Want to Implement 

all known you the best tools into operations of your remote division

Looking Closely  

to management and partners to implement a new business idea

To develop healthy business
in The Russian Federation


For your attention 


Online Strategy for Distributors

  • Written by 
Online Strategy for Distributors

This article provides a brief overview of the historical background for development of the distributor business in Russia, as well as an analysis of the potential threats to businesses using this format. The unique features of the development of e-commerce automation platforms are considered – as are the problems confronted by Internet-retail startups. Elements for the strategy of distribution companies in Russia are formulated as links in the wider chain of merchandise distribution from manufacturer to end-consumer.

Boom years for distributors

The distributor format of doing business underwent active development in 1990s Russia. Each merchandise group and each manufacturer, whether in the cities or in the regions, was typified by several small-scale wholesalers competing among one another for retail outlets. The factors driving the robust development of the distributor business at that time were:

  • relative ease of entering the market;
  • high number of import manufacturers and merchandise groups entirely unrepresented on Russia’s emerging FMCG market;
  • absent hypermarket format and preponderance of small-retail commerce.

In the first half of the 2000s, consolidation of the distributor market began just as intensively as the previous growth. Its main catalyst was the active emergence of hypermarkets and Cash&Carry centers. With the appearance of each large-format store, the earnings of the distributor in that region started declining within weeks.

Investing not just in infrastructure and delivery processes but in software as well, such companies are essentially laying the foundation for a qualitatively-different kind of distribution development.

Despite owning large warehouses and vehicle fleets, and notwithstanding their years of successful operation, some wholesaler owners went out of business in a matter of just three-four months.

The niche for distributors today

The evolution of retail over the last decade demonstrates that the space for distributors doing business hasn’t disappeared, but has become more clearly defined. That said, today’s situation is characterized by the following trends.

Many regional distributors have managed to preserve their sales volumes by gearing their supplies not to a small-retail market but to large chains. For a variety of reasons, in such situations the infrastructure of distributors turned out to be irreplaceable in the merchandise supply chain from manufacturer to store shelves.

In the regional centers, the number of hypermarkets is beginning to outstrip demand. Despite continuing sales growth, the rate of growth has dramatically slowed, particularly for non-food products. The number of new shopping establishments being commissioned has also declined.[1] The territorial distance of hypermarkets from households is becoming a barrier to the expansion of hypermarket chains.[2] In this connection, according to current projections, growth in Russia’s large-scale commercial segment will be based on the leading companies’ development of the home-shopping format [3] and even small-wholesaling.[4]

The strategy of retail chains is geared towards the promotion of proprietary trademarks as opposed to the brands of outside manufacturers.[5]

Insofar as the total supply in each individual product group is quite high, and the display space in hypermarkets remains just as limited, the large retailer is primarily worried about the representation of its target assortment of different kinds of merchandise as opposed to the fullness of the product spectrum within a particular brand.

Moreover, the assortment policy of hypermarkets is such that the shelves are filled with the most efficient (meaning the most mass-market, mid-range) items. Manufacturers, on the other hand, have traditionally aimed for the promotion of their full product line, and here they have allied themselves with distributors, for whom breadth of assortment has been a longstanding contractual clause.

In connection with the geographical remoteness of Russia’s regional centers, the fact that distributors have logistics infrastructure will necessarily remain a critical factor. Wholesalers offer storage and transportation services, and also provide crucial analytical information for manufacturers operating within a limited territory in the regions. They can specialize in a very narrow assortment of a few key brands and do business with a small number of retailers.[6]

Current threats

With the development of e-commerce and web-technologies, and with the improved quality of mobile Internet in the regions in the 2010s, the national level of distribution gained fundamentally-new formats for the distribution of merchandise from manufacturer to end-consumer. At issue here are online retail stores like OZON, Wildberries or Ulmart.

Today, successful online-marketing specialists are creating video and photographic materials of amazing quality that represent real value.

It would seem that this phenomenon is not having a serious impact on major retail, since e-commerce’s penetration of Russian retail is no more than 4% and not expected to surpass 10% over the next five years. For retail chains, the ramping-up of commercial platforms remains a more attractive way of maintaining sales growth, with approaches to this kind of scaling formulated in-house by the concerned companies over the course of years. In particular, in late-2014, the national X5 Retail Group fundamentally scaled back its online-store project.[7]

However, regional distributors aren’t so powerful as to not see the dangers. The Ulmart format shatters virtually all of the aforementioned competitive advantages enjoyed by distributors in the distribution chain, namely:

  • maintenance of manufacturers’ assortment breadth – for leading Internet-platforms, this is measured in hundreds of thousands of line items[7];
  • existence of proprietary logistics-and-storage infrastructure – companies like this are independent operators of regional distribution centers and pick-up points;
  • exclusivity of territorial sales, which distributors have been establishing over the entire development history of the business – getting the manufacturer to agree to regional exclusivity is unlikely.

