Russia has become the it girl of e-commerce. Even amid a slowing economy, the country’s online shopping increased 26 percent last year, to 510 billion rubles (about $14 billion), according to Moscow’s Data Insight, and could double by 2015. That has made the country an intriguing target for foreign players such as Amazon.com (AMZN), EBay (EBAY), Asos (ASC:LN), and China’s Alibaba Group, while boosting the fortunes of such local companies as search engine Yandex (YNDX) and Amazon-like Ozon.
The dark horse leading the race right now is Ulmart, an online retailer that reported $1.2 billion in sales last year. It has succeeded by doing what Amazon does not. Instead of wooing customers with low-cost home delivery, Ulmart encourages them to pick up their orders at urban outposts and warehouses that double as stores. While Amazon ships on such partners as United Parcel Service (UPS), Ulmart keeps its own fleet of 190 trucks. The St. Petersburg company ships fast-moving items in bulk from suppliers to urban outlets instead of breaking apart the shipment and repackaging it at a mega-hub. Where Amazon’s Jeff Bezos racked up $3 billion of losses in his early years, Ulmart’s chairman and major shareholder, Dmitry Kostygin, says his site has lost around $30 million in its first five years. “It’s in the ‘illions,’ but with an m,” he laughs. And yet Ulmart’s three-tier distribution and fleet allow it to bypass Russia’s byzantine postal service, turn around orders in as little as seven minutes, and accept cash in a country where many are reluctant to use credit cards. While Amazon has expanded deliveries and may be testing the waters in Russia, Kostygin says he’s not worried. “In this market,” he says. “Amazon has no chance.”
That prognosis may prove to be premature in a country where e-commerce makes up less than 2 percent of retail sales. But it points to the strength of the hybrid model that Ulmart’s co-founder and chief executive, Sergey Fedorinov, has built with Ulmart Outposts and Kibermarket stores. It also illustrates the intensity around Russia’s e-commerce business right now. Kostygin and Fedorinov were together in New York yesterday to promote the company to journalists. That follows an unusual press release earlier this month in which Ulmart announced it was shelving plans to become the “first major retailer in all of Europe” to accept Bitcoin as payment after the Bank of Russia warned that could promote illegal activities, such as money laundering or the financing of terrorism. Ulmart’s push comes at a time when Ozon CEO Maelle Gavett has also raised her public profile and Russia’s government is making it tougher for locals to buy goods at foreign sites.
Ulmart chairman Kostygin knows firsthand the power that foreign rivals wield when it comes to having capital and known brands. As chairman of the hypermarket chain Lenta, Kostygin tussled with TPG Capital when it took a controlling interest, though in yesterday’s interview he cited the U.S. private equity giant’s stake as a sign of Russia’s openness to foreign players. (Lenta is expected to raise at least $1 billion in its initial public offering on the London Stock Exchange.)
On one level, Ulmart’s formula is simple. Its product mix focuses largely on electronics, and its network sticks to the cities of “European” Russia, an area, about three times the size of Texas, where much of the country’s wealth and consumption are concentrated. Ulmart currently has three national hubs that average 12,000 square meters, or roughly 129,000 square feet, with plans to build two hubs almost twice that large this year. (Many of Amazon’s 100 fulfillment centers worldwide exceed 1 million square feet.) Customers can pick up or order goods at 30 urban warehouses, each of which range from 2,000 to 3,000 square meters. They can also have their orders sent to one of 250 outposts that are only 100 square meters or pay extra to get home delivery a day or two later on one of Ulmart’s 190 trucks. Those living in other parts of the country are subject to the vagaries of Russian Post, a system so sclerotic that Kostygin says it can take two weeks just to cover the 400 miles between Moscow and St. Petersburg.
Ulmart is not the only Russian player relying on pickup points to deliver goods ordered online. Ozon, the site that most resembles Amazon in look and product mix, also has a vast network of offline centers. While Ulmart sells 55,000 different products, Ozon.ru’s menu is well north of 2 million.
Unlike Fedorinov, Ozon CEO Maelle Gavet has tried to build her business across Russia’s nine time zones, which increases delivery costs. For years, those advantages were muted by a generous duty-free policy that let consumers order up to 1,000 euros at a time on foreign sites and have them shipped tax free. That has now changed, with lower limits and new customs rules that prompted FedEx (FDX) and DHL (DPW:GR) to suspend deliveries in January, resuming only after officials promised to simplify the process. Kostygin, for one, supports the tougher policy, saying “we’ve had considerable abuse of these rules, mostly by entrepreneurs who arrange shipments for their corporations without customs clearance.”
While smart distribution has helped make Ulmart a leading player online, Russian e-commerce is still at an early phase. Whether a company that now gets half its sales from electronics, such as iPhones, and its “MicroXperts” house brand will continue to dominate as more foreign players and consumers get into the game remains to be seen. CEO Fedorinov acknowledges that distribution is only one factor in success. With such children’s products as diapers and electronic toys becoming more popular on his site, he’s looking at expanding into new categories such as kids clothes and plans to take Ulmart’s distribution model to all of Russia over the next few years. He’s also made moves to create an Amazon-style marketplace for third-party retailers and talks about the power of big data and new customer tools. “What we have is not simply a model for Russia or selling electronics,” Fedorinov says. “The logistics component and platform could work anywhere in the world.”