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This Company Could be the Amazon of Russia

0 | By Alex Kagin

I’m not sure I could have survived this year without shopping online, and I have a feeling many of you are thinking the same thing. In fact, e-commerce is growing faster than ever before, jumping to 16.1% of total retail sales in Q2 2020 from 10.8% last year in the United States.

That equates to billions of dollars spent online from groceries to electronics and even cars. That’s why we have seen stocks like Shopify Inc. (NYSE: SHOP), Amazon.com Inc. (NASDAQ: AMZN), and Carvana Co. (NYSE: CVNA) skyrocket over 100% this year with everyone at home.

The best part about this is that it is not a trend that is going away anytime soon. According to a survey done by the United Nations Conference on Trade and Development, the Covid-19 pandemic has forever changed online shopping behaviors. Following the pandemic, more than half of the survey’s respondents will continue to shop online more frequently.

The pandemic has accelerated the shift towards a more digital world, and we have seen that everywhere. We talked about it with MercadoLibre Inc. (NASDAQ: MELI) in Latin America and with Sea Ltd. (NYSE: SE) in Southeast Asia.

Now I want to talk to you about an entirely different market with a recent IPO that is taking e-commerce head-on in Russia.

We have all heard of Amazon and Alibaba, but chances are you have not yet heard about Ozon Holdings PLC (NASDAQ: OZON), one of the top e-commerce companies in Russia, with a bright future ahead of it. Interestingly enough, just like Amazon, it was founded as an online bookstore in 1998.

They quickly expanded to sell clothing, music, movies, electronics, fresh food, and now offer more than 9 million products across 24 product categories.

Now you may be thinking, isn’t there a lot of risk to investing in a foreign country? Well, yes there is always some risk in investing in foreign companies. The same could be said for investing in China, where companies like Alibaba Group Holding Ltd. (NYSE: BABA), JD.com Inc. (NASDAQ: JD), and Nio Ltd. (NYSE: NIO) have all brought triple-digit returns.

But I want to point you to where the growth is, and e-commerce in Russia is one of the fastest-growing industries in the country.

Russia’s Untapped E-Commerce Market

Despite existing for decades, e-commerce in Russia is still a nascent market compared to many other parts of the world. The e-Commerce market for 2020 in Russia is roughly $24 billion in sales compared to in the U.S., where retail e-commerce sales totaled roughly $600 billion. That’s quite a big gap even with the population difference.

But that is changing quickly as the pandemic has helped fuel a paradigm shift across the globe. E-commerce penetration in Russia has increased from 7% of total retail sales in 2019 to about 11% in 2020. Still a long way to go where the United states e-commerce penetration is about 19% and China estimates are anywhere between 27-37%.

Russia isn’t standing still as eCommerce sales grew 51% YoY during the first 6 months of 2020 and we are not about to see growth slow as Russia embraces the benefits of e-commerce.

Where does Ozon fit in?

Ozon is one of Russia’s leading multi-category e-commerce platforms. Its Gross merchandise value (GMV) expanded 142% in the first nine months of the year up helped by its active customers ordering more than ever before. This growth is helped by the low penetration rate of e-commerce in Russia.

Ozon is also investing in logistics having announced plans to spend more than $300 million in the next two to three years. This will enable the company to add over 2.5 million square feet of distribution centers across the country, an over 100% increase.

While there is competition with other e-commerce companies like Wildberries, which has 34 million customers, and Alibaba which has teamed up with Mail.ru in order to create the joint venture AliExpress, there is a rising tide lifts all boats situation happening.

The market is still highly fragmented as the top 3 players control roughly a quarter of the market according to Data Insight. While these numbers vary depending on the source, Data Insights pegs Wildberries at 13%, AliExpress Russia at 8%, and Ozon at 6%.

For comparison, some estimates put Amazon at over 50% of the US market on its own. Given the new frontier of this business for Russia, competition is not a huge concern at this point.

Key challenges

Russia’s main problems lie in the long distances and weak infrastructure. The country counts 11 different time zones and stretches over 5,600 miles, double the United States.

Ozon is well aware of these challenges and now has over 2 million square feet of fulfillment infrastructure across Russia with one of the largest fulfillment centers in the business, over 40 sorting hubs, 7,500 parcel lockers, and 2,700 couriers.

This investment is definitely a risk with the Russian ruble being under pressure and investing in foreign markets, but at a valuation under $10 billion, this could be a huge stock.

You could even say it’s the same principle behind revolutionary tech startups; a company bringing in investors who can give them the resources they need to explore uncharted territory and bold new opportunities.

Companies like those, pre-IPO and in their earliest stages of private funding, often have the highest potential for fortune-building gains. Owning a share of the business that early on means that you get a share of the enormous growth that can happen before most investors can even get access to it.

You can see how to get involved in these pre-IPO investment opportunities more easily than ever before. Check out our special presentation right here to see exactly how.

Where Ozon is Now

The benefits to owning Ozon could outweigh the risks and I like the fact that they are going into such a big market with Sistema owning 31% of the company and not looking to sell.

Ozon had 11.4m active buyers in Q3 2020 and more than 51 million people have downloaded the company’s shopping app, which had 41 million monthly active users in the same quarter.

With its previously mentioned logistics centers, Ozon is able to cover 40% of the Russian population with next day delivery and that could greatly improve given the committed investment in logistics.

Much like Amazon, they are also making the switch towards a marketplace and now counts 18.1m active merchants up from 1.3m in Q1’19.

All of this has helped them to grow their revenue 70% to roughly $1 billion dollars in the first nine months of 2020 compared to the previous year and operating expenses as a percentage of sales was down from a year early from 51% to 48%.

Ozon also had 66m in cash pre-IPO and raised almost $1B during the IPO to fund its expansion.

Overall Ozon is in a strong position to continue to expand in the Russian eCommerce market and should continue to be a major player.

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