highlights


Russia’s year of sweeping changes

March 2006



There were many changes within the Russian watch market in 2005.In one way, it resembles the year 1998, when the country faced a severe financial crisis and quintuple rouble devaluations.

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The beginning was unhurried. The Russian market looked very stable one year ago with figures showing steady growth. Lists of major retailers, distributors and the brands they represented had remained consistent for many years. Certainly, many Russian companies expected that sooner or later the larger watch companies would start their own operations on the Russian market. However, they saw that as something in the distant future.

The ‘grey’ market
Due to the Russian legislation and legal practices, the majority of goods were supplied through ‘grey’ channels (not only watches and jewellery, but also mobile phones, TVs, etc.). According to official data, about 2.6 million mobile phones were imported to Russia, whereas about 25 million mobile phones totally were delivered to the country. Watchmakers could not accept ‘grey’ supply channels, changes were not anticipated and nobody expected to see the brands themselves in Russia for many-many years.
Big shipments of expensive watches and jewellery were captured by the custom authorities in the spring, which was the first signs of coming changes. It caused problems for several companies, although the market in general was not affected. In April TAG Heuer changed its distributor. One could consider it as a normal event, but actually it was a market penetration by one of the world's leaders. TAG Heuer had a weak market presence and turnover before. It was presented in 20 shops (for example, Omega is selling through 120 shops). The Bristol Company, one of the biggest Russian companies, became the new distributor of TAG Heuer in Russia, promising fast growth of the brand and triggering off other companies' activities.
In June, the customs authorities reacted against mobile phones ‘grey’ supply channels. Scores of containers, several million dollars worth, were seized by the authorities. Simultaneously, many cheap watch distributors experienced problems with goods delivery through the old channels. Then things began to happen.
Omega initiated important changes on the market – they announced a new distribution program for Russia. Omega planned to decrease the number of shops and keep only one distributor (there were 3 distributors before). Mercury, a leader in the luxury goods distribution segment, was assigned as the exclusive distributor of Omega. About one month later two companies from the Swatch GroupTissot and Certina – announced similar decisions: they selected exclusive distributors for their products (in both cases it was the Primetime company).
Later Romanson (a leader in the Russian watch market in the below $100 price segment, with a turnover of more than US$ 10 million per year) limited the number of its distributors from 4 to 2 companies. Finally, at the end of autumn, the long-awaited event happened – Swatch decided to start its own trade operations in Russia. Very quietly, without announcements or presentations in the press Citizen opened its office in Russia. Whether by accident or design, the offices of the Swatch Group, Citizen, Breitling and Christian Dior distributor’s representatives are located in the same building.
Mention should be made that all these events were accompanied by a decrease in the production of Russian watches and regular delays of imported watch shipments at the borders.
These delays were also caused by the Government’s efforts to fight ‘grey’ importing channels. During the autumn all Russian companies experienced problems with imports.


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National products
Importing problems combined with an overall decrease in import volume should have helped domestic manufacturers to increase their sales. However, the demand for Russian watches is shrinking. Today they produce 4-5 times less compared to the best after-crisis years of 2000-2001. Manufacturers have had to cut down on personnel and their facilities. The Chaika company is a good illustration of this problem: in December the owners announced that they would sell the plant for 1 rouble, but the buyer had to pay off the company's debt of US$ 5 million.
All these events mentioned above make the Russian market quite interesting. Retail trade development supports this trend. Three major tendencies affect the situation: retail trade consolidation, demand shift towards more expensive goods and competition growth.
In spite of the fact that the retail trade remains the most profitable sphere of the Russian business, difficulties increased in 2005. Mass shopping malls construction results in the spread of buying activity and sales have dropped in the majority of retail shops. At the same time increasing leasing, advertising costs and salaries reduce profitability. Business needs very professional management to be successful today and, unfortunately, there are not many skilled managers in watch retailers that have the experience of working with severe competition.
Retail networks are more competitive in this situation. They have more experience, techniques and financial resources to successfully compete with retail mono-shops – most of them are affiliated with powerful wholesalers and have preferential treatment in supplies. All these conditions explain the rapid development of networks in 2005. Consul company shops were opened in Samara, Rostov-on-Don, Kazan and Perm, bringing its total to more than 20 shops. Another big network, Moscow Time, which concentrates on mass produced watches, has more than 35 shops in 14 cities. Networks have a powerful position in the major cities making them key players on the retail market. At the same time strong local networks appear in the big cities and they too are trying to expand their operations into other regions.

