Internet penetration in Regions

Internet penetration in Russia is still uneven. There is a two-fold difference in the per cent 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 per cent 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.

Figure 3.5 Internet penetration in Regions of Russia from

http://russiansearchmarketing.com/facts-figures-russian-internet-growth-and-development/

As expected, Moscow and St. Petersburg (main cities in Russia) have the highest Internet penetration by a significant margin. Elsewhere the Internet penetration is still increasing as more people gain Internet access and start relying on it to solve their everyday needs. Generally, areas outside of Moscow and St. Petersburg are driving significant growth in a number of major industries.

Figure 3.6 Internet penetration according to the city size from

http://www.gfk.com/fileadmin/user_upload/dyna_content/RU/Documents/Press_Releases/2016/I nternet_Usage_Russia_2015.pdf

All these data should be taken into consideration when operating logistics and delivery planning.

3.3 Russian Е-commerce Industry Introduction (including food and beverage e-commerce)

Russia has got a very unique geographical and cultural position on the world map. It’s part European, it’s part Asian, but above all it’s Russia.

More than 143.7 million people live in Russia, which makes it the 9th biggest country in the world. Slightly more than 45% of all Russian people are between 25 and 54 years old. In early 2014, 59% of the adult population (69 million people) had access to the Internet, making Russia Europe’s number one in terms of Internet users.

COUNTRY RUSSIA

Population 143.7 million people

- % internet users 59%

Online sales €10.4 billion (2013)

Online stores worth mentioning: Ozon, Ulmart, KupiVIP

Table 3.1 E-commerce market in Russia in numbers from

http://ecommercenews.eu/ecommerce-per-country/ecommerce-russia/

The e-commerce market in Russia

With 160 million small packages and parcels sent to online consumers in 2015, up 10% from the previous year, Russia’s domestic online retail market grew in real terms. It also grew in roubles, reaching some 650 billion (+16%), with an average order value amounting to some 4,050 roubles (up from 3,750 roubles in 2014), according to Data Insight. According to East-West Digital News, the Russian ecommerce sector could grow to 35 billion to 50 billion euros by the end of this decade and exceed 75 billion euros in ten years.

Figure 3.7 Russian e-commerce market growth forecast from

https://www.ecommerceworldwide.com/AcuCustom/Sitename/DAM/002/e-retail_Russia.pdf

Given the rouble’s sharp depreciation (from 38.5 rub. per dollar in 2014 to 62 rub. per dollar in 2015 on average), the picture looks darker in dollars: market size fell to $10.5 billion for physical 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. 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.

It has been well-publicised that the Russian Federation has recently been affected by both international and domestic crisis; situation that caused current pseudo-stagnation of the Russian economy. However, despite these obstacles, the Russian e-commerce market continues to show consistency and growth at impressive double-digit rates, and of course specialists predict this

growth rate to slow down in near future. Never the less long-term expectations for this virtual market are still high, specialists point out that the full potential of Russian e-commerce has not been fulfilled yet⁶.

Big online stores in Russia.

The biggest on-line store in the Russian e-commerce field is Ulmart.ru. It has got a wide assortment of products: from electronics to items for the home and garden. Its 2013 turnover reached an estimated 42 billion euros, not including VAT or an important fraction of sales via offline. Among the other important players are Ozon, which can be seen as a Russian equivalent of Amazon, KupiVIP (a copycat of Venteprivee.com), group buying platform Biglion, platform Avito and the online properties of the German Otto Group. (see Appendix for diagrams)

E-commerce customers in Russia

As long as e-commerce is a relatively new phenomenon in Russia, consumers there generally distrust the safety of online transactions and, in certain cases, the honesty of online retailers.

That’s the reason why the most ubiquitous payment method (around 80%) is cash payment on delivery, as far as physical goods are concerned. Bank cards aren’t used very often for purchases even in real stores (even though it depends on the region you are looking at), but online it also represents a low part of total online consumer spending. Of course the situation has been changing.

The most popular local electronic currencies are Yandex Money, Webmoney and the QIWI Wallet. PayPal began serving domestic transactions only in late 2013. 93% of all domestic purchases made online are cash-on-delivery, according to SPSR Express.

