Ikea Shopping Centres Russia’s leasing director says UK retailers have nothing to fear when it comes to doing business there.
In London for a whistle-stop 42 hours, Håkan Nilsson has had a full-on day by the time Drapers catches up with him. The leasing director of Ikea Shopping Centres Russia, the shopping mall arm of the Swedish furniture giant, has spent the day at Retail Connections 2013 - a networking event focused on shopping centre leases - where he has been talking about the opportunities in the Russian retail market.
However, as we settle down in the library at Drapers’ London headquarters, the Swede shows no sign of tiredness; instead his mood seems lifted by the event, where interest in Russia - one of the BRIC countries high on the agenda of UK fashion brands and retailers - is mounting. “It was very good. I was here last year as well,” he says in his Scandinavian lilt. “The interest is definitely picking up for Russia. I think last year we had three pre-booked meetings and this year it was 16. And it’s a case of much less wishing and thinking [on the retailers’ part], it is much more ‘when can we get the place’.”
And it’s not hard to see why. With a population in excess of 143 million and 12 cities with more than 1 million inhabitants, the opportunities are huge. The value of the Russian clothing market stood at £36.41bn in 2010, and is estimated to reach £39.94bn this year, according to figures from market research firm Mintel.
Ikea Shopping Centres Russia is testament to this. Launched into the Russian market in 2000, it opened its first Mega shopping centre at Teply Stan, Moscow, in 2002, and now has 14 Mega shopping centres throughout Russia, which attracted 254 million visitors in the 2012 financial year, with total sales up 38% to 285bn rubles (£5.92bn), around 40% of which is fashion.
The shopping centre operator now has three schemes in the Moscow region, two in the St Petersburg area, and one each in Adygea, Ekaterinburg, Kazan, Nizhny Novgorod, Novosibirsk, Omsk, Rostov-on-Don, Samara and Ufa.
Touching on the differences between regions, Nilsson says: “Ekaterinburg is highly developed. You are really amazed when you go there; you see a fully modern city. Our figures there are very high, almost reaching Moscow levels, so it’s a very lucrative market for us. It’s very much the same situation in Kazan. While down south, Samara is the reserve capital of Russia. It is highly industrialised with high-tech industries - specialising in areas such as airplanes and rockets - so it’s a very interesting place to be with lots of money. Other local developers have realised this and there is huge competition in the area.”
He adds: “In Siberia we have Novosibirsk, Omsk and Ufa, but here it’s a couple of years backwards; it needs some more years before it develops but it will come.”
The operator has chosen its locations based on population density, and of course where wealth is located. But Nilsson warns that UK brands and retailers need to recognise that Russia is a huge country, with the blanket white snow of Siberia completely different to the year-long summer-like temperatures of the South. He adds: “Also, if you look financially, some areas are much more developed than others and it’s quite heavily connected to whether there is oil and gas.”
Each shopping centre is anchored by an Ikea store, and typically 70% of space is let to international retailers, with Karen Millen, Debenhams, Next, Topshop, Marks & Spencer, New Look, and Bhs among its British tenants.
Nilsson saw plenty of UK retailers at the Retail Connections event, but says he also met a lot of American retailers, which he describes as a “game changer”. He adds: “Something has happened since last year.
[Previously] it has been more us wanting to meet them, now it’s them wanting to meet us. And it’s more than talking. We aren’t signed yet but we are close to one [deal] now and two more are coming up,” he says, although he’s keeping the names under wraps for now.
The brainchild of Ikea founder Ingvar Kamprad, who saw the potential in the Russian market, the Swedish firm was one of the first foreign shopping centre developers to enter the Russian market, and aptly took a do-it-yourself approach, deciding that its Ikea stores would be more successful as part of a family-oriented shopping centre environment. “In the beginning it was very simple. We were a success story, with no competition, with everybody looking at us. Of course times have changed, we have learnt, retailers have learnt,” says Nilsson.
Now present in eight of Russia’s 10 ‘Millionniki’ cities - those with between 1 million and 1.5 million inhabitants - Nilsson says there is room for the business to grow further, and adds that the sheer scale of the country should make it attractive to UK brands and retailers. “We still have some Millionniki [Chelyabinsk and Volgograd] we haven’t expanded to yet. But then Russia has about 25 cities with more than 500,000 inhabitants, and I think that is a natural new step. There is money in these cities.”
Karen Millen now has 25 franchise stores in Russia, mostly concentrated in Moscow and St Petersburg, and the country is one of the womenswear chain’s largest markets outside the UK. Simon Gaffey, international business development director at Karen Millen, agrees there is potential further afield. “The regional cities are far less developed in terms of recognised brands and in some of the cities where Karen Millen trades, such as Krasnodar and Arkhangelsk, there is limited international fashion. This presents an opportunity in terms of offering a point of difference to a local market that desires quality and inspiration and has the capacity to spend,” he says.
Behind Saudi Arabia, Russia is Arcadia Group’s second largest market, with 44 stores across its Dorothy Perkins, Miss Selfridge, Topman and Topshop fascias, again mostly focused around Moscow and St Petersburg. Paul Gould, international director at Arcadia, says: “We’ve gone out to some of the regions, so we’ve taken some of the big regional cities.
“There’s  cities with more than a million people outside of Moscow and St Petersburg, so we’ve looked at some of those and picked some we feel are absolutely right for our brands.”
Ikea Shopping Centres Russia has a mid-market proposition, and Nilsson says it is at this level where most opportunities are. “The luxury brands are already there, they came in very early,” he says. “The middle market, here I’d say there are the big possibilities. The middle class in Russia is growing rapidly, especially in the towns.”
The main barrier to UK brands and retailers entering the market is their concerns about how to do it. “All retailers talk about entering the market and then brrrrr, it’s so scary,” he says, with a laugh. “First of all I think they need to overcome internal barriers and really dare to do it. If I go back to Sweden, they have a 10 to 15-year-old view of what Russia is. I imagine the UK has a similar perception.”
And of course he’s keen to stress that as a partner, Ikea Shopping Centres is able to ease that transition into the market, whether a retailer chooses to go direct or through a franchise partner (currently Ikea’s split is 71% franchise, 29% brand owned), though he does note a trend towards taking a more direct route to market.
Nilsson is confident the next few years will see many more UK brands and retailers taking the plunge into Russia. “For those that have entered and are successful, they’ll look back and say ‘why didn’t we do it before, my goodness how stupid we were’. There is really nothing to fear anymore,” he says. “So stop talking about it and do it instead.”