To build Amazon in Ukraine: how Rozetka became a marketplace
When Jeff Bezos, Founder and CEO of Amazon, challenged his new employee, former top manager of Wal-Mart retailer, to increase tenfold the distribution center capacity, the employee was astonished. What for? It was 1998 and Amazon, founded in 1995, grew rapidly, but at that time, they only sold books. “We have to find a solution that will allow delivering to customers absolutely everything, except perhaps an aircraft carrier,” explained Bezos. The interlocutor was sure that his chef was pulling a trick on him.
However, yet already at that time the Founder of Amazon dreamed of the world’s largest online supermarket. For this purpose, he decided to create a universal platform, which could be used for e-commerce by other sellers from the network as well. In 2000, Amazon announced the Marketplace initiative and for the first time the products of outside sellers appeared on its page. The employees inside the company were panic-stricken: what, Amazon will lose revenue by allowing competitors to trade on its own website and using its own infrastructure? But all Bezos could think of was how to offer customers a maximum choice and in this he saw the guarantee of his success. Within 2 years, the platform for retailers began to give Amazon a third of the revenue. Later this model was repeated by many others: it was tempting to receive income from the rapid development of its competitors.
Crisis is a growth engine
The term “marketplace” is used in a broad sense and denotes an online trading platform integrated by a common set of rules of different stringency, explains Mykola Paliyenko, co-owner of Prom.ua (the controlling stake belongs to global media group Naspers headquartered in Cape Town). “This is a model helping business to develop faster,” he says.
According to Prom.ua, the audience of marketplaces is growing faster than the one of traditional online stores. From 2014 to 2016 the audience of traditional online stores added only 4% in traffic, while the one of marketplaces 78%. They also can differ depending on the set of services. “The minimum of services provided by the platform is a price-aggregator (price comparison website services) or bulletin board, the maximum of services is what is called “fulfillment” in the west,” explains in detail Alexander Olshansky, president of Internet Invest Group holding. The extreme conditions, he notes, are the least stable, so online merchants try to experiment by introducing some additional services or by refusing them.
So far, Rozetka, the largest Ukrainian online store, is far ahead of all others. It is the only one of all Ukrainian online retailers offering fulfillment, that is, a full range of services for its partners from storing goods at its warehouse to delivery and after-sales service. So what is the point?
As early as 2013, there were 160,000 unique commodity items in the company’s assortment. Nowadays there are already 1.5 million.
However, it is not enough for the company. The goal is to sell online all products that are in retail. If you focus on Amazon selling almost everything then it is 12 million unique SKUs (Stock Keeping Units) presented on one online platform.
“The processes are not yet ideal. We are torn between clever and beautiful ones,” Vladyslav Chechotkin, Founder and co-owner of Rozetka, is full of self-irony. The company is haunted by the success of OLX (a bulletin board, Naspers affiliated company as well), admits Chechotkin. Although Rozetka, as he says, will never go along the path of an irresponsible ad aggregator, he likes the idea to reduce risks without damaging the assortment. “We want to offer our buyers the maximum quantity of goods and the best choice. That is the strategy” Vladyslav Chechotkin almost repeats the Amazon Founderâ€™s credo. “But not everything we want we can actually sell,” he adds.
In 2013, the most successful year for e-commerce in terms of turnover, the online retail market grew by 25% compared to 2012 and amounted to about $ 2,2 billion (UAH 16 billion). At the end of the year, Rozetka took 135th place in the Forbes Ukraine rating of retailers with the revenue of UAH 2,13 billion ($ 350 million) and became the largest online store (Allo and Mobilluck stores took the second and the third places respectively).
At that time, Rozetka was already selling on its website various products for outdoor activities, sport and tourism, for children, household goods, games and gifts. The website had 160,000 stock key units. Chechotkin felt quite confident and tried to experiment by displaying certain products at the website. However, the company maintained strongest positions of the traditional categories – engineering and electronics. While the share of Rozetka at overall online market was 13% (Ernst & Young assessment), the share of 35% in the segment of household appliances and electronics assured its absolute leadership.
However, the crisis burst out in 2014 collapsing the market in dollars to 1,5 billion (it grew only slightly in UAH to 16,6 billion). Ukrainians became poorer because of the fall in exchange-rate. An average check in stores has been cut in half. Later the pessimists forecasts would come true: the decline would continue in 2015 pulling back the online commerce market to a volume of $ 1 billion.
