Finding the Future Online

Transcription

1 Finding the Future Online E-commerce trends in Russia Changes in online consumer behaviour, new e-commerce models and key trends in online retail November 2011

2 Acknowledgements: We would like to thank companies representatives who answered our questions for their contribution to the survey, for taking the time to share their viewpoints with our team. We would also like to acknowledge the contribution of Inna Zinina, PwC Marketing Research Assistant Manager, to the materials preparation.

3 Introduction When we first studied online retail in Russia in 2009, this topic had just started to pique public interest. Not much was being written about online retail then; there was not enough data even though e-commerce had begun to look very promising, especially after the crisis when customers started using online retail in the hopes of saving money. The situation has changed drastically since then. New online shops are opening all the time in various sectors, traditional retailers are increasingly going online, and domestic and foreign investors are contributing their funds to Russian e-commerce projects. As the online retail market grows, the consumer is also undergoing changes. The trust that people have in the Internet is growing and they are shopping online more frequently. In addition, e-commerce has started to have a significant effect on traditional sales. Consumers have gradually stopped differentiating between online and offline retail, and the two now complement each other as retail formats. If retailers ignore the multichannel approach demanded by consumers, they could face declining market shares in the medium to longer term. When we conducted our research in 2009, we were mostly interested in such basic questions as the rate of e-commerce expansion among Internet users, the main advantages of online trade and factors that might scare customers away. By 2011 online retail had already become an obvious trend, and so we decided to examine the matter in detail. We wanted to better understand the profile of a Russian online shopper. Who shops online the most? How do the preferences of the most active shoppers differ from the rest? What is important for them when they are choosing an online store? What type of online stores do Russian consumers prefer? How popular is shopping using mobile devices in Russia, and how do mobile purchases differ from purchases made using desktops? How actively do Russian consumers use discount vouchers on group coupon websites, and how do brand groups in social media impact them? We have also reviewed the e-commerce market from another perspective - from the position of retailers and stores - to understand how the market is organised, what business models exist in Russia and what the main areas for their development are. Moreover, we have prepared a brief overview of key trends in global online retail, which will most likely continue developing in this country as well. The Russian online retail market is still lagging behind the global markets in terms of volume and maturity. However, it is growing quickly and increasingly adopting global trends and experience. Finding the future online. E-commerce trends in Russia 3

4 Frequency of purchases The PwC survey shows that in 2011 almost 92% of those surveyed were buying on the Web (in 2009 they accounted for only 80%). Almost 70% of the respondents are using Internet to shop at least once every 1-3 months. Russians shop online less often than Europeans. For example, in the UK 28% shopped on the Web every week, 2 whereas only 12% of PwC s Russian respondents did so that often. Online trade evolution The Russian online retail market is rapidly maturing, gaining momentum every year. In 2010 the Internet retail market in Russia reached RUB 240 billion, and in the next five years it is forecast to grow by at least 250%. In 2011 the market is expected to grow by 30%-40%, which will far outstrip traditional retail (expected to show a mere 5-7% increase). However, despite such impressive growth, the online segment currently accounts for just 1.6% of the total volume of Russian retail. This is low when compared to other European countries like the UK, where online shopping accounts for 10% of total retail, Germany (8%) or the US (6.5%). Meanwhile, in some European countries Internet shopping is not so mature, and its share in the total retail volume is comparable with that of Russia (e.g. 1.2% in Italy and 1.3% in Spain) 1. In Russia, Internet shopping will develop most significantly in the regions. This is largely to do with the fact that the Internet is rapidly emerging in cities with a population of over 100,000 people; the majority of new shoppers will live far from the nation s capital. However, the spread of the Internet throughout the regions will be much faster than the growth of Internet shopping there. Several factors contribute to this; consumers, especially those who live in the regions, do not trust online retail and run into difficulties making payments and returning goods, as well as with delivery. 4 PwC

5 What do online shoppers buy? Which products do you buy online? (%) Household Бытовая appliances техника Книги Books Mobile Мобильные phones, smartphones телефоны Computer Компьютеры hardware/software и ПО Apparel Одежда and footwear и обувь Travel Бронирование/туризм (tickets, reservations) Cosmetics Косметика and и beauty парфюмерия products Бронирование/концерты Event tickets Видео, Video, аудио audio Детские Toys, товары, baby игрушки products Things Товары for the для home дома and и garden сада Продукты Groceries питания Лекарства Medicine Спортивные Sporting товары goods Другое Other Previously, the absolute leader in web sales was books, but they have now been replaced by household appliances. The PwC survey shows that the number of respondents who bought household appliances on the Web grew by 7%, and the number of those who bought books online remained the same. One of the reasons is increased online activity among major sellers of household appliances and mobile telephones, such as M.Video, Tekhnosila, Euroset and Sviaznoy. In addition, an increasing portion of retailers advertisement budgets is being allocated to supporting online retail channels. Compared to 2009, Web sales of apparel and footwear show the biggest increase (13%). In developed economies, especially the US, buying clothes online has become more popular than catalogue sales, which did not do well in Russia. Foreigners have been buying clothes without trying them on for a long time, but Russians are not in the habit of doing so and at first they were not confident in online shopping. However, the boost in online orders this year leads us to believe that their concerns are a thing of the past. It is important to note that Russian trends are quite similar to international developments. According to a survey conducted by Mintel, UK online stores sold USD 7bn in clothing in 2010, and in the last five years sales in the segment have gone up by 150%. In addition to clothes, growth was demonstrated by video and audio products (12% up) and sales of various types of services. Online booking of hotels, tours and airline tickets is gaining momentum (11% up), as well as buying tickets to events and other forms of entertainment, such as the cinema, the theatre and concerts (up 10%). Finding the future online. E-commerce trends in Russia 5

