Russia Ecommerce Market Is Under-Penetrated!

Today, we bring your attention to Russia ecommerce market. Here’s why

You may be very familiar with the US ecommerce giant, Amazon, with a market capitalization  $1.6 trillion. From its IPO price of $18 a share back in 1997, to the current share price of more than $3200, it represents a whopping 178 x returns! Meaning, if you have invested $10,000 back in 1997, it will be worth $1.78 million today.

But what if you could travel back in time and buy Amazon when it was still cheap. Would you like to do that?

So, we will share with you how you might be able to do that in an under-penetrated Russia ecommerce market. Let’s take a look!

Russia Ecommerce Market Overview

Just a quick overview. Russia has a population of more than 144 million people, making it the 9th largest country in the world. As a reference, note that the US has a population of around 328 million people.

Russia’s 80% internet penetration rate is higher than that of China, and on par with US and other emerging markets.

Yet, the country’s ecommerce penetration was only about 11% of total retail sales in 2020. Comparatively, the United States has a penetration rate of around 19% for the same year. In terms of volume, Russia’s ecommerce sales was estimated to be about US$35 billion. On the other hand, ecommerce sales in the US was around US$800 billion in 2020.

Russia Ecommerce Market Opportunity

Russia Ecommerce Market Penetration

Source: Barings.com / Why Russia May be Set for an Explosion in E-commerce Growth

Such a high internet penetration rate alongside a low ecommerce penetration, represents a substantial opportunity for Russia’s Ecommerce market to grow rapidly in the near future.

You can observe this from the Covid-19 crisis, which actually served as a catalyst that accelerated Russia’s ecommerce growth. The country’s Ecommerce penetration increased from from 7% in 2019 to 11% in 2020. That’s simply because more people are forced to shop online. We are expecting online sales to grow by 10 – 15% a year over the next 5 years, according to Euromonitor.

The Catch In The Russia Ecommerce Market

Well, the problem is that there must be some reasons behind this gap. Why ecommerce hasn’t taken off as fast as its counterparts? So, we researched and identified one key reason for the low penetration rate of online retail in Russia. It is sparsely populated.

Given its vast size in terms of land area, Russia stretches across 11 time zones. To put this in perspective, it is bigger than the US by 74%. Yet, Russia’s population only makes up about 44% of the number of people in the US.

You can see from the snapshot below, major cities are located very far away from each other. This presents a very challenging logistical environment.

Thus, companies will need to invest heavily in both delivery and warehousing infrastructures. So that they can stock enough products to maintain the current level of service for the sparsely populated country. We can now see why Amazon has not entered Russia to extend its ecommerce presence.

Russia Ecommerce Market Logistical Challenges

Source: Reuters / Covid-19 crisis: a shot in the arm for Russian e-commerce

Russia Ecommerce Market Players

The absence of foreign ecommerce giant and local domination has led to a fragmented Russian market. To put it into perspective, Amazon takes up half of the ecommerce sales in the U.S. Similarly, Alibaba controls more than 57% of the ecommerce market in China. However, in Russia, the top four companies accounted for just 27% of the market.

Key players include Wildberries, a privately owned company, which leads with a 15% market share, and Ozon, which went public in November 2020, and has a 7% share of the market. Other competitors include Aliexpress Russia, a joint venture between the Chinese tech giant Alibaba and Russian partners. Another key competitor is Sbermarket, a joint venture between Russia’s largest bank Sberbank and internet group Mail.Ru.

Growth And Development

Despite the fragmented market and geographical challenges, we are beginning to see signs of rapid online retail adoption catalyzed by the coronavirus pandemic.

For instance, Wildberries saw a spurt in growth of its new customers in the first nine months of 2020. The company added 12 million new customers, bringing its total customer base to 34 million. The company now has 13 warehouses and a handful of distribution centres across Russia to help reduce delivery times.

Similarly, Ozon has committed to spending $300 million on logistical improvements. They have opened a logistics centre in Rostov-on-Don, close to Ukraine, for same-day delivery. The company also benefited from the pandemic situation, recording an 84% increase in new active buyers year-on-year.

Sbermarket saw the number orders in major cities at 15-17 times higher in the third quarter of 2020 than the beginning of the year.

Conclusion

To sum it up, Russia’s lagging behind in terms of its ecommerce penetration can be an opportunity for investors. By referencing comparable financials of companies in the U.S, one can better gauge the potential and profitability of ecommerce companies in the rising online retail market in Russia.

The ecommerce market in Russia could very well progress like the one in the Chinese market. In order for an ecommerce market leader to emerge, the company needs to develop a marketplace model, invest heavily to improve logistical infrastructures in the country, and provide a financial system and support for merchants and suppliers.

However, given the fragmented nature of the ecommerce market, it may be challenging to identify the eventual winner. Then again, there may be multiple winners eventually, as the online retail market continues to expand at a rapid pace.

But that doesn’t mean that we can just buy into any ecommerce or tech companies in Russia. They can still be overvalued depending on the individual stocks. This is especially so in the current hype of the financial market in general.

What’s crucial is that due diligence and thorough analysis are conducted. And investors need to buy in with a margin of safety. Practising such prudence will reduce the risk of overpaying for overvalued stocks, and translate to higher returns on investment!

If you want to find out how we research and look at companies to identify investment opportunities, whether in the Russian ecommerce market, or other sectors and industries, sign up for our mailing list below, so that you can be informed once our next tip and analysis are out!

Keep learning and happy investing!


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