CONNEcTED RUSSIA: AN EVOLVING DIGITaL MaRKeTING LaNdSCaPe

Alex Astakhov
Marketing Strategy Lead, SapientNitro Russia

CONNeCTed RUSSIa: AN EVOLVING DIGITaL MaRKeTING LaNdSCaPe

On a wintery, early morning in the western outskirts of Moscow, faces young and old on the crowded suburban train are lit with a bluish glow, engrossed in their smartphones, tablets or e-book reader. Dynamic ads on their phones and tablets are glimpsed: Get an app for buying train tickets reads one, and Attractive deposit rates, reads another.
The historical architecture of Kievsky terminal station stands in stark contrast to the digital marketing and advertising landscape in this country in transition. But small and large signs of change are everywhere: fewer outdoor banners drape the station square than in the past; instead, large digital windows of a nearby shopping mall are twinkling with new apparel collections, cafe menus and other ads.

In the past year, marketers in Russia have allocated more than $9 billion1 in media advertising, and about 18 percent2 of that amount was put to digital and mobile channels. In addition to being one of the top 10 economies of the world3, Russia is driving Eastern Europes growth, and its total digital media spending is expected to record double-digit increases yearly through 2015. Despite its challenges, this sophisticated new, connected Russia represents a significant opportunity

for globally minded marketers but only for CMOs who understand nuances of consumer behavior in Russia, ranging from the social networks they use (hint: Facebook is not the most popular) to the search engines and mobile devices they employ to learn about brands and each other. Russia is a diverse market, and Moscow culture is just the tip of the iceberg. Lets take a look at the new connected Russia and a few implications for brands.

Fig. 1 Russia will rank 4th on digital media spent in 2016 among other European Countries
30,000 25,000 20,000 15,000 10,000 5,000 0
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2012

2016

2012

2016

Digital (including mobile)

Total media

UK

Germany

France

Russia

Italy

Spain

Netherlands

Sweden

Norway

Denmark

Finland

Worldwide Ad Spending Forecast, eMarketer, 2013 Ibid 3 Russia is ranked at #7 in GDP as of 2012, with $2.5 trillion. CIA World Factbook.

Source: Worldwide Ad Spending Forecast, eMarketer, 2013

CONNeCTed RUSSIa: AN EVOLVING DIGITaL MaRKeTING LaNdSCaPe

Fig. 2 Average Mobile Data Speeds

The New Connected Russia

I never get out of home without my smartphone, Irina, a morning train passenger says. I would feel very uncomfortable if I do. Within a few minutes she is out of the door, chatting on the go with her friend via WhatsApp Messenger. Mobile Because of a rise in affordability and a rapidly developing infrastructure, connected devices are becoming far more popular among the countrys 143 million citizens, even as their disposable income does not exceed annual $9.000.4 Recently regulatory change such as mobile number portability should boost competition and drive prices down among mobile data providers. The result is that mobile data traffic tripled in 2012, and it may increase tenfold by the end of 2015,5 but remains closer to other BRIC countries in terms of date speed (see Figure 2). Moreover, major operators are developing fourthgeneration networks to comply with the terms of licenses they were recently granted by the government. To get those licenses, the carriers committed to spend 420 billion rubles ($12.9 billion) on faster 4G networks by 2019.6 The rest of Russias online sector is also evolving. Over the past decade many Russians have, often for the first time, obtained robust online access to information. With annualized growth of 3-percent-to-five percent, a total of 59 percent of Russians use the Internet today.7 There are significant differences among populations: it exceeds 80 percent among students and white-collars, while among retirees and population over 55 it is at or below 15 percent.

2.5

US Japan

Megabits Per second

Germany

Brazil

Russia

India

It takes about three minutes to download 50MB of music in the US... ...and about 45 minutes in Russia
Source: Bloomberg Businessweek, Cisco.