6Ecommerce worldwide (2015, December 17). Re: E-retail in Russia. [on-line report]. Retrieved from:

https://www.ecommerceworldwide.com/AcuCustom/Sitename/DAM/002/e-retail_Russia.pdf

Yandex Money payment system was introduced by local searching engine Yandex. It’s a universal payment solution for payments online, that is being accepted by more than 65 000 internet retailers and on-line shops. This payment is used by more than 27% of Russian internet shoppers⁷. The national bank of Russia, Sberbank, owns 75% of shares and majority ownership in Yandex Money. Yandex Money e-wallet balance can be easily deposited through a bankcard or through a Sberbank’s ATMs.

Another successful and popular payment system in Russia is WebMoney. It’s an international settlement system, that offers customers a platform to operate their e-commerce business. Due to it’s convenient use WebMoney has gained over 28 million users all over the world. Web Money guarantees fast and secure online transactions.

QIWI Wallet is another popular payment system; its terminals are available for client self-service 24/7. QIWI terminals are installed in most big shopping centres and in convenient locations in the streets. The system is being used in 20 countries worldwide, offering a quick, secure method to pay bills, loans and even more. Main QIWI Wallet advantage – users can charge their account with cash without commission at any self-service terminal.

7Omelchuk Inna (2015, December 17). Re: We have gone through the main stages of the payment market development. [on-line magazine]. Retrieved from:

http://psm7.com/interview/my-proshli-vse-osnovnye-etapy-razvitiya-platezhnogo-rynka-aleksandr-magomedov-yandeks-dengi.html

Figure 3.8 Online payment methods in Russia, from Payvision.

Turnover of the Russian e-commerce market in 2015 reached $32 billion with 80 million online users, which is more than half of the Russia’s population. According to the e-Commerce User Index 2014 published by Markswebb Rank & Report, to date, the most popular items to buy online are airline- and train tickets, clothing, footwear, electronics including mobile phones and computers, cosmetics and personal hygiene products. Cash on delivery remains the most popular payment method for online purchases, however, more and more shoppers switch to other online payment methods such as credit/debit cards. The most active Russian city in terms of online shopping is Moscow – over 80% of the capital’s population make purchases online. Smaller cities stay behind due to a lower level of service of local online shops and relatively smaller amount of Internet users.

Russian online consumers are highly educated and technologically savvy; their social media engagement rates exceed global averages. Personal consumption levels lead the BRIC countries, with 60% of pre-tax income spent on shopping (the highest in Europe) – with disposable income levels supported by low housing payments, socialized healthcare and a flat personal income tax

of 13%. Top selling online categories are consumer electronics, apparel & accessories, and auto parts.

Cross-border sales account for an estimated 10-15% of total ecommerce sales in Russia, as many consumers find the product selection and prices to be better abroad. Additionally, a history of fraud by domestic sellers gives recognized and reliable foreign brands a leg up in capturing consumer trust and wallet. Import tax and duty de minimums thresholds of 1,000 EUR per private individual per month are globally competitive (but highly regulated and currently under government review).

Several logistical challenges persist in selling into Russia. English proficiency is very low; only 5% of Russians speak English. Payments and marketing have a local flavour, with nearly 70% of online purchases being paid for via cash upon delivery, and search results on Yandex favouring local companies and translated websites. Lastly, 9 time zones, 6.6 million square miles and a notoriously unreliable and slow postal service means use of courier services are a must⁸!

8Russian Search Marketing (2015, May 19). Facts & Figures: Russian Internet Growth and Development. [on-line report]. Retrieved from: http://russiansearchmarketing.com/facts-figures-russian-internet-growth-and-development/

Figure 3.9 B2C e-commerce sales in Russia from 2011 to 2016 from http://www.statista.com/statistics/280929/b2c-e-commerce-sales-in-russia/

Food and beverage e-commerce in Russia

Starting from august 2014 Russia decided to ban $25 billion worth of food imports from the EU, US and other countries. It means that there is still a huge need for import from other countries.

This also means that exporters in countries unaffected by the bans have a once-in-a-decade chance to acquire a share of this huge market.

Being seventh-largest market in the world, Russia’s population is growing, and changes in tastes and technology opened up the sector to new suppliers and new ideas.

