What is the first thing you normally do when you want to buy, say, an LCD TV over the Internet? Let me guess: you go to Russia’s leading online marketplace, Yandex Market, and look for the desired product – then buy it wherever it’s cheapest.
Here is the paradox: the best offers usually come not from large and established companies, but from small retailers. Logically, it seems that just the reverse should be the case: the larger the store is and the more sales it makes, the bigger the discount it can offer thanks to the high volume.
Let’s go further: choose any product and find its lowest price, then compare it to the manufacturer’s.The match will be exact in most cases. But in some, the manufacturer’s price will be higher than the retailer’s – which is total nonsense, it would seem, since an unprofitable business simply cannot work.
But the situation described above is only impossible when white – that is, entirely legal – techniques are in use. No, these “discounts” don’t generally recall the stories from the mid-2000s of “gray goods” imported illegally (saving on tax and customs payments). Sure, there are still small online retailers, mainly in the regions, that occasionally sell goods that may have been brought back by a neighbor returning from China, or come from confiscated-items storage, or were stolen from a warehouse through a hole in the fence. The possibilities also include a fly-by-night LLC, a wife turned into a call center, a husband doing the deliveries, and a web site built by a nephew for $500, run with contextual advertising.
Devastating consequences
But another scheme has had far more devastating consequences on the market, and here’s how it works. First, the goods are sold in a completely official and legal way by the manufacturer’s representative office to a wholesaler. The wholesaler then resells them at cost to an online retailer. (The distributor makes his profit later, as a bonus from the manufacturer for meeting or exceeding the sales targets.) The online retailer also sells the goods at cost to the end customers, without paying any taxes. The goods being paid for in cash, the retailer accumulates a pile of money that can then be offered under the table to anyone who needs “black cash” . The retailer will usually get a 4% fee for this cashing operation, called “obnalichka,” and shares the profits with the wholesaler.
Televisions, a popular consumer product, are easy to deal with using such schemes. One can sell hundreds of units in just a day at an average price of $600, and up to $2,000 for upmarket models. Unlike selling pens or pencils, this offers the maximum revenue from a minimum of operations. Let’s tote it up: the daily earnings of an online store can reach $100,000, or $3 million monthly; if a businessman runs perhaps ten stores, this can mean $30 million per month of gray-scheme outflow.
This situation has existed for several years. Naturally it irritates large retailers like M.Video and MediaMarkt, as well as smaller but legitimate online shops. But too many people are interested in preserving these gray operations. Manufacturers say they do not like them, but in fact they’re indifferent since their only goal is to reach sales targets. Wholesalers, for their part, get direct benefits from the situation. And most important, customers are happy since they spend less. Of course, they may encounter problems with returns or customer service, but this is secondary – customers still vote with their money, they want to buy now and on the cheap, and in Russia they are used to gray schemes.
The tolerance of law enforcement bodies
The consequences are the overpricing of all accessories for which the gray competition is not that fierce, and delivery cost inflation, which is less visible to the consumer. Big players simply put televisions at high prices in the storefront window rather than actually sell them, while smaller ones either do not sell them or play by the only possible rules – the “gray” ones.
Law enforcement authorities can be blamed for de facto tolerance of this double-standard situation. Manufacturers can be blamed too, since they could put an end to the gray schemes – but it is hard to believe that their sales force would want to threaten, in any way, their personal annual bonuses.
So e-commerce entrepreneurs have to choose: either cheat and make money right now, or do business honestly at the cost of losing up to one third of their customers. Over my 15-year experience in procurement and sales of household appliances, I ran across hundreds of methods of optimizing revenues. But my partners and I decided that MallStreet.ru would be a 100% legal business, and would work and talk with everybody – in particular, with the state and law enforcement agencies – on an entirely legitimate basis, even though doing so means we sacrifice part of our potential profits.
Dmitry Shashkin is the CEO and co-owner of Mallstreet.ru. This comment first appeared on Slon.ru, a Russian online publication.
- RUSSIAN E-COMMERCE REPORT 2012 – The total volume of Russian online retail reached 310 billion rubles, a little more than $10 billion, in 2011, up 25% from the previous year. EWDN’s research study of Russian e-commerce, which contains an analysis of ‘gray’ e-commerce, will be available soon. To receive free insights or to order the full version, please contact us at [email protected].