E-commerce is opening up new opportunities for manufacturers themselves. Fine-tuning a sales strategy geared directly to the consumer, they are developing their own Internet-platforms and completely eliminating the distributor link from the distribution chain. Prominent examples of this trend are Apple, Next, Nike. Thus, within short order, not only individual brands but whole merchandise groups could disappear from traditional distribution.

Structural origin of a new sector

Specifically determining the status of companies like OZON is rather difficult: what is it exactly – a logistics company or a strong player on the information-technologies market?

Investing not just in infrastructure and delivery processes but in software as well, such companies are essentially laying the foundation for a qualitatively-different kind of distribution development.

The ongoing achievements of Amazon in the USA have been heralded by analysts at MacKinsey as a “Distribution Revolution”. With minimum effort on the part of the consumer in terms of order placement and its vast assortment, Amazon is already offering same-day delivery in a number of major U.S. cities and next-day delivery throughout the entire continental United States. In the near future, same-day merchandise delivery from Internet-platforms will be available to 75% of the U.S. population [8]. Similar consumer expectations are gradually emerging on the Russian market.

Problems of small online-business

Moving to the idea of creating proprietary online-retail, let’s analyze a problem typical of small business: developing an online store with minimal expenditures.

In the early 2010s, demand for the creation of store websites went mass-market on the part of small entrepreneurs. Today’s Russian Internet-space is populated with more than 38,000 store websites. Thanks to the widespread supply of affordable CMS (Content Management System) platforms and web-designers working on Soft-as-a-Service (hereinafter – SaaS) platforms, the initial creation and launch of a web-platform isn’t a problem today.

Their success is frequently associated not with the existence of regular customers but the flow of constantly-changing subscribers.

However, despite the relatively-low entry threshold, the subsequent marketing costs, delivery expenditures and entry price from the distributor leave small business without a chance over the long-term. It loses the ability to compete with the professionals right at the start, and tries to survive by depending on a small core of regular customers whose loyalty is based on more than just price. The only consistently-successful players in this segment are stores offering exclusive or manufactory products.

Let’s focus on the six main factors constraining the development small-business e-commerce in the FMCG segment.[9]

Price and delivery competition. Dozens of vendors offer identical goods, and the entire online product-search system shapes competition according to price. Albeit in different ways, both Yandex and Google prompt shoppers to start their search with offers at the lowest price, without reflecting in quick-search results the other strengths or weaknesses of a given platform. At the same time, the multitude of small online stores try to compete based on factors other than minimum price, since that isn’t something they can offer. They attempt to differentiate their stores in terms of uniqueness of product range, brand style, special privileges for regular customers, delivery service and shopping convenience.

As concerns lowering transportation costs (at large companies, this is achieved through the existence of proprietary logistics services, integrated distribution centers and long-term store credits), smaller stores are increasingly being forced to tackle this problem by turning to the same delivery services that are springing up in each region but thus far incapable of successfully sustaining price competition. Since the customer expects delivery to be fast and free, the importance of this factor will only increase over time.

In order to survive, small online-retailers have to either invest in their own mini-warehouses and delivery services, or pursue cost optimization by establishing the best-possible contracts and routes with the same transport services.

Competing with manufacturers. We’ve already discussed above how manufacturers are becoming the independent retailers of their own merchandise. This trend will only intensify moving forward.

Costs of social-media promotion. Social networks have proven themselves as an incredibly powerful tool for online marketing specialists. According to some estimates, their potential is far from fully explored in this respect.

In today’s world, they have become an alternative to the traditional online search. For example, networks like Facebook and Pinterest are already the best sources of e-commerce traffic in certain segments. In mid-2015, Instagram launched a toolkit for the promotion and search of brand merchandise that’s already being used by many mobile technologies going beyond the usual scope of product-promotion concepts with the aid of searches and web-markets (aggregators of offers on similar goods from different suppliers).

This means that a vast range of generally-accessibly tools has appeared that even a small regional online-vendor will have to utilize in order to compete successfully. As a result, fully-funded advertising budgets will have to be rolled-out, and regular time investments will have to be made in mastering the corresponding promotional methods and technologies.

