Ukraine's flourishing e-commerce sector is catching up with Russia's

Ukraine's flourishing e-commerce sector is catching up with Russia's
Ukraine's ecommerce was the second fastest growing in Europe in 2018 and it is rapidly closing the gap with Russia
By Ben Aris in Berlin February 19, 2019

Ukraine saw the second fastest e-commerce sector growth in Europe last year, up by just under a third (31%) y/y, according to the Better Regulation Delivery Office, or BRDO, a regulatory advisory body funded by the EU. Only Romania’s market grew faster and Ukraine was well ahead of the global average of 25%, according to BRDO.

Russia remains the biggest online market in New Europe and is together with Ukraine amongst the fastest growing on the continent, but Ukraine is closing the gap fast.

Ukraine is famous for the quality of its engineers. There are currently an estimated 185,000 tech specialists in Ukraine with another 16,000 graduating each year. And the country has also seen the export of IT services soar in the last year, with many of the world’s biggest tech companies operating offices in Ukraine to tap into the low-cost talent pool.

A recent list of the top 50 Ukrainian IT companies is topped by EPAM, which originally hails from Belarus, but is now headquartered in New York and counts the world’s blue chips as its clients. But the company relies on an army of Ukrainian engineers to crunch the code, making it the biggest IT company in the country. At number four on the same list is Luxoft, which was originally a Russian company until its international business was spun off into Luxoft and likewise relies on Ukraine for its worker bees.

Last year the Ukrainian tech sector already earned the country an estimated $4.5bn from exports of tech services, making tech the fourth biggest export earner for the country after agriculture, labour remittances, and metals. For comparison, food exports earned Ukraine $18.8bn in 2018 but the rate of growth is much slower – agro exports were up by a (still healthy) 5%, whereas tech exports were up over 20%, according to the “Tech Ecosystem Guide to Ukraine” factbook, published on January 29. Tech exports are expected to double to $8.5bn by 2025, according to App Annie, a multinational data research company.

A bit less than three quarters (70%) of this money came from sales of software development services abroad, of which the leading foreign owned IT companies with operations in Ukraine account for a large share. The 2018 Global Outsourcing-100 ranking includes 18 Ukrainian firms, and foreign firms with offices in Ukraine, and is ranked 24th in the world overall.

And apart from software development, Ukrainian tech entrepreneurs have started up their own companies, with the most successful including: Depositphotos, which has 400 employees; Gitlab, which is worth $1bn; and Grammarly, which boasts 7mn daily users, to name a few.

However, unless the government manages to stabilise the economy and produce some growth there is a danger that Ukraine will lose this valuable resources to a brain drain. A recent survey by the Seetarget company found that 80% of Ukrainians believe the country is going in the wrong direction and around a fifth of the working population has already left to neighbouring countries to find a better job. While surveys have found that the majority of these migrant workers are typically only spending three months away from home and that 60% of them say they want to go home again, the same survey found that only 13% of workers from the IT sector are willing to return home again. Typically if an IT worker leaves the country then Ukraine has lost them for good.

E-commerce flourishing

E-commerce is also rapidly invading the territory occupied by traditional organised retail. Like in Russia, but earlier in the development cycle, online stores are already starting to impact the warehousing market.

In Russia, while the real estate sector is still limping following the ruble crisis of 2014-2015, warehousing is booming as supply can’t keep up with the demand from fast-growing online stores.

After opening five stores on Kyiv’s right bank last year, Rozetka.ua, Ukraine’s largest online store,  can’t find warehouse space in the capital.

“Ukraine is growing fast enough — this is good — but the problem is that the infrastructure is not keeping up with such growth,” Vladislav Chechetkin, co-owner of Rozetka, told Interfax-Ukraine, as cited by Ukraine Business Journal (UBJ). “The vacancy of the warehouses is zero. Therefore, if you want a warehouse on the right bank, this means that you have to find (land), get approval, permission to build ... is a significant time lag.”

Two years ago, Rozetka bought a warehouse on Kyiv’s left bank. Although that space is full, the retailer plans to open a sixth Kyiv store this year, on the left bank, UBJ reports.

That is creating new opportunities for investors which are starting to jump into the game. Investment activity remains woefully inadequate – the finance minister said in the week of February 18 that Ukraine attracted $2.5bn in foreign direct investment (FDI) in 2018, but needs $10bn to grow – but Ukraine’s leading investment bank Dragon Capital has resuscitated its real estate fund and just bought a cold storage warehouse complex on western Kyiv’s Ring Road, raising the investment company’s warehouse holdings to 300,000 square metres.

With the purchase of the Arktika warehouse, “logistics space will constitute 48% of our total commercial property portfolio,” Volodymyr Tymochko, Dragon’s managing director for private equity, told UBJ. “Ongoing growth in demand for warehouses, fuelled by the expansion of offline and online retailers, is making this particular real estate segment attractive for investment.”

The appearance of real estate investments is a good sign as they are usually the precursor of increasing investment activity – typically the first in and the last out in the investment cycle.

While e-commerce is biting traditional organised retail in Russia to the point where foot traffic at the leading malls has been falling for the last four years, according to the Watcom Shopping index that bne IntelliNews tracks, Russia has a huge advantage as Russians have been buying online for some seven years, Oskar Hartmann, a pioneer in the sector, tells bne IntelliNews, which means the Russian online market is only now reaching maturity. Ukraine has been slower into the game, but it seems to be catching up much faster too.

In 2017, online shopping accounted for 3.2% of retail sales in Ukraine, compared to circa 6% in Russia, 8.8% in the EU, 10.2% in the US, and 17.8% in Britain. And this is despite the fact that Ukraine has one of the lowest internet penetrations in Europe at only 49%, according to Ecommerce Europe. Only 58% of the population use the internet and a mere 3.7mn people shop online. It is still very early days yet for e-commerce in Ukraine. 

Another good proxy for the growth of e-commerce is online advertising. In 2018 Russia’s online ad-spend overtook TV for the first time and remains the fast growing segment of the advertising market, up 22% in September y/y. However, the pace of growth in Ukraine is twice as fast, with the online ad-spend up a whopping 40% in 2018 to $125mn. In terms of volume Russia remains the bigger market with a massive $4.8bn spent online ads in the first nine months of last year alone, but at this pace Ukraine is closing the gap fast.

In-stream video totalled 42% of spending in Ukraine, banners for 37%, in-page video for 9%, ‘non-standard solutions’ for 7%, and sponsorships for 5%. Social media and instant messaging platforms accounted for 34.5% of the ad spend, up from 26% in 2017.

Indeed the advertising markets in both Russia and Ukraine continue to boom and lead the entire emerging Europe region, according to the weCAN advertising agency. In 2017, the Russian and Ukrainian advertising markets reached their highest growth rate of the last three years, according to an annual survey by weCAN.

Following a 10% decrease in 2015 and a 11% increase in 2016, the net advertising spending in Russia grew by 14% last year, reaching RUB417bn (€6bn). Meanwhile, the Ukrainian ad market continued on an astonishing growth path: after a period of stagnation in 2015 and a 27% increase in 2016, it recorded a growth of 29% amounting to UAH16bn (€540mn) last year, according to the weCAN survey. Within the ad-spend, online is the fastest growing segment in both countries.

As consumers get comfortable with online purchases, businesses are leapfrogging over entire stages of development to facilitate them and going straight to state-of-the-art solutions.

 

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