6 Online shopping preferences by gender (%) Men % Women % Consumer electronics 50 Books 51 Computer hardware/ 48 Cosmetics and toiletries 48 software Mobile phones 44 Apparel and footwear 45 Books 42 Consumer electronics 45 Video, audio 38 Toys, children s goods 37 Although both men and women shop with the same frequency, their preferences in online shopping differ and show that they have different interests. Men buy high-tech products (computers and software, mobiles and smartphones, video and audio products) more often than women. Women buy beauty products (cosmetics and toiletries, apparel and footwear) and children s products more often than men. Payment What online payment method do you prefer? (%) Какой способ оплаты Вы предпочитаете, покупая товары и услуги онлайн? Наличные курьеру Cash при on доставке delivery Web money Интернет-платежи The most popular payment method for online purchases in Russia is still to pay the courier; in cash. This method was chosen by almost 60% of respondents in 2009, and the same number of respondents prefer to pay this way in However, paying with credit cards is gaining in popularity. In 2009 only 20% of those surveyed opted for this method, compared to 32% this year. This is due to a rapid increase in the use of bank cards. According to the National Agency for Financial Research, in spring 2011 bank cards were being used by every second Russian citizen, and users are expected to grow in number even further. This will bolster confidence in bank cards as a popular method of making online payments. It is interesting to note that 24% more men trust payments via Web money than women. Women tend to opt for the traditional payment method of cash to courier. We have been seeing increased popularity among new online payment methods, such as text message (SMS) payments from mobile phones and payment terminals; these are used by almost 23% of respondents. Price The average size of the online shopping basket is gradually increasing. In 2008 purchases worth RUB 500 to RUB 3,000 accounted for the largest proportion of online purchases (41%), but in 2010 they had dropped to 27%. In 2010 most purchases (30%) were orders totalling RUB 10,000 to RUB 30,000. The most likely reason is a rise in online sales of household appliances and mobile phones. The proportion of small purchases (less than RUB 500) is gradually decreasing (13% in 2008 and just 5% in 2010). In 2010 only 2% of respondents made very large purchases (RUB 100,000 or more) online, and that segment has not demonstrated any stable tendency toward growth. Russians still prefer not to spend such large amounts online. 3 Bank card Кредитная карта Bank or postal transfer Банковский или почтовый перевод SMS-payments Смс -платежи Payment terminals Через терминалы оплаты PwC

7 Why do consumers shop online? Residents of Moscow and the regions use online retail for various reasons. Muscovites like Web shopping because it can save them time, whereas people living in the regions are primarily looking for those products that are not always in stock in traditional shops. Potentially finding lower prices online is also an important consideration. Half of Moscow s residents and a third of consumers residing in the regions shop online because of the convenience of delivery. 4 Почему Вы покупаете онлайн? Which factors make online shopping attractive for UK citizens? It is curious that in developed countries consumers shop online for different reasons. The PwC survey conducted in 2010 in the UK shows that 80% of respondents use the Internet because it allows them to shop whenever they want. This factor is much more important for Europeans because shops close earlier in Europe than in Russia, leaving them less time for traditional shopping. Two other reasons are lower prices and the ease of comparing products and offers. Therefore, consumers choose to shop online not only to try and save time, but also to enjoy the convenience of not being restricted to a set time and place. In 2007 similar research was conducted and found some other key factors of about the same importance: lower prices, saving time, easy delivery of large items and the ability to find favourite brands with less effort. Respondents (% of online shoppers) in , % онлайн- покупателей Increased in importance since 2007 Easier than visiting shops Access to products I can t buy elsewhere Decreased in importance since 2007 Easier to compare products and offers Wider variety of products I can shop whenever I want Lower prices/ better offers Easy home delivery of big/heavy items Quicker than visiting shops Easier to find my favorite brands Respondents (% of online shoppers) in , % онлайн-покупателей в Великобритании Source: PwC, UK In 2009 only 20% of those surveyed opted for paying with credit cards, compared to 32% this year. Consumers have always preferred shopping on the Web for two reasons: firstly, due to a wider range of products than in traditional stores, secondly, due to lower prices. Today, in addition to the above key reasons, comprehensive criteria are emerging, such as the convenience of buying online, opportunity to compare goods and consumer-friendly delivery. It will likely be difficult for traditional retail to compete with online stores, especially in the regions, because of physical restrictions : Internet stores are able to offer a wider product range simply because they do not need to worry about replenishing an entire store chain s stock as they deliver goods directly from the warehouse. This results in less working capital frozen in the inventory of chain stores and lower transportation and storage costs. The effective design of an online store s website can automate the main process of comparing goods and helping to pick them up, which in traditional stores is done by salespeople. This is something that not all salespeople are particularly good at, especially in the regions, where the qualifications of the sales personnel is lower, not to mention the continuously growing costs of qualified labour in sales areas and the high turnover rates among such personnel. Vardan Gasparyan Senior manager Supply Chain Managment PwC in Russia Finding the future online. E-commerce trends in Russia 7

