15 Nov 2018
Russian Retailers Set to Co-Opt Cross Border E-Commerce Benefits
Tools and DIY supplier 220-volt.ru seen as pioneering new O2O import business model for domestic retailers.
At the forefront of a decidedly if-you-can't-beat-'em-join-'em movement, 220-volt.ru – the largest Russian retailer in the tools and DIY sector – has forsaken its opposition to allegedly unfair cross-border e-commerce legislation and set about exploiting a number of related loopholes for its own benefit and for that of its extensive clientele. This has seen the Moscow-headquartered company launch a new division dedicated to selling China-origin goods online.
The company's move comes at a time when e-commerce is continuing to gain momentum across Russia, with more and more conventional retailers being driven online by the loss of market share to newly established digital marketplaces. In the case of cross-border e-commerce, this exploded into Russia with the arrival of AliExpress in 2014, with other China-based platforms following soon after, developments that sent the whole of the local retail sector reeling.
Back then, 220-volt.ru offered its extensive hardware range via a nationwide click-and-collect model, with items available at either one of its proprietary pick-up points or via one of its franchises. It has proved to be a successful and sustainable formula with the company still Russia's ninth-largest e-commerce operator in terms of sales volume.
Keen to defend its position, alongside many other members of the Russian Internet Retailing Association (AKIT), 220-volt.ru was very proactive in calling for amendments to Russia's cross-border e-commerce legislation. This militancy was driven by the difficulty that most domestic e-commerce players faced when it came to competing with their cross-border counterparts, many of which could offer reduced prices due to their lower tax burden. In order to counter this, AKIT's overall position was to call for the imposition of a mandatory 30% tax on all Russia-origin purchases made via overseas online sales platforms, while also demanding that tax-free cross-border purchases be abolished for all Russian consumers.
Rightly sensing that the tide of legislation and consumer opinions was irretrievably turning against them, 220-volt.ru then made an abrupt u-turn, announcing plans to rent a 26,000 sq m warehouse in an industrial park north of Moscow, through which they would sell China-origin goods via their e-store. Primarily – initially at least – offering Wester, Hammer and Military branded items, the plan is to carry up to 20,000 items by mid-2019, at which point this new division is expected to account for about 5% of the company's total sales.
Essentially, this will see the company play an intermediary role between mainland Chinese suppliers and Russian end-users, allowing it to make 7% commission as the middleman. As orders made via foreign e-stores are free from the 18% VAT chargeable on conventional transactions – while also being exempt from the standard 10% rate of import duty – all goods offered on this new platform will be almost 30% cheaper than the same items imported by official Russian entities. On top of that, the company is also hoping that its nationwide network, established reputation and existing logistics capabilities will also help to woo consumers.
Even though it will take up to two weeks for individual items to be delivered, the company believes that consumers will prioritise the cost benefits over the immediate availability on offer elsewhere. This may prove to be especially true in the relatively common instances where such items are ordered by groups of friends or neighbours, making keen pricing the key purchase criteria.
For Hong Kong suppliers, this development is significant in terms of not only offering a new outlet for tools and DIY equipment, but also for the insight it offers into likely future developments in Russia's retail space. Following 220-volt.ru's lead, it's thought that companies in other sectors – notably garden accessories, musical instruments, interior decor, commercial electronics and office supplies – will soon establish equivalent operations, opening up still more export opportunities.
Leonid Orlov, Moscow Consultant