By Vogue Business Team as guest authors
The first in a new series of premium reports uncovering the risks and opportunities in luxury markets.
High-level summary: The USD 17 billion Russian luxury market is a fragmented mix of local players like market leader Tsum, a luxury department store chain owned by luxury developer and distributor The Mercury Group, luxury mall and store operator Bosco di Ciliegi (majority owner of the famous GUM on Moscow’s Red Square), multi-brand concept stores like Nevsky 152 in St Petersburg (owned by distributor and retailer Babochka, who opened the country’s first fashion boutique in 1998) and international luxury mono-brand stores.
Many foreign brands, including Gucci, Burberry and Prada, used local partners like Mercury to enter the market in the early 2000s during the economic growth period, eventually directly operating their stores. Louis Vuitton, for example, one of the first international entrants to Russia, opened on Moscow’s Stoleshnikov Lane in 2002. It now has a store in luxury mall Vremena Goda, stores in Tsum and GUM, and two more boutiques outside Moscow: a store on Nevsky Prospect in Saint Petersburg and at the Black Sea coastal resort of Sochi. But given Russia’s 144 million population, wealth and growing middle-class, it is relatively underserved in terms of stores. Luxury spending is focused in a handful of cities including Moscow, Saint Petersburg and wealthy pockets in central and north-west districts, PWC says.
Accessing those other shoppers is harder. For one, Russian luxury shoppers mostly shopped outside of the country prior to Covid-19, but this is changing as travel is restricted. And secondly, few international brands have developed a local e-commerce offer. A lack of local delivery options, a dislike for prepaying for goods (preferring to see the items in hand before agreeing to payment), price sensitivity and high return rates have detracted brands, leaving local players to dominate. With cross-border shopping restricted by heavy customs duty on orders over EUR 200 on international e-commerce sites, that makes local e-stores even more important. Few have, but Prada is launching this year or early 2021 and Louis Vuitton launched in 2018.
For those that do, online shoppers are very price-sensitive, expect fast delivery and a wide assortment in stock, PWC says. High-income earning millennials are the most active online shoppers, and with the market expected to double by 2023 as older shoppers become more comfortable with digital purchases and services like collection points improve, there is a big opportunity.
Domestically, the fashion market has been sanguine since 2015 when the ruble collapsed, and US and EU economic sanctions weighed on the broader economy and consumer sentiment after Russia’s annexation of Crimea. High-net-worth luxury shoppers and Chinese tourists (buoyed by the introduction of tax-free tourist shopping since 2018) have propped up the top-end of the market.
Russians are sophisticated, digital-savvy shoppers with a propensity for fashion. They want quality, depth of assortment, classic styles and fashionability, according to market leader Tsum, whose average basket is 47000 rubles (about EUR 550). Culturally, the market differs with its popularity of fur, price-savvy (department stores have reduced their price differentials versus Europe to meet that need for “European pricing”, particularly given their propensity to travel) and expectations for private, concierge-style service for those high-net-worth shoppers. Clienteling is key: discretion and highly personalised services are expected. Luxury brands assign personal shoppers to high-net-worth clients who receive personalised messaging on WhatsApp, private shopping appointments and pre-selected items for events or special occasions.
Around 52 % of Russian customers say social media influenced their purchase decisions in clothing and footwear, per PWC. YouTube is the most popular social media site, with 47.6 million monthly users, per Mediascope, followed closely by local platform Vkontakte, Russia’s equivalent to Facebook, then Instagram, local platform Odnoklassniki and Facebook. But given that, very few luxury brands have social media offers tailored specifically for the Russian consumer, or even in the Russian language. Some are starting: Miu Miu launched on Vkontakte in July, but there is an opportunity for growth and better engagement.
Anecdotally the luxury shopper is older on average versus other markets: Gen X, those aged 37-51 years, are the biggest consumer cohort, according to PWC. But Gen Z are significant drivers of growth, McKinsey says. They are very price-conscious and digitally enabled, enjoy following celebrity social media accounts and popular local bloggers like Nastya Ivleeva. A recent McKinsey and Condé Nast study found online was the best way to engage Russian Gen X and millennial shoppers, followed by print media and brand events.
Mercury started as a single watch and jewellery store in 1993 and built a network of stores. It began opening mono-brand stores for jewellery and watch brands it carried and established early franchise and distribution rights for international brands, later repeating the same strategy with fashion for brands like Gucci, Dolce & Gabbana and Prada.
The group became real estate developers with the Tsum department store in Moscow and DLT department stores in Saint Petersburg, developments like the Tretyakovsky Proezd shopping arcade filled with international brand flagship stores and the Barvikha Luxury Village in the wealthy Moscow residential area. Barvikha Luxury Village has Tsum, along with a multi-brand area, a concert hall and five-star hotel and spa, restaurants, automobile salon and a boutique area with Dolce & Gabbana, Graff and Loro Piana among international stores.
