Building a giant? Rocket bets big on new online markets

The Rocket businesses are growing fast – revenue was up 74 percent in 2013 – and they have succeeded in attracting over 1 billion euros in capital from a raft of high-profile investors – most recently German service provider United Internet AG and Philippine Long Distance Telephone Company.

The firm announced plans on Thursday to bring together its five emerging market fashion brands to create a company worth 2.7 billion euros ($3.6 billion) and simplify its structure before a likely stock market listing.

— AutoNavi Holdings Ltd. provides digital map and navigation services in China. Alibaba paid aliexpress curly hair $294 million for a 28 percent stake and last month agreed to buy all outstanding shares for another $1.13 billion.

Rocket’s strategy is to identify markets and niches where big players have yet to get established, cutting its losses if the competitive environment turns out to be too fierce, as it did in 2012 when it closed down operations in Turkey.

In Russia and Brazil, home to the two Rocket businesses with the highest sales in 2013, Alibaba’s AliExpress is already a force to be reckoned with: it is No. 2 shopping site in Brazil behind local firm MercardoLivre and no. 2 in Russia behind Avito, according to web traffic measurement firm SimilarWeb.

“They are smart to go into markets where most other big players don’t have a footprint and (elsewhere) round out the offers of Alibaba and Amazon,” said Forrester e-commerce research director Zia Wigder.

In many markets where Rocket firms operate, credit-card ownership is rare and shoppers prefer to pay in cash on the doorstep. That helps explain why e-commerce has been slow to take off in Latin America, apart from Brazil where cards are more common and online sales have reached $12 billion a year.

Online fashion store Lamoda in Russia is leading the way in many of those areas. It expects to have over 1,000 delivery staff and more than 500 vehicles by the end of 2014 and over 2,000 staff by 2015 as it seeks to reach more clients in such a vast country. It also wants to distinguish itself by offering a free try-on service at the door.

In Southeast Asia, Rocket has had a freer run to do both fashion with Zalora and general wares with Lazada, although Alibaba has positioned itself to expand in the region by taking a stake in logistics firm Singapore Post.

In those markets, Rocket has sought to focus on fashion with its Dafiti and Lamoda sites rather than the general merchandise of AliExpress. Dafiti is No. 16 overall in e-commerce in Brazil, but is No. 1 in online fashion. In Russia, Lamoda is at No. 15 – but in fashion, it is No. 2 behind local rival Wildberries.

Chief Executive Oliver Samwer, who founded Rocket Internet in 2007 with his brothers Alexander and Marc, sees huge opportunities for digital businesses in emerging markets, noting that the cities with the most active Facebook users are Bangkok, Jakarta and Istanbul – with no U.S. city in the top 10.

“It has been a very tough challenge here in Russia to create great customer experience, but this try-on concept, this interaction with the customer at the door … creates a very high barrier for anybody who wants to offer the same level of service,” said Lamoda Chief Executive Nils Tonsen.

“It’s very easy to order anything from the online store and then to refuse the payment. If it happens, the merchant has to cover both the shipment and the unsuccessful delivery costs,” Kaczmarek said. “It … requires exceptional processes to control the size of the stock and the management of new orders.”

Xiloyannis said it took Amazon 10 years to break even. “When I look at Zalando, I see a venture which has done it in half the time – I see the Rocket companies performing faster than the first pioneers of e-commerce in terms of breaking even.”

In Russia and Brazil, home to the two Rocket businesses with the highest sales in 2013, Alibaba’s AliExpress is already a force to be reckoned with: it is No. 2 shopping site in Brazil behind local firm MercardoLivre and no. 2 in Russia behind Avito, according to web traffic measurement firm SimilarWeb.

“You cannot think of beating the Chinese on cash, because they have so much of it,” Giulio Xiloyannis, managing director of Zalora Malaysia, told Reuters. “You beat them on branding and product quality.”

But they face a rocky road, not least due to competition from Alibaba itself as the Chinese firm – soon to be bolstered by funds from a bumper listing – looks for new opportunities outside its home market.

That spells mounting losses as the venture capital company gears up to launch an initial public offering (IPO) this month that will help provide the war chest it needs to build and defend what it hopes will be the largest online shopping empire outside the United States and China.

Xiloyannis said it took Amazon 10 years to break even. “When I look at Zalando, I see a venture which has done it in half the time – I see the Rocket companies performing faster than the first pioneers of e-commerce in terms of breaking even.”

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