8 Why do some consumers choose not to make purchases online? The main reasons why consumers both in Moscow and the regions do not shop online is because they want to physically see products before buying them, they are afraid of being cheated, and they have problems finding a reliable store. Interestingly, the main reasons that regional consumers do not make purchases online are that they (unlike Moscow residents) do not feel the need for it and are unwilling to wait for the items to arrive. In addition, 20% of regional consumers do not shop online because they do not know how to and because they have heard negative things about it from their relatives or friends. Moscow consumers are not afraid of online shopping since they have more experience with it 5. Despite this negative attitude, as Internet use in the regions expands and people gain more experience using the Web, consumers are developing more trust in online shopping. According to the forecasts made by the Public Opinion Fund and Yandex, the Internet s penetration of the regions by autumn 2014 will be 70%, compared to just 48% in autumn The gap between the levels of Internet penetration in Moscow and the regions will be three times smaller by Therefore, consumers choose to shop online not only to save time, but also to enjoy the convenience of not being restricted to a set time and place. 8 PwC

9 As Internet use in the regions expands and people gain more experience using the Web, consumers are developing more trust in online shopping.

10 Defining characteristics of consumer behaviour on the Internet The most active shoppers fall into two age groups: and Fifteen percent of year-olds and 14% of year-olds shop on the Web every week, much higher than the other groups. The same two age groups account for the majority of people who use Russian-language websites. 6 This data proves that the frequency of online shopping is directly related to having experience using the internet. Shoppers who are years old have the highest rate of involvement in online retail: 81% of respondents from this age group shop online at least three times a month. They are not the most active online buyers, however; almost half of the respondents from this age group shop online once every one to three months. Most online shoppers come from the more well-off party of society; middle and senior management and entrepreneurs shop online at least once every three months (77%, 74% and 72%, respectively). Twenty-one percent of top managers surveyed shop online every week. Correlation between income level and frequency of shopping online (%) Despite the fact that online retail is rapidly developing, not everyone is getting involved. In our research we tried to understand who the most active online shoppers are and draw up their demographic and behavioural profiles. Who is the most active online shopper? Correlation between respondents age and frequency of shopping online (%) Взаимосвязь возраста респондентов и частоты покупок 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 10 0% total Every week Every month Once every 1-3 months Once every 6 months Once a year or less Never % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% total moderate middle above the high very high middle Every week Every month Once every 1-3 months Once every 6 months Once a year or less Never Online shopping activity depends heavily on the shopper s income; the higher is their income, the more frequently they shop. This is because wealthy respondents normally have less time to visit traditional stores. They have a higher level of Internet literacy and free access to the Internet PwC

11 Why do consumers buy from specific online stores? More than a half of respondents choose an online store because it has the lowest prices (58%) and a wide range of products (54%). However, the picture changes dramatically if we look at the criteria used by individual groups of consumers depending on their online shopping activity. The most active categories, which include middle and senior management and entrepreneurs, choose a specific online store because of low prices and a better variety of products. However, they also focus on some other factors that are not as relevant for respondents from other groups, namely, trust in a specific store and convenient returns. Similar results are produced by an analysis of the relationship between the criteria for choosing a specific web store and an individual s income level. For the respondents with the highest income, the low price criterion is significantly less relevant than on average for the sample. At the same time, they find that confidence in a specific store, the ability to receive products from the warehouse immediately and a reliable system for returns are more important factors. It is interesting that the respondents whose income is higher than average appear to be rather sensitive to the low price criterion. In addition to low prices, respondents with moderate income appreciate a wide range of products and user-friendly site navigation more than others. The need to establish long-term relations with consumers to win their loyalty means that online stores should start to seriously consider improving their delivery in the regions. This would require them to make drastic changes in their multi-level logistics structure. A whole swath of factors would be involved, such as the right design (and IT support) of the website used for shopping; online merchandising (that is, managing all data about the goods in the most user-friendly form possible, which would push the buyer to shop more, in which stores such as Amazon and Ozon have been particularly successful); finding the right location and set of logistic services for distribution centres from which items are dispatched delivery; choosing regional courier companies and structuring the product return systems that could be effectively embedded in the logistics system and would not scare the shopper away from the brand or the store. Vardan Gasparyan Senior manager Supply Chain Managment PwC in Russia Finding the future online. E-commerce trends in Russia 11

