MOSCOW — Modest crowds filtered through the historic GUM department store here during the week ahead of what is usually a frenzy of gift-giving on New Year’s Eve — the equivalent of Christmas for Russians.
Signs trumpeting discounts as high as 50 percent at stores including Lacoste, DKNY and Ugg didn’t seem to spark any shopping frenzy. Indeed, the cafés and bars were markedly busier than any of the fashion shops.
A more lively scene played out at Mega Belaya Dacha, a giant suburban mall about a 50-minute drive from the Russian capital featuring stores such as Zara, Massimo Dutti, DKNY, Marks & Spencer and Kiehl’s — some also offering deep discounts. The parking lot was jammed with cars; the coat checks overflowing, the restaurants full of weary shoppers.
Welcome to a new budget-conscious Russia, where a withering currency, Western sanctions and prolonged slump in oil and gas prices have sent consumer sentiment plunging like the thermometer in January — and cast a long shadow on the retail sector, beset with high vacancies, surplus stock and weak productivity.
Consider Bosco, one of the biggest distributors and retailers of high-end fashion brands, which operates the 30,000-square-foot Outlet Village Belaya Dacha that sells premium names at discount prices, including the likes of Hugo Boss, Furla, Michael Kors, Tommy Hilfiger, Calvin Klein, Pinko, Bogner and Trussardi Jeans.
“Out of necessity and the bad market situation, it seems to be more important these days to generate cash flow than to care for the brand image,” commented industry consultant Andreas Kurz, president of Akari Enterprises LLC.
It is well-documented that Russians have reined in travel and shopping sprees in glitzy European capitals like Paris and London.
According to data from tax-free operator Global Blue released Monday, Russian spending abroad has declined for 24 consecutive months, albeit at a slower pace in December, falling 12.2 percent versus 30.5 percent in November and 44.2 percent in October. Global Blue registered the first positive Russian data in 22 months as spending on leather goods and bags rose 13.9 percent. Russian purchases of clothing and watches/jewelry continued to decline, by 16.1 percent and 12.2 percent respectively.
While one might presume that such a long stretch of diminished travel could lead to pent-up demand, thereby increasing domestic consumption, the opposite seems to be the case.
“Consumers have to pay more for food and have less discretionary income for clothing,” said Kurz, who notes that Spanish low-cost brands such as Zara are among the few beneficiaries. Spain was the only European country able to increase exports to Russia in 2015, up by 5 percent in the first eight months of the year.
Inditex, parent of Zara, Pull and Bear and other banners, opened its first store in Moscow in 2003 and built up to 478 locations across the country as of Oct. 31. “For 2016, our intention is to continue growing and opening new stores,” said the company, which launched online sales in Russia in 2013.
According to data from the European Fashion and Textile Export Council, exports of apparel from all 28 European Union countries into Russia from January to August last year totaled 1.46 billion euros, or $1.58 billion at current exchange rates, down 29 percent versus the year-ago period.
Reinhard E. Döpfer, an international textile and fashion marketing consultant, told WWD that declines in retail sales in Russia could be observed almost monthly in 2015, slipping 3 percent in mid-October versus mid-September, or 10.4 percent compared to October 2014.
He characterized 2015 as “a year of overall shrinkage, closing of unprofitable stores, rotation of locations from badly placed stores at less frequented shopping centers to better located malls.”
Döpfer, who is also chairman of the European Fashion and Textile Export Council, described a clothing market flooded in recent years by direct imports by international retail chains and Russian federal networks. The latter are Russian clothing retail chains using Chinese manufacturers of affordable casualwear, denim and knits for adults and children.
He said this overstocked situation is in the process of being cleaned up, which may involve eliminating as much as 40 percent of the total fashion retail market value.
For example, the council forecast a downturn of clothing imports from China of at least 20 percent for 2015. Other important exporters to Russia include Italy, Germany, Lithuania and the United Kingdom.
The situation is particularly grim for Turkish textile and clothing producers, which face a trade embargo put in place by Russian President Vladimir Putin as a reprisal for the downing last November of a jet near the Turkey-Syrian border.
