Q1 2010 marks revival on Russian clothing market after crisis

2010-07-07

Retail Update Russia speaks to Daria Yadernaya of the Esper Group about the revival on the Russian clothing market, the factors behind the rapid growth in Q1 2010 and the prospects for market development throughout the year, in addition to the luxury and children’s goods subgroups of the market.

Joanna Swatowska-Rybak, Retail Update Russia: In the recently published figures for the first quarter of 2010, the Esper Group estimated that the Russian clothing market had grown at a very respectable 57% year on year, whereas the figure in 2009 was a mere 5%. Do you think that this rapid growth in Q1 can be interpreted as a revival on the Russian clothing market after the crisis?

Daria Yadernaya, the Esper Group: Those active on the market first saw positive indicators in Q4 2009, but signs of revival were still scarce at that time and not enough to claim that there was a definite trend. Those signs started to coalesce into a critical mass of indicators which formed a trend in Q1 2010, and that is when imports began to grow, internal production started to recover and consumer demand started to increase. The most promising signs of revival could be seen when people crowded into Uniqlo in April, with more than 70 people at a time trying to push their way into the changing rooms, and slightly fewer, but a still significant number, of people – at D&G a month earlier.
JS-R: Let’s take a closer look at the 57% growth figure. Which factors, in your opinion, stood behind the growth?

DY: First of all, we have to bear in mind the low base in Q1 2009, when the crisis was at its peak, from which the Q1 2010 growth was calculated. In addition, to specify the indicators which actually caused the growth in Q1 2010, I must mention the recovery of demand and the significant number of orders for the spring-summer season in the first place, with the majority of deliveries taking place in January-February 2010. The increase in orders was reflected in the increase in the value of imports of clothes to Russia, which, according to Federal Customs Service data, was 23% year on year in Q1 2010, in contrast to only 7% during the corresponding period of last year.
On the contrary, Q1 2009 was a period during which stocks were sold and little was ordered.

JS-R: And the other factors which prompted the growth?

DY: The second most important factor was the rouble-euro exchange rate. In Q1 2010 the euro rate (RUB 38 per euro) was significantly lower than that of Q1 2009 (RUB 43.4 per euro). Taking currency fluctuations into account, the real growth figure in Q1 2010 should, therefore, be reduced by 14 p.p. If one takes further corrections, for example, those pertaining to customs, into consideration, the figure in real terms was even lower.

JS-R: Could you explain why?
DY: In February 2010 the customs authorities confiscated counterfeit and low-quality clothing worth about RUB 300m (€7.9m), which was imported and traded without appropriate market entry documentation. Sanctions followed, and most deliveries were later cleared officially at customs. They thus appeared in the official statistics, and some “grey” imports which became official and therefore contributed to the increase in the Q1 2010 figure. This did not happen in 2009.

JS-R: I suspect that the appearance of large international players on the Russian market in the first quarter of this year also contributed to the strong Q1 growth?

DY: Certainly. The appearance of major players such as Uniqlo and Dolce&Gabbana, and the fact that existing players strengthened their positions, were the final, but not the least significant, factor which drove the Q1 growth. The clothing supply for Uniqlo alone was so substantial that it virtually paralysed customs offices, and this eventually delayed the opening of the company’s first store in Russia. We estimate that about 5-7% of all imports of clothes into Russia in Q1 2010 were provided by Uniqlo. In addition, if we also bear in mind the 1,000 m² D&G store, along with a number of Dolce&Gabbana points of sale, the figure might even be slightly higher.

JS-R: Do you think that these players deliberately chose the first quarter of 2010 to enter the Russian market?

DY: Yes, they did plan to enter in Q1 2010 for several reasons. Firstly, they obtained substantial rent discounts. We assume that Uniqlo, in particular, obtained significant discounts, as the Atrium trading centre, where it opened the store, had serious problems after losing major anchor tenants, such as the cosmetics and beauty store Arbat Prestige, which went bankrupt. Furthermore, this was precisely the moment just before the revival [In September 2009 Retail Update Russia reported Uniqlo’s plans to open its first stores in Russia in the spring of 2010 – JS-R], when they focused on the niche market in Russia and started to work with customers in order to exploit the recovery and to achieve a market share and loyal customers in the early days.
The same can be said of D&G. Their financial problems were quite serious, and the Russian market, on which they had been traditionally very popular, probably saved them from serious financial difficulty. Their partnership with Mercury in Russia helped them to choose the correct moment to enter and to find attractive areas to rent.
JS-R: Finally, bearing in mind all of the seasonal and currency-related factors, what real growth figure do you estimate on the Russian clothing market in Q1 2010?