12 What are your main criteria for choosing an online shop? (%) Почему Вы делаете покупки в конкретных Интернет магазинах? - % Above average High Very high Там предлагается They самая have низкая the cheapest цена на товар, prices on the products I который am looking я ищу for Нравится ассортимент I товаров. like the products Я знаю, что they всегда offer; I могу can always найти там find то, what что I мне need нужно there Very Очень convenient удобные delivery условия (easy, доставки cheap) Я доверяю этому магазину/сайту I trust them Очень удобная навигация Uder-friendly на сайте, website; легко найти it s easy что to find what нужно you и need сделать and заказ order Товары They всегда always есть have в наличии everything на складе, in stock; не you приходится never have to ждать wait Я получаю бонусные баллы/скидки за покупку в этом I get points/rewards магазине и and могу can потом use их them использовать afterward Удобная Good система return возврата policy Другое Other To what degree (as a percentage) is this factor more important in selecting a web store for those respondents with this income level than for the sample as a whole Therefore, to attract the most active and creditworthy customers, online shops should work hard on their brands and focus not only on having the lowest price, but on developing long-term relations with consumers. Online shopping activity depends heavily on the shopper s income; the higher is their income, the more frequently they shop. 12 PwC

13 What incentivises more purchases? Что может стимулировать вас увеличить онлайн покупки? What would encourage you to spend more online? (%) Online prices Цены are буду significantly ниже, чем lower в офлайн than магазинах in shops Бесплатная Free доставка delivery Будут попадаться хорошие предложения Interesting offers on the things I am looking for с интересующими товарами Удобная система Convenient возврата returns товара My Рост overall общего situation благосостояния improves Надежная Safe система system оплаты for payment банковской by credit картой card Возможность покупать Option онлайн to buy on в кредит credit Option to pay from a mobile account Возможность оплачивать с телефонного счета for more expensive goods Recommendations on online shops and offers from Если друзья будут активно рекомендовать friends who actively shop online Возможность покупать через социальные сети Convenient shopping through social networks Не увеличу ни при каких условиях Nothing Almost 80% of those surveyed mentioned that if prices are lower than in traditional stores, they shop online more actively. For 71%, an important factor encouraging an increase in online shopping is free delivery. These seem to be more relevant for women than for men. Top managers are more concerned with payment: can they buy on credit, would bank card payments be more reliable, can the products they buy be returned? Young people tend to shop more at their friends recommendation (for them this factor is 3% more important than for the sample average), and when products can be ordered through social media (it is 2% more important than for the sample average). Looking for product information online More often than not, consumers look for product information using search engines, such as Yandex.Market; on average, 44%- 49% of respondents aged do this, and consumers with a very high level of income use them more than anybody else (55%). Meanwhile, only 39% of young people under 24 use such web resources, and 18% of respondents have never used such services. Website forums are the second most popular source of information among respondents. On average, 24% of those surveyed use these to look for product information. The least popular are specialised resources where products are discussed: Veshizm.ru, Vladelia.ru, etc. (6%). With the expansion of social media, more companies understand the importance of having an account there to be able to communicate with their consumers. Numerous foreign retailers and an increasing number of Russian retailers have set up social media groups to spread information about their companies, promotions and new offers. However, it remains unclear whether or not consumers are interested in them. Finding the future online. E-commerce trends in Russia 13