“Turkish retail chains like LC Waikiki or Koton, which built a strong monobrand retail presence in Russia, are badly affected,” Döpfer said. “Also, nobody knows what is going to happen with merchandise sitting ‘under arrest’ in Russian customs or on Turkish trucks waiting to enter the country via Georgia or Azerbaijan.”
What’s more, merchandise wholly manufactured in Turkey for many European fashion brands — German, Italian and Dutch ones in particular — are being held up by Russian customs for “individual inspection,” Döpfer said. “This messes up the whole supply chain procedure and causes delays in supplying orders for the spring retail season.”
Private consumption and investment are declining in Russia despite a rise in government spending, according to Euromonitor, which forecasts that Russian gross domestic product will contract by 4.3 percent in 2015 versus a gain of 0.6 percent in 2014. The real value of private final consumption was expected to decline by 7.3 percent for 2015.
Among factors denting private consumption are rising unemployment, falling wages, a higher cost of capital and diminishing confidence. Exacerbating the situation is high inflation, set to reach 15.1 percent by the end of 2015, Euromonitor said.
“There is a definite shift towards more affordable brands,” Kurz said, noting that, because of the weak ruble, the retail prices of imported brands rose by about 20 percent for the spring 2015 season and then another 20 percent for fall 2015, which resulted in lower sales.
About two years ago, 100 rubles were worth about $3. In the first days of 2016, against a surging dollar, 100 rubles now fetch barely $1.25.
According to Kurz’s calculations, prices of imported goods rocketed 53 percent last year, sending traffic in malls down by about 25 percent and forcing many stores, especially multibrand formats, to shutter.
Domestic fashions do not necessarily offer a respite from relentless economic forces.
Ulyana Sergeenko, a Moscow-based designer and couturier who shows in Paris, noted that customs regulations make it difficult to work with manufacturers abroad.
“Also we have a lot of difficulties due to the currency exchange rate,” she said. “The cost of materials has doubled as we purchase them mainly in Italy, England, France and Japan.”
She confirmed price sensitivity even among the elite customers she attracts. “We noticed an interesting tendency that our clients’ annual couture orders decreased by 10 percent, but at the same time our capsule collection sales, that is the equivalent of ready-to wear, increased by 30 percent,” Sergeenko said.
Almost all apparel segments were under pressure in Russia last year.
According to Döpfer, sales of men’s suits declined 33 percent; neckties, 39 percent; business shirts, 28 percent, and denim, 20 percent. In the women’s segment, sales of coats declined, 40 percent; suits, 36 percent; knitwear, 24 percent, and jeans, 12 percent.
While Moscow, now thoroughly Westernized, gleams like other cosmopolitan cities, morale is low as business owners and employees feel like they are getting poorer, and all their hard work has been for naught.
“I earn less now than when I started working after university,” lamented Andrei, a former member of team Russia in BMW Motorrad, who spoke on the condition that his last name be withheld. “I did not work so hard these past few years to end up with nothing. The thing that makes me angry is that I have no control over the situation.”
On Moscow streets, one doesn’t get an immediate impression of a deep crisis. Cafés, bars and eateries in popular areas remain relatively full, yet malls, which multiplied in the boom years, can seem eerily empty. That was the case in the run-up to New Year’s Eve at the new Raikin Plaza, steps away from the famous Raikin Theatre and KVN, a historic comedy club since the Soviet era. Here, the busiest parts of the malls were the cafés and Swedish budget-fashion chain H&M — another beneficiary of penny-pinching in Russia.
At Tsum, the historic mall steps away from the Bolshoi Theatre and a five-minute walk from Red Square, crowds were sparse, including in the cosmetics area on the ground floor — typically thronged ahead of the holidays. There were more clients on the women’s fashion floor, while fall collections in the men’s department seemed untouched, the sales staff outnumbering clients. Their explanation? Shoppers were waiting for the official sales period, which in Russia usually starts the first days of January.
While full results of the holiday sales season are still trickling in, Döpfer said Debenhams reported a 1.9 percent increase, with perfume and lingerie among drivers. “Experts had forecast a growth of 0.3 percent,” he noted, suggesting that the figures point to “no steep decline anymore.”
