Germany's Rocket Internet faces daunting logistical challenges and rising local competition from Lagos to Laos as it races to capture customers in emerging markets before e-commerce titans Amazon and Alibaba can catch up.
That spells mounting losses as the venture capital company gears up to launch an initial public offering (IPO) this month that will help provide the war chest it needs to build and defend what it hopes will be the largest online shopping empire outside the United States and China.
Chief Executive Oliver Samwer, who founded Rocket Internet in 2007 with his brothers Alexander and Marc, sees huge opportunities for digital businesses in emerging markets, noting that the cities with the most active Facebook users are Bangkok, Jakarta and Istanbul - with no U.S. city in the top 10.
"We like to collect countries, small markets that together can create a giant," he told a retail conference in June.
But while Rocket Internet has launched about 70 companies - ranging from online fashion to food delivery and marketplaces for real estate - in more than 100 countries, many in the last couple of years, it is still far from being a giant.
Rocket's top eight e-commerce ventures in emerging markets - including Lamoda in Russia, Dafiti in Brazil and Zalora in Southeast Asia - together made sales of 539 million euros ($708 million) in 2013 and an operating loss of 351 million, according to figures from major Swedish investor AB Kinnevik.
That compares with the $2.54 billion revenue that 15-year-old Chinese e-commerce juggernaut Alibaba reported for the quarter ended June 30. Alibaba's net income attributable to ordinary shareholders nearly tripled to $1.99 billion.
The Rocket businesses are growing fast - revenue was up 74 percent in 2013 - and they have succeeded in attracting over 1 billion euros in capital from a raft of high-profile investors - most recently German service provider United Internet AG and Philippine Long Distance Telephone Company.
But they face a rocky road, not least due to competition from Alibaba itself as the Chinese firm - soon to be bolstered by funds from a bumper listing - looks for new opportunities outside its home market.
The Samwer brothers have gained notoriety for cloning businesses pioneered in Silicon Valley in new markets - most notably German online auction site Alando which they sold to eBay, the site it was modelled on; and Amazon Zappos-copy Zalando, now Europe's biggest online fashion site which is on track to list soon.
Rocket's strategy is to identify markets and niches where big players have yet to get established, cutting its losses if the competitive environment turns out to be too fierce, as it did in 2012 when it closed down operations in Turkey.
It says it can launch a company within 100 days by drawing on expertise in areas like legal, finance, communications, marketing and business intelligence at its Berlin head office, helping it start an average of three to six new firms a year.
It aims for its ventures to be operationally independent within another 100 days - but can pull the plug if the business is failing, as they have done in about 20 percent of cases.
"Beat them on branding"
In Russia and Brazil, home to the two Rocket businesses with the highest sales in 2013, Alibaba's AliExpress is already a force to be reckoned with: it is No. 2 shopping site in Brazil behind local firm MercardoLivre and no. 2 in Russia behind Avito, according to web traffic measurement firm SimilarWeb.
In those markets, Rocket has sought to focus on fashion with its Dafiti and Lamoda sites rather than the general merchandise of AliExpress. Dafiti is No. 16 overall in e-commerce in Brazil, but is No. 1 in online fashion. In Russia, Lamoda is at No. 15 - but in fashion, it is No. 2 behind local rival Wildberries.
In Southeast Asia, Rocket has had a freer run to do both fashion with Zalora and general wares with Lazada, although Alibaba has positioned itself to expand in the region by taking a stake in logistics firm Singapore Post.
"They are smart to go into markets where most other big players don't have a footprint and (elsewhere) round out the offers of Alibaba and Amazon," said Forrester e-commerce research director Zia Wigder.
"In Brazil there are lots of companies selling consumer electronics, but apparel is much less well penetrated."
Rocket has the top e-commerce sites in terms of overall rankings in Indonesia, the Philippines and Thailand, while its Jabong fashion site ranks No. 2 among all e-commerce sites in India. In Malaysia, Lazada is No. 3 shopping site and Zalora is No. 1 in fashion, according to SimilarWeb measurements.
"You cannot think of beating the Chinese on cash, because they have so much of it," Giulio Xiloyannis, managing director of Zalora Malaysia, told Reuters. "You beat them on branding and product quality."
To that end, the Rocket online fashion stores are investing in building their own fashion labels and spending on advertising, a lesson learnt from Zalando, which gained widespread recognition in Europe with its "scream for joy" slogan and ads showing delighted shoppers ripping open parcels.
Rocket is also spending heavily on building warehouses and developing delivery networks, particularly in countries like Vietnam, Thailand and Nigeria with poor local infrastructure.
The firm announced plans on Thursday to bring together its five emerging market fashion brands to create a company worth 2.7 billion euros ($3.6 billion) and simplify its structure before a likely stock market listing.
It wants the five to collaborate on sourcing and share expertise in areas such as building delivery networks, creating their own fashion labels and developing mobile applications.
Online fashion store Lamoda in Russia is leading the way in many of those areas. It expects to have over 1,000 delivery staff and more than 500 vehicles by the end of 2014 and over 2,000 staff by 2015 as it seeks to reach more clients in such a vast country. It also wants to distinguish itself by offering a free try-on service at the door.
"It has been a very tough challenge here in Russia to create great customer experience, but this try-on concept, this interaction with the customer at the door ... creates a very high barrier for anybody who wants to offer the same level of service," said Lamoda Chief Executive Nils Tonsen.
"E-commerce penetration in Russia should be higher than in the U.S. because offline retail infrastructure in Russia is much less developed," he said. "This is something that gives you so much potential going forward."
However, that potential is attracting rivals like Wildberries, which boasts the top downloaded iPhone app in the country, according to SimilarWeb.
Krzysztof Kaczmarek, a Manila-based e-commerce consultant, sees problems with the standard Rocket delivery model, particularly cash-on-delivery orders.
In many markets where Rocket firms operate, credit-card ownership is rare and shoppers prefer to pay in cash on the doorstep. That helps explain why e-commerce has been slow to take off in Latin America, apart from Brazil where cards are more common and online sales have reached $12 billion a year.
"It's very easy to order anything from the online store and then to refuse the payment. If it happens, the merchant has to cover both the shipment and the unsuccessful delivery costs," Kaczmarek said. "It ... requires exceptional processes to control the size of the stock and the management of new orders."
Rocket Internet spokesman Andreas Winiarski says the company sees its cash-on-delivery offer as a key competitive advantage. "Cash is reconciled on a daily basis when sales representatives return to the transit warehouse in the evening. Ultimately, fraud occurs with credit cards and not cash," he said.
Xiloyannis of Zalora, who is a former investment banker and used to work in Europe for Rocket Internet, also played down cost concerns.
"Southeast Asia is wonderful for delivering from a cost perspective: it's a fraction literally of the cost," he said, adding he is particularly optimistic for fashion profits.
Xiloyannis said it took Amazon 10 years to break even. "When I look at Zalando, I see a venture which has done it in half the time - I see the Rocket companies performing faster than the first pioneers of e-commerce in terms of breaking even."
© Thomson Reuters 2014