Russian e-business in practice: lessons from experience (2001)

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First of all, I would like to thank organizers of the RBCC and LOVELLS Company seminar for an opportunity to deliver this speech and comment on the development of e-commerce in Russia before such a …

First of all, I would like to thank organizers of the RBCC and LOVELLS Company seminar for an opportunity to deliver this speech and comment on the development of e-commerce in Russia before such a dignified audience.
I will start my report with informing you about the current situation in online shops, those that are engaged in Internet trade only (so called “pure” Internet shops) and those that are controlled by off-line companies (or multi-channel shops). All examples will concern Russia only.
I will comment on parameters typical for such shops and their outlooks for the near future (a year or two). Later in my speech I will pay attention to problems typical to all online shops on the Russian Internet.
Then I will comment on application software preferred by online shops.
At the end of my speech, I will draw the conclusions.
So, let’s consider the state of e-commerce in Russia
In fact, there is no e-commerce in Russia in the true sense of this word because an activity, which brings no profit, cannot be called “commerce”.
If we consider pure online shops (I mean shops that exist only in the cyber space), we can characterize their activities by the following proportion
 50x5x0.5 (thousands of US dollars)
50 – means expenditures necessary for maintaining an online shop for a month;
5 – means a monthly turnover of a pure Internet shop;
0.5 – means revenues an online shop gets per month
 These figures testify that there is no profit in Internet shops or it is negative.
 The above proportion is true for typical pure Internet shop. If we consider the largest of them, every figure in the proportion should be multiplied by about 3. As a result, we will have the following proportion:  
150:15:1.5
 If we consider the situation in a small Internet shop, we will have to divide the first proportion 2 but not more. Otherwise, they will have no money to pay salaries to their personnel.  
 
If we consider activities of an Internet shop engaged in another offline business (for instance, department store), the proportion would be reversed (as compared to the first one)
 0.5x 5x 50
 In this proportion,
0.5 would mean a 0.5% rise in trade turnover of the off-line company that controls the Internet shop,
5 mean a small amount of orders in the shop per day.
Customers of traditional shops do not like purchasing things without trying them on, therefore the trade volume of online clothes shops is not high.
50 means the total number of employees in the offline company who are working on the Internet project.
The above proportion, which characterizes multi-channel shops in Russia, seems to be more preferable for Internet trade. Therefore, if a company has a brand name and a necessary infrastructure typical for a traditional shop, the risk of suffering losses while opening an Internet shop is much smaller. E-commerce projects for such Russian companies will face a rapid development in the near future. The Internet project of GUM, a famous Russian mall located in front of the Kremlin, is an example of a successful online shop
Not long ago we announced that 15 large Russian department stores from different Russian cities made a decision to join the GUM Internet project. The solution for GUM, elaborated on by RosBusinessConsulting, will be applied to other department stores. A special department will be engaged in managing the new GUM-ARU project, and LOVELLS is working on necessary formation documents. They will be ready by the beginning of December.
A few words about ARU. In every big Russian city there is department store # 1. The shop #1 usually is the best. All shops #1 are members of the Association of Russian Department Stores (see the map). Apart from the common goals of an Internet portal, the founders of the new structure will raise the efficiency of offline enterprises through better interaction with the suppliers, novel information technologies, and additional who

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    First of all, I would like to thank organizers of the RBCC and LOVELLS Company seminar for an opportunity to deliver this speech and comment on the development of e-commerce in Russia before such a dignified audience.

    I will start my report with informing you about the current situation in online shops, those that are engaged in Internet trade only (so called “pure” Internet shops) and those that are controlled by off-line companies (or multi-channel shops). All examples will concern Russia only. I will comment on parameters typical for such shops and their outlooks for the near future (a year or two). Later in my speech I will pay attention to problems typical to all online shops on the Russian Internet. Then I will comment on application software preferred by online shops. At the end of my speech, I will draw the conclusions.

    So, let’s consider the state of e-commerce in Russia In fact, there is no e-commerce in Russia in the true sense of this word because an activity, which brings no profit, cannot be called “commerce”. If we consider pure online shops (I mean shops that exist only in the cyber space), we can characterize their activities by the following proportion 50x5x0.5 (thousands of US dollars) 50 – means expenditures necessary for maintaining an online shop for a month; 5 – means a monthly turnover of a pure Internet shop; 0.5 – means revenues an online shop gets per month These figures testify that there is no profit in Internet shops or it is negative. The above proportion is true for typical pure Internet shop.

    If we consider the largest of them, every figure in the proportion should be multiplied by about 3. As a result, we will have the following proportion: 150:15:1.5 If we consider the situation in a small Internet shop, we will have to divide the first proportion 2 but not more. Otherwise, they will have no money to pay salaries to their personnel. If we consider activities of an Internet shop engaged in another offline business (for instance, department store), the proportion would be reversed (as compared to the first one) 0.5x 5x 50 In this proportion, 0.5 would mean a 0.5% rise in trade turnover of the off-line company that controls the Internet shop, 5 mean a small amount of orders in the shop per day. Customers of traditional shops do not like purchasing things without trying them on, therefore the trade volume of online clothes shops is not high. 50 means the total number of employees in the offline company who are working on the Internet project. The above proportion, which characterizes multi-channel shops in Russia, seems to be more preferable for Internet trade.

