Since the past few years, Russia has been facing challenges such as lower oil prices, the dwindling rubble and international sanctions for annexation of Crimea, resulting in real incomes falling since 2014, and poverty in the country is expected to return to 2007 levels this year. But the Saint Petersburg Economic Forum, a three-day event aiming to help Russian businesses connect with the rest of the world, provided the much needed relief to the challenge-stricken Russian economy. In the meanwhile, apparel and footwear specialist retailers accounted for an 11 per cent share of value sales in non-grocery specialists in Russia in 2015, and it was one of the most dynamic channels for growth today.
According to the latest figures, the overall economic situation in Russia is still bleak but not as bad as it has been in recent years, last year Russia’s economy shrank 3.7 per cent. The World Bank forecasts that this year it would experience 1.9 per cent to 0.3 contraction (Russia’s Finance Minister). Last week, Russia’s central bank lowered interest rates for the first time since July, predicting that inflation will fall and growth rates could turn positive in the second half of the year. This is somehow affecting the luxury goods segment positively as has been reported in Bain & Company’s luxury report highlighting the improving situation in Russia’s luxury market.
Experts note that most luxury players have remained in the Russian market in spite of crisis and there is a sense of relief amongst these brands, resulting in more positive investments by brands. Also, a few retailers are taking advantage of Russia’s weak economy to score prestigious retail space at cheap prices. This year, brands such as Fendi, Valentino, Bulgari have opened new stores in Moscow, with Bulgari announcing plans to open more stores in Russia. The flagship jewellery brand, Bulgari, plans to open up to four more stores in Russia over the next 10 years, betting on the long-term prospects of its luxury market. It is the second luxury brand to signal its confidence in the Russian market after French luxury group Hermès tripled the selling space of one of its two Moscow shops in December last year. Louis Vuitton also plans to open a second store in Saint Petersburg, while Eres has also opened a flagship store earlier this year.
Currently, more than 50 per cent of the world’s leading retail chains operate in Russia, which is amongst the exclusive group of nations that command attention from global merchandisers, including the UK, the US, the UAE and China. As per HKTDC Research, this a positive development for the country’s beleaguered economy apart from a total of 52 global retail chains launching their first store in Russia in 2015. So what is changing for Russia?
Tourism brings in hope from China
As per the Russian tourism department, the flow of Chinese tourists into the country increased by 67 per cent in 2015, mostly to Moscow and Saint Petersburg, which together comprise 74 per cent of Russia’s luxury market. Apart from this the Yuan to Rubble exchange rate has also increased, making Chinese prices for luxury goods goods 70 per cent higher in China than in Europe (including Russia). Due to Russia’s proximity to China, it is becoming cheaper to visit Russia than other European shopping destinations. As per statistics, 15-17 per cent of customers in DLT, a luxury department store in Saint Petersburg, are Chinese and at Moscow’s high-end department store TSUM, purchases by Chinese tourists have increased four-fold in the last month.
According to CBRE, the world’s leading commercial property and real estate services adviser, 11 international brands have abandoned the Russian market in the entire period of 2014-15. The mid-priced companies that have already headed for the exit include Chevignon, Gerry Webber, and Sepalla, as well as representatives of the cheap mass-market segment – Esprit, New Look, OVS, River Island and Wendy’s. Among the new arrivals are budget brands such as Cortefiel, Superdry and Violetta by Mango. Meanwhile, H&M, Monki, Uniqlo and Forever 21 are doing well in the market.
Russian consumer spending at home
Due to weak rubble, the Russians are travelling less and also spending less in historically relevant markets such as Italy. According to Bain & Company, in 2015, Russians cut their European luxury spending by 37 per cent. This is influencing various luxury brands to do market price corrections to encourage the consumers to buy at home. Luxury brands such as Chanel and Patek Phillipe are fixing price differentials worldwide, giving Russians an incentive to buy at home.
Russian market for fashion
Though Russia’s high-end fashion market is stable, maintaining a 10 per cent share of Russia’s overall apparel market from 2014 to 2016, the disposal income for most Russians has dropped from 30 to 50 per cent with the middle-class being badly affected and the mid-market brands rapidly losing their market share. According to Fashion Consulting Group, the middle segment will shrink to 20-25 per cent of the overall apparel market in 2016, down from 39 per cent in 2014. So brands need to change their strategy radically to compete in Russia. Nonetheless, a few street brands are doing well in Russia such as the French Label Kiabi, which opened its largest Russian flagship store in March and plans to open six more stores, this year. Also, H&M has hugely invested in Russia by rolling out 105 stores, making it the brand’s third largest market for store expansion in 2015. In the first three months of 2016, H&M’s sales in Russia have increased by 40 per cent.
Popular destinations for international retailers
Apart from Moscow, retailers are looking at other popular cities such as St. Petersburg, Yekaterinburg, Nizhny Novgorod and Samara for store openings. These cities are specifically home to many international standard shopping malls with significant number of international retailers such as Ikea (Sweden), OBI (Germany) and Auchan (France). Apart from this, many retailers have made their debut in Russia in 2015 such as Tsumori Chiasto, MCS, Malo, Nelva and Henry Cotton’s out of which 25 per cent came from Italy.
Local brands still being fed by production from Asia…
The Russian clothing industry, which was once highly dependent on imports, mostly from China, has in the last few years started giving more space in the market for local manufacturers, especially in the lower priced segment as the labour cost has significantly reduced in Russia. Another important development post China becoming expensive is that countries such as India, Bangladesh, Pakistan, and to a lesser extent Vietnam, Cambodia, Indonesia, Laos and Korea have also caught the attention of the Russian retailers looking for ‘value for price’ products. There are two major factors that make garment imports to Russia from these countries more competitive than from China, the prices and the lower import duties imposed by the Russian Government.
“Speaking of import growth in 2013-14, one may see an obvious trend. The negative dynamics of China, Italy and Turkey and growing figures for Vietnam, India and Bangladesh,” remarked Anna Lebsak-Kleimans, CEO, Fashion Consulting Group in a recent interview to the Russian media. Some of the leading clothing retailers in Russia are Mercury, Bosco di Ciliegi, Centrobuv and interestingly, some domestic brands such as Sportmaster, SELA and Concept Group are expanding and even eyeing the lucrative markets of China, India and ASEAN, as western markets pose challenges due to the economic and political conditions.
In such a scenario, now more Russian brands are opting for combined production. They purchase fabrics and accessories abroad and sew in Russia where the cost of sewing is cheaper. Since consumers value not only cheap prices, but also overall impression and quality of the apparel, factors like modern materials and new processing technologies become important.
This is the area where Russian manufacturers cannot compete at the moment. “We are working with Russian market for the last eight years, but it has really picked up post 2012, when Russia became a part of the WTO,” says Nitesh Kumar Sogani of M.N. Enterprises. The company has 7-8 regular buyers in Russia and Ukraine and they claim to be doing really well there. However, he does add a note of caution, “There are all kinds of buyers in Russia and the best way is to work through Indian agents who have deep roots there, they know the Russian systems, language and are responsible for all your risks, even for payments.”
Despite the Russian market sending mixed signals of improvement for retailers, experts believe this is the ideal time for new brands and overseas retailers to enter the Russian market. Though the currency devaluation is eating into the margins of many retailers, but still luxury brands are seeing a surge in sales looking to either expand or open more stores as its ever loyal customers – the rich Russians, are leading the way and spending more.