The future of the Russian fashion market

What is in store for today's Russian fashion market? How will the EU sanctions against Russia and Russian retaliatory measures affect the international retail business in the country? Darya Yadernaya, Russian fashion industry expert and Managing Director at Esper Group,

an international consulting company, says not to panic and be optimistic about the future. She shares her predictions for the future with FashionUnited.

These days, sanctions against Russia are generating a lot of debate, mostly panic-stricken in nature. It seems the entire Russian market, and the fashion market in particular, are coming to an end. In reality, however, Darya Yadernaya believes we should not be driving to such a radical conclusion. In general, one can isolate several limiting factors that are indeed affecting the retailers, a small set of factors that may play a role if things turn out negatively, and a significant set of factors that will even help improve the sales for some fashion retailers.

A few possible scenarios

Firstly, the one thing that has already become noticeable within the industry is the decrease in foreign shopping carried out by Russians. Not much time has passed, and there are no compelling analyses yet on why it is happening, but a potential reduction in travel volume may be expected due to the euro rise against the ruble, pending sanctions, patriotic sentiments, as well as foreign travel restrictions for a limited number of people with high purchasing power.

However, it is more likely that we are seeing overall Russian shoppers’ refocusing on the domestic market. For example, May-to-June sales in London’s Chanel boutiques dropped by almost 40 percent from last year (and it is estimated that up to 35 percent of their clientele are Russian); premium department stores in Paris are rumored to have lost 20 to 22 percent in sales volume in Q2 2014 from 2013, due to a 74 percent drop in sales to Russian tourists from April to June of 2014.

Compared to that drop in foreign sales of luxury goods by Russian consumers, the 39 percent increase in revenue for Tsvetnoy, a Moscow department store, according to the latest publications, and a stable continuous increase in revenue for TsUM, another Moscow department store, look quite compelling.

At

most, TsUM insiders are complaining about slower sales growth from double to single digits. And all of that is happening not thanks to, but in spite of appreciation of the euro, stagnation of Russian economy, and threatened sanctions. Therefore, it can be said that Russians are buying more and more in Russia and less and less abroad. This is definitely a positive consequence from the current political situation not only for Russian retailers, but also for the Russian market in general as it indicates the development of a more mature luxury and premium market in Russia, with similar offer and service that the buyers are ready to pay extra for, compared with the European stores.

Almost the entire volume of apparel consumed by Russia is manufactured in South-East Asia and China

Secondly, the threat of a cut-off in supplies from the EU and the US to Russia seemed impossible and preposterous not too long ago, yet after the quotas on food products it became a conversational topic. Darya Yadernaya notes that it is important not to blow things out of proportion, but to stop and see the actual facts: according to Euratex, Russia imported apparel and textile goods from the EU for a total of 3,023 billion euros in 2013, while the overall Russian market turnover for the similar period in comparable prices constitutes 43.3 billion euros.

Thus, we are talking about a moderate import volume that can easily be replaced, and even more so if we are talking about quotas and not about a total import restriction. On the other hand, Russia is a very important partner for the EU, and since the EU is already concerned about the 12 billion euros lost as a result of the food sanctions, then 3 billion euros can also become the business of the day. We can conclude that the volumes in this segment are not that important for Russia to dwell on in light of the sanctions. Also, we should not forget that the total apparel volume consumed in Russia is, in fact, manufactured by South-East Asia and China, and, to some extent, Eastern European countries and Turkey, most of which are not affected by the sanction packages.

Restrictions on foreign purchases positively influence the competitiveness of Russian companies

Thirdly, an even less probable threat of foreign travel limitations for the general Russian population has been brought up. It is an almost unthinkable prospect, yet “the new economic conditions” are changing on a daily basis, so we might as well weigh the consequences. In these conditions, since the cross-border trade restrictions have not been finalized, some purchases could be replaced via that channel. Besides, judging by the food sanctions that do not affect individuals, i.e. strictly speaking, St. Petersburg residents will still be able to make purchases in Finnish supermarkets as ever, that, by the way, over 11 percent of them do, it is unlikely that we will be seeing any restrictions on foreign purchases, and in light of the first statement about the increase in domestic purchase volumes, they will hardly be relevant.

All in all, any restrictions on foreign purchases or global market access will positively influence the competitiveness of Russian companies. Taking into account the quite high market consolidation in the mass-market segment — according to Esper Group estimates, 19 percent of the ready-to-wear apparel, accessories, and shoes sales fall on Russian companies, — it can also improve their competitiveness and open additional opportunities. New opportunities will also be provided to companies that are already represented in, and especially those that are planning to enter, the Russian market, because it can turn out as the most effective way to service the Russian buyer in the next few years. And there is no need for real-life servicing: it is important that the buyers bear that idea in mind as it will stimulate them to actively purchase new brands on the domestic market.

Darya Yadernaya believes these external restrictions will, if anything, help refocus the demand to the domestic market, which will in the end give additional opportunities to Russian retailers and international retailers operating in Russia in this context. And this, in turn, will help the country come out of recession.

From our editor in Moskou