DY: Without seasonal and currency-related adjustments the figure might be around 20%, which is objective given the fact that most retailers sold stocks in 2009. However, we cannot separate this figure from the inflation rate until we have received proven data.

JS-R: What growth do you expect in the subsequent quarters of 2010 and for the overall year?

DY: We believe that Q2 will bring only moderate growth, of 3% year on year, after the upturn of Q1 2010. We expect Q3 and Q4 to show stable growth of 6% and 5% respectively, bearing in mind the Customs Union, which will become active on 1 July 2010. We also expect the increase in imports in August to fill stocks for the autumn-winter season.
For 2010 as a whole, we forecast 8-9% growth in comparison with 2009.
JS-R: What impact does the luxury clothing market subdivision have on the overall clothing market in Russia at present, and what is its condition after the crisis?

DY: The luxury clothing market accounts for about 6-7% of the overall Russian clothing market, i.e. €2.5bn. The luxury subgroup has become even more competitive than it was before the crisis. On the one hand, customers are more demanding and sophisticated, and on the other, they have aspirations pertaining to eternal values and essentials in collections, along with a desire for affordable luxury. In addition, luxury has become more consolidated, as many market participants who described their products as luxurious despite the lack of a clear brand identity went bankrupt during the crisis or found their products difficult to sell in Russia – this applied to a substantial number of American designers and some Belgians. In the end, Russians stayed with fewer luxury brands with strong positions, a loyal audience, clear positioning and brand individuality.
JS-R: So those luxury brands which survived remained stronger?

DY: Luxury brands are still striving for market shares, and most companies have discovered a method of driving sales – publicity and trading on the internet. Chanel, for example, has signed advertising contracts with Vogue.ru and Lookatme.ru, a teenage entertainment portal. Today there are Chanel watch banners on the site, and more will come with the new collections. This is the first time a brand such as Chanel has paid for online publicity in Russia. Along with Burberry’s online promotion and trading, this is a significant step toward a new target audience for luxury goods, in particular, men who are often too bored to shop in person: those who sometimes do not try clothing on but will happily choose it online.
JS-R: What are the prospects for luxury clothing in Russia in 2010?

DY: On the whole, the potential of the luxury market in Russia is impressive because there are many target customers in the country, and this is a group which is expanding quickly. However, 2010 will not produce an excessive increase in luxury business, in our opinion, as hedonists do not significantly increase the amount they buy, and the fashion conscious and status seekers will take time to make money after the crisis before they turn back into loyal luxury customers. Furthermore, sales and discounts during the crisis probably prompted consumers to buy more than they needed, and demand is now probably moderate. We therefore believe that the luxury market will grow by 6-7% per year, i.e. a little more slowly than the overall market, but that this will be offset by the medium-priced bracket, which suffered considerably during the crisis but is now reviving rapidly. The budget market and will, however, grow only slightly in step with prosperity, as customs regulations become stricter and consumers opt increasingly for superior clothing. We therefore predict an increase of only 3-4% for the cheaper end of the market in 2010.
JS-R: According to your estimates, children’s clothes proved to be resistant to the crisis in 2009. What developments do you expect this year in this market subdivision?

DY: We believe that this area of the market is saturated and consolidated but we see several reasons for growth. Firstly, general growth in welfare in Russia is allowing parents to spend more on each child. If the average annual amount spent on children’s clothing is now about RUB 10,000 (€263), which is fairly low in comparison with the European average, we expect it to grow steadily. Secondly, the children’s clothing market extends not only in quantity but in quality to various price levels. Today, the differentiation on the market is increasingly apparent, and this prompts more promotion techniques and drives demand. Finally, new production and stitching technologies, and new children’s clothing designs, have come to Russia, along with new fabrics, which again attracts increasing numbers of new customers.

JS-R: Do you think that the upper-price bracket is increasing more rapidly than the lower-price bracket on the children clothing market?

DY: The budget market is already oversaturated, although this applies mainly to inferior goods. It is, therefore, increasing more slowly. On the other hand, the higher price bracket experienced difficult competition during the crisis, which forced poorly managed companies to abandon the market. The upper-price bracket therefore declined sharply. However, at present, the potential of the upper-price market is considerable, and many companies hope to exploit vacant niches after the economic collapse. This subdivision is, therefore, recovering more rapidly.