Bullet-proof fashion

By bne IntelliNews October 26, 2010

Ben Aris in Moscow -

Crises in Russia don't affect the rich. Jeremy Barnes, one of the investors in Moscow's first Christian Dior store, said they delayed the launch of the shop because of the financial crisis in 1998, but this proved to be a mistake. "When we finally opened, sales were a lot better than we expected and the business grew quickly."

When you have more than $100m, a $5,000 handbag remains just as affordable even if you lose $50m. The Dior shop, like many of Russia's other luxury stores, caters to a few thousand people a month, but those people can spend several thousand dollars on a single outing, making Moscow's high-end retailers amongst the best grossing stores in the world.

After 70 years cut off from fashion behind the Iron Curtain, Russians - particularly the women - went on a shopping orgy when the country opened up. While the pictures in magazines like Vogue are an ideal in the West that women (who are interested in fashion) aspire to, in Russia the same pictures are taken as a blueprint for those with the means - and because Moscow is awash in oil money, many do have the means.

The entire retail sector has exploded in the last 10 years as goods became accessible to even the less well-off thanks to the advent of express credit in about 2001. Huge shopping malls pepper the capital, venues for the hordes of western retailers blazing a trail to the lucrative Russian market. The oil money has even benefited the aspiring middle class, as it has sent the value of the ruble soaring, making imported goods progressively cheaper. Whereas a supermarket or DIY store may be the anchor store in western shopping centres, in Russia the luxury brand chains are as likely to be the key attraction for a Moscow mall.

A handful of Russian traders who cornered the top names in the early 1990s now dominate the elite shopping brands and have the developers over a barrel when it comes to negotiating their terms.

Natalia Oreshina has been in the retail segment of Russian real estate since the start and was part of the team that set up Swedish furniture chain Ikea, the first true mall, that was built in 1998. "Russia was a developing market in the late 1990s. Russian developers had the money, but not the knowledge. So I travelled extensively in Europe and the US to get an idea of how it was done elsewhere and brought these ideas back to Moscow," says Oreshina.

The overnight success of the Ikea mall was a revolution for Moscow retailers and developers rushed to build large shopping centres across the city.

Three big luxury-brand distributors dominate the retail market. To build a successful mall, you need a strong anchor tenant that will bring in the clients. Obviously, the richer the punters are the better, so the high-end luxury brands are obvious anchor tenants. The trouble is, all the best brands like Dolce & Gabbana, Armani and the like are controlled by just three companies: Bosco, Mercury Trading and the Crocus Group. "These companies have divided up the brands between themselves and decide who is going to represent what on the market. They also decide where to offer these brands and in what department stores. Everyone who wants a prime shopping space has to have one of these brands, but you can't play them off against each other. So if you build a prime facility with a luxury anchor, the profits are limited," says Oreshina.

Increasingly, top-end names like Chanel are starting to do business for themselves, but many leave it to the trading companies who can deal with the Russian bureaucracy better than any foreigner.

Crocus also develops its own stores and also operates on the mass market - such as its Crocus City development on Moscow's outer ring road - but both Bosco and Mercury have left the construction of shopping centres to others.

Still feeling good

Of course, the crisis has slowed trade, but even in 2009 average incomes rose by about 8% and over the first half of this year were up another 5% - well ahead of inflation. Indeed, a poll at the start of September found that Russia's "feel good factor" was at an all-time high: the Levada Center found that just under half of all Russians can comfortably afford food and clothes, up 10% from a year ago, and 16% feel they can afford bigger-ticket items like expensive clothes, electronics and furniture, up from 13% a year ago and well ahead of pre-crisis levels. While retail turnover has been rising slowly, the fastest growth has been in the small-ticket items like apparel.

The results of the survey highlight the fact that the crisis has hurt the corporations more than the man in the street; despite the collapse of economic activity in 2009, which saw GDP contract by 7.9%, average wages continued to grow over the year, up 8% over the same period. This means that materially the average Russian is better off than he or she was at the start of the crisis in September 2008 in terms of cash in the pocket. "The development of retail runs in parallel with the rising incomes of the people," says Oreshina. "For most Russians at the moment, more money in the pocket means more shopping."

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