After more than 15 years in the market, Bertelsmann subsidiary Arvato Russia has asserted itself as one of the main fulfillment providers in Russia, both for traditional distance selling and for e-commerce operations.
In this exclusive interview, CEO Michael Poetschke talks about the opportunities and the difficulties of the Russian market with equal frankness. He also comments on the latest trends in e-commerce fulfillment, where a limited number of warehousing service providers are available to deal with a growing demand from startups and more established companies.
When and why did you come to Russia?
Our Russian story started back in the beginning of the 1990’s. Arvato initially entered Russia to serve an existing client of Bertelsmann’s German printing business, “Book Club Terra,” a newly created Russian book club inspired by the Bertelsmann experience. This kind of business was a novelty at that time in Russia. It was a huge success and soon had a million members, but this company had a weak point: logistics. As such, they came to us in 1995, and this triggered us to set up a full-fledged logistics business in Russia in 1997.
At that time, I was responsible for Eastern Europe, and this was one of my projects. My boss told me: You’ve sold us the project, now why don’t you go there to make it work and show us the result? This is how I moved to Russia.
How did Russian companies manage their logistics at that time?
No one understood what we were doing when we started. Even though the local authorities provided some investment incentives, they did not understand this new kind of business. They were used to seeing companies buying and selling things but not to handling goods and providing services for third parties.
The very concept was unknown in Russia. In addition, there is little trust in Russia, not only do people not trust companies, companies do not trust each other either. This creates a lot of paperwork and the most simple structure for businesses is vertical, with everything in-house and under direct control, including logistics. An example in the mail order business is Mir Knigi; they developed a logistics department for their own mail order business in the early 1990’s known today as Beta Production. Observing carefully how we do our business they eventually started to serve third party clients as well.
Setting up a business in Russia was not among the simplest things for a foreign company in the 1990s…
Gorbachev had a famous piece of advice for Honecker: “Who comes too late will be punished by life.” I would add: “Who comes too early is punished as well.” Indeed we came too early and experienced plenty of difficulties – the unprecedented 1998 financial crash in particular. However, as a conservative, German, family-owned company we showed enough patience to stay and wait for market conditions to improve.
Meanwhile, we quickly gained more clients, in particular publishing houses interested in personalized mailings like Reader’s Digest, as well as new companies trying to copy Terra’s B2C model. In 2003, we started dealing with new product categories. We were serving a German publishing giant which had launched a joint venture in Russia, named “Moi Mir.” Their catalog included not only books but also household and office items.
However, they closed their business in 2008. The lesson is that distance selling has a cost, from fulfillment operations to supporting a call center and of course delivery throughout a huge country. If your AOV [average order value] is too low you will not cover this cost, you will not be successful. AOV should reach at least 1,000 or 1,500 rubles [approximately $30 to $50] – not 500 rubles [$15]. A specific problem here was also that book prices are traditionally low in Russia.
Nevertheless, we went deeper into product diversification. As a matter of fact, the basic principles, processes and the IT systems you need are the same, no matter what the product is. In 2004, Yves Rocher found us. They were satisfied after testing us and migrated from one of our competitors. This was the starting point of our rapid growth. In the beginning of 2006, the well-known German mail order giant Quelle (fashion) launched its Russian business and chose us for fulfillment services right from the very start. It was a huge success immediately. In 2009, we dispatched four million parcels for this client alone.
Our second important client was La Redoute, which we started serving in 2008. In contrast to most other companies, they always look ahead: they make sure that there are reserves to switch on in case demand will grow faster than expected. Accordingly we set up more packing stations, more equipment, PCs and printers than actually needed at a given moment. This approach is quite unique.
We soon came under great pressure to keep pace with the rapid growth of our clients’ businesses. Scalability – as we call it – in personnel and space as well as IT is a must to have satisfied customers. We always managed.
Some e-commerce companies complain there is too little competition on the market of logistics services today…
Today the market of fulfillment for e-commerce is, indeed, very small. Many big names have their own capacities. Independent companies are few and small. The new wave of bigger players offering their in-house capacities to third parties (OTTO, OZON, KupiVIP, Mir Knigi) is recent. Some Western logistics companies like DHL or Kuehne&Nagel certainly have the competence to offer fulfillment services in Russia as well, but they have not gone very far to date.
Logistics services for e-commerce (B2C) significantly differ from those provided by traditional providers of transport and warehousing services (2PL, contract logistics, B2B). For instance, FM Logistic, in spite of their huge warehousing capacities for companies like L’Oreal, Nestle and others did not succeed in their attempts to diversify into B2C. One of the reasons for this failure is that, in e-commerce, you need to provide complex and tailor-made solutions for very different business models and product and consumer groups, including integration of CRM, reverse logistics, tracking systems, last mile management and much more. This obviously requires high flexibility, competencies for the whole value chain and – last but not least – a very robust and sophisticated IT.
