How is the deepening economic and political crisis in Russia affecting UK retailers?
Moscow may be 1,800 miles away, but what happens in the Russian capital can - and does - have an impact on retailers in the UK. The Russian economy has come under severe pressure following the annexation of Crimea on March 21, 2014, which provoked the European Union and US government to impose sanctions restricting access to international financial markets.
In December the rouble plunged to its lowest point for 16 years, down more than 50% against the US dollar. By January 27, the Russian currency had slid to a six-week low after global ratings service Standard & Poor’s cut the country’s credit rating to junk for the first time in a decade. The World Bank forecasts near stagnation for Russia’s economy during 2015-2016, with GDP expected to grow just 0.3% in 2015, compared with 3.4% in 2012.
The economic dip hit Russian footfall to January’s European fashion shows. The Russian Fashion Council cancelled its country-sponsored stand at menswear fair Pitti Uomo (January 13-16), blaming the rapid devaluation of the rouble, while Russian visitors fell 25% on January 2014. No Russian exhibitors took part in Panorama in Berlin (January 19-21), with only 97 buyers from the country in attendance, half the number expected.
Russians are travelling less internationally. From annual growth of 11% for the past decade, the European Travel Commission expects Russian outbound travel to drop 10% in 2015.
Tax-free shopping provider Global Blue found UK sales to Russian consumers declined 28% during 2014. In December alone Russian spend fell 45% year on year, with Russian consumers making 43% fewer transactions, reports Global Blue UK and Ireland country manager Gordon Clark. In December Russian spend per average transaction in the UK fell 4% to £838. In 2014, Russia also dropped out of the top five to become the seventh highest-spending nationality in the UK behind China, Kuwait, Saudi Arabia, Qatar, the UAE and Nigeria.
Harvey Nichols told Drapers that, while it had seen a slowdown in Russian visitors, its Knightsbridge flagship store remains an attractive destination for them. Clark believes Russians will return to the UK when the economy, exchange rate and consumer confidence improve, but in fewer numbers.
The retail landscape is rocky for UK retailers in Russia. River Island was forced to close its 10 stores there during November and December when joint venture partner Maratex ceased trading due to a “loss of business in Russia”. Maratex had previously owned 50% of River Island’s Russian business.
A River Island spokeswoman said it would “maintain its ecommerce business in Russia and its wholesale business with partner La Moda, as well as selling through Asos.com in Russia”. River Island ships to Russia, but does not have a Russian-language site, so customers must buy from its EU or UK sites.
Marks & Spencer blamed worsening currency and macro-economic issues in its Middle East and Russia franchise region for a 5.8% drop in international business during the third quarter of 2014/15. The company has 40 franchise stores in Russia operated by its partner Fiba Group, mostly in Moscow and St Petersburg, but also Ekaterinburg and Kazan. The retailer would not comment on its future plans.
Adidas’s 2014 income was hit by goodwill impairment losses of €80m (£60.4m) due to the rouble’s significant deterioration. The sportswear business closed 27 of its 1,100 Russian stores in June and plans to open just 30 in the country during 2015.
Despite identifying Russia as a major international target in June, New Look put its expansion plans on hold in August, describing the country as a “poor” market given the political tensions.
But not all retailers are feeling the pinch. Russia is one of the biggest markets for Italian hosiery retailer Calzedonia, which added 70 shops to its existing 400 there in 2014. More stores are slated for 2015.
This year Spanish retailer Mango will add an unconfirmed number to its portfolio of 164 stores.
According to expansion director for Russia and CIS Anikó Kostyál, consumers are spending cautiously but Russia is still important: “Our objective is to develop the brand in Russia. We entered in 1999 and our product has been very well accepted.”
Russia director of the Russo-British Chamber of Commerce Alan Thompson argues that long-term investment in infrastructure means this is the wrong time to pull out: “The consumer market in Russia is still enormous. Long-term investments are coming on stream, like large shopping centres with cheap rents. If you can manage the risks there are still opportunities.”
Russian retail may have growth potential, but there is a long road to travel. With the World Bank predicting weak growth for the second year in a row, high inflation and depressed consumer demand, the economic situation remains tough.