Letter from Moscow – Russia: Winners and Losers

March 2010

A view on the Russian market

Drastic change
For many years Russia has been one of the most fast-growing markets. Last year the country remained one of the leading markets, however, with a drastic drop in imports of - 52% . Why has the Russian market dropped so dramatically and what is the current situation?
Of course the main reason for the decrease in watch imports was due to the substantial decline in demand. The official statistics show more or less optimistic figures, but the real level of income in Russia fell by 30%. Furthermore, this fall in income was rather irregular: while the residents of Moscow and St.-Petersburg felt little change, in many small towns and industrial centres, salaries fell by 30-50% and unemployment has become a serious problem.
This situation has influenced the sale of watches considerably. Not only have sales declined, but consumer behaviour has also significantly changed. According to retail chain-store owners, the traffic in shopping centres has dropped slightly by – 5-10%. In addition to this, the average price of watches has changed considerably as the value of the ruble dropped twice in 2009. It is for this reason that some of the inexpensive brands have felt an increase in interest from consumers towards their products, while watches that cost more than US$4,000 have turned into museum exhibits. “In our town nobody has money. Someone even suggested that I exchange one of my Girard Perregaux watches for a Lada (Russian car), but where shall I keep three cars?” – One of the retailers complained. Demand has returned to 2005 levels. Only inexpensive and the most popular brands were sold, such as the Swatch Group brands: Tissot, Longines and Rado. The price limit for fashion brands fell to US$200.
Most retailers in the middle price segment estimated that demand had reduced by 10-30% in 2009. The figures are serious but not catastrophic. The difference between them and the 50% reduction of Russian imports is explained by the more considerable fall in the expensive (luxury) segment, which had been overheating in previous years, in addition to problems of credit.
Since 2000 the sales of Swiss watches in Russia have grown 4.5 times. Before 2004-2005 the better part of watch sales and income had been concentrated in Moscow, however more recently the financial flows have reached other big cities. Previously, retailers aspired to outdo one another, tried to be the first to open a new point of sale in a new shopping centre, bought new and more expensive brands, and did everything to enlarge their collections. To spend 2 million Euros on interior decoration and shop equipment was the norm. In 2007 and 2008, as a result of this competition, the purchases of watch shops grew nearly twice as fast as retail sales in these shops. In order to keep up with such a high growth rate, most retailers resorted to credit.
Until the middle of 2008 retailers and distributors built their plans based on the euphoria of growth, until the growth suddenly turned into a decline. To make things worse, the biggest fall took place in medium and big cities – the places where property development plans were the most highly concentrated. The shops and stores turned out to be overfilled with goods which were already of little interest to the consumer. Besides, the banks demanded that the credit be returned ahead of time and the shops had very little turnover. All these factors together – reduced demand, excess stock of goods and lack of turnover – led to the colossal fall of Russia as a market.
Another problem impeding official exports is the black market. High customs duties encourage black market dealers. For some brands the price the retailer pays for the product from the Russian distributor (or the Russian office) turns out to be higher than, for example, the retail price of the same product in Switzerland or the USA. In other countries the shops are glad to see Russian customers and are ready to offer them a discount. As a result black market dealers offer goods 30-40% cheaper than the official points of sale. Many companies do not make real efforts to monitor the market. And as one retailer from St.-Petersburg explains “only 10% of customers, who are the laziest and for some reason failed to go to Europe last weekend, buy watches in our shops ” which turns out to be a frightening truth.
As a result of this decrease in sales, the change of consumer behaviour and the demands from the banks to return money, most of the shops simply didn’t have the means to buy new goods. “One of my clients owes US$100 000 and his bill is overdue by 10 months. Yesterday he phoned and asked if it would be possible to buy one strap. I added the sum of his debt to the price of the strap and sent the invoice” - my old friend – a distributor – laughs. Such rather severe conditions for the distributors have forced them to sue their clients in court, which is the worst measure in the Russian culture.

