Why has the magic disappeared from Prague’s luxury market?
Over a decade ago, when Czech Republic was selected among the lucky few Eastern European countries to join the European Union in 2004, along with Hungary, Poland, Slovenia and Baltic States. Czech Republic applied for EU membership in 1996 and was accepted as a full status member in 2004.
Some of the ”Eastern Block” countries are today still on the waiting list for E.U. accession (Croatia, Turkey, Ukraine) while other countries such as Albania and Serbia are not yet official candidates. Romania and Bulgaria were the last Eastern European countries to have been officially accepted in the E.U. on the second wave of expansion in 2007, the economic crisis of the past 3 years hindering the integration process but also deteriorating the confidence in the Eurozone and its very foundation principles.
During the first 5 years of E.U. integration, Prague and Budapest reigned as the undisputed capital cities of the entire Central & Eastern European, the accession providing the validation of stability investors were seeking. From real estate to tourism, both capital cities flourished, with an influx of investments from around the world and especially from Germany, Austria and the Netherlands which remain, to date, the biggest foreign investor countries in the Czech Republic and Hungary.
The accession to the E.U. of Romania and Bulgaria, coupled with the debt crisis which made its debut in 2009, kindled the downturn of Czech Republic and Hungary, the latter being also among the worst affected economy among the Eastern European E.U. countries. In Hungary, the economic instability was deepened by a political one, bringing the country on a virtual collapse, which climaxed last month with the bankruptcy of Malev, Hungary’s national airline.
Even more than Budapest, Prague positioned itself from the early 2000 as a premium destination, with a flurry of luxury hotel openings, most of them, without a sound feasibility analysis. The influx of tourists from Asia, especially South Korea and Japan, as well as from the US, Ukraine and Russia, was also part of the motivation of major international luxury chains to open hotels in Prague. Czech Republic’s lax visa system and the very good air transportation connectivity, mostly by Czech Airlines attracted record number of Russian and Ukrainian travellers in early 2000. At the time, Ukrainians, Serbians and Russians would also flock to Budapest and Prague for shopping, especially international luxury brands which were either unavailable locally or they were at least 30 to 40% cheaper than in Ukraine, Serbia and Russia.
Currently, Prague has over 40.000 hotel rooms and its luxury hotel sector being over-supplied by at least 40%. Four Seasons, Rocco Forte, Mandarin Oriental, Kempinski, Sheraton and Marriott are among the five star international chain hotels which opened in Prague since 2001, joining existing hotels such as Hilton and InterContinental.
The same booming development trend took over the major international luxury brands which, in the early 2000, would not even anticipate the advance of China or Brazil, therefore, focusing on emerging markets such as Eastern Europe. From the point of view of luxury retail, Prague has always been ahead of Budapest, most of the luxury fashion and accessories luxury brands operating directly, as opposed to Budapest, where most would operate in franchising. Following a mixed or even negative performance in Prague, some major international brands such as Hermes, Christian Dior, Fendi, Cartier did not open mono-brand stores in Budapest too.
Much like luxury hoteliers, the luxury retailers would realize, soon after opening, sales to the locals would be minimal, therefore relying mostly on foreign tourists. Some international luxury brands also failed to understand the ‘’Anglo Saxon’’ nature of the luxury consumer profile in Slovenia, Czech Republic, Hungary and Poland – more price sensitive, conservative in style, driven by quality rather than brand notoriety, less affinity for luxury brands and a slower degree of show off. Nowadays, according to research by CPP, top international luxury brands would have an yearly turnover in Bucharest or Kiev, equivalent to Prague and Budapest taken together. Today, however, the economic crisis and the increased attractiveness of other destinations, has reversed the consumer base, the majority shoppers being wealthy Czechs. Without the additional balance provided by foreign travellers, the market size has diminished, threfore, some brands needing to scale down – keeping the same surfaces, however, with considerably lower stocks.
Five years since my last visit to Prague, I was disappointed to discover a downturn and almost no improvements. I would say that Prague remained somewhere stuck in its post E.U. integration times and still, like the entire country refuses to accept today’s reality. From the airport, the roads, most of the heritage buildings downtown, not to mention the suburbs, an air of derelict dominates Prague extensively. As I was taking a short tour of the luxury hotels, I was surprised to see how they were themselves stuck back in time, none of them having undergone renovation since opening, although in some cases, the hotels are more than 5 years old.
