PARIS — When “Jenny From the Block” — better known as Jennifer Lopez — decides to open her first store in the world in Moscow, you know something is going on in the neighborhood.

Indeed, fashion and retail firms are heading to Russia in droves, attracted by a vibrant economy, a free-spending elite and what’s perceived as pent-up demand for style and status. While there is nervousness about the market and its stability — fueled by the Beslan terrorist attacks earlier this month, the murder of the American editor of Russian Forbes and the economic impact of the struggles of oil producer Yukos, executives overall believe the country continues to represent a mother lode for fashion and luxury brands.

“I have customers coming in to the store and buying 700 socks because they wear them once and then throw them away,” said David Gisi, managing director of the men’s fashion division of Mercury, one of the biggest luxury players in the country. “They consider Rolex to be almost like Swatch.”

Rebounding swiftly from an economic crisis in 1998, retail sales in Russia are growing by an average of 9 percent a year, reaching $119 billion in 2002, according to the most recent government figures. All told, Russia’s 143 million citizens wield some $280 billion in total spending power.

While most foreign retail investment to date has been in food and general merchandise, spending on fashion is considerable. Goskomstat, Russia’s national statistics agency, says an average of 13 percent of household spending goes to clothing and footwear. The Russian clothing market is estimated at about $10 billion to $12 billion. Brands as diverse as Levi’s, Hugo Boss, L’Oréal and Benetton have been present on the market for more than a decade. More recent arrivals range from Burberry and Louis Vuitton to the German discounter Metro Group.

And investments in Russia are expected to continue. A recent survey by Chicago-based AT Kearney management consultants rated Russia as the most attractive emerging market for retailers for the second year in a row, beating India and China, in second and third, respectively, in its 2004 rankings.

To be sure, the luxury crowd is cashing in on Moscow’s big spenders, with many brands reporting annual sales growth there in the range of 20 to 30 percent or more. Christian Dior, for example, cites year-to-date sales growth in excess of 50 percent in Russia and ranks its Moscow flagship fifth in terms of volume among its network of about 170 stores.

This story first appeared in the September 30, 2004 issue of WWD. Subscribe Today.

“The business is very good,” said Dior president Sidney Toledano. “Russians like to spend; they like to have fun, go out and to party, and they like fashion. Also, men like to buy gifts for the women in their lives.”

“It’s a very fashion-driven clientele — they love color, print, patterns — and have a more bold approach to buying,” agreed Rose Marie Bravo, chief executive of Burberry, which opened its first Russian location last March in Moscow. “There’s really an enthusiasm for fashion and luxury.”

A recent survey of the Russian market by Pambianco Consultants in Milan showed 98 Italian brands present with 326 stores, and 23 French brands operating 40 stores. Pambianco pegged the luxury share of the fashion market in Russia at about $600 million, with growth of about 6 to 8 percent expected for the next two or three years.

“Russia is a country of culture and history. They know what a watch is and they know what fine jewelry is,” said Bernard Fornas, president of Cartier International. “The potential is not only in the domestic [Russian] market. But it’s also elsewhere, because the Russians are traveling and spending money on luxury products.”

Cartier, which has been present for four years in Russia, now operates four shops, including a 5,000-square-foot flagship in Moscow.

“Russia represents the best ‘emerging’ country for our fashion house,” said Paolo Di Spirt, ceo of Emanuel Ungaro, which has opened two franchised boutiques in Moscow in the past two years and has begun distributing its ready-to-wear and diffusion lines. “Over the next three years, we expect an increase of 25 percent per year in keeping with the growth of the local economy.”

Despite Russia’s proximity and reputation for high-end consumption, many European luxury players only recently arrived on the scene. But all were aware of the spending power of the richest Russians, having welcomed them at boutiques in European fashion capitals and resort locations.

Yves Carcelle, ceo of Louis Vuitton, was vacationing in Dubai around New Year’s Eve and he estimated about 60 percent of the tourists there were Russian nationals.

