8/01/13

The Eastern Front

Eastern European e-commerce is expected to grow at a compound annual rate of 14.7% through 2016 when it will reach $71.4 billion. E-retailers are enjoying the fruits of that growth, and they’re hungry for more.

Katie Evans , Managing Editor, International Research

Eastern Europe has its own homegrown versions of Peapod.com and Amazon.com. These merchants are growing, and so are many other e-retailers marketing to consumers in the landmass that lies east of Germany and the Alps and west of Asia. And they are ripe for even more growth.

Take, for example, Delivery Club, a Russian grocery retailer similar to Peapod.com. The retailer, which launched in 2010, processes around 7,000 orders each day, says Sergey Karpov, managing partner of venture capital firm AddVenture Advisers, which late last year invested $4 million in Delivery Club. Karpov, who has been tightly involved in Delivery Club's operations activity over the past two years, says the retailer's number of orders is growing an average of 20% to 30% each month.

And it has plans for more growth. Karpov says Delivery Club is using AddVentures' investment to expand outside of Russia.

Russia isn't the only Eastern European country with a promising e-commerce market. Poland also offers great potential to online retailers, says Warsaw-based consultant and market researcher Laurent Jerinte. And companies are taking note. The number of online stores in Poland rose from 7,500 to 10,800 between 2009 and 2011, according to Polish market research firm TNS OBOP.

Poland is attractive not only for its 38 million citizens, who are all potential consumers, but because of the country's pivotal midway position between Western and Eastern European markets. "Strategically, it offers a perfect gateway to countries such as the Ukraine and Russia," he says.

Overall, Eastern European e-commerce will grow at a compound annual rate of 14.7% from 2012 to 2016 when it will reach $71.4 billion, projects research firm eMarketer Inc.

That growth is attracting the eyes of big retailers. For example, France-based supermarket and general merchandise chain Carrefour Group, No. 17 in Internet Retailer's 2013 Europe 500, in recent years introduced a feature that lets Polish consumers buy products online and pick them up at drive-in locations at Carrefour stores. And in May the retailer launched a Polish Facebook page.

However, when it comes to Eastern European e-commerce, many retailers have their eyes on Russia, which muscled its way into the ranks of the world's most attractive economies by more than doubling its gross domestic product per capita from 2003 to 2008, according to the World Bank.

Russia is unquestionably the giant of Eastern Europe, and it's nowhere near fully grown. Russian online sales are expected to grow from $12 billion in 2012 to $36 billion by 2015, says investment bank Morgan Stanley. Russia has the largest online audience in Europe with 61.3 million web users, or 15% of Europe's total of 408.3 million, according to web measurement firm comScore Inc. And, after Italy, it boasts Europe's fastest-growing online population, up 15% in 2012 from about 53.3 million in 2011.

Retailers reaping the greatest sales in the country are the ones who understand Russian consumers' shopping preferences and who have learned to navigate the hurdles that come with a young e-commerce market in an emerging economy. They have devised ways to sell to consumers who want to buy online but pay with cash, and have found ways to get goods to shoppers when the government postal service is widely viewed as unreliable. They are also using more sophisticated types of online advertising, such as retargeting, along with other innovative online marketing tactics. They are busy because the opportunity is knocking and they don't want to miss it.

Russia's online sales potential is attracting big international players. Online marketplace eBay Inc. in March announced a major investment to grow its business in the region. Its efforts include a Russian-language site and mobile initiatives in collaboration with local merchants to drive Russian consumers into stores. And U.K.-based apparel retailer ASOS Plc Holdings (No. 32 in the Europe 500) recently put a team on the ground in the country and is developing a dedicated Cyrillic web site and marketing team for the region.

Local retailers, meanwhile, are reaping the rewards of having set up online shops years ago in the country. Ozon.ru (No. 99), for example, fashions itself as the Amazon.com of Russia and, like Amazon.com, it got into e-commerce early, grew at a fast pace and devised creative ways to makes its e-commerce site appealing. Amazon.com does not currently sell into Russia.

Ozon.ru, which launched in 1998, sells directly to shoppers and, like Amazon.com Inc., also operates an online marketplace where other retailers sell their wares. About a third of Ozon's sales are multimedia products and books, another third electronics and the rest other categories. The retailer says sales of cosmetics, products for mothers and kids, home and decor, and apparel are growing rapidly.

The site is part of the larger Ozon Group, which is comprised of five primary businesses: Ozon.ru; O-Courier, a delivery service that also fulfills orders on behalf of other retailers; online travel site Ozon Travel, which launched in 2009; Sapato.ru, an online shoe and accessories retailer that launched in 2010 and was purchased by Ozon in February 2012; and eSolutions, which launched in 2013 and provides e-commerce technology and services to other e-retailers. Ozon in April also launched Ozonru.kz, an e-commerce site for shoppers in Kazakhstan, says Mariya Nazamutdinova, head of public relations for Ozon Holdings.

The retailer's sales are growing at a pace many merchants would envy. Ozon's 2012 web sales totaled $250.35 million, up 55% from $161.22 million a year earlier, according to the 2013 Europe 500.

Much of Ozon's web retailing success stems from finding creative solutions to regional and logistical stumbling blocks, the retailer says. That includes launching O-Courier in 2003. That type of service might not be necessary in more developed economies, but it was necessary given the Russian e-commerce landscape, Nazamutdinova says. "Russia differs from Europe and the U.S.A.," she says. "[E-commerce] is really huge, growing 25% to 30% annually, but a logistical system similar to UPS doesn't exist."

