Eastern Europe, an untapped market with many resources for luxury brands
For many years, luxury brands have ignored the potential of many Eastern European markets, focusing on Russia and Central Europe, both proving recently to be extremely volatile during the current crisis. Major luxury brands have followed each other in Prague and Budapest, both having shown strong potential prior to the debut of the crisis mid 2008. Louis Vuitton, Cartier, Hermes, Dior are just some of the top luxury brands that have decided to open directly operated stores in Prague. The trend then followed in Budapest, with Louis Vuitton, Gucci and Burberry opening their own stores. CPP Management Consultants Ltd, sole Central and Eastern European consultancy specialized in luxury has warned as early as November 2006 that luxury brands in both Czech Republic and Hungary will actually address foreign travellers, especially from Asia – South Korea, China and Japan and not local nationals. Foreign travellers have grown to represent over 60% of sales of luxury brands, locals representing less than 30%. This was a sign of vulnerability for both markets in case foreign tourism would drop. First such drop occurred during the SARS virus expansion, yet the current economic crisis has had the first dramatic effect on the luxury markets in Prague and Budapest, with sales dropping by over 25% on all luxury industry sectors. Most affected sectors remain hospitality with average occupancy rates having halved in the 2 capitals. In the case of hospitality, luxury hotel chains have rushed to open properties in both capitals and now are facing critical conditions.
CPP’s in depth analysis has shown throughout the past 5 years that the Central and Eastern European markets are divided in two, on the one hand, the anglo saxon countries including Hungary, Czech Republic, Poland, Croatia and Slovenia with its majority wealthy consumers showing low affinity and demand for luxury brands, and on the other hand the strong luxury markets – Romania, Bulgaria, Serbia, Montenegro and Ukraine with a very strong affinity for luxury brands among its wealthy consumers.
Sales in the strong luxury markets are driven over 70% by locals, tourism representing a small percentage. There is also an important difference between the 2 areas, the strong luxury markets showing a very high demand for luxury branded products and services. People in Romania, Bulgaria, Serbia or Ukraine would even take up loans to purchase luxury products or accept to live in a small studio but to own the latest luxury car or watch. Social status is the most important kindler of luxury consumption, that is why top international labels are among the highest in demand.
During the 2006-2007 international economic boom, most of the top international luxury brands motivated their lack of interest in these markets due to the non membership to E.U. In the mean time, consumers in all these countries used to make all their purchases abroad especially in Milan, Paris and Munich. The EU integration of Romania and Bulgaria came in January 2007 and suddenly most of luxury brands became interested in these markets. However, the timing for expansion couldn’t be worst, especially due to the sky high, ever growing price of real estate, making any mono-brand franchised store unfeasible under the existing conditions. That is why, for instance, Louis Vuitton has compromised by choosing a hotel gallery in Bucharest, at a distance from the centre and which is today almost empty.
According to CPP’s research, the markets with the largest number of wealthy consumers are: Ukraine (25.000), Romania (11.000), Serbia (7.000) and Bulgaria (5.000), figures representing the number of wealthy consumers with assets of over EUR 5 million and with a minimum yearly allocated budget for luxury products and services of EUR 100.000. With the exception of Ukraine, all other markets maintain a high potential. This is also illustrated by smaller sales drops in existing luxury brands than in Western Europe since the debut of the crisis mid 2008.
In the case of Ukraine, the market was destabilized by the internal political fights, high corruption as well as a rocky relationship with Russia especially due to natural resources such as gas. Currently, Ukraine luxury market has dropped by more than 15%, yet some sectors such as luxury hospitality and SPA having grown by 10% in the past 12 months. CPP believes the Ukraine luxury market will see a recovery by late 2010, provided that some of the top luxury brands already present in franchising, change their existing partners. The concentration of all luxury brands (fashion, accessories and jewellery) in the hands of four players has proven to be one of the causes for the current instability, creating a high exposure to the current conditions. For instance, all Gucci Group brands are represented by one local franchisee, company which represents 10 other luxury brands.
Of the other 3 markets, Romania and Serbia represent the highest potential with smallest drops in sales and still a very low penetration of top luxury brands. Bulgaria’s luxury market is currently experiencing drops of up to 10-15% , yet the market will most likely see a revival by mid 2010. One of the segments which has been oversaturated in Bulgaria is jewellery and watches, many top international luxury brands having pushed too early for franchised, mono-brand locations.
As for Serbia, it is probably the hidden gem of luxury in the entire region, for instance the capital of Belgrade which is mainly a corporate destination has just one 5 star international chain hotel (Hyatt), with many exceptional opportunities – former properties to be renovated and projects under construction.
The luxury sectors with the highest potential of growth in the following 10 months in the strong luxury markets are:
Ukraine – SPA, hospitality, organic concepts
Romania – SPA, fashion, accessories, organic concepts
Serbia – SPA, fashion, hospitality, accessories, organic concepts
Bulgaria – SPA, fashion, accessories
The biggest challenge identified by CPP in the further growth process of the luxury industry in all of these markets is the lack of experienced and viable local partners / franchisees. That is why, in the past 6 months, representatives of CPP have identified major experienced international retailers or developers especially from the Middle East and Asia which could expand their operations and therefore invest in this region, ideally in a joint venture model with a local partner.
Furthermore, the current economic crisis presents an exceptional timing for investment due to the very reasonable price of real estate especially on high streets as well as the clear interest of many European banks to finance luxury retail projects, especially those under long term franchising agreements.
As for top international luxury brands which have shown a definite interest in Eastern Europe are: HERMES, ARMANI, DIOR, GUCCI, RALPH LAUREN and also luxury department stores such as SAKS FIFTH AVENUE and HARVEY NICHOLS. Regarding the hospitality sector, chains such as STARWOOD or KEMPINSKI have very limited presence in the strong luxury markets of Eastern Europe, while chains such as FOUR SEASONS, MANDARIN ORIENTAL have no properties in these markets.
CPP Management Consultants Ltd