With net sales reaching €470 million in 2011 – including 50% 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 openly about the challenges of building a multichannel business covering Russia’s immense territory.
When did Otto start operating in Russia and what does the group look like at present?
Otto Group Russia started its business in 2007, bringing in its successful Western-European brands Bonprix, Witt and Otto. They started as multichannel concepts with on- and offline offers. Quelle.ru, another multichannel retailer, was acquired in 2009.
Pure online activities were launched a bit later. MeggyMall.ru came as a part of Nadom Group, the distance-selling company, which we acquired in 2008 from Direct Group. Mytoys.ru was launched in late 2010 and Promenad.ru, an online shoe and accessory retailer, in early 2011.
What have been the main challenges?
Russia is great and difficult at the same time due to its size. The main issue is that the infrastructure – especially fulfillment – is clearly less developed than Western Europe.
We had to build our own capacities, since nationwide delivery is an essential condition to 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 young and not very skilled and experienced. They tend to developed “in-house” practice rather than look at international best practices. What’s more, people rarely stay very long in 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 marketing, CRM, and warehouse. This is not the case for IT, and it is very difficult to find people in this sphere.
How did you build your logistic capacities?
Promopost was included in the Nadom acquisition. Business Service – our business unit that manages clothes fulfillment – was built from scratch.
Fortunately, Otto Group has accumulated a valuable experience since the 90s when the first Internet shops were launched in Germany. This experience has helped us roll out online processes in our Russian multichannel concepts.
More serious challenges were experienced to transform Nadom – formerly based on print catalogs only – into a multichannel business. Entirely new processes and competencies were required.
Building our own logistic capacities has cost several million euros. This is big, but necessary money, clearly we could not have rolled up these businesses throughout this country at such a large scale – we send millions of parcels each month – relying on existing providers.
This being said, we still have a lot to do. Even the huge fulfillment capacities we have built are not sufficient to support our growth.
Do you offer these services to third parties, or intend to do so?
As long as we can hardly deal with our volumes, providing services to third parties is not our main priority at that time. Nevertheless we are considering starting this kind of business.
Have you internalized delivery, too?
No, these processes are mainly outsourced to the Russian Post, DHL and [Ozon’s subsidiary] O’Courier. In addition, Hermes – a part of the Otto Group worldwide – is currently establishing a network of pickup points in Russia, which we also use.
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. For speaking to the old target audience, print remains the main channel. But, that is not the case for younger people. The same applies to the regions (Moscow region or others). Most importantly, Russia is not mature enough to leave the print channel fully any time soon.
So print will stay, but not only in Russia: in Europe, we even see pure players coming 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.
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 different 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 be happy to have a parcel delivered in one or even two weeks.
What are your growth forecasts?
Our objective is to reach 1 billion euros net sales in the nearest years. But even more important to us is profitability. Otto Group Russia is a profitable company and intends to remain so.
Priority for sure to E-commerce projects as we want to take part in the overall growth in Russia. It is likely that we will launch a new e-commerce project in 2012.
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.
- RUSSIAN E-COMMERCE REPORT 2012 – The total volume of Russian online retail reached 310 billion rubles, a little more than $10 billion, in 2011, up 25% from the previous year. EWDN’s research study of Russian e-commerce will be available soon. To receive free insights or to order the full version, please contact us at [email protected].