With the onset of the crisis in 2014, the experiment of Rozetka with product categories entered an even more active phase. The section “railway and air tickets” was introduced already in February, clothing and footwear appeared on the website in April. These segments are much more profitable than electronics, for instance: the margin in the trade of footwear and clothing can be from 50 to 200%, says Valentin Kalashnyk, president of Ukrainian Association of Direct Marketing. It rarely exceeds 10-15% in the segment of engineering and electronics.
Realizing that the usability of the site is affected because of such an intensive expansion, the management of Rozetka completely updated its design. The new version of the website adjusted more to the expansion of categories was launched in March 2015. “We can no longer be called a specialized electronics supermarket. We are moving towards the actual Internet supermarket, where you can buy almost everything from mobile phone to clothing and seeds for your summer house,” the company’s press service reported.
Within 2 years, Rozetka introduced the categories of seeds, auto products, jewelry and cosmetics to its product assortment and began selling alcohol. In 2016 the company entered the grocery segment and launched a sale of books, and in January 2017 pharmacy products became available for sale.
Chechotkin claims that the company has already been working on the marketplace model for several years. “A little more than a year ago we released it to the public as an offer for partners,” he said. Today there is a direct link “to sell on Rozetka” on the main page of the website. By clicking on it you will be requested to fill a short application form for partnership.
When Amazon decided to start selling something other than books, DVDs and CDs were introduced to the product assortment and then Jeff Bezos set his sights on children’s toys and electronics. However, he did not even imagine what difficulties were ahead: these goods required a completely different approach than those that were already familiar to the retailer. In 2000, with the Christmas boom on toys coming up, the head of the company made all possible mistakes in the estimation of both the required range and volume. Still not knowing this, he invested $ 120 million in a new sector and swore to the team that he would personally landfill all the leftover stock using his car should there be any after the holidays. In the end, it would be problematic to implement this, especially considering that Bezos was driving Honda Accord at that time: the company could not manage to sell toys for $ 50 million.
The expansion of Rozetka has not passed ideally either. Competitors assure that Chechotkin was not selling sport goods very well and there did not seem to be a surge in railway and airline ticket prices. “I admit that the traffic of Rozetka could be monetized in this direction. But the way I would do it is very different from how they did it,” says Serhiy Kravets, director of Tickets.ua. “Tickets pay off, but they are not something outstanding for us so far. They generate hundreds of sales a day, not tens of thousands as we expected,” agrees Chechotkin. Rozetka is not interested at all in selling such products like books, for example, he says, as its logistics is simply not tailored to such low-margin products. “Or tires. There are strong players here who have well established processes. It is more profitable for us to cooperate with them and not to enter this market,” he continues.
In general, the head of the company reluctantly talks about the categories he succeeded in and the ones he failed. “And it makes sense, because it is also a competitive advantage if you know what you need to sell by yourself and what should be outsourced,” Alexander Olshansky agrees.
“Quite logically, they have failed. For example, we clearly understand that selling electronics and clothing are absolutely different things. Everything is different: from displaying on the website to communicating with clients and delivery,” Dmitry Pokotilo, Founder of F.ua, notes. He recalls how Fotos (the forefather of F.ua) for a long time has been losing money on delivering large-sized household appliances, until the logistics of the store was adjusted to this category new for the photography equipment seller.
“Why are we doing so well? Perhaps we really love money,” Chechotkin jokes. He also adds that commercial risk is the main point in trade.
“Marketplace fixes this problem for us, the risk whether a product will be sold or not is taken by an entrepreneur,” – the businessman tells.
It is indicated on some products on the Rozetka website that the seller is not Rozetka itself, but one store or another its partner. There are about 30 such stores publicly available on the website, although the head of the company claims that there are several hundred of them. As he said, according to the assortment, most of the products on Rozetka are the products of partners, although in retail trade the greater part is the production of Rozetka. He does not give exact figures, but says that the positions of Rozetka in the field of household appliances, children’s goods, and clothes remain very strong.