Vuitton opened its first boutique in Russia only 18 months ago — but in grand style, with a “global store” selling all categories of product, from leather goods and shoes to rtw. At present, sales are growing at a pace in excess of 30 percent on a like-for-like basis, and Vuitton this summer opened a location in Moscow department store GUM with an entrance on Red Square — within view of Lenin’s tomb.

Making an observation echoed by most luxury players, Carcelle noted that Vuitton sells a higher percentage of rtw in Moscow, especially men’s rtw, than in any other market.

Ditto for Hermès International. While rtw represents only about 15 percent of the French brand’s sales worldwide, executive vice president Christian Blanckaert noted the figure is well over 30 percent in its Moscow store. “Russian people love our ready-to-wear, especially our men’s ready-to-wear, which is a huge success. [Hermès men’s wear designer] Veronique Nichanian’s style is very appreciated in Russia and I’m sure the new [women’s collection] by Jean Paul Gaultier will be, too. They are waiting for it.”

Harald Stolzenberg, ceo of beauty firm La Prairie Group, describes Russia as a polarized market, where top-level and mass brands work.

“Of course, our parent company [Beiersdorf] does fantastically with Nivea,” he said. “The problem is in the middle. Russia is not exactly what I’d call a democratic market.”

As the AT Kearney survey pointed out, low per capita spending remains a risk for foreign retailers. Russian per capita spending of $1,950 is only half that of neighboring Lithuania, at $3,750.

“The great question is, ‘How will the middle market develop?’” according to Aliona Doletskaya, editor in chief of Russian Vogue, which was founded six years ago just as the country went into an economic crisis. “That’s where the biggest gap exists right now, and I think if H&M were to set up in Moscow, they would become billionaires. We need stores like Gap, Marks & Spencer, H&M.”

The Metro Group, Germany’s fourth-largest retail group and the world’s fifth largest, has been active in Russia since 2001. It operates seven Metro Cash & Carry wholesale hypermarkets and will open up to eight Cash & Carry stores in Russia this year, a spokesman said.

In 2003, Russia accounted for sales of 510 million euros, or $628.3 million at current exchange, out of group sales of 53.6 billion euros, or $66.03 billion. Metro cites a “first-mover advantage” to being the first big international player in a new market, especially for securing the best locations. Plus, Metro has the further advantage of actually being invited into new markets.

A Metro spokesman said the retailer is often instrumental in introducing or establishing a value-added tax system in the countries in question, consequently providing the governments with a continuous source of revenue. This is the case in Serbia. Even in countries where there is VAT, many small-scale retailers often don’t pay it, the spokesman explained. “We offer very reasonable prices, and so many of these small retailers start buying their ranges at Metro, and thus do pay VAT,” he said.

L’Oréal, beauty’s behemoth, staked its claim on the Russian market in 1990. Its sales soared 39 percent in Russia last year and have multiplied by 2.5 times since 2000.

Its Vichy brand, introduced in Russia in 1998, is now available in 2,500 pharmacies there and is the number-one skin care brand in the country, according to the firm.

L’Oréal has adapted its brands at a local level to better meet the needs of Russian consumers. For its L’Oréal Paris brand, for example, it tweaked its methods of communication with customers.

“Technical advice is a key element of success in Russia, where consumers expect information on the most ‘technical’ products, such as hair color, skin care, and makeup,” the company said. “Consequently, [L’Oréal Paris] has designed new counters called ‘Espace Beaute,’ in which consumers can receive diagnosis from beauty advisers.”

Also at a local level, L’Oréal’s Garnier brand tackled the effects of Russia’s harsh winters by launching Total Comfort in November 2003. The skin care product was developed especially to meet the needs of the Russian market as 39 percent of women in the country have very dry skin.

On the apparel side, foreign retailers face little competition from Russian makers, which compete mostly at the low end of the market against cheap Asian imports.

Russia’s textile and clothing industry went through a devastating crisis in the Nineties as domestic demand plummeted and cheap cotton imports from Central Asia dried up. That has seriously dented the industry’s export potential, as well. In 2002, Russian exports of textiles and footwear amounted to just 0.6 percent of the country’s overall exports, or some $540 million. Official imports in the two categories were 4.4 percent of total imports, or around $1.58 billion. The actual figure, however, is likely to be significantly higher, with gray- and black-market imports still rampant. Torgovaya Gazeta, a Russian trade journal, estimates that the share of imports in many clothing categories hovers at 70 to 80 percent of the total.

