Gestión de las Adquisiciones

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– Setting up a business in Russia was not among the simplest things for a foreign company in the 1990s…

Gorbachev had a famous piece of advice for Honecker: “Who comes too late will be punished by life.” I would add: “Who comes too early is punished as well.” Indeed we came too early and experienced plenty of difficulties – the unprecedented 1998 financial crash in particular. However, as a conservative, German, family-owned company we showed enough patience to stay and wait for market conditions to improve.

Meanwhile, we quickly gained more clients, in particular publishing houses interested in personalized mailings like Reader’s Digest, as well as new companies trying to copy Terra’s B2C model. In 2003, we started dealing with new product categories. We were serving a German publishing giant which had launched a joint venture in Russia, named “Moi Mir.” Their catalog included not only books but also household and office items.

However, they closed their business in 2008. The lesson is that distance selling has a cost, from fulfillment operations to supporting a call center and of course delivery throughout a huge country. If your AOV [average order value] is too low you will not cover this cost, you will not be successful. AOV should reach at least 1,000 or 1,500 rubles [approximately $30 to $50] – not 500 rubles [$15]. A specific problem here was also that book prices are traditionally low in Russia.

Nevertheless, we went deeper into product diversification. As a matter of fact, the basic principles, processes and the IT systems you need are the same, no matter what the product is. In 2004, Yves Rocher found us. They were satisfied after testing us and migrated from one of our competitors. This was the starting point of our rapid growth. In the beginning of 2006, the well-known German mail order giant Quelle (fashion) launched its Russian business and chose us for fulfillment services right from the very start. It was a huge success immediately. In 2009, we dispatched four million parcels for this client alone.

Our second important client was La Redoute, which we started serving in 2008. In contrast to most other companies, they always look ahead: they make sure that there are reserves to switch on in case demand will grow faster than expected. Accordingly we set up more packing stations, more equipment, PCs and printers than actually needed at a given moment. This approach is quite unique.

We soon came under great pressure to keep pace with the rapid growth of our clients’

businesses. Scalability – as we call it – in personnel and space as well as IT is a must to have satisfied customers. We always managed.

– Some e-commerce companies complain there is too little competition on the market of logistics services today…

Today the market of fulfillment for e-commerce is, indeed, very small. Many big names have their own capacities. Independent companies are few and small. The new wave of bigger players offering their in-house capacities to third parties (Otto, OZON, KupiVIP, Mir Knigi) is recent. Some Western companies like DHL or Kuehne&Nagel certainly have the competence to offer fulfillment services in Russia as well, but they haven't gone very far to date.

Logistics services for e-commerce (B2C) significantly differ from those provided by traditional providers of transport and warehousing services (2PL, contract logistics, B2B). For instance, FM Logistic, in spite of their huge warehousing capacities for companies like L’Oreal, Nestlé and others did not succeed in their attempts to diversify into B2C. One of the reasons for this failure is that, in e-commerce, you need to provide complex and tailor-made solutions for very different business models and product and consumer groups, including integration of CRM, reverse logistics, tracking systems, last mile management and much more. This obviously requires high flexibility, competencies for the whole value chain and – last but not least – a very robust and sophisticated IT.

– So how did you start serving e-commerce companies?

Our traditional mail order customers launched their first online initiatives already some time ago. Now the online part of our business is typically above 50%. In September 2010, we started to serve our first pure e-commerce client, myToys.ru, a subsidiary of the German OTTO group. We set a record with them. There were just six weeks between the day I first met their managing director and the day we dispatched the first parcel! With Lamoda it was also a mere two months. Such projects are conducted at a crazy speed, talking day and night on the phone, exchanging SMS, etc. Everything goes much more quickly in e-commerce. Speed is value for these businesses.

To serve these clients you have to be much more flexible and even to reinvent your business to a certain extent. The differences between traditional mail order and new e-commerce cover practically all logistical processes. For instance, Lamoda or Sapato may have 100,000 or 200,000 different references (SKU) with just two or three identical pieces of the same item. Compare this to Yves Rocher’s 1,500 references and 20 million products in stock! When you deal with e-commerce you must build shelves and mezzanines – instead of pallet rags – to handle this huge diversity of items. You pick the items directly from the storage places.

– Which kinds of difficulties do online retailers typically face when dealing with logistics?

E-commerce startups face many issues. To build a wide assortment – which is a necessity in most online business concepts – they are looking for sourcing from local companies as well as from abroad. Local sourcing is often a nightmare. As a small customer, e-commerce startups do not get any special treatment from suppliers. Moreover, many of the items they receive are in a terrible shape with damaged packaging or second sort. Electronic data exchanges, bar codes to scan and proper labeling are often absent, which makes item identification very difficult. In this painful learning process, we (Arvato) often have to do the corrective work. Just imagine the scene. We receive a truckload of shoes without any labels or documents. We had to put them all on the floor and our ladies spent days checking and identifying each pair individually!

This is a reflection of the low level of logistics in Russia as well as its still considerable gray economy. Many goods still do not go through customs the official way.

HR is another acute issue – especially in e-commerce. It is very difficult to find good specialists for almost all areas – purchasing, marketing, IT, logistics, accounting and so on. As far as we see, there is a lot of “job hopping” going on. Teams are not very stable. As a result, we sometimes do not know with whom to talk and in what “language.” We have launched master-classes to help our clients raise their staff’s skills.

– How does Russia stand in terms of logistic costs compared to other countries?

For Western companies coming to Russia it is at first a shock to find out that everything is more expensive here compared to Europe or the U.S. They usually expect the other way round, but Russia is not China. The reasons are simple: low productivity and big deficits in infrastructure and human resources.

As for Arvato in particular, when our customer knows what he needs and understands which processes have to be setup, it is not difficult at all to agree on the cost of our services.

– How do you envision future developments on the logistics market?

I expect the usual development – where there is demand, there will be an offer. As e- commerce continues to grow in Russia more fulfillment capacities will evolve and more cost- effective and faster delivery solutions will be proposed. We are noticing an increasing competition and new offerings in this area over the last two years, which is very healthy and the consumer wins. This development has finally even woke up the Russian Post, which is also very much welcome.

Russia is such a vast country by geography that all kinds of distance-selling businesses have an enormous potential to cover it and to reach consumers in all regions, towns and villages in the long run. I expect online businesses to tap into this potential even more intensively in the near future.

– Do you feel an actual or potential impact of the current international tensions on cross-border sales to Russia?

Yes, there may be an impact from that. Even though the market, far from politics, continues to grow, some Western players have postponed or suspended their plans to set up or enhance their online sales channels to Russian consumers. But the effect might also be positive. Already now usual wholesalers feel a credit shortage due to Western sanctions and the rising interest rate of Russia’s central bank. Some Western manufacturers or sellers observe declining sales to Russia through the usual retail channels. But there are clients in Russia who want to buy products and still have the purchasing power, be it apparel, electronic equipment or other goods being bought on a regular basis. They may turn to cross-border offerings more actively now.

So far online demand for Western brands in premium segments has not necessarily decreased. As a rule, the brands who managed to avoid sharp price increase have maintained good sales volumes. Those who raised their prices very significantly have exposed themselves to more severe sales contraction.

(Updated May 2015)

E-COMMERCE IN RUSSIA

Interview | Michael Poetschke (Arvato Russia)