E-commerce: Wildberries - Catch Me If You Can

Yesterday we hosted a webinar with Vladimir Bakin, CFO of Wildberries, the largest domestic online retailer in terms of GMV and the only profitable one among the Big-4 online retailers. The company is emphasizing growth of market share rather than earnings (which it reinvests into growth), and believes that its business model makes it self-sufficient in order to finance that growth without tapping capital markets. > The leader in Russian e-commerce. We expect the Russian e-commerce market to reach R2.9 bln in 2020E (+35% y-o-y), including R2.5 bln for domestic e-commerce (+47% y-o-y). That is 8.7% of the retail market, including 16.3% penetration of e-commerce into non-food retail and still below 1% penetration for food. The share of the Big-4 could reach 37% of the total e-commerce (+11 pp y-o-y). We estimate the market share of Wildberries in Russian e-commerce at 17% in 2020. It recorded GMV of R224 bln in 2019 (+88% y-o-y) and R178 bln in 1H20 (+111% y-o-y) and was the only of the Big-4 online retailers that was profitable (R4.4 bln earnings in 2019 under RAS, +135% y-o-y). The company may be able to more than double GMV in 2020 y-o-y.> Profitable growth. Wildberries is focused on growth and capturing market share. It treats this as more important than growth of earnings, which it reinvests into the business. The company had posted positive EBITDA to the tune of about R2-4 bln, but this year may be below that, according to the company. In April, the company introduced 100% prepayment of orders (which helped profitability), and it does not plan to return to the previous model of payment after an order is received. > Lots of focus on cost control. Wildberries emphasizes the cost side of the business and wants to bring opex to 10% of revenues. There is a lot of focus on simplifying processes and squeezing costs. Investment in marketing and advertising is minimal, so Wildberries' TV advertising is mostly paid for by partners who advertise their goods that can be bought on the site. Wildberries operates its own truck fleet, which it sees as cheaper and easier to manage. Capex was very low two years ago, but now the focus is on building new warehouses, which will entail spending circa R15-20 bln this year, a figure that might double next year. > Funding the growth. Wildberries has always had a self-sufficient business model and has been able to develop without third-party investors (with the exception of bank loans). The company also does not plan to tap capital markets. The shareholders of the company are Tatyana Bakalchuk (CEO) and her husband.> Attractive take rates. Wildberries has reduced its take rate for suppliers from about 40% to less than 20% on a blended basis (including payments on top of the nominal take rate). Meanwhile, for some product categories, the nominal take rate is as low as 5% (including electronics, construction tools, sports nutrition and cosmetics). Wildberries translates its gains in internal operational efficiency into reducing the take rate for suppliers.> Controlling logistics from DC to the last mile. Currently, the company operates seven distribution centers (DC) in Russia for 450k m2 in total. In order to provide attractive customer service, Wildberries targets longer-term to have a DC in each city with a population above 1 mln. The CFO mentioned that next-day delivery is no longer an advantage in the capital cities, but it could be an advantage to deliver goods in other regions that way. Orders are delivered to nearly 26,000 pickup points in the convenience store format across Russia and seven other countries. Over 90% of customers prefer pickup points to courier delivery, although during the lockdown the latter rose to 20-25% (it is back to normalized levels now). > Wide assortment with focus on 3P. Wildberries' biggest categories are apparel and footwear, which combined accounts for about half of its GMV currently. However, the share of those two categories is decreasing as the company focuses on other categories that fit its business model, such as goods for home and garden or cosmetics. Wildberries does not have private-label goods. According to the company, 1P sales account for about 20-25% of total GMV (with about 30-40% gross margin); however, ultimately in longer term this can go to zero. According to the company, the average check is about R2,500. Meanwhile, the introduction of prepayment allowed the return ratio to be decreased from 50% to 15% of GMV.> Lockdown triggered growth in number of suppliers. According to the company, this year the number of suppliers increased threefold to 54,000 as of August.