Russia's internet store pioneers powering ahead

Moscow - When ru-Net Holdings investment company bought internet store ozon.ru in 2000, it had monthly sales of just US$35,000 ($51,000) and was losing money.

But, although hardly a match for American online retail pioneer Amazon.com, ozon.ru was still Russia's market leader and has kept its top spot by reaching 2005 average monthly sales of books, DVDs, toys and software of US$2 million.

"Others sold even less, so it was not just faith in the leading position of ozon.ru but faith in the growth of the market," said Leonid Boguslavsky, ru-Net Holdings chairman.

He says rising living standards in Russia, which has a population of 143 million, and growing access to the internet mean the market holds great potential for electronic retailers or "e-tailers".

"We might have been wrong about exactly when the business would turn a profit, but it was clear from the start that the market would eventually become big enough," Boguslavsky said.

With prices for oil, Russia's main export, running at close to US$60 a barrel, there is no sign yet of an end to an economic boom now into its sixth year. Retail sales increased by 12 per cent last year to US$194 billion, but internet retailers posted sales growth of 40 per cent - although with total sales of US$600 million they accounted for just a fraction of the total.

SpyLOG research shows Russia has more than 1500 internet shops. But, of 400 e-tailers investigated last year by SpyLOG, half were the virtual office of a real shop trying to save on costs and reach more customers. Only 12 per cent of the shops had more than 10 staff.

Serious operations have to contend, meanwhile, with a shaky legal environment, widespread fraud and an unreliable postal service.

Few Russians have credit cards and most of those who have them only use them to withdraw their salaries. SpyLOG says 80 per cent of the shops use couriers to deliver their goods to the customer. Couriers usually take payments.

"People are afraid of using their credit cards for internet shopping," SpyLOG spokesman Alexander Travin said. "That is why some of them even have [debit] cards where they keep a little money to use on the internet."

Although Russians' average monthly incomes are just US$280, people in cities like Moscow and St Petersburg are generally better off and have much lower levels of debt than their Western counterparts, meaning they do have free cash to spend.

Half of the shops sell goods only in Moscow, underlying the fact that only 15 per cent of Russians are internet users and the bulk of them are concentrated in the capital.

Boguslavsky says that a typical ozon.ru customer is 20 to 35 years old, a middle-class city dweller interested in business literature and self-education books.

Half of the customers are Muscovites but Boguslavsky is not discouraged.

"So what? The population of Moscow is about the same as in the whole of Hungary, but living standards are much higher," he says.

Boguslavsky expects that within five years, half of Russia's adults will have access to the internet, meaning that ozon. ru will be able to expand sales by 90 per cent a year.

Underpinning his hopes is the fact that only 12 per cent of ozon.ru's customers are Russian speakers living abroad.

In 2000, expatriate Russians accounted for half the total.

Da to growth

Russia has more than 1500 internet shops.

Growing access to the internet means these numbers will rise substantially.

Overall retail sales increased 12 per cent last year, with internet retailers taking US$600 million.

- REUTERS