CROSS-BORDER DISTANCE SELLING IN UKRAINE: INFO DIGEST JA

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1st ISSUE

DEAR COLLEAGUES,My name is Valentin Kalashnik, President of Ukrainian Direct Market-ing Association (UDMA). For the 5th consecutive year I observe rapid (20-30 % of market volume annually) development of distance selling in Ukraine.

This year we at UDMA decided to provide distance selling compa-nies, having good success chances in Ukraine, information about the market of 45 million potential customers. Bi-monthly we will publish the Info Digest containing statistics, articles, and analytics (from our Association and other sources) and send it to you.

I am sure that once you find out more about our country and its possibilities for your business you will understand that entering Ukrainian market is worth including in your development strategy.

Ukraine is strategically located at EU borders. In traditional retail all product niches are well filled and presented whereas distance selling has lots of “free” offers. Ukrainians came to know catalogues relatively recently, in mid-1990es when the first franchisers of large mail order companies (mainly OTTO and Quelle) started to take orders in small shops. Second “birth” of distance selling in Ukraine started in 2005 when Neckermann entered the market with its first main catalogue using consignment for parcels delivery. Thereafter every year new brands from Western and Eastern Europe enter the market (see infogram on the right).

If one knows market peculiarities and develops accurate start-up plans the results could be astonishing. This is what companies already present on Ukrainian market experienced. Ukrainian customers are not spoiled and are loyal, especially when they sense attention from mail-order companies. Their loyalty system does not allow them to order identical goods of different colors and sizes in order to choose the most suitable one. They usually order only what they in fact are going to purchase. The percentage of goods returns and refusals is very low and usually doesn’t exceed 10 %.

Ukraine offers already developed and ready for instant use instruments for cross-border dis-tance selling assisting companies to send goods (with up to 200 Euro value) without paying any customs taxes/duties and VAT. It reduces startup expenses and risks as the companies do not have to be physically present in Ukraine. Using postal consignment and reliable partner in Ukraine all business processes including customers recruiting and servicing can be managed from the country of company’s main business.

You will find more information in next editions of the Digest. If you are already interested please contact us.

In this issue we will present you main information about country, provide data on population (incl. regional distribution), recent changes in Ukrainian legislation and economics. You will learn about most popular search requests in Ukrainian Internet segment and find out what are the preferences of Ukrainian customer while purchasing online.

It is my pleasure to meet you and welcome to Ukraine!

Valentin Kalashnik

Time infogram indicating key players

entering Ukrainian market

before 2005

2005

2006

2007

2008

2009

2010

2011

Bertelsmann

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January 2011CROSS-BORDER DISTANCE SELLING IN UKRAINE: INFO DIGEST

Kiev

MOLDOVA

BELARUS

LITUANIA

LATVIA

UKRAINE

POLAND

GERMANY

FRANCE

UK

PAIN

ITALY

RUSSIA

HUNGARYROMANIA

BULGARIA

GREECETURKEY

SLOVAKIA

CZECH REP.

BELGIUM

NETHERLAND

SWITZERLAND

SERBIA

MACEDONIA

ALBANIA

BOSNIA

AUSTRIA

UKRAINE. GENERAL INFORMATION

Ukraine is a country in Eastern Europe, bordering the Black Sea, Poland, Romania, and Moldova in the west, Belorussia in the north and Russia in the east

Total area: 603 550 sq km (country comparison to the world: 45) land: 579 330 sq km water: 24 220 sq km

Population of Ukraine is 45 808 893 persons (country com-parison to the world: 28), more details see next page

Age structure

Population density: 75,9 people per sq.km.

Cities with over 1 mln. inhabitants: 5

GDP (Purchasing Power Parity) 302.679 billion Int.dollars (2010 est.) GDP per capita (PPP): 6,656 Int.dollars (2010 est.)

Population income (monthly): approx. 268 USD (real income on average 3-4 times higher)

Currency: UAH (Ukrainian Hryvna)

Quantity of mobile phones: 49 976 000

Internet penetration rate: 15,3 mln. regular users (June 2010)

0-14 years 15-64 years 65 years and over

13.8%

70.3%15.9%

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January 2011CROSS-BORDER DISTANCE SELLING IN UKRAINE: INFO DIGEST

REGISTERED POPULATION

The table below presents detailed distribution of Ukrainian population by regions. Most inhabited regions are situated mainly in the East (Dnipropetrovsk, Donetsk, Luhansk and Kharkiv regions). There is also Lviv region in Western part and Kiev region in central part.