Most observers do not expect any immediate improvement in retail activity in 2016.
According to Knight Frank, the peak of mall opening was between 2009 and 2014. And even though it characterized 2015 as a difficult year for Russia, the firm managed to take part in 13 mall openings in the Moscow region with a total leasable area of 132 million square feet.
It is clear that the business strategy embraced by the real estate company is to open malls outside Moscow, where retail activity is gravitating by municipal decree. The city took this action several years ago in an effort to reduce chaotic traffic from the city center to the Garden Ring, a road which encircles central Moscow.
Yet even if malls are built, few are completely filled up, mirroring the difficulties of the whole Russian economy.
Olga Yasko, head of research at Knight Frank Russia, said vacancy rates are currently hovering around 11.3 percent.
She noted that the propensity to open malls in Moscow remained flat in 2015, with children-oriented retailers among the only format to show improvement. Knight Frank pointed to the recent reopening of historical children’s mall Detsky Mir, or Children’s World in English, on Lubyanka Square, which had closed for reconstruction in 2008.
Tepid demand drove rents down by 23 percent to 35 percent last year for both commercial and residential properties, Yasko said.
Adapting to the new business realities, Knight Frank has created a more flexible business model to entice retailers, allowing contracts to be made monthly, with the rents calculated according to how much the shop sells.
Although luxury goods are under pressure in Russia, some European players are plotting expansion moves, taking advantage of the weak currency, falling rents and vacancies galore. Last March, Hugo Boss secured a space via Knight Frank in Kuntsevo Plaza to host its men’s wear, women’s wear and sportswear.
According to market sources, Louis Vuitton and Dior are among firms currently in talks to add boutiques in prime Moscow locations.
Yasko noted that the biggest real estate investments are in offices and business centers. “In 2015 foreign investment was around $540 million, a slump of 60 percent compared to 2014. Regarding the total amount of investments in Russia, the foreign one accounts for 18 percent,” she said.
Yet most deals point to the new budget-conscious reality of Russia today. To wit: Knight Frank recently closed a deal with the French low-cost clothing chain Kiabi. In March, it is slated to open a 38,000-square-foot shop in Aviapark Mall, with the Kiabi unit billed as the biggest franchise shop in Russia. The contract is for 10 years.
Few observers expect any dramatic improvements in economic fortunes any time soon.
Döpfer foresees “another extremely difficult year for the Russian fashion retail market” marked by “consolidation, stabilization, restructuring and further professionalization of many fashion retail enterprises.”
He held out hope that the cleaning-up phase would start bearing fruit, with pent-up demand accelerating the process because “Russian women, traditionally addicted to fashion, want to update their wardrobes. This might happen over the summer of 2016. This would increase cash flows at the points of sale, which could encourage retailers to increase their purchasing budgets for the spring 2017 season.”
He noted the climate should improve over 2017, because big events like the FIFA World Cup, to be hosted by Russia in 2018, usually contribute positively to consumer sentiment. Unknown factors include the development of the exchange rate.
According to Euromonitor, economic growth could resume by 2017, but the company warns that annual gains will be less than 2 percent a year in the medium term, reflecting Russia’s structural dependence on oil prices. With no sign that oil prices will recover in the near term, Russia’s economic growth is likely continue to be restrained.
Jack Geula, who distributes premium brands in Russia and CIS countries, has a more optimistic outlook, noting that Russians are becoming more educated about fashion and the desire to consume is “comparatively much stronger than in Western Europe.”
That said, “brands that come to Russia today, with everything that is going on, must be prepared to develop their product towards Russian taste. Respect heavy winters and profit from it,” he said. “Brands that just want to come and open another market and sell some denim will not make it very far.”
Geula also said he sees a particular opportunity for domestic firms, as they operate in rubles, and therefore face fewer import woes.
What’s more, “the Russian people feel very strongly about their nation and in light of international pressures and tensions, many consumers turn to local designers. We have seen a certain trend here already,” he said.