Earlier this month Mail.Ru Group and Alibaba completed their e-commerce joint venture deal with participation from jointly with Russian telco MegaFon and sovereign fund Russian Direct Investment Fund (RDIF). This JV will leverage on the existing businesses of AliExpress Russia, the B2C marketplace owned by Alibaba which controls the bulk of e-commerce flows between China and Russia.
Dmitry Sergeev, First Deputy CEO of Mail.ru Group and co-CEO of the JV, shared with East-West Digital News his vision of the market and insights about the JV’s future developments. This interview is an excerpt from an in-depth report on Russian e-commerce released recently by EWDN.
What is your vision of the Russian e-commerce market and its prospects?
Russia is on the brink of an e-commerce boom, with market analysts expecting the market more than doubling in the next few years (Morgan Stanley) This trend is fueled by high Internet penetration exceeding 75% (GfK), combined with a massive and increasing use of smartphones, which have put dozens of millions of Russians just a few clicks from purchasing online, with 79% of Russians making purchases via mobile phones today (PWC). Improvements in the logistics infrastructure and in payments are playing their role, too.
A virtuous circle is being created. Big growth rates attract big investments, which allows for even higher growth, whichbenefits all players and consumers. And when you see that e-commerce penetration remains below 5% in Russia comparedwith 12% global average (PWC) you can be confident that this growth isn’t likely to end soon.
Surely, average purchasing power is modest in Russia. But even this may have a favorable impact on e-commerce, sinceonline retailers often sell cheaper than offline retailers, and contribute to diversity of consumer choice. Affordable inventory isone of the drivers behind the latest growth acceleration, we believe.
The market remains very fragmented…
There is a clear leader: AliExpress. Wildberries is a very strong player on the domestic market. Yet, the market is stillfragmented overall and we see big consolidation ahead.
What are the main challenges for players to grow on this market?
Investments are costly, especially in the field of logistics: Russia is the largest country in the world in terms of territory, while a significant part of current infrastructure is outdated and customer has increasingly high demands around service, including delivery time. Addressing these challenges requires deep pockets.
Another challenge is high share of cash-on-delivery. This means of payment, which is not very friendly to online retailers, still reigns when purchasing online domestically. However, this practice is almost unknown in cross-border e-commerce and givenrising credit card penetration and multiple new payment solutions, we expect upfront payment share to increase for domestice-commerce as well.
What are your group’s own goals and strategy, taking into account your alliance with Alibaba?
The first key point in this strategy is that the JV will not focus exclusively on cross-border, but will actively develop a domestic dimension. By localizing the operations and by integrating into social, not only the user base but also the local merchant base of the combined business will grow. Meanwhile cross-border flows on AliExpress will originate from a larger range of countries than just China, including from Europe and Turkey. At the same time, Russian businesses will be able to sell their goods locally and abroad.
Social commerce is a very important part. We believe the process of discovering products is increasingly social: with or for friends and family, through opinion leaders, feedback, etc. So we’ll develop a lot of use cases to deeply integrate this social dimension in e-commerce, including around communities and businesses located within Mail.ru Group’s social ecosystem.
What about Mail.ru Group’s existing e-commerce platform Pandao, which you launched in late 2017?
We launched Pandao before making the alliance with Alibaba. The initial idea was to leverage the group’s social networks with a cross-border marketplace that is adapted to our users. Decisions on its strategy will now be taken by the JV, not by Mail.ru Group.
Which are your challenges in building the JV, and when do you think it will become operational?
Naturally, such partnerships cannot be launched instantly, especially in case of such deep integration and many parties involved. Since the alliance was agreed in principle in late 2018, we have had to go deep into strategic and operational details, start integrating each side’s capacities, address legal aspects, etc. As all this has now been done and commercial terms and other aspects agreed upon. The definitive agreements have been signed, the JV will [soon] be operational […]
Is Mail.ru Group’s strategy focused on this JV, of which it will own just a 15% share?1
We strongly believe in partnerships, especially those which can bring more than just capital. The percentage of ownership is less important than the nature of the partner, and which kinds of use cases can be created together. In evaluating the deal, we have also taken into account the fact that our social network assets [Vkontakte (VK) and Odnoklassniki (OK)] will greatly benefit from this JV given the target integrations as well as active marketing. Partnership could also be further broadened, including to payment solutions.
(1) Alibaba, MegaFon and RDIF are the other shareholders with, respectively, 47.8%, 24.3% and 12.9% economic shares.
