Alan DraperAs domestic markets become saturated; many retailers have recognised the importance of expanding into new territories internationally in order to increase revenues and profits.
A.T. Kearney’s Global Retail Development Index™ (GRDI) reported that in 2013, developing countries have become hugely attractive targets for global expansion. The annual study ranks the top 30 developing countries for retail expansion globally. The 2013 report identified South America (Brazil, Chile and Uruguay), China and the UAE as having the most attractive markets. However, what was surprising was the exclusion of Russia from the top 20.
In the past, Russia was viewed as a bit of a backwater and a difficult place to do business. The country was plagued with logistics and delivery issues and there was a lack of effective payment options which both contributed to sluggish growth in the eCommerce sector.
However, things are beginning to improve and as a result, many global brands have started to invest in Russia. For instance, EBay Inc. launched their Russian language website in 2010 and following its success opened offices in Russia in 2012. China’s Alibaba Group and the UK fashion retailer, ASOS PLC, are among other international companies that recognise the strategic importance of Russia – with both companies launching Russian versions of their websites in recent months.
There are many reasons why these companies have decided to enter the Russian market and many more why other brands should follow suit.
1. Huge country
Russia’s sheer scale is very attractive to investors and brands alike. The country is the largest in the world and has a huge population of an estimated 143.5 million people. That’s almost as many as Germany and France combined.
2. Highly urbanised population
Russia is a highly urbanised country with 73.8% of the population living in urban areas. There are 10 Russian cities with a population of more than 1 million people, providing brands with access to huge markets in relatively small geographical areas.
3. Huge eCommerce market
According to the Russian search engine Yandex.ru, internet penetration in Russia rose 14% to 53 million users between 2010 and 2011, making Russia Europe’s largest internet market.
4. Huge opportunity for future growth
In 2012, Russian internet penetration was estimated to be just 51%. This means that there is still a significant opportunity for growth as new users and communities are connected to the internet and begin to shop online.
5. Persistent growth in consumer spending
Consumer spending has almost tripled in Russia since 2003 aided by rising consumer borrowing. Household spending currently accounts for about half of the Russian economy.
6. Relatively fast internet connections
High-speed Internet usage has exploded in Russia and has not been confined to major cities. In 2013, the average internet connection speed in Russia was estimated to be 6Mbps, an 8.4% increase on 2012, while the average connection speed in France was just 5.2Mbps. This allows brands to reliably deliver rich internet experiences with video and other interactive functionality.
7. Strong real wage growth & large middle class population
Russia is the most prosperous of the BRIC (Brazil, Russia, India and China) economies and the only BRIC country in with a tangible upper middle class today (10m households with income >US$50,000 at PPP(Purchasing Power Parity)).
The middle class population is also expected to increase in the future. It is estimated that 82% of all households in Russia will be part of the middle class by 2015 (Global Insight, Rosstat).
8. Russians are big spenders
As a result of the increase in real wage growth and the Russian middle class, many countries’ tourist boards are reporting an influx of Russian tourists. Many of these reports claim that Russians spend more than their European counterparts. For instance, Russians were the second biggest spenders of any tourists to Dubai in 2011, just behind UK visitors.
High net worth Russian shoppers typically seek out luxury British brands when visiting the UK or shopping online. To meet demand, the Mercury Group, Russia’s biggest retailer, has agreed franchise deals to operate physical stores for some of the world’s best-known luxury fashion retailers including Burberry, Ermenegildo Zegna, and Giorgio Armani.
While Russia presents so many opportunities, breaking into the Russian market can be challenging. It is recommended that brands begin with a Russian language website, professionally translated and localised, before embarking on expanding into physical stores.
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This article was written for Business 2 Community by Alan Draper.
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Excellent overview of the positive fundamentals of Russia. However, there are numerous negative issues too. The key to understand is that domestic e-commerce is primarily a COD business, which goes offline right after the order is made. Russian e-commerce is very labour intensive.
Leighton Prabhu
Blog: insights into russian e-commerce