Russia: a Market to Reckon With – eCommerce and Internet in Russia

Internet penetration has been growing rapidly in Russia during the past few years. 

According to a recent GfK study, Internet penetration exceeded 70%, with 84 million users aged 16 or more across the country, compared to under 40% just five years back.

Russia - A Market to Reckon With – eCommerce and Internet in RussiaWith over 70 million people using Internet monthly, Russia has the biggest online audience in Europe. Up to 2015 the online market grew 25% annually.

Research agency Data Insight reports that in 2015 160 million small packages and parcels sent to online shoppers in 2015, up 10% from the previous year. Russia’s domestic online retail market grew in real terms. It also grew in Rubles, reaching some 650 billion (+16%), with an average order value amounting to some 4,050 rubles (up from 3,750 rubles in 2014), according to Data Insight. Given the ruble’s sharp depreciation (from 38.5 rub. per dollar in 2014 to 62 rub. per dollar in 2015 on average according to Data Insight), the picture looks darker in US dollars: market size fell to USD10.5 billion online retail goods, down 28% from 2014. These numbers do not include cross-border orders, deliveries of ready meals as well as corporate, C2C, MLM and group purchases.

 

Percentage Share of Online Retail in Total Retail Sales

Russia - Percentage Share of Online Retail in Total Retail Sales 

Growing share of online retail

As the graoh above shows, online retail currently accounts for just over 2% of the Russian retail marker, forecast to reach 5-7% in the near future. Although in 2015 both online traffic and growth of e-commerce sales have slowed down, purchases of digital goods and tickets are still increasing with 15 – 20%.

In 2015, the fastest-growing categories were sporting goods and leisure items, pet goods, children’s goods, clothing and footwear, as well as groceries. Meanwhile, electronic devices, home appliances, cosmetics and perfumes were less in demand than during the previous year.

 

Chinese retailers fuel cross-border sales

Foreign retailers’ online retail sales have grown considerably over the past few years.  36% of Russian online shoppers have reported that they have made purchases from foreign internet shops, and crossborder online retail is one of the fastest growing segments in Russian ecommerce.

Since mid-2014 Chinese retailers are dominating the Russian cross border market mainly due to unbeatable prices, a wide range of goods and fast delivery. In these days of rapid depreciation of the Ruble most western retailers lost their competitiveness as the ruble lost half of its value in 2014 – 2015.

Even if the number of sales is declining, the average amount of orders in rubles is still growing. For example, the online sales in the 200 largest online stores increased 15% between August 2013 to August 2014, but about half of them had less orders than a year ago. Also, the new limits for cross-border online purchases (150 euro) may affect electronics and luxury goods markets. The majority of cross border purchases cost less than 40 euros.

 

Online shoppers driven by price

Russians have a short online shopping history, on average three years compared to eight in the USA, and the number of first-time buyers is considerable. Also, several prominent retailers, such as Magnit, Lenta and Metro, are still absent from the online market.

The majority (64%) of online shoppers are female, and mostly between 30-39 years old. However, men tend to spend more online than women as they buy more expensive items (car parts, mobile phones, computers). The average age of an online shopper is 44 years.

As many other online shoppers around the world, Russian shoppers are mostly driven by prices, convenience and a wider range of goods available online. And equally shared are trust and confidence both in buying online as the reliability of the online store.

Yet, the Russian e-commerce market differs from the West in many ways. More than 90% of the Russian Internet users use social networks. Therefore, it is important to find the customers on Russian sites like Yandex and Vkontakte, to communicate in Russian language, and to build trust with your customers. Customer service is equally important as Russians want immediate answers to their questions with maximum 15 minutes waiting time.

 

Mobile drives growth

According to the earlier mentioned GfK study, much of the growth comes from increasing mobile connectivity. According to the survey, mobile Internet access in Russia more than doubled during the year. By the end of 2015, 37.5% of users 16 years and older went online by way of their phone and 19.5% from tablets. In 2014, the same research found that 17.6% of users were connecting on mobile phones and 8.4% by tablets, displaying a major climb from 2014 to the end of 2015. Access to Wi-Fi and mobile application packages from the major telecom operators contributed to the mobile rise in Russia.

Today in Russia there are approximately 50 million users accessing the Internet from mobile devices, which is 42% of the adult population in Russia. The older population drove a strong portion of the Internet growth because 97% of younger users were already online. The younger users (16-29) drove more of the mobile activity. 70% of this age group goes online through their phones and 35% on tablets.

 

Current challenges for Russian online retail

The current challenges of the Russian economy undermine the so far mushroom growth of e-commerce.  Experts predicted that gross domestic product (GDP) would fall by 3.8 per cent in 2015 and 0.3 per cent in 2016. Domestic demand remains weak, as consumer income is shrinking and the exchange rate dynamics has made goods in US dollar price almost 20% more expensive to Russian customers.

The Russian online retail business is at the moment plagued with obstacles. The payment infrastructure and logistics with customs and delivery are problematic. Couriers carry most deliveries and about 20% are self-deliveries from the store or warehouse. The Russian post is facing new challenges due to the rapid increase of online purchases from abroad. This has resulted in up to two month’s delays in deliveries. The users also complain of lost or broken parcels. Lack of trust in online payment security is a big barrier for online business in Russia. Most purchases are paid for by cash on delivery, and only roughly 20% of payments are made by bankcard online.

 

IORMA’s Conclusion:

Beyond the current ups and downs of the Russian economy, it is clear that the full potential of the Russian e-commerce market is far from being tapped. Important growth is likely to resume after the current crisis. As main factors for this favourable outlook we see the growing number of internet users, growing trust and confidence in shopping online, improving payment and fulfilment options as well as the continuing opening up of the regions.  

In our view Russia remains a highly interesting and promising market to do business, both for retailers and online only retailers. However as the country is also highly complex to do business, it is essential when entering this huge and attractive market to find a reliable local partner who has experience, knows the market and consumer mentality and may guide and closely accompany new entrants to successfully enter this highly potential market.

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IORMA Research – February 2016 – AW