Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained in more detail elsewhere in this prospectus. This summary may not contain all the information that may be important to you, and we urge you to read this entire prospectus carefully, including the “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and our audited consolidated financial statements and unaudited interim condensed consolidated financial statements, including the notes thereto, included in this prospectus, before deciding to invest in the ADSs.Overview
We are a leading e-commerce platform in the large, fragmented, underpenetrated and growing Russian e-commerce market. Over the years, we have become the most trusted and respected online retailer in the country, according to INFOLine, and our brand has become synonymous with online shopping for our approximately 11.4 million active buyers in Russia in the twelve months ended September 30, 2020. Our mission is to transform the Russian consumer economy by offering the widest selection of products, best value and maximum online shopping convenience among Russian e-commerce companies, while empowering sellers to achieve greater commercial success. We attribute our success to our focus on enhancing the buyer and seller experience, our nationwide logistics infrastructure, which is one of the largest among Russian e-commerce companies, according to INFOLine, and our cutting-edge technology and strong culture of innovation.
We connect and facilitate transactions between buyers and sellers on our Marketplace (our “third-party” business), which represented 45% of our gross merchandise value including services (“GMV incl. services”) and 15% of our total revenue in the nine months ended September 30, 2020. We also sell products directly to our buyers (our “Direct Sales or “first-party” business), which represented 51% of our GMV incl. services and 79% of our revenue in the nine months ended September 30, 2020. We believe that this globally proven business model of an online marketplace for third-party sellers, complemented by a first-party business, allows us to offer Russian consumers the largest multi-category assortment of products, according to INFOLine, with approximately 9 million stock keeping units (“SKUs”), as of September 30, 2020, in categories ranging from electronics, home and decor and children’s goods to fast moving consumer goods (“FMCG”), fresh food and car parts, at competitive prices and with a wide range of delivery options. This business model also enables us to better manage our inventory and enhance the online shopping experience of our buyers for certain product categories and geographical regions through our Direct Sales business. In the nine months ended September 30, 2020, 8% of our SKUs were offered through our Direct Sales business, while 92% of our SKUs were offered by our sellers through our Marketplace. Our growing base of approximately 18,100 active sellers, as of September 30, 2020, plays a key role in the expansion of our platform’s product catalog. We attract sellers to our platform with a strong value proposition that combines access to millions of our active buyers with a comprehensive set of tools and services for our sellers, such as sales management solutions with access to data analytics and advertising services, financial products and fulfillment and delivery services through our nationwide logistics infrastructure through our Fulfilled-by-OZON (“FBO”) and Fulfilled-by-Seller (“FBS”) logistics models. These seller-facing tools and services equip our sellers to attract more buyers, grow their sales and provide a seamless transaction and buyer experience.
We believe that we are one of the pioneers of e-commerce and the most recognized e-commerce brand in Russia, with a top-of-mind brand awareness of 32%, compared to 18% for our nearest competitor for the month of June 2020, according to INFOLine and BrandScience. In the twelve months ended September 30, 2020, our platform served approximately 11.4 million active buyers who placed an average of 5.0 orders during that period, an increase from approximately 6.6 million active buyers who placed an average of 3.8 orders in the twelve months ended September 30, 2019. The selected periods of 2020 include the period from April 2020 until June 2020, during which we experienced increased demand for our products and services as a result of the COVID-19 pandemic and the related government-imposed social-distancing measures. The combination of our wide assortment of products (the largest selection in the Russian e-commerce market, according to INFOLine), competitive prices and seamless shopping experience, coupled with our brand reputation, enable us to attract more buyers to our platform, which, in turn, draws more sellers to our Marketplace, resulting in the expansion of our product catalog, and bolsters the retention and order frequency of our buyers.
We believe
that this powerful network effect has allowed us to achieve faster growth than the Russian e-commerce market, which grew by 41% in the nine months ended September 30, 2020 as compared to the same period
in 2019, and compared to 29% in the year ended December 31, 2019 and 22% in the year ended December 31, 2018. Our GMV incl. services grew by 142% in the nine months ended September 30, 2020, as compared to in the same period in 2019,
supported, to some extent, by the government imposed social-distancing measures related to the COVID-19 pandemic, compared to 93% in the year ended December 31, 2019 and 74% in the same period in 2018.
Our GMV incl. services grew by 46% and 20% in the years ended December 31, 2017 and 2016, respectively. We reported a loss of P12,857 million in the nine months ended September 30, 2020, compared to a loss of
P13,033 million in the nine months ended September 30, 2019. Due to significant investments in our growth, we incurred losses of P19,363 million and P5,661 million in the years ended December
31, 2019 and 2018, respectively.
