Money Growing: Forced Liquidation

Foreign brands that intended to enter the Russian market this year have reconsidered their plans. Traders working in cheap segments have not lost optimism.

Everyone’s happy

Retailers selling essential commodities such as food, medicine, personal hygiene, are feeling relatively stable. Companies selling goods of other categories (books, clothes, jewellery, etc) have already had time to feel all the complexities of an economic situation. In most cases owners of chains and representatives of brands refuse to comment on a situation connected with the closing of shops. In April last year Georgy Pobelyansky, ex-director of national retail jewellery chain 585, which had four shops in Moscow and four in the Moscow Region noted that “it is just the beginning.” The company had planned to have up to 200 stores in the capital. However now it is only possible to find one store operating in Moscow - on Old Arbat.

In response to an enquiry from Vedomosti to comment on the situation the press-service of the chain sent a letter stating that "for quite some time now the external PR network had closed." According to employees of the store, this shop is the "last remaining."

The Russian representation of Maratex, which owns the rights to numerous brands in the mass market class (Aldo, Companys, Orsay, Esprit), has not responded to questions regarding its plans to keep or close stores. Inditex, which represents well known clothes brands in the Russian market (Zara, Bershka, Pull and Bear, Massimo Dutti, Stradivarius, Oysho, Zara Home, Uterque), have said that they don’t plan to close any stores, but refused to talk about a recession in consumer activity.

According to the Association of Enterprises in the Fashion Industry, the plans of foreign companies in the fashion segment to independently enter the Russian market are being reconsidered: they are once again looking for local distributors. Because of unpredicted falling demand, devaluation and complications in the customs regime the opening of official representations of Dior, Chanel, Louis Vuitton, Max Mara, Escada and Kiton in Russia in 2009 will not take place. The brands Converse, His, Kookai, Diesel, etc. are also not renewing their distribution contracts in the Russian Federation.

In December last year the commercial management of the Arbat Prestige chain notified suppliers that it ceased to exist. However, many market experts connect this not with the crisis, but with the arrest of owner of the chain Vladimir Nekrasov. He was arrested in January last year, on suspicion of tax evasion. Only one shop of the largest perfumery chain in the capital remains in the Atrium shopping center. But this is not operating to full force and will be closed in the first quarter of this year. Unmortgaged premises that remain the property of the chain (in the Atrium and premises on Ulitsa Sergiya Radonezhckogo), have previously been valued by market participants at $27 million.

At the beginning of February, the Institute of Globalization and Social Movements distributed a press release in which it told about serious problems in the branch of book-trade. Experts at the institute ascertained that companies have a surplus of unsold goods whilst they have an increasing deficit of payment funds.

"In 2009 many enterprises expect to go bankrupt, and the literature market will become considerably smaller. Books are selling even worse and we shouldn’t expect this to change soon. The crisis has started to affect the population, and it can’t spend money like it used to,” notes Boris Kagarlitsky, director of the institute. According to him, even a 30% reduction in rent for shops would not improve the position of book-selling companies.

According to the Institute of Globalization and Social Movement, in 2008 the volume of the book market in Russia actually grew. In 2007 it was estimated at approximately $2 billion. According to 2008 results this volume had increased to $2.5-$3 billion. However in the autumn of last year the market stagnated and recession quickly followed. New Year sales were almost 30% lower than a year ago. In 2008 there was also the bad news of the liquidation of some bookshops, which did not happen in 2007. In December 2008, the Bookberry chain of bookshops closed three of its 17 shops.

Head of the Center of Economic Researches Vasily Koltashov thinks that liquidation threatens 30-45 shops in the country. According to him, discounts in 2009-2010 are unavoidable.

According to Natalia Aristova, press-secretary of Evroset, at the end of January the mobile phone store located at 17 Tverskaya street closed. In total, since November last year, according to her, about 200 shops of the company across Russia have closed. Now Evroset has about 4,100 branches.

This does not mean that the company is reducing the quantity of its shops because of the crisis, assures Aristov, it is only to optimize costs.

"Several years ago Evroset opened shops practically everywhere that was empty. Now we don’t need to do that, and we can choose more carefully the location of shops," he explains.

Aristov approves that even if the company closes 10 stores from the total number of operating shops, sales will drop by no more than 5% and will considerably improve its EBITDA. The company’s flagship store at 4 Tverskaya street is still open and, according to the press-secretary, there are no plans to close it.

According to Sony’s reports, net profit for the first nine months of the current fiscal year (which ends March 31, 2009) has dropped by 5 times, says general director of Smart Property Konstantin Korolev. In his opinion, this perfectly characterizes the change in demand for long-life products.

The volume of consumer crediting has sharply fallen, which has first of all affected sales volumes and, accordingly, the turnover of retailers. Under conditions of increased unemployment and increased social tension connected with the risk of losing work people tend to save money for a rainy day, which could come some time soon, says Korolev sadly.

