Amazon Effect Meets Russian Consumers Slogging to Recovery

LAGOS (Capital Markets in Africa) – Russian consumers, the missing piece of the economic recovery puzzle, may have been there all along — they were just browsing the web.

As online shopping lifts off in Russia, it’s taking a growing bite out of brick-and-mortar businesses, helping account for the months-long mismatch between gains in incomes and retail sales near a standstill. That disconnect, one of the biggest mysteries of Russia’s rebound from its longest economic contraction this century, could at least partly be an illusion: the statistics service includes only a fraction of purchases on the internet when it compiles retail sales. 

“Recent signs hint at the possible emergence of a new purchasing model in Russia, with a higher share of online shopping not captured by retail-sales data,” Renaissance Capital economists Oleg Kouzmin and Charles Robertson said in a note. “Russian consumer demand could be better than it appears considering the new emerging model.”

Continuing a trend in place since early 2015, data due on Wednesday will show wages adjusted for inflation outperformed sales again in September, growing for a 14th month and adding 3.7 percent from a year earlier, according to the median of 14 estimates in a Bloomberg survey. Meanwhile, retail sales climbed an annual 2.1 percent after rising only 0.2 percent in the first eight months of the year, another poll of economists showed.

Selling their wares at cutthroat prices, online retailers are catering to the consumer scarred by Russia’s worst currency crisis since the sovereign default in 1998. The proliferation of shopping on the internet and price comparison websites could also keep downward pressure on inflation, already at the lowest in the country’s post-communist history.

While the phenomenon has become known globally as the “Amazon effect,” the agents of change in Russia include Alibaba Group Holding Ltd.’s Ali Express, Naspers Ltd.-backed Avito and Yandex NV’s market arm. Traditional electronics retailers now advertise prices so low that they dare customers to compare offers online before visiting their store. 3

Online Bazaar
In Russia, which has Europe’s largest number of internet users, three-quarters of people remain price-sensitive, and the share of those trading down to cheaper options is almost equally high, according to Sberbank CIB’s survey of the typical shopper.

While official statistics showed a decline in retail sales that lasted 27 months, a record contraction that only ended last April, online trade jumped 21 percent in 2016 following a gain of almost 7 percent the previous year, according to local internet lobby group Akit. It projects a surge of 25 percent this year, which would put the market at 1.15 trillion rubles ($20 billion), or about 7 percent of all non-food retail trade.

M.video, Russia’s largest consumer electronics retailer, said on Wednesday that its online-based net sales soared an annual 55 percent last quarter, compared with an overall increase in net sales of 9.3 percent.

“There is still a gap between the retail-trade dynamics and household consumption,” Alfa-Bank analysts Natalia Orlova and Valeriya Volgareva said in a report. “Growth via online purchases may be the main reason for the strong difference.”

Data Askew
The methodology used by the Federal Statistics Service helps explain the discrepancy. To assess online retail, companies respond to questionnaires asking them to estimate the volume of their sales over the internet, according to Lyubov Kuzmicheva, head of the state agency’s division for trade and services statistics. 

It doesn’t count firms not reporting officially that they trade online, she said. Cross-border trade — which accounts for more than a third of all e-commerce — is another missing data set because the statistics service excludes sales by non-residents, Kuzmicheva said.

Still, the changing marketplace is forcing adjustments. Just this week, Russia’s statistics service will discuss the issue of measuring online trade with colleagues from Italy. Starting next year, an assessment of households will include a question about their purchases over the internet, Kuzmicheva said.

The transformation of retail trade is on the central bank’s radar. The head of its research and forecasting department, Alexander Morozov, said in an interview that the bank has developed an index to track online prices for some items to see if that yields any “forward-looking characteristics.”

Internet purchases from abroad are growing important for the economy, including by increasing the volatility of imports and exposing them daily to the currency market, according to Anton Stroutchenevski, economist at Sberbank CIB. Imports are more sensitive because consumers can now capitalize on moves in the exchange rate by ordering online from outside Russia or opting to buy from domestic retailers.

“Retail sales are not a reliable proxy for consumption anymore,” Stroutchenevski said in a report. “Other indicators that capture cross-border e-commerce are needed as well.”

Source: Bloomberg Business News