14 Correlation between age and membership in brand groups in social networks (%) % 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 100% total Joined a brand group because like the brand Joined one, but not active Not a member of any social network Almost half of respondents (47%) are members of brand groups through social media. The main reason for becoming a member is to qualify for discounts (21%). However, the percentage of respondents who join groups like these because they like a certain brand is also quite significant (13%). Young people aged between 18 and 24 account for the largest number of loyal customers (21%), while the other groups account for 7%-12%. The older people are, the less likely they are to be members of any brand groups via social media, simply because they do not see the benefit. The highest percentage of people who have consciously joined brand groups with social media (those who are loyal to a particular brand and those who want to get discounts) comes from the most active group of online shoppers, namely, senior managers and entrepreneurs (49% and 44%, respectively). Therefore, to attract the most active and creditworthy customers, online shops should work hard on their brands Joined a brand group to get discounts Have not joined one because do not find them useful 7 How do our compatriots shop? New trends and preferences Impulsive online buying As consumers gain more experience, their online behaviour changes. Our PwC colleagues in UK noticed that shopping is becoming more impulse. There is a growing number of people in Britain who do not plan purchases in advance and cannot resist the temptations offered by super offers, promotions and discounts. Unlike the British, more than a half (51%) of Russian respondents always plan their purchases in advance, and only 19% of them prefer to make spontaneous purchases online (only 9% buy impulsively in most cases and 10% only do so half of the time). Thirty percent of respondents plan their online shopping, but sometimes buy impulsively. The percentage of impulsive buyers among women is higher than among men (20% vs. 17%). In Russia there is an interesting tendency to buy impulsively among those who shop online no more than once every six months. For those who shop on the Web no more than once a year, the percentage of impulsive shoppers is double the average at 21%. This means that in Russia impulse buying is a trend mostly demonstrated by inexperienced web shoppers. The reason for this could be that they find out about good offers by chance. Savvy consumers are more reasonable shoppers; they shop according to a specific behavioural model. In addition to a reasonable price, they look for good service and a wide variety of products. Online shopping from mobile devices Around the world smartphones and tablet computers are increasingly forming a part of the consumer community s daily life and are used to shop more and more often. Today, 31% of Americans, 30% of British people and 27% of the French own smartphones. 7 Across Russia, 16%-17% of the population owns smartphones, 8 and this is significantly lower than the number of smartphone owners among the PwC survey s respondents (52%). This is due to the characteristics of the sample used in the survey conducted online (and thus, covering the most technically advanced groups of the population) and only in the largest cities. 14 PwC

15 Mobile phones are a preferred way to shop for 29% of Americans, 28% of British people and Germans and 45% of the Japanese. Sixty percent of our Russian respondents shop online more or less frequently, but only 8% do it on a regular basis. 9 A quarter of respondents have never bought any products using a smartphone and are not going to change their habits. Almost half of those who shop online once every six months or less are often included in this group. Twenty-four percent of consumers shopping online every week also use mobile devices, while 8% of those who shop online every one to three months shop using mobile devices. What do people buy using mobile devices? Top 5 most frequently purchased items Total online purchases % Purchases made from mobile devices Household appliances 47 Books 38 Books 46 Бронирование/концерты 34 Mobile phones 38 Computers and software 32 Computer hardware/ 37 Travel bookings 31 software Apparel and footwear 36 Video, audio 27 The top five products bought online and from mobile devices overlap in just two categories: books, and computers and software. The other three categories reflect the specifics of shopping using mobile devices. Consumer electronics, mobile phones, apparel and footwear are products that consumers usually study for a long time, and compare and review before buying. Since the process of selecting these products is so long, it is much more convenient to shop from desktop computers. Booking tickets for events or travelling, as well as buying video and audio products do not require quite so much thought, and so consumers buy them wherever it is more convenient. This is why consumers often use mobile devices to buy products and services that can be chosen quickly. % Deal-of-the-day sites In the past few years, a new type of online shopping deal-of-theday has started to emerge. Groupon and LivingSocial are the two dominant players in the field. Groupon operates in several countries, including Russia. But we also have purely local projects, such as Biglion, KupiKupon, BigBuzzy and others. It works like this: a company offers discount coupons on its website. The discount for a specific product is usually steep, up to 90%, but the offer is only valid for a short period of time. Companies that offer coupons benefit from an influx of clients, and the deal-of-the-day sites receives payments for the coupons. These services have already become very popular in the US and Europe. US-based daily deal sites issued about 63,000 coupons with various offers in At the moment, the country hosts about 350 deal-of-the-day sites, 11 and in 2010 consumer expenses on group coupons accounted for around USD 873m. By 2015 the coupon market is expected to grow by 450% to reach USD 3.9bn. The most popular group coupons in the US in 1Q 2011 were for restaurants and food (27% of all offers), beauty treatments, spas and massages (19%), and sports and travel (14%). 12 Although the service is fairly new, Russians are already well aware of daily deal sites; 80% of respondents know about them. Thirty-six percent of those surveyed buy coupons more or less regularly, and 14% do it often. The most frequent users of social discounts are young people aged 18-24; 18% of respondents from this age group buy coupons on a regular basis, and 26% do it occasionally. The service is a little less popular with consumers aged (15% use it regularly, 25% occasionally). Most respondents who are indifferent to deal-of-the-day sites are between 41 and 50 years old (54% have not heard of such sites or are aware of them but have never used them). This is why consumers often use mobile devices to buy products and services that can be chosen quickly. Finding the future online. E-commerce trends in Russia 15