Winners and Losers
Today in Russia, at least one company is winning despite the recession – The Swatch Group. First of all, its brands, Longines, Rado, CK and mainly Tissot, found themselves in the most relevant price ranges given the new market conditions. Secondly, owning the whole chain from manufacture of goods to distribution, Swatch Group managed to keep the prices stable in rubles despite the considerable devaluation of the Russian currency. “The prices for Blancpain in our shop are 10% lower than in the boutique in Geneva” – a Moscow retailer shared in February. The distributors of other brands could not offer such terms and had to surrender their place in the shop windows to the brands of the Swatch Group. The third factor of the Swatch Group’s success has been the active work of the company’s personnel with the retailers, which contrasted favourably against the background of confusion with the independent brands. All this allowed Swatch Group to considerably enlarge its market share. There are no precise statistics, but approximately it is estimated that the company’s market share increased by 35%.
So what is happening with the other brands? Only a few of them have managed to increase their sales and share on the market. Thus TAG Heuer has showed good results having found itself in a demanded niche. Ulysse Nardin also looks good with its steel models becoming the upper limit of luxury brands which were in demand with customers. A few Richemont brands and a few other independent brands can also boast good results.
In general, however, the share of independent brands tends to be low. Partially this is because of the specificity of the Russian watch shops: as a rule the owners save money on training their personnel and the sales people are only able to sell those goods which the customer asks for. Long years of staying on the market as well as active advertising campaigns have provided Swatch Group with the adequate structure and good sales in the current year.
Independent brands have failed to create such a strong demand for their products and to offer such comfortable conditions to their retailers as the Swatch Group has. In addition, conflicts between distributors and suppliers have further prevented success on the market.
“Why did I stop advertising this year?” – asks the manager of a wholesale company, - “in 2008, in accordance with the purchase plan, we spent US$500 000 on advertising. In October, when the magnitude of the recession became clear, it was already too late to break the contracts with the press and advertising agencies. And then we stopped the last shipment of goods and were behind the plan by 10%. Now the brand is refusing to compensate advertising expenditures.” Did such steps and attempts to change the plans by the distributor lead to the weakening of the brand position on the market?

What to expect from Russia?
The first one and a half years of the recession are already behind us. What is happening now and what can be expected from the Russian market in 2010? Unfortunately the real state of the economy remains rather tough. Consequently, consumer demand is not likely to return to its former level any time soon, and retailers should count more on stability than on the return of 2007-2008 figures. At the same time positive signs for importers are starting to appear: the banks have renewed trade credit and retailers have been optimizing their companies. Discrepancies in stock have been partially corrected. Thus, today the market looks much healthier than a year and half ago. And it can be expected that purchases will gradually grow and return to a place where they are in line with demand.
However, it doesn’t mean that all the brands will automatically return to their previous positions. The representatives of Swatch Group say that in 2010 they believe in stable work and do not plan a repetition of the last boom year in Russia. The reason is that the Group has already captivated the maximum possible share on the market and has reached the desired level of penetration. The next step will be to intensify the existing dealer chain, plus, possibly, building their own retail network.
As for the independent brands, if they want to stay in the Russian market, they will have to repair their shortcomings. Many companies have already changed their product offer, taking into consideration present day reality. But just to improve the collections will not be enough. They will also need competent advertising and very active work with retailers. Considering the huge territory, the brand will need a strong and competent team – either a professional distributor, or their own office or, if it is economically ineffective, a joint office with several brands. In order to make an economic decision one should remember that watches are a very specific business, and much depends on personal relations.
But despite the serious collapse of 2009, the Russian market is keeping good perspectives. Thanks to the export of energy products, the internal demand will always remain on a relatively high level, and the Russian watch companies, which managed to survive the crisis in 2009, proved their professionalism. Those companies who want to work in Russia have to be patient and do their best to support their distributors and retail partners.

Source: Europa Star April - May 2010 Magazine Issue