1. The Russian Internet market 1.1. Internet penetration In the fall of 2014, 62% of the adult population, or 72.3 million people, were connected on a monthly basis, according to the Public Opinion Foundation (FOM). Of them, 59.9 million people used the Internet daily. The Internet became popular in Russia much later than in advanced European countries, with a mere 10% of the adult population connected in 2003 and just 20% in 2007. Today, Russia still lags behind most other European countries in terms of penetration, with roughly half of the adult population connected. Russia is catching up quickly however, with average annual growth in Internet users exceeding 10% over the last few years. In September 2011, Russia overtook Germany as the market with the largest number of unique Internet users in Europe. If growth continues at its current rate, it will take Russia less than a decade to reach the current levels of Europe's most connected countries.

Source: Public Opinion Foundation (FOM)

Internet penetration rate in Russia (2003-2014)

Unique users 18+

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL MARKET OVERVIEW

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South

North-West

Volga Urals

Siberia

Far East

Source: FOM

Distribution of Internet users by federal district (Autumn 2014)

Center incl.

Moscow

Nationwide – 100% (72.3 million unique users)

28.6% 20.7 м

10.8% 7.8 м

19.3% 14 м

14.5% 10.5 м

8.8% 6.4 м

13.7% 9.9 м

4.2% 3.1 м



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1.2. Regional contrasts Internet penetration in Russia is still uneven. There is a two-fold difference in the percent of Internet users on a monthly basis between the capitals, Moscow and St. Petersburg which have over 77% Internet penetration, compared to only 50% in Russian small towns villages, or an average 58% in the Volga federal district, according to a FOM report from Q3 2014. Among the key factors explaining these regional contrasts are differences in the standard of living, purchasing power and development of broadband and wireless Internet access, as well as computer and Internet literacy. The differences between regions by usage intensity are even more profound. Internet penetration and usage intensity are interconnected: the higher the percent of Internet users, the higher the level of Internet activity and vice versa. As of Q3 2014, just 11% of Russian Internet users lived in Moscow, 4% in St. Petersburg and 12% in other cities with more than 1 million inhabitants, while 21% lived in rural areas. Almost three quarters of all Russian Internet users live in the European part of Russia. 1.3. Russian audience world-wide The Russian-speaking audience exceeds 90 million users, if taking into account an approximate 20 million Russian speaking users in the former Soviet republics, Western Europe, Israel and North America.

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2. The online retail market 2.1. Market size In 2014, according to Data Insight, the Russian online retail market for physical goods neared 560 billion rubles ($14.5 billion), up 30% at least (+10-15% in USD), depending on estimates, from the previous year. This volume did not include cross-border sales as well as food deliveries, C2C, MLM, collective purchases, tickets or bookings. As much as 40.1% of e-commerce orders in 2014 came from consumers living in Moscow (11.5% from St. Petersburg), according to InSales. Regarding market segments, the general picture is rather clear, although different methodologies from different sources reflect some differences. The categories of physical goods most in demand are apparel and footwear, household appliances and home items, consumer electronics and computer hardware as well as car parts and children’s goods.

* In nominal terms; inflation exceeded 11% in 2014 Source: InSales

Top 10 e-commerce segments (by turnover, in billion rubles, 2014)

Segments

Turnover Growth/2013*

Household appliances & electronics 146 37% Clothing, footwear 92 21% Computer, notebooks, computer parts 69 22% Car parts 38 44% Mobile phones 32 24% Home items 31 60% Children’s goods 30 23% Furniture 27 34% B2B equipment 23 24% Construction materials 21 43%

•  Detailed segment analysis by sales volumes, number of buyers, spending amount and average order value;

•  User segmentation by gender age, income level, education and occupation; •  User segmentation by gender and age applied to different product and price

categories, with highlights of geographic contrasts and variations.

To order this study (10 chapters, 300 pages), please contact East-West Digital News at [email protected]

IN EWDN’S RESEARCH STUDY:

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2.2. Current situation and growth forecasts

Due to the current economic downturn, some e-commerce companies have seen their sales volume stagnate or even decrease in late 2014 and early 2015. The crisis has not affected all segments equally: while consumer electronics have been hit hardly, children’s goods, for instance, seem to go through the crisis without damage.

Important differences can also be noticed depending on site size. According to Data Insight, while the traffic of sites with less than 20,000 monthy visitors fell by 10%, those with more than 200,000 visitors saw their traffic grow by 11% between Oct. 2013 and Oct. 2014. Several large players, e.g. KupiVIP and Umart, are expecting significant growth in 2015. Beyond the current ups and downs, it is clear that the full potential of Russian e-commerce market is far from being tapped. Important growth is likely to resume after the current crisis, fuelled by such structural factors as:

•  The growing Internet and e-commerce penetration in Russia’s regions; •  E-signature and online payments becoming more popular: mass demand for non- material products such as insurance and tour package offers. •  Fulfillment infrastructure reaching maturity: With reduced delivery costs, the scope of e-commerce will extend to cheaper product categories and be made available even to small cities and remote areas.

The Russian e-commerce could thus reach or exceed the $100 bn mark in 10 to 15 years.

Domestic sales of physical and digital goods, including tickets but not hotel bookings, B2B sales and coupons. The calculations are based on a moderate 10% to 20% yearly growth rate between 2014 and 2025

Source: EWDN

Russian e-commerce market growth forecast (physical + digital goods)


2.3. Number of users; user profiles and behavior Online shopping has already become a rather common method of consuming for active Russian Internet users, particularly those with upper middle and high incomes living in Moscow, St. Petersburg and large Russian cities. This is why online shopping penetration in Russia, which is still weak compared to some Western European countries, is expected to catch up in the long term with the most advanced countries like the UK, where up to 85% of Internet users are involved in online shopping. According to Data Insight, e-commerce involved 26 million active Russians in 2014. The figure could exceed 30 million in 2015, with tens of millions of additional online shoppers by the end of the decade. Three groups drive this growth in the number of online shoppers: individuals in the regions, especially in small towns, individuals with low incomes and individuals newly connected to the Internet. Significant differences regarding online purchases can be observed between different population groups. For example, men to spend more online than women; they more actively purchase car parts, mobile phones and computers, while women are more attracted by such categories as clothing and children’s goods. Generally speaking, people from younger age groups, with higher revenues and that have completed higher education, tend to consume more online than those from the opposite groups. In a survey of its customers conducted in February 2015, fashion flash sales site KupiVIP found that a new online consumer behavior is emerging in the current unstable economic context. Only 5% of the respondents said they were going to increase their spending on clothing, footwear and accessories this year, and only 12.6% believe that the crisis will not have any impact on their purchasing power. No less than 83% of clothing and footwear buyers are looking primarily for discounted products — a proportion 1.5 times higher than in early 2014. As many as 58% have more than half of their clothes bought at discounted prices. This new mindset explains the exceptional success of such recent sales events as Black Friday and Cyber Monday. Price has thus become the key factor in purchasing decisions for KupiVIP’s clients. Well-known brands, new collections and exclusiveness tend to be less important, if of any importance at all.