Our nationwide logistics infrastructure facilitates the fulfillment of products and delivery of parcels sold through both our Marketplace and our Direct Sales businesses in an efficient and reliable way. We have developed one of the largest and most sophisticated logistics infrastructures in the Russian e-commerce market, according to INFOLine, with nine fulfillment centers, including one of the largest fulfillment centers in Russia among e-commerce businesses, and our delivery infrastructure, consisting of approximately 43 sorting hubs, 7,500 parcel lockers, 4,600 pick-up points and 2,700 couriers, allowing us to provide what we believe to be one of the best online shopping experiences for our buyers in terms of cost, speed and convenience. We offer same-day delivery services in Moscow and in parts of the Moscow region and Saint Petersburg and next-day delivery coverage for over 40% of the Russian population as of September 30, 2020.
We are a technology-driven company with a strong culture of innovation. Our secure and scalable technology infrastructure, developed by our in-house research and development team, provides the foundation for seamless buyer and seller experiences on our platform, as well as for our supply chain operations, business intelligence, traffic and search optimization, customer relations managements (“CRM”) operations and payments. We collect and analyze data to optimize our operations, personalize the shopping experience of our buyers and enable us, our buyers, our sellers and our logistics partners to make informed real-time decisions on our platform.
We believe our mobile-first approach makes shopping more convenient for our buyers, increases buyer retention, improves the efficiency and conversion rate of our marketing programs and accelerates the growth of our business. According to INFOLine, our mobile app for buyers (our “Shopping App”) is one of the leading shopping apps in Russia by number of average monthly users, with approximately 10 million monthly average users (“MAU”) (which we define as unique visitors within a particular period) on our Shopping App in the six months ended June 30, 2020, according to AppAnnie. The orders made through our Shopping App accounted for 70% of orders on our platform in the nine months ended September 30, 2020, an increase from 51% of orders in the nine months ended September 30, 2019. In the year ended December 31, 2019, 56% of orders on our platform were made through our Shopping App, an increase from 35% of orders in the year ended December 31, 2018 and 15% of orders in the year ended December 31, 2017.
We believe that developing complementary products and services will help us to grow our core business and our market share. We have developed and successfully launched financial products and services for buyers and sellers, advertising and logistics services for sellers and an online travel booking service through our OZON.Travel business. We will continue to develop and enhance our existing products and services as well as expand our range of service offerings to our buyers and sellers, which will help us achieve our mission to contribute to the transformation of the Russian consumer economy. For example, one of our buyer-facing financial products, OZON.Card, our branded debit card, offers benefits to our buyers when it is used to make purchases. OZON.Card holders made an average of approximately three orders per month in the nine months ended September 30, 2020, which is approximately 1.6 times more than the average monthly order frequency of our buyers who placed at least one order each month in the same period in 2020. As of September 30, 2020, approximately 260,000 OZON.Cards were activated, compared to approximately 57,000 OZON.Cards as of December 31, 2019 and fewer than 10,000 OZON.Cards as of September 30, 2019.
Our Industry
Russia has the eleventh largest economy in the world, with strong economic fundamentals, including a total gross domestic product (“GDP”) of approximately $1.7 trillion in 2019 and the highest GDP per capita based on purchasing power parity (“PPP”) among Brazil, Russia, India and China (the “BRIC countries”) in 2019, according to Euromonitor. Russia is the ninth most populous country, with a population of 147 million as of December 31, 2019, according to Rosstat.
Russia has the largest number of internet users among European countries and the seventh largest number of Internet users in the world, with approximately 113 million users, an internet penetration rate of 83% and a possession of smartphones rate (defined as the proportion of households that own a smartphone within a particular period) of 75%, on average, for the year ended December 31, 2019, according to Euromonitor. The country’s telecommunications infrastructure, which provides nationwide internet coverage, has facilitated the online migration of Russia’s consumer economy. The internet has become an integral part of the Russian consumer’s lifestyle. The rate at which the offline to online migration of commerce is taking place, combined with a large population and strong macroeconomic fundamentals, are key pillars of the growth drivers for the Russian e-commerce market.
Impact of COVID-19 and Projected Recovery of the Russian Economy
According to the Ministry of Economics Developent, Russia experienced growth in real GDP from 2016 to 2019, with a compound annual growth rate (“CAGR”) of 1.9%. Russia’s real GDP growth in 2020 is expected to be adversely impacted by the COVID-19 pandemic. Recent macroeconomic forecasts by the Ministry of Economic Development suggest that the Russian economy will contract by approximately 3.9% in 2020, although its projections also indicate a strong and rapid recovery as soon as in 2021, followed by real GDP growth with a CAGR of 3.1% from 2021 to 2025. According to the Central Bank of Russia (“CBR”), the Russian government and the CBR aim to provide the necessary liquidity to support the Russian economy during the pandemic, with international reserves at an all-time high of approximately $592 billion as of July 31, 2020.