In general, the Russian clothing industry has found it difficult to compete with inexpensive imports from Turkey and China. However, a few domestic brands are emerging.

Among the most successful is Gloria Jeans Corporation, which last year reported sales exceeding $100 million. Located in the Rostov region, an impoverished coal-mining area in Southern Russia, Gloria expects to produce 15 million to 16 million pairs of jeans this year under its own brand, plus some 4.5 million pairs as a subcontractor for Levi Strauss. Gloria jeans retails for as little as $14, but the company is highly profitable with earnings last year of $12 million. It’s now branching into knitwear, with a new line of T-shirts and sweatshirts, officials say. “We’re going down the same road as any major jeans producer in the world. We’re growing, and in that process, we’re expanding our product range,” said Maria Ostrovskaya, managing director of Gloria.

While imported clothing abounds, there are still relatively few international clothing retailers in Russia, after Next and British House left in the wake of the 1998 financial market crash. But others may move soon to fill the void.

Fast-fashion behemoth H&M has signaled that it’s eyeing the Russian market — hardly surprising given the runaway success of another Swedish retailer, Ikea. The furniture giant opened three Russian stores in 2000, and has said it will open a mall and its first regional store in Kazan soon.

“There are incredible opportunities,” said Robert Pesser, retail manager for Eastern Europe at Amsterdam-based Mexx, which is owned by Liz Claiborne Inc. “Russians have a hunger for fashion. But the Russians are also sparking business elsewhere. They are traveling — and buying — all over Europe.”

Indeed, Pesser said Russia could potentially assume the same importance as the U.S. He said the company has seen like-for-like growth of more than 20 percent over the last few years. Mexx opened its first store in Russia in 1998 and today operates 10 units in Moscow and three in St. Petersburg. Elsewhere in the country, the firm has some 70 franchised units. Pesser said there are plans to introduce other Liz Claiborne-owned brands in Russia.

Russian retailers are on the move, as well. Russia’s biggest retailer, the discounter Pyaterochka, plans to launch 155 new stores this year, most of them outside of the Moscow and St. Petersburg regions, according to the AT Kearney report. Pyaterochka had sales of $930 million last year.

Still, most of the foreign fashion players surveyed by WWD said they see limited expansion potential beyond the capital.

“The consensus today is the big money is in Moscow,” said Carcelle at Vuitton. “We might even open a third store in Moscow before going into St. Petersburg.”

“Outside of Moscow, the potential is limited,” agreed Ralph Toledano, president of Chloé, which opened its first unit in the capital in June.

Indeed, regional variations in spending are huge. Nationally, monthly per capita income averages about $140, whereas Muscovites take in about $400. Even though only 7 percent of the population lives in the sprawling capital, it generates an estimated 25 percent of the country’s total retail volume.

Last year, rents for prime real estate in Moscow were $1,340 a square meter, according to the Economist Intelligence Unit.

Russia’s other populous cities, some flush with oil money, include Samara, Volgograd and Togliatti, which are seen as the next focal point for retail expansion. Other secondary cities include Ekaterinburg, Novosirbirsk, Perm and Rostov.

Giorgio Armani is sticking with the big cities. The Italian designer operates two freestanding stores and three shop-in-shops in Moscow. The plan is to add another Giorgio Armani boutique in Moscow and the first Emporio Armani unit in St. Petersburg, but not before the end of 2005 or early 2006.

“What’s interesting is that there are only two ‘lifestyle metropolises’ — namely Moscow and St. Petersburg,” said a spokesman for Germany’s Hugo Boss, which has been on the Russian market since 1992 with men’s wear and since 2002 with women’s. “And in between, there are a further 25 cities with populations of a million or more, which require other strategies than is the case in fashion-conscious Moscow.”

