For every US tech giant, a domestic version is launched in Russia – witness Yandex and Vkontakte, Google and Facebook’s respective equivalents. Amazon is another example: its Russian equivalent since 2008 has been Ulmart, a St Petersburg-based e-commerce firm that currently ships consumer goods to more than 240 cities across Russia.
But while Ulmart’s digital storefront, which offers everything from tyres to baby clothes to pet toys, might resemble Amazon, the similarities end there, says Denis Solovyov, the company's chief investment officer. “In Russia, the majority of customers live in apartments, not houses, and as such delivery of goods to their doors is not always efficient, so we had to develop an operating model that takes that into account,” he says.
The solution? Taking full control of delivery processes and launching a hybrid model between e-commerce and traditional bricks-and-mortar stores, in which customers pick up goods ordered online. “Such a solution decreases our operational costs, especially with regards to the most costly last miles of delivery,” says Mr Solovyov. Since implementing that model in 2009, the company has launched 450 pick-up points.
Additionally, Ulmart operates a network of 46 urban fulfilment centres, located in major Russian cities that also store the most frequently ordered products, which are offered via door-to-door delivery or pick-up point delivery, as well as two suburban fulfilment centres for products ordered less frequently.
Defying the recession
Despite the recession in Russia and shrinking consumer spending, Ulmart’s growth continued between 2015 and 2016. “The past two years were a good time to scale up the business model of Ulmart, and scale up the logistical network – and that was especially good because of the devaluation of our currency, as we enjoyed a cheaper execution of our projects,” says Mr Solovyov.
By 2021, apart from ramping up operations of its wholesale club Ryady, in line with the Ulmart 2.0 expansion strategy announced two years ago, the company plans to launch 11 new suburban fulfilment centres and two regional distribution centres across Russia.
“We want the network area around our centres to be no wider than a radius of 300, or maximum 400, kilometres to cover the area, to make it achievable to reach the furthest destination overnight,” says Mr Solovyov.
As it expands across Russia, Ulmart is eyeing promising new markets, where residents are becoming increasingly economically active, but still might be underserved by existing retailers.
“Looking for new investment destinations, we check which region is economically well off and where our goods will be in demand,” says Mr Solovyov. “We always look carefully as our projects require significant investment.”
Asked what cities in Russia recently passed Ulmart’s location benchmarking exercise, Mr Solovyov points to Krasnodar, a city of 744,000 people located on the banks of Kuban river, and Yekaterinburg, a city of 1.3 million on the border of Europe and Asia.
“Both cities are big markets and have economically active populations, but they are not yet saturated when it comes to consumer products,” he says.
Leading the tech charge
Apart from national expansion, Ulmart recently announced that it was increasing its technological capabilities by adopting blockchain, a distributed database technology, in order to prevent the sale of counterfeit goods.
“Consumers complain to us about [counterfeit goods] and ask us to do something. The blockchain will let us join forces with major manufacturers and anyone can then merely point towards a barcode or QR code and follow the entire history of the product from production line to Ulmart’s fulfilment centre,” said Ulmart chief international officer Brian Kean at the #Blockshow conference held in Munich in April.
Just one month later the company went ahead with yet another tech-related announcement, with Dmitry Kostygin, the company’s CEO and chairman, stating that beginning in September, Ulmart’s customers will be able to pay for their orders with Bitcoin.
“As blockchain technology is coming into our operations to fight counterfeit items, we see that the mystery that existed around Bitcoin three years ago has significantly receded,” said Mr Kostygin.
The race for the rouble
The Russian economy appears to be far from a full recovery. The most recent analysis by EY – ‘Russia: a pulse on the consumer products market’ – states that Russian consumers remain resilient and price-sensitive, but Ulmart is not the only company betting big on future market demand in the country.
In April, Spanish clothing giant Inditex revealed that it will start garment production in Russia, and French retail group Auchan announced plans to invest $355m into opening 20 new supermarkets and four hypermarkets in Russia by the end of 2017.
Earlier in the year, Lenta, Russia’s second largest hypermarket chain, reported 21% increase in fourth-quarter 2016 sales and Dixy Group, one of Russia’s largest food retailers, recorded a 4% revenue increase in the same period.
Paired with an increase in e-commerce sales noted in the EY report, this could prompt Ulmart’s foreign competitors to work on getting a foothold in the market. Ulmart is unfazed by such a prospect, however.
“The nature of e-commerce companies is such that they are usually the most successful in their home markets. They might have some sales overseas, but this is such a complex business that it is really hard for them to compete with local e-commerce sellers,” says Mr Solovyov. “[This is particularly true] in Russia, where you need to invest in facilities, because otherwise customers would end up waiting for their deliveries for weeks and months, rather than days or hours.”
According to Ulmart executives, even giants such as Amazon might have more success in developing self-driving cars and drone delivery techniques than succeeding in e-commerce in Russia – especially given Amazon’s reliance on third-party delivery companies, such as FedEx or USPS, and lack of similar partners in Russia.
“[Our model] is the next generation of internet retailing; we can even argue that we are faster and more reliable than Amazon,” Mr Kostygin said in a 2014 interview with CNBC. “We bet that in a couple of years, Amazon will switch to our model.”
It is a bold statement. Then again, it took boldness to create a business in light of Russia’s inefficient postal system, lack of infrastructure and the sheer size of the country.