The investment in the self-styled “Russian Amazon” is the largest in the country’s e-commerce market after KupiVIP, a private buying club with big ambitions, raised $55m in April. Ozon’s round follows the stock-market debuts of Mail.ru and Yandex at eye-popping valuations.
The deals highlight the big opportunities that international and domestic investors are grabbing in Russia as internet penetration reaches more than a third of the country. Many expect Russia to overtake Germany as Europe’s largest internet market in the next two years.
The market is unusual because domestic firms are still winning out over international giants such as Google, Facebook, Ebay and Amazon, thanks to a combination of Russians’ national pride in their own companies and the unique challenges of online retailing in a vast country where payment and delivery systems are still significantly underdeveloped.
Ozon’s investors are a mix of strategic partners, local specialists and more traditional funds looking for Russian exposure. They include Rakuten, Japan’s largest online retailer which is expanding rapidly overseas, and Alpha Associates, a Swiss private equity firm.
Ru-net Holdings, an early investor in Russian web search leader Yandex and existing Ozon backer, led the round alongside Index Ventures, one of Europe’s leading tech investors. Morgan Stanley advised Ozon on the deal.
“What is really exciting about Ozon is the unique combination of the solid foundation they have built over the years… and the headroom potential,” said Giuseppe Zocco, partner at Index. “We are more interested than ever in the Russian tech community. There are about 57m people online in Russia, 41m go online every day. They have reached the tipping point in my view.”
The new funds have taken longer than Ozon expected to pin down but in the end, it has raised more than twice as much as it originally planned. The $100m will be used to build new warehouses and distribution operations, widen its product range and expand its marketing.
Ozon’s turnover last year reached $137m, up 34 per cent on 2009, from 5.2m registered users – but its current momentum has been long in the making. The company was founded in 1998, first taking investment from Ru-net’s Leonid Boguslavsky 11 years ago, but the Russian market only began to really take off in the last three years.
Like Amazon, Ozon began selling smaller, low-margin items such as books and CDs; it even has its own version of the Kindle e-reader, the Galaxy, although this has not yet achieved the same degree of popularity as it US counterpart.
But with its extra funds, Ozon can accelerate its push into higher-ticket items such as travel, children’s goods and homewares.
Ozon’s French chief executive, Maelle Gavet, believes that its wide range of genuine products will attract Russia’s emerging middle classes, especially as the company looks beyond the capital.
“Russia has always had a supply problem, especially outside of Moscow,” she told the FT. “In the regions, having access to 1.5m [products] is paradise because you can get access to things you never knew existed…. We do not want to be the cheap store – we want to be the customer-friendly store at a fair price.”
To tap that opportunity, Ozon is having to make a large upfront investment in building its own package distribution system, as Russia lacks a good national postal service or cheap courier network. Its O-Courier already has a presence in 97 Russian cities with 959 delivery points and Ozon is now allowing other e-commerce start-ups to use this platform, providing another source of income.
Although creating such infrastructure is expensive, it creates a key barrier to entry if Ozon is to follow Yandex and Mail.ru in fending off the giant global internet companies.
Today, issues such as Russians’ distrust of online transactions and preference for payment on delivery mean that e-commerce – while growing fast – just represents around 1 per cent of total retail spending in the country.
While Amazon may not yet be a major competitor, it may be that it’s happy to let companies such as Ozon spent tens of millions of dollars educating the market and infrastructure before it swoops.
As Mr Zocco says of Ozon: “They are in a very strong position and they have a long way to go.”
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