Constraints breed innovation. That was Oren’s first reaction when I was describing Russia’s small but growing e-commerce companies that I’m so fascinated with.

Russia’s constraint:

  • Very poor logistics and affordable distribution (No UPS or FedEx equivalents)
  • Low credit/debit card penetration (48% of Russians have bank accounts)
  • Vast country
  • Difficult for international businesses to enter
  • Only 1.5% of sales are online compared to 6.5% in Germany or 13% in the UK

Russia’s strengths:

  • Large population at 148 million
  • Large and growing middle class, most notably in cities
  • High internet penetration at over 66%
  • Largest e-commerce market in Europe
  • A go-do-it spirit of self-reliance
  • Onlines sales are growing 26% year-over-year with $36 billion expected in 2015

Russia is different than many Central and Western European countries beyond their obvious geopolitical differences. It’s a huge country and it has one of the worse wealth inequality disparities in the world with a cultural transformation that is difficult for many Americans to grasp as generations shift from central control to capitalism. All of these factors make Russia from a macro level difficult to understand but if you start to look at the specifics the opportunities and solutions businesses have come up with in Russia are exciting and can kick minds in high gear for innovative solutions.

Online retailing – Russians never give up on an opportunity

The constraints of Russia make it difficult for Westerns to think of a viable business model that is in their wheelhouse. Russians understand the set backs but see opportunity, and if the Soviets did one thing they made the people have an attitude of perseverance and creative spirit to overcome odds. In e-commerece you can see this come shinning through.

There isn’t a good way to get goods order online to customers? Ok. How many servers AND trucks do we need to buy.

Many don’t have a way to pay online? Oh well, cash is king.

The most unique company is LaModa which is an online fashion retailer that sells above average and higher end fashion with over 1.5 million customers. Lamoda has over 400 cars and over 700 sales associates that deliver clothes while providing fashion advice. The sales associates bring customers their order and gives them 15 minutes to try everything and acting as your favorite fashionista friend for a second opinion. The customer can keep items or return them and pay in cash or credit. It’s called Lamoda Express.

Can you image asking the UPS driver if this cut of jeans is going to be popular this fall?

Boom! Lamoda just solved most of the constraints from the West’s perspective. Don’t have a credit card? check. Don’t have UPS? check. All in one swoop. It’s a solution, albeit a costly one.

Lamoda adds customer value with the personal advice of the trained drivers and encourages people to order more by allowing them to refuse items. This increases the average ticket price and is a distinct differentiation from other online and physical retailer. It’s a solution that is costly but it doesn’t mean it’s not profitable.

According to some estimates Lamoda’s costs might be 25% of their total revenue on orders $100 or less. However, if you look at their site you realize that it would be difficult to have less than $100 order because of their product selection. Lamoda furthers keeps these costs down by only serving 25 high density cities like Moscow and Saint Petersburg so transportation costs are somewhat controlled. Since most of the transportation costs are, let’s say, ? fixed and ? variable as the site grows their margins will continue to grow and their sales associates make more efficient delivery drivers. They may or may not be profitable now not but they are a bright spot for their lead investors Rocket Internet.

Ulmart- straddling the line

Ulmart took a new approach to online retail – they built brick and mortar stores. With over 8% of Russia’s $14 billion e-commerce revenue they launched their website and later opened their doors to customers. Ulmart did what many in the US expect Amazon to eventually do but this Ulmart’s hybrid approach serves Russia unique delivery problem. Ulmart splits up inventory and distributes it to tiers of warehouse that also serve as stores and pick-up locations throughout Europea Russia. Customer can receive home delivery for an extra charge.

Ulmart’s distribution system

  • 5 national hubs at 129,000 sq. ft
  • Distribution only
  • 30 urban warehouses at ~27,000 sq. ft
  • Distribution and Pick-Up
  • 250 Outposts at ~1,100 sq. ft.
  • Distribution and Pick-Up
  • Home delivery for an extra charge

The chairman of Ulmart Dmitry Kostygin describes this tiered systems as the next generation of online distribution because of the cost benefit and perference for customers. In fact only 12% of goods are delivered directly to the customer with 68% pick uped at warehouses and 20% pick uped at urban outposts. These pick up centers serve over 165 cities and towns in Russia.

This all might sound strange to Americans where Amazon promises reliable 2 day delivery for $99 a year, but Kostygin says Russians prefer reliability and quality over price and the the current Russian postal systems can’t provide that. Kostygin describes that you can get many illegal and counterfeit items throughout Russia but knowing the product is high quality and that the company can provide convenience is a competitive advantage that is difficult to duplicate.

Several Russian e-commerce companies are developing their own delivery systems as the market continues to grow as a way to combat payment collection and logistics. Ulmart is the largest player with a hybrid approach that makes them adaptable to their customers needs. It’s also a smart logistical approach that lowers their overall costs in the long-term for companies that can’t rely on affordable distribution companies.

What can we learn?

The intnernet is pervasive and changing the way consumers shop but that doesn’t mean it changing every country in the same way. Some pieces are missing and business models can’t be easily moved from country to country. Russian companies see the opportunity in e-commerece and customer’s preferences are changing fast but entering into the market requires higher capital expenditur and much higher risks. However, if successful the barriers to entry are high and the returns can generous for a long time.

I believe a fashion retailers in the US could duplicate the Lamode model of having sales associates deliver goods and advice. It’s a unique customer service advantage that goes beyond the Zappos model of no hassle returns.

is growing with over 8%  Russia $14 billion e-commerce and 190 trucks delivering goods. They did what many expect Amazon to eventually do – build stores.