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EU’s Eastern Expansion a Potential Boon for Fashion Brands

Continental fashion executives see great business potential in the 10 Eastern European countries that joined the EU this spring.

PARIS — “They’re crying out for new, interesting fashion,” said Adrian Joffe, managing director of Comme des Garçons, describing consumer sentiment in several of the 10 Eastern European countries that joined the European Union last spring in the biggest expansion ever. “They’re ready and waiting.”

Joffe said he senses “great potential” in the new members, which is why Comme des Garçons just opened a “guerrilla store” in Ljubljana, Slovenia, and has another slated to bow Saturday in Warsaw. The units are operated with local partners and stay open for one year in frontier neighborhoods, selling a mix of new and out-of-season Comme des Garçons lines.

A recent spot check of other industry executives — from luxury to fast-fashion — shows they, too, see opportunities in the expanded EU, citing low-cost manufacturing and a population that’s bound to develop a greater appetite for fashion and luxury. The organization, which started with just six members — Belgium, Germany, France, Italy, Luxembourg and the Netherlands — seeks to promote economic prosperity through job creation and trade. In January 2002, the EU — excluding the U.K., Denmark and Sweden — introduced the euro as the single European currency. The new members have not yet converted to the euro.

“Today, we are leaders in all these [new] markets and see further growth potential there,” said Bruno Sälzer, chairman of the managing board of Hugo Boss. “At a very early stage, Hugo Boss entered the countries of Eastern Europe, now the new members of the EU.”

Hugo Boss has roughly 67 freestanding and shop-in-shops in Eastern Europe, including 21 in Russia. Reflecting the split in Boss’ overall turnover, the lion’s share of sales in the region is in men’s wear, but women’s wear is well represented.

Escada, too, is already well entrenched, with about 8 percent of its fiscal 2003 sales of 621 million euros, or $757.6 million at current exchange, pouring in from Eastern Europe.

“We are, with the exception of Malta and Slovakia, already represented via franchise partners in the new member countries,” Wolfgang Ley, chief executive of the Escada Group, said in an interview, noting there are Escada and/or Escada Sport shops in each of the capital cities of the new member states. “We are growing reasonably in all of these markets.”

Ley projected that in the next five to eight years, purchasing power in the new EU members will become more in line with the countries of Western Europe, “but not equal, as we’ve seen in East Germany,” he said.

Many luxury brands are not yet present in the 10 countries. For example, Louis Vuitton has operated a 1,400-square-foot boutique in Prague since 1998, but it has no other openings scheduled in the region this year or next, said a company spokeswoman in Paris.

Yet some are making first steps. Christian Dior opened a unit in Prague in the first half of this year, not far from the city’s picturesque and tourist-clogged old town square.

Françoise de Montenay, president of Chanel, said Eastern Europe represents an important market for the company’s fragrances and beauty products, where the brand is found in about 100 outlets. In the coming years, Montenay envisions widening beauty distribution in the 10 countries, as chains like Sephora and Marionnaud make inroads into the market. But higher-ticket items such as handbags and tweed suits may have to wait.

“Within 10 years, it will be very important,” she said. “I bet within 10 years, we will have boutiques for fashion in those countries, most likely Poland and Hungary — and Malta is interesting, too.”

Bernard Fornas, president of Cartier International, said, “It will come. One day we will open in Warsaw, Prague and Budapest. But opportunities are limited right now. Most [citizens] of these countries buy elsewhere [when on holiday] or spend their money elsewhere, as in housing.”

But Fornas said he expects the tables to turn. “[The new member countries] will probably grow faster than the old Europe,” he said.

Cartier products are sold by independent retailers in Romania, Poland, Serbia and the Czech Republic.

In the near term, luxury players said increased tourism to Western Europe by Eastern Europeans may bring gains — albeit more in terms of awareness than sales. Chanel already has some Eastern European clients, but “they don’t spend much,” Montenay said. “They buy handbags and costume jewelry. They don’t buy ready-to-wear. We need a very rich population to develop.”

Ley also said he didn’t expect short-term increases in Escada purchases in other markets by this clientele. However, “The more they see, the more they will want one day to have these same brands and shops in their own countries,” he said. “Long term, we will see a gain.”

Many agreed that Poland, with a population of 38 million, offers the most immediate potential as central Europe’s largest clothing market. The average per capita income in Poland was 544 euros, or $664, per month in 2003. (Dollar figures are converted from euros at current exchange.) Clothing and footwear amounts to 19 percent of average monthly household expenditure, up from 17 percent in the mid-Nineties, according to figures from the official Polish statistics agency, GUS.

The Polish Federation of Apparel and Textiles estimates the total value of the country’s textile and clothing market at 6 billion euros, or $7.32 billion at current exchange. After growth of some 20 percent a year in retail trade in the late Nineties, the economy has cooled down, and overall retail sales are now growing at about 3 percent a year.

The federation estimates that imported clothing has a 37 percent market share in Poland. That may well rise as international chains, such as H&M, which opened six Polish stores last year, expand in the country.

“Even though Polish consumers continue to be chiefly price-oriented in their shopping decisions, they are increasingly reaching for brand-name products,” PriceWaterhouseCoopers said in a report on retailing in Poland. The country is also home to one of the few homegrown retailers with pan-regional ambitions: Gdansk-based LPP SA now has more than 50 outlets in Poland and close to 20 elsewhere in Central and Eastern Europe selling clothes under its Reserved brand.

