With net sales reaching €550 million in 2012 – including more than half generated online – the Otto Group has asserted itself as a leading player on the Russian e-commerce scene.
In this exchange with East-West Digital News, CEO Martin Schierer shares his vision of this fast-growing market, speaking about the challenges of building a multichannel business covering Russia’s immense territory, increasing competition from well-funded startups, and potential acquisitions.
When did Otto start operating in Russia, and what does the group look like at present?
Through the program “Trade Partners” the Otto Group was already operating in Russia in the early 1990’s. In 2007, the Otto Group started business in Russia with its own operations, staff, and legal entities, by establishing its successful Western-European brands Bonprix, Witt and Otto in Russia. It was in this year that the Otto Group Russia was installed as a group structure. Subsequently, we acquired Nadom Group and Quelle.ru and built up our logistic companies to support our own businesses.
Our latest business initiatives in e-commerce retail are Lascana.ru and Domalina.ru. At the end of 2012 we also launched a B2B service offer (see below).
Overall, we today employ more than 2,000 people in Russia and generated net sales in excess of €550 million in 2012. We completed 14.8 million orders, up from 11 million in 2011.
What have been the main challenges?
Russia is a great, yet difficult market at the same time, mainly due to its size. The central issue for us as a distance retailer is that infrastructure – especially fulfillment infrastructure – is clearly less developed here than in Western Europe.
As a consequence, we had to build our own capacities since nationwide fulfillment capabilities are an essential condition for large-scale success in this country.
HR shortages are another strong challenge, especially for the online business. Russia is a “young” market; therefore, most people are not yet as experienced in e-commerce and online marketing as in Europe. They tend to focus on “in-house” solutions rather than look at international best practices. Furthermore, people rarely stay very long with the same company, which translates into additional costs, recruiting headaches and, sometimes, excessive salary expectations.
Offline to online adaptability is pretty manageable for positions related to purchasing, CRM, and operations, for example. This is, however, not the case for online IT, and, as a consequence, it is very difficult to find experienced people in this sphere.
How did you build your logistic capacities?
Our Promopost facility was part of the Nadom acquisition. We built Business Service, our business unit that manages clothing fulfillment, from scratch. The next step will be the enlargement of our warehouse capacities in Tver. We are going to almost double our logistics premises for the textile business within the next two years.
Building our own logistic capacities required a substantial investment at a very early stage of developing the company in Russia. Clearly we could not have rolled out these businesses throughout this country at such a large scale – we send millions of parcels each month – by relying on local providers. Now we are going to invest another €50 million in the above-mentioned enlargement of our warehouse capacities to support our growth.
This enlargement will allow us to ensure further development of our own business as well as for third party clients of our eTraction service business.
In the field of delivery services, we work closely with the Russian Post, which is our main partner. We strongly believe that nationwide delivery is an essential precondition for large-scale success in Russia. In addition we are also delivering via all leading alternative delivery companies, in order to cater to different customer needs and preferences.
We know from experience that delivery services require a very large-scale effect to achieve profitability, and even more so in a country like Russia. Otto Group Russia has no intention to enter this business, even less so, since Hermes, Otto Group’s company is developing a delivery network in Russia together with DPD.
In late 2012, you started sharing your fulfillment and other service capacities with third-party players from the fashion segment. Please explain.
In 2012, we founded a new company called for providing third party e-commerce services. This offer has been developed specifically for clothing and accessories brands.
Under the brand name of eTraction, we offer several service modules, including e-commerce platform development, warehousing and operations management, customer service center, and content production.
Our eTraction clients may also take advantage of payment solutions offered by specialized providers like PayU, Robokassa and Assist, as well as our group’s partnerships with all leading delivery companies. This way our clients benefit from Otto Group’s low rates and from optimal and highly scalable operational processes.
Within the first 12 months, eTraction has won nine national and international clients, of which five are already operative and the remaining brands will be launched by the end of 2013. In 2014, we will enable 15 additional brands to sell online via eTraction services and infrastructure.
eTraction also provides the full suite of online marketing services from SEO, contextual advertising, affiliate marketing and social marketing to our network of clients.
