Launched in 2008 by Stanford graduates Maxim Faldin and Kamil Kurmakaev, Wikimart had the initial ambition of creating a Russian analog of eBay. Funded initially by major US investment funds, then by Russian investors, the startup has now become a major marketplace offering its own products alongside nearly 2 million items from over 1,000 merchants.
In a recent interview with Russian online publication Slon.ru, Faldin speaks frankly about the widespread “gray commerce” practice in the industry, the financial challenges of Russian e-commerce companies in a context of international tensions, and the growing competition from Chinese retailers. Here are the main excerpts from this interview.
Is it true that that the bulk of the Russian online retail industry is made up of the gray economy?
I remember very well how, in the late 1990s, flea and wholesale markets were demolished in Russia. One of them was next to my place. I remember that the products – milk, cheese – there were 30% cheaper (because sales tax plus VAT amounted to those same 30%). And I thought: why should a law-abiding business open a store here? It will obviously not be competitive.
As for Wikimart today, unfortunately we do not have such practice. Otherwise, we would be more profitable.
But traditional retail chains assert that low prices on the Internet are provided by gray and black imports.
Retailers are mixed up in their concept of “gray imports,” which can mean different things. Firstly, there are counterfeit, fake goods, which is a result of incorrect customs declaration. Then there are import channels that are not agreed with the manufacturer. We disagree with retailers on the last type: in my opinion, retail networks, in collusion with the producers, have created in Russia a reservation where they control prices and receive all the profits.
[In a recent case,] Motorola has not given consent to import goods into the country, but it is Motorola’s problem, why should we be concerned? There’s nothing illegal in this case. Parallel importation is not against the law, it is the violation of the rights holder. As long as there is demand, we will trade these kinds of products.
This should not be confused with smuggling and tax evasion. We are audited by PricewaterhouseCoopers, and there are many control procedures.
This year you changed investors. Instead of the American investment fund Tiger Global your shareholder became a little-known banker, the co-owner of Finprombank Anatoly Goncharov. Why have the Americans gone?
This is directly related to the political situation. Goncharov was a minority shareholder with 15%, while Tiger had about 50%, and they were actually leading the development strategy. It was necessary to develop the business, to invest in it. (…) In July we agreed on everything – but the Boeing fell in the south-east of Ukraine and the world changed. Only 12 hours after the fall of the Boeing, I had a conference call with New York and they said: “We can no longer fund the company, do whatever you want.”
We sat for two months without money and with wage arrears. Then, when I arrived in October to New York, I learned that Tiger Global was raising a huge investment round, and their main investors were representatives of the Republican Party. It all became clear. On the same day, they clinched a $1 billion deal in India.
Is this a kind of plot against doing any business with Russia?
It’s not quite like that. It is a question of the business environment: somewhere at a cocktail party someone said something. You’re not going to risk rounds worth billions in order to invest an additional $15 million in Russia, which then will bring you $50 million.
What do you expect for your industry this year?
In 2015, things will be very difficult. When household incomes fall, our revenues fall, too, but the substitution effect will make people purchase cheaper goods instead of the more expensive brands. This factor will play in our favor.
Meanwhile this is the perfect time to start a business! [I have just launched] a kid’s fashion site, christened “Little Gentrys.”
Wikimart recently teamed up with Terminal.ru, which owns warehouses and retail outlets in the regions. You now have offline points of sale.
We do, but they are all terribly unprofitable. We are thinking of what to do with them. The whole of 2015 will be spent looking for new formats.
But your competitor Ulmart opens many offline stores.
Well, Ulmart is not a profitable company, and neither is Enter. We want to be profitable. That’s the whole story. Enter has around about 80 stores left. There were more, but they were terribly unprofitable. What will happen now with Enter, nobody knows.
Why is Anatoly Goncharov so engrossed by e-commerce? What is his ultimate goal?
He wants to make a technology holding company, which provides retail and financial services. I know Goncharov many years; I practically led him into e-commerce. First, he bought a small stake in Wikimart and supported us financially while we built the company with Tiger Global.