Labor-intensity of maintaining customer loyalty. For e-commerce, just as for traditional offline retail, what’s relevant now is the smart management of the regular-customer base, focusing on the maintenance of existing customers, and incentivizing them to make repeat purchases. Fostering customer loyalty is a strategically-important thrust of e-commerce.

In practice, this task essentially boils down to the creation of an effective CRM-system, the development of e-mail marketing and its use timed to synchronize with the retailer’s individual price and product policy. This necessitates the use of the entire range of electronic services, which the entrepreneur must monitor on a daily basis.

Falling behind cutting-edge online stores in terms of technical equipping entails exponential growth in the labor expenditures required for the implementation of marketing campaigns.

Content creation costs. Constant attentiveness is required not just in terms of supplying the consumer with content, but also with respect to its actual creation.

The smaller regional teams and services tend to be limited in terms of the number of competencies required for the comprehensive automation of store promotion.

Today, successful online-marketing specialists are creating video and photographic materials of amazing quality that represent real value. At large online stores, entire teams are responsible for creating appealing content. Small business are left with the choice of either assembling a group of specialists within their limited staff who have all of the required skills, or relying on the support of producers who traditionally fill their channels with a particular form of content.

Growing dominance of mobile technologies. According to our statistics, more than 40% of Russian shoppers are already viewing content from their mobile devices. This means that today’s Internet platform is expanding beyond the confines of web-technologies. It requires the existence/creation of mobile applications on Android and iOS platforms that complement or fundamentally replace the function of a website. What’s more, the website itself with all of its developed infrastructure must be constantly adapted to suit the multitude of mobile devices and browsers.

The threshold of entering the e-commerce market is only perceived of as low if one overlooks the expenditures outlined above. The entrepreneur only grasps their necessity as he gains experience. The insufficiency of this experience is typical not only of the entrepreneur himself, but also of the market as a whole. As concerns regional web-studios and advertising agencies, attracting established specialists or the kind of major projects that could be used to build-up in-house competencies poses a significant problem.

It would be fair to say that the first factor (price competition) is not applicable to the regional distributor. If the distributor is developing its own e-commerce platform, however, it has to pay attention to the other five.

The software developer's perspective

Thus, the toolkit required for the full-fledged management of e-commerce is generally concentrated in the area of information systems. The need on the part of retail is driving demand for software solutions. At the same time, the supply of services involving the comprehensive automation of e-commerce is lacking. Let’s try to figure out the causes of the current situation.

We’re going to look at two kinds of IT companies:

companies offering web-platforms (CMS) for the organization of online storefronts;

all other companies, including small teams of web-designers, consulting and advertising agencies offering designs for commerce automation based on the leading CMS, designers of customized iOS and Android apps, etc.

The leader and prime example of the first group is 1C Bitrix. Along with the competing platforms, it offers a rather well-developed and up-to-date toolkit for managing the product range featured by an online store and making purchases.

The business of platforms like this boils down to service monetization through the receipt of subscription fees. Developing a resource consistent with mass-market demand is a capital-intensive endeavor requiring returns for investors, although the existence of a web-platform (CMS) in and of itself is far from sufficient to make the online store successful. Developing additional tools, ensuring integration with other services and internal accounting systems and implementing the corresponding deployment services costs a lot more money and time.

There’s currently a large, under-served niche for companies offering services involving the creation of comprehensive systems for the management of online-promotions.

A similar situation is observed in offline-retail. At the end of the day, the retail-space landlord doesn’t care how long the beauty salon, farmer’s market or cafe survives, just so long as it pays the rent. In this case, the realtor can be compared to the IT studio or private designer responsible for providing initial content and launch of the online storefront as a contractor. It also receives its commission, irrespective of the lease term for the space. The more frequently there’s renter turnover, the more profitable for the realtor. In one way or another, all of today’s online platforms have spent money on the installation and design of their establishments, and the subsequent risks are borne directly by them – the entrepreneurs dealing directly with the end-consumers of their products.

Since current sales are paid much more attention than investments in expensive, comprehensive advancements, CMS-platforms are always playing catch-up relative to cutting-edge Internet companies and the professional players (independent software developers) on the online-retail market. The things that online-marketing technologies make possible today and national retailers have already begun to implement will only become broadly available within the scope of CMS services months and even years later, while the retail shopper needs that level of service right now.

Aside from CMS-platforms, the first group of companies also includes niche services performing individual marketing functions, as well as loyalty-card aggregators, SMS and e-mail forwarding services, and payment services, etc. Their success is frequently associated not with the existence of regular customers but the flow of constantly-changing subscribers.