Changing demand
Growing demand for expensive watches was the third main trend within the Russian market in 2005. The growth is explained by several factors: a global trend, changing attitude to watches, increase in income. All these elements began to change a long time ago, however, there was a qualitative change in 2005. Under the influence of changing demand, retailers considered the revision of their assortment and their shop’s positioning. Owners who concentrated on Casio-Romanson explain that consumers ask for watches of the Tissot class and higher. Those who used to deal with Tissot-Longines-Omega now search for more expensive luxury brands.
In spite of the changing demand, cheap brands were well-presented in the shops in the summer. Nevertheless, the process of their replacement was sped up by the distributors cheap watches supply problems. Shops had to compensate for the shortage of habitual brands. Price increases after switching to legal supply channels became an additional reason for shops to change their assortment. For example, the average retail price of Romanson grew from US$ 70 to US$ 110, which is close to the lowest prices of Tissot. Such changes will result in a new line-up of market forces. As can be seen, market conditions in 2005 can be characterized as agitated.


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Distribution
It is difficult to make forecasts about the future. Company managers in December-January explained that they had no clear-cut plans for 2006. It will depend on the development of the situation and mostly on the Government’s activities. Regardless of the declared struggle with ‘grey’ imports and certain customs problems, ‘grey’ channels still work. For legal imports, the total tax on watches is about 60%. If import conditions are changed, it will result in a substantial growth in the retail prices and a drop in sales. Russians have already realized that the price difference for a watch in Moscow is very different from the prices in Berlin and Geneva boutiques - enough to pay for a week’s visit to one of those cities.
Watchmakers' activities will also affect the situation. All of them use almost the same strategy – they want to keep only one distributor to control prices and promotions. They also require distributors to refuse ‘grey’ channel offers in order to secure their operations in Russia. A successful implementation of the suggested measures will help watchmakers to open their own sales offices in Russia within two to three years.
The Richemont Group was the first along this road. They opened their own office about two years ago and now it is one of the most dynamic companies in Russia. Several mono-brand boutiques were opened this year and the total number of shops almost doubled. Richemont managed to control the price policy and the supply channels to the shops. It took one and a half years of hard work to achieve it though. Today, the most popular Richemont brand is now presented in only 20 shops. The manufacturers of mass produced brands, selling in more than 100 shops, will face more difficulties.
Wholesalers – the third power on the market after the Government and manufacturers – are confused today. Working conditions changed so abruptly, that not all of them managed to update their strategies. They had to fight on many fronts simultaneously. The most complicated problem was how to calculate what exactly the Government wants. Many wholesalers are ready to work legally, but they are afraid that the rules will change without prior notice. Nobody knows if the current fight against ‘grey’ imports is a long-term government strategy or just a temporary action, which we have seen a lot of during the last 20 years. Many times businessmen learned by experience that they should not trust the Russian Government.
Wholesalers try to defend their business from the brands' actions. Some of them develop their own retail business, others adjust their brand portfolio, replacing famous brands with less popular, but more reliable ones. The list of brands presented in Russia is expanding: Dolce & Gabbana, Mexx, Milus, Wyler Vetta entered the market during the last year, decreasing the share of former leading brands.

The changing market
The Russian watch market is changing rapidly. Some companies are leaving the market. For example, Belka, formerly the largest Casio distributor, is actually ruined; Altime and Wonder do not respond to phone calls. The share of some brands is decreasing, although the total market is not shrinking. Many distributors announced that their turnover at least did not decrease during 2005 despite all the problems. The market is changing its structure, new points of growth are appearing.
While old domestic manufacturers reduced their production, some new interesting Russian brands with good export potential appeared. The main luxury street in Moscow (Stoleshnikov pass) finally matured, Vacheron Constantin, Piaget, Chaumet, Louis Vuitton boutiques are located there. Power distribution among wholesalers and retail networks is changing and several successful shops focusing on fashion watches appeared in Russia in 2005.
Further stratification will likely continue in the future. Those who focus on Tissot-Maurice Lacroix-Omega ranges now will move to the more expensive segment. Others will limit their assortment within the US$ 3000 range. Many shops dealing with watches below US$ 200 will acquire more fashion watches. Some dealers will have to limit the number of shops served or completely quit their business due to costs and the required investments for growth.
Many brands will have to rebuild their distribution system in Russia because of the market structure change. Presence in retail shops and the attitude formed by a brand will be the key success factor under the new market conditions.
2005 brought many changes to the Russian watch market. However, even more changes can be expected in the future. Probably we will see a completely different market soon as far as distribution and leading brands are concerned. And those companies and brands that do survive these changes, will remain in Russia for a long time.


Source: Europa Star April-May 2006 Magazine Issue