16 Correlation between age and frequency of purchasing coupons (%) % 80% 70% 60% 50% 40% 30% 20% 10% 10 0% 0 100% total the internet very often. Secondly, coupons usually offer discounts on entertainment and services that are popular with well-off individuals (massages, beauty treatments and spa services, restaurants, etc.) and rarely used by people with low income. In addition to the relation between coupon services and a consumer s level of income, we are seeing a relationship between how often an individual buys coupons and how often they buy from a mobile device. Active mobile device shoppers account for the largest proportion of consumers who regularly buy coupons (28%). This is why the development of mobile phone applications is such a promising business, and apps like these are already offered to Western users. I buy coupons regularly I browse through offers, but never buy I have never heard of them I sometines buy coupons I have heard about them, but never used them Thus, there is a relation between a consumer s age and how often they use group coupon websites. The higher is the shopper s income, the more frequently they buy discount coupons. This seems a bit backwards; social strata with lower income are usually the ones expected to be more interested in discounts. There are several reasons for this. Firstly, people with lower income normally do not know how to use these coupons, do not trust new services, and generally do not use Group coupon services have established a completely new way of attracting clients and selling products and services. However, use of such services for promotions should be based on the following key factors: Discount coupons enable companies to offer special prices to various consumer categories and receive some benefits related to marketing and advertising their products, for example, from attracting clients outside existing distribution channels. However, for a company to benefit from such discounts, management should analyse awareness of their brand and the impact of such offers on their business in the broader context. For example, do prices offered by group coupon services impact new consumers expectations of prices on similar products and services? Offers from group coupon sites may require larger product stocks and result in a much larger burden on a company s supply system. They can also increase demand for personnel engaged for a relatively short period of time. Moreover, the use of group buying services can have certain implications on companies internal controls, systems and processes, for example, in terms of sales taxes and accounting for used and unused discount coupons. Anna Davydova Director Audit and Assurance services, Retail and Consumer PwC in Russia 16 PwC

17 Active online buyer profile Young and active This group includes young people under 25 and young professionals starting their career (no longer studying). Eighty percent of this group s respondents estimate their income as average or above average and shop online almost every week. Young people buy apparel and footwear online more often than other age groups. Furthermore, they are interested in tickets for various events. In contrast (primarily due to their age), people in this group are rarely interested in household appliances children s goods. The majority of this group likely do not have a family or children and do not need to furnish their own flats. Their parents are usually the ones to buy any household appliances necessary. When a respondent chooses a specific online store, they first focus on the variety of products and only then on prices. Young people are interested in their friends opinions on products and services (usually shared on Facebook or Vkontakte), and are attracted by the opportunity to shop via social media. Buyers from this group are more inclined toward impulsive online buying. In addition, they make purchases on deal-of-theday sites and use mobile devices to purchase and select products more frequently than others. More often than other groups, young and active shoppers are members of brand groups on social media due to their loyalty to a certain brand. Smart and active Smart active shoppers are people aged between 30 and 40 with aboveaverage income. Often they are middle-tier or top managers, entrepreneurs or business owners. We assume that many people in this group have families and therefore buy children s goods more often than others. Moreover, they buy more pharmaceuticals and household appliances. They also prefer to book tickets for entertainment online and do so more actively than respondents from other categories. As opposed to other groups, it is more important for smart and active shoppers to trust a specific store and be able to return the goods easily if they are not quite right. But low prices and free delivery are much less important to them; they are ready to pay for high quality service. However, such shoppers are generally more conservative and rarely make impulsive decisions. If they do something online they do it consciously and to their own benefit. A distinctive feature of this group is that its representatives shop from mobile phones more often than others. This could be because they do not have much spare time and are under pressure at work; they often have to shop online not at the office or at home, but rather on the go when they have only their mobile to hand. Finding the future online. E-commerce trends in Russia 17

18 Expansion of e-commerce into the regions St Petersburg Moscow Nizhny Novgorod Ekaterinburg Novosibirsk Rostov-on-Don Percentage of respondents 74 who shop online at least once 56 every three months Percentage of respondents who own a smartphone or tablet PC 32 Percentage of respondents who shopped online from a mobile device (out of the total number of smartphone or tablet PC owners) What consumers buy online in different Russian cities* (%) Moscow St Petersburg Novosibirsk Household appliances 58 Household appliances 49 Books 40 Books 48 Books 46 Cosmetics and beauty products 37 Mobile phones 45 Travel bookings 44 Household appliances 36 Computer hardware/ software 42 Mobile phones 42 Computer hardware/ software 35 Travel bookings 41 Event tickets 41 Travel bookings 35 *Percentage of respondents from the total number of those surveyed broken down by city.