The young populations in several of the new member states have caught the eye of activewear giants. Quiksilver, for example, already has franchises in Poland, the Czech Republic, Slovania and Slovakia.

“We have been getting ready for this for several years. Each county offers a different type of potential,” said Peter Bloxham, vice president for Quiksilver Europe. “It’s the youth culture that is driving the market in these countries.”

In Poland, 15- to 25-year-olds make up approximately 16.9 percent of the population, compared with only 11.4 percent in Germany, according to the most recent figures available from Eurostat.

Quiksilver’s sales in Poland generate an estimated 2 percent of its sales in Europe — a number that should grow to 6 percent by 2007.

Adidas, which says it was the first activewear company to enter Eastern Europe, last year integrated Poland, Hungary, the Czech Republic, Slovenia and Slovakia into what it calls its Area Central region. “We are expecting strong double-digit growth this year as a result of the integration of the countries into Area Central,” said Michael Rupp, head of that market at Adidas. “We expect private consumption to increase, with further strong growth in the coming years.”

But many experts said the Eastern European nations are likely to offer more sourcing than selling opportunities — at least in the near term.

H&M sources 60 percent of its production in Asia, but Eastern Europe is already important, where the Swedish fast-fashion giant has suppliers in Romania, Bulgaria, Ukraine, Lithuania, Latvia and Poland. A spokeswoman said the company did not envision expanding its sourcing or retail presence into any other new EU nations.

Dorota Gutkowska, general manager, Eastern Europe, for Levi Strauss, said the Czech Republic and Poland offer the best potential, “as they benefit from a good industrial infrastructure and a qualified workforce. The Czech Republic and Poland are, respectively, listed fifth and ninth of the top 10 EU suppliers in textiles, with 23 percent and 11 percent growth on a year-on-year basis.”

Gutkowska said Levi’s has owned and operated production facilities in Hungary and Poland since the early Nineties. “Poland, in particular, has well-developed textile and machinery industries and has a tradition of producing high-quality textiles and clothing,” she said.

Meanwhile, Slovenia, the Czech Republic, Poland and Hungary provide the best retail opportunities because of their higher GDP per capita and sustained economic growth, she added.

One London-based analyst said apparel retailers will gravitate to the new EU members for “high-fashion-content” garments related to cheaper labor costs and closer location. “We think basics like T-shirts and sweatshirts will continue to be sourced in the cheapest, long-distance locations, but the closer location and cheaper cost of Eastern Europe is very attractive to retailers in terms of time to market,” the analyst said.

Mario Boselli, president of Italy’s Camera Nazionale della Moda, said the lower labor costs and proximity to Italy are good news for manufacturers looking to keep prices in check and increase margins.

“There are really four primary countries that make up a solid production bloc, and they are Hungary, the Czech Republic, Slovakia and Poland. These countries not only can produce textiles, but I would say they are equally capable of producing finished products as well,” he said. “The other encouraging signal is that these countries, especially Poland, are starting to show impressive growth rates, which will eventually mean more consumers for fashion goods.”

Boselli is also president of the Italo-Slovakia Commerce Board and owns a textile plant in Slovakia that produces synthetic yarns.

“These countries have helped Italian manufacturers remain competitive, especially in the face of China,” said Carlo Altomonte, a professor of European economic policy at Bocconi University in Milan. Altomonte noted that labor costs are 50 percent lower in countries such as Poland and Slovenia than in Italy, but warned that as these countries grow wealthier, wages will ultimately rise.

“In the future, you’ll see an increase in the production of labor costs in these countries, but the population will also grow richer and eventually become consumers of Italian goods,” Altomonte said. “The evolution will be a kind of economic trade-off.”

The Baltic countries, particularly Lithuania and Latvia, are bound to play a bigger role as wage costs in Poland escalate. The average labor cost in Polish industry is 4.50 euros, or $5.49, per hour, according to Eurostat. In Lithuania it’s 2.70 euros, or $3.29, and in Latvia 2.40 euros, or $2.93. In Ukraine, still outside the EU, a ballpark wage estimate would be just 1 to 1.25 euros, or $1.22 to $1.52.

Many European producers have relocated to Ukraine in recent years. The main export markets therefore are in the EU, with Germany alone taking 50 percent of Ukrainian textile and clothing exports. Precise figures are hard to come by, but anecdotal evidence suggests a fairly massive influx of investment from neighboring Poland. Last month, for example, German men’s wear group Ahlers said it would cut 700 jobs in Poland and Sri Lanka and shift production to subcontractors in China and Ukraine.

Ley at Escada pinpointed Ukraine as the “next strong market in the next five to seven years.” And he noted that Escada’s recent success in the former Yugoslavia suggests how new European frontiers develop in unique ways.

“It’s not that you open there and immediately have success,” he said. “It takes four to six seasons to develop a regular business with regular customers. But there’s no old wealth in these countries, and so we’re dressing a much younger clientele. These are women in good positions between 26 and 38 years old, and it’s fun to be there.”

Joffe agreed. Judging from Comme des Garçons’ experience in Russia, he said he expects the new EU members to take a unique approach as the fashion market opens up. “[Russians are not out to slavishly copy what the West has done. They like to be different and independent,” he said. “There’s more of a sense of pride. They have their own point of view.”

— With contributions from Robert Murphy and Emilie Marsh, Paris; Melissa Drier, Berlin; Courtney Colavita, Milan; and Poul Funder Larsen, Denmark

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