Usually, entering a market of Russia’s size and potential means competition to get the products on the shelves is fierce, but geopolitics have dramatically altered the landscape.

Of course Russians show certain preferences when shopping on-line. Three categories are taking up a significant portion of this online marketplace: consumer electronics (42%), clothing and footwear (13%) and car parts (10%). See the chart below.

Figure 3.10 Russian e-commerce by shares from

https://www.ecommerceworldwide.com/AcuCustom/Sitename/DAM/002/e-retail_Russia.pdf

Food and drink online shopping constitutes only 2% of the overall e-commerce, but the rise of online grocery shopping in Russia is catalyst for the growth of its food sector. Russia has the most internet users in Europe, and this is a serious increase in food e-commerce – a study from Euromonitor estimates that online sales of food and drink in Russia will grow 11% year on year up to 2018.

Online shopping has been unfamiliar territory for many Russians, but the rewards for diving into the sector can be big. One Russian online retailer, Azbuka Vkusa, tripled the size of its warehouse in 2015 to meet online sales demand, and its customers spend four times as much online than they do in store.

While logistics issues can still pose a problem for the home delivery market in the capital and elsewhere, this growth in online sales is another factor driving demand in Russia’s booming food industry.

Russia is one of the largest B2C E-Commerce markets in the world. In 2014, it ranked ninth worldwide, fourth in Europeand second among the BRIC countries in terms of online retail sales,

E-Commerce sales grow at double-digit rates and maintain the mentioned global rankings in the foreseeable future. Though overall retail sales are in a decline and consumer confidence is at an all-time low, the B2C E-Commerce market in Russia still has room for growth due to its untapped potential.

Of course one of the most well-known is Aliexpress. Every day several million Russian shoppers browse Aliepxress.com, and those Russian consumers’ orders result in hundreds of thousands of packages being shipped each day from China to Russia, according to Alibaba Group Holding Ltd.

(the parent company of AliExpress)⁹.

Alibaba says Aliexpress offer a place where Russian consumers, especially those living in smaller cities or towns, can access a vast selection of products at low prices, including many items that they can’t find in their local markets.

After Alibaba rolled out a Russian-language version of AliExpress, ru.aliexpress.com, that accepts the most popular online payment options for Russian shoppers, it became even more accessible for Russians. But most products people buy there are cheep clothes and consumer electronics, Russians are taking food and beverage seriously and need local platform which they could trust to do food and beverage on-line shopping.

3.5 Tea market in Russia (off-line and on-line market)

Tea drinking is a traditional leisure activity for Russians historically and nowadays. Russia was one of the first countries to be introduced to tea in the mid-1600s. The Chinese ambassador to Moscow made a gift of several chests of tea to Tsar Aleksey Mikhaylovich. During this period, Russia was attempting to establish trade with China and tea soon became one of the desired imports.

9Tong Frank (2015, June 23). Re: Alibaba says its Aliexpress.com is the leading retail site in Russia. [e-commerce intelligence portal]. Retrieved from:

https://www.internetretailer.com/2015/06/23/alibaba-says-its-aliexpresscom-leading-retail-site-ru

Tea was appealing to the Russian life-style because it was a warm and hearty brew. Russians have always preferred a strong, dark brew, which is sweetened with sugar, jam or honey.

To this day, tea and vodka are the two primary beverages in Russian society.

Russia is home to one of the world’s biggest tea market. In fact, the statistics are showing that 94%

of all Russians are tea drinkers. The nation is the world’s second biggest tea market and the eighth

largest coffee market globally¹⁰.

According to a presentation at the 2015 World Tea Expo, Russian retail sales of tea totalled

$4 billion in 2014. According to the report from the International Coffee Organisation tea makes up two thirds of Russia’s entire hot drinks sector.

Traditionally tea has been an integral part of Russian life since XVII centaury. The figures show that even of economic conditions fail to blunt Russian appetites for this particular beverage. Euromonitor suggests Russia’s tea market will grow at a steady 1% annually for the foreseeable future. Small

The 2015 saw Russian businesses import a total of 170,5 tons of tea worth $645.7 million. The share of black tea constituted 91.6%, meanwhile the share of green tea was 8.4%. For context, 168,5 tons of various teas were imported in 2014 at a value of $638.5 million. The figures are showing the huge desire for tea amongst Russia’s many millions of consumers.