He now has a controlling interest in Terminal and Wikimart. Owning two companies in the same industry is pretty pointless, so he decided to combine them. I manage both companies; we have merged and are looking for the most suitable model for profitability in the market.
In addition, Anatoly Goncharov takes part in the restructuring of companies under the Svyaznoy brand.
Are all law-abiding Russian e-commerce companies unprofitable?
Yes, all companies that we mentioned today are unprofitable. Ozon has been unprofitable for 17 years. But this should not be so, it needs to change.
Another example is E5 [the online interface of X5 Group’s supermarkets] which was simply shut down, writing off its losses. We were the only bidders for the company. However, it was easier for the X5 Group team to write off $50 million in losses than to save the project and work with us, even when we demanded nothing from them. It’s a kind of apathy by the managers. It’s not their money.
More generally speaking, in Russia all white online trade is unprofitable. In order to build a profitable online retail platform, you require five to seven years and $100 million. Miracles do not happen.
Even more than logistics costs, the key expense is programmers’ salaries. Of the $50 million that was invested in us at of late 2014, we spent $30 million on the salaries of programmers.
But the market will consolidate. Similar to what happened to us, and to Utinet. Nobody can incur losses by themselves.
When you started your business, you stated that in a few years you will surpass Ozon.ru. This did not happen: they see 9.2 billion ruble revenues while you generate only 4.7 billion (around $238 million and $122 million, respectively, at the average 2014 exchange rate).
We definitely grew faster than Ozon, but not fast enough to overtake them. We are six years old, and Ozon is 16. In addition, the proceeds of Ozon are a little misleading if including their travel ticket business. The comparison could be more relevant with Ulmart: although they are only a year older than us, they have a lot more revenue [21 billion rubles, approximately $545 million at the average 2014 exchange rate].
I think we had a problem accessing capital. In late 2011, Tiger decided that Russia is not as promising as India. Since then, they invested more than $1 billion in the Indian online store Flipkart, but with us they invested only $15 million. There is a difference.
How are you fundamentally different from Yandex.Market?
We are a retail company while Yandex is an Internet company. Yandex will never own the products and think about them. We buy in advance one-third of the goods we have.
The commission of Yandex.Market for orders from online stores is 1%, whereas Wikimart charges from 2% to 15%.
The 1% is not an exact figure, it is just the starting amount for retailers that rises. In reality, they do not have a fixed rate.
What about AliExpress and eBay?
AliExpress has 800 million items. I cannot even imagine such a number. eBay offers around 150 million goods in Russia. At Wikimart there is 2 million, although we believe that we have the biggest range. But this 2 million is a drop in the ocean, compared to the offerings by Alibaba’s subsidiary. There are simply not that many products in Russia.
However, these are different products. Judging by the top 10 best-selling products, AliExpress sells primarily cords and straps for mobile phones. You may find iPhones too, but it is likely to be a Chinese iPhone with two SIM cards for 6,000 rubles – ugly-looking and with a slightly different interface.
When you are not competitive in terms of range, you are not competing at all. The average check of AliExpress is 300-500 rubles.
Buying from foreign online stores is becoming easier. That is why cross-border trade is growing in Russia two times faster than the entire e-commerce industry. Meanwhile, unequal tax treatment is an issue. Consumers pay VAT when purchasing items in a domestic offline or online store; why do they pay neither VAT nor, in most cases, customs duties when buying from a foreign online store?
You were planning to build a warehouse with eBay in the Baltic states. What is happening with this project?
It stalled. eBay is interested in the Russian market, but the Russians are buying Chinese goods, which will always be cheaper in China. Now the task for eBay is to defeat Alibaba, so all projects like a warehouse in the Baltics went to the periphery.
The full version of this interview was first published in Russian in online magazine Slon.ru.
- According to a research study by East-West Digital News, the Russian online retail market grew to more than $17 billion in 2014, not including the cross-border segment and hotel bookings.
