Romania, the best performing Eastern European luxury market in 2011?

Valentino, Gucci, Alfred Dunhill, Max Mara, Burberry, Gerard Darel and Ermanno Scervino are some of the international luxury brands which have made headlines with developments in 2011, in Romania, the second largest E.U. market in Eastern Europe after Poland. Gucci inaugurated its mono-brand store in Romania in 2011 and so did Alfred Dunhill, Valentino and Ermanno Scervino.

Max Mara announced the relocation of its mono-brand store to a three times larger space, while Gerarrd Darel opened a second mono-brand store within a large shopping mall. British luxury brand Burberry signed a franchise agreement for the opening of its first mono-brand store in Romania, due March 2012. German luxury brand Escada, which used to be present in Romania with 3 mono-brand boutiques till 2007, announced it is re-entering the market with a mono-brand boutique for its first line, with the same franchise partner it used to operate its boutique.

But to what extend do these developments reflect the real potential of the market? Unfortunately, the buying power has continued to decrease among Romania’s wealthy, CPP‘s research estimating that over 20% of the segment have actually disappeared from the databases of luxury brands (all sectors). And the economy, although applauded by the E.U. for being among the first to cut costs, has remained flat in 2011, foreign direct investments decreasing and a banking sector highly reluctant to finance the private sector, not to mention the alarming market share Greek banks hold in the Romanian economy?

So where does this apparent boom come from ? With the exception of Max Mara which has been present on the Romanian market for over 10 years, with a coherent business performance and a solid database of clients, Alfred Dunhill which has been in multi-brand distribution for almost 5 years before the distributor deciding to open a mono-brand store and Gucci which has had an important database of loyal Romanian customers at its flagship stores in Europe, all the other openings raise a question of feasibility or better to say, business sense. However, the annual turnover of Gucci or Max Mara in Romania is below 1,5 million euros. Valentino, Escada and Ermanno Scervino might have indeed notoriety among Romanian consumers, but would their presence in Romanian with a mono-brand store be justified from a long term business point of view? Definitely not!

Even though, the openings demonstrate one thing – the availability of cash for the franchisees, hardly experienced in luxury retail, however, lusting for self promotion and recognition, thus fuelling their need to show off among their piers. Are they to be blamed in any way? No! But rather the brands themselves, which have coalesced into such ventures, being very well aware of an imminent mid term failure. Afterall , Escada opened and close three stores after less than 4 years of operation in Romania, so did Bally, Versace, Gianfranco Ferre, Cerutti, Vivienne Westwood and Lancel in the past decade.

In the case of Valentino, Ermanno Scervino and Escada, the low rents (decreased up to 50% in the past 4 years only) and the magnetic presence of Louis Vuitton within the same premises, the shopping gallery of the JW Marriott Hotel must also have played an important part in the opening decisions. The new openings have indeed brought a desperately needed breathe of air for the JW Marriott Grand shopping gallery, yet, the operators of the gallery have failed to recognize the mid term risk of such a mix. In less than 5 years, one of  the spaces within the shopping gallery, has been occupied by four tenants: theBally mono-brand boutique, Rafar shoes multi-brand boutique, IT Ittierre multibrad store and today by Ermanno Scervinno. During the 5 years, the only constant performers have been: Louis Vuitton, Casa Frumoasa (luxury menswear and accessories) multi-brand  and Rolex (mono-brand), over 30% of the gallery remaining deserted, with shops moving from one location to the other.

Personally, I wonder what would happen if Louis Vuitton were to decide to move out of the JW Marriott Grand shopping gallery, let’s say to a street location such as Calea Victoriei, which today concrentrates 70% of the major luxury stores in Bucharest - Gucci, Zegna, Max Mara, Hugo Boss, Belstaff, Emporio Armani, Guess, Frey Wille, Rolex and the most important luxury watches and jewellery stores Helvetansa (largest retailer of Richemont Group brands), Cellini and Micri Gold (Bvlgari, Damiani, Chopard etc).

Regarding the upcoming opening of Burberry, real estate must have been playing a crucial role in the decision to enter Romania. While the entire media advised Burberry would open in the former Stefanel space on Calea Victoriei (in the meantime taken by Max Mara), the local franchisee of Burberry opted for a much cheaper rent option, on a lateral street of Calea Victoriei, with very limited visibility and derelict buildings in the surroundings. In a review of all Burberry locations in Eastern Europe, Bucharest is by far scoring lowest from all points of view, the decision of the brand to go for this location seeming at least odd.

In sharp contrast with the fashion sector, all other luxury sector of the Romanian market stagnated in 2011, with slight improvements compared to 2010 in the cars, haute parfumerie, SPA. Due to the grey market, especially imports by un-authorized dealers and the growing market of counterfeits, the luxury watches sector has continued its poor performance, most of the major official retailers being forced to cut stocks and rely on imports only made for confirmed orders. Spanish jeweller Carrera Y Carrera was the only major international brand to enter the Romanian market, with a corner within a boutique on Calea Victoriei in the capital of Bucharest.

High-end technology, especially audio-video, a sector which was previously disregarded, has continued to post double digit growth, brands such as Sony, LG, Samsung registering solid sales for their high end products especially LED television sets. Like elsewhere in Europe, traditionally luxury positioned Bang & Olufsen has seen its sales drop, slightly, the only store in Romania underperforming in comparison with other regional stores such as those in Kiev, Budapest, Belgrade and Prague.

Despite the attraction of gold as investment, sales of high end international luxury jewellery brands have stagnated in 2011, the most prominent brands being Boucheron (mono-brand corner),Damiani (multi-brand in two locations), Bvlgari (multi-brand in one location) and Cartier (multi-brand in one location). Wealthy Romanian continued to buy expensive jewellery pieces abroad, especially in France, UK and Switzerland. Higher prices, limited selection of collections and lack of customer experience have also been to the detriment of local sales.

There are no major international luxury brands seeking entry in Romania, 2013 being taken into consideration by brands such as Prada (most likely directly operated stores), Bottega Veneta (franchise) and Tiffany.

Similarly with Ukraine and Bulgaria, the grey and counterfeiting luxury gods market has been growing at a double digit rate in the past three years due to several reasons: the financial crisis, the lack of coherent action by local authorities in most cases corruption driven, ignorance of luxury brands, growing criminality among lohn producers. Major suppliers are China and Turkey, especially for counterfeit products, while in  Romania, Bulgaria and Serbia the production of ”invented” products using original parts (especially accessories) usually stolen from lohn factories,  has been booming. This creates a very dangereous precedent, which is almost impossible to track down and required concerted efforts by the luxury brands, authorities and producers.

Oliver Petcu

CPP Luxury Industry Management Consultants Ltd has been actively covering Romania since 2004. Late March this year, CPP will release the latest annual Luxury Market Review Report on Romania.