Foreign clothes brands cannot sweep Russian market


During crisis on Russian market of clothes there were two most powerful world players: Swedish H&M and Japanese Uniqlo. Theoretically the companies could arrange repartition of clothes retail, but specificity of our market has prevented them to do it.

It’s not a secret that t Russian market of clothes is seriously distinct from European and American. According to experts, in Russian Federation there are not so many strong local players, and, conceiving a new brand, the domestic businessman, as a rule, considers it necessary to write it Latin letters. Moreover, though shopping centers are filled on 70 % by the same marks, as European мalls, the prices in Russia appear twice or even three times above, not to mention the difference in assortment which, as it is known, in many cases depends on personal tastes of Russian franchise of famous marks. Thus, potential leaders of clothes market in Russia have what to divide. According to Verdict Research company, our market before crisis grew a minimum on 12 % annually and it entered into the six of the largest in Europe together with Great Britain, Germany, Spain, Italy and France. And now Russia has more common things with world fashion. In crisis two from five of leading world players: Swedish H&M and Japanese Fast Retailing (Uniqlo) came on the local market independently, not under the franchise. However these companies could not change anything in our market.

Invasion of leaders

According Fashion Consulting Group, in 2009 year, market volume of clothes in Russia was $40 milliard. Many of world leaders have been in Russia with varying success. For example, Spanish Inditex (brands Zara, Oysho, Massimo Dutti, Bershka, Pull and Bear) has been developing both the capital and the regions. In return Gap is presented only by franchise and it doesn’t seriously develop. Against this background, H&M and Fast Retailing decided to take risk in the crisis time. Since 2009 year H&M Company has opened five outlets in Russia, four of them are situated in Moscow and one- in St. Petersburg, besides one more shop should be opened in Moscow shopping center “Atrium”. In return, Fast Retailing, 80% of which are mass- market brand Uniqlo, will be opened this spring in the same “Atrium”.
Tatiana Stepanenko, the representative of Uniqlo press-office in Moscow has said: “Entrance to Russia connects with global expansion of the brand, we have had a shop in London, in Paris and now it will be in Moscow. Fast Retailing has more than 900 shops in all and 126 of them are situated other than Japan, however, through 10 years, Uniqlo plans to increase the turnover on 80-fold”. According to her words, the crisis not just helped the brand to come to the capital market. She explained: “We rented those floor spaces which we couldn’t rent before the crisis. We needed 1200 m2 for our shop. Next step forward of the chain depends on the success of the first shop”. However, according to experts, new leaders coming to us are unlikely to take serious positions on the local market. Andrei Tsitser, the director of investigatory “Rosconsultproject” , the representative CSN in Russia is sure: “Coming of these players will not change Russian market in the short term”. According to his word, “the criterion of serious attitude to market is very simple: whether west company invests money in Russian retail”. For example, the expert marked that Gap, developing on partner’s account, sees no need to invest but it can display the world turnover which is $14 milliard. Andrei Tstser added: “Russian market is interesting by Adidas and Inditex, which actively opens their shops, but for H&M, coming to Russia is not more than public relations. Indeed, it comes really slow: This chain can opened 60 shops annually on others markets. Several million dollars which have been spent on Russia are a very small expense for this company”.

According to his words, foreign corporations in many cases don’t handle such conceptions as share of the market at all. Really, capture of market is not always interesting for them, the work according to the principle of Investment Company and first of all they are interested to know the date of repayment. With that, our market is not the most interesting for leading players. China, showing a great growth is much more attractive for them. There are easier logistics there: you should just bring the thing from production in the same China to the China stand. Again, for Uniqlo, as for the others China company, American market is interesting first of all. However, there is way out. According to experts, if multibranded retail would be developed in Russia, many west brands would be presented better than now. Indeed, for that to present a collection in the department store, a brand shouldn’t invest. Tsitser supposed: “It is easier for European brand to dispatch goods in Canadian chain and consummate transaction on $20 millions than to work with our marketer for 50 000-70 000 euro. And many representatives of west brands, for example Stallman or Finnish company talk about that it’s no easy matter for them to work with small Russian company. But it doesn’t mean that if in our country department store would be built then brands wouldn’t stand in a line to us”.



Jacket which is as good as gold

As a result in Russian market there is a strange situation. Skirt or jacket in Mango or Zara costs about 1500 rub though a release price of such a thing on the fabric in China is about $5. But the customs take for the thing 20% of cost, VAT- 18%, to this sum we should add logistic expenses, the sum of which is difficult to calculate. Besides initially, as a rule, clothes are sent to Europe and from there Russian companies import it. If a brand is imported by distributor in this case his churning- not less than 15% is put in the price. Even more, if in food market a markup of chain retailer usually is not more than 40%, then in the segment of clothes it’s difficult to meet a markup less than 100%. Andrei Tsitser said: “A markup of Adidas and H&M in Russia is 300%, it’s a good business! According to experts, incredible markup can be explained by high rent rate, but it’s not panchrest”. Olga Sagirova, the partner of Roland Berger Strategy Consultants supposed: “The reason for high prices also is in non-competitive conditions on market. Russian market of clothes today is far from satiety. And it permits to take a good margin”.