Is online on the verge of completely replacing print in your industry? Or has the distinction become irrelevant?
This situation fully depends on each business unit. As a communication medium to the 45+ target audience print still remains the main channel, but this is not the case for the younger audiences. The same applies to the regions (Moscow region or others). Most importantly, e-commerce in Russia is not mature enough to drop the print channel entirely any time soon.
As such, print is here to stay, but not only in Russia. In Europe, we even see former online pure players expanding to the offline channel, as exemplified by Zalando.de. What will change for sure is the way we will use the print channel in the future.
But online will definitely remain the leading channel in most of our businesses and it delivers already the main part of our net sales.
What about online? Are the processes and requirements the same as in Western Europe?
They are not identical but comparable. However, a Russian specificity is that consumer behavior in the big metropolitan cities, Moscow and St. Petersburg in particular, differs from that in the regions. This requires a clear focus for each business to meet its specific target groups. For example, if a parcel is ordered online by a client in Moscow, the parcel should be delivered the next day, while a client from Vladivostok will still accept to have a parcel delivered in one or two weeks.
Competition is harsher and harsher on the market, especially in the fashion segment, with startups like Lamoda.ru and KupiVIP.ru raising fantastic sums (more than $300 million in total over the last few years) with seemingly little attention to immediate profitability. How is your group putting up with this kind of competition?
Obviously the Russian e-commerce market is already one of the most attractive markets in Europe, not only due to its potential size, but also due to its rapid growth. However, the current state and the specifics of the market make it more difficult to successfully develop an e-commerce business on a relevant scale. Money is an important element to start and fuel your growth, but it is not the ultimate parameter to help you succeed in the long run. You can win clients with marketing power, but you will lose clients if you do not succeed with operational excellence.
Our target is to develop sustainable business for the long term and to be and stay profitable, which we have already been for several years.
The rumor has it that your online growth has decreased over the past year; has this come as a result of this increased competition?
I do not know which source of information you have, but I can assure you that it is not the right one.
In 2012, the overall business of the Otto Group Russia has again grown by double digit figures. We had different developments in our different businesses. Online was the main driver of growth, with the strongest growth of all channels. This year, online is growing again by double digit figures, and all our main businesses are delivering substantial growth.
What concerns us in statistics is the current ruble devaluation [nearly negative 10% in a few months in Spring 2013], as we are reporting in euros to the headquarters. However, this is rather a mathematical effect, which doesn’t show the market development.
Nevertheless, we feel the increasing competition in the market – especially in the costs for customer acquisition, which are becoming more expensive year over year. As I mentioned already, we are also interested in growing profits, which in my understanding should be a general target for any business. That’s why we follow our own market approach and do not concentrate on market share only. We are pursuing a balance between growing net sales and at the same time earning money, which allows us to invest even further in the Russian market.
What are your forecasts for the future?
Our objective is to reach one billion euros net sales in the near future, but profitability is even more important to us. The Otto Group Russia is a profitable company and intends to remain so.
The Otto Group Russia is a multichannel company with a big share of online activities. As a consequence, we want to benefit from the overall growth in Russia in general and from our Group’s strength in particular. It is very likely that we will launch additional e-commerce projects in the near future and we will solidify our position as the leading eFashion retailer and eService provider in Russia.
Do you rather consider internal growth or acquisitions?
From developing own projects to acquiring existing businesses, we do not rule out any option. A variety of internal and external opportunities may appear in an emerging market. The main point for us is whether or not they correspond to our business strategy.
- A guided tour to Otto’s logistics center (Nov. 27): The Otto Group offers a guided tour to its logistics center in Tver (Moscow region), which handles up to 80,000 orders per day – those of the group as well as of third-party players from the fashion segment. To participate in this tour, please send a request to Irina Chinnova at [email protected]
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 an in-depth analysis of the key issues defining this industry as well as 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].
