Yandex (NASDAQ:YNDX), which owns Russia's top search engine, recently launched an online marketplace called Beru, which it claims could become one of the country's top three e-commerce platforms for local goods by the end of 2020. The platform will offer nearly 100,000 different products, with an initial focus on pet products, diapers, consumer electronics, and home appliances.
Beru will sell many of the quick-turnover products through private label brands, and will help match buyers and sellers of less common items for a commission of about 10%. Russia's state bank Sberbank (OTC:SBRCY), which is investing $500 million into the platform, will fund the construction of Beru's warehouses.
In exchange for that investment, Yandex is giving Sberbank half of Yandex.Market, a price comparison platform that links to external businesses. Yandex tried to turn Yandex.Market into a direct online retailer like Amazon (NASDAQ:AMZN) two years ago, but the effort flopped because it confused customers and merchants by blending a price comparison site with direct sales.
Launching Beru as a new platform similar to Amazon -- which hasn't entered Russia due to political tensions and logistical challenges -- could clear up that confusion and bring more Russian shoppers online. If Yandex succeeds, Beru could become a major threat to Alibaba's (NYSE:BABA) AliExpress, the country's e-commerce leader.
Understanding the Russian e-commerce market
Russia has an internet penetration rate of over 70%, but e-commerce transactions will only account for 3% of the country's total retail transactions this year according to eMarketer. The sluggish adoption of online shopping is mainly caused by the lack of a cohesive logistics network across the massive region.
But despite those challenges, Alibaba took over the market with AliExpress, a marketplace that allowed Chinese merchants to directly sell their goods to overseas customers. This worked well due to China's close proximity to Russia, and Alibaba merely passed the shipping costs onto the customers.
AliExpress now controls 69% of Russia's e-commerce market according to Ecommerce News Europe. Alibaba also launched a dedicated version of Tmall for Russian shoppers last year, and recently inked a $2 billion Kremlin-backed e-commerce venture with billionaire Alisher Usmanov. Therefore, Alibaba clearly plans to use AliExpress' first mover's advantage as a launchpad to become the "Amazon of Russia".
But that's not all. Smaller rivals -- like apparel e-tailer Wildberries and consumer electronics retailers Citilink and M.video -- are also expanding their online presences. Alibaba's rival JD.com is also reportedly eyeing a return to the Russian market after failing to crack it in 2015. There's also the chance that Amazon, which struggled to gain a toehold in China, could finally establish its Russian beachhead.
How Beru could help Yandex
Yandex is Russia's top search engine on PCs and mobile devices, but it still faces intense competition from Alphabet's Google, which ranks a close second on both platforms.
To counter Google and lock in its users, Yandex aggressively expanded its ecosystem of services -- which include cloud and email services, a virtual assistant called Alice, an AI-powered recommendations platform, streaming videos on its homepage, rides and food deliveries from Yandex.Taxi, and online payments via Yandex.Checkout. It also launched a firmware update called Yandex.Kit, which creates a forked version of Android that lets OEMs replace Google's first-party apps with Yandex ones.
Launching Beru is clearly an extension of that strategy, and it could help it overcome the organization's previous failures with Yandex.Market. If all goes well, Yandex could leverage its position as Russia's top search provider to promote Beru to more shoppers, integrate it into other services like Yandex.Market, Yandex.Checkout, and Alice, and create a cohesive "Amazon-like" experience for shoppers.
That expansion could diversify Yandex's business away from online advertising, which accounted for 83% of its revenue during the second quarter of 2018.
But can it take down Alibaba?
With the support of Russia's largest bank and its top search engine, Beru looks like a formidable new foe for Alibaba. However, Beru could still struggle to pry Russian shoppers away from AliExpress, and Alibaba's introduction of a localized Tmall platform could protect its lead. Therefore, launching Beru is a smart move for Yandex, but it still has a lot of catching up to do.