19 Rapid expansion into the regions is one of the key trends in the development of online retailing in Russia. Although e-commerce is more developed in Moscow, other large cities in Russia are not far behind. The proportion of respondents using smartphones and tablet PCs and shopping from these devices appears to be unexpectedly high in large cities. St Petersburg, Yekaterinburg and Rostov-on-Don are the closest to Moscow in terms of online shopping activity. Interestingly, St Petersburg has the lowest share of people shopping online from mobile devices among Russia s cities. For people in the regions, online shopping is not only a way to save time, but also an opportunity to buy goods that are difficult to find locally. As payment systems and logistics improve, the regions are likely to catch up with Moscow, if not in online retail turnover then certainly in the share of active users. Online consumers preferred payment methods in various Russian cities (%) Moscow St Petersburg Novosibirsk Ekaterinburg Nizhny Novgorod Cash on delivery Bank or postal transfer Web money SMS-payments Rostov-on-Don Bank card Payment terminals Ekaterinburg Nizhny Novgorod Rostov-on-Don Household appliances 49 Books 48 Books 51 Books 45 Household appliances 35 Apparel and footwear 43 Mobile phones 40 Computer hardware/ software 33 Event tickets 39 Cosmetics and beauty products 38 Video, audio 33 Cosmetics and beauty products 37 Video, audio 34 Cosmetics and beauty products 32 Video, audio 37 Finding the future online. Trends of e-commerse in Russia 19

20 Online shopping models in Russia Twenty thousand online stores are registered in Russia. Four thousand of them willingly provide their products details to shopping comparison systems like Yandex.Market, but only around 2,000 stores actually work. 13 In order to identify different online store models, we classified existing types of companies using two characteristics: specialisation in one or more types of products/brands (singleor multi-product) and the format of the core business (online/ offline). As a result, we have five basic models, one of which is divided into two based on the substance of the services provided. Online retail only Online stores set up as Web shops only (i.e. without any traditional retail outlets) have followed the way of the traditional retail development. They include both super- and hypermarkets which sell all categories of goods and brands, just like traditional retailers, and stores which specialise in one product category. Therefore, online shops are effectively copying traditional retail formats while adding some twists, which will be considered below. The only offline store format that does not have a counterpart among Russian websites is a small niche business that sells one category of one brand, e.g. jewellery or apparel. But this format is rare even globally. More and more online shops are seeking diversification as they believe it will increase sales and attract the maximum number of buyers. And investors agree with them. As a result, the largest amounts of investment available in the Russian market flow to diversified supermarkets and price aggregators. Our survey results also support the positive outlook for online super- and hypermarkets 22% of our respondents shop there regularly. Our research has identified a link between a shopper s level of income and their loyalty to hypermarkets: the higher the income level, the larger the proportion of consumers who shop there regularly. This could be explained by the sheer convenience of buying many different goods in one place, but it could also be due to their loyalty to a specific store. It is interesting though that there is no such link for other types of online stores. Online shopping models in Russia Assortment Multi-product, multi-brand One product, multi-brand Online supermarkets Ozon.ru, Utkonos.ru, 003.ru, zakazhi24.ru, Top-shop.ru, Vasko.ru Online window shopping Utinet.ru, Wikimart.ru Specialised online shops (household appliances, apparel and footwear, etc.) Sapato.ru, KupiVIP.ru, Holodilnik.ru, Sotmarket.ru, Citilink.ru Hyper- and supermarkets Azbuka Vkusa, Auchan TSUM Specialised retail chains (household appliances, mobile providers, children s goods, etc.) Detsky Mir, Kenguru Euroset, Svyaznoy M.Video, Tekhnosila, Eldorado One product, one brand Direct sales from brands Ecco, Sela, FiNN FLARE, Mango Online In store Key format 20 PwC