    Therefore, if a company has a brand name and a necessary infrastructure typical for a traditional shop, the risk of suffering losses while opening an Internet shop is much smaller. E-commerce projects for such Russian companies will face a rapid development in the near future. The Internet project of GUM, a famous Russian mall located in front of the Kremlin, is an example of a successful online shop

    Not long ago we announced that 15 large Russian department stores from different Russian cities made a decision to join the GUM Internet project. The solution for GUM, elaborated on by RosBusinessConsulting, will be applied to other department stores. A special department will be engaged in managing the new GUM-ARU project, and LOVELLS is working on necessary formation documents. They will be ready by the beginning of December.

    A few words about ARU. In every big Russian city there is department store # 1. The shop #1 usually is the best. All shops #1 are members of the Association of Russian Department Stores (see the map). Apart from the common goals of an Internet portal, the founders of the new structure will raise the efficiency of offline enterprises through better interaction with the suppliers, novel information technologies, and additional wholesale discounts.

    When a traditional shop launches an Internet trade project, it has the same goals as GUM when it implemented the GUM-Internet project: To present information on available goods and on possibilities to reserve them To present information on location of the shop and parking near it To support special marketing programs To raise efficiency and quality of services for online kiosks To use new methods of deliveries, etc. It is important to raise the capitalization of the mother-company due to launching a promising Internet trade project

    As for pure Internet shops, the situation in them becomes more and more aggravated every day. It is clear that a necessary rise in the effectiveness of a pure Internet shop may be reached when its revenues will be almost equal to expenditures. This means the number of purchases in each Internet shop should go up 100 times! However, no such significant rise in the number of Russian Internet users is expected over the next year or two. Therefore, the only left possibility of rising effectiveness is to reduce their number. As of now there are about 500-1000 Internet shops registered on the Russian Internet. In a year, this number is expected to drop to 10 shops, which will really work, and their revenues will be almost equal to their expenditures. (These companies will make both ends meet). 99% of Russian Internet shops that exist now would go bankrupt, or their web sites will be frozen and customers will stop visiting their pages.

    As a result, the Russian market will have a correlation typical for the West: 3:70 This proportion would mean that three companies are controlling 70% of the corresponding market.

    As for multi-channel Internet shops, the number of them will continue growing and trading sites like e-marketplace will be created on the basis of unions of the largest shops. An active struggle will start between major software developers for participating in projects on the Russian market. At present, these software developers are engaged in forming their representative offices and searching for partners in Russia.

    One of John Lennon’s song is called “I don’t believe”, in which he says he does not believe anyone (well, probably, except for his wife Yoko Ono). The same is true about Russians. Russian citizens do not believe almost anyone because they are constantly deceived by the government, which conducts fiscal reforms, by banks, which do not give money back from their clients’ accounts and so on. However, Russians still believe well-known western brands and those producers who do not forge brands. That’s why offline trademarks of a multi-channel shop are very important for trade on the Internet. As of now, there are few people who would agree to buy goods in an Internet shop with all its products of unknown origin despite low prices.

    It’s not a secret that an Internet shop is not so strictly controlled by fiscal agencies as compared to an ordinary shop because an Internet shop has no assets and so it is not fined by authorities. In addition, the legislation base concerning Internet shops is underdeveloped. However, there is no doubt that controlling agencies as well as crimes will emerge in the future.

    Another important problem is the problem of non-cash payments. In the existing system, both a client and a merchant are not secured enough. Clients are not secured because it is easy for criminals to use stolen credit card numbers and merchants are not secured because they have to return money for all fraudulent transactions to legal owners of banking cards. Thus, a merchant is suffering losses during fraudulent transactions even in the event the processing center confirms successful authorization. There are no additional methods of identifying owners of banking cards when he is not present in person (Card Not Present, AVS and so on) or these methods are very expensive. As a result, the majority of purchases worth more than $100 are fraudulent. The R-department, which is fighting hi-tech crimes, detained a resident of St. Petersburg about a month and a half ago who tried to buy a Panasonic audio center in the GUM-Internet shop using a stolen card number (by the way, the card belonged to a US citizen). The detention was successful, however, only one R-department is not enough for all shops. Therefore, all banks willing to provide acquiring services for e-commerce should create their own departments on e-security as soon as possible.