•  A detailed analysis of user profiles with segmentation by gender, age, occupation and education;

•  An anaysis of the recency, frequency and motivations of online shopping with international comparisons;

•  Developments on the trust issue, with accounts from online players, service providers and industry associations on how they deal with it.

To order this study (10 chapters, 300 pages), please contact East-West Digital News at [email protected]


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3. Online retailers 3.1. Number of sites In 2014, payment aggregator Robokassa and analytics company Openstat identified 1.17 million “commercial sites” (i.e. sites that offer payment functions) in the .ru, .su and .рф domains out of more than 3 million sites on the Russian Internet in total. Of these “commercial sites,” just a small part can actually be considered e-commerce sites as far as physical goods are concerned. In 2014, InSales estimated the number of e-commerce sites (with a shopping cart function) at 43,000. Of these sites, a mere 50 generated more than 4 billion rubles (approximately $100 million) in sales revenues per year, and 950 reached or exceeded 200 million rubles ($5.2 million). 3.2. Market fragmentation A consequence of the limited size of the market itself – with Russia's $13 billion in 2012 representing less than 40% of Germany's online retail market and one twentieth of the US market – Russian online retailers are noticeable for their small sales volumes in comparison with major foreign players. The order of magnitude is simply different: in 2012, the Ozon group's net sales, for example, represented less than 3% of those of its model, Amazon.com, in countries such as Germany ($250 million vs. $8,732 million). In certain segments, there are no major professional players due to a lack of significant investment, while existing small e-merchants generally offer poor service. This situation particularly affects the fields of construction materials, furniture, plumbing and small niche industries. 3.3. Gradual involvement of offline players Large domestic retail companies began to enter the Russian e-commerce market much later than in western countries, and many are still absent. As for international players several still do not sell online in Russia even though they have strong e-commerce experience in other countries. However, a clear move toward online-offline integration has been noticeable over the last few years. While traditional retailers are developing their first e-commerce activities, several online players, in a reciprocal move, have gone offline. 3.4. Gray e-commerce In certain market segments, a significant part of online retail – anywhere from 20% to 80%, depending on the estimates – goes through unofficial schemes of varying scale. It can even not be ruled out that even some of the largest Russian e-commerce players keep part of their cash revenues undeclared. According to a controversial theory, it is virtually impossible for legitimate e-commerce businesses to be profitable in the current Russian market conditions (http://www.ewdn.com/?p=35696).

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4. Investments in Russian e-commerce From 2010 to 2013, according to research studies by Fast Lane Ventures, PwC and RVC, e-commerce in the broad sense was the major destination for venture investment in Russia. During these four years – if counting only publicly disclosed transactions – the Russian online retail industry attracted nearly $1.3 billion in venture investment, including more than $360 million for 2012 alone. Venture investment in Russian e-commerce fell to $235 million in 2013, reflecting the contraction of the local venture market as a whole. Attracting venture money became more difficult in 2014 and 2015 – even though not all Western investors have withdrawn from Russia and a new generation of domestic investors is emerging. In spring 2014, Ozon closed a record $150 million funding deal with Russian investors while Ulmart held talks with leading US VCs. In September, Wikimart raised $40 million from Russian players – having failed to attract Western investors as initially planned. In the travel segment, package tour online reseller OnlineTours.ru raised $7 million in July from an international VC consortium. Its competitor Travelata.ru got the same amount from EBRD and Polish fund MCI. Hotel booking service Ostrovok raised $12 million from a Russia-connected fund in June and another $5 million in December 2014.

Few significant deals in Russian e-commerce were announced in the first half of 2015. The most important, in January, was Bonum Investments’s commitment to invest up to 25 million euros in Aizel.ru over the next few years.

The research contains: •  Full list of all disclosed venture investment deals from 2010 to 2014; •  The attractiveness of Russian e-commerce from an investor point of view is also discussed with leading Russian and Western investors: Leonid Boguslavsky of Ru-Net, Gleb Davidyuk of iTech Capital, Maxim Krasnykh of Intel Capital, Damian Doberstein and Alexandra Rasskazova of e-Venture Capital Partners, Bakhrom Ibragimov of EBRD, Edward Shenderovich of Kite Ventures and David Waroquier of Mangrove Capital Partners. Among the topics discussed are: •  The pros and cons of investing in Russian e-commerce; •  The financial impact of Russia's specific conditions for e-commerce venture; •  The impact of the international tensions on investors’ attitude; •  The exit issue, with an analysis of the existing exit cases as well as of the M&A and IPO perspectives in the short, middle and long-term. To order this study (10 chapters, 300 pages), please contact East-West Digital News at [email protected]


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1. This figure encompasses "classic" e-commerce, travel services, private sales, daily deals and collective buying as well as classifieds and other startups involved in e-commerce. The amounts invested in these sectors could be significantly higher if undisclosed transactions were included.


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Sources: EWDN, Fastlane Ventures – A comprehensive list of deals is offered in the full version of the study

Venture investment in Russian e-commerce (2010-2014)

Publicly disclosed deals of more than $10 million

Official data Unconfirmed amounts


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5. Cross-border sales Foreign retailers’ online sales of physical goods to Russia have grown considerably over the past few years. Russian consumers appreciate foreign retailers’ diversified assortment and enjoy the virtually tax-free purchases. The market reached up to $4 billion in 2014, up from some $2.5 billion in 2013. Since mid-2014, however, Chinese players have captured the better part of market growth while the overall sales volume from the West has stagnated or begun decreasing – with a variety of situations, from continued growth to bankruptcy, depending on market segments and individual players’ strategies.