Regions with prevailing urban population are Dnipropetrovsk, Donetsk, Zaporizhzhya, Kyiv, Luhansk, Kharkiv and Lviv (mainly Eastern and Central Ukraine). Regions where rural population prevails are Vinnytsya, Zakarpattya, Ivano-Frankivsk, Rivne, Ternopil and Chernivtsi (Western Ukraine).

As of November 1, 2010

Total urban rural

Ukraine 45 808 893 31 449 324 14 359 569

Autonomous Republic of Crimea 1 963 743 1 234 035 729 708

regions

Vinnytsya 1 643 298 814 295 829 003

Volyn 1 037 493 536 933 500 560

Dnipropetrovsk 3 339 422 2 787 621 551 801

Donetsk 4 438 035 4 017 023 421 012

Zhytomyr 1 280 672 741 304 539 368

Zakarpattya 1 247 083 463 393 783 690

Zaporizhzhya 1 802 759 1 385 925 416 834

Ivano-Frankivsk 1 380 043 596 940 783 103

Kyiv 1 717 984 1 052 893 665 091

Kirovohrad 1 011 862 626 178 385 684

Luhansk 2 294 444 1 988 963 305 481

Lviv 2 545 832 1 546 767 999 065

Mykolayiv 1 184 478 801 410 383 068

Odesa 2 388 391 1 593 847 794 544

Poltava 1 489 583 908 595 580 988

Rivne 1 152 685 551 012 601 673

Sumy 1 163 371 783 589 379 782

Ternopil 1 085 341 474 695 610 646

Kharkiv 2 757 333 2 206 628 550 705

Kherson 1 089 379 665 933 423 446

Khmelnytskiy 1 328 564 727 641 600 923

Cherkasy 1 287 235 721 464 565 771

Chernivtsi 904 423 380 799 523 624

Chernihiv 1 100 406 689 861 410 545

City of Kyiv 2 794 285 2 794 285 х

Sevastopol agglomeration 380 749 357 295 23 454

Source: www.ukrstat.gov.ua

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CHANGES IN UKRAINIAN LEGISLATION AND ECONOMICS

NATIONAL BANK OF UKRAINE: BY THE END OF THE YEAR GDP TO REACH 4 %

According to the National Bank of Ukraine (NBU) growth of actual GDP in October was 5,6 % and 4,8 % — within 10 months of 2010.

“Taking into account comparative base of 4th quarter 2010 we expect to observe certain slowdown in annual growth

measurement in November — December allowing to reach GDP growth of no less than 4% by the end of year 2010” NBU informs.

NBU experts also note that increasing of domestic consumer and investment demand caused growth acceleration of primary industries product index in autumn (9,3 % in October and 10,8 % in September). This is notably higher than monthly average growth in January-September (6,8 %).

According to data provided by regulator fourth month in a row investment activities rally due to increased governmental financing. “This is proved by increased investments in core capital (4,5 % in 3rd quarter on an annualized basis) and dynamics of building activities (growth 15,2 % in October on an annualized basis though one can observe decrease at the level of 9 % within 10 months).

Moreover, NBU informs that stable increase of population income stimulates development of domestic consumer demand. Growth of turnover on an annualized basis in October was 11,8 % in retail, 9,3 % in consumer industry, and — 4 % in services provided.

Source: www.nbu.gov.ua

NATIONAL BANK HAS LEGITIMATED USING ELECTRONIC MONEY (E-MONEY) Legalization of E-money market in Ukraine has stared. Kommersant-Ukraine informs that National Bank registered two systems owed by banks. Up to now market with annual turnover of 200 million USD operated semi-legitimately.

For the first time National Bank confirmed operational instructions of two E-money banking systems. As it was provided in December by the regulator such companies as MoneXy owed by small bank “Kontrakt” and VAB bank (system “Maksi”) received licenses for such activities. “Our system is going to

be an analogue to WebMoney and “Yandex.Money”. The difference is that electronic money would have real equivalent and they could be immediately converted in “real“ ones. This business is developed for private persons only, not B2B” said Pavel Krapivin, Board Chairman Deputy of bank “Kontrakt”. VAB bank wasn’t able to provide any comment on license receipt. So far none of two systems is actually operating.

