14 August 2015
Online Retail in Russia: A conversation with the CEO of Ozon.ru
“There is a war raging for every ruble”
Danny Perekalsky, CEO of Russian e-commerce group Ozon.ru, recently spoke with The Village, a Russian-language online publication, about life online, sales growth and business competition on the Web. This translation was sponsored by USRCCNE for the benefit of our members and readers interested in business in Russia. The original Russian can be viewed here.
“Do you live online?” immediately asked Danny Perekalsky, CEO of the Internet store Ozon.ru, when we sat down. A graduate of Israel Bar-Ilan University, he worked in Nielsen consumer research company, headed the merchandising department of the Russian branch of Metro Group, and worked as marketing director of Dixy, one of the largest Russian food retailers. Last year he became a deputy CEO of Ozon.ru, one of the largest Russian internet stores, and later became CEO. To get into his new position Danny says he had to "start living online:" now he makes all his purchases only through his online store to test their service. The Village interviewed Danny to learn how his business is developing and how it has been affected by the economic crisis and arrival of foreign competitors.
When did you start working at Ozon?
- I started in March 2014 when I came in to head up Ozon.ru. At that time Ozon Group consisted of six companies; Ozon Production warehouse, O-Courier delivery service, Sapato.ru online shoe store, Ozon.ru online retail store, Ozon Travel, and Ozon Solutions. Ozone Solutions is a company assisting foreign retailers in selling their products in Russia. In May 2014, JSFC Sistema and MTS invested $150 million into our company. Later we sold Sapato.ru, and in March 2015, I merged four of the companies. It was my initiative: I wanted all companies to be joined together in Ozon.ru so we all could build relationships with our clients together. Only Ozon Travel continues to exist as an independent company.
The foundation of this strategy I laid in 2014 as five promises. (Danny points to five circles of different colors next to company’s logo on his desk and starts listing). We offer everything you may need – you can find it all right here. We have 4 million items in our store, every week our assortment of goods grows by 10,000; over the last month we added 62,000. We make it beneficial for our clients: if we learn that another ‘white’ store sells the same thing cheaper, we lower our price. We make it convenient for our clients to sort, select, purchase, pay, receive, and return. We offer individual attention – we make personal recommendations and add small gifts to the orders. And, finally, we promise trust – if something goes wrong, we compensate the losses.
Now we are building a life where everyone will find that (reads a slogan on the wall – Editor’s note) “everything that is necessary, affordable, and convenient is online.” If a foreign brand desires to sell their goods through our store, they are welcome to do so. They will be able to post their goods on our site, the purchase money will be directed straight to the seller, but the buyers will deal with our call-center. At first, the seller will be responsible for the delivery of goods, but later we will take care of that, too. We will start this area of business in the third quarter, but it is a very small part of our business.
What has changed over the past year?
- Our assortment of goods has changed radically. Previously we looked for things that would bring the most profit, with greater margins, but now we sell everything. We switched our focus from the needs of the company to our clients’ needs. Before we looked at what profit we wanted to receive; now we are looking at the market and lower prices, if someone sells cheaper.
How do you do it?
- We either trim down our interest margin or call our supplier and ask, how come [they have a lower price]? Moreover, we improved our delivery service. Now, in Saint-Petersburg and Moscow, orders placed before midnight are delivered the next day. We hired more couriers. Recently our branded cars made an appearance on the roads (shows photo on his phone). In other regions delivery used to take 4 days, now it’s only 2. We added consultants to electronics, cosmetics, and pet food departments.
How many people work in the call-center?
- There are 300 employees in Tver and Tambov. The head office in Moscow employs 400 people. There is a warehouse in Tver with another 1,000 workers, and approximately 1,000 couriers in Ozon Delivery.
What do you buy in your store?
- I came from retail sales: I worked in Dixy, Metro, I advised 100 companies, including Walmart and Tesco. When I came into online sales, my opinions completely changed. I buy everything through the Internet. Today I placed my 151st order in the last 15 months. Jeans and socks, a t-shirt from Ozon.ru, napkins, pen, notebook – everything is from Ozon.ru.
We created a mobile app. It is a huge trend right now, mobile sales increased by 500%. Six months ago mobile traffic on our site was 15%, today it’s 22%; the percentage of sales through the app was 0.8%, now it’s almost 5%. We have an awesome option to "Scan It." At home I have two bottles of shampoo, two bottles of conditioner, and two bags of dog food. When one of them runs out, I scan the bar code and add it to my online cart – and that’s how we live. Anything runs out, we scan it, place it in the cart and, when the cart is full, we place an order.
What ideas came to you after your orders?
