E-commerce in Russia: The rules are different

June 27, 2012: 11:24 AM ET

Russia is the last e-frontier in Europe. So why haven't big companies like Google and Amazon had much luck there?

By Maelle Gavet, contributor
Maelle-Gavet
FORTUNE -- When it comes to the likes of Amazon, eBay and Google, one might think Russia would welcome such foreign Internet giants with open arms. So why is it that, despite its best efforts, Google with just 27% market share has been forced into the unfamiliar position of playing second fiddle to Yandex, its Russian contemporary which holds a comfortable 61% share, while Amazon has no presence in the country at all?

It's not as if Russians don't want them. With more than 53 million people now online, Russia not only has the largest online audience in Europe but also a year-on-year growth of more than seven times that of Germany, its closest rival. And there's plenty of room for further expansion. Add to that an extremely favorable disposable-income-to-debt ratio and the Russian fervor for products that are either exotic or locally hard to come by, and on paper it looks like a country ripe for an e-tail revolution.

That is not to say that some companies aren't already doing extremely well out of it. Besides Yandex, Russia's answer to Craiglist, Avito, has been seeing off its large US rival. And while eBay (EBAY) is being given a run for its money by the Mail.ru-backed Molotok, OZON.ru has been branded the Amazon of Russia. Even those that have formed alliances with Russian companies, such as Groupon's (GRPN) partnership with Mail.ru, have been given a rough ride in the face competition from local rivals KupiKupon, Biglion and Vigoda, some of which have been able to generate tens of millions of dollars of revenue in their first year of business. In Russia, it seems, global hegemony doesn't count for much; little wonder then that the country has been described as the last Internet frontier of Europe.

MORE: Under siege, Amazon shifts on taxes

But while Russia undeniably has its own unique way of doing things, the failure of large western brands to wade in and effortlessly dominate the market -- as they are so used to doing -- cannot merely be attributed to a clash of cultures. And nor is it just a case of hubris. No, arguably the problem is the failure to understand that just because an increasing number of Russians have Internet access and money to spend, businesses cannot just stroll in and set up shop like a traditional clicks-and-mortar business.

For although Moscow has all the makings of a modern western city, boasting the highest population of billionaires over any other city in the world, beyond the major cities the rest of the country lacks the infrastructure necessary for the gears of e-commerce to turn smoothly, if at all. The Russian postal service, for example, was either too expensive or too undependable to be relied upon. Similarly because of exorbitant bank charges and a lack of trust of electronic payments the vast majority of customers usually prefer to pay for online items with cash.

Despite such seemingly intractable obstacles to an online business some companies are thriving. OZON.ru is now drawing in more than 700,000 unique visitors who spend more than $1 million in sales every day. This was made possible by turning such obstacles into opportunities and adapting. With no adequate delivery service in Russia OZON.ru simply created one, O-Courier, which now operates in 130 cities across the country with more than 2,000 pick up points. Similarly, although 80% of its customers still pay in cash OZON.ru is investing in electronic payment technology to enable the transition as trust builds up. And it is using much of the $100 million funding raised last year to invest in reliable data centers and to improve its web interface.

MORE: Why PayPal is reorganizing itself

The point is that many of the companies that are thriving in Russia are the ones that have grown and adapted with the Internet and the online community as it has grown. In fact to some extent it's fair to say that the companies that are succeeding in this modern-day e-frontier wilderness are the true pioneers, the ones willing to invest in and ultimately shape the web. It may be riskier and take more effort but with a population of 140 million, most of which has yet to be tapped, the rewards should be worth it.

Since July 2011, Maelle Gavet has been Chief Executive Officer of OZON Holdings, which includes OZON.ru, OZON.travel, O'Courier and Sapato, and is currently Russia's leading e-commerce business.

Join the Conversation
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.