End Game Series vol. 2: The Ozon pivot of 2018

The context

I thought a lot about whether to write this story… but it was a story that I think deserved to be told… as I think it will one day be considered a major turning point in the history of Russian ecommerce. And having had an insider’s view, and since I enjoy to write, i figured… who better to tell the story than me… lol :)

So in the middle of 2018 I’d moved back to Russia after a 8 year hiatus (I lived in Moscow from 2006–10) and was helping a company called Ozon. I’d joined as a contractor with the intention of going full-time but for a variety of reasons, primary of which a pretty hard decline in my health in late 2018, I’d decided not to stay onboard full-time. Basically the health issue, which had impacted me a couple times in the past, had eaten up a lot of my ability to ingest and retain information… and when that happens trying to manage a massive scope is simply not a good idea for many reasons.

And so I was there for about 6 months from June till November 2018 with responsibility for operations & marketplace product (20+ product managers) and kind of a ‘head of strategy’ role for some months as well.

For my first few months I’d have 1–1 meetings about 2x per week for about an hour each with the CEO, Alex Shulgin…. and I found him to be a very uncharacteristic CEO, but one that I had a lot of respect for. He was the rare combination of being fairly soft spoken and a good listener but at the same time a hard-ass ballbreaker at times… that could easily threaten to fire everyone in the room if he was pissed off.. the people that are reading this and have worked with Alex will probably laugh at this one too as they know its true…lol :)

But in retrospect I really enjoyed these discussions. He’d ask a lot of questions and would want to understand the story behind Lazada, Wayfair, Alibaba, Amazon, etc. And he was putting together in his mind the strategy for the company based on the lessons of others. And I think he knew that I enjoyed these strategy brainstorming sessions and giving my perspective on things.

The Russian eCommerce Landscape in 2018

In 2018 Russia was very un-evolved in terms of eCommerce. The largest players were probably:

1. Yandex Market ($1–2bn gmv): who was in fact more like a price comparison site that generated traffic for small DTC sites. But they’d just recently started Beru, an Amazon-styled model that Sberbank had put $500m into.
2. Aliexpress ($1–2bn gmv): who was pretty much a pure crossborder from China platform
3. Wildberries (~$500m gmv): complete retail model that was 100% fulfilled from a single large warehouse.
4. Ozon (~$400m gmv): complete retail model that was 100% fulfilled from a single large warehouse.

Note that these are all rough estimates on the GMV and its according to my old memory.. so i could be off. If I am, please do not shoot me.

Ozon, which was founded all the way back in 1998 during the very first dot com boom had a very long and winding history with a wide variety of leaders. When I lived in Russia from 2006–10 they were the clear market leaders and often referred to as the ‘Amazon of Russia’ but they’d fallen from that pedestal to 3rd or 4th place. And to make a long story short, they had lost money for their entire 20-year history till 2018 and were hovering at about a $500m valuation or so at the time. Which when you compared to what Amazon and Alibaba had achieved by then (both valued at $300bn+ at the time) fell far short. And even when you compared to the more recent successes of platforms like Lazada & Shopee which also had multibillion dollar valuations, it was a bit of a lackluster story. And the investors were leary…. it was time for change.

In comes a new CEO…. Alex Shulgin (in about the start of 2018)

The board hired a new CEO, Alex Shulgin, who was mainly a finance guy and the ex-CFO and ex-COO of Yandex Group (who was the #1 Internet co of Russia with a $15bn+ valuation at the time). Alex also came in with a fresh round of ~$100m in funding and some aggressive targets. Alex somehow got connected with Eugene Chistyakov (ex-CTO of Lazada Group) and the next thing you knew.. you had Eugene as Head of Technology at Ozon and close to 200 people move over from the Lazada Moscow tech hub (which had just been shut down by Alibaba following their acquisition of Lazada).

Alex was driven to change the history of Ozon… and had that type of fierce ‘win at all cost’ type of mindset that are reminiscent of guys like Stalin. lol. So armed with a fresh round of cash, and a ex-Lazadian tech mercenary army, Alex started putting a torch to the old Ozon. Within the first year or so, im not sure if any of the old guard management team remained. And I happened to be one of these new folks that came in during this ‘changing of the guard’, and thus had a glimpse into this pivotal time which i believe will later be considered one of the pivotal points in Russian ecom history… as things blasted off afterwards.

In a clear pivot from the past, Alex went full throttle on Marketplace

Now marketplace was something that never had taken a strong foothold in Russia… despite the efforts of earlier predecessors like Wikimart, which was founded in around 2008 and whose story i know well because one of the co-founders is a friend… but ended up not making it.

