East of Eden: How Russia’s Isolationism is Impacting Fashion, Part Two — Retail

At the beginning of the year, Russia was one of the world’s most promising fashion markets. But in the last ten months, isolationist policies combined with a fragile financial climate have seen the country’s economy plummet. In the second instalment of a two-part series, BoF explores the consequences for fashion retail in Russia.

LONDON, United Kingdom — What happens if you ban fashion for 69 years? As with any denied pleasure, it becomes forbidden fruit.

Following the collapse of the Soviet Union, Russia unleashed a desire for fashion that had been dormant for decades, suppressed by the USSR’s official distrust of commercialism, luxury and indulgence, and curbed by the regime’s restrictions on imported Western goods, including clothing. Over the 23 years since the fall of the USSR, Russia has grown to become one of the largest emerging markets for fashion in the world. In 2013, the country’s fashion market was worth 2448 billion rubles (about $53 billion), according to Fashion Consulting Group, a consulting firm with offices in Moscow and New York.

But in the last nine months, exacerbated by the effects of president Vladimir Putin’s foreign and economic policies, Russia’s economy has tanked. The country has upped its tariffs on imported goods — and banned imports of certain products altogether — which, coupled with sanctions imposed by the international community in response to Russia’s military actions in Ukraine and Crimea, has helped to hike inflation in the country to above 8 percent. The ruble is at its weakest since 2008 and Russia’s billionaires are moving their money abroad as fast as possible, with capital flight forecast to hit a record $120 billion this year.

How is the country’s fashion market faring?

In the first six months of 2014, Russia’s fashion sales declined by 7 to 8 percent, compared to the same period in 2013, according to Fashion Consulting Group. But the firm forecasts that, all told, the Russian fashion market will dip by 20 percent, year-on-year, by the end of 2014.

As Russia’s political and economic climates get frostier, some retailers are turning away. Earlier this month, high street retailer New Look announced it was exiting Russia, despite having previously planned to buy out its franchise partner and establish a joint venture with a new partner to accelerate expansion in the country. The reason? According to the brand, "political uncertainty" was the primary cause for the about face. Uniqlo has also halted its plans for expansion in Russia, revealed Maxim Karbasnikoff, head of retail real estate at Cushman & Wakefield, which had been engaged by the Japanese retailer, in The Moscow Times.

And it’s not just the high street that has been affected. Russia’s market for personal luxury goods will contract by 18 percent this year, according to Bain & Company, a global consultancy. "Russia is becoming a more complicated and difficult market, therefore it becomes less attractive," said Anna Lebsak-Kleimans, chief executive of Fashion Consulting Group.

"A great problem is that international companies, international brands, really are reluctant about development in Russia. Because you don’t know what you will have tomorrow," added Ekaterina Petukhova, a retail specialist at international consultancy Texere Advisors.

Interestingly, in April, Prada announced a 30 percent surge in Russian sales for the first quarter of this year (right in the midst of the Crimean crisis), but the brand credited the rise to a reduction in Russians’ shopping trips abroad following the imposition of economic sanctions. Once big spenders on luxury fashion when travelling abroad, Russian tourists in Europe spent 13 percent less in June, according to Global Blue, a tourism shopping tax refund company, According to a report by consultancy FashionBi, in February 2014, Russian spending in the UK was down 17 percent compared to the same month the year before.

Some are taking a long view on the current turmoil, however. "We look at Russia as a market with significant long term potential. Russian luxury consumers are some of our most knowledgeable and loyal customers," said a spokesperson for Gucci, which unveiled a new flagship store in Moscow last week. Benneton also recently opened a flagship store in Moscow (on Tverskaya, the city’s equivalent to Oxford Street) and plans to open 40 stores in the country in the next three years. Zara, which entered the market in 2003, had major plans in Russia. In late 2012, the brand’s owner, Inditex, announced plans to open 50 to 60 shops in Russia each year. And while Inditex declined to comment for this article ("We prefer not to comment on political or macroeconomic issues," said a spokesperson), the company confirmed that its "operations in Russia are business as usual."

Ultimately, major international chains, for whom revenue in Russia ultimately makes up only a minor part of their global business (five percent for Zara, one percent for H&M), are well positioned to absorb the current decline in sales and demand, as consumers curb their spending, nervous about the future of the economy.

But the full impact of the recent shift in political and economic conditions remains to be seen. Based on growth over previous years, Russia has the largest mall development pipeline in Europe, with almost 100 new shopping centres planned to open in coming years, and this week overtook the United Kingdom, becoming the country with the second-most mall space in Europe, according to Cushman & Wakefield.

Previously, the kind of retail space required to host big brands was in short supply, especially in the country’s far-eastern regions. But in September, with consumers in panic mode, mall traffic the week before schools opened had dropped by nearly 25 percent compared to the year before, reported The Moscow Times.

Indeed, with some of the most desirable retail space in Russia performing poorly — watchmakers Omega and jewellers Pandora are amongst the international brands who have recently closed their shops on Moscow’s prestigious Tverskaya Street, where at least 18 properties are now vacant — the health of the country’s physical retail sector is shaky.

As for e-commerce, much depends on how the geopolitical situation develops. In January, Putin increased the duty fees on international online orders to combat the advantage international brands have over Russian companies, which have to pay taxes and customs duties on all of the goods they import. "We had amazing conditions for these parcels. People bought loads from foreign e-commerce," said Petukhova. "At the moment it’s really difficult to get something in, especially with this political situation.,, The problem with e-commerce is that too much money was invested into it. It had a bubble effect; I think in the future we will see these companies begin to shut down."

In the face of sanctions imposed by the international community, the Russian government has also imposed import bans on some western goods. Currently this only applies to food products, though president Putin — whose relations with his Western counterparts are frostier than ever — has threatened to expand these bans to apparel if Russia is dealt more sanctions, which would completely change the game for international fashion retailers operating in Russia.

The last year has also shaken things up for Russia’s domestic fashion players. Most fashion designers in Russia import their materials and high import tariffs coupled with the weak ruble have seen the cost of doing so rocket. But if there is a curious silver lining to all of this, it would seem that the exposure Russia is currently receiving in the international media has done young Russian designers a favour, said some.

"With all these sanctions and the political situation and the patriotic propaganda, what’s interesting is that Russian designers seem to be doing much better," said Anna Dyulgerova, commercial director for Russian magazine Garage and a consultant to Russian designers.

"This political situation I think is quite beneficial for young designers," agreed Ekaterina Petukhova. "People are talking about Russia, they pay much interest to Russia, to Russian designers." But she is quick to add: "It’s very difficult for them. The problem with Russian designers is that they have more PR than orders."

To be sure, the problems afflicting Russia’s retail sector are not all linked to the current political climate, which may simply be exacerbating deep rooted economic issues relating to the fallout from the 2008 crisis and declining oil revenues. Poor management may also be to blame. "Many brands try to say that it’s the wrong political situation and that’s where our problems come from. But really I think the situation is more complicated. It’s combined with mistakes of retailers in positioning and business strategy," said Ekaterina Petukhova.

"We have so many external and internal factors in play here that people are more or less waiting for the political situation to calm down. Not to get better, but just to calm down. Before that happens I think everything will be postponed."More News:

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