•  International giants eBay and Amazon, as well as a number of Western fashion brands in the clothing segment, still enjoy trust and popularity among Russian customers, but Chinese retailers are currently gaining an even stronger traction, although in different product categories or price segments.

•  Apparel and accessories, consumer electronics and gadgets, as well as automobile parts are the most in demand product categories.

•  Besides common localization, marketing, and customer service issues, foreign e-merchants run into three key difficulties: customs clearance, delivery to the consumer, and payment process.

5.1. Market figures and trends The total number of B2C cross-border orders delivered to Russia has risen rapidly, expanding by nearly 75% in a year to reach some 70 million in 2014, of which the vast majority were packages weighing no more than 1kg, according to the Russian Post and NAMO.2 More than 90% of the orders were delivered by the Russian Post, demonstrating the dominant influence of the national postal operator on cross-border deliveries in spite of the emergence of alternative service providers.

Source: Higher School of Economics

Average order value: Russian and foreign e-merchants compared (Q3 2013)

Clothing: Russian online

stores

Clothing: Foreign online

stores

Electronics: Russian online

stores

Electronics: Foreign online

stores

$115 $105 $455 $180

Sources: NAMO (Rutaobao, eBay, Aliexpress), Dostami.ru

Average order value from some significant cross-border retailers (2013)

Western mail forwarder Rutaobao eBay AliExpress

> $400 (for repeat purchases) $160 ~$40 $24


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Russian audience for AliExpress and eBay (Sept. 2013 – Oct. 2014) CHART 2-1

The full version of this study includes a full set of data on the Russian audience of five top cross-border sites over the past two years, in partnership with research company Gemius.

Foreign vs. Russian online stores: Online shoppers’ behavior analyzed by product category (Sept. 2014)

In which product categories did you make your last online purchase?

Clothing and footwear Mobile phones, tablets

Cosmetics and perfumes Small-sized household appliances

Children’s goods Computers and notebooks

Consumer electronics (video, audio, photo) Items for the home and garden

Car parts Sporting goods

Large household appliances Construction materials

Furniture Handmade items

In which store did you make your last online purchase?

25%

75%

12%

9% 3%

8%

9%

2%

<1%

2%

2%

2%

2%

7%

6%

6%

4%

1%

2%

4%

1% 3% 0%

2% 2%

2%

0%

0% 1% <1%

Russian store Foreign store

Survey conducted in September 2014 among 2,400 online shoppers of 20 to 55 years of age from Russian cities of 100,000 inhabitants or more – Source: Yandex GfK

Source: Gemius


Market growth benefits major international online retailers – first of all, Alibaba’s subsidiary AliExpress and eBay – as well as many sites selling small quantities in niche segments. Some of them report their sales volume and order size from Russian customers are significantly larger than with any other country. However, since late 2013, many Western online stores have seen their sales to Russia grow more slowly, stagnate or even decrease – while sales from China reached ever higher levels.1 3.2. Why Russians buy abroad Even taking into account delivery costs, many products are still cheaper if bought abroad than on the domestic market. One reason for the price advantage in some categories is that orders received by inhabitants of the Customs Union (including Russia) are not subject to customs taxation if they do not exceed 31 kg in weight and 1,000 euros in value per month, for each recipient.2

However, foreign Internet stores do not always have a price advantage over Russian ones, and often the advantage will not carry across all products the retailer offers. In the electronics segment foreign online stores, especially in China and Germany, offer more favorable prices for cameras, but have no clear price advantage for smartphones. Russian online stores show a wide range of prices for clothing and footwear and foreign stores are located within this price range. Additionally, a number of products are simply not available, or are hard to find, on the domestic market. This concerns not only obscure collectables, but other items such as a number of spare automobile parts and accessories, which when related to rare or little known car brands are virtually nonexistent in Russia, especially in the regions. 1. In July 2014, AliExpress became Russia’s most visited e-commerce platform and one of the country’s top 10 most visited website. http://www.ewdn.com/?p=32192. In late 2014, this platform’s sales to Russia could reach several hundreds of thousand orders per day. 2.. If weight or value do exceed these numbers, customs duty amounts to 30% of the value of the part in excess, with a minimum tax fare of 4 euros per kg. Russian authorities may introduce a less liberal customs regime.

Reasons for shopping in Russian vs. foreign online stores (2013)

Clothing: Favor Russian online stores

Clothing: Favor foreign online stores

Electronics: Favor Russian online stores

Electronics: Favor foreign online stores

• Faster delivery (49.2%)

• Ease of returns and exchanges (21.7%)

• Less risk of package loss (23%).

• Can purchase products not available in Russia (63.3%)

• Price differences (46.6%)

• Wider assortment (39.3%)

• Higher quality products (35.8%).

• Faster delivery (54.8%)

• Ease of returns and exchanges (28.1%)

• Less risk of package loss (27.8%)

• Product guarantees (27.8%)

• Can purchase products not available in Russia (61.4%)

• Price differences (48.5%)

Source: Higher School of Economics


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3.3. What Russian consumers like – and fear Russian consumers have unique qualities that often necessitate specific merchandizing strategies to attract purchases. Among their fears and expectations are the following:

•  Russian consumers are more distrustful of retailers and fearful of artificially high pricing. They must be certain a product is worth paying for, whether this is based on quality, warranty, brand recognition etc..

•  Unlike Western consumers, Russians are anxious in regards to international delivery and fearful of unscrupulous suppliers. High visibility and display of postage conditions is vital.

•  Russians love promotional offers and activities, especially those linked to their cultural and social habits. Frequent and catchy promotions and discounts are important to sustaining local consumer loyalty.

3.4. Customs clearance and shipment issues Occasional slowdowns at customs checkpoints and the slow service of the Russian Post create serious obstacles. However, a new generation of Russian and international delivery providers and cross-border operators are emerging, thus offering more choices to international players. Meanwhile, the Russian Post is progressively enhancing its capacities in partnership with its foreign counterparts, while the customs service is introducing simplified and faster procedures.