Some firms are making inroads beyond the capital, such as Sonia Rykiel.

“We’ve been in Russia for seven years. We started in Moscow and St. Petersburg,” said Didier Grospiron, Rykiel’s international commercial director. “But now we’re sold in about 20 cities throughout Russia.”

But a scarcity of prime retail space, especially outside of Moscow, is considered a key challenge.

According to an executive at one large Russian apparel brand: “There’s little competition between those shopping centers with spacious retail floors, so they charge inordinately high rents, creating obstacles for retailers’ expansion.”

The complexities of the Russian market make having a partner a necessity, according to most observers.

“Finding the right partner is the biggest challenge,” said Burberry’s Bravo, who works with Jamilco.

“I would dissuade anyone who plans to do business in Russia without a local partner,” agreed Caroline Scheufele, vice president and creative director of Chopard, which works with Mercury. “It’s just too complicated, between the language and the mentality.”

Grospiron at Rykiel agreed. “The country’s too different and the laws are different. You need a partner to help understand.” He added that one concern in Russia is getting paid. “We always ask to be paid in advance because you don’t know where the money’s coming from and when it may dry up,” he said.

Multinational perfumeries are choosing to ally with local chains in Russia, according to Rimma Chainikova, a consultant with Moscow research group BKG Consultancy.

“To construct stores so far from our [home] base would be complicated and require a high level of investment,” said Marcel Frydman, president of Marionnaud, which has a franchise deal with Arbat Prestige. “We could open one or two stores, but to cover the country would be a costly ambition and would take a lot of time. Franchising doesn’t cost Marionnaud anything at all, so it means we don’t take any financial risks.”

Already, Russia’s beauty scene is dominated by international brand names, which command 53 percent of total market share, according to Staraya Krepost. Among the top-ranking multinationals are L’Oréal, Procter & Gamble and Beiersdorf.

Indeed, competition in fragrance and cosmetics in Russia’s capital city is now as fierce as in more mature markets.

“Today in Moscow, you can find the same offer as any Sephora in Paris,” said Philippe Benacin, president of Inter Parfums SA, which holds beauty licenses for brands including Paul Smith, Burberry, Christian Lacroix and Celine.

Chanel has been present in Russia with beauty products for two years through an affiliate, and should end 2004 with more than 150 points of sale. A spokeswoman said the beauty business is expected to grow 50 percent this year. She noted Russian consumers have a taste for its most expensive beauty products, in large-size formats, and a craving for new products.

Benacin noted he sees future growth coming from cities and towns beyond the capital, adding that Inter Parfums has seen the pace of its sales growth slacken over the past two years due to stepped-up competition in Moscow.

Russian customers are stereotyped for having flashy tastes, but some observers say the market is evolving quickly and becoming more sophisticated.

Daniele Ballestrazzi, a general director at Versace, said Russians tend to go for more of a “total look” than American and Western European customers, who are more individual and self-confident.

He said Russian customers like to shop in big stores and boutiques in Russia or make purchases while traveling, with tastes ranging from flash to substance. “The fashion and trendy are very well-received, but the Russian consumer likes to buy both trendy clothes as well as classic tailored suits,” Ballestrazzi said.

Russian Vogue’s Doletskaya said high-end shoppers are increasingly discerning, even if they love recognizable fashion.

“The women who do have money go for the best: If they buy Vuitton, it will be the golden ostrich coat,” she said. “They want what’s most expensive, most fantastic and most chic. Russians generally think big.”

A love of fashion is built into the Russian genes, said Ella Krasner, a London-based Russian socialite and writer. “Even middle-class people in Russia will save up money to buy a Prada bag and Gucci shoes. It comes from being deprived for so many years.”

Benetton, which has 115 stores in 39 Russian cities, said the typical Benetton customer in Russia is a middle-class woman aged 20 to 35 with a monthly income of $300 to $750. She buys clothes in shops about once every four months. Benetton said its marketing research shows the Russian woman is most concerned with quality, product assortment, brand name and where it is made.

