The fact that one of the fastest growing Russian online shopping sites is headquartered in Skokie, Illinois, probably says more about the realities of doing business in Russia than it does about the “World’s Largest Village,” as the Chicago burb fancies itself. But as BayRu’s rapid growth suggests, not being in Russia can be a big competitive advantage in some ways when it comes to doing business in Russia.
BayRu, named June’s “Startup of the Month” by the startup community Built In Chicago, basically acts as a middleman between online behemoths such as Amazon and eBay and Russian consumers. After an order is placed from the site’s massive catalogue, which features products from a bevy of American retailers, the item is shipped from, say, Amazon to BayRu’s warehouse in Skokie, where it’s re-packaged for shipping to Russia via carriers such as USPS, FedEx, and UPS.
Repackaging, the company has found, is crucial if orders are to survive the journey to the some 160 cities the company services in both Russia and former Soviet republics such as Kazakhstan and Azerbaijan. “We’ve got five years of experience of how things get damaged, dropped, and wet,” says BayRu CEO Aaron Block. “How you package these things makes a big difference.”
BayRu was founded in 2007 after Illinois-based immigrant brothers Anton and Gene German noticed that every time they returned to their native Russia, they were being asked to bring back coveted American merchandise. Buying foreign products online is exceedingly difficult in Russia.Thus the idea for BayRu was born, and with the young company showing promise, Anton dropped his computer science studies at the University of Illinois at Chicago to tend the business.
Since then, BayRu has grown to 55 employees (including workers at a branch in Moscow) and projected sales are expected to reach $40 million by year’s end. From early 2011 to early 2012, the company reported a sales increase of 700%. The company makes money from its markups–9% and up per item–and other charges. Auto-parts is the top-selling category, followed by electronics and fashion (Dolce & Gabbana does especially well). “We sell a ton of auto parts,” Block says. “Russia is very cold. The roads there are rough. It’s a big country and there’s lot of cars in that market that weren’t meant for that market.”
Why all this in Skokie? Anton German was living with his dad in Skokie when he founded the company and wanted offices nearby. More importantly, BayRu relies on employees who can speak the language of business, which in this case is Russian. Skokie “just happens to be an area where there are in fact a lot of Russian immigrants, especially in the northern suburbs,” Anton German says. (At the company’s Skokie 24-hour call center, a native Russian speaker phones each customer after their order is placed to confirm the deal.) Other area perks, according to Block: affordable real estate, easy access to Chicago, and “a great post office.”
The company’s fast growth raises the inevitable question: How is an Illinois startup successfully gaining market share in the huge, crowded market of Russian online retail? It turns out that market is neither as huge (it’s growing) nor as crowded (it’s getting more so) as click-happy Americans might expect.
“There’s a really severely limited supply in Russia,” says Block, especially when it comes to foreign goods like iPhones, or say, Hummer parts. The language barrier can limit foreign online sales, and for a country still rife with fraud and corruption, trust in online transactions is hard to come by. On top of that, cash is still king in Russia. “E-commerce is still very much a COD market,” Block says. “Credit card penetration is still very, very low.” To deal with this, BayRu works with a network of some half-million payment points where customers can put down cash for BayRu purchases.
BayRu may be off to a stellar start but before the Anton-German-as-Mark-Zuckerberg-of-Russia comparisons pass customs, the company will have to find a way to keep its competitive edge against a growing onslaught of competitors, foreign and domestic.
Sheila Puffer, a distinguished professor of international business at Northeastern University who specializes in Russian markets, points to the rising online profiles of Russian competitors such as Wikimart.ru and Ozon.ru (the largest domestic online retailer). Then of course there’s also BayRu’s prime suppliers: “A question might be what happens to BayRu when and if companies like Amazon and eBay expand to Russia, which they would seem likely to do over time,” Puffer says.
Russia’s rapidly growing online market may very well drive such expansions: While only 1.5% of all Russian retail purchases take place online now, that number is projected to grow to 10% to 20% over the next decade, according to Puffer.
German, BayRu’s chief marketing officer, voices confidence in his business model, for now at least. “Our business is very long-tail in terms of the products that our customers buy, so although Russian e-commerce market is quickly moving towards offering a greater selection to online consumers … it will take many years if ever for them to match the selection of products available for purchase online in the U.S. market.”
But in a country where the government has a habit of playing favorites and laws and regulations can change on a whim, Puffer sounds a sober note: “Their business model seems to be unique and may be successful, but they will have stiff competition and had better be well-financed to realize their growth potential.”