Competitors are motivation, lockdowns are an opportunity

Competitors are motivation, lockdowns are an opportunity
Melon Fashion Group CEO Mikhail Urzhumtsev on the storied past and promising future of a Russian fashion industry leader.
By Theo Normanton in Moscow November 24, 2021

The pandemic was a challenging time for the fashion industry worldwide. 

 

As huge swathes of the global population went into lockdown, many retailers faced heavy losses. The trends developing before the pandemic picked up pace, with online shopping and sustainable manufacturing gaining traction. While some established players lost ground as a result, considerable opportunities were available to those agile enough to adapt quickly to the shifting consumer demands.

In Russia, a convergence of burgeoning e-commerce sales of which fashion represents a 21% share and a booming retail sector in which home-grown players are gaining market share has created a fertile environment for some vendors, in spite of the pandemic’s adverse effects. Melon Fashion Group’s revenues were up 66% in the first nine months of 2021 as it increased online sales while also adding more shops to its chain already the biggest in Russia within its segment. In an exclusive interview with bne IntelliNews, Mikhail Urzhumtsev, CEO of Russia’s Melon Fashion Group, talked about the trends driving this growth and how the company hopes to sustain it in the future.                                                                                                                                                        (Photo: Melon Fashion Group)

Fashion retail in Russia

“When we started our Melon operations in 2005, we had 74 stores. As of the end of Q3, we have 815”, Urzhumtsev said. “Last year, in spite of all the disruptions and the mess created by COVID, we opened more than 70 new stores. And we have opened almost 70 so far this year, with more to come in November and December.”

How is this possible? Urzhumtsev explains that it’s down to the peculiarities of Russia and its market dynamic. The Russian apparel market is more fragmented than its European or American counterparts, with the 10 biggest players accounting for just 17% of the sector, against 30% in developed nations, so market leaders have plenty of room for growth. Melon Fashion Group has benefitted from this with two M&As over the last 12 years, most recently acquiring Sela in 2019 in possibly the biggest deal in the local apparel market.

Social factors have helped Melon Fashion Group too. Branded clothes have retained a certain glamour in the minds of many Russians who remember the Soviet era, when they were seen as the preserve of an elite.

For fashion retailers, this blend of fortuitous factors has meant the ability to continue growing in spite of the adverse effects of the coronavirus (COVID-19) pandemic. “For the last five years, our annual growth rate of revenue averaged 19%. We have ambitions to continue this growth, and believe that there is big potential for us on the market,” Urzhumtsev said.

For retailers, the flipside to Russia’s generally favourable socio-economic environment is a certain amount of dependence on Russian income dynamics. Higher inflation and slowing real wage growth are bound to affect businesses of all descriptions. Urzhumtsev seemed unfazed. “We see big potential for growth, regardless of the economic environment,” he said. “We have four brands in three price niches low, medium, and high and with different fashion trends – some are more trendy, some are more basic. The fact that we can provide a wide range of assortments in different price brackets particularly helps us when officially incomes are not growing.”

Melon Fashion Group’s four brands – befree, ZARINA, LOVE REPUBLIC, and sela – cater to a variety of demographics, from young fashionistas to mothers with young children. For Urzhumtsev, this variety of target audiences is one of the company’s key strengths, and an invaluable asset in a changing market: “All four brands have their own distinct audiences. And I don’t know of any other Russian fashion company which has such a diversified portfolio.”

(Photo: Melon Fashion Group)

 

Outfit refresh

The flourishing online segment was another key driver of growth through the pandemic, and continues to play an ever greater role. Russian e-commerce has enjoyed 40-50% growth year on year for the last two years, and fashion was the second-biggest beneficiary after consumer electronics. Melon Fashion Group has leaned into this trend, heavily indexed in digital channels like Amazon, Aliexpress, and Wildberries – Russia’s leading marketplace, on which it is the most popular fashion retailer.