“You must have a brand. The Russian consumer needs and wants brand awareness,” agreed Michael Rosenblat, ceo of Germany’s Tom Tailor, which currently boasts more than 40 points-of-sale in Russia. “Especially in women’s, clothes have to be sexy. They want a tighter fit, shorter skirts, low rise. If it’s not sexy enough, they won’t buy it.”

Most foreign players play down the risk of economic or political turmoil.

“We expect the economy in Russia will grow continuously,” the Metro spokesman said. “Our investments in these markets are long-term oriented.”

“Russia has a very good chance to be among the top seven European markets in three to five years,” said Martin Shankland, managing director of Adidas Russia.

“We believe that the Russian market has a voracious appetite for anything American, even more than in the markets where the Mary-Kate and Ashley brand is present,” said Robert Thorne, president of Dualstar Entertainment Group, the licensing and production firm of the Mary-Kate and Ashley apparel line co-owned by the Olsen twins. The Mary-Kate and Ashley television series is already a hit among young Russian teens and the twins recently graced the cover of Russian Elle Girl there. “We are seriously considering Russia for 2006. Every day that goes by becomes more viable due to the Westernization of the market, but we think it is between a year and a half to two years short of where it should be for our needs.”

Others take a slightly more cautious view.

“Growth in Russia has been big, double-digits, but there will be a ceiling one day,” said Chopard’s Scheufele. “It will be like it was in the Middle East, which grew and grew and then suddenly hit the top. I think Russia still has a lot of potential and it should continue to grow very fast over the next five years.”

Dorota Gutkowska, general manager of Levi Strauss in Eastern Europe, said Russia doesn’t hold as much potential as the Central European countries that just joined the European Union. She noted that Levi’s has been sold in Russia since the early Nineties, with distribution at present through 103 Russian stores, 31 of which are Levi’s-only stores. Five stores are in Moscow. A 2,000-square-foot flagship opened early this summer on Tverskaya Street, a favorite shopping destination for young Muscovites.

“Nevertheless, in the longer term, the sheer size of the country and its consumer base makes Russia a market with interesting development opportunities for branded goods companies,” she said.

On the West Coast, doing business with Russia is seen as too problematic due to a plethora of reasons ranging from strongmen to style.

“Well, it’s the [cold] weather there and the currency exchange for two things,” said Ilse Metchek, executive director of the California Fashion Association, who said California manufacturers tend to not do business with retailers in Russia. “And, it’s the size of the people. Our manufacturers are oriented to juniors’ and contemporary and if you just envision Russians, there aren’t too many manufacturers here that make things warm and large.”

West Coast contractors are not sourcing goods from Russia, either. “I can only surmise that labor costs there are not as cheap as China,” said Joe Rodriguez, executive director of the Garment Contractors Association, noting even Vietnam or Cambodia would be more logical alliances because of their geographic proximity to California. “Whenever an American or Californian sources elsewhere, they’re looking primarily for the lowest costs. I would think they have other options here.”

On two separate occasions since 2001, a Russian delegation of retailers, including GUM, came to Los Angeles to buy goods. They went home empty-handed.

“[The retailers] were commenting on the fact that California style and American style [are] so different from European style, and European fashion is what Russia is leaning toward,” said Olga Karasik, a corporate attorney who accompanied the Russians on their tour. “On the flip side, they were finding it’s very difficult to sell Russian [goods] here. There’s a clash on every style level.”

Leon Max, owner of in Pasadena, Calif., with 150 contemporary stores worldwide, grew up in St. Petersburg and defected to the U.S. in the mid-Seventies. He, too, has shunned doing business in Russia. “There’s a distinct lack of enforceable commercial codes and contractual laws there,” he said, noting that, just after the Soviet regime, there was even significant amounts of unclaimed retail real estate in cities like Moscow and St. Petersburg. “No one knew who owned the properties. And up until a few years ago, one would have to have protection from strongmen to do business and not be bothered with local bandits. I’m quite sure it’s still a problem around Russia. Also, there’s a growing middle class but a slow-growing middle class. There are very few credit cards in use. I’m better off opening a store in Glendale, [Calif.,] — and they speak Russian just as well there.”