With growing political and economic uncertainty in Russia, should retailers still gamble on expanding there?
Whether standing in Red Square gazing up at the GUM luxury shopping centre or visiting the three-storey Okhotny Ryad underground mall just 200 metres away, packed with high street names and fashionable Muscovites, it’s clear why Russia - like China - has dominated international retailers’ expansion plans in recent years.
But the vast country has more recently dominated news headlines, as the political and economic ramifications of its annexation of Crimea and its involvement in Ukraine continue to unfold.
Western economic sanctions were first imposed in March and Russia has responded with retaliatory import restrictions, even mooting limits on “certain types of clothes” (although this is not currently expected). Customs duties are set to become increasingly complex and costly in November, and question marks hang over future consumer spending.
While this dynamic, affluent retail market has always been one of the most difficult to crack, future prospects and prosperity are now more uncertain. This has divided the retail market: could expansion into Russia be a dicey game of roulette, or could it boost retailers’ sales through long-term exposure to a vast, fashion-hungry new audience?
For the likes of New Look and Adidas, Russia’s ambiguous future prompted a temporary halt in expansion this summer. For the more bullish, like Mango and Calzedonia, it is business as usual - albeit cautiously - as the potential is too big to ignore.
Speaking to Drapers in Moscow, Mango’s expansion director for the region, Anikó Kostyál, explains: “It’s a huge market. There are 13 cities that have more than 1 million people living there and Russia is a very fashion-oriented market.” The Spanish retailer entered Russia in 1999 and has 170 shops, of which 40% are company-owned. It plans to open 30 to 35 this year and a similar number next year.
Conversely, when Drapers asks German footwear brand Salamander about its Russian expansion plans, its general director for the country, Julij Kulikov, says: “Now is not the right moment to ask this question because of the political and economic situation.” He adds that it is instead focused on “preserving what we have”. It trades from 40 standalone and 40 franchise stores in Russia, and wholesales in around 200 stores.
The headline economic numbers for Russia make for uncomfortable reading. Last month, the World Bank published a report (see box) stating that “Russia’s economy is stagnating” and political and economic uncertainty “is casting a shadow on Russia’s medium-term prospects”. It predicted that should tensions and sanctions increase it could “send business and consumer confidence into another downward spiral, further reducing domestic demand”, ultimately pushing the nation into a low-level recession.
But as things stand, retail demand offers a glimmer of hope. The 144 million population has an annual purchasing power of RUB 206,882 (£3,190 at current exchange rates) per capita and their appetite for more product continues to build.
Maureen Hinton, global research director at retail consultancy Conlumino, describes the country as “a big opportunity for western retailers” but adds that they “have to be careful at the moment as it’s quite a volatile situation”. Conlumino’s research shows Russia’s expenditure on retail in 2013 was €435bn (£343bn) and is projected to grow 22% to €529bn (£417bn) in 2018. Ecommerce is also expanding rapidly, comprising 2% of sales last year, with this set to double by 2018.
‘There’s a trend towards spending a little less, but there’s still a very good premium available for British products’
Alan Thompson, Russia director for the Russo-British Chamber of Commerce
Russian retail is predominantly concentrated in shopping centres and large department stores, due to the extreme climate. When Drapers visited Moscow last month, malls including Ikea Shopping Centres Russia’s Mega Khimki and premium department stores like TsUM were teeming with domestic shoppers clutching shopping bags. In the 12 months to the end of August, Ikea watched footfall rise 4% to more than 270 million across its 14 Russian malls, while its tenants’ sales climbed 6%.
Moscow-based Alan Thompson, Russia director for the Russo-British Chamber of Commerce, which supports UK companies entering Russia, tells Drapers most retailers already in the country know trading comes with complications and believe “they can weather the storm”. For new entrants, he says opportunities are still plentiful as most international brands have limited penetration, having focused on Moscow and St Petersburg at the expense of affluent cities further afield, such as Kazan (450 miles east of Moscow) and Novosibirsk (1,745 miles east).
“There’s a big population out here still wanting to consume,” he says. “Many travel to the UK to buy clothes, but at the moment Russians aren’t looking to travel as much. There’s a trend towards spending a little bit less, but you still see huge capital consumerism within the middle class, particularly in Moscow and St Petersburg. Spending in Russia is still quite immature as people spend all their salary on what they want rather than investing for the longer term, and retailers can play to that behaviour.”
“There’s still a very good premium available for good-quality British products,” he adds.
This is supported by a walk around GUM, where shoemaker Barker proudly displays its British heritage through windows displaying the Union Jack, stating ‘London Barker’, while Monsoon and Accessorize proclaim their product is ‘Designed in London’. Burberry’s signature check - whether genuine or fake - is ubiquitous.
Thompson warns that “any company coming in will have to think long and hard about how they enter the market now given the financial backdrop”, yet “there’s still the perception this place will grow and develop its retail market”.
Russia manufactures very little clothing itself and, outside of big names like Bosco, Kira Plastinina and Sportsmaster, there are few large Russian brands or retailers. This means international names dominate, although due to the complexities of trading here many, such as Debenhams and Marks & Spencer, do so through franchise partners.
