Online retailer from Kazakhstan is developing roots in the U.S.

This year American customers have gotten one more online grocery shopping site to choose from. The new site dubbed Pinemelon is an ambitious, new project launched by Alexey Lee and his team from Kazakhstan’s online grocery store Arbuz.kz. Now they are ready to share with the Kursiv edition what their experience has been like so far.

Arbuz.kz is a well-known shopping site in Kazakhstan. Many from the country’s business community are used to comparing Arbuz.kz with a barbell because the development of this business was as hard as lifting heavy weights. However, Lee and his team have become successful because they managed to start from little and add weights bit by bit. Given that Arbuz.kz wasn’t the first startup for Lee (he was a co-founder in Ticketon and Aviata), he knew what he was going to do. 

Lee joined Arbuz.kz in 2017 as a high-ranking employee but decided to buy the company for $50,000 the next year. Later on, he developed the company with the help of his own money and venture investments.

Currently, Arbuz.kz has more than 20,000 clients with 2,000-3,000 orders a day and $2.1 million in revenue per month. The online shopping site gives jobs to 600 people and has been developing its business in Almaty and Astana where it runs two large warehouses with more than 10,000 different products in each of them.

Alexey Lee does not doubt that Arbuz.kz is a flagship company in the e-commerce sector in Kazakhstan. On the other hand, Pinemelon is just a startup. «In the U.S. we have started from scratch. Now we need to think in the same way as we thought years ago,» he noted.

From Medeu to Denver

The city of Denver, which Pinemelon chose in April 2022 as a place to start its business, in some ways looks like Almaty. It is located between the Rocky Mountains and South Platte River Valley and sits at an altitude of 1,609 meters above sea level (at the same level as the high-altitude skating complex Medeu). The climate here is very sunny. Denver is quite a big city with 710,000 residents proper and more than three million people in the Denver–Aurora–Lakewood agglomeration.

Initially, Arbuz.kz wanted to open a new business in both Europe and the U.S. However, when the company faced difficulties in Belgium, it decided to focus on the U.S. market. «Even though this is the most crowded and competitive market in the world, it’s awesome given its capacity of capital and consumers,» Lee said.

To make the dream of international expansion come true, Lee attracted about $7 million of investments.

It took some time for Arbuz to find the best location to start. In the first stage, there were 350 American cities in consideration. Since the company wanted to use just one big fulfillment center, it was looking for a city of 2-3 million people. They tried to consider everything they could: climate, the number of families, how many children those families have, the average income and the dynamic of population growth.

Also, Arbuz wanted to hire the best team of executives with expertise in the industry and did it over May-August 2021. According to Lee, they didn’t appeal to any recruiting agencies and used only Linkedin. As a result, they not only saved tens of thousands of dollars on recruiting but also received deep analysis of the market. Chris Franklin, who has 15 years of work experience in a grocery chain business, has become the general manager of Pinemelon. The company’s head of sales had also worked in the grocery industry for 20 years.

«All our executives are locals with huge professional experience and knowledge of the market. In fact, we tried just to buy this expertise. So far I have mixed emotions because even though they all worked in grocery chains, they never worked in startups. Sometimes they weren’t as flexible as we wanted. But, it’s always hard to establish a new team,» said Lee.

Finding a warehouse

In August 2021, Alexey Lee, Arman Suleymenov, Larissa Park and the technical director from Arbuz.kz arrived in Denver to find a building for its fulfillment center. Given that Denver has been going through an e-commerce boom for years, the team hadn’t found anything but an old building of 3,000 square meters in the industrial part of the city. Before Pinemelon, this building was used as storage for carpets, so serious repair was needed.

«Loads of permissions for design and equipment were required before we were able to start converting the building into a food product fulfillment center. Different inspections came to visit us. Eventually, after three rejections we got our final permission on December 31. Luckily, during the process we managed to find food suppliers,» said Arman Suleymenov, a former adviser in Pinemelon.

The process of searching for the building and its following reconstruction took nine months. Localization of food products took six months. For comparison, when Arbuz.kz started its business in Almaty, it took just three months.

Pinemelon’s first sales

Over the period from June 2021 to April 2022, Pinemelon’s team was busy preparing an assortment of goods, signing agreements with suppliers, stocking goods and hiring staff. Currently, there are 50 employees in Pinemelon. The official launch was scheduled on April 12, although the company got its permission to import about 5,000 items of goods only on April 8.

In order to raise brand awareness, Kazakhstani businessmen used almost everything: ads on billboards, radio, sponsorships, leaflets, social networks and targeted ads online. At this stage, the company was assisted by a local PR agency which provided the company with publicity on television and in business newspapers.

«References in media helped us gain the trust of consumers. We continue to make experiments every day because we want to use only the best tools,» said Larissa Park, executive director of Pinemelon. She also noted that even though the price of these marketing services is quite high in the U.S., the average bill for shopping here is also higher.

The aspirational middle class is the key target audience for the company. These people cannot afford to buy a big house in Los Angeles and eat natural healthy food every day but they would love to. Arbuz.kz offers its services to the same category of consumers in Almaty and Astana. They are young professionals who are pursuing their careers.

On April 12, right after the launch, Pinemelon started to receive its first orders. «Our biggest fear was to announce the official start of sales and receive no sales. But we have received orders and we are happy,» says Lee.

What is the difference between e-commerce in Kazakhstan and the U.S.

In the U.S., Pinemelon promotes itself as a local online supermarket where consumers can find organic food from local farmers, even though it sells goods produced in different regions as well. So far, the company’s assortment includes more than 7,000 stock-keeping units including items from 20 different farms.

«As you know demand always determines supply. In the U.S. we see a huge demand for food products produced by local farms. People go to the farmers’ market every weekend. We try to make a delivery on the same day as a farmer uploads his goods to the marketplace. We are going to take 1 or 2% of this market,» explained Lee.

Both Arbuz and Pinemelon rely on the same business model, although their assortment is quite different. «These two markets are different from a behavior point of view. In America, human labor is much more expensive and bills are higher. If you are going to order a meal from a restaurant in the U.S. you have to be ready to pay $50-100 on average. That’s why Americans aren’t prone to order a meal online unlike people in Kazakhstan. But in general, there aren’t any big differences in the business model, because both businesses were established by our team. The only exception is the different assortment and our approach to delivery vehicles. In the U.S. we prefer to rent those vehicles while in Kazakhstan we lease them,» he said.

Money for growth

Pinemelon has been growing by 25% each month. For instance, in August, the service reported only 1,000 repeat customers, while in October it reported 1,500 such customers. According to Lee, in November the startup reported $150,000 in revenue.

Currently, Pinemelon is looking for new easy-to-scale channels for attracting new clients and is preparing for a series A round. The company wants to attract $10 million in order to reach a breakeven point by 2023. At the same time, Lee is thinking of other options. «Even though I am focusing on attracting new investments, I keep in mind other scenarios as well. In our industry, we have to grow constantly and when we grow we need money all the time. This is a big problem but we will solve it sooner or later. If we won’t grow we can lose clients and will be forced to either change or close the business. We choose the former,» he said.

Arbuz.kz isn’t going to close either. «There are some rumors in the market. Some say we are going to close. But it’s ridiculous given our monthly revenue of more than $2 million, a 79-fold growth. Indeed, like any other startup, we face difficulties from time to time. Some people quit the company and sometimes we delay payments to suppliers. However, it’s simply not true that we are going to close,» underlined Lee.