According to its players E-money market exists in Ukraine semi-legally for at least seven years now. In 2008 NBU adopted Statement №178 according to which solely commercial banks were allowed emitting E-money. Nonetheless many of the companies continue providing such services without corresponding permissions. “About ten companies are operating with E-money. We have informed Ministry of Internal Affairs, Security Services of Ukraine and Tax Administration about this fact but so far there are no visible results” said Viktor Kravets, acting director of NBU Payment Systems and Accounting Department. For the last two years no license was issued to the bank due to strict requirements to the system and consecutive documentation.

Players of existing market assess current market volume as significant. “There is no E-money market in Ukraine officially.

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Unofficially there are 4–5 companies that are present on the market de-facto. Market volume in 2009 was estimated approximately 100 million USD equivalent in UAH, the same estimations are for USD segment. For year 2010 we expect that the market grew almost 2,5 times, as well as its main player WebMoney with the share of 80 %, said Aleksey Grishin, director of the “Internet.Money”. However WebMoney said that they are not engaged in E-money in Ukraine.

In order to occupy some part of the market banks would have to strain itself: “The market is structured. It is growing very fast and there is quite a number of competitors. To occupy any niche on the market one has to take to account all technological, legal, financial, marketing and organizational moments. NBU

requirements are rigid and I do not believe that the market could exist under such requirements. This segment implies risks and banks are usually very conservative” says Mr. Grishin.

However, not every credit institution is interested in E-money market. An alternative for E-money as bank transfers. “In order to use E-money it is not enough to have software. The market emerged when bank transfers weren’t developed enough but nowadays technologies allow using traditional money in all kinds of operations” noted Head of E-business department of one major bank. Still companies that are operating E-money unofficially informed Kommersant-Ukraine that they had already passed their requests for E-money operating licenses obtaining to NBU.

Source: Kommersant-Ukraine

INFLATION IN UKRAINE TO BE LOWER THAN 10 % FOR THE FIRST TIME SINCE 2003At the end of 2010 for the first time over many years inflation in Ukraine could be less than 10 %. Last time one could observe one digit inflation in Ukraine at the end of 2003 (8,2 %). According to the National Statistics Committee consumer prices during 11 months of 2010 grew 8,2 %. Inflation in November was 0,3%. During last 10 years there was not even once such low indicator.

According to Nikolay Azarov (Prime Minister of Ukraine) in 2011 the tendencies will be fixed: estimated goal — 8,9 %. “This is a huge achievement and it would allow us to have credit rates for production sector at the level of 10-11 %” said Prime Minister. As it is well known inflation forecast agreed with International Money Fund for 2010 is 12 %.

STATE EMPLOYMENT CENTER: RATE OF UNEMPLOYMENT IN UKRAINE IS LOWER THAN IN EUROPE

Unemployment rate in Ukraine is lower than average in EU countries. Such information was provided by State Employment Center of Ukraine.

Experts note that unemployment rate among Ukrainians aged 15–70 years calculated by ILO methodology decreased from 8,6 % of economically active population for 9 months of 2009 to 8,0 % for 9 months of 2010. Decrease of unemployment rate took place in all regions.

At the same time average level of unemployment in European Countries increased from 8,8% to 9,6%. Namely, for 9 months of 2010 unemployment rate in Poland was 9,7%, in Bulgaria — 9,9 %, Hungary — 11,2 %, Slovakia — 14,6 %, Estonia — 18,0 %, Lithuania — 18,1 %, Latvia — 19,9 %, Spain — 20,0 %.

Compared to 9 months of 2009 in 2010 number of unemployed decrease by 153,6 thousand people and currently is 1,8 million people. 71,6 % of unemployed is urban population (almost 1,3 million), the rest is — rural population (504,1 thousand). The biggest decrease of unemployed took place in Donetsk and Dnepropetrovsk regions and in Kiev.

Source: www.liga.net

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MARKET NEWS YANDEX PUBLISHED STATISTICS OF THE MOST POPULAR INTERNET SEARCH REQUESTS MADE BY UKRAINIANS

Yandex is Russian search engine that is widely used in Ukraine. Major part of search requests in Ukraine go via Yandex, not Google due to its early appearance.

Yandex published statistics of the most popular requests ac-cording to which Ukrainians type less purchasing requests than average Yandex user. Share of such requests is about 2 % in Ukraine and almost 4% of general request flow, informs TECH-NO bigmir)net.