Ikea’s general director in Russia, Armin Michaely, explains around 70% of retailers across his malls are international, including 31 British companies like Karen Millen, New Look, Marks & Spencer and Topshop. And proposed future mall development is extensive due to low shop space to population ratios (see box). Ikea alone will invest €2bn (£1.6bn) in the next couple of years to build the Mega Mytischi scheme in Moscow and a series of extensions. It claims to have an international tenant waiting list and an average vacancy rate of just 0.9%.
With official footfall figures up this year, Michaely feels “quite confident” but adds: “Last month was a bit weaker but not to the extent that we have to be really concerned.”
To help British brands overcome their nerves, he wants to bring them together with those already trading in Russia, who can testify to the benefits.
Those forging ahead with Russian launches include US women’s young fashion retailer Forever 21, opening two stores in Moscow in November, Inditex’s women’s fast-fashion brand Lefties, which opened in August in three centres across Moscow and St Petersburg, and womenswear brand Violeta by Mango, which launched in Kazan in April.
Mango’s Kostyál explains that the retailer initially focused its expansion on the core cities, but as its roll-out progresses it is now targeting smaller cities with populations of 100,000 to 300,000, such as Obninsk (southwest of Moscow) and Petrozavodsk (northwest Russia). Stores have a “similar level of profitability” compared with western Europe, she adds, but there are extra costs to bear in mind. Without providing figures, she says rents in Moscow and St Petersburg are “extreme” while “customs duties are important to remember; it’s not only the cost but the processes and bureaucracy linked to the import of goods.” As a result, Mango’s prices are “a little more than 10% higher” in Russia.
“The red tape is much more difficult in Russia than in Europe so any company wanting to enter here has to consider this. You need to build a volume operation, otherwise it’s not worth it.”
On the sanctions, she adds: “We don’t see the impact now, but we are observing the situation. We have noticed that in the shopping centres the footfall has gone down, but it’s not that significant now.”
Retailers also need to take account of the climate. Mango offers a Siberian winter collection in June/July, peaking in July/August, which comprises coats with a higher wool percentage. In March/April the collection features knitwear in spring colours.
Italian lingerie group Calzedonia, which has 400 Russian shops across its Calzedonia, Intimissimi, Tezenis and Falconeri brands, of which 30% are company-owned, expects to open 70 stores this year.
A representative for the Italian retailer in Russia, who asks not to be named, says one of the biggest hurdles to overcome is the logistics of distributing stock across a country representing 14% of the world’s land mass and spanning nine time zones. He says it can take up to 30 days to get stock to Russia’s far east from Italy and retailers must be prepared to invest to succeed there.
A spokeswoman for UK premium retailer Reiss, which has three stores in Moscow and St Petersburg, says while there are “no imminent plans for further expansion, footfall and performance is strong”.
Shipping to Russia is also still strong. WnDirect has been shipping there for 18 months for retailers like Next, River Island and Asos.com, carrying 15,000 parcels a week. Operations director Jonathan Matchett says: “It’s a fantastic market if you can crack it, but it’s not the easiest to get into. We haven’t seen a slowdown; there’s been continued demand from UK retailers and brands wanting to ship into Russia.”
However, changes to customs regulations for business-to-consumer imports will culminate in November with a change in the duty threshold from €1,000 (£780) across all parcels per month to €150 (£117) per parcel, which Matchett warns could lead to UK-based retailers losing some orders to international brands located in Russia.
Despite this, he says: “We expect 20% to 50% growth for us in Russia next year. No one is looking to stand still internationally and UK retailers are looking at Russia with keen interest.”
Others sound stronger notes of caution. Stephan Krug, managing director of footwear distributor Highline United Europe, selling brands such as French Connection and women’s footwear label Julian Hakes in Russia, says while “the market has huge potential”, orders are down 30% to 40% in the last four months as retailers struggle to buy in euros while the ruble depreciates. He adds that it is increasingly difficult to transfer money in and out due to the sanctions and the company is now looking to Asian and Middle Eastern markets to pick up the slack.
Salamander, which has traded an adapted collection including fur-lined and thicker-soled shoes in Russia since the 1970s, has seen footfall drop by between 10% and 20%. Kulikov explains: “The remaining part of 2014 and 2015 we expect to be quite complicated politically and economically, so we don’t foresee growing consumer demand. When uncertainty happens, [consumers] start saving.”
He urges those considering entering Russia to ensure they have a good partner with experience of the conditions, and warns the low unemployment rate of 4.8% means it can be difficult to secure staff.
Corruption is also an issue, with Russia ranked 127th out of 177 nations in the campaign group Transparency International’s Corruption Perceptions Index - equal with Pakistan and Nicaragua. Retail consultant Jonathan De Mello at retail property consultancy Harper Dennis Hobbs says retailers also have concerns about counterfeiting, making them wary about moving into secondary cities.
So while Russia has always tested retailers, it is now dividing the pack. For some, the uncertainty is just too great a risk when trade at home is still far from booming, but others take a longer-term view on future prospects despite the current crisis. What is certain is that now more than ever, Russia is complex and, as with any game of roulette, requires steady nerves.
Room to grow: Retail space in square feet per 1,000 inhabitants
|St Petersburgh, 3013|
Retail development pipeline in sq ft
- Moscow 56 million
- St Petersburg 11 million