The second aforementioned market segment is comprised of small- and medium-sized teams engaged in development and online promotions. At their level, they don’t provide for the competitive automation of retailer operations for the following reasons:

the temporary nature and final cost of the services they provide conflict with the long-term objectives of the retailer; the development-team’s efforts to deliver the project as quickly as possible and recoup their time investment reduces the quality and comprehensiveness of the service they’re providing in terms of automation of the online-platform (or to be more precise – automation of the processes entailed in its ongoing promotion);

the smaller regional teams and services affordable to small- and medium-sized business tend to be limited in terms of the number of competencies required for the comprehensive automation of store promotion;

the technological spectrum available for the implementation of particular services is incredibly broad, so the focus in developing an online-platform system should be on comprehensive architectural design and the limited use of numerous systems in the daily work of the store team, which requires additional funds and qualifications;

the internal motivation of competent individual developers is such that their interests are far removed from commerce and even farther apart from the individual retail brand – what they’re striving for is long-term high-tech projects with generous budgets and a high rate of return.

We believe that there’s currently a large, under-served niche for companies offering services involving the creation of comprehensive systems for the management of online-promotions that would be affordable in terms of price and contractual terms to small retail companies. In the early 2000s, a whole service area emerged for the implementation of intra-corporate accounting systems based on a particular platform for managing enterprise resources (Enterprise Resource Planning – ERP), and these services weren’t limited to software customization but also encompassed consulting in the area of organizational structuring. Today, solving the tasks of promotion, content formation and loyalty management requires not only the existence of automated services, but also their qualitative integration into the organizational processes of retailers.

A number of distributors fear that they could lose some of their small-wholesale clients if they were to appeal to customers directly over the Internet.

Doing what we can

The technologies and methods involved in organizing a “supermarket in your pocket” have gone beyond the scope of the usual processes found at traditional distribution companies. Today’s situation in the sphere of online-retail is characterized by the unique features detailed below.

  • The speed of the development of merchandise-promotion technologies, evolution of search engines, requirements of retention-marketing (use of various methods to retain customers) and mobile-platform capabilities is much higher than the potential speed of their mass-market implementation.
  • The very structure of a distributor’s workforce can’t meet the “online-servicing” requirements of the retail customer. Depending on the company’s size, its structure is geared towards logistics-and-storage processes or commercial (purchasing) work with suppliers. As of today, the number of in-house specialists directly engaged in customer service and the teams responsible for supporting e-commerce operations are either inconsequential or are incapable of meeting the growing demands placed on service level. This is due to the evolutionary nature of the development of the wholesale market. At many distribution companies there are no IT specialists at all, and the servicing of corporate ERP 1C is outsourced to non-staff workers.
  • Good, comprehensive offers for the organization of e-commerce from integrators and SaaS-services that have a proven, longstanding track-record on this particular market are virtually non-existent.

All of the foregoing means that in order to claim a worthy spot in online-retail, a distribution company must fundamentally rebuild its usual processes. Most of these companies, intuitively grasping this external trend but not seeing any real growth in earnings from online-retail, develop their online-sales through the efforts of their in-house IT service and recruit individual specialists from within the general structure of the sales department for the purposes of merchandise promotion. That said, the retail shopper is often referred to managers specializing in the servicing of wholesale customers and wholesale-retail document management and therefore offered inferior consulting, whereas the service level in this case should be fundamentally better than in small wholesaling.

Whether it's worth the trouble

After calculating the investments entailed in software development, workforce overhaul and the maintenance of independent marketing, it may turn out that creating an online-retail area would require more funds from the distributor than whole its current operations could support. A company geared towards maintaining an e-commerce IT platform will be operationally more cost-intensive than the entire wholesale-logistics business to which the distributor is accustomed. Against the backdrop of the continuing decline in distribution-company sales margins, the cost effectiveness of reform investments is doubtful.

Moreover, a number of distributors fear that they could lose some of their small-wholesale clients if they were to appeal to customers directly over the Internet. This position is particularly typical of companies that have a stronger competitor in their region or a neighboring one. The smaller the distributor’s turnover and narrower its product line, the greater would certainly be the dissatisfaction of small-wholesale clients and therefore the corresponding risks of a decline in sales volume.

The existing practice and accumulated experience of corporate executives also emerges as an important factor. Executives who have traditionally grown their business according to the requirements of improving document flow and fostering good counterparty relations within the scope of the logistics-and-warehousing business frequently admit that they simply lack the skills and experience entailed in confidently leading the qualitative development of an e-commerce platform.