IN EWDN’S SPECIAL REPORT ON CROSS-BORDER SALES:

In addition to in-depth trend analysis and market figures, this report contains: • An analysis of customs practices and customs legislation, as well as possible changes in them; • Interviews with representatives of Russian and foreign online stores and intermediary sites; • A detailed analysis of the product categories most in demand; • An analysis of delivery difficulties, their causes and possible solutions regarding the bottlenecks at the Russian customs; • Information on the unreliability of the Russian Post and on alternative courier companies; • The options available to foreign merchants to promote their offers to Russian consumers; • A discussion of the different options for market penetration, from selling from abroad to partnering with Russian operators to opening a local representative office or subsidiary.

For more information about this report, please contact [email protected]


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INTERVIEWS & ANALYSIS

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MCI Managing Director Tomasz Czechowicz: "We are still interested in Russia and we will continue searching for investment opportunities"

Over the pas year, several western venture investors have withdrawn from Russia due to the international tensions. This is not the case for MCI, a major Polish fund which actively investing in a range of European countries as well as Russia and Turkey. In this exchange with East-West Digital News, the fund's managing partner Tomasz (Janusz) Czechowicz shares his vision of the Russian digital market and comments on MCI’s Russian portfolio companies KupiVIP, Travelata and Oktogo. – Please explain your fund’s strategy and the reasons why you are interested in the Russian market. MCI Management is the most experienced private equity group in emerging Europe with a focus on digital transformation. We specialized in growth-stage investments in the CEE region, DACH countries (Germany, Austria and Switzerland), Russia and Turkey. MCI’s investment strategy is based on three growth pillars: •  Digital disruption investments: These are investments in pure-play Internet business

models. We believe that the strongest growth will be recorded in the fields of digital media, e-commerce, marketplaces, fintech, Internet of Things, Software as a Service, cloud computing, mobile Internet and digital entertainment.

•  Digital ecosystem investments target companies operating on the Internet infrastructure, such as telecoms and data storage centers.

•  Digital adaptation investments are intended to support companies which, being already well established in the traditional economy, aspire to become European- and global-level players using opportunities offered by the Internet.

We believe that the Russian digital market – in particular, in the field of e-commerce – has a lot to offer regarding good quality companies at the growth stage with the potential to become national champions covering this hub e-commerce market. Thus we already invested in three companies: KupiVIP in the field of fashion as well as Travelata and Oktogo in the travel segment. – What has been the impact of the recent international tensions on your Russia strategy? Do you still consider investing in the country? We are still interested in the Russian market and we will continue searching for investment opportunities. Our strategy is to have about 10% of all assets located in Russia.

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL INTERVIEW: MCI MANAGING DIRECTOR TOMASZ CZECHOWICZ

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– What are your investment criteria? We are interested in healthy businesses. These are characterized by a high growth potential, a high-level management team, and perspectives to become a national or even global champion. – In 2012, you invested 12 million euros in KupiVip. Why did you do so at that time? What are the positive and the negative points with KupiVip, in your view? The level of managing team and its track record hugely impressed us. Equally impressive were the investors who had already backed this company. We are very happy with this investment; the company’s current performance is very impressive – not only to us. – A couple of years ago, KupiVIP’s founder Oskar Hartmann envisioned a Western IPO. Is this perspective still valid? At this particular moment we do not think that IPOs or full exits are the best solutions for shareholders in leading online and tech companies in Russia. We believe it’s a time to buy and build. –Tell us a bit about your other Russian portfolio companies Travelata and Oktogo. Why did you invest in them? What is so attractive in the Russian online travel market, in your view? We started to invest in online travel in 1999. We had a very positive experience from companies like TravelPlanet in Poland and Invia in the Czech Republic. Both companies delivered close to 10-times returns from initial investment. This is why we are so bullish about online travel. Russia is a huge consumer market and Russians are definitely “travelers.” As simple as that! Oktogo is our latest investment in Russia. The total investment round amounted to more than $5 million with MCI and current shareholders converting a part of the debt into equity. Taking part in this round MCI invested in Oktogo $4 million with another $3 million as an option for the future. This will depend on the future results of the company. In our opinion, this is a very healthy and well-run company. It grows by more than 100% every year, and we believe its valuation should be somewhere at twice of the run-rate of gross revenues. Travelata provides a convenient service for buying package tours online or over the phone. If offers tours from more than 120 major Russian tour operators to all popular touristic destinations. In July 2014, we announced a joint, $7 million investment with the EBRD for this company. So far our total investment in it has exceeded $4.5 million.

(March 2015)

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL INTERVIEW: MCI MANAGING DIRECTOR TOMASZ CZECHOWICZ

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Wikimart ex-CEO Maxim Faldin: “Virtually all Russian legitimate e-commerce companies are unprofitable”

Launched in 2008 by Stanford graduates Maxim Faldin and Kamil Kurmakaev, Wikimart had the initial ambition of creating a Russian analog of eBay. Funded initially by major US investment funds, then byRussian investors, the startup has now become a major marketplace offering its own products alongside nearly 2 million items from over 1,000 merchants. Faldin’s controversial theory is that, outside the "grey economy," legitimate Russian e-commerce businesses are doomed to be non profitable. A few weeks before resigning as Wikimart CEO, Faldin was interviewed by Russian online publication Slon.ru. Here are the main excerpts from this interview. – Is it true that that the bulk of the Russian online retail industry is made up of the gray economy? I remember very well how, in the late 1990s, flea and wholesale markets were demolished in Russia. One of them was next to my place. I remember that the products – milk, cheese – there were 30% cheaper (because sales tax plus VAT amounted to those same 30%). And I thought: why should a law-abiding business open a store here? It will obviously not be competitive. As for Wikimart today, unfortunately we do not have such practice. Otherwise, we would be more profitable. – But traditional retail chains assert that low prices on the Internet are provided by gray and black imports. Retailers are mixed up in their concept of “gray imports,” which can mean different things. Firstly, there are counterfeit, fake goods, which is a result of incorrect customs declaration. Then there are import channels that are not agreed with the manufacturer. We disagree with retailers on the last type: in my opinion, retail networks, in collusion with the producers, have created in Russia a reservation where they control prices and receive all the profits. [In a recent case,] Motorola has not given consent to import goods into the country, but it is Motorola’s problem, why should we be concerned? There’s nothing illegal in this case. Parallel importation is not against the law, it is the violation of the rights holder. As long as there is demand, we will trade [these kinds of products]. This should not be confused with smuggling and tax evasion. We are audited by PwC, and there are many control procedures.