Today, Mercury Group operates 12 store locations including department store Tsum, hotels, shopping alleys and arcades and malls in Moscow, three locations in Saint Petersburg, including department store DLT, and others in Sochi and Yekaterinburg.
- 2019 turnover: 20 % growth
- 2020 turnover (Feb — June): -7 %
- E-commerce: 32 % of revenue
- E-commerce revenue growth (2019): 70 % growth
- Instagram @tsum_moscow: 920000 followers
The Russian market today:
“Russians are normally quite good shoppers, our top customers in our department stores and our boutiques really appreciate luxury and fashion goods. So when they buy, they really buy. They‘ve been on a diet for proper shopping, so they are compensating for that.”
“Our strategy is that we know our customer very well. Because if you know your customer, you come with the right product and the right service for your customer, and that is critical for successful luxury business.”
“I would say flagships are not really that critical… There is a global tendency to open a flagship, and in this market, we feel the environment we create in our department store is safe enough for any brand to be present. Flagships are slowly becoming less attractive.”
On the consumer:
“Russians shop a lot with their eyes. If they see a strong offer, abundance in a brand, they feel better, and they shop better. If you have 25 pieces to bring out in the back to show to customers, it’s perfectly valid, but I’m not sure it’s the best for the customer. Of course, you should have a few pieces to show just to that particular (VIP) customer, but you should really look strong and abundant for the consumer. That’s the way Russian consumers shop. They should see a strong selection. What you see in our stores, we follow the guidelines of the (concession) brands always. But we are at the top limit (of the product that we display).”
“We have several profiles of customers. We have young customers, we have extremely young customers, you see extremely young kids walking away with Balenciaga and Off-White, and it’s a totally new group of customers that is growing that love for particular brands. They know exactly what they want. They go for those brands; they are focused. You have a more classical customer who still buys classical brands in a classical way, and they prefer them, and the cross in-between who understands fashion and classic and they select from both.”
“Ultra-high-net-worth individuals are not the biggest shoppers. The biggest shoppers are people who are rich enough to want and to get. We have people who walk in and buy everything. But in general, people who understand fashion, who want to be in touch with the times, we cater to them.”
“Can you name me one person who doesn’t like it? It’s a worldwide thing, I would say it’s not a driver, people who are really into fashion are right there before it hits the floor and the offer is not important. [A promotional] offer is important for people who need encouragement or have reservations. We do have special offers from time to time. We don’t have sales in stores. We have outlets, of course.”
The growth opportunity in Russian luxury: “The real opportunity is online, and that’s where we see the biggest potential. To come with a whole facility and open up another department store doesn’t make sense because you won’t find the proper environment in terms of statement, and it’s not necessary if your customer in a little city somewhere else is able to access the whole inventory of Tsum and have the best service and product is delivered next day or day after, you can select what you want and send back the rest. We feel that is even better, so we feel potential is amazing. We’re putting in a lot of effort.”
“We do have our pick-up points and continue to explore more. You create a tiny area, come there, try the product, it’s more convenient, and it’s an additional service, and it’s an experience and still see what Tsum is, a flare of it, but a bit of an environment. You can feel luxury and fashion, and you’re taken care of.”
Prada opened its first store in 2002 with the Mercury Group, and its first directly operated store in 2011. It now has nine, including the flagship store, Prada Dmitrovka, opened in 2012, four corners in Tsum, and three Miu Miu stores in Moscow.
Russia is showing “more than encouraging signs of recovery; we are experiencing strong double-digit growth in recent weeks”, the Italian fashion group told Vogue Business in July. Since Prada opened its first store, the local clientele has changed into a “more sophisticated” shopper, mainly women over 30 years old, who love elegant and high-quality clothes. Menswear is also growing in Russia, and younger shoppers are buying into Prada’s revamped sportswear-inspired line Linea Rossa and Prada Re-edition bags, popular styles from 2000 and 2005, like the 2000 Nylon mini bag for 45000 rubles (around EUR 520). The bag sells for EUR 590 in Europe.
Prada has started taking a more localised approach, using Russian influencers like stylist Natasha Goldenberg and model Elena Perminova, adopting local platforms Vkontakte, offering Russian language-version of its website and plans to launch e-commerce by the end of this year or early 2021.
The Russian luxury market has potential with a growing middle-class and local high-net-worth shopper, now revenge spending at home amid Covid-19, as well as growing Chinese tourism. International brands have mostly expanded into Moscow and Saint Petersburg in small numbers leaving other cities under-served and dominated by local industry players like market leader Tsum. To reach them, e-commerce is a must, but few international brands have adopted it, due to heavy investment required in logistics, high return rates and a preference for payments on delivery. Taking a more localised approach from social media communication to well-stocked stores and high-level clienteling is key to success. Key risks remain fluctuations in the ruble, oil prices and economic sanctions.
Lucy Maguire contributed reporting to this.