The real potential of Russia’s luxury market and the challenges of doing business in Russia for luxury brands
At the end of March this year, Italian luxury brand PRADA, which only parted from its franchising agreement with leading Russian retailer Mercury last year, inaugurated its largest store store in Russia, in the capital of Moscow, in a strategic location in the heart of the city’s luxury shopping quarter at the corner of Dmitrovka and Stoleshnikov Streets, across from Louis Vuitton and Chanel.
Many have regarded this particular grand opening as a milestone in the development of luxury retail in Russia and the sometimes painful transition from franchising to direct operations, especially considering Prada, with 8 stores in Russia at the moment, does not have even a fraction of the operations structure of Louis Vuitton, which has been operating directly in Russia for almost a decade. Prada’s new flagship store was made possible thanks to a strategic relationship it holds with Crocus Group, which not only owns the space of the new flagship store but also operates Crocus Mall in Moscow, where Prada’s store has been serving as a major anchor in attracting other luxury brands. For instance, ”thanks” to Prada’s presence, Chanel is due to open a fine jewellery and watches mono-brand boutique later this year.
Louis Vuitton is probably the only major international luxury brand which has succeeded in building an ideal retail chain not only through directly operated stores but aso without any strategic partnerships. Louis Vuitton is probably the best represented international luxury brand in Russia, with two strategic mono-brand locations in Moscow: GUM Department Store (the existing store will tripple in size once construction works are finalized by the end of summer) and Stoleshnikov Street. Outside Moscow, Louis Vuitton operates two stores in Yekaterinburg and St Petersburg with a fifth Louis Vuitton store is planned for the city of Sochi, ahead of the 2014 Olympics.
Louis Vuitton’s Moscow office is also in charge with Ukraine and is run by an Italian, an exceptional luxury retail professional who has mastered operating directly in Russia, through a myriad of challenges, from accounting (bureaucracy and huge taxation), logistics (setting up a supply chain), human resources (high turnover and a lack of experienced professionals) to real estate (huge rents). These are challenges which all other international luxury brands with direct operations face in today’s Russia ever more complex luxury market.
The two most critical challenges in Russia’s today luxury retail market are human resources and real estate. The growing number of new luxury retail outlets in a market with already few skilled luxury retail professionals has led to an increase of 30% in salaries and a 50% higher turnover. More luxury retailers in Moscow are turning to other sectors such as hotels and cars to recruit service professionals. The high turnover has also been translating into an important increase in training costs, especially for the major luxury brands operating directly which aim for a high level of customer service. According to our research, the announced new openings in Moscow this year will require an additional of 200 staff.
With rents in Moscow that average from 200 to 700 euros per square meter, real estate is another critical issue for luxury retail. Moscow’s retail dynamics are changing very fast, therefore, major luxury brands deal with a major dillema in terms of demand. Take for instance, Crocus Mall, the shopping centre on the outskirts of Moscow versus new developments downtown Moscow, such as the new MOSCOW GALLERY at the Moscow Hotel. While Crocus Mall attracts a growing number of wealthy living outside Moscow, especially families, due to the complex offering of retail, food and entertainment, the Moscow Hotel, the brand new hotel in the heart of Moscow, facing the Kremlin and Bolshoy Theatre seems to be equally strategic for a luxury brand, considering the hotel is dubbed to be opened as a FOUR SEASONS Hotel. Although the hotel has an uncertain opening date (already delayed more than 2 years from initial annoucements), the Moscow Hotel has already been leasing its retail space and several international luxury brands have already leased spaces in the shopping gallery (ZILLI, Corneliani etc) and brands such as Chanel have confirmed future openings.
Moscow’s luxury retail real estate ”puzzle” is completed by the two historical shopping centres, the iconic GUM facing the Kremlin and the TSUM Department Store, the latter controlled by Mercury Group, which continues to be, at the same time a retailer and a real estate developer. The flurry of new openings in GUM this Spring is a testimony that development of luxury retail in Russia is entering a more mature phase, with decisions based on a realistic long term business perspective. Openings of niche brands with limited awareness in Russia, which hardly make sense such as DKNY or Ballantyne, are still happening, yet, it is more and more the big players who now drive the future. In the case of GUM, Louis Vuitton’s store enlargement and relocation of Christian Dior to a much larger space are a testimony to the maturity of the market.
Will Mercury, Jamilco or Bosco, the top three luxury retailers in Russia, which have been losing international luxury brands from their portfolio due to the fact they decide to operate directly, sign on new brands? This seems less and less likely, especially in the case of Mercury and Bosco, each with more pressing agendas such as the development of new retail projects such as the DLT Mall in St Petersburg opening this summer (Mercury) and the development of the Bosco sports retail chain (Bosco is the official outfitter of the Russian sports teams) as well as Bosco’s Marina Mall in Sochi.
In the case of CHANEL, development seems to be rather inconsistent, with its major flagship store opened only last year, on the groundfloor of an office building, far from a spectacular location one would expect in a major capital such as Moscow. The Moscow flagship store will be followed this year by two new Chanel boutiques this year, one at the Crocus Mall and one at the Moscow Hotel. Surprinsingly, Chanel’s most beautiful, ultra luxurious store in Russia is not in the capital of Moscow but in the city of Yekaterinburg, where the brand actually purchase the location.
Despite the new trend of switching from franchising to direct operations, some major international luxury brands such as GUCCI still prefer the ”comfort” of dealing through a franchise with Mercury. However, even in this case, which may allow for many of the complicated operationals aspects being taken care by Mercury in Moscow, when it comes to the regions, GUCCI operates with different franchisees - for instance, in Yekaterinburg, local Weda Group is the franchisee of the brand. One could only imagine how GUCCI is able to implement a coherent and consistent marketing communications strategy when dealing with different franchisees.
Ralph Lauren, a brand with increased potential in the Russian market both for its clothing / accessories and home collections is still being represented in Russia by Mercury,hence the limited marketing (especially awareness) and no stores outside Moscow.
When surveyed by CPP Luxury Industry Management Consultants Ltd, most international luxury brands have almost unanimously admitted that dealing with a franchisee has had major advantages, the major retailers being much more prepared in deadling with issues such as relationship with authorities (fiscal and customs), logistics etc. However, they quoted the lack of marketing (including research) , training of personel among the major disadvantages.
As for other sectors, such as jewellery (international luxury brands), the Russian market, especially Moscow, which represents 90% of all sales in Russia, is still very much controlled by Mercury Group and one of the major issues is the grey market and the ”imports” by piece, even in the case of franchising type of representation.
Most of these topics will be debated at CPP’s annual BUSINESS OF LUXURY FORUM, which will be held in Moscow, October 8th. With the occasion of the event, CPP will present the findings of the comprehensive annual luxury market report on Russia, covering all luxury sectors, as well as a case study on retailer Bosco. The Business of Luxury Forum will provide a platform for all luxury sectors, each being represented by a highly experienced local top executive.
Oliver Petcu in Moscow