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Naspers $1.2bn Russia classifieds bet pays off in crisis

Economic crisis sees number of consumer-to-consumer deals surge.

Naspers spent $1.2 billion to gain control of Russia’s largest classifieds website last year. That hefty bet in an economy mired in recession is paying off as consumers buy more second-hand clothes, pets or used cars on Avito.ru, boosting the site’s sales by 55% in 2015.

Valued at $2.4 billion in the Naspers deal, Avito would be Russia’s third-largest internet company by capitalisation if it were listed after social-networks operator Mail.ru Group and search engine Yandex. Its 2015 sales grew the fastest of the three as Russia’s crude-price induced economic woes offers support for the business model.

“The number of consumer-to-consumer deals is surging during an economic crisis — we prefer to sell something that we would’ve normally thrown out or to buy a second-hand item instead of a new one,” said Fedor Virin, a partner at Moscow-based researcher Data Insight. 

Avito’s growth lends support to Naspers chairman Koos Bekker, who’s scouring the globe to prove the South African company is more than a giant venture-capital fund built on a single fortuitous investment. Naspers is best known for its $32 million 2001 bet on then-obscure Chinese Web company Tencent Holdings. That stake is worth about $60 billion today, more than Naspers’ own market value, indicating that investors accord little or no value to its other businesses, which include Africa’s largest pay-TV network and investments in dozens of startups.

Tencent represented about two-thirds of Naspers’ R73.1 billion ($4.7 billion) in total revenue in the year ended March last year. But while Tencent accounted for earnings before interest, taxes, depreciation and amortisation of R19.8 billion, Naspers’ e-commerce operations lost R5.6 billion.

The number of listings at Avito has increased 43% since March 2014 when the ruble started a near-50% plunge against the US dollar as geopolitical tensions over Ukraine and lower oil prices sent the Russian economy into a tailspin. Women’s clothing and used iPhones were the items most in demand on Avito recently, according to the company. In the quarter ended December 2015, Avito’s sales rose 70% to 2.1 billion rubles ($30 million). Adjusted Ebitda rose 86% to 908 million rubles.

Jonas Nordlander and Filip Engelbert founded Avito in 2007 as a clone of EBay. They quickly switched the business model to one more similar to classified advertisements website Craigslist after discovering that Russians, at least at the time, didn’t like auctions or making online payments. Avito has since become a one-stop site for second-hand items, house listings, used cars and online jobs. It also helps connect local service providers such as painters, plumbers and therapists with customers.

Fewer Players

“Now we have these five arms, perhaps six because we’re also challenging the search engines on selling traffic,” Nordlander said in an interview in Moscow. “And I see a lot of future potential. That’s what’s good about being here compared to being in America, where there are a few more people to play this game.”

Avito has expanded despite local competition, and partly by acquisitions. Naspers in 2013 merged its Russian classifieds operations into larger rival Avito in exchange for a minority stake and last year boosted its ownership to just under 68%. Vostok New Ventures kept its 13.3%, while Nordlander and Engelbert own a combined 10% and private-equity firm Baring Vostok controls part of the rest.

Naspers shares rose 0.9% to R2 013 at 5:07pm in Johannesburg. The south African company also owns a 29% stake in Mail.ru, which runs Russian Facebook rival VK.com.

With TV ads asking Russians “How much is your mess worth?” Avito has tried to get consumers accustomed to the whole idea of garage sales and has sought to raise brand awareness across the country of about 140 million. While Avito charged users who wanted to promote their adds to the top of the page starting in 2012, basic listings were free until last year.

Market Leader

It’s an approach that has allowed Avito to pass the former market leader Iz ruk v ruki, which started life as a traditional classifieds newspaper and then turned online, according to Virin.

Avito had 30 million unique visitors in January, according to researcher TNS. To better monetise this audience, the site has gradually started introducing listing fees. This has helped boost revenue and also solved a problem with crafty users who posted the same or slightly amended classifieds over and over again to stay on top of searches.

Avito’s new verticals, including cars and real-estate, have proved successful in Russia’s economic crisis. The company faces stronger competitors in these newer categories. Yandex backs a car site called Auto.ru and online real-estate service Cian.ru is owned by banking billionaires Alexey and Dmitry Ananiev. 

“They are still significant players, but by just changing the game slightly, we were able to be part of a growing market,” Nordlander said.

© 2016 Bloomberg

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