13 Nov 2017
High-end Russian Fashion Sector Soars While Middle-market Stagnates
Conflicting signals are emanating from the Russian fashion market, with some mid-market consumers slashing their spending, while affluent Chinese tourists and renewed spending by Russia's super-rich are boosting the luxury sector.
Russia's fashion retail sector is awash with contradictory indicators, with some maintaining that the market is set to be polarised as never before. In essence, there seems to be a growing divide between the everyday Russian consumer and the super-rich. Although such a distinction has long been part of Russian life, it has never been quite so entrenched and quite so difficult to bridge.
On one side, some 70% of Russians have drastically cut back on their garment and footwear spending since 2016, with 12% said to have wholly abandoned the idea of buying new clothes for the foreseeable future. In line with this, no major shopping mall has opened in either Moscow or St Petersburg over the same period, while footfall in the existing malls has apparently fallen by 15-20%. Overall, some 50% of all Russia's fashion retailers have closed at least some of their stores in the past year, resulting in the loss of 1,230 outlets across the country.
By contrast, sales in Russia's luxury branded clothing sector have enjoyed a period of sustained growth. Chanel, for instance, the Paris-headquartered fashion group, reported a 15% surge in sales in its Russian outlets, even while its performance dipped in many of its other key markets. Demonstrating that this is far more than just a blip, two other luxury fashion retailers – Prada and Burberry – announced similar results, with the latter reporting that its Russian operation had grown by an unprecedented 200% in value terms over the past 12 months.
According to most analysts, two major elements have contributed to the buoyancy of high-end fashion sales. Firstly – and most obviously – there is the fact that Russia's wealthiest shoppers once again have the confidence to spend. Secondly – and equally significantly – there is the vast number of Chinese tourists that now visit the country every year, with many of them finding the opportunity to explore the upper levels of Russia's retail sector somewhat irresistible.
Despite this apparent upturn at the high-end of the sector, the 2016 value of Russia's fashion retail market was still 22% lower than its pre-crisis high back in 2014. It is now expected that the market will plateau over the next two to three years, a period taken as representing the typical lifespan of the clothing and footwear currently owned by Russian consumers.
In terms of the composition of the market, imports still dominate, with 78% of all items in the fashion sector currently sourced from abroad. With regard to successful promotional activity, sales and discounts remain the key drivers in the sector.
Overall, in the period 2015-2016, 44 multinational fashion retail chains withdrew from Russia, while only 11 such businesses made their first forays into the country. There is, however, an upside to this, with many market analysts agreeing that those companies that have weathered the storm are now well-positioned to occupy the niches abandoned by the departing multinationals.
Among those tipped to do well once consumer confidence is restored are some of the most familiar names in the Russian retail sector, including O'Stin, Gloria Jeans, Zara, Bershka, H&M, Adidas, Sela, Reebok, Detsky Mir, Wildberries and LaModa. Growth in the sector is expected to be led by the established e-tailers, with Wildberries and LaModa seen as likely to benefit the most.
Despite the optimistic forecasts being churned out by the Russian Ministry for Economic Development, it is expected that prices will continue to rise faster than wages for some time yet. Although such an economic reality will certainly dampen demand, a number of other factors may yet mitigate the situation.
One particular cause for optimism came in September this year when the Russian Ministry of Industry and Trade announced that the Eurasian Economic Commission had scrapped import duties on all knitwear fibres and most viscose fibres. The move was intended to stimulate the local production of knitwear and viscose fibre items, including clothing, underwear, hosiery and sportswear.
Overall, it is expected that cutting the payable duty will lead to the prices of the related items falling by as much as 10%. The measure will have a particular impact on Russia and Belarus, the two Eurasian Economic Union (EEU) member states that produce the bulk of the region's knitwear, while Milavitsa, the most successful EEU viscose fibre brand is headquartered in Minsk, the Belarusian capital.
Leonid Orlov, Moscow Consultant