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Russian fashion market still prospective despite challenging 2009

The financial crisis started to affect fashion industry in Russia and, to a high degree, the operations of retail chains. On the one hand this verifies the strategies of some least effective retailers, while on the other it creates opportunity for others to build upon the situation.
Clothing, footwear and accessories (CFA) is the second-largest retail sector after food retailing in Russia. “Clothing and footwear market in Russia 2009,” the most recent report by PMR, a research and consulting firm, forecasts that in 2009 the Russian CFA market size will decrease by some 5% to RUB 1,380bn ($41bn, €31bn). The expected downtrend in 2009 compared to 2008 will be a result of a sharp drop in clothing sales and stagnation in the sales growth of accessories and footwear.
Meanwhile, the main factor hampering further growth of the CFA industry is the decreasing purchasing power of the population. Compared to 2008, values expressed in dollars and euro are to demonstrate an even steeper drop in 2009. The underlying reason is that at the end of 2008 a dramatic fall in commodity prices as well as substantial capital outflow caused by the economic crisis resulted in significant rouble depreciation.
According to estimates of PMR, in 2008 the Russian CFA market amounted to RUB 1,452.3bn ($58bn, €40bn), which already represented stagnation in relation to the previous year. The lack of growth was mainly caused by a decrease in sales for the clothing segment in the second half of the year. Even though the segments of footwear and accessories demonstrated growth, this was insufficient to offset the decline in the clothing segment.
Nevertheless, general trends for distribution channel development have not been influenced dramatically by the financial crisis in Russia. The share of open-air markets and independent CFA stores as traditional distribution channels for the fashion industry in Russia continues to shrink while mixed-assortment stores (such as department stores and hypermarkets) and predominantly CFA retail chains constantly strengthen their position on the market.
While the Russian CFA market remains highly fragmented (there are no clothing retailers with a visible market share of over 5–8% in any price segment), in line with PMR’s report, the aggregated share of CFA retail chains accounted for 33% of the market in 2008 in Russia, and are expected to increase to nearly 40% by 2011.
Meanwhile, however, the financial crisis started to affect the industry and, to a high degree, the operations of chains. On the one hand this verifies the strategies of some least effective retailers, while on the other it creates opportunity for others to build upon the situation.

Struggling companies
As it becomes harder for retailers to get loans for further business support, the active development of modern formats has significantly slowed down. Some foreign CFA brands were forced to leave the Russian market (e.g., Diesel, Stella McCartney and Alexander McQueen). The CFA retail chains become more and more dependent on the lease level set by property owners. The retailers need considerable discounts in the lease to survive as their sales have demonstrated a downtrend since Q3 2008. What is more, chains developing via franchising in the Russian market (both foreign and domestic) are likely to face significant problems as it is becoming hard for franchisees to purchase the collections from the brand owner and they often appeal for delay of payment.
Meanwhile, the retailers try to fight the devaluation of the Russian currency by decreasing the share of CFA items produced abroad. This is true for both retail chains with own production and those purchasing collections from suppliers. The Gloria Jean’s company transferred part of its production from the Far East (China, Bangladesh) to Russia. The Zimaletto retail chain decided to reduce the orders from abroad to 40% (compared to 75% before the financial crisis). The company considers such an initiative as a tool for maintaining prices in rubles at the same level.

Opportunities on the horizon
Some CFA retailers consider the crisis as an opportunity for further development including diversification of their portfolios. In consequence, though yet low, M&A activity is increasing in CFA retailing with retail chains becoming the objects of investments.
In October, 2008, Melon Fashion Group acquired Taxi clothing retail chain consisting of 14 stores. What is more, the company launched a new retail project under the Love Republic banner. In Q1 2009, Sun Investment Partners (investment company) established by the former co-owners of Kopeyka retail company acquired a 33% stock share of the CentrObuv footwear retail chain.
Also, the St. Petersburg-based clothing retailer Budu Mamoi specializing in maternity clothing announced its plans on conquering a considerable market share by exploiting the opportunities offered by the financial crisis. Budu Mamoi considers that many competitors are likely to go bankrupt during the crisis as the maternity clothing niche is relatively narrow. During 2009, the company expects to double its storecount by opening 20 new stores in the regions of Russia. Also, the Glance chain consisting of about 250 stores plans to open 70 new outlets during 2009.
Despite the unstable economic situation in the country, foreign CFA retailers tend to continue their expansion and increase the level of market penetration. H&M, which entered the country in March 2009 by opening two stores in Moscow, plans to open its stores beyond the capital city. According to the company, at times like these people are more deliberate in choosing the optimal price/quality ratio. If they find this ratio in a certain brand, they become loyal to this brand for the long term. Besides, it requires less investment to enter the market of Russia at present than a year ago.
The Japan-based Uniqlo and the American firm GAP are also said to be considering expansion into the market of Russia.

This press release is based on information contained in the latest PMR report entitled “Clothing and footwear market in Russia 2009, Luxury market insights and development forecasts 2009-2011”

More information on the report:
Marketing Department:
tel. /48/ 12 618 90 20
e-mail: marketing@pmrpublications.com

About PMR

PMR Publications (www.pmrpublications.com) is a division of PMR, a company providing market information, advice and services to international businesses interested in Central and Eastern European countries and other emerging markets. PMR key areas of operation include market research (through PMR Research), consultancy (through PMR Consulting) and business publications (through PMR Publications). With over 13 years of experience, highly skilled international staff and coverage of over 20 countries, PMR is one of the largest companies of its type in the region.

PMR
ul. Supniewskiego 9, 31-527 Krakow, Poland
tel. /48/ 12 618 90 00, fax /48/ 12 618 90 08
www.pmrcorporate.com

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