And so it was kind of silently assumed that ‘marketplace does not work in Russia’…. which now everyone now understands is absolutely not true as the marketplaces are thriving. And rather what they should have concluded at the time is that….

“The marketplace model had not worked in Russia because nobody properly studied & implemented the formula that Amazon, Alibaba, and Lazada had already patented”.

That formula being:

1. To win long-term you need both awesome assortment (eg. Amazon is the ‘everything store with ~1bn sku’s) and the best prices
2. To be awesome at price, you need a marketplace so that you can get the lowest cost sellers selling on your platform (and kind of look the other way on some of the grey schemes that enabled the low prices)
3. To be awesome at assortment, you needed a lot of sellers who would be motivated (ie. profitable) to sell a ton of sku’s. And to enable this you needed a fulfillment/logistics solution that enabled this... ie. dropshipping.

Now when you look at the history of Russia… and the fact that in 2018 guys like Ozon & Wildberries were both running fully retail biz models with a single fulfillment centre (with probably around max 100k-200 sku’s) it was clear that they had not understood this formula. Which is something Alex set out to change.

The end game was simple: Win = Assortment = Marketplace = Dropshipping

It was simple math. Even a very large fulfillment center will struggle to house more than 100k sku’s or so. Awesome assortment probably meant 10m+ as it is at this point where people can generally make the conclusion..

“if i want to buy anything i can find it on Ozon”. And so how do you get from 100k to 10m+ assortment? Well you’re not gonna do it just by building warehouses…. as that takes too long. “

This is not rocket science by any stretch of the imagination… it was the simple logic that Lazada, run by Max Bittner, used back in 2014–5 when it began marketplace dropshipping.

And all you had to do was study a bit of history on Alibaba and Amazon to see how this evolution typically looks…

• sellers begin dropshipping (often from their own house or warehouse)
• 3pl fulfillment centers begin getting more popular and professional
• sellers begin using more of these 3pl’s so that they can keep their inventory in a centralized place instead of shipping to lots of different marketplaces (which is less efficient inventory storage & working capital usage)
• sellers scale and grow their assortment rapidly as they see the profit opportunity
• marketplaces can then build out more warehouses to lure some of this mp assortment back from the 3pl’s (eg. Amazon Prime)

But it was clear to me in Russia back in 2018.. that nobody had thought out this ‘end game’…. that winning = massive assortment = marketplace = dropshopping.

Or if they had, then nobody had done it successfully. And this was the formula that i’d repeat many times in that summer of 2018 in my discussions with Alex, who to my memory was still focused much more on fulfillment centers at that time. And while i do not take credit for it, as Alex is a man who very much goes his own path and i am sure he was influenced by others… he did blaze ahead into marketplace dropshipping in the 2nd half of 2018.

And it was like flicking a match above a gas stove that you’d left on for awhile…. because all the seeds had been planted:

• Yandex market had developed a ripe flock of sellers to pluck from that were already dropshipping
• These sellers had already started using 3pl warehouses, which were now getting larger and more professional
• Courier delivery companies that could handle dropshipping were also exploding

What happened in the ensuing years? Did the ‘end game’ pan out?

Well, let’s see….

• I’d estimate that Ozon now sells over 10m sku’s on their platform (up from max 200k that were in stock in their Tver warehouse in mid-2018). Note that this is based on a count i did of items that were in their top categories (note this list to the right doesn’t include all categories.. but just most of the larger ones)
• I’d estimate that Ozon now has 30% of their sales through dropshipping (ie. fulfilled by merchant)… and if you were to calculate the % of assortment that is sold thru dropshipping i’d guess it is >80%.
• Ozon reported 8,100 sellers active sellers at the end of 2020
• Sales was reported at $1.3bn in 2020 and i heard its expected to come in around the $3bn mark for 2021
• Ozon is now outperforming Wildberries according to rumors I hear, in particular on the most recent Black Friday sale.
• Ozon IPO’d on Nasdaq in Dec. 2020 and hit a $12bn+ market cap in Feb 2021 (up from what i believe was a ~$400m valuation in end 2017)
• The Russian ecommerce market has rocketed… I don’t have statistics on this but i would bet that it did 2x or more in 2018, 2019, 2020 and in 2021.
• Alex Shulgin is probably one of the most recognized CEO’s in Russia now as Ozon now stands next to Yandex as being one of the most highly valued Russian tech companies. And it is one of the biggest turnaround stories in Russian corporate history.

And while I do not take anything away from the team…. as they worked their butts off. The true story here, in my view, is one of strategy and understanding what the end game should look like...