9 April 2018
Beleaguered Russian Jewellery Sector Looks to Franchise and Expand
With the country's economic recovery still hesitant at best, Russian retailers are keen to spread the risk.
Despite what has generally been perceived as an upturn in the Russian economy overall, the vast majority of the country's jewellery retailers had a poor 2017, with sales notably down across the board. This should, perhaps, come as no real surprise. Typically, jewellery purchases are among the first to be abandoned in times of financial uncertainty and the last to be resumed as prosperity gradually ebbs back.
With Russia clearly seeing the proverbial green shoots of economic growth, the habits formed during the longest downturn in the country's post-Soviet history remain engrained. As well as lingering uncertainty as to whether the bad times really have passed, there is a nervousness related to conspicuous consumption, with those that have seen their fortunes at least partially restored unwilling to flaunt their wealth when so many remain enmired in comparative poverty.
Whether this is down to empathy or relates more to self-preservation, however, is quite a different issue. It is, though, an issue that particularly affects the middle strata of Russian society, with both the aloof mega-rich and the disastrously impecunious rendered somewhat immune. This makes it a particular problem for those jewellery businesses – such as Adamas, Russia's best-known jewellery brand – that largely target middle-class consumers.
Established 25 years ago when Russia first embarked on its post-Soviet capitalist adventures, Adamas now runs a nationwide chain of some 200 jewellery retail outlets, while also maintaining its own production facilities. As well as serving 77 cities across Russia, it has also developed a successful export wing, which is said to have clients in 22 countries, including the UAE, UK, Turkey and Saudi Arabia.
Like many other Russian businesses faced with the country's long-flatlining economy and lingering thrift, Adamas has had to rethink its business model. This has seen it shift its strategy on two particular fronts – international expansion and franchising.
In term of expansion, it has now moved into Belarus and Kazakhstan, two of Russia's fellow members of the Eurasian Economic Union. The two countries have a long history of being among the first stops for any Russian retailer looking to broaden its trading horizons. Despite this, they are very different markets.
Belarus is clearly the least appealing the two. With a comparatively small population of 9.5 million and its relatively low income levels, it is characterised by feeble consumer demand. Kazakhstan, however, is a far better bet.
Bordered by Russia and China, Kazakhstan has a population of 18.5 million and is largely seen as the dominant force in Central Asia. From a Russian point of view, there is the added plus that Kazakhstan's two principal cities – Almaty and Astana – are almost identical to many of the one million-plus population cities found in its northerly neighbour, as are the income levels and consumer preferences.
Of particular appeal to Adamas, as well as to the other Russian jewellery brands set to follow its lead, is that it will face very little domestic competition. Overall, there is only one jewellery manufacturer active in Kazakhstan and only one retail chain specialising in the sector – KazakhJuvelir. Furthermore, there is only a small number of independent retailers, all of which largely source their stock from Russia, Italy or Turkey.
As to franchising, this latest move represents Adamas' second attempt to branch out into this particular business model. Its initial foray into the sector, which involved appointing both domestic and overseas licensees, foundered when franchisees took to sourcing and selling their own product lines.
This time around, the company is taking a far more stringent approach to the process. In line with this, franchisees are obliged to stock only items from the Adamas range, all of which must be sold at the company's specified price points. Even their actual stores must conform with Adamas' specified dimensions and livery.
Overall, the two strategies adopted by the company are set to become relatively commonplace at the middle to high end of Russia's retail sector. While both have the advantage of spreading trading risks across a wider geographical area and minimising the company's exposure and outlay, they also open a number of new opportunities for Hong Kong manufacturers and distributors.
In particular, the extended Adamas network can function as an effective O2O channel for Hong Kong companies. In Russia, it is still officially illegal to complete a jewellery transaction online, ensuring that physical stores remain an essential part of the purchases process. This factor, together with the enhanced market knowledge and prominence enjoyed by chain-store managers / franchisees, could make such operations well worth wooing by any Hong Kong business with an interest in the jewellery sector.
Leonid Orlov, Moscow Consultant