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Breakingviews

Breakingviews - Russia is blessing and curse for e-commerce IPO

A view shows the pick-up point of the Ozon online retailer in Moscow, Russia March 16, 2020.

LONDON (Reuters Breakingviews) - Russia’s nascent e-commerce market is growing up fast. Online retailer Ozon’s upcoming listing in New York, valuing it at as much as $5.6 billion, is the biggest market debut by a Russian company in years. Its home market’s vast size will be both a help and a hindrance in getting it to profitability.

For online retailers Russia is that rare combination of a big market with ample room for growth. Despite a boost from Covid-19, its more than 144 million citizens will do just 11% of their shopping online this year, according to Euromonitor. The 10 biggest online and offline retailers command just a quarter of the market, INFOLine reckons. Crucially, Russia is also a tough market for foreign rivals like Amazon.com.

Ozon is expanding rapidly by flogging everything from electronics to food and pharmaceuticals. It processed transactions with a total value of $1.6 billion in the first nine months of 2020, up 140% on last year.

The challenge, however, is getting those products to customers. The world’s biggest country lacks ready-made delivery infrastructure, forcing Ozon to invest in its own warehouses, couriers and pickup points. Though it can deliver from Kaliningrad to Kamchatka, customers aren’t prepared to pay up. Ozon spent $260 million on fulfilment and delivery in the nine months to September, but charged just $16 million for those services. As a result, the company is still loss-making.

Prospective investors are taking an optimistic view. At the top of the mooted price range, Ozon would be valued at 2.8 times the $2 billion of gross merchandise value it processed in the 12 months to September. That’s broadly in line with Polish marketplace Allegro, which listed in October. But Allegro is profitable and has a 36% share of online shopping in Poland; Ozon has less than 7%.

Economies of scale may eventually allow Chief Executive Alexander Shulgin to break even. But getting there will be expensive. The company burned through almost $200 million in the last 12 months; at that rate, the IPO’s potential net proceeds of around $1 billion will last just five years. This fundraising is unlikely to be Ozon’s last.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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