Russian Retail Market
We define our market opportunity by reference to the total addressable market (“TAM”) that we believe we can address over the long term. Our core
addressable market is the Russian retail market, which was the fourth largest retail market in Europe, totaling P33.6 trillion in 2019 and projected to total P46.2 trillion in 2025, according to INFOLine.
According to INFOLine, the Russian retail market grew at an average CAGR of 6% from 2016 to 2019, but is expected to contract by approximately 1% in 2020 due to the economic impact of the COVID-19 pandemic. INFOLine projects that the Russian retail market will recover in 2021, and grow at a CAGR of approximately 6% from 2021 to 2025, driven primarily by the growth of real disposable income and consumer lending.
The Russian retail market is highly fragmented, with the top ten retail businesses, including both online and offline, accounting for 25% of the total retail sales in the country in 2019, according to INFOLine. This figure compares to 42%, 40% and 35% in 2019 in the United Kingdom, Germany and the United States, respectively, based on Euromonitor data. According to INFOLine, the highly fragmented state of the Russian retail market places leading multi-category e-commerce businesses in a strong position to gain market share from small online and offline businesses. Small businesses generally have a relatively limited assortment of products, less attractive value proposition and generally do not provide a convenient shopping experience, compared to multi-category businesses that generally have a broader assortment of products and stronger value proposition for consumers, which gives online multi-category businesses a competitive advantage over smaller businesses, according to INFOLine.
Domestic Multi-category Businesses are Well Positioned to Gain Market Share in Russia
The size of Russia’s domestic e-commerce market, excluding cross-border
e-commerce (the sale of products through e-commerce into the domestic market from sellers in other countries), was P1.4 trillion in 2019 and is expected
to reach P2.1 trillion in 2020, according to INFOLine. Russia’s domestic e-commerce market grew at a CAGR of approximately 26% from 2016 to 2019, which was higher than the CAGR of
cross-border e-commerce in Russia of approximately 20% in the same period. Driven by an expanding range of products available to consumers, shorter delivery times and more comprehensive customer support,
domestic e-commerce businesses have been continuously growing their respective shares of Russia’s total e-commerce market since 2017 according to INFOLine. The
share of cross-border e-commerce in Russia’s total e-commerce market has historically been higher than in other countries, primarily due to the historically
underdeveloped logistics infrastructure and limited assortment of, and relatively high prices for, products of many domestic e-commerce businesses. INFOLine projects the domestic
e-commerce market in Russia to grow at a CAGR of 30%, from P1.4 trillion in 2019 to P6.8 trillion by 2025, compared to a CAGR of only 6% for cross-border e-commerce in Russia by 2025. As a result, INFOLine projects that the share of the total e-commerce market in Russia, held by Russia’s domestic e-commerce businesses, will increase from 71% in 2019 to 89% by 2025.
Russian Domestic E-commerce Market is Fragmented
The Russian domestic e-commerce market is highly fragmented compared to other international markets, with the top three domestic e-commerce companies accounting for only 18% of the total e-commerce market and 25% of the domestic e-commerce market in terms of GMV incl. services as of the year ended December 31, 2019, which is significantly lower compared to the market share of the top three e-commerce companies in some other countries, according to INFOLine.
In the six months ended June 30, 2020, we represented approximately 6.6% of the overall domestic Russian e-commerce market and were the leading multi-category e-commerce business in terms of offering the widest assortment of products and selection of delivery options, according to INFOLine. We also held strong positions across many product categories in the Russian e-commerce market in the same period.
COVID-19 Impact on the Russian E-commerce Market
During the six months ending June 30, 2020, the lockdown measures implemented by governments around the world to stem the spread of the COVID-19 pandemic accelerated the already occurring shift in consumer behavior towards an increasing reliance on online shopping. In the six months ended June 30, 2020, the COVID-19 pandemic contributed to the growth of the Russian e-commerce market, which grew by 51% compared to the six months ended June 30, 2019, and there was a 3.4% increase in e-commerce penetration in Russia compared to the same period in 2019. In 2020, the Russian e-commerce market is expected to grow by 34%, accompanied by an increase in e-commerce penetration to 8.1%, compared to 6.0% in the year ended December 31, 2019, according to INFOLine.