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL INTERVIEW: MAXIM FALDIN

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– In early 2015 Wikimart changed investors. Instead of the American investment fund Tiger Global your shareholder became a little-known banker, the co-owner of Finprombank Anatoly Goncharov. Why have the Americans gone? This is directly related to the political situation. Goncharov was a minority shareholder with 15%, while Tiger had about 50%, and they were actually leading the development strategy. It was necessary to develop the business, to invest in it. (…) In July we agreed on everything – but the Boeing fell in the south-east of Ukraine and the world changed. Only 12 hours after the fall of the Boeing, I had a conference call with New York and they said: "We can no longer fund the company, do whatever you want." We sat for two months without money and with wage arrears. Then, when I arrived in October to New York, I learned that Tiger Global was raising a huge investment round, and their main investors were representatives of the Republican Party. It all became clear. On the same day, they clinched a $1 billion deal in India. – Is this a kind of plot against doing any business with Russia? It's not quite like that. It is a question of the business environment: somewhere at a cocktail party someone said something. You're not going to risk rounds worth billions in order to invest an additional $15 million in Russia, which then will bring you $50 million. – What do you expect for your industry this year? In 2015, things will be very difficult. When household incomes fall, our revenues fall, too, but the substitution effect will make people purchase cheaper goods instead of the more expensive brands. This factor will play in our favor. Meanwhile this is the perfect time to start a business! I have just launched a kid’s fashion site, christened “Little Gentrys.” – Wikimart recently teamed up with Terminal.ru, which owns warehouses and retail outlets in the regions. You now have offline points of sale. We do, but they are all terribly unprofitable. We are thinking of what to do with them. The whole of 2015 will be spent looking for new formats. – But your competitor Ulmart opens many offline stores. Well, Ulmart is not a profitable company, and neither is Enter. We want to be profitable. That's the whole story. Enter has around about 80 stores left. There were more, but they were terribly unprofitable. What will happen now with Enter, nobody knows. – Why is Anatoly Goncharov so engrossed by e-commerce? What is his ultimate goal? He wants to make a technology holding company, which provides retail and financial services. I know Goncharov many years; I practically led him into e-commerce. First, he bought a small stake in Wikimart and supported us financially while we built the company with Tiger Global.


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He now has a controlling interest in Terminal and Wikimart. Owning two companies in the same industry is pretty pointless, so he decided to combine them. I manage both companies; we have merged and are looking for the most suitable model for profitability in the market. In addition, Anatoly Goncharov takes part in the restructuring of companies under the Svyaznoy brand. – Are all law-abiding Russian e-commerce companies unprofitable? Yes, all companies that we mentioned today are unprofitable. Ozon has been unprofitable for 17 years. But this should not be so, it needs to change. Another example is E5 [the online interface of X5 Group’s supermarkets] which was simply shut down, writing off its losses. We were the only bidders for the company. However, it was easier for the X5 Group team to write off $50 million in losses than to save the project and work with us, even when we demanded nothing from them. It’s a kind of apathy by the managers. It's not their money. More generally speaking, in Russia all white online trade is unprofitable. In order to build a profitable online retail platform, you require five to seven years and $100 million. Miracles do not happen. Even more than logistics costs, the key expense is programmers' salaries. Of the $50 million that was invested in us at of late 2014, we spent $30 million on the salaries of programmers. But the market will consolidate. Similar to what happened to us, and to Utinet. Nobody can incur losses by themselves. – When you started your business, you stated that in a few years you will surpass Ozon.ru. This did not happen: they see 9.2 billion ruble revenues while you generate only 4.7 billion. We definitely grew faster than Ozon, but not fast enough to overtake them. We are six years old, and Ozon is 16. In addition, the proceeds of Ozon are a little misleading if including their travel ticket business. The comparison could be more relevant with Ulmart: although they are only a year older than us, they have a lot more revenue [21 billion rubles]. I think we had a problem accessing capital. In late 2011, Tiger decided that Russia is not as promising as India. Since then, they invested more than $1 billion in the Indian online store Flipkart, but with us they invested only $15 million. There is a difference. – How are you fundamentally different from Yandex.Market? We are a retail company while Yandex is an Internet company. Yandex will never own the products and think about them. We buy in advance one-third of the goods we have. – The commission of Yandex.Market for orders from online stores is 1%, whereas Wikimart charges from 2% to 15%. The 1% is not an exact figure, it is just the starting amount for retailers that rises. In reality, they do not have a fixed rate.


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– What about AliExpress and eBay? AliExpress has 800 million items. I cannot even imagine such a number. eBay offers around 150 million goods in Russia. At Wikimart there is 2 million, although we believe that we have the biggest range. But this 2 million is a drop in the ocean, compared to the offerings by Alibaba's subsidiary. There are simply not that many products in Russia. However, these are different products. Judging by the top 10 best-selling products, AliExpress sells primarily cords and straps for mobile phones. You may find iPhones too, but it is likely to be a Chinese iPhone with two SIM cards for 6,000 rubles – ugly-looking and with a slightly different interface. When you are not competitive in terms of range, you are not competing at all. The average check of AliExpress is 300-500 rubles. Buying from foreign online stores is becoming easier. That is why cross-border trade is growing in Russia two times faster than the entire e-commerce industry. Meanwhile, unequal tax treatment is an issue. Consumers pay VAT when purchasing items in a domestic offline or online store; why do they pay neither VAT nor, in most cases, customs duties when buying from a foreign online store? – You were planning to build a warehouse with eBay in the Baltic states. What is happening with this project? It stalled. eBay is interested in the Russian market, but the Russians are buying Chinese goods, which will always be cheaper in China. Now the task for eBay is to defeat Alibaba, so all projects like a warehouse in the Baltics went to the periphery. The full version of this interview was first published in Russian in online magazine Slon.ru 1 in April 2015.