The formation of proprietary online competencies, as well as their maintenance and ongoing improvement, makes it possible not only to retain current sales volumes, but also to compete successfully with national brands.

The lack of required investments and management competencies virtually eliminates the possibility of developing professional services in online-retail at distribution companies. In recent times, structural changes have only been seriously contemplated at the largest niche-market national distributors, whose founding members tend to be more differentiated and whose management is recruited from the outside. For their part, the autocratic owners of many medium-sized regional companies (from among those who survived the early-2000s) are adopting the less-risky strategy of “good enough for now”.

How to win

In order to achieve long-term stability in the distribution business, it’s clear that one of two paths forward must be considered.

The more robust companies with funds to invest would do well to consider pursuing the creation and systematic development of their own staff of e-commerce developers and specialists tasked with designing an updated service system aimed at either attracting and retaining the online retail shopper, or at achieving a qualitatively-new automation of customer service in the small-wholesale trade.

Those companies that don’t see their own potential in the current situation should opt for cooperating with their colleagues from other commercial segments and regional IT companies. A successful example of this kind of cooperation is provided by the United States’ well-known online store Vitacost.com, which brings together the products of several FMCG niche brands on a single platform. Smaller manufacturers sell their products directly to the retail customer via the integrated e-commerce platform. This idea is also completely applicable to clusters of regional distributors.

The formation of proprietary online competencies, as well as their maintenance and ongoing improvement, makes it possible not only to retain current sales volumes, but also to compete successfully with national brands.

Share with retail stores the costs associated with the development of content and a description of the best practices of using merchandise in your product range.

That said, we believe that mid-sized distributors working towards the development of e-commerce needn’t necessarily strive for going national. In fact, they would be better served by focusing on ensuring a high quality of service within a limited region than on diffusing their efforts on regional expansion. For instance, the national ambitions of one wellknown online retailer are one of its weaknesses: in the regional centers, after visiting the national website, shoppers often go to the local online stores and when asked the survey question “Why?” answer: “Product not in stock”, “Product can be ordered and shipped from Moscow in X days”, or “Inconvenient pick-up options”. As a result, the purchase is made in the regional online store and therefore from the local distributor’s warehouse, despite the factor of a better price.

The idea of creating joint ventures among distributors not competing within the scope of a single brand, as well as among competent IT companies whose objective and core business is aimed at the development of aggregated online platforms, seems to us to be strategically expedient and timely. This kind of format would make it possible not only to split investments between software development and promotion, but also to maintain the long-term motivation of participants and attract professional developers into the structures.

At the same time, it would also be helpful to point out more local (tactical) measures, some of which distributor management might care to employ.

  • Initiate organizational changes, recruit at the top-management level people who have specialized in the comprehensive promotion of brands and online platforms.
  • Whether at your own company or through outsourcing, develop a service for the servicing of retail customers. If the creation of proprietary online-retail isn’t at issue, then this may entail a consolidated consulting center for your small-wholesale clients and their retail customers.
  • Offer individual pricing terms and store credits for regional online stores. Technologically speaking, they need much more time for rollout than a stationary outlet. At a small sales volume, they won’t causes losses due to low transfer price, but will become your strategic regional ally in the online-struggle against national and foreign platforms.
  • Share with retail stores the costs associated with the development of content and a description of the best practices of using merchandise in your product range. Improve the service of regularly providing your small-wholesale and e-commerce clients with this content.
  • Look for inter-regional partnership options with companies in your segment. It’s possible that the pooled investments from three-four companies like yours from other regions would be enough to launch a joint professional online format. Over time, the success of such a potential project would definitely strengthen your positions in the region.


The threshold for entering the online-retail market is quite high and will continue to grow, despite the seeming ease of getting started. In order to overcome this threshold, we recommend cooperating on partnership principles and sharing the risks with wholesale suppliers of related merchandise groups, as well as with qualified development and online-promotion teams. Without fostering the long-term motivation of the participants in such joint ventures, competing with professional online-retail players that have the most cutting-edge technologies and the corresponding budgets will become impossible over time. Today, the time has come for regional FMCG distributors to start making some serious decisions about their long-term strategy as they move forward along this path.


I'd like to khow 

I'd like to know your vision to the question:


Likely you will not receive a rapid response to a question. But your message will not be ignored. Material on given topic by you will be published on our website and we will notify you at the specified e-mail address. Thank you for your message.