    Now I would like to say a few words about software programs. All Internet shops that exist now are using software programs they developed on their own. These programs do not provide for a significant rise in trade volumes, such as 10,000 purchases a day. Neither do they provide for servicing e-malls with their global baskets and unified payment systems. It is clear that as e-commerce and trading sites like B2B develop in Russia, professional software programs will be required, such Intershop, FirePond, IBM WebSphere and so on. Companies that will be first to prepare Russian-versions of the above mentioned programs will get maximum advantages. As an example, I would like to mention Intershop programs that are used on the Russian market; however, the number of their installations is limited. In addition, mostly the old Intershop 3.0 version is used in Russia. The new version, Intershop 4.0, could be successfully used on the Russian market if it had a Russian interface and a lower price. It is senseless to pay $5,000 for a license to use Intershop programs, which every client should transfer into a Russian version himself. A well-known Russian Internet shop Bolero.ru was launched 2 years ago on the basis of Intershop software programs, however it does not use them now. As for other software developers mentioned earlier, they have even less to boast of.
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  • First of all, I would like to thank organizers of the RBCC and LOVELLS Company seminar for an opportunity to deliver this speech and comment on the development of e-commerce in Russia before such a dignified audience.

Transcript

  • 1. Russian e-business in practice: lessons from experience Timur AITOV, CEO, GUM-Internet, Moscow
  • 2. Contents
    • Pure online shops
    • Multi-channel (“click-and-mortar”) shops
    • Common problems and perspectives
    • Applications for online shops
    • Conclusions
  • 3. Pure online shops : 50x5x0,5
    • Here :
    • 50 K – maintaining a shop per a month
    • 5 K – monthly turnover
    • 0,5 K – revenues per month
    • Variant for “Russian Amazon”:
    • 150:15:1,5
  • 4. Click-and-mortar : 0,5x5x50
    • Here :
    • 0,5 % - means rise in turnover of “mother” company
    • 5 – number of orders per day
    • 50 - employees working on project
  • 5. New! GUM-ARU Project
    • GUM-Internet
    • and
    • 15 Best Russian Department Stores, members of ARU,
    • with a help from
    • Lovells (as a law firm)
    • and
    • Terra MediaLink Company …
    • Setting up New Company!
  • 6. Association of Russian Departments Stores (ARU)
  • 7. Net can support existing Brick-and-mortar business:
    • Presenting information on goods and on possibilities to reserve them
    • Presenting information on location of the shop and parking near it
    • Support special marketing programs
    • Raising efficiency and quality of services for online kiosks
    • Using new methods of deliveries, etc.
    • To rise the capitalization!
  • 8. Poor, pure Internet shop…
    • REVENUES must .GT. EXPENDITURES, so PURCHASES should go up 100 times!
    • There are 500-1000 online shops,
    • In a year this number drops to 10 !
    • Russian Market will have a correlation:
    • 3:70%
  • 9. I don’t believe in …
    • Russians still believe well-known western brands !
  • 10. Important problems: 
    • Quality of goods :Internet shop is not so strictly controlled by fiscal agencies
    • The legislation base concerning Internet shops is underdeveloped.
    • Non-cash payments : in the existing system, both a client and a merchant are not secured enough.
    • The R- department : all banks-acquirers for e-commerce should create their own departments on e-security as soon as possible.
  • 11. Applications for online shops
    • We have entry-level web-storefronts or
    • single Store Solutions
    • Applications do not support 10 000 purchases per day
    • We need customized, integrated Solutions with open architecture
    • INTERSHOP, FirePond, IBM WebSphere are good, but:
    • Localization ?
    • Implementation service?
    • Education?
    • Support , etc.
  • 12. Conclusion #1
    • The Russian Internet is developing as a source of mass media and entertainment. There are several successful projects on selling information on the Internet, such as RosBusinessConsulting. However, there are few successful projects.
    • E-commerce in Russia is in an embryo stage so far.
  • 13. Conclusion #2
    • Multi-channel Internet shops will continue their development. However, no competition should be expected among them, as the volume of trade will remain low on average.
  • 14. Conclusion #3
    • Multi-channel Internet shops are not a good target for investments as all profits go to the company which controls the shop. At the same time, promising trading sites like B2B will be created on the basis of large unions of multi-channel Internet shops
  • 15. Conclusion #4
    • Pure Internet shops are still ineffective. In a about year or a year and a half there will be only about ten of them left on the market. These strongest Internet shops will control the market and make profits.
    • The task of pure Internet shops right now is to survive during a necessary period of time.
  • 16. Conclusion # 5
    • A struggle between software developers for B2B projects will start on the Russian market soon
  • 17. About the author:
    • Timur AITOV ,
    • PhD, (Physics and Mathematics), CEO GUM-Internet, LLC.
    • Prior to joining GUMinternet.com Timur has developed and managed Computer Technology Center (an IT-department of Trade House GUM). He was responsible for hardware and software in the largest trade center of Russia during 7 years (from 1993 till 1999). Before 1993 he was a head of the “Securities Department of JSC TD GUM”.
    • E-mail:aitov@gum.ru aitov@hotmail.com