The Russian postal service, Pochta Rossii, won't guarantee that an item will arrive by a specific date, Nazamutdinova says. And parcels are often lost, stolen or delivered to the wrong address, says Sergei Millian, Belarus-born president of the Russian-American Chamber of Commerce, which aims to bring together U.S. and former USSR companies. To guarantee its shoppers delivery by a certain date, Ozon decided to deliver the goods itself.

O-Courier delivers items sold on Ozon.ru, Sapato.ru and 70 other online shops, including shoes and accessory retailer Mascotte and skin care retailer L'Occitane. Many of its deliveries arrive not at consumers' doors but at one of Ozon's 2,100 pickup points in 300 cities across Russia and Kazakhstan. Here, shoppers can pick up items and pay for them with cash if they choose. They can also prepay online with a payment card.

Shoppers who choose to have items delivered to their homes also can pay with cash. 80% of Ozon orders are paid with cash, Nazamutdinova says. Millian estimates 60% of all online orders in Russia are paid for with cash when the consumer receives the item. Ozon says customers in Moscow or St. Petersburg can typically get their goods in one day.

As Ozon has grown, investors have taken notice. In September 2011, it raised $100 million from a group of investors that includes Rakuten Inc., the Japan-based e-marketplace operator that bought U.S. e-retailer Buy.com Inc. and subsequently renamed it Rakuten.com Shopping. It used those funds to continue to innovate. For example, in 2011 it launched apps for Apple Inc.'s iPhone and phones operating on Google Inc.'s Android and Microsoft Corp.'s Windows and Samsung Electronics Co. Ltd.'s Bada smartphone operating systems. That followed the 2010 launch of its mobile commerce site. Still, less than 5% of sales stem from mobile devices, Nazamutdinova says.

Ozon markets to shoppers in part by sending about 1 million e-mails a day to its customers, and it also relies on appearing high in search engine results, other forms of online marketing and television advertising.

Marketers spent $1.9 billion advertising online in Russia last year, according to research firm DigitalGuru. In Russia, many marketers advertise online via the two top search engines, Google Russia and Yandex.ru, Millian says. Retailers are also increasingly marketing via VKontakte, or VK, a social network that Millian calls the Russian Facebook.

Some Russian retailers are using a more advanced form of online marketing to drive sales. X5 Retail Group N.V., which launched the E5.ru e-commerce site in Russia early last year to sell general merchandise, shows online shoppers images of products for sale on the site before they arrive at E5.ru, says Georgiy Levin, head of advertising and marketing communications. For visitors who leave E5.ru without completing a purchase, it shows images based on products they considered buying when they arrive on other sites in an advertising network.

X5 developed its new targeting application last year with Israel-based marketing technology vendor myThings. The vendor hosts images and descriptions of retailers' products, then serves the images up in banner ads placed on web sites via online advertising networks. It uses a shopper's online activity to decide what images to display in ads.

For example, if a shopper searches for a cordless iron on a comparison shopping site in a participating ad network, the retargeting system will display the same or a similar product from the retailer's site in ads the consumer sees on other web sites. A click of the ad will take a shopper to X5 to buy the item.

MyThings charges for its ads only when the shopper makes a purchase and that, on average works out to between $10 and $60 per acquired customer, says Michael Swope, myThings managing director for the U.S. market. MyThings also provides creative services, including ad copywriting and placing product images into banner ads, he adds.

MyThings also displays retargeting ads with product images on advertising network sites after a shopper abandons a client's web site without completing a purchase. X5 also deployed in December a "pretargeting system" that shows online shoppers items likely to interest them based, for example, on what they searched for online or viewed on a comparison shopping site, even before they ever visit E5.ru. When X5 bids to place that type of item in a myThings targeting ad, myThings' software displays an X5 ad a shopper can click to return to E5.ru. Swope says a client can pay for "first bid" rights so that its ad will appear before any competing ads for a particular product category.

That system has both lowered the retailer's cost of acquiring customers in Russia and increased its new-customer retention rate, Levin says. He notes that myThings' ads may cost more per individual order than other forms of marketing, but that new customers brought in through the program buy more products. "It offers a very good cost per client," Levin says.

There are plenty of online shopping clients in Russia already, and the pool is only getting bigger. To tap this surging sales potential, retailers need to extend a welcoming hand to these online shoppers, understand how they want to shop, and market to them in their language and on their terms. The web retailers doing that are gaining access to a growing republic of sales.

katie@verticalwebmedia.com

@KatieIR

Topics:

2013 Top 500 Europe Guide, AddVentures, Amazon.com Inc., Asos plc., buy.com inc., Carrefour Group, Delivery Club, DeliveryClub.ru, E5.ru, eastern europe, Eastern Europe e-commerce, eBay Inc, Google Inc.'s Android, L'Occitane, Mascotte, Microsoft Corp.'s Windows, mobile apps, mobile commerce, myThings, O-Courier, Ozon.ru, Polan online sales, Poland e-commerce, Polish Facebook, Rakuten Inc., Russia e-commerce, Russia online sales, Samsung Electronics Co. Ltd.'s Bada, X5 Retail Group N.V.

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