Franchising, a cancerous ”disease” for luxury

After five years of fierce battles and struggles, Louis Vuitton’s former Russia & CIS Regional Manager has been GUCCI’s key to switching to direct operations in the world’s most challenging luxury market. After more than 7 years in the Russian market, Gucci now directly operates 2 stores in Moscow.

But why is DOS (Directly Operated Stores) so important, even if, paradoxically, there is no improvement in financial performance? And how could Chanel, Hermes, Prada Dior and Richemont Group pull off the switch from franchising to DOS much earlier than GUCCI?

Unlike any other market in the world, Russia’s luxury market has long been tightly controlled by two giant companies, both connected to the Kremlin. In an apparent split of brand mix, the two companies, which fully controlled the entire premium commercial real estate assets in Moscow and four other wealthy cities in Russia, established a monopoly over several luxury sectors, including fashion, cars, jewellery, watches and accessories.

Through a web of carefully interconnected companies (each with no obvious legal link one to another), the two luxury ”luxe giant” would re-invent a unique luxury business model by acting as a franchise operator,  tenant, advertising company, importer, logistics operator, construction company, interior design etc. For over a decade, none of the international luxury brands would be able to enter Russia without opting for one of the two ”exclusive” partners.

Any attempt to develop luxury in a city outside the control of the two giants, such as Yekaterinburg, had dramatic consequences, with most luxury brands closing down or down-sizing, despite the documented potential of the city. The final blow? Introducing 5 daily non-stop flights from Yekaterinburg to….Dubai (Dubai is closer than Moscow). A similar fate looms over Kazan, the third largest city in Russia, in terms of HNWI potential. A flight from Kazan to Milan or Paris is at least 10 times more expensive than the 90 minute non-stop flight to Moscow.

Each of the early DOS switch success stories had a ”skeleton in the cupboard”. Prada‘s largest flagship store in Moscow was conditioned by an opening in the mall which is owned by the same realtor, even if the respective mall is far from luxury. Chanel‘s ”Russian DOS venture” was conditioned by an indefinite ban to open anywhere outside Moscow, while Richemont Group can only open stores in locations indirectly owned by the two ”luxe giants”.

I cannot help but wonder, in a hypothetical scenario, what would happen  if all the luxury companies which now operate directly in Russia would switch back to franchising? Could such a move prove there is no crisis in Russia’s luxury market? Most certainly, YES! And the effects on all luxury sectors around the world would be immediate.

Major risks for franchising in luxury fashion:

- importing of goods on different legal entities than the company which has the legal franchising rights

- ”VIP sales” by home delivery, of goods without invoicing, therefore without VAT

- reported sales which actually end up at major wholesale buyers for duty free, outlet and online sales

- advertising budget never spent (all media deals are bartered) but reported and deducted from orders

Oliver Petcu in London

Gucci new store in Moscow on Petrovka St