Shopping Moves Online

November 2012 | Statistics

Online shopping is still in its early stages of development in Russia and other developing countries, but its prospects are good with high growth potential. The industry’s projected annual growth rate (CAGR) is expected to reach 21% from 2011-2015, a conclusion drawn by analysts at the Center for Strategic Research (SRC) ENTER, based on the latest statistics for inedible online commerce.

As a result of the expanding market, online shopping is actively attracting new players to the industry. The market is consolidated relatively weakly at the moment: the largest player represented less than 3% of the market, whereas over 30,000 online retailers operate today, with more than 50 new stores opening daily. The intense level of competition developing in e-commerce has one advantage, however – it presents economists with a new understanding of the marketplace and how it works.

How will e-commerce evolve in Russia and around the world? What will support its growth, and what, if anything, will inhibit its development? And what should a company bet on to become a leader in the market? The Center for Strategic Research ENTER conducted research to find answers to questions like this, and presented its results in a study called “Contemporary Trends in the Development of Online Retail: Facts and Figures”. Research for the presentation was based on data processed from the non-food markets in more than 80 countries, such as the BRICS countries, the United States, and the European Union.

Preliminary projections show that the average growth rate of online retail in Russia will be more than double the average growth rate for all standard retail from 2011-2015.

According to data from ENTER and other national statistical agencies, the global leader in terms of e-commerce company turnover is the European Union, which has a market size of $260 billion. Trailing the EU is the United States, with $194 billion, and the BRICS countries, which each earn approximately the same – Russia with $10.3 billion, Brazil, with $10.2 billion, and India, with $10 billion.

Additionally, the country with the highest projected growth in e-commerce for the same period is India, with a CAGR of more than 50%. Europe and the US, by contrast, have the lowest projected CAGRs, around 10%. Russia, Brazil, and India also have the lowest proportions of e-commerce sales compared to the country’s retails sales overall, with only 2% coming from online shopping: the European Union is the leader in this specific category, with 8% of its retail sales coming from online commerce.

The most “typical” country, in terms of e-commerce, is actually China: the percentage of e-commerce sales in the retail sector and its average growth rate for 2011-2015 accurately reflect the average for the countries examined in the survey.

China also exhibits the most significant growth rate for online retail  – in the first half of 2011, China’s growth rate reached 219%, as compared to the first half of 2010, and in the first half of 2012, online retail sales grew by 122% compared with the first half of 2011. Analogous indicators in Russia rose by 30% in both 2011 and 2012, and data in the European Union changed very little – only 9% and 9.5, respectively.

Online retail does have its advantages – according to ENTER’s assessment, along with data from Bloomberg, Reuters, and Google Finance, the growth rate leaders are China’s and Russia’s top three online retailers, which increased online sales in 2011 by an average of 174% and 100% respectively. In comparison, the rate in Brazil was 44%, 34% in South Africa, 24% in the United States, and 22% in India. It is also worth noting that the greatest growth in revenue rates over the last 5 years came from companies operating in the consumer electronics, pet care, and automobile sectors. Out of all online commercial retail, the most profitable sectors proved to be cosmetics and perfume, automotive (as mentioned above), clothing, and shoes.

The high growth for online retail potential in Russia, and around the world, is facilitated by factors by the economy overall and by specific sectors. According to the results of the analysis, there are several key factors that influence the development of e-commerce more so than others, such as infrastructure, state regulation, and economic, socio-cultural, and technological factors (IGEST).

According to data from the World Bank and the International Monetary Fund, Russia’s per-capita GDP in 2011 was $13.1 thousand – the highest per-capita GDP among all the BRICS countries in 2011 from a macroeconomic point of view, which demonstrates its relatively high standard of living and its purchasing power. But even this high number is 3.5 times less that the U.S.’s GDP. India, on the other hand, has the lowest per-capita GDP, around $1.5 thousand. Globally, the higher growth rates for per-capita GDP were found in Russia (around 25%) and China (around 22.5%), and the lowest rate was in the US (around 4%).

The increased prevalence of desktop computers and mobile Internet are actively supporting the development of e-commerce. In the Russian provinces, the highest growth rates of Internet access, a driver for increasing e-commerce sales, were in the Ural Federal District (18.6%), and the Southern and Northern Caucasus Federal Districts (19.5%) from the summer of 2011 to the summer of 2012, according to data from the Foundation for Public Opinion (FOM).

Certain infrastructural factors– such as the development of payment infrastructure, online credit, and remote payment systems – also play an important role. For example, only 10 of the top 30 online retailers in Moscow have a service where customers can pay with a credit card upon delivery, according to ENTER. For now, Moscow remains the undisputed leader, unsurprisingly, with 80% of the retailers allowing its customers to pay with a credit card online and 33% allowing its customers to pay with a car upon delivery. St. Petersburg is close on its heels, however, with 73% allowing the use of a credit card online, and 20% allowing upon delivery, and in Kazan, the numbers are 70% and 13%, respectively.

In comparison, cash-free operations in the United States, or using payment cards, make up 40% of the country’s GDP, as compared to Russia, where those operations only account for 2.5%. Similarly, the average citizen in the States owns 6 credit cards, whereas in Russia, that figure is only 1.2, according to data from the Bank of Russia. Given these numbers, Russia shows considerable potential for growth when it comes to cash-free payment.

So what is holding back the development of e-commerce in the country? The most important factors are the underdevelopment of Russia’s payment infrastructure, the insecurity of current cash-free transactions, and the complexity of return and exchange procedures. Furthermore, according to data from ENTER, there are large variations in the delivery times for ordered products; the minimum home delivery time for large goods delivered by an independent courier service in 5 days in Novosibirsk, which services the top 30 online retailers within the children’s product sector.

One fact that is particularly noteworthy is that online retailers can maintain average prices for their goods equally across all of Russia’s regions. The real cost of goods, however, can end up much higher than listed because of the high prices for shipping. As a result, the variations in price for middle-priced laptops throughout the country’s regions was no more than 7.5%, but the fastest delivery to Novosibirsk ended up being twice as expensive as a delivery to Voroezh.

According to ENTER, nearly 90% of the top 30 online retailers have a physical presence in Moscow, while only 63% have one in St. Petersburg. Elsewhere in Russia, Nizhny Novgorod, Kazan, and Samara lead, with more than 50% of the top stores present in each city.

But while this is the case for now, companies are actively working on a new delivery format – the “postamat”, which involves a special terminal with a built-in storage compartment, where an order can be delivered. 5 companies within the top 30 list have postamats in Moscow, and 4 of those have postamats in cities as far away from the capital as Novosibirsk, Omsk, and Krasnoyarsk.

Due to high-growth rates, e-commerce is becoming more and more attractive as an investment. According to Fast Lane Ventures, investments in start-ups increased by 350% from 2009-201, with the largest share of those investments going into e-commerce. Overall, Russian e-commerce received more than $340 million in investments from 2010-2011. Mergers and acquisitions activity also increased in global e-commerce: for instance, one of the world’s top Internet commerce market players, Rakuten, acquired at least 5 large global companies from 2010-2011, including Buy.com in the United States and Priceminster in France.

With all of this new data, it is possible to try and imagine the landscape for online retail in the future. Stores will most likely be multi-formatted; they will start interacting with customers online and use “smart” solutions to anticipate the desires of consumers and offer products based on past searches and purchases. The world of retail will also start seeing far more black and white QR codes, in-store purchases (with the use of NFC technology and smartphones), the “virtual” trying on of products, and other new technologies – all with the help of the mobile phones seen worldwide.

Text: Elena Shesternina