Luxury goods market in Russia recovering from the crisis - an interview with Peter Partma, CEO of TSUM

2010-03-16



Retail Update Russia recently talked to Peter Partma, CEO of TSUM department store (part of the Mercury Retail group) in Moscow about the effects of the economic crisis on the luxury goods market in Russia, the current situation on the market and its future.

Katarzyna Koprowska, Retail Update Russia: Sales of all luxury goods worldwide decreased by 12% in 2009 and amounted to €153bn[1]. In your opinion, what was the situation like for Russia’s luxury goods market last year?

Peter Partma: First, let’s look at this market from two perspectives: the luxury goods bought by Russians in Russia and also abroad, and the luxury goods purchased just in Russia. Looking from the first perspective, it appears that when the global market for luxury goods is taken into consideration, Russians continue to be among the most important and best consumers, especially in Europe.
But concentrating specifically on goods purchased in Russia, the market contracted last year by 5-10% year on year, or perhaps slightly more. Some companies managed to post flat sales, while others reported declines. The decrease was a result of lower consumer demand – people bought less and so retailers were more careful and adjusted their orders accordingly in 2009.

K.K.: How has the crisis affected Mercury’s business? What measures has the company taken to deal with it?

P.P.: Of course, business has slowed down slightly – we have experienced a slight reduction in sales volumes – but not significantly. The decrease, however, is also due to the fact that we are taking less commercial risk right now. The crisis has not, however, changed any fundamentals of the company, and neither has it caused any major changes to the company’s structure. We are still, and continue to be, in the business of prime luxury merchandise with our main focus being fashion and, to a lesser extent, jewellery and cars.

K.K.: When can we expect to see the market recover?

P.P.: I think the market has bottomed out and is on the early path to recovery right now. We are already observing an increase in demand and, on a positive note, the market is definitely stabilised. I think it is slowly returning to growth mode, albeit not at same pace as before the crisis. While I believe that, in value terms, it will definitely reach a higher level than before, it will take time.

K.K.: Do you believe that Russians significantly reduced their spending on luxury goods because of the crisis?

P.P.: The economic crisis did not make Russians stop spending on luxury goods, however, they did postpone some purchases or, in some cases, cut back on the amount spent for this purpose. But, as I said, we are now seeing demand return. I must admit, though, that the crisis has taught Russians to spend more cautiously on such goods.

K. K.: Purchases of which luxury goods were postponed?

P.P.: The first category of luxury goods to suffer from downturn was actually that of cars and jewellery while the last to be affected was probably fashion. On the other hand, the first categories to recover have, thus far, been cars and jewellery while fashion has probably been the last to recover. In this way, they are on different sides of the circle.

K.K.: Russians are famous for their love of expensive brands. Do you think the crisis can change their attitude to luxury?

P.P.: Absolutely not. The crisis will not change the buying behaviour of Russians. Right now, they are buying less than before but, as the economic situation in the country improves, they will return to their old purchasing ways and may even spend more.
The luxury market in Russia is actually quite small compared to European countries. At present, it is a case of a very small number of people buying a lot of luxury goods, but in the future, I believe that the luxury market will spread into the upper-middle class and will not be limited to just the highest and richest levels of society.

K.K.: Is the Russian market now a prospective option for foreign luxury companies?

P.P.: In my opinion, the big foreign luxury brands will continue to invest in Russia. Moscow is a global city and the centre of the luxury market in the country – all of the big brands need to be here. I think it will take some 5-6 years for all of the major global brands to have entered Russia.

K.K.: Will they develop in Russia independently or will they do so through distributors?

P.P.: I think it will be a mix. It depends on the strategy of each company – some companies will operate exclusively through distributors, some exclusively through proprietary stores, and some will pursue a strategy that is a mix of the two.

K.K.: You said that Moscow is the centre of the luxury goods market in Russia. Are there any other cities in the country that are potentially interesting for luxury brands?

P.P.: While there are individuals outside Moscow who are interested in buying luxury products, the main market is Moscow and I believe that this will continue to be the case. Right now, I don’t see big volumes of luxury goods being sold in cities other than Moscow.

K.K.: And what about Russia’s second-largest city – St. Petersburg?

P.P.: St. Petersburg is an interesting market but is significantly smaller than Moscow in terms of consumption of luxury goods. I’m not saying that there is absolutely no market there, but it is definitely much smaller than in the capital.

K.K: What are Mercury’s future plans regarding the luxury goods market in Russia?

P.P.: We will continue to develop: in terms of space (more square metres), people and number of new brands. We have been expanding in these areas throughout almost the whole downturn, although more carefully than before the onset of the crisis.

TSUM is a part of Mercury Retail group – one of the main players on the luxury goods market in Russia. Mercury operates 20 watch and jewellery stores (Rolex, Tiffany & Co, Chopard etc.), and 70 mono-branded fashion stores (Gucci, Ralph Lauren etc.) in Moscow. The company is also a dealer of luxury cars, including brands such as Bentley, Ferrari, Lamborghini etc. and the operator of concert hall and five-star hotel and spa complex near Moscow.
TSUM was opened in 1885. Its trading area comprises 65,000 m². The store stocks brands such as Gucci, Prada, Dolce&Gabbana, Bottega Veneta, Givenchy, Lanvin, Valentino, Roberto Cavalli, Yves Saint Laurent, Versace, Jimmy Choo, Alexander McQueen, Emilio Pucci, Marni, Balenciaga and many others.