More is not always better

April 2003

Since 1998 when the Russian rouble devalued five times, watch consumption here has been speedily increasing. In 2000 the export of Swiss watches to Russia rose 103% in comparison with 1999; in 2001 the rise was 42%. Despite the 9/11 events, sales of watches and luxury pieces in Russia continued to grow. According to the data provided by the Russian Department of Statistics, incomes of Russian people increased 16% and consumer demand rose 12%. Trade, including watch imports, prospered. Everybody wanted to believe that this growth would last forever.

But at the beginning of 2002 the Russian watch market showed some signs of satiation. The majority of manufacturers and wholesalers went on working according to the old scheme expecting healthy sales. But that year the growth was ridiculously low. According to FHS the volume of Swiss watches exported to Russia in 2002 rose by only 5%. The figure might be satisfactory in comparison with other countries. But the real situation on the Russian watch market is quite dangerous: watch supplies both of wholesalers and retailers exceed the consumer demand.

Due to the growing demand for all kinds of products from 1999-2001, much has been invested in the building of new trade centres. In 2002 the number of trade centres and big stores in Moscow increased 2.5 times, while the consumer demand had only a 12% increase. More and more shops are ready to satisfy the demand, which is growing much slower than the supply. The lack of qualified personnel and harder competition, often by means of price reductions and dumping, results in considerable declines of turnover in the stores. Sometimes the margin of a shop may fall by up to 13-15%. At the same time it becomes more and more expensive to run a watch store, which is why today many watch stores are balancing on the verge of profitability. A minor event may provoke mass closing of watch shores. In this case, as happened in 1998, stocks of liquidated watch stores obstruct sales of wholesalers and, accordingly, exports to Russia.

The danger of a possible decline in sales on the Russian watch market is due often to manufacturers' efforts. Encouraged by the high sales figures of 1999-2001, manufacturers thought that an increase in exports to Russia would compensate for the decline in exports to other countries. They started exercising pressure upon Russian distributors, making them work with greater volumes and number of points of sales. Unable to resist the pressure of both manufacturers and retailers, distributors were forced to break pricing rules.

The most difficult situation is for the brands that have been increasing the number of distributors. The addition of, for instance, two more distributors to the existing two, does not double sales. It initiates a war for a market share where the distributors' most popular weapon is dumping. Besides, manufacturers who sign contracts with new distributors risk losing the trust and reputation of their brands with the established sellers. Distributors who no longer believe in the manufacturers' support are not inclined to invest in the promotion of a brand.

A brand with only one distributor is in a much more advantageous position. An exclusive distributor actively promotes his brand and controls the situation on the market. Both distributors and retailers are satisfied and make a handsome profit. Today, the number of brand distributors and their inability to prevent dumping are the major factors for including or not including a brand into a watch store's assortment.

The results of 2002 clearly show how rises and falls in sales depend upon the chosen strategy. The greatest success on the Russian market are manufacturers who work according to the principle of 'one country – one distributor'. Their sales in Russia have grown between 50 to 90%. At the same time cooperation with many distributors explains why some Japanese brands for example, have only a small market share of the Russian watch market.

I believe that in 2003 there will not be a large growth of the Russian watch market. At best manufacturers, distributors and retailers should unite their efforts and prevent its downfall.