1. http://snob.ru/selected/entry/90635

Arvato Russia GM Michael Poetschke: “Some Western players have suspended their e-commerce plans for Russia, but the effect of the international tensions might also be positive”

After 18 years on the market, Bertelsmann subsidiary Arvato Russia has asserted itself as one of the main fulfillment providers in Russia, both for traditional distance selling and for e-commerce operations. In this exclusive interview, CEO Michael Poetschke — who arrived in Russia almost 20 years ago — talks about the opportunities and the difficulties of entering the Russian market for foreign e-commerce companies. – How does the logistical chain work for e-commerce companies selling to Russian consumers from abroad? The logistical chain works most efficiently for customers of Arvato in Germany or other countries in Europe, where we service their e-commerce businesses. This is because it is the same warehouse where their goods are stored and picked, packed and dispatched to different countries. For many Arvato customers, we service the whole value chain, including running the online stores, carrying out e-marketing, order management, customer care, payment processing and more. The cut in our value chain happens when we have to hand over the prepared parcels to a carrier delivering them to the final clients. We cooperate with the Russian Post, DHL and other international carriers. Originally, one obstacle was that clients had to prepay their orders by bank cards. Now solutions work that allow cash-on-delivery as well. The biggest remaining problem is the procedure to return orders fully or partially. It is quite costly and very slow. This is one serious disadvantage of cross-border online sales and concerns potential clients a lot. – Is Russia very specific in this regard compared to other countries in terms of processes, costs, etc.? Russia is specific in many ways. What separates Russia from many other countries is that there is a border, in terms of geography, but more importantly in terms of customs procedures, bureaucracy and cost. Cross-border online trade is actually a loophole to reach consumers in Russia. The sellers don’t have to certify all the goods they are selling compared to the usual trade channels and nobody has to pay customs duties for the goods within certain limits and neither VAT. – Do you feel an actual or potential impact of the current international tensions on cross-border sales to Russia? Yes, there may be an impact from that. Even though the market, far from politics, continues to grow, some Western players have postponed or suspended their plans to set up or enhance their online sales channels to Russian consumers.

THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL INTERVIEW: ARVATO RUSSIA GENERAL MANAGER MICHAEL POETSCHKE

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– Do you feel an actual or potential impact of the current international tensions on cross-border sales to Russia? Yes, there may be an impact from that. Even though the market, far from politics, continues to grow, some Western players have postponed or suspended their plans to set up or enhance their online sales channels to Russian consumers. But the effect might also be positive. Already now usual wholesalers feel a credit shortage due to Western sanctions and the rising interest rate of Russia’s central bank. Some Western manufacturers or sellers observe declining sales to Russia through the usual retail channels. But there are clients in Russia who want to buy products and still have the purchasing power, be it apparel, electronic equipment or other goods being bought on a regular basis. They may turn to cross-border offerings more actively now. So far online demand for Western brands in premium segments has not necessarily decreased. As a rule, the brands who managed to avoid sharp price increase have maintained good sales volumes. Those who raised their prices very significantly have exposed themselves to more severe sales contraction. – How do you envision future developments on the Russian e-commerce logistics scene? Do you still feel an important growth in demand? Have recent investments in this field been sufficient to address the demand? I expect the usual development – where there is demand, there will be an offer. As e-commerce continues to grow in Russia more fulfillment capacities will evolve and more cost-effective and faster delivery solutions will be proposed. We are noticing an increasing competition and new offerings in this area over the last two years, which is very healthy and the consumer wins. This development has finally even woke up the Russian Post, which is also very much welcome. Russia is such a vast country by geography that all kinds of distance-selling businesses have an enormous potential to cover it and to reach consumers in all regions, towns and villages in the long run. I expect online businesses to tap into this potential even more intensively in the near future.

(Updated June 2015)

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THE INTERNATIONAL BUSINESS & TECH CONFERENCE ON RUSSIAN ONLINE RETAIL INTERVIEW: B2B-CENTER CEO ALEXEY DEGTYAREV

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B2B-Center.ru CEO Alexey Degtyarev: “In 2014, Russian B2B e-commerce amounted to $609 billion”

With a montly trading volume exceeding $2,2 billion in 2014, B2B-Center.ru, Russia’s main electronic trading platform, serves more than 200,000 clients from 120 countries. CEO Alexey Degtyarev recounted for East-West Digital News how this business started and gained such strong traction in Russia and beyond. – How does the Russian e-procurement market look – and does it differ from other countries? Russia’s model of B2B e-commerce is definitely unique: all stages of procurement, from planning to contract award, are conducted online. Ten years ago there were only so-called online boards which stored information about tenders. Some of these have evolved into full-fledged electronic trading platforms, where you can conduct transactions for buying and selling goods and services in real-time. In 2002, when we introduced the idea of B2B e-commerce, we had to evangelize the market. Now e-commerce is an essential business tool widely used by the biggest enterprises and organizations. In 2014, according to our estimate, the volume of B2B e-commerce market in Russia amounted to $609 billion. This figure includes the volume of electronic purchases in both public and private sectors. Using these platforms, thousands of new customers and contracts can be found – and millions of dollars saved by vendors. The figures speak for themselves. In 2010, Bashkirenergo saved more than $26 million, Tyumenenergo $81 million and Bashneft over $60 million. Today, our clients save up to 20% of original contract price by using our procurement marketplace. Furthermore, B2B e-commerce helps companies improve efficiency by automating processes, among other benefits. Foreign companies enjoy the same benefits. We have users from 120 countries! While first-generation online boards still exist in foreign countries, some electronic platforms do offer full-fledged online trading procedures. However, these advanced features are less in demand than in Russia, where companies use all bidding functionalities much more actively.


