31 July 2019
Falling Mortgage Rates Drive Recovery of Russian Furniture Market
Second consecutive year of growth sees sector re-established after the dark days of the 15% slump of 2015.
The Russian furniture market recorded its second successive year of growth in 2018, according to figures just released by the Russian Association of Furniture and Wood Processing Enterprises, the industry's Moscow-headquartered trade body. Overall, total sales value in the sector increased 30% to US$7.58 billion from $5.87 billion. At the same time, domestic furniture production rose 8% in volume terms, while sales value increased to $3 billion from $2.66 billion. Given the size and sustained nature of the upturn, many in the industry believe the market is well on the way to recovering from the dark days of 2015, when the overall value of the sector dropped by 15%.
Although the overall market has picked up, certain sub-sectors have outperformed the average, with kitchen furniture, wooden sitting room / dining room furniture, wooden-framed sofas and wooden beds all notching up growth of 12-19%. This has been something of a boost for the regional economies of Volga and South Russia, where the majority of such items are manufactured. Not only do these two regions have far lower labour and production costs than areas such as Moscow or St Petersburg, but they are also well placed to serve buyers in the relatively nearby Urals and Western Siberia, where extensive new-build residential developments are helping to drive demand.
Indeed, it is the surfeit of new-build residential developments that has played a significant role in the resurgence of the furniture sector. With the market somewhat oversupplied with new properties, mortgage rates have been lowered in a bid to lure would-be purchasers. With more buyers and more people investing in their first home, this has inevitably triggered greater demand for furniture.
The lowered mortgage rates and the need for developers to clear their property inventory has also led to growth in both the buy-to-let and second-home sectors. In the case of the latter, such properties tend to either be in vacation-friendly South Russia or in one of the university cities where an older child might be moving to study.
A third factor, again relating directly to the property market, has been the mandatory introduction of escrow accounts for payments relating to properties still under development. This has given buyers the confidence to invest at an early stage as they know their capital can't be misappropriated by unscrupulous developers or tied-up in some convoluted contractual wrangling further down the line.
While the domestic furniture sector is clearly undergoing a minor renaissance, the market share of imported furniture is still holding steady at about the 50% mark. As of the end of December 2018, the total value of such imports, however, had climbed 30% year-on-year to $6.7 billion. China remains the largest single source of such imports, accounting for 26% of all non-domestically produced furniture on sale in the country.
Imported items are typically targeted at the lower end of the market and distributed via one of the large retail chains active in the country, notably Ikea, Hoff, OBI Leroy Merlin or Castorama. While these retailers also sell Russian-made furniture, the volumes involved are low compared with items of China origin. In general, the Russian manufacturers tend to produce furniture of a higher quality, with components sourced from Austria, Germany and Italy. As a result, such items tend to be priced at a premium compared with their Chinese counterparts.
Despite this, Russian furniture manufacturers are meeting with some success in the export sector, with such items subject to no import levies within the Eurasian Economic Union. Domestically, it also enjoys preferential treatment within the state sector. This sees all airports, railway stations, schools / kindergartens, hospitals, clinics, governmental bodies, the military and the police obliged to use Russian-made furniture.
As to the future, well the health of the sector is clearly wholly dependent on the state of the property market. In a bid to make this link yet stronger, a number of manufacturers are lobbying for a change in the law that would allow house buyers to incorporate furnishing costs into their overall mortgage amount, an extension that could prove something of a windfall for domestic producers and overseas suppliers.
Overall, though, the market share of imported furniture items is not expected to drop any time soon. This leaves considerable scope for Hong Kong manufacturers and distributors with an understanding of the country's consumer preferences to make inroads into this expanding sector. As this particular industry is almost impossible to access via cross-border e-commerce – largely due to the bulk and value of the items involved – approaching the large retail chains already active in the market will remain the strategy most likely to prove successful.
Leonid Orlov, Moscow Consultant