So how did you start serving e-commerce companies?
Our traditional mail order customers launched their first online initiatives already some time ago. Now the online part of our business is typically above 50%. In September 2010, we started to serve our first pure e-commerce client, myToys.ru, a subsidiary of the German OTTO group. We set a record with them. There were just six weeks between the day I first met their managing director and the day we dispatched the first parcel! With Lamoda it was also a mere two months. Such projects are conducted at a crazy speed, talking day and night on the phone, exchanging SMS, etc. Everything goes much more quickly in e-commerce. Speed is value for these businesses.
To serve these clients you have to be much more flexible and even to reinvent your business to a certain extent. The differences between traditional mail order and new e-commerce cover practically all logistical processes. For instance, Lamoda or Sapato may have 100,000 or 200,000 different references (SKU) with just two or three identical pieces of the same item. Compare this to Yves Rocher’s 1,500 references and 20 million products in stock! When you deal with e-commerce you must build shelves and mezzanines – instead of pallet rags – to handle this huge diversity of items. You pick the items directly from the storage places.
Which kinds of difficulties do online retailers typically face when dealing with logistics?
E-commerce startups face many issues. To build a wide assortment – which is a necessity in most online business concepts – they are looking for sourcing from local companies as well as from abroad. Local sourcing is often a nightmare. As a small customer, e-commerce startups do not get any special treatment from suppliers. Moreover, many of the items they receive are in a terrible shape with damaged packaging or second sort. Electronic data exchanges, bar codes to scan and proper labeling are often absent, which makes item identification very difficult. In this painful learning process, we (Arvato) often have to do the corrective work. Just imagine the scene. We receive a truckload of shoes without any labels or documents. We had to put them all on the floor and our ladies spent days checking and identifying each pair individually!
This is a reflection of the low level of logistics in Russia as well as its still considerable gray economy. Many goods still do not go through customs the official way.
HR is another acute issue – especially in e-commerce. It is very difficult to find good specialists for almost all areas – purchasing, marketing, IT, logistics, accounting and so on. As far as we see, there is a lot of “job hopping” going on. Teams are not very stable. As a result, we sometimes do not know with whom to talk and in what “language.” We have launched master-classes to help our clients raise their staff’s skills.
From fulfillment to IT, from data management to customer care, from loyalty to financial services – you now offer an extended range of services. Are you no longer focusing on logistics?
Under the term logistics many in Russia understand just transport, delivery and, at best, warehousing, but these are only part of the complex solutions needed for fulfilling B2C orders. We indeed extended our offerings to the widest possible full service range (E2E), including consulting at the very early stages of an e-commerce project, web shop development, BPO and more. This extended offer is intended mainly for foreign companies that are interested in starting in Russia but do not have a team to organize operations on their own – at least at the first stage. For example, we did the whole cycle for another well-known German fashion company. We even setup, registered and staffed a local Russian subsidiary for them, including the managing director, and developed an online shop for testing and the initial marketing. They started that way. Then after one year they manned the business themselves and started to do more and more things on their own.
I should add the total services specter of the Arvato group of companies is very wide and includes a lot of industries and almost all services a company could possibly outsource – even making available Windows’ latest versions. As soon as there is a demand, we will provide these services in Russia as well. Most often our satisfied international customers will request something when they think the time is right.
How does Russia stand in terms of logistic costs compared to other countries?
For Western companies coming to Russia it is at first a shock to find out that everything is more expensive here compared to Europe or the U.S. They usually expect the other way round, but Russia is not China. The reasons are simple: low productivity and big deficits in infrastructure and human resources.
As for Arvato in particular, when our customer knows what he needs and understands which processes have to be setup, it is not difficult at all to agree on the cost of our services.
To compare the fulfillment cost with established levels in the West it is helpful to look at total CPO [cost per order] or the percentage of sales. The total cost for our services as a percentage of total sales gives a good benchmark. Depending on what level of orders per day a business has reached this figure may be as low as 4% or as high as 12%. From our experience, this approach works very well for budgeting, getting a realistic business plan and monitoring the progress of an e-commerce project.
- RUSSIAN E-COMMERCE REPORT – This interview is an excerpt from a research study by East-West Digital news on Russia’s e-commerce. Conducted in partnership with leading universities and market experts, this report contains a 60-page chapter on fulfillment and delivery issues with concrete recommendations to online retailers on how to optimize processes, improve performance, and reduce costs in these fields. To receive free insights or to order the full version, please contact us at [email protected].