According to AIN.UA, the categories of such products as books, car tires and pharmacy goods are almost completely outsourced. In the categories of auto products, footwear, clothing, children’s goods and household utensils, the assortment of Rozetka intersects with its partners ones. How is it possible to compete with one product on the same platform, for example, in clothing? The segment is very large and lucrative, there is enough space for everyone. “For the purposes of discussion, there are expensive ethno brands. Each vyshyvanka costs UAH 10,000. Do I believe that they will be sold? Not sure. But my partner believes, then let him take this risk,” says Chechotkin. The market of organized clothing retail in Ukraine is estimated at about $ 5 billion. Online retailers have only a small part of it, no more than 3% (according to UADM estimations, $ 140 million in 2015). However, given that more and more Ukrainian Internet users prefer to shop online, these figures will obviously increase.
The most significant competitor of Rozetka in terms of marketplace is OLX ad aggregator. The companies compete for the attention of the Internet audience. According to Factum Group Company, in 2016 OLX outrun Rozetka in two key categories audience reach (45% vs. 40%) and average daily share (17% vs. 9%). Why is that important? Sellers use both websites to attract attention to their product. “Sales on Rozetka do not provide us with a special additional revenue, although their percentage is very loyal. The partnership with them serves more to the image purpose, it is like an alternative to promotion in Google,” Artem Kiryahno, head of the online store for clothing trade GrandUA, admits.
In this context, both Rozetka and OLX are akin to online media: they act as advertising platforms and monetize their traffic. However, the conditions are different. OLX places advertisements free of charge, but sells packages for business users, who are not satisfied with the limited number of placements. Prom.ua charges a subscription fee from customers for the period of service.
Rozetka can offer its partners a wide range of services communication with customers, warranty service, delivery and storage at its warehouse. The company does not act as intermediary, but guarantees the quality of goods to buyers by its name and reputation. In doing so, it charges a commission for the effected transaction from partner rather than a fixed fee, as competitors do. “Commission can be different, from a fraction of a percent to tens of percent. It depends on the range of services and the terms of the agreement, which may differ for clients,” says Chechotkin.
Amazon began its activity under the motto: “to sell as much as possible, to carry as little as possible.” Bezos was obsessed with the idea of creating such a virtual store that would not exist offline. This model was hardly intended for stockpiling and the right to form the assortment was initially delegated to Amazon trading partners and publishing houses. The cost of storing books was also delegated along with this right. But the businessman quickly understood that customers want fast delivery and they had to do it on their own. So the focus of the model shifted to efficient logistics, the company launched a grandiose investment project for the construction of fulfillment centers throughout the USA and later in other countries around the world.
“The construction project of Rozetka is very expensive. It is necessary not only to have funds to buy it, but also the volume of the market, so that it will pay off. We cannot afford this and hardly anyone else can,” Dmitry Pokotilo from F.ua says. We are talking about the huge warehouse complex in Brovary acquired by Rozetka in January this year. The A-class warehouses of a total area of about 49,000 sq. m are located on a plot of 9.5 hectares in 10 km away from Kyiv and 15 km away from Boryspil International Airport. $16 million spent on the purchase is not everything. “Twice as much as we spent on the warehouse, we will spend on its equipment,” the owner of Rozetka says.
The point is that the warehouse will be automated. The dimensions and equipment make it almost unique in Ukraine. They say on the market that even large offline networks do not have something like that. They do not have to, as their business model does not involve creation of such large stores as they trade “off the shelf” and not from warehouse. For comparison, the size of Auchan network in Kyiv Region is 27,000 sq. m, the warehouse of EpiCentre occupies an area of 20,000 sq. m. in Kalynivka urban-type settlement. Fozzy Group uses its own distribution center with an area of 30,000 sq. m (although the total storage area of the group exceeds 100,000 sq. m.), and fulfillment area of Nova Poshta, that is two warehouses in Brovary and Belgorodka, reaches 18,500 sq. m.
“No distributor stores at his warehouse more than 5,000-7,000 names of goods. Perhaps some electronics distributors have up to 10,000 unique products at warehouse. We have 1.5 million items, we sell 250,000 unique SKUs every month. These are completely different challenges, technology and processes,” Chechotkin says.
“Is there something like this in Ukraine? I do not know, I’m not sure. In fact, Rozetka is one of three largest companies in Ukraine (by the number of client transactions) along with PrivatBank and Nova Poshta,” Olshansky believes. According to Chechotkin, logistics is now the most cost-intensive part of the company’s budget: the company spends about $ 1.5 million on it every month.