- Placing many orders helps increase the assortment. I tell my staff if something is not easy to find, and we immediately improve it. We have made significant investments into search, content, and delivery. If you yourself order things online, you will understand that a courier needs to call an hour before arrival. Many changes originate from our employees and clients; we read suggestions every day and make improvements. We are proud to have a record increase in revenues this year – 38% since January.
But the prices grew.
- Rises in price accounts for approximately 10% of this growth. For this year, revenue is already 5-6 billion rubles – we haven’t seen this kind of growth in many years. (Ozone reported a record growth of 63% for 2012. In 2014, company’s clear profits amounted to 11.8 billion rubles versus 10 billion of the previous year. The company received $250 million in investments. – Editor’s note). Our company is not profitable yet, but, as a result of improvements, we decreased our losses by 50%.
Perhaps, you brought some ideas from other companies?
- I have been working in sales for 15 years. My approach is in developing a relationship with clients. When working offline, I was looking for best way to use every bit of space on the store shelf. Now I discovered that the shelf is limitless.
This could cause you to lose your mind.
- Yes, it changes the approach. In merchandizing you need to decide how to place bottles of shampoo: all together or separated by brands. Here our buyers can sort it for themselves.
So, it means your previous experience is no longer necessary?
- During my first two months here I said many things, but then I told my staff to forget everything I said.
Are you emulating other companies?
- No, we are emulating others. I want to be Ozon.ru. During the last year and half, I spent less than a day on other stores. I try not to look at anyone else. This is our approach. We want to build our relationships with buyers in our own manner.
Right now Alibaba is actively gaining popularity in Russia.
- We are very happy they came to Russia. We respect them for their growth of sales. But we also have record sales growth. Alibaba is helping us develop e-commerce: people buy online more. Moreover, it helps us show what is better in our company: quality, service and so on. We do not have ‘gray’ goods – what you buy is what you expect it to be. I am happy that our customers can compare. The greater is the competition, the better our customer will understand why he chooses Ozon.ru. The market is not growing right now; just like us, the market is in crisis. Previously, e-commerce had 25-30% annual growth, now it is 10-15%.
Your predecessor, Maelle Gavet actively lobbied for laws on customs duties for foreign Internet stores. Are you also doing this?
- Very little. I have a different approach: I focus on Ozon.ru business. There is the government, it attends to the laws, I attend to our clients. The government addresses their issues; but we work with our customers, suppliers, and growth. This is our focus.
Russian online retailers used to be afraid of foreign stores coming to the Russian market.
- But now they help us, not hinder us. Why should I block them? They help show our customers why I am better.
In brick-and-mortar stores, you can now see more salespersons than customers. Is it the same for online stores?
- Yes, we see how great our competition is. Many are trying to make their prices lower. We see that everyone wants to sell; there is a war raging for every ruble. We place our focus on the price, sometimes lowering our margins to offer a better price.
But there is a limit to lowering prices.
- We have money and we are improve efficiency. We are convinced that we need to continue doing it. We check prices every day and keep fighting this war.
How many shareholders do you have?
- I cannot disclose numbers.
What kind of relationship do you have with your investors?
- Better than I could imagine. We are all focused on the same goal. Our relationship is very transparent. I receive healthy support; they are helping me, not hindering me. I couldn’t even dream that things could work like they are.
Internet sales are interconnected with currency rates.
- I disagree. All competitors work on the same market. If currency rate changes, everyone’s prices change.
But it also leads to lower demand.
- That’s why the market is growing only by 10%. And, yes, people start buying things of a cheaper category.
What do you do about it?
- We have merchandise of all categories; you can choose what you want. Our store shelf is endless. If you want the cheapest option – we will buy the cheapest merchandise and will stop purchasing the more expensive options. We have 4 million items in our store, not many of them are sold by thousands every day. We purchase our merchandise based on the clients’ demand.
How many purchases are made every day?
- There are 15,000 orders daily. Of them, 25% are books, 25% electronics, 10% each for household goods and kids merchandise, and 7% each for sport goods and cosmetics. The rest is clothes; we recently restarted this department. Also, all shoes formerly sold by Sapato.ru are now on Ozon.ru. I predict that the share of electronics in our sales will grow, the share of books will decrease, and everything else will increase.
How do you see the future growth of online retail market?
- This year we will see 10-15% growth and probably approximately the same next year. I think after that our growth will increase. Right now our sector is widely promoted, international players also help. It is a huge step forward – people know more and it encourages growth. Online sales are growing faster than off-line retail; this situation will not change, such is life. When my kids want to buy something, they first of all look it up on a tablet, they argue with me whether they should put it in the "shopping cart." They are the next generation. I cannot even imagine what is coming next. Everything will be sold online, except for impulse buys and goods that need to be touched.
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