Amazon Enters Russia

amazon.ruNews is breaking today by Forbes Russia and RIA-Novosti about Amazon’s plan to open a Russian office. Subsequently, posts appeared on TechCrunch and Engadget about the move, but there has been no corroboration by the company.

While the rumours about this have been circulating for months, this is the first time concrete details have been published by the international media. Speculation had initially arisen from reviewing openings on Amazon’s recruitment website, several of which request Russian market experience and language ability. At least one Russian-based employee, Arkady Vitrouk, lists himself as affiliated with Amazon Kindle on his LinkedIn profile. This seems to be a common way of uncovering new entrants in Russia before their official announcement, as it also occurred with Kayak’s recent opening in Russia.

It appears that Amazon’s strategy in Russia is to initially focus on digital media products such as Kindle e-books and other downloadable software, digital music and apps. While these are logical stepping stones as they avoid Russia’s notoriously inefficient and expensive distribution channels, selling digital media products in Russia is very challenging given rampant illegal downloading.

While Russia’s accession to the WTO promises to tighten up enforcement, no significant action has yet been detected, nor is anticipated in the near term. Indeed, one of the reasons that VK, Russia’s leading social media network, is an outlier in terms of minutes of use per user per day, is the ease in which its users can freely access digital media files.

Of course, Amazon is already very active in Russia as a cross-border seller of physical and digital products. Market estimates for 2012 are that Russians purchased online about $1 billion of out of a total of $12 billion through international sellers which had no physical presence in Russia. eBay alone is reporting that their Russian sales amounted to $400 million in 2012. Given these market measures, Amazon’s sales of physical goods in Russia are easily in the hundreds of millions of dollars.

So, another practical reason for Amazon establishing a Russian branch is the need to deal with the sale of physical goods to its Russian customers, as the company must surely be seeing volumes in Russia explode. Their cross-border sales are likely already facing capacity constraints, since each order must go independently through Russian customs, and shipping costs must be eating into profit margins. So far in 2013, there has been a massive surge in cross-border e-commerce imports, to the extent that EMS-Russian Post is currently limiting the volume of new international parcels it will accept, while it deals with a backlog rumoured to total about 500 tonnes.

Russian Post backlog

Russian Post’s backlog of unprocessed parcels stands at 500 tonnes!

Amazon’s localization options in Russia include building an independent distribution network, working with a Russian logistics partner, or acquiring these capabilities from an existing company. There are only a handful of realistic acquisition options for the company, and none of these companies are likely to object to a fair offer since most have already planned IPOs to provide liquidity for their shareholders as well as expansion capital.

In the longer run, Amazon certainly does need to be “on the ground” with a localized Russian offering in order to maintain its global standing as an e-commerce leader. With cash-on-delivery accounting for up to 80% of sales at Ozon.ru (the “Russian Amazon”), the “real” Amazon is severely limiting its addressable market in Russia by only operating as a cross-border player.

Another US-based behemoth, eBay, has announced aggressive plans for expansion in Russia, although they function as a platform for other sellers and don’t have to take on the cause of improving the physical distribution environment, other than encouraging efficiency and transparency as a means of increasing the volume of transactions occurring on their platform. To a large extent, US-based e-commerce companies have conceded the Russian market to local players and European companies until now. All significant global e-commerce competitors are also eyeing Russia. Even China’s most prominent e-commerce companies are moving in on Russian territory.

And in the even bigger picture, all retailers with global ambitions — including those which primarily focus on offline channels — must make a serious assessment of their Russian market potential. Emerging markets are where their growth will increasingly originate – there’s no denying the impact of the massive demographic changes taking place, which will shift economic power from West to East.

 

About Leighton Peter Prabhu

I am a partner in Interstice Consulting LLP and head of the Russian office. My practice focuses on e-commerce business and marketing consulting, especially for foreign e-commerce brands entering the Russian market. I also serve as a consultant to some of the largest international portfolio investors in Russian equities (both public and private). You can find out more about my background and business interests on LinkedIn. You can also connect with me on Twitter and on Google+.

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