The purchase of a warehouse and movement towards the marketplace are interrelated processes, confirms co-owner of Rozetka. “We are setting a new logistics and this will allow us to offer full service to our partners,” he says. It is interesting that in this niche his company will have to compete with Nova Poshta, one of its best partners. Not so long ago, Nova Poshta started rendering fulfillment service based on outsourcing. “You can just bring them the product, everything else they do by themselves – sorting, repackaging and delivery to the buyer,” – says Dmitry Pokotilo. Many online and offline retailers are among the company’s clients: Allo, WOG, Nestle, Philip Morris, Garna Mama, Rozetka and others.
However, Nova Posta is not only fulfillment. In fact, it saved Rozetka many troubles that neither Amazon nor many other global online retailers could avoid. We are talking about the most important, “last mile” of delivery delivery to the buyer. “Once Rozetka tried to develop its own delivery, they had a company for this purpose. But it could not manage to compete with Nova Poshta and it was closed down,” the market participant, who asked to remain anonymous, says. Chechotkin partially confirms: yes, Nova Poshta can do it more effectively in terms of economy. Rozetka has not disbanded its delivery service, but limited its activities to the territory of Kyiv, he clarifies.
Nova Poshta made an enormous contribution to the development of e-commerce in Ukraine. You cannot even imagine how big it is,” Chechotkin assures.
“Ask our neighbors in the north or north-east what is the situation with delivery in their countries. They will howl and swear. We do not have that kind of thing.”
Gods of content
What else, besides effective logistics, it is necessary to have to be a marketplace and make money on growth of your partners? In Amazon, huge value has always been seen in creating a convenient infrastructure for website users. At first Bezos invested tremendous funds in the purchase of technology companies and start-ups that could join the structure of the company and raise it to a new level of innovation. During the dot-com crash in 2000-2001, many of them went bankrupt, and Amazon began to develop independently. One of the company’s notable achievements is the 1-Click online shopping system allowing reducing the number of actions a buyer takes before buying up to 1 step. Once Bezos tried long and unsuccessfully to defend his patent right to this system and today hundreds of stores around the world use it (or try to adopt it).
Amazon paid much attention to technologies aimed at attracting users to the website, as well as at analyzing their behavior on it. Two different departments, the editorial and personalization ones, with hundreds of employees have worked on these tasks for a long time. In the first department, copywriters and editors dealt with the buyers, who played the role of product experts and made individual detailed descriptions on them. The second one employed analysts and programmers who worked with dry figures and designed algorithms. When the crisis started and the question of one of the departments dissolution arose in order to cut costs, the editorial department fell victim to it. Tests have shown that the stereotyped recommendations are more effective. Algorithms defeated people.
In Rozetka, there are people working on content: there are about 60 copywriters and editors in the staff, even more people are working on outsourcing. Chechotkin clearly understands how to catch the Internet user on the hook. After all, most people search through the network in order not to buy, but to get information. “We relied on content from the very establishment of the company. Not to brag, but if they start talking about some new trend in e-commerce in terms of content, it means that Rozetka has been in this trend for several years,” the businessman tells. He states that the base of videos, reviews, comments and product descriptions, which was created by Rozetka during its existence, is the largest in the Russian-speaking segment of the Internet. “I agree, they are the gods of content, we can’t reach this too soon,” the representative of one of the competitors, who asked to remain anonymous, confirms. For example, the video channel of the store on YouTube is ahead of e-Bay and Amazon channels in terms of traffic and number of subscribers.
$400,000 Rozetka spends every month on IT development
The technical department of the company employs even more people than the editorial office over 100 developers apart from outsourcing. Chechotkin says that Rozetka spends $400,000 per month on IT development. The company strengthens its IT infrastructure every month, constantly rewrites modules, optimizes load and just physically expands capacity by increasing the number of servers every year. “Perhaps, the infrastructure of the website is the least problematic place for us now,” co-owner of the company states.
Of course, the gap between Amazon and Rozetka is huge, if only because of market volumes and over recent years the American retailer has gone even further. In fact, today it is not only an online store, but also a technology company. In 2015, 55,9% of Amazon’s revenue came from the product of Amazon Web Services, a cloud-based operating system, an e-commerce platform for many companies. It is the logical continuation of marketplace development: IT infrastructure improvement and automation of processes reach such a high level that it allows scaling service and selling it separately as business services.
Does Vladyslav Chechotkin consider such a path for himself? So far, he believes that e-commerce in Ukraine cannot exist without a strong off-line component and intends to develop this direction first of all. However, who knows, maybe one day Rozetka will also become not a trading company, but an IT one.