Transcript from Voice of Russia radio, 19 April 2013, with Dan Moody and Peter Prabhu, discussing Amazon’s entry into Russia.
Dan: Talking to the Voice of Russia about Amazon’s move into the Russian market. This is Peter Prabhu, a Managing Partner of Interstice Consulting and head of their branch in Russia.
Peter: [on why Amazon has been late to Russia] They’re a company that is looking globally and if you compare the opportunities in Russia with about 140 million people to China and India, I think from their point of view the potential of those markets is far greater. What Russia has going for it is per-capita income is a lot higher than these other couple of markets that I’ve mentioned but it’s still quite a difficult place to do business if you’re not on the ground. I’m sure they’ve looked at those two big players that you’ve mentioned as potential acquisition candidates and I wouldn’t rule that out in the future because, as a global company, it just makes logic that they should have a presence in Russia, but I’m not sure that those two companies are really extremely profitable from a bottom-line perspective. And neither is Amazon, for that matter, in the global scheme of things.
Dan: How do you mean it’s not “in the global scheme of things?”
Peter: I mean, compared to their sales and those of a typical offline retailer, Amazon’s been focusing on growth vs. profit margins. So if you look at their overall basic profit margin and gross profit margin it’s not as high as one would expect from an online retailer without those expenses of physical distribution retail outlets.
Dan: Do you think it’s a wise decision then for Amazon to establish kind of a ground presence? Do you think in that case it might be too much of a stretch for Amazon?
Peter: Well, yeah, I think the strategy makes sense to lead with digital in the Amazon name. They are already in Russia in a fairly big way just selling cross-border even though they may not have a local office. Cross-border sales in Russia were over $1 billion last year out of a total market of about $12 billion so people are buying from abroad and getting their packages delivered directly through international courier services. But it’s just been surging recently and actually the Russian Post has shut down as they’ve just been inundated with parcels from abroad. Even last week one of my clients, they were trying to send a package to a Russian customer through EMS where Russian Post takes care of their local services, and they’re not accepting packages coming to Russia through EMS.
Dan: Although you said your experience with Russian Post hasn’t been too bad in some of your e-commerce ventures, didn’t you?
Peter: Well, it depends on which service you’re running and where it’s being delivered. With Russian Post we haven’t really lost anything it just sometimes takes time. There have been just a couple of instances where we’ve lost packages. And the rates just are the only thing we can use in far-away places. It’s just not economical to service customers in Chukotka and places like that with private courier services. It’s the only option available and those customers are aware of that too, so it’s either buy something that they can get or do without. There’s just a lack of choice in the regions.
As I understand, Amazon’s strategy in Russia is the intellectual property so it’s distribution of digital products like Kindle e-books and other apps through their AppStore. I’d be surprised if they’re jumping into local physical goods and importing things and having a distribution centre here. I don’t think it’s really worth the investment of starting things off the ground so either they would be better off getting into it through acquisition of a local company… and there’s also an emerging segment of players who are offering stores on behalf of foreign companies so they would have a shared environment. That’s also a potential entry point.
Dan: Would you say now is probably one of the best times for certain types of companies to try and get involved in e-commerce?
Peter: I think a lot of people are pointing towards these next few years as an inflection point in the growth of the Russian e-commerce market. Partly that’s to do with more internationalization. People are more comfortable shopping abroad and using their credit cards and there’s just more stability, let’s say, in the general environment. We see that in our own projects — the percentage of people paying online vs. cash has grown dramatically in the last couple of years. That’s one thing in its favour. We still have these bottlenecks with physical distribution across the country. That’s not going to go away any time soon.
But from an international perspective, these companies that have been slow to the market, like Amazon, like eBay, have seen that Russian companies have basically taken over that gap in the market, by servicing Russian customers in their own language and with a local office. So I think that because, most of these companies acknowledge that the future is from emerging markets and international markets, that they need to be there on some level because that’s where their growth is coming from in the future. They are international to begin with, now.
Dan: It’s hard to ignore when you see the local players like the Russian Amazon equivalent. They’re making year-on-year, huge growth.
Peter: Yeah, on one level that’s true but it’s also a massive investment of resources to get into Russia because things are so specific here. Companies, let’s say not the giants of Amazon but mid-sized companies who are doing well elsewhere have depended on, let’s say, Google and their advertising network or social media marketing through Facebook and these two properties, which are quite massive internationally, are by far from the leaders in the Russian market so you have to kind of adapt your marketing strategies to these realities.
Dan: That was Peter Prabhu, Managing Partner of Interstice Consulting and head of their branch in Russia talking to me, Dan Moody, for the Voice of Russia.