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– What about e-procurement platforms for the government? Observing the success of the business, the government eventually decided to transfer purchases for state needs in electronic form – both to save budget resources and combat corruption. Since 2009 procurements for state needs have been conducted through electronic auctions as well as via paper tenders. As a result, the better part of state orders is now carried out in electronic form. The State Duma is now considering a bill that involves digitization of other trade procedures – tenders, request for quotations and proposals. As a result, state and local government procurement (except for purchases from a single supplier) will be gradually converted into electronic form. The Federal Law “On the procurement of goods, works and services by individual types of legal persons” came into force on January 1st, 2012 and served as a stimulus. A subsequent resolution from the Russian government defined the types of goods, works and services to be purchased in electronic form. The list includes paper; printing products; office supplies; office equipment; medical devices; equipment and instruments for radio, television and comm-unication equipment; vehicles and accessories; natural water; trading services; maintenance and repair of motor vehicles, motorcycles and office equipment; and the cleaning of buildings. To date, most of the tender-based procurement operations at large Russian companies are made in electronic form. This process, which has been noticeable in recent years, has greatly simplified their work. – B2B-Center has been operating for more than 12 years now. What have you achieved over this period of time? The company was established in 2002 and, in fact, was one of the founders of today’s e-commerce market in Russia. The first electronic trading platform, B2B-Energo, was solely focused on the energy sector. Soon after that UES, Russia’s electricity giant, started operating through our system. According to power engineering specialists, the cost of equipment and services in the first year decreased by 50%, and the price of the products purchased decreased by an average of 17.5%. Since then, the list of our clients has expanded continuously. (…) Our cumulated trading volume has reached $77 billion since launch. (…) The next step is to involve medium-sized players more deeply in our platform. They already use it as supliers, we’d like to see them as buyers as well. In 2012, we launched B2B-Turkey. The platform incorporates more than 1,200 local companies from the construction, tourism, woodworking and other industries. In addition, we launched a pilot project B2B-Export with several African countries involved. This project is potentially strong. Goods delivered by Russian suppliers, primarily in machinery industry, were able to obtain access to foreign markets. This leaves a lot of open questions with regard to logistics, insurance, customs clearance.


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– What has been the impact of the troubled 2014 year on your business, and what do you see next? After exceptional growth in 2013, the market slowed down in 2014. This tendency is related not only to the economic situation, it was also affected by the completion of several government-run giant projects, especially the Olympic games in Sochi. The public procurement market in 2014 decreased both in volume and number of proceduresMeanwhile the volume of transactions in the private sector remained unchanged. Since late 2014, major customers altered their work, keeping in mind the experience gained from the previous recession. They are adjusting investment programs and reducing the volume of individual purchases. Recession is a time of new opportunities for ETP. Buyers are eager to think about efficiency of activity, while suppliers are looking for new markets and sales methods. ETP can give both sides a great chance to get ahead. – What is your business model and tariff policy? Our users pay a one-time access fee and a monthly rate based on the options they select. We have no interest in the amount or number of transactions and charge no extra fees for additional services. Transactions and fees must remain independent – this is a matter of principle to us. One of our most appropriate tariff plans, $150 per month, allows you both to organize tenders and participate in an unlimited number of biddings. – Who are your competitors and what are your distinctive advantages?

Many of our competitors are major commercial electronic trading platforms. We have had healthy competition with them and we feel comfortable in this environment. It’s always challenging to search for and develop new solutions. – Is your platform profitable? How has it been financed so far? B2B-Center is not only profitable, but also a high-growing company. Over the past five years, the company has grown more than three times. Such performance was achieved due to the development of electronic procurement, an idea which has attracted number of major energy companies. Our solution has helped them improve procurement efficiency while attracting new customers to our platform. Among B2B-Center’s shareholders is a consortium of foreign or internationally-oriented funds – Da Vinci Capital, Insight Venture Partners, Alfa Associates, Runa Capital – as well as the leading private equity fund in Russia and CIS, Elbrus Capital. B2B-Center’s founder, Alexander Boyko, is chairman of the board of directors.

(March 2015)

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Optimizing e-commerce fulfilment: A European and Russian perspective By Matthieu Hallouin, Head of Business Development for Savoye Russia/CIS and Eastern Europe

Stimulated by the emergence of new players, the multichannel initiatives of traditional retailers, and made more accessible with high-speed Internet, e-commerce is becoming more and more popular in Russia like elsewhere. Online consumers now benefit from a more diversified assortment while bargains provide them almost permanently with attractive shopping opportunities. As online shoppers have become more demanding and volatile, e-commerce websites can no longer focus only on product-oriented offer. They must also ensure they provide quality services to stand out, gain market shares, maintain margins, keep or reinforce their position on the market. To respond to increasingly frantic consumption, and remain competitive, e-commerce companies must have a responsive and efficient fulfillment and delivery network. Superior-quality service requires continuous optimization of distribution schemes, efficient information systems and flexible organization structures, while minimizing costs to maintain profitable margins. This also requires optimizing logistics organization to manage increasing shipped volumes and returns, offer high-level order tracking, and ensure the best possible quality in order fulfillment and delivery. Supply chain management is becoming a differentiating factor for e-commerce and more generally for the retail sector, as a crucial part of their offer. A major challenge for companies is to integrate these changes by anticipating them, and to engage in necessary reorganization. This mainly concerns the operational supply chain, which must rely on a modular and efficient distribution platform in order to manage each stage of the order lifecycle – from order reception and customization of goods and packages, to delivery and returns management. Service level will be the key success factor for customer satisfaction. Among the main challenges of the e-commerce supply chain are the following: •  Having the goods provided to consumers in minimized time – In addition to optimized

management of company stock, the use of an optimized WMS solution will enable stock reliability to support fast and effective goods reception on the logistical platform, and optimize stock-picking operations.

•  Improve or maintain delivery service quality – The company should be able to adapt the delivery to new customer expectations by offering them not only on-time delivery but also a set of associated services. For example, optimized protective packaging will preserve the goods’ integrity. This is an important issue to avoid returns, which are a major factor of loss margin in online sales. Packaging solutions also exist to minimize the volume of the parcels, which may also lower transportation costs. Finally, marketing and promotional items can be inserted in the parcel.

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•  Optimize order traceability, which are significant cost factors – Customers want to follow up the delivery of their order from start to finish and to get information in real time via email, SMS, etc. This information will allow the buyer to take action on the order before its delivery, thus lowering the risk of return.

•  Keep returns costs low – Since returns cannot be fully avoided, your logistics system should be organized as to manage them efficiently at the lowest possible cost.

Here are a few ways to manage these challenges: •  A flexible and responsive supply chain – Online consumers are very demanding when

new products, or services, are introduced. While online stores must constantly adapt their assortment and anticipate changes in fashion, their logistics must adapt to these changes as well as to new delivery methods.

•  High-performance Information System (IS) – In particular, your WMS should take into account a variety of specifications for e-commerce order preparation and fulfillment: a wide product assortment, various product types, a high number of end customers, orders with many or a few items, returns management, etc. From this point of view, IS and software offer is as varied in Russia as in Europe. Specific e-commerce experience should be a key criterion to select a software provider.