Users from Ukrainian segment generally type in research re-quests in two languages: Ukrainian and Russian. The number of requests in different languages depends on geography: much more requests in Ukrainian come from West than from East of Ukraine. The biggest requests share in Ukrainian was received in Ternopol (33 %) and Ivano-Frankovsk (30 %) re-gions; the least number — in Crimea. Requests share in Ukrai-nian according to Yandex was only 3,7 % in Crimea and 6 % in Donetsk region.

On week days Ukrainians submit about 10 million requests in Yandex search. Users’ search activity decreases on week-ends and makes an average of 9,3 million requests. Ukrainian use on average three search request attempts while searching via

Yandex; in 53 % of requests they find what the searched for with only one request.

Majority (44 %) of Yandex requests in Ukraine consisted of two or three words in autumn 2010. The longest words searched for are chemical elements and various phobias. The longest word searched for was “гиппопотомомонстросесквип-педалиофобия” (phobia on pronouncing of long words).

According to Yandex about 13 % of search requests from Ukrainian users (in any languages) contain spelling mistakes and misprints. The same percentage is observed all over the world. The most frequent misprints are caused by users hur-rying up or typing using wrong keyboard layout. Words are missing letters or words contain incorrect letters order.

About 1/3 of Yandex requests received form Ukrainian users are unique (typed only once a day). It shows users’ diverse interests: request vary from “purchase oil heater DeLonghi 771225” to “Kiev Marusya, wise girl, the sweetest fairytale hero”. The most popular requests are submitted over 10 thousand times a day (they make about 7 % of the general requests flow).

There is a share of specific regional request among the most popular ones. Samples include “weather Lutsk”, “job position Sevastopol’”. General thematic of top requests in regions al-most exactly corresponds to the top of All-Ukrainian requests. Exception is Crimea where people looking for more informa-tion about poems and text messages (“Blok’s poems Night lan-tern street “or” text message wishing good night”).

Almost 3 % of users’ requests from Ukraine are submitted as a question (contain interrogative word); the most popular ques-tion is “how?”, the least – “where from?”.

According to earlier formed most popular search requests rat-ing of 2010 Ukrainians were mostly interested in President’s election, brothers Klychko (famous Ukrainian boxers) and bi-zarre case with wreath happened with the Ukrainian President.

Source: ТЕХНО bigmir)net.

UKRAINIAN INTERNET ADVERTISING MARKET “EARNED” 280 MILLION UAH“This year market showed results of 280 million UAH. It is quite an increase and provides great pos-sibilities for the ad agencies to involve these resources for

instruments developing and new skills obtaining. Indicative tendencies of 2010 are popularity of social networks among advertisers whereas growth rate of Ukrainian audience engag-ing in social networks except of Facebook is decreasing. This network is only at the beginning of its development in Ukraine. The advertisers became more interested in international re-sources, mainly Russian ones” says Mr. Zabolotskiy (acting di-rector of Ukrainian Internet Advertising Association).

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January 2011CROSS-BORDER DISTANCE SELLING IN UKRAINE: INFO DIGEST

Prognosis of Aleksandr Olshanskiy, Deputy President of Ukrainian Internet Association advertising market will grow because as ad-

vertising money in the Internet is the most important for its future development. It is expected to grow about 60 % annually.

Source: www.mmr.net.ua

CONTACT CENTERS: 7 CONTACT-CENTERS MAKE 70% OF MARKET VOLUME OF OUTSOURCING SERVICES

Ukrainian Direct Marketing Association together with Club “Hot Skills” conducted research of outsourcing call-centers market of Ukraine. It lasted for 6 months and is conducted for the first time in Ukraine.

Such research allows to understand more deeply processes taking places on this market and also to learn main

Ukrainian outsourcing call-centers market (OCC) is quite young. The first company was established only 15 year ago. Currently market is very active and its development rate is amazing:• more working places appear every day • new OCC are created • already existing OCC open new sites in regions • quantity of industry sectors using services of OCC grow.

Despite such activities the market itself stays closed. The very few are ready to provide any information. Number of clients, working places, agents and sometimes event OCC location is considered as commercial information. Nonetheless analyzing information from different sources and indirect indicators the researchers could manage to estimate approximate market volumes.

“During research conduction we have developed informa-tion gathering and analyzing methodic. It is very important for the estimation to compare different indirect factors which at the end give us possibilities to check data authen-ticity. We mainly oriented on information provided by com-panies’ decision makers, mass media publications, analysis of secondary sources. The results, of course, have inaccura-cies but already we have some ideas how to minimize them and to improve the further research“, — affirms Valentin Ka-lashnik, President of Ukrainian Direct Marketing Association (UDMA).

