Last year saw paradoxical investment trends in Russia’s young e-commerce industry, with venture and private equity investment continuing to fall while a range of offline players started or resumed online projects.
On the venture side, investment reached historic lows. According to RMG Partners’ preliminary estimates, just 42 deals were closed, totalling $137 million — down from 68 deals and $390 million in 2014. The decline was particularly notable in the segment of physical goods, with 15 deals reaching a mere $104 million, down from 36 deals ($319 million) during the previous year. The decrease in investment amounts year-on-year is attributable partly to the depreciation of the Russian currency (approximately 62 rub. per USD in 2015 vs. 38 rub. per USD in 2014).
One may remember with nostalgia the period between 2010 and 2014, when e-commerce in the broad sense was the major destination for venture investment in Russia. The largest deals of these golden years, involving both foreign and domestic investors, were the $130 million capital injection in Lamoda in June 2013 and Ozon’s $150 million round in the spring of 2014.
Such companies as KupiVIP and Wikimart also received considerable amounts, exceeding or nearing $100 million in total over for each of them over these years.
“The market situation was very favorable at that time,” recalls Alexandra Rasskazova, an advisor to German-American fund e.Ventures, which invested in several Russian Internet companies, including Sapato and Teamo.ru. “As many business models (e.g. Zappos) had not been applied yet to Russia, competition was relatively low while Internet usage in the country and the population’s purchasing power were growing steadily.”
Unfavorable conditions
Today’s conditions are radically different: “The majority of successful western business models have been built – and those which have not yet been tried are not that interesting to venture investors, i.e. are unlikely to generate $100 million or more in four or five years. Meanwhile, VCs tend to better understand the concrete challenges faced by e-commerce companies in Russia,” Rasskazova notes.
In the field of physical e-commerce, developing a company requires a long period of time with substantial investment in infrastructure, while exit prospects are not obvious.
In the field of digital e-commerce, online marketing is expensive and the market is not that large. “Here Avito, which operates in a slightly different segment, is the exception rather than the rule,” Rasskazova says. Founded in 2007, this online classifieds platform was sold last year to international group Naspers at a $2.7 billion valuation.
The current crisis has brought even more uncertainty to the market: “Even buying decisions of the population are hard to predict now,” Rasskazova notes.
David Waroquier of Mangrove Capital Partners — which has invested in KupiVIP and Oktogo — sees the main challenge in “the lack of prospects for later stage investment and exit.” This is enough to deter most early-stage investors.
The international tensions, which have been bubbling since the Ukrainian crisis started in 2014, “are not helping, of course,” notes Waroquier.
“With very few exceptions, international investors have put their strategy in Russia on hold until the situation is finally settled.”
“Western capital markets are completely closed to Russian companies for the moment,” confirms another international investor, who regards Ulmart’s IPO plans as “fantasies.”
Russian investors themselves turned away from their domestic market, opting massively for international startups. Thus Ru-Net has made several investments in Indian and Turkish e-commerce companies. True, this Moscow-based fund has also invested in Russian online retail companies (such as Esky and TrendsBrands in 2013) — but much more modest amounts were involved.
A brighter future?
The situation is likely to improve in the future, however, Rasskazova and Waroquier believe, as e-commerce penetration rates will grow in Russia and consumption will resume after the crisis.
While large Russian corporations might be more willing to buy startups, foreign players will see the Russian market in a more favorable light as soon as the tensions will ease.
“From an e-commerce perspective, Russia remains a very attractive market. Most e-commerce big names in Russia have shown strong revenue progression in 2015, especially those fulfilling elementary consumption needs like retail and apparel,” notes Waroquier, citing KupiVip’s 50% revenue growth and break even last year.
Waroquier does not even rule out new investments from his fund in the short term: “We are carefully monitoring how market conditions are developing, and keep following up Russian startups, especially those which target the global market. We are still very open to good investment opportunities.”
Offline retailers go online
Meanwhile, food and FMCG retailers are showing renewed interest in developing online sales. “This is an impressive new wave,” says Data Insight co-founder Boris Ovchinnikov, citing moves from a range of important players. Recently, Perekrestok (X5 Group) hired a high-level e-commerce manager, while Magnit began testing online orders. Another retail chain, Lenta, could launch online sales as soon as this year.
On its side, Okey is already promoting actively its e-commerce service, after a test period last year. ” By traffic levels, this site is already second after Utkonos,” the most established player in online groceries, notes Ovchinnikov.
For several offline retailers, the stagnation of offline sales has made it more difficult to keep developing their offline chain in a financially sustainable way. As a result, these retailers have got more money and management resources available for their e-commerce projects, Ovchinnikov explains.
In certain non-food segments, however, the crisis has led some players to refocus on their offline channel, which appears to be more competitive, the expert notes.
Demonstrating nevertheless a solid faith in the future, some omnichannel players continue to invest in giant fulfilment centers. In 2015 Leroy Merlin started building a 100,000 sq. m. warehousing facility in Domodedovo – the largest retail distribution center in Russian history and the largest retail warehouse deal in the world in 2015, according to Radius Group, the US company which is conducting the project.
Meanwhile, in late 2015, Ulmart opened a 25,500 sq. m. fulfilment center in St. Petersburg. The company plans to open two additional logistics centers in the near future in Mytishchi and Domodedovo on the outskirts of Moscow.
No less than 30 logistics centers will be required to reach the company’s ambitious turnover target of 300 to 500 billion rubles (from $4 billion to $6.8 billion at the current exchange rate), Ulmart’s chairman Dmitry Kostygin recently told the Russian media.
