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Opening Russia’s Retail Frontiers

While Moscow and St Petersburg account for most of Russia’s fashion retail spend, its provincial cities are an increasingly interesting opportunity.
The Siberian city of Irkutsk, Russia | Source: Shutterstock
By
  • Sascha Amato

IRKUTSK, Russia – "The Russian fashion market can still be rather uncivilized," says Natalia Usacheva, owner of Enigma, a designer boutique in Irkutsk, a picturesque city the size of Boston located in the far-eastern corner of Siberia. From here, it is a mere 40-minute flight to Mongolia's capital but an epic 5,000 kilometres to Moscow.

“In the EU, municipal laws dictate a single period for sales on all goods, and if someone isn’t doing well financially they’re allowed to lower their prices. Prices are regulated. There’s nothing like that here,” Usacheva laments.

Retailers in Russia's biggest cities have survived waves of economic hardship by either dominating a niche or adapting their business models. Olga Karput's influential Moscow concept store Kuznetsky Most 20 and Hatulia Avsadjanashvili's boutique Nevsky 152 in St Petersburg flourish because their ultra-wealthy clientele is essentially recession-proof.

Due to heavy import duties, luxury fashion can be 20 to 30 percent more expensive in Russia than the same items at retailers in Europe, depending on product category. But Tsum, Moscow’s largest luxury department store, adopted a ‘Milan prices policy’ last year, adjusting prices down to attract international customers and make up for the shortfall in domestic spending – a pricing strategy that executives say boosted the department store’s sales by 40 percent.

There has been no such extraordinary uptick in Russia’s provinces because the customer base is exclusively local. But that doesn’t mean people aren’t hungry for international brands in the hinterland.

From the heartland to the hinterland

"I try to supply a vast variety of brands in my store – from Acne to Alexander Wang – but I can't sincerely say that people in Irkutsk, for example, prefer one specific designer to another [yet]. They buy a little of everything," Usacheva explains.

When faced with the largest country on the planet, it is all too easy for outsiders to equate remoteness with insignificance. That couldn’t be further from the truth, say some Russian market experts.

Irkutsk is one of about 40 cities in Russia with a population over a half million people and many of these are great distances from the country's fashion centres of Moscow and St Petersburg. Yet luxury brands have found loyal customers as far as away as Vladivostok, the Pacific Ocean terminus of the Trans-Siberian Railway that straddles the Sea of Japan.

"Our clients used to visit Europe all the time, specifically to buy clothing," says Pavel Reznichenko, founder of the Defile store in Vladivostok. "Now they try to get everything in our store as it's just more financially sound. They have become incredibly careful – they used to buy several Stella McCartney and Alaïa dresses in a single purchase, but the sanctions against Russia and, in particular, our government's responding policies have made such wild splurges a thing of the past, at least for the foreseeable future."

Multibrand retailers operating out of Russia’s provincial cities can be roughly split into two categories. Fashion boutiques like Iqons from Chelyabinsk and Irkutsk’s Enigma appeared soon after the collapse of the Soviet Union. After managing to gather enough capital to stay afloat, more opened in Omsk, Irkutsk, Samara and Vladivostok and gathered several loyal international brand partners.

The second category includes multi-brand stores like Volna in Samara and Defile in Vladivostok. These managed to gain enough momentum before the 2008 financial crisis by partnering up with regional real estate developers and oligarchs.

“The contemporary fashion market took the hardest hit in 2015, but the luxury brands persevered and thrived,” says Yekaterina Zavodchikova, owner of Volna. “Local designers like Alexander Terekhov and Walk of Shame, all of which we sell in our store, are successful simply because they’re so well adapted to the Russian market – their feminine and bright garments have definitely found a niche.”

Creeping out of recession

As Russia creeps out of recession, the economy remains in a precarious position. The country continues to face Western sanctions as well as inflation and weak consumer confidence but things are beginning to look up. After a decline of 0.4 percent in the third quarter of 2016, the Federal Statistics Service revealed that Russia’s fourth quarter GDP increased 0.3 percent from a year earlier. The rouble has also partly recovered since the collapse of oil prices.

In spite of tough economic times, the Russian apparel and footwear market has grown at a CAGR of 7.6 percent over the past five years, according to Euromonitor International. The market in 2016 was worth 2.8 trillion roubles (approximately $50 billion). Given that Russia’s provincial markets account for about a quarter to a third of the national market, provincial cities beyond Moscow and St Petersburg could present global fashion brands with an interesting growth opportunity. The provincial Russian fashion market could therefore be worth somewhere in the region of $12-17 billion.

The provincial Russian fashion market could be worth somewhere in the region of $12-17 billion.

"Tastes in the Russian provinces remain staunchly conservative," cautions Anastasia Kislyakova, owner of the online retailer Thrillstore, which sells brands like Vetements, Off-White and Gosha Rubchinskiy. "[But] the accessory market is especially hot right now, as classic bags and jewellery are always a safe bet for a buyer taking their stock to the provinces, unlike say, something from a new Chanel collection. People here just won't buy it."

Dina Sultanova is founder of the boutique DNA, located in Ufa, a city with over a million inhabitants in the Russian republic of Bashkortostan. “We have around 500 brand-loyal customers,” she says. “We know all of them, and we know everything about them, from their dress size to their favourite colour.”

This highly personal relationship is one of the only weapons provincial retailers have against the growth of local e-commerce players like Rocket Internet’s LaModa.ru and others.

"Online retailers are growing because online retail is perceived as a market where the customer can save money," says LaModa co-founder Niels Tonsen. "More and more Russians will switch to e-commerce in 2017."
However, the over-35 generation in Russia's provinces still rarely buy online and are much more loyal to brick-and-mortar stores.

More cautious mass market

Euromonitor forecasts a slow recovery of the Russian economy with a caveat of currency fluctuations and a decline in consumers’ disposable incomes. As a result, many middle-income and low-income consumers (which together represent at least 80 percent of Russian society), will remain price-conscious and cautious about spending on fashion.

Many in this demographic could turn to private label or unbranded fashion, creating a mixed bag for international global brands – with some enjoying rising fortunes and others faltering in the Russian market.
"There is no real boom in specialised concept stores in our region. Online commerce is where people can get everything," says Oleg Kustikov, publisher of Russian fashion magazine Dirty Snow that caters to luxury buyers around Russia's fourth largest city of Yekaterinburg. "And we're not really seeing an increase in interest towards smaller fashion brands, which I would assume is because most people simply can't afford them."

The stark divide between the Russian super-rich and the rest of society continues to plague retail development. “This affects our buying activity and the luxury market,” says Lubov Yeltsova, deputy minister of the Russian Ministry of Labour. “We shouldn’t expect any cardinal changes in these factors before 2018, due to several laws signed by the president coming into effect that year.”

Yet the recent economic crisis has served as a powerful stimulus for some kinds of development. In order to find new ways to keep afloat and to modernise, provincial retailers have been forced to become extremely savvy and to do so fast.

"[The crisis] truly mobilised Russian retail, and made it consider new marketing strategies, new loyalty programs and sales stimulus packages," says Anna Lebsak-Kleimans of the Fashion Consulting Group.
"It made the provincial retail market much more competitive, more professional, and has allowed it to continue its slow but steady approach towards reaching EU standards."

Sascha Amato is the Features Editor of Buro 24/7 Russia

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