The economic downturn and the drop in visitor numbers have translated into lower rates (for the luxury hotel sector rates today are almost 50% of what they used to be in 2004-2006) and this has had a direct impact on profitability. Therefore, investment plans such as refurbishments or renovations were actually replaced by cuts. However, current hotel rates at luxury hotels in Prague are also very much influenced by the steep positioning crisis of hotels in Prague. To add to the confusion of travellers who seek information prior to possibly booking a trip to Prague, the 32 five star hotels in Prague include a Best Western (to my knowledge a three star franchise chain) and many boutique hotels with up to 10 rooms. To illustrate this positioning crisis, take a look at Tripadvisor, the world’s leading review website which lists all these 32 luxury hotels in Prague and according to its calculation and methodology of scoring places Four Seasons, Mandarin Oriental and the Rocco Forte way below the boutique hotels, the names of which I could hardly remember.
I understand Prague is a very tough luxury hotel market from a competition point of view, which derives from over-supply, however, I wouldn’t be able to consider the luxury hotel market as being competitive. Hoteliers and travel operators should rather look at Vienna as the direct competitor.
Although hoteliers are aware of the identity crisis which, Prague, as a destination, has been facing, in the past years, they are not doing much either. If I remember correctly, after the fall of communism in 1991, Prague was gradually a romantic destination, arts and culture destination, leisure weekend break destination and a conventions and congresses one.
As for luxury retail market in Prague, apart from Escada there have been no notable closures in the past 5 years. There were even new openings in the past year, such as Dolce Gabbana, Fendi and Bottega Veneta – all, with mono-brand stores. While some stores may look generous in size, especially from outside, I was surprised by the relatively low inventory they have, especially that they just received the new Spring Summer collections. Another important aspect which needs to be taken into consideration is the pricing – most international luxury branded goods being sold 5 to10% higher in Prague compared to Milan or Munich. The explanation I received from most of the brands is the currency devaluation risk which has pushed them to calculate an exchange rate of 27 to 28 kr for 1 euro, instead of 24 kr for 1 euro, which is the official exchange rate.
With the exception of Prada and Louis Vuitton, which have a very good representation of their collections, similarly to any other flagship store in Europe, Hermes, Dolce Gabbana, Salvatore Ferragamo, Burberry, Bottega Veneta and Christian Dior, Salvatore Ferragamo seem to be operating with minimal stock, therefore with a very small representation of the collection of the season. The ebbing performance of stores must have also had a negative impact on sales personel, customer service being of average quality at most luxury stores.
Stores appear even more deserted when walking around the PaÅ™íÅ¾ská (Parizska) street one could see large crowds of foreign tourists, whose breaks, unfortunately, do not include luxury shopping. While touring some of the top luxury hotels in the Prague, I was thinking – why wouldn’t luxury hotels and retailers join forces in re-establishing Prague as a luxury destination? Could wealthy Asians – who now prefer mostly Italy, UK, France and Spain and Russians / Ukrainians who go to Dubai and Istanbul, be replaced by nearby Serbians, Bulgarians, Montenegrans? or even with travellers from the Middle East, who are very fond of historical capital cities such as Prague – moreover, there are non-stop daily flights from Prague to Dubai (Czech Airlines, Emirates) Abu Dhabi (Czech Airlines), Beirut (Czech Airlines) and Doha (Qatar Airways).
Unfortunately, such a repositioning or re-branding cannot be implemented overnight and needs a concerted effort by hoteliers, travel operators, authorities as well as retailers. Unless some of the international luxury brands realize they need to invest more in awareness, customer service and stocks, they risk the fate of similar brands, which, in Budapest, closed down last year – Roberto Cavalli, Christian Dior.
In terms of luxury watches and accessories, the Czech market is more in line with its real potential, most international luxury brands being represented in wholesale – multibrand boutiques. The only two mono-brand jewellery/watches boutiques in Prague are Boucheron and Cartier, both with a 40%/60% sales ration between jewellery and watches.
Developing an international luxury department store with most of brands represented with corners or shop in shops could also be a feasible solution. Yet, even in the case of such a department store, the mix of brands would be critical and the diversity of products. I am sure foreigners would greatly appreciate a large retail space dedicated to crystal, glass or even fashion by local designers.
Oliver Petcu in Prague