According to specialists, difficulties are about the same for the most segments: administrative barriers, blackness of market and bad logistics. Even more, market of clothes has its own particularities. Natalia Chinenova, the general manager of SELA Corporation said: “Imperfect legislation is also not insignificant fact. In any country there are no so many checking trade instances as in Russia. Maintenance of documentation and fulfillment of all customs conditions at clothes import is made difficult”. According to analysts, clothes market also manages to fall behind the food market on 5 years. If a producer of food can concentrate on production only, then leading players of Russian clothes market are just obliged to develop their own retail and to invest just to this direction apart from production. Andrei Tsitser explained: “So, the owner of one of the leading clothes companies Gloria Jean’s Vladimir Melnikov in his time refused at all from development of wholesale direction, which brought to him $70 million annually and he concentrated on retail. Just his clothes “flowed” to markets and it did damage to the brand. He lost $70 million but strategically it was a right decision”. With that, according to his word no one west company in Russia did the same. In particular, according to the expert, Nike feels much worse than Adidas, because the first prefer to develop by wholesale but not by the way of building of its own retail. According to analysts, settled market situation is very complementary for home players because they know how to cope with problems which embarrass “westerners”. In such a situation, according to expansion rate, local clothes chains advance foreigners. Basically, the largest fashion operators on our market are Russian Corporation SELA (560 shops), Russian OGGI (287 shops) and Gloria Jean’s & Gee Jay (about 250 shops). Native brand Savage also reckon among the leaders of the market. But generally, the balance between local brands and foreign is 20 to 80%.


Everybody- go to department stores

The fact that in Russia there are no department store by European type and multibranded retail practically isn’t developed. Andrei Tsitser marked: “These investors which will invest creation of department stores will get very stable money flows. The chain of five department stores will generate money flow in $250 million annually. And besides, you will have no need to build something- cases of department stores have been left since Soviet time”. According to experts, building of clothes department store can pick interest of the companies which earlier invested to food retail. Georg Dzagurov, the general manager of Penny Lane Realty is sure: “To invest to this segment is profitable”. According to the leading consultant “Shop of shops” in association with CB Richard Ellis of Victoria Didovich, even in Moscow, practically, there are no department stores. The expert said: “It, maybe Central Department Store or “Moscow” on the Leninsky Avenue and also Stockmann. In the near future should be opened one more department store on Tsvetnoy Bulvar”. Besides according to her words, Holding-center has its own department store in the late shop “Bucharest”. She explained: “Department stores which are known by us very well in Europe- for example, Galleries Lafayette- have long-standing history, many of them exist more than one hundred years. Europe and American department stores, as a rule not too willingly practice expanse. They often work through the partners; in particular, they sell franchise and technologies. On Russian market those who would want to become a partner of west department store, would have many problems”. For example, in Luxury segment they collide with the fact that they can’t get some brands: in Russia rights on them belong to 3-4 companies and they may have no desire to present their brand in the department store. Though, in this segment there are no rough standards, a department store must have quite big floor spaces: from 5000 till 30 000 m2. Payoff periods of the projects are different but as a rule it’s very serious term, because it is necessary to invest about 10 million euro only to furnishings of 10 000 m2. Besides you should add money for buying of fashion collections. According to experts it’s much easier to create shopping centers. All ex- soviet department stores work very so, they just lease space to monobranded shops and they have enough tenants. Victoria Didovich explained: “This business is much easier and clearer. Investors take interest about creation of department store before the crisis but in crisis interest to this business disappeared”. Even more, to lease space for department store is not profitable for an owner: in this case he should give all the spaces with bigger discount for volume, for example, at $300 per square meter, but he may lease space to small shops at $2000- $3000 per square meter. That’s why it’s show that buildings of the largest department stores are in property, for example the biggest part of spaces of Central Department Store belongs to Mercury group.

As a result, multibranded retail in Russia as before is changed into merchandise market. About 40% of volume of retail clothes market is merchandise market and these market, mainly, sell China goods “noname”. Tsitser said: “And a consumer is ready to conceive new for him clothes brand”. However, coming “fresh” west companies such as H&M and Fast retailing, is likely to play into native players hands, which once again will think about their effectiveness. West players, which have been in Russian Federation for a long time and which have accustomed with the local market- for example Inditex, Mango, Motivi, Sixty group and so on, are more dangerous for Russian companies. The brands have been known by consumers and they practice reacquisition of shops from their franchise, step by step advancing their own chains. With that, they can display higher technologies of management than Russian competitors have. West players know how to make fast- brands (quick renewal of collections- “Ko” note) and they have access to the best cloths. Andrei Tsitser supposed: “But I don’t expect some serious changes on market, including the entrance of new brands in the near future. And it gives a good chance to develop for large and small Russian companies and it means that something will be seriously changed on market.