The OCC services are actively used in the following industries:

It is important to note that marketing and advertising agencies are working as intermediaries and resell OCC services increas-ing total share of industries using OCC services.

UDMA estimates that the volume of Ukrainian OCC market was $25,3 million in 2009. There are seven leading companieson the market: Teleperformance, Adelina, GlobalBilgi, Beeper, eCall, OS-Direct, Contactis. These companies provide 68,6 % of market gross income. The rest 31,4 % is filled by 35 companies.

Positive market factors are: • low costs of labour resources compared to other countries, • growing trust toward services outsourcing, • increasing demand on OCC services.

Source: www.dmdays.com.ua

«DC UKRAINE» IS GOING TO OPEN 60 SHOPS IN 2011 Company “DC Ukraine” retail chain selling cosmetics, per-fumery and personal hygiene products and pharmacy “DC”, (drogerie format) is going to open 60 shops in Ukraine in 2011. The company already opened 40 shops in 23 cities in 2010.

Currently retail chain “DС” consists of 200 shops and 28 pharmacies in 61 cities of Ukraine. First DC shop was opened in Kiev in 1997.

Closed joint-stock company “ASNOVA Holding” (Kiev) owns 35 % of “DC Ukraine”. Since 2006 the company is a member of Interna-tional Corporation ASWatson. ASWatson Corporation was estab-lished 1828. It consists of more than 8,3 thousand of retail shops in 34 countries of Western and Eastern Europe, Asia and Philippines.

Source: www.retailstudio.org

financemarketing

and advertising agencies

tele- communications

automobile business

11,5 % 9,7 % 8 % 6,2 %

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January 2011CROSS-BORDER DISTANCE SELLING IN UKRAINE: INFO DIGEST

E-COMMERCE IN UKRAINE

Currently E-commerce in Ukraine is at the start-up stage which to the large extend depends on delay of Internet penetra-tion development. Currently level of Internet penetration in Ukraine is 30 % (about 15 million of active users). Ukraine has 7000 actively operating online stores registered in Ukrainian In-ternet segment. During the economic crisis rate of online sales dropped less than in traditional retail. Due to this online stores even could slightly increase its share in general retail structure.

Main characteristics of e-commerce market in Ukraine are:• annual growth of 50–60 % within 5 year • estimated market volume of approximately 400–500 million USD• great development potential due to many promising niches which either extremely fragmented or almost not filled in.

Ukrainian customers appreciate advantages of online purchas-ing. 71 % of respondents declared they had experience of online purchasing, 66 % thereof purchased online within last 3–6 months.

Peculiarity of Ukrainian online sales is significance of offline ac-tivities: choosing product 63% of Ukrainians prefer to call sell-er’s contact-center. The reasons for such behavior vary. 35 % of respondents stated that they prefer purely live communication with online store employee because:

• presented information on products/services is insufficient for mak-ing a decision to buy (60%),• lack of information about product availability (51 %)• “feedback” receipt time after order placement online is too long (44%).

The most popular product categories bought online among Ukrainians are computers and office gadgets (including com-ponent parts), household appliances and books.

The other categories of products bought online are:

Building prognoses for online selling market development Ap-pleton Mayer expects the quantity of online platforms to grow (due to low entering costs); main players to soon understand they have to be distinguished among others; shift of online busi-ness underst`anding to come. Earlier online businesses were working on operations and logistics. Now they have to under-stand that customers don’t “see” neither big warehouse nor up-to-date call-center unless they make an order. So in order to attract new ones in next years main efforts should be put on building perfect companies credit and effective marketing.

FYI: There are no amazon, e-bay and other familiar players on the Ukrainian market.

Source: Appleton Mayer

In next digest you will find:

• Changes in Ukrainian legislation and economics

• Market news

• Article on Entering Ukrainian market via consignment

• First feedback of new Personal Data Protection Law (came into force on January 1st, 2011)

Please feel free to write us at distance_selling_in_UA@uadm.com.ua if you want to decline or recommend digest to your colleagues.

© UADM, 2011

mobile phone and

its accessories

27 % 22 % 16 % 12 %

online tickets booking

and purchasing

souvenir- and giftware

food and

beverages

11 % 9 % 9 % 8 %

goods for kids

multimedia products

stationary photo- and audio equipment