Serge Faguet explains why e-commerce businesses succeed when they are located near their customers.
In internet and e-commerce, local players tend to win in local markets. This is often surprising and unexpected, because in many cases there are much larger, better-funded and more experienced companies that exist in more developed markets, primarily the US, that try to expand internationally. So the question is: why does it happen?
At Ostrovok.ru, this question is highly relevant to us. Our only meaningful competitor in the Russian online hotel booking market is global online travel company Booking.com, and we have researched extensively why they have failed against local competitors in other emerging markets.
We think that ultimately it comes down to having a team that is locally-based and locally-focused. And it’s not just about having part of the team locally: it needs to be the entire organisation. Broadly, there are three reasons why this is essential to success.
Firstly, with very rare exceptions, most internet businesses have a number of components that are locale-specific. Those include marketing and distribution, fulfilment and operations, and customer support. They are all sensitive to local market conditions, relationships, languages and culture. And a local team is essential to execute on all of these.
Secondly, any global company by definition works in an environment that is different to its own, yet it has many processes it has optimised for its own home market. So when it places a small local team in another market, those legacy processes become a burden: even if there is a local team, it cannot optimise for the local market flawlessly because it is constrained by head office.
Thirdly, and somewhat more subjectively, it is simply not as important for a global company to win in any given local market. The founders of Yandex, Arkady Volozh and Ilya Segalovich, like to say: “If Google doesn’t win Russia, Google will be fine. If we don’t win Russia, we are dead.”
There is a lot of truth to this – global companies just don’t care enough. Their local employees go home at 5 p.m. and collect a paycheck; they have no mission that drives them to excel because their survival is not at stake. This is a massive disadvantage.
Getting it out there
In terms of marketing and distribution, each market is different. It’s not just language, but also where people spend time online and how they search for products. So by tailoring local solutions to what local consumers require you can reach those consumers much more effectively. For example, we advertise on Yandex, which is the dominant search engine in Russia with over 60 per cent market share.
It is much easier for us to do a good job out of advertising on Yandex than it is for a global online travel player that is used to advertising on Google, and for whom Russia is just another of their many markets. It is easier to focus on optimisation. It’s also easier to focus on finding the right platforms and negotiating the right terms to acquire customers.
As the market evolves, it becomes more and more difficult for global companies to advertise and attract customers effectively because the advertising platforms and potential partners to work with become more and more local. Every local winner makes it easier for other locals to win. This is why we want Yandex to win in Russia but Booking.com wants Google to become dominant.
Aside from marketing and distribution, it’s also important to keep in mind that there are specific logistical and operational challenges to each local market. If you need to ship something to consumer, you must have local logistics, comply with local tax law, pay import duties and be aware of regulations.
If you want to collect payments from consumers, you have to support local payment options and not just international credit cards. You need to provide customer support that is in the local language, available during the local business hours, and most importantly that is comprised of people who are based locally, because they have the requisite cultural understanding to deal quickly and efficiently with your customers.
Of course, if you are trying to scale your business across the globe, the last thing you want is to have different operational processes in each country you operate in. It’s just too complicated. What you end up creating instead is a template approach that approximates how consumers everywhere in the world will consume your product and which is ultimately grounded in the way that things work in your own home country.
This templatized approach is, by definition, inferior, akin to an off-the-peg suit.
The fact that local players tend to win in local markets is grounded in the operational reality that acquiring customers and serving them cannot be done the same way in each market. This is then accelerated by the fact that every local winner makes it easier for other local players to win.
But beyond this lies another important fact: that teams which are 100 per cent local are able to make all of their decisions in a locally-optimised way without legacy processes from elsewhere. Even more importantly, local teams have better motivation and culture than local offices of global companies: this motivation and culture stems from the realization that winning is not an option, but a necessity essential to your survival.
You fight better when it is a fight to the death.
Serge Faguet is co-founder and chief executive of Ostrovok.ru.