Online sales have been of particular importance to Russian fashion retailers during the spate of lockdowns in 2020-21. These varied region by region, but often saw non-essential stores, including apparel, closed. Urzhumtsev, speaking to bne IntelliNews just after Moscow’s most recent lockdown had finished, emphasised the simultaneous spike in online sales: “Our stores were closed for 10 days and this certainly had an impact. Whether it will be significant… we will see. But our online presence has greatly helped us. It’s normally a big proportion of sales anyway, when physical retail locations were closed, it acted even more like a balancing force.”

Indeed, Melon Fashion Group’s share of sales which are made online is 30% greater than the ratios of Spain’s Inditex, Sweden’s H&M or Russian children’s goods retailer Detsky Mir. This has raised another question: given how strong Melon Fashion Group’s online performance is, why not get rid of the bricks-and-mortar format?

“We can’t be 100% sure, because the speed of changes in the world is quite fast, but we believe that the offline experience will always have an important role on the market,” Urzhumtsev postulated. “We’re humans, we like to go shopping, to have that experience of looking, touching, trying clothes on. I think we still have years ahead where offline will be of extreme importance. After all, in a lot of Russian cities the shopping mall is the main place you go on weekends or after work.”

 

                                            (Photo: Melon Fashion Group)

Nonetheless, Urzhumtsev recognised the centrality of digital formats in future models of fashion retail. As Russians are quickly getting used to buying clothes online, online sales in fashion are set to grow by 37% to RUB335bn ($4.5bn) in 2021, and to exceed RUB1 trillion ($14bn) by 2025, according to Fashion Consulting Group.

“A number of our stores support an omni philosophy. The borders between online and offline are becoming blurred – many customers want to order online and pick up in store. We embraced this omni model two years ago, and it’s going to be an important one,” said Urzhumtsev.

 

Competition: friend or foe?

For all its many virtues, the fashion sector is a very competitive market. Brands have to work increasingly hard to set themselves apart as new players enter the fray. “When you go to the shopping malls, you see a number of fashion retailers, and all of them have the potential to fight for our customers and to open their wallets,” Urzhumtsev admitted. “We have the mindset that the competition in the fashion industry is not a threat for us. On the contrary, we see it as a driving force to be better, to improve our offering, and to set up and fulfil new, more ambitious targets. Competition and competitors are good things.”

One factor which can distinguish socially conscious players from the rest of the pack is their ESG offering, particularly in an industry like fashion, where unsustainable manufacturers can have a huge environmental footprint. At Melon Fashion Group, Urzhumtsev said the shareholders have been demanding increasingly impactful corporate governance and sustainability measures: “This has become a part of our company philosophy and we are investing more and more in sustainability processes. Our office in China, where our main production is, checks the social and environmental characteristics of all our suppliers along with quality measures. Together with the “Spasibo” & “Second breath” foundations, we’re collecting old clothes in our stores for recycling and reusing. But of course, the most important thing is our supply chain. We’ve already started an investigation of our supply chain, as well as audits. Next year we plan to enforce the results, and set up our goals to make the company even more sustainable.”

The history of Melon Group’s headquarters itself represents a striking example of the resilience which the company is so proud of. The group’s base in St Petersburg started off as a handicraft school for girls founded by Empress Maria Fedorovna. In the time of the Soviet Union, the building was transformed into an industrial-scale sewing factory. The most recent chapter for this clothing palace began in the 1990s, when Swedish businessman David Kellermann visited the factory and met Galina Sintsova and Mikhail Urzhumtsev, two diligent fashion lovers involved with the existing clothes production. Now the CEO, Urzhumtsev sees precisely this storied past as one of Melon Fashion Group’s greatest assets: “What I feel sets us apart from most players on the Russian retail market is a very long history. Our roots go back to 1882, so next year we will celebrate the 140th anniversary of our particular vision of the fashion industry, which was born in the time of the tsars.”

Looking to the future, it would have been an oversight not to ask Urzhumtsev if Melon Fashion Group was planning to go public. “The company's strong growth is supported by the stable cash flow that the business generates. At the same time, like any successful company, MFG considers various strategic options for future growth, including opportunities in the capital markets, but it is too early to talk about any specific plans.”

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