International retailers continue expansion on the Russian clothing and footwear market despite the crisis

2010-08-04

Despite economic turbulences, the value of the clothing and footwear market in Russia increased last year after a stagnant 2008, positively influenced by the clothing sector, according to the recent PMR report Clothing and footwear market in Russia 2010. Nevertheless, the forecasts for the current year are less optimistic and the market is expected to struggle, while a more optimistic scenario is not expected before 2011.

The value of the clothing, footwear and accessories (CFA) market in Russia increased by 5% in 2009, to reach RUB 1,525bn ($48.1bn), according to the PMR report. However, if calculated in US dollars, the CFA retail market in Russia demonstrated a sharp drop in 2009 compared to 2008 (over 17%) as a result of rouble depreciation.
The CFA market appeared relatively resistant to the economic conditions and the main factor behind this growth was an improvement of the clothing segment, which reported a considerable increase of its value in contrast to the drop noted in 2008. However, according to forecasts by PMR, the market value is expected to decrease by over 4.4% in 2010, influenced by negative development on the footwear market. Apart from the increase in tariffs for imported footwear, the negative impact from the weak economic environment and only slow increase of disposable incomes will continue as one of the factors limiting potential for market growth.
CFA, traditionally the largest retail segment by value in the Russian non-food market, in 2009 accounted for 27% of non-food retail sales in the country. The share of CFA in total consumer spending is decreasing in Russia: while in 2000, clothing, textiles, furs and footwear accounted for more than 18% of the total retail turnover, in 2009 this share fell to 11.2%.



Independent stores loose to chains and open-air markets
As in the previous years, CFA chains sustained their leading position as the distribution channel, maintaining their share of around a third of the market value. On the other hand, open-air markets increased their share, after years of consecutive downward trends, as they attracted more customers during the more challenging economic times due to lower prices. This was at the cost of independent CFA stores, whose share decreased in comparison to 2008, as, among other things, the owners of such stores lack financial resources for the purchase of new CFA collections.



Struggling market still provides opportunities
Despite the weak economic situation in the country, foreign CFA retailers tend to continue their expansion and increase the level of market penetration. For example, since March 2009, Swedish clothing retailer H&M has opened five stores in the country. A new Japanese clothing retailer, Uniqlo, opened its first store in Moscow in spring 2010. In addition, one of the largest footwear chains in the US, Payless, owned by Collective Brands Inc., also announced its plans for entering Russia in 2010. Nevertheless, the Russian market retains difficulties for foreign companies’ expansion. In addition to such difficulties as significant administrative barriers, market non-transparency, weak logistics and poor legislation, the market offers also smaller return on investment in the CFA retailing than in some other emerging markets.
Moreover, the penetration of foreign CFA companies in Russia is partially influenced by the lack of department stores and poor development of multi-brand retailing. The fiercest competitors among foreign operators are represented by retail chains which have established a strong presence in Russia and have gained popularity among Russian consumers. Such chains include Inditex, Mango, Motivi and Sixty Group. These companies are acquiring stores from their franchisees and gradually increasing the number of their own stores.
At the same time, some Russian CFA manufacturers plan to invest in development of their own retail chains as well. Sela, one of the leading retailers on the market, has managed to increase its storecount in Russia, although the company closed some units in other countries and in Russia as well. The other company operating on the market, Gloria Jeans, one of the leading clothing producers in Russia, decided to withdraw from the loss-generating wholesale business and focus on its own store chain. However, worsening economic conditions had a negative impact on the company, which was forced to take some measures in order to reduce costs and postpone its expansion until the financial situation has improved.

Luxury clothing and footwear market down
The luxury CFA sector in Russia decreased to RUB 119.6bn ($3.8bn) in 2009, accounting for 7.8% of the whole CFA market in the country.
Under the pressure of the financial crisis the majority of luxury CFA retail operators .have suspended their development and focused on the existing projects in Moscow, St. Petersburg, Nizhny Novgorod and Ekaterinburg. Further development of the luxury segment is hampered by the high level of investments required for the store opening and lack of cheap financial resources.
The unstable economic situation resulted in the shutdown of stores under such banners as Diesel, Stella McCartney, Alexander McQueen and Vivenne Westwood. New luxury monobrand stores opened in 2009 include Сasadei, Cesare Paciotti, Alberto Guardiani, Giuseppe Zanotti and multibrand lingerie store Estelle A-Store.
Gradual recovery after the financial crisis is likely to stimulate the interest of foreign operators in the Russian luxury CFA market. Some foreign brands may turn back to distributors to minimise their own risks. PMR analysts expect that foreign companies will prefer cooperating with local partners rather than entering the Russian market independently.

This article is based on information contained in the latest PMR report entitled Clothing and footwear retail in Russia 2010. Luxury market insights and development forecasts for 2010-2012.