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E-tailing in Russia

by Stuart Wilson, Tuesday 6 July 2010

Channel EMEA Editor Stuart Wilson focuses on e-tailers in the first part of a commentary series on what happened at the inaugural DISTREE Strategy Forum for senior executives working in the Russia & CIS IT channel.

The DISTREE Strategy Forum series already holds annual events in Monaco for EMEA’s leading distributors and in the UAE for senior executives from the Middle East retail channel. Building on the success of these events, launching the event in Russia was a natural progression The DISTREE Strategy Forum arrived in Russia on Thursday 24th June, taking place alongside the main DISTREE IT Channel Week (DITCW) event, which attracted 650-plus delegates.

As an exclusive invitation-only high-level discussion and networking platform, 40-plus channel VIPs attended the inaugural Strategy Forum for a day of discussion, debate and dialogue on the major issues impacting the growth and development of the Russia & CIS IT channel.

Payment issues

One of several topics up for discussion at the Strategy Forum was the emergence of e-tailers as a viable channel in the Russia & CIS market, and the unique challenges that impacted the growth of this route-to-market. In a lively discussion, expert speaker Ryan Mackey – assisted by Dmitriy Lavnikovich, senior consultant at GfK’s IT division in Russia - explored some of the successful e-commerce models in Western Europe and their viability in the Russian market.

While e-tail has started to emerge as a viable channel in the Russia & CIS region, there remain many obstacles to its success and retailers in the region are wary of investing too much time, money and effort in building e-tailer platforms before the channel reaches critical mass.

One of the main problems is payment mechanisms, with a lack of credit card penetration in Russia & CIS hampering the ability of consumers to purchase online. Some e-tailers have attempted to overcome this challenge by developing cash on delivery (COD) systems, whereby consumers order products online and pay when the product is delivered to them. This is not without its risks with one retailer claiming that some consumers order products and then change their mind and refuse to accept the delivery and pay for it.

Potential payment methods are starting to emerge, including special credit cards that can be funded by an individual and used only for online payments. According to the retailers present at the Strategy Forum, there remain some concerns from Russian consumers when it comes to inputting any sort of personal or financial information into a website.

Retailers in Russia & CIS are also acutely aware of the prospect that the rise of e-tailing as a viable channel could cannibalise traditional retail sales made through physical stores. This fear of cannibalisation was played out in the US and European retail markets and it remains a tough call for retailers in emerging market where e-tailing remains in its infancy. The question is when to invest in setting up an e-tailer platform? Go too early and there is no return on the investment and rivals have the opportunity to thoroughly examine your plans and strategies. Go too late and a retailer may have left itself a mountain to climb to displace early adopters – many of whom may actually only have an online presence.

The role of the web

Many of Russia’s major retailers currently view the internet as an information platform for consumers. Those that subscribe to this view will post information about products and even pricing details, but will still look to attract customers to a physical store to make the actual purchase. This model was not without its detractors, with some retailers complaining about the use of ‘phantom products’ to lure consumers to particular retail stores. This practice involves posting details of high demand products at very low prices online with consumers directed to the store to make the purchase. On arrival at the store, it would soon become apparent that these offers do not exist or that the quantities stocked at the special price were so low that it was highly unlikely a consumer would be able to take advantage of the offer.

Some retailers reckoned that Russia’s overall level of internet penetration remained an obstacle to the growth of e-tailing in the region. With a huge population of 140 million, even a low penetration rate of slightly above 30% puts Russia at number eight globally by number of internet users. The low penetration rate in Russia is compounded by the vast geography of the country, which means that setting up efficient and reliable delivery networks for products remains a challenge.

Some retailers in Russia have adopted a kiosk approach, giving consumers access to a terminal where they can access their entire catalogue of products, make purchases and pay for them and then await delivery. This transaction typically takes place in a retail environment and is seen by many consumers as a more secure way of ordering.

Russian retailers believe that a combination of in-store sales coupled with some telephone sales and e-tail sales will be the model of the future, but it remains some way off. While retailers in Western Europe continue to develop increasingly sophisticated bricks and clicks retail models that fully integrate the physical sales channel alongside e-tailer operations, the consensus in Russia remains that the market is not yet mature enough to handle such a model. It must also be noted that many retailers – dealing with Russia’s vast geography – do not have the inventory management, supply chain and ERP systems and visibility to support such a model.

Obstacles and opportunities

Several retailers attending the Strategy Forum firmly believed that they had yet to reach the full potential of sales through physical outlets. As such, they were still focused on expansion of their retail networks and improvements to their existing store formats. E-tail sales were still seen by some as the preserve of the enthusiast PC user, not the mainstream consumer.

What became clear during the Strategy Forum was an ongoing belief among retailers that Russian consumers still value the ‘touch and feel’ experience that comes with visiting a retail outlet to view a product before purchasing.

The models of Western Europe and even US e-tailing do not apply to the Russian market at present. Many felt that the physical infrastructure meant that an e-tailing operation covering the whole of Russia is not viable at present. Retailers were keen to discover whether any of the main third party logistics providers believed they could provide an effective logistics and delivery solution for an e-tailer wishing to operate across the entire country.

Some retailers reckoned that e-tailing could become a viable proposition in Russia’s cities with a population in excess of 1 million. Elsewhere, it was feared that the expense incurred in the delivery would effectively prohibit e-tailing from an operating cost perspective.

One retailer has already launched a hybrid model of sorts, using its extensive retail network as a foundation for its e-tailing operation. The retailer combines local store deliveries with e-tail sales to each store’s catchment area, dispatching all the products as part of one logistics shipment. Even this model is only deemed suitable for smaller cities where customers have limited points of purchase and are not spoilt for choice as they now can be in large cities.

Following on from the Strategy Forum, all delegates at DITCW attended a Channel Pulse session where they had the opportunity to vote live on topical issues, including the potential for e-tail and online sales. When asked on the potential for online sales in the Russia & CIS channel, 30% of delegates believed it was a great opportunity now, 45% said it was coming but slowly, while 21% reckoned it was still a long way off from mainstream adoption.

DITCW

DITCW represents the combination of two events: Digital Consumer Channel (DCC) and Digital Business Channel (DBC). DITCW operates a unique business model based on an ‘invitation only’ event format, offering a compelling mix of pre-scheduled one-on-one meetings, keynotes, awards and networking opportunities for vendors and channel executives operating in the Russia & CIS region. For more information, visit www.distree.com/ru

DITCW took place at Le Meridien Moscow Country Club from June 23-25th 2010. For more information on next year’s event, please contact fsimard@distreevents.com


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