Rosstat 2013, www.gks.ru Russian Wireless Carriers Plan to Get Up to Speed, by Adam Ewing, Marie Mawad, and Ilya Khrennikov. Bloomberg Business Week, July 25, 2013. http://www.businessweek.com/articles/2013-07-25/russian-wireless-carriers-plan-to-get-up-to-speed 6 Ibid 7 recent survey published by an independent pollster, Levada Center.
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CONNeCTed RUSSIa: AN EVOLVING DIGITaL MaRKeTING LaNdSCaPe

For marketers, this connectivity has simplified access to Russian consumers. Marketing research definitely has gone online, says Tatiana Astakhova, senior manager at marketing research firm Ipsos ASI. [The] Internet is a proper tool to reach the audience for almost any brand, unless you are targeting people who are older than 50. Even big CPG companies, who are the most cautious and conservative clients, [have] started to actively adopt online research tools, she says. A National Search Engine Similar to China, one significant difference relative to other countries is the role of the localized search engine -- in this case, Yandex8 and its search engine platform. With 62 percent marketshare in Russia, it is the fourth largest search engine worldwide (2.5 percent of global searches) when measured by search requests,9 recently overtaking Bing, and lagging behind Google (62 percent), Baidu (8.2 percent) and Yahoo! (2.8 percent) globally. It offers Cyrillic, Russian-language searches and claims to recognize Russian inflection in search queries. Using these tools, marketers are taking their dollars online. The audiences between TV and Internet may differ, but the growing ad revenue at the search engine clearly identifies a shift in attention by brands. Yandex which includes the search engine plus a set of apps and services - generated 28.1 billion rubles in 2012 (about $890 million), whereas a popular TV station, Channel 1, has earned about 28.2 billion rubles last year. Rapid progress of eCommerce Russia is projected to be at the cusp of a massive growth in eCommerce from roughly $12 billion today, to more than $72 billion by 2020. With 44 percent compound annual growth rate over 2012-2014, this represents a huge ongoing shift of monies online, and is a significant opportunity.10

Yandex has the potential to be a key beneficiary of countrys eCommerce growth. Eighty seven percent of online consumers use search engines to research purchases, and also is additive to the low 2 percent click-through rates as new advertisers compete through more targeted and relevant advertisements. Still, patience is required. Current online commerce (Figure 3) lags, and trails global peers, including China. Forty eight percent of Russian online consumers made their first online purchase in the last two years. Changing Social Media Unlike in the West, where Facebook has become a comprehensive tool for brands social marketing needs, in Russia marketers need to navigate among several social platforms. The Russian social leader, VK.com, offers the largest coverage and allows good targeting for advertisers (somewhat similar to Facebook). The follower network, odnoklassniki.ru, has older demographics and lower online time that users spent on social. Facebook comes third, sourcing from both leaders. Many Russians have accounts in two or three networks simultaneously. User adoption is becoming more complicated as Russians increasingly adopt on-the-go social networking through their connected mobile devices. The adoption of Twitter, Instagram and Foursquare is still low, but is rising among young, urban Russians, as well as usage of that media by brands: many local businesses offer bonuses for social check-ins. Some advanced brands, like Miller beer, do Instagram contests.

http://blogs.wsj.com/tech-europe/2013/02/11/yandex-overtakes-bing-as-worlds-fourth-search-engine/ Comscore 10 Russian eCommerce At the Tipping Point, Morgan Stanley, 2013
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CONNeCTed RUSSIa: AN EVOLVING DIGITaL MaRKeTING LaNdSCaPe

MAJOr PLAYErS IN RUSSIAN E-MArKET

Utkonos $300 million (230.6 million euro) Geared towards Moscow and the surrounding region, this company allows customers to buy food and other products online and have them delivered. Wildberries $290 million (223 million euro) An online clothing store Ozon.ru $270 million (207.6 million euro) Basically a Russian version of Amazon. An online megamart. Holodilnik $262 million (201.4 million euro) The companys name means refrigerator in Russian and, as the names suggests, its a store which sell home appliances. KupiVIP $256 million (197 million euro) An online fashion retailer which we first mentioned last June when it raised $38 million (29.2 million euro). Theyve recently announced that theyre seeking a $145 million (111.6 million euro) IPO in 2014. Biglion $175 million (135 million euro) Offers a variety of products and services for large discounts.