INFOLine believes that the COVID-19 pandemic will have a sustained and long-term impact on e-commerce penetration in Russia, fueled by an increase in the number of active buyers and growth in purchasing frequency. INFOLine expects the approximately P13.3 trillion in e-commerce sales in Russia, cumulatively over the six-year period from 2020 to 2025, to be attributable to the impact of the COVID-19
pandemic.
Our Strengths
We believe the following strengths have contributed, and will continue to contribute, to our success.
Leading e-commerce platform in Russia
We are a leading online shopping destination for buyers in Russia, according to INFOLine. Our business model, which is based on a globally proven e-commerce model that complements a marketplace of third-party sellers with a direct sales online retail business, enables us to offer our buyers the widest multi-category assortment of goods on the Russian e-commerce market, according to INFOLine, at competitive prices, and an extensive range of delivery options. Our Marketplace allows sellers to complement their product offerings with our high quality buyer support services, including flexible delivery options and our 24-hour contact center service.
We believe that we are well positioned to continue to benefit from the ongoing shift, from offline to online, of retail in Russia. According to INFOLine, the Russian e-commerce market is still significantly underpenetrated compared to other more developed e-commerce markets. E-commerce penetration in Russia was 6.0% in the year ended December 31, 2019, compared to 4.3% and 3.7% in the years ended December 31, 2017 and 2016, respectively.
In the nine months ended September 30, 2020, we grew by 142% in terms of GMV incl. services compared to the nine months ended September 30, 2019, which is approximately three times faster than the growth of the e-commerce market in Russia, which grew by 41% in the nine months ended September 30, 2020, compared to the same period in 2019, according to INFOLine. We believe our growth was due to various factors, including our reputation as the “go-to” destination for online shopping in Russia. According to INFOLine and BrandScience, for the month of June 2020, OZON was the most recognized e-commerce brand in Russia with a top-of-mind brand awareness of 32%, compared to 18% for our closest competitor.
Value proposition for buyers
Offering the widest assortment of quality products is one of the key pillars of our value proposition to buyers. On our platform, buyers have access to approximately 9 million SKUs, as of September 30, 2020, comprising of both every day and upmarket products across one of the broadest product category ranges of all e-commerce companies in Russia, according to INFOLine, which includes electronics, home and decor, children’s goods, health and beauty, apparel, pharmacy, packaged food, FMCG, pet care, books and sport. Our sellers range from large retailers to small and medium-sized enterprises (“SME”), which collectively offer on our Marketplace the widest selection of goods in the Russian e-commerce market at competitive prices, according to INFOLine. We are regularly expanding the variety of products available to our buyers by attracting more sellers to our Marketplace.
We also seek to provide the best value for our buyers by offering products at competitive prices on our platform. Our proprietary pricing algorithm allows us to price our Direct Sales products competitively, as well as provide real-time pricing recommendations to our Marketplace sellers. We believe the growth of our seller base will intensify competition on our platform and lead to competitive pricing for the products across our many product categories, which will help us attract and retain more buyers and increase order frequency.
We aim to provide our buyers with one of the most convenient online shopping experiences in Russia with a combination of fast and reliable delivery services, high quality buyer support services and financial products. According to INFOLine, we offer a wider variety of delivery options than any other e-commerce company in Russia, which includes courier delivery, collection from pick-up points and OZON.Box parcel lockers and delivery by Russian Post and other third-party delivery providers, providing our buyers with greater convenience when shopping on our platform. We offer same-day delivery services in Moscow and in parts of the Moscow region and Saint Petersburg, and next-day delivery coverage for over 40% of the Russian population as of September 30, 2020. Our commitment to high quality buyer services includes ensuring that buyers receive their parcels on time. Our “On-Time ratio” (which we define as an average ratio over a particular period of time, calculated by dividing the number of parcels that we delivered to buyers on their chosen date by the total number of parcels to be delivered on that particular date) was more than 95% in the nine months ended September 30, 2020, and reached 97% in the month of September, 2020. Our ability to provide high quality services has led to high customer satisfaction. In the three months ended September 30, 2020, we received a Net Promoter Score (“NPS”), an index of buyer satisfaction with our products and services and their loyalty to our brand, of 79 points, compared to 67 points for the three months ended September 30, 2019, based on our internal surveys provided to our buyers after they make a purchase, which demonstrates our ability to provide high quality services. We have also developed a suite of financial services, such as our OZON.Card, OZON.Account e-wallet and OZON.Installment buyer lending options. We believe that these offerings increase shopping convenience, payment flexibility and buyer loyalty, which we believe will lead to higher purchasing frequency on our platform.