•  Optimized and automated order picking – When sales volumes reach a certain level, costs may be reduced through warehouse automation. A mechanized order preparation system – sometimes integrating sorting systems to handle waves of grouped orders – will optimize processes that rely heavily on human resources. Labor costs are usually lower in Russia than in Western Europe, which implies that the break-even point of this type of installation will be different. Meanwhile, in the rapidly growing e-commerce sector, the question of the mechanizing preparation processes relates first of all to quality and performance considerations in terms of flows. There are different levels of mechanization, ranging from a simple order preparation conveyor system, with stations for picking by sector, to a fully automated system where goods come to the operator in a fully automated preparation system ("goods to person").

•  Optimized delivery process – In Europe, demanding online shoppers expect their orders to be delivered within 24 hours. Such a short delivery time is not always possible across Russia’s immense territory, but in urban areas, e-commerce companies can easily manage to ensure deliveries within 48 hours.

Neither pure e-commerce players nor traditional retailers can ignore the deep changes in consumers’ number and behavior, which is no less noticeable in Russia than in Europe. Russian online retailers are facing the same challenges as their Western counterparts; namely, having the appropriate marketing tools, modernizing their information systems into a powerful performance tool, and ensuring that their sales are backed up by efficient logistics. Increasing wages in Russia and the crisis context are shifting the focus to reducing costs for the most labor-consuming operations. In order to remain competitive, e-commerce players should reduce fulfillment costs while automating or optimizing processes, and reducing delivery time. In Russia as in Europe, modern logistics technologies are key instruments to reach these goals.

International e-marketing expert Bas Godska: “Young Russian digital marketing professionals are craving for knowledge”

Dutch online marketing expert Bas Godska came to Russia in 2008, when the Russian e-marketing and e-commerce markets were still embryonic. He helped a range of international and Russian players – from Ozon, to Lamoda, to KupiVIP, to Enter.ru – reach major positions on the market and optimize their budget. Lesser known, but prolific, has been Godska’s activity as a business angel: with more than 30 portfolio companies so far, he became the number one foreign business angel on the Russian startup scene. Godska shares here his vision of the market, its maturation over the past few years and development prospects in today’s troubled times. – You started working in Russia in 2008; what was the landscape at that time? When I came to Russia, I noticed companies were behind in comparison to Europe; behind by approximately five years in technology, the marketing ROI mindset and other important issues. The lack of high-quality management resources was evident. Marketing budgets were lower than in Western companies and money was spent carelessly on customer acquisition – with a focus on gross demand, not profitability. – What have been the most important changes/trends since then? And how do you think the picture will evolve in the foreseeable future? Here is my top 10 of the most important changes and current trends: •  E-commerce has evolved significantly since 2008, although even now it’s still only 1-2% of

all retail sales, so a lot is still ahead. •  Affiliate marketing is a nice example of a mature (yet fragmented) acquisition channel that

hardly existed in 2008. •  Retargeting and DSPs have become a widespread technology since early 2011, when

Mythings was launched in Russia. •  The data-driven marketing ROI mindset has evolved well: a lot of analytical and tracking

tools are used, maybe we’ll even see proper next-gen attribution tracking become mainstream in the very near future!

•  E-commerce as a sector is experiencing its second wave; more and more offline companies are embracing the Omni channel business model where a few years ago it was more a case of ticking a box for senior management. They all know that the digital world has become an integral and unavoidable part of our lives and consultancy firms are thriving.

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•  Venture funds have found their way to the Internet shops and many have also abandoned the arena, or have at least become more reluctant to accept high company valuations. One thing that hasn’t changed much is the venture climate – it’s still maturing. I haven’t seen many successful exits here, especially if you compare Russia to Silicon Valley.

•  More foreign companies have begun to operate in Russia/CIS – eBay, Amazon, ASOS, PayPal, AliExpress, Rocket Internet.

•  Cross-border sales are here to stay and the competition is intense. •  Russian young professionals are craving for knowledge as ever, more than their Western

colleagues. Russians’ professional skills have improved. Digital marketing is hotter than ever before: marketing master classes, seminars, conferences and webinars can be attended pretty much daily if one wants.

•  The government has become much more aware of the digital scene. Things have become more regulated. Still – there was more paperwork a few years ago, now some processes have become easier.

– You have served both Western and Russian companies and worked with professionals from both sides. Did you notice significant differences in their approach? Russians are ready to risk and react faster than, for example, their Dutch counterparts. The speed of business is higher here in general. The gap in knowledge and competences has become much narrower than compared to five years ago. I no longer feel big differences between the Western and Russian management competence level in e-commerce, yet the operational part and the focus on customer satisfaction is often at a lower level than in the West. – Has corruption spared the Russian online marketing industry? As the sector is digital there is a lot of transparency, everything is measurable. In e-commerce, ROI-dominated performance marketing is king. So the corruption level seems not overly high for Russian standards. In digital brand marketing, however, there is more room for shady deals, as ROI is less relevant. I remember how a marketing manager of a large firm approached the sales manager of one of my projects at the first meeting with a very professionally outlined corruption offer. We were required to wire funds to an offshore account prior to getting the budget approved. Needless to say, we declined the offer. Certainly such cases are not overwhelming, but may happen. – Do you feel that the recent international tensions and sanctions have had, or might have in the future, an impact on the Russian online marketing industry? A lot of foreign companies used to approach me with questions relating to Russian market entry or market intelligence. There are a bit less of those foreign inquiries now, and those who were quite ambitious earlier are watching now to see what’ll happen next. Local demand is on the rise though. I’d like to be an optimist about the future. But we are witnessing tough times now, some companies live the market, some startups vanish, revenues and profits of many companies have lowered. I think this year e-commerce in Russia won’t show the same growth dynamics as in previous years, but still I do not lose faith and hope that downturn is temporary. New companies come, technologies arrive still, all of them need to sustain their growth and boost marketing efficiency where possible.

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The Bible of Russian E-Commerce

•  Reliable and precise data on the market and its different segments with forecasts and trends to 2020

•  A thorough analysis of consumer practices, preferences, and expectations

•  "The Russian payment jungle:" A 40-page overview of payment methods with practical advice to Russian and foreign merchants

•  In-depth analysis and practical advice on the most sensitive operational issues, from marketing, to order fulfillment, to HR and legal aspects

•  "Cross-Border Sales:" A special report with market analysis and detailed practical recommendations on how to organize and increase sales to Russia

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E-Commerce in Russia

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