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Russian Online Retailers Start Small, but Grow Fast

July 25, 2005

MOSCOW — When ru-Net Holding investment company bought Internet store ozon.ru back in 2000 it had monthly sales of just $35,000 and was losing money.

But, while hardly a match for U.S. online retail pioneer Amazon.com, ozon.ru was still Russia’s market leader and has kept its top spot by reaching 2005 average monthly sales of books, DVDs, toys and software of $2 million.

“Others sold even less, so it was not just faith in the leading position of ozon.ru but faith in the growth of the market,” said Leonid Boguslavsky, ru-Net Holdings chairman.

Rising living standards in Russia, which has a population of 143 million, and growing access to the Internet mean the market holds great potential for electronic retailers, or ‘e-tailers’, he says.

“We might have been wrong about exactly when the business would turn a profit, but it was clear from the start that the market would eventually become big enough,” Boguslavsky told Reuters in an interview.

With prices for oil, Russia’s main export, running at close to $60 a barrel, there is no sign yet of an end to an economic boom now into its sixth year.

Retail sales increased by a 12 percent last year to $194 billion, but internet retailers posted sales growth of 40 percent — although with total sales of just $600 million they accounted for just a fraction of the total.

“The future is very bright but there is a long way to go,” said Alexander Borisov of the Russian Chamber of Commerce and Industry.

VIRTUAL REALITY

Russia has over 1,500 Internet shops, according to a research by SpyLOG Internet counter.  

But, of 400 etailers investigated last year by SpyLOG, half were the virtual office of a real shop trying to save on costs and reach more customers. Only 12 percent of the shops had more than 10 staff.

Serious operations have to contend, meanwhile, with a shaky legal environment, widespread fraud and a Russian postal service that cannot be relied on to deliver packages to Kaliningrad in the west or Vladivostok, 11 time zones to the east.

Few Russians have credit cards and most of those who have them only use them to withdraw their salaries. SpyLOG says 80 percent of the shops use couriers to deliver their goods to the customer. Couriers usually take payments.

“People are afraid of using their credit cards for Internet shopping,” SpyLOG spokesman Alexander Travin said. “That is why some of them even have (debit) cards where they keep a little money to use on the Internet.”

GROWTH CENTERS

Although Russians’ average monthly incomes are just $280, people in cities like Moscow and St. Petersburg are generally better off and have much lower levels of debt than their Western counterparts, meaning they do have free cash to spend.

Half of the shops only sell goods in Moscow, underlying the fact that only 15 percent of Russians are Internet users and the bulk of them are concentrated in the capital.

Boguslavsky says that a typical ozon.ru customer is 20 to 35 years old, a middle-class city dweller interested in business literature and self-education books. Half of the customers are Muscovites but Boguslavsky is not discouraged.

“So what? The population of Moscow is about the same as in the whole of Hungary, but living standards are much higher,” he says.

Boguslavsky expects that within five years, half of Russia’s adults will have access to the Internet, meaning that ozon.ru will be able to expand sales by 90 percent a year.

Underpinning his hopes is the fact that only 12 percent of ozon.ru’s current customers are Russian-speakers living abroad.

In 2000, expatriate Russians accounted for half the total.

($1=28.67 Rouble)




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