Cautious Growth Organizations are facing a core challenge. They are struggling to meet the requirements of the present day: changing technologies and shifting consumer expectations, even while facing outdated models and lack of scalability in technology. Longer-term, the consensus is that growth represents opportunity. Online rate-of-sales hits expectations, says one product manager in a fashion retail sector, welcoming performance of his companys newly launched Russian e-commerce. We could do even better, with bigger efficiency, but there are infrastructure problems, some backend related issues which do not allow us to implement some great ideas, he says. Implications for Marketers: A New Opportunity for Brands As the new Russian consumer gets online, theyre attracting the attention from the traditional Russian brands, along with multi-nationals. For example, the consumer giant Samsung has done a great job building a digital media presence on the

market; they now connect with more than 1 million Russian consumers across the major social platforms. Apart from Facebook, Twitter and YouTube, Samsung has invested into local touchpoints such as VK.com and odnoklassniki, which has provided the brand with a high level of exposure among Russians. Samsung also serves a good amount of localised, Russian-language content on its YouTube channel. Play Where the Locals Do The Russian online market is, to a certain extent, self contained because of language and dominance of major local social and search sites. So it is crucial for foreigners to adapt content and build relationships with the local online players in order to succeed. Russian companies can provide several good examples of efficient utilisation of local resourses. Sberbank, a leading Russian consumer bank, is notable for leveraging the power of social in line with its multichannel business strategy. The Sberbanks official community on vk.com has supported more than 1 million of Sberbanks connected clients.

CONNeCTed RUSSIa: AN EVOLVING DIGITaL MaRKeTING LaNdSCaPe

Moscow Is Not Russia Another point for a westerner to consider about Russian reality is the diversity of the population in terms of income levels and online maturity. For example, Moscow enjoys strong online penetration (higher than 70 percent) and relatively high average income (approximately $18,000 annually), while in Tambovskaya oblast (500 kilometers from Moscow) online penetration and income trend at least three times lower. Still, despite the good progress in the adoption of digital, TV remains the most efficient channel for mass communication, especially when it comes to reaching the diverse countrys rural population. In fact many companies differentiate their digital strategies for particular geographies of Russia, which largely means adapting technology solutions for segments with different level of digital maturity. For example, tobacco giant Philip Morris is creating sophisticated, web-based, cross-channel activations to advertise its premium brands among the audience of fancy Moscow cafes and bars, while using simple SMSbased mechanics to promote its low-priced products across the regions of Russia. Under-penetration of broadband in many places of Russia implies the need for low-tech marketing solutions and enhances the role of mobile in connecting with consumers. Be Prepared for a Mobile World As of right now, mobile traffic is not highly monetized in Russia, certainly not to the extent that it has been within the US and European markets, according to Konstantin Kruglov, deputy CEO of Tinkoff Digital11. We think that this growth will happen in Russia in 2014-2015. Still, many brands are limiting their mobile activities to bulk SMS sendouts, or creating mobile versions of websites. But given the rapidly growing penetration of smartphones and mobile Internet, brands will be rethinking the role of the channel in their marketing mix.

In this sense western brands have a certain advantage as many of these have already developed and tested mobile-enables strategies for the modern world. For example Nike has sustained its market position in Russia. Approximately 30,000 Russians lined up for a 10-kilometer run organized by Nike as a culmination of its We Run Moscow 2013 campaign, which was enabled through interconnection of marketing efforts and the brands proprietary Nike+ mobile platform. Other Implications Russia comprises a vast territory spread across nine time zones, which implies certain difficulties for marketers trying to manage their supply chains. Russia has uneven penetration of broadband connectivity, which is also true for infrastructure such as transport, commercial estate and human resources. In many cases, marketing campaigns in Russia receive less response, as product does not advance to the shelves in time. Peculiarities in local legislation, accounting and bureaucracy may also affect operational performance. However brands that manage to navigate that complexity discover the great opportunity underneath. For example, adidas has managed to develop strong position in the retail domain by opening a network of more than 700 stores in Russia. Adidas has also done amazing things such as having Russian astronauts to speak about their product online, directly from the International Space Station. The potential for brands to connect with Russian consumers via the digital channels is enormous. Savvy marketers have unprecedented opportunities to create powerful brand stories and promise at the increasingly connected Russian digital Klondike.

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Spotlight on Russia: Major Local Players Lead RTB Market, AdExchanger, 2013 http://www.adexchanger.com/online-advertising/spotlight-on-russia-major-local-playerslead-rtb-market/

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