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Retailers Look for Windfall in Resurgent Russian Luxury Goods Sector

Currency stabilisation, VAT rebates and stay-at-home spenders all contribute to rise in high-end purchases.

Photo: Valentino’s new flagship store in Moscow: A vote of confidence in the rallying luxury sector.
Valentino's new flagship store in Moscow: A vote of confidence in the rallying luxury sector.
Photo: Valentino’s new flagship store in Moscow: A vote of confidence in the rallying luxury sector.
Valentino's new flagship store in Moscow: A vote of confidence in the rallying luxury sector.

With sales in the luxury sector frequently seen as a reliable indicator of the overall health of any economy, there has been considerable speculation as to just how retailers in this sector are weathering Russia's prolonged downturn. While there has been much previous doom and gloom, there are now signs, however, that 2016 marked a turning point for sales of many of the country's most aspirational brands.

Unlike many of its Western neighbours, Russia had no luxury market to speak of before the early 1990s. Fuelled by soaring individual wealth in the country, demand then rose sharply, peaking in 2013 before falling victim to Western sanctions and the country's own economic crisis.

Significantly, though, in the past four years none of the high-end shopping malls in Moscow or St Petersburg were forced into closure. This, though, left many wondering just how long they could survive.

Between 2013 and 2015, Russia's luxury market contracted every successive year. Starting at its 2013 high of €5.5 billion (US$5.9 billion), it fell to €4.3 billion in 2014, before bottoming out at €3.2 billion in 2015. According to the best available figures, 2016 then saw a rise to €3.5 billion.

This growth has been linked to overall economic stabilisation and an accompanying return of consumer confidence. This renewed affluence has been most apparent in Moscow and St Petersburg, with domestic purchases supplemented by spending on the part of overseas visitors.

Indeed, a number of Russia's leading upmarket retailers have latterly implemented measures designed to specifically appeal to high-spending tourists. Mercury is Russia's largest luxury chain and operates the TsUM Department Store and the Barvikha Luxury Village Mall in Moscow, as well as the DLT Department Store in St Petersburg. In 2015, it launched its highly successful "Milan Prices" campaign, aiming to reassure consumers that its range of luxury items couldn't be bought cheaper anywhere in Western Europe.

Specifically targetting wealthy tourists from mainland China, the company also began accepting Union Pay cards, while recruiting a dedicated team of Mandarin-fluent frontline sales staff. As a result, the group enjoyed a 15% rise in footfall in 2016 and, more importantly, a 30% sales increase.

In line with this, the majority of Western luxury brands operating in Russia reported increased demand last year. One clear sign of the growing confidence of such brands came with Valentino – the upmarket Italian fashion line – upgrading its Moscow operation from just one store at the end of 2015 to four by the end of 2016.

Many luxury brands are now expecting a further surge in sales following the imminent introduction of VAT refunds on all purchases valued at 10,000 rubles (US$168) or more by non-residents of the Eurasian Economic Union (Russia, Belarus, Kazakhstan, Kyrgastan and Armenia). This tourist-oriented rebate system is due to be piloted in Moscow, St Petersburg and Sochi in the spring, prior to a national rollout some years down the line.

Another factor in the resurgence of the domestic luxury sector has been the travel ban imposed on law-enforcement officers and judges, a further consequence of the Western sanctions. Typically well-remunerated, such individuals were previously accustomed to making luxury purchases abroad. Now, however, they are obliged to conduct all of their high-end spending in the malls and department stores of Moscow and St Petersburg, rather than those of New York or London.

Overall, it is now seen as a hugely opportune time to enter Russia's luxury sector. Despite the resurgence in sales, reasonably priced sites remain available in prime retail areas, while the restored fortunes of the rouble have seen it gain nearly 40% against both the Euro and the US dollar over the past six months. As additional incentives, customs procedures have been dramatically streamlined, while corruption among import officials is said to be at an all-time low.

Leonid Orlov, Moscow Consultant

Content provided by Picture: HKTDC Research
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