The share of black and green teas in the market has been stable for a decade, since 2006. The share is 90%to 10%. The green tea is popular, but not as popular as black tea, it has been defined by two factors: the main export comes from Sri-Lanka, Kenya and India (the countries that mostly produce

10Sichev Michael (2015, May 10). Re: Review of Russia tea and coffee market. [Online magazine survey]. Retrievedfrom: http://www.foodmarket.spb.ru/current.php?article=2151

black teas) and also because the green tea share is manly comes from the premium part of the market, high quality, not tea bags packaging¹¹.

Figure 3.11 Tea import dynamics in Russia from 2001 to 2015 (thousand tones) from http://ab-centre.ru/news/rynok-chaya-rossii-v-2001-2016-gg

Regarding import, three nations dominate Russian tea imports, accounting for nearly 70% of total volumes shipped. Sri Lanka comes out on top, supplying 29.91% of tea imports, followed by India with 23.52% with Kenya rounding off the big three by shipping 15.57% of total tea imports to Russia in 2015.

Black tea is the most popular variety on the market, as 86% of Russian consumers take their tea this way. Green teas hold a 9% market share while herbal varieties are not very popular. Just 1%

of Russians regularly consume herbal teas.

11CHIN-RU (2015, June 19). Re: Russia tea market survey. [Online company survey]. Retrieved from: http://chin-ru.com/rynok-chaja-v-rossii/

While loose tea seems to rule the market, packaged tea and tea bags are seeing their popularity rise.

As such, bulk imports of tea are set to rise as domestic brands seek to match demand.

Some chain shops opening tea and coffee shops that sell packaged tea. But the quality of tea sold in those is very low. Those chain shops mainly constitute the 10% share of Russian green tea market.

But the demand for exotic Chinese tea obviously exists in Russia. The Russian has got a great interest for the exotic, products from Asia, to be more specific from China.

Russians have always had international tastes – you cannot move in Moscow for sushi restaurants – but now suppliers of more exotic products are seeing Russia as an invaluable market. For example, the first cargo of buffalo meat from India hit the shelves in Russia in March 2015, and South African farmers signed deals at the WorldFood Moscow exhibition directly after the import bans to export ostrich meat to two Russian clients.

Judging from the data gathered through Yandex Wordstat (the analogy for Google Adwords) the popularity of green tea in Russia is enormous and there is great potential for the on-line trade in this area.

Yandex Wordstat shows search query statistics for searches on Yandex that include the words or phrases one entered and other searches made by Internet users. It shows the interest to a given product in the Internet. The acceptable number for Russian regions and Moscow is above 3000-5000 queries. For “green tea” query the result in Yandex Wordstat is 166 286, “Green tea buy” - 11 385,

“Milk green tea” - 10 947, “Chinese green tea” - 9 597, “Oolong tea” – 22 511 etc. So there is a solid interest in the product in the Russian market.

Table 3.2 Yandex Wordstat data on “Green tea” key words in numbers from Yandex Wordstat Internet, on-line shops that’s how Russian market tries to meet the existing demand in Russia

There is a great number of blogs and on-line shops selling authentic Chinese green tea. Google shows up to 5 million search results for “Chinese Tea Shop”.

Russian Internet differs a lot from the civilised “western” Internet. One can find lots of one-day online tea shops or tea shops that sell low quality tea products from China. There are also many websites that are organised chaotically and look old and ill-organised. Many of them don’t actually work. So there is a great potential for an online shop platform that provides accurate, cultural and historical information on tea product.

There is, though, a popular online shop website in Russian selling tea from Mainland China. In this work I’ll devote a chapter to analysing the website business model.

3.6 Summary

The domestic e-commerce market in Russia increased from 560 billion roubles in 2014 to 650 roubles in 2015. It now accounts to 2 percent of the total retail industry in Russia, so there is still

The domestic e-commerce market in Russia increased from 560 billion roubles in 2014 to 650 roubles in 2015. It now accounts to 2 percent of the total retail industry in Russia, so there is still