21 Multi-product supermarkets can use two different business models: classic supermarkets and online shop-window. The former sell goods online by shipping them to their own warehouses on consignment, and deliver goods to their customers themselves. And the latter use their websites as a platform for other online and offline stores, just like a real shopping centre, where these stores compete against each other through more favourable offers. Online shop-windows do not have their own warehouses or logistics, and do not deliver goods (this function is delegated to partner shops). The one material difference between offline and online formats is that shopping centres attract customers because of their location and range of brands, whereas online shop-windows are brands in and of themselves that attract customers and enable small and lesser-known shops to sell their products. The model of comparison shopping sites has started to change. As some customer services, such as payment, delivery and returns are provided by a partner store, these sites find it difficult to control the quality of the services. Any negative customer experience related to these services has an impact on a shop-window's brand; this is why some have started thinking about extending the range of their services and offering infrastructure and logistic services to their partner stores, in addition to online trading floors. This model (online showcase with an extended range of services) is used by Amazon, the world s largest online retailer. Частота совершения покупок в онлайн -магазинах разных типов (%) 100% % 90 80% 80 70% 70 60% 60 50% 50 40% 40 30% 30 20% 20 10% 10 0% 0 How often do you shop at various kinds of online stores? (%) Online supermarkets Regularly Sometimes Specialised online shops 10 8 On the other hand, some traditional online supermarkets are starting to offer online shop-window services to third party web stores, giving them the option of handling their own delivery and payments from customers, or purchasing these services from supermarkets. In this way, online supermarkets and shop-windows are gradually moving towards a mixed model Traditional retailers' online shops 1-2 times in the past Never Direct sales from brand What changes will we see in e-commerce in Russia over the next five years? According to analysts, the growth rate of e-commerce will remain about the same as it is now, i.e % a year. New regional and nation-wide online shops will appear, and these are likely to be niche shops. Toady, e-commerce mainly revolves around major cities, but given the saturation of the Moscow and St Petersburg markets, the main vector for its development will lie in the regions. Due to greater diversity among e-shops and growing market competition, the quality of services will improve day-by-day. What do you think of the prospects of developing sales through social networking sites? Will good e-shops in social networks appear in Russia? Will they be regarded as real competitors to traditional online shops, or will they remain as forums for discussing and selecting goods? Surveys show that most people subscribe to certain brand pages in order to get better offers and be the first to find out about discounts. Of course, the volumes of social media sales in the near future don t even come close to those coming through traditional channels. However, given the massive audience coverage, this business potential should not be underestimated. Creating a good online shop in a social network requires developing a separate, comprehensive application, the cost of which may exceed the cost of developing a website. It is unlikely that such social shops will appear in Russia too soon. It is more likely that major market players will more actively integrate with social networks to increase their presence. Can you give us an estimate of how many customers purchase items on Ozon.ru using mobile devices? What do you feel will be the proportion of e-purchases via mobile devices of the entire e-sales volume? Today, sales using mobile devices account for about 1% of our turnover, and we expect this sales channel to grow rapidly. Juliana Sokolovskaya Sales and Marketing Director OZON.ru Finding the future online. E-commerce trends in Russia 21

22 The majority of online specialty stores sell household appliances and electronics, mobile phones, apparel and footwear. Such stores tend to gradually expand the range of their products, adding goods close to their core category. Some large online supermarkets were set up on the basis of specialty stores and in many cases are still associated with them. For example, many shoppers still think of Ozon.ru as a book store even though it has been selling a wide range of products for a long time and has growen into a hypermarket. Utkonos is also known mostly as an online grocery store although its product range is much broader. Traditional business goes online Traditional retailers often seek to open their own online shop, but the popularity of this idea depends on the store. Generally, traditional super- and hypermarkets are not well represented on the Russian Internet ( Runet ) as opposed to the purely online formats of super- and hypermarkets which are developing rapidly. The Russian environment differs greatly from the global practice, where leading retailers (Walmart, Sears, J.C.Penney, etc.) have long been selling their goods online and have been included in the ratings of the largest companies by online sales revenue. This is probably because organised retail (super- and hypermarkets) is relatively new in Russia as compared to the global leaders. Companies prefer to focus on their core business and are not paying due attention to the development of their online sales yet. On the other hand, consumers are gradually maturing, gaining more experience and getting used to the thought that they can order food online. In Moscow, ordering food online no longer seems exotic thanks to Utkonos, Russia s flagship online food retailer. However, some hypermarkets are beginning to develop their own online business. A retail chain, for example, intends to expand the range of products it sells online but they will not deliver goods to customers as yet. Store employees will put together and pack orders made online and the buyers will have to come pick them up themselves. Arrangements where customers place orders online and then pick them up at the store have become a global trend among supermarkets. Walmart launched a similar service this year. Well known US stores Sears and Kmart have also expanded their services: they pack items ordered online and bring them out to the customers cars when they arrive at the store. Smaller retailers that do not have an extensive chain of stores are introducing similar services; you can order food online and pick it up at a specific place where this service is provided (a pick-up location). Traditional specialty stores are better represented on the Internet. Primarily, they sell household appliances and electronics, mobile phones and children s goods. To date, traditional Russian retailers have accounted for no more than 10% of online sales, and many are below 5%. However, these companies business plans reflect their confidence in the potential of online retailing. Traditional retail chains with an additional online channel have two big advantages over specialised online retail platforms: The goods can be exchanged or returned at the nearest store, meaning that the issue of potential buyers mistrust could be easily addressed. In the regions, it is easier to deliver goods to customers from a network of own warehouses that open together with the retailers regional representative offices. Customers will not have to wait as long for their orders and sellers will spent less time on delivery. It is no secret that Russian retail operators drive the development of quality delivery infrastructure in the regions. This also relates to the construction of distribution centres and increasing supply of quality warehouse space and courier delivery services in the regions. Such national players have already appeared in the household appliances and sporting goods segments, and regional expansion, which means development of the regional delivery service, is a matter of survival for them. The fact that shoppers have more retail channels available to them does not mean that they will spend more; they will simply shop differently. 22 PwC