Romania’s luxury market deeply affected by political and economic crisis

One of the weakest economies in the Eastern block of the European Union, Romania has been dramatically impacted by the ongoing political crisis of the past 3 months which has lead to an unprecedented impeachment of the President. The take over of power by the leftist coalition USL in June was followed by a fierce political battle to empeach the current President, belonging to the now opposition party, PDL. A referedum took place on July 29th and due to intense political pressures, the Constitutional Court, the only abilitated to validate the referrendum, has delayed a decision for 31st August.

The political instability has led to a depreciation of the currency, higher inflation, a legislative gridlock and a complete hold of any activity by the government and a back lash from the E.U. commision, Commisionner Viviane Reding which stated that the instability in Romania threatens to impact the entire European Union. The absorbtion of E.U. funds is the lowest in the EU, standing at 9% in the past months and foreign investors have indefinitely postponed projects in Romania. All economic sectors have been affected and there are estimates of price increases in energy (both for population and companies) petrol, food and other utilities. Monday, the USL led Government of Romania has re-shuffled cabinet, naming 6 new ministers, after the Home Office Minister resigned and had admitted pressures for the organization of the referendum.

CPP Luxury Industry Management Consultants Ltd already estimated in January a 20% drop in buying power and a 40% decrease in the number of wealthy. Sales in the first 6 months of 2012 were 30% lower than compared to the same period of last year accross all luxury sectors, especially fashion, accessories, jewellery and watches.

Belstaff and Pal Zileri mono-brand closed down last month, while other two mono-brand stores are expected to close by the end of the year. In June, over 40 percent of premium retail locations have become empty on leading highstreet Calea Victoriei (Furla and Guess closed their locations, relocating to one of the  major shopping malls).

Worst performing international luxury fashion brands in the first 6 months of 2012 in Romania have been: Gucci, Moschino, Alfred Dunhill, Valentino, Emporio Armani, Hugo Boss and Burberry. Louis Vuitton has maintained its leading position, however, its 2012 turnover is unlikely to reach last year’s record of 5,1 million euros. By comparison, most mono-brand stores such as Ermenegildo Zegna, Canali, Gucci, Max Mara, Emporio Armani hardly reach a 1,5 million euros annual turnover (each). Another issue affecting the performance of international luxury brands is real estate. Although half empty, rents on Calea Victoriei have not decreased significantly and locations such as those of Gucci or Max Mara have a unique status, hence lessors’ unwillingness to adjust rents to crisis conditions and this way, indirectly support tenants. That is why, most brands have found an ”escape” to the JW Marriott shopping gallery, which does have much lower rents but has a major disadvantage in terms of location (away from the downtown) and image of the hotel, which is no longer frequented by the wealthy locals.

Louis Vuitton store, Bucharest, Romania

The best selling internationa luxury brand in a multi-brand has remained Christian Dior, at Victoria 46, the store relocating to a larger location earlier this summer. Brands which have disappeared from the portfolios of luxury multi-brand stores: Chloe, Bottega Veneta, Fendi, Givenchy, Yves Saint Laurent.

The pressure to reduce costs and improve profitability has pushed luxury retailers such as Sodo Migliori, the franchisee of Gucci for Romania, to close down some of its watches and jewellery stores. Another retailer, Alsa Group, franchisee of Max Mara and Ermenegildo Zegna for Romania has had to sell its stake in the company franchising Emporio Armani and close the mono-brand of Pal Zileri.

Much hailed and intensly promoted Cocor, former communist department store which underwent a 30 million euro make-over investment, has failed to attract any luxury brands, as part of the company’s strategic plan to become Bucharest’s luxury destination. The Cocor store was put on sales last week, following a strained financial situation, which may lead to a bankruptcy proceedure.

The situation is even worse when it comes to luxury watches and jewellery, a sector affected not only by the economic and politica crisis but also by sales of counterfeits and wealthy individuals shopping abroad. Most international luxury watch and jewellery brands are present in Romania in multi-brand boutiques, with very small sales levels, hardly justifying a corner or a mon0-brand presence. The best example are top international luxury watch/jewellery brands which have mono-brand boutiques through several countries in Eastern Europe, only have small corners (each with one corner) in Romania.

The economic crisis has also impacted the level of customer service, most retailers resorting to cuts in salaries and hiring of less qualified staff. Major retailers and airlines from the Middle East have intensified their recruitments in several Eastern European countries, including Romania. For instance, a sales associate from a luxury store in Romania can earn up to 3 times as much as flight attended on a Middle East carrier.

With an uncertain political and economic environment and the looming crisis in Italy and Spain will continue to affect Romania’s economy, including its luxury sector. That is why, opening of new mono-brand stores of major brands such as Prada, Hermes, Chanel Ralph Lauren or Tiffany (none currently present in Romania) is unjustified earlier than 2014, unless a luxury department store project is develop, which would concentrate all brands, create a destination and allow for lower stocks, thus smaller risks.

To understand how critical the political and economical stability of a country is for its luxury market, the most relevant comparison is with Ukraine. The country’s ongoing disagreements with Moscow, the stalling of E.U. accession due to the imprisonement of former Prime Minister Iulia Timoshenko and a weak banking system which has drastically reduced loans have led to a decrease of luxury sales in Ukraine by at least 30% in the first quarter of 2012 and the negative trend is likely to continue as buying power is diminishing and the number of HNWI is ebbing. Ukraine is also facing the major issue of high duties and import taxes which makes pricing at least 20% higher than in Europe. In November, CPP will release further data on Ukraine.

Oliver Petcu