Fashionable but unprofitable

"The fall in consumer demand will entail the revision of not only retail tactical programs, but also the strategic plans of all market participants," says Maria Smorchkova, general director of the Association of the Fashion Industry.

In order to maintain their share of the market and income retailers are closing non-profitable shops in unreasonably expensive shopping centers and opening stores where more favourable conditions are offered, she emphasizes. This process will become obvious in March, and a full picture of the market will develop by the new season – August to September of this year, considers Smorchkova.

In 2008 sales in the fashion segment in comparison with 2007 seemed to be positive, but optimistic forecasts of 13-15% growth were not justified. According to Fashion Consulting Group, at the end of last year the volume of the Russian clothes market did not exceed $37 billion. In September 2008 because of the crisis, owners of chains were forced to reconsider long-term plans for development in terms of opening new premises. According to the information of the Association of the Fashion Industry the sales of clothes in the third quarter of 2008 on average fell 15% in Russia in comparison with the same period of 2007. This data reflects the fall in demand in the regions. But already in December 2008 sales had fallen 30% in Russia and the fall in demand also reached the largest cities in the country.

Annual Christmas sales did not have the usual effect, the margins of traders were cut by half, Smorchkova says. "The main problem of business owners today is falling market share. Thus many understand that in the next two years, for this purpose, they should work at zero," he complains.

The average fall in the volume of orders for the spring/summer 2009 season in 20%. And for the autumn/winter 2009 season the expected fall is 40%, compared with the current period. More precise data, according to Smorchkova, will be available when seasonal exhibitions in Europe and Russia end in February-March this year.

It is possible to count domestic factories capable of producing fashionable clothes on one hand. According to market experts, it was unprofitable to open factories in Russia at a stable ruble exchange rate, therefore everything has been ordered from abroad. But after an increase in the summer of customs charges, imports of clothes to Russia have significantly increased, and in some cases by several times. The increased competition in the last few years has halved the margins of retailers. Prices haven’t risen anywhere for a long time and if previously owners of brands counted on growth in turnover in Russia due to opening new shops and development in the regions, now the trend will be opposite.

"The consequences of this crisis for retail fashion, unlike 1998, will be much stronger, and last much longer. The main thing is that now and in the near future there is and will not be any growth in demand in the country," sums up Smorchkova.

The cheap lead

The financial crisis has forced even retailers of basic necessity products out of the market. In October 2008 Vedomosti was informed that Marta holding had been compelled to close the Grossmart chain of shops (190 shops with areas of more than 210,000 sq.m). Igor Syrtsov, general director of Marta, announced the termination of development of the chain, in connection with the necessity to reduce costs and a lack of funds.

In November last year it became known that one of the largest retailers – Mosmart – had announced that it was closing 54 Mosmartik stores in the capital. The management of the chain cited loss making stores. At the same time the management of the chain emphasized in the mass-media, that Mosmart intended to continue to develop other directions. For example, to open hypermarkets. In 2009 the company plans to open 10-20 shops.

In December last year it became known that businessman Oleg Boiko was closing his Smak chain of grocery shops. Representative of the investment holding Finstar, which manages the shares of the businessman, confirmed this information to Vedomosti. Almost all the 30 stores which appeared to be subject of closure were unprofitable "because of the financial conditions."

At the end of January on the website of the arbitration courts there was information on a claim to be recognised as bankrupt by Samo-Khval, which owns a leading chain of grocery shops under the same name. On the company’s website there is an announcement of the sale of among other assets 16 retail premises in Moscow, the Moscow region and Ryazan (a total area of 53,200 sq,m worth 2.9 billion rubles) .

Dixi, according to president of the group Ilya Yakubson, intends to develop and open new shops mainly in rented space. In the first seven months of 2009 the company will open 100 shops, he notes. In the second quarter they can revise their plans if the situation with the economy strongly worsens.

The company plans to open mainly discounter shops, though Yakubson does not exclude the opening of several mega markets (a compact hypermarket measuring on average 2,194 sq.m. Also on a hire basis. Dixi’s plans last year were realized in full: it opened more than 100 shops. However, six shops nevertheless have been closed, which the president of the group explained was due to changed market conditions and the competitive environment.

According to Yakubson's forecasts, the company will consolidate at a fast speed until the second half of 2009. There is particular uncertainly about small, regional chains which are burdened by large debts.

Another large retailer, Х5 Retail Group, plans to spend $500 million in 2009 on opening new shops. Preference is given to rented areas and a popular format today - discounter. The Magnet chain has also decided to expand its local format of shops: the company plans to open 350-400 outlets.

"No matter what people have eaten, eat and will eat, and there is only one question – how consumer preference is distributed,” says chairman of the Union of Independent Chains of Russia Irina Kanunnikova. In her opinion, premium segments will experience difficulties, and cheaper segments will increase their market.