Consequences of the growing global we feel the economic crisis every day. We recently wrote that Topshop is in danger. Yesterday, on December 8, the world office of the Dutch company Mexx filed for bankruptcy - the chain could not cope with the decline in purchasing activity. However, Mexx stores will not close for the time being - the company needs to sell off its stock and try to find a buyer for its assets.
We continue a series of materials about the future of retail in Russia. In this issue, we spoke with Anna Lebsak-Kleimans, CEO of Fashion Consulting Group, an analytical and consulting agency in the Russian fashion industry, which has existed since 2000. We asked her about who is in danger today, who will stay afloat, what the assortment of stores will become and why soon everyone will switch to multifunctional items.
About global division
labor and types of retail
The fashion industry is a multi-stage system from fabric manufacturers and designers to industries where things are sewn. At the end of this chain are buyers and retailers whose tasks are to buy and sell the collection to the end consumer. However, over the past decades, these competencies have been divided in the world. On the one hand, a clear circle of European and American specialists has formed in the creation of an intellectual product: ideas, marketing, trade marks, collections. On the other hand, there are specialists in manufacturing and sewing technology. The sewing machine industry is concentrated in Asia, where quality costs less money than in Europe.
The sales market can be divided into traditional and vertical retailers. The traditional retail business is department stores like TsUM and Stockmann, concept stores, and multi-brand stores. The essence of their competence is sales service. They buy the finished product in bulk and sell it at retail at a premium of two or three times to cover the cost of renting retail and warehouse space, working capital (buying the next collection), staff salaries, advertising, and so on. After closing all expenses, the retailer is left with a net profit, which in the best case is 10-15%. To date, investments in a store pay off in an average of five to seven years.
In the 80s and 90s, a new type of retailer appeared - the vertical one. It grew out of the traditional. These are companies such as Inditex and H&M. They do not buy collections from other brands - they produce and sell them themselves. The vertical retailer knows how much it needs to produce to fill its retail space. The task of such a company is to flexibly respond to demand and open a store in places where its audience congregates. This can be a store on a street in the city or a lot in a shopping mall. Usually, mass market companies do not create original designs, but find reference brands and recycle their bestsellers. Some of them, like Uniqlo, even produce the fabric on their own, bypassing intermediaries and all the steps mentioned in the beginning. Thus, a successful vertical retailer is able to raise the profit level up to 25%.
On the situation on the Russian market and the past
Today, the net profit of companies (the same margin) is
10-15% for horizontal retailers and 20-30% for vertical ones.
8-10 years ago, profit margins were completely different, as the market was low-competitive and in a stage of rapid development. Companies with new products were just emerging, the first shopping centers and stores with a European mass market were opening. World premium and mass brands took their first steps in Russia, “tested” a new market with the help of Russian partner representatives. It was the best and very generous time for Russian distribution companies.At the same time, the most active Russian retail companies of that period, such as Sela, OGGI, Savage, Baon, quickly grew with new stores, skimming the cream off this still not saturated market. Stores fought back after a year of operation. But it was an abnormal market, and in assessing the current situation, one cannot be guided by it. Until 2006, the market growth was 15–20% per year, and now it is 4–5%. The situation cannot be compared with the 1998 crisis either. In 1998, the banking system collapsed, and people did not have savings, there was no middle class. The nature of the crisis was different.
Times have changed. The market was relatively saturated. The hungry and emotional customer has been replaced by a rational and demanding customer. Today the market situation is rather complicated. Due to the weakening ruble and falling demand, the profit of companies this season is close to zero. Due to the collapse of the national currency, the retail business is at a loss. Most of the companies brought their goods from abroad, where the collections were purchased for dollars or euros. And today is the time to pay for the new spring collection, which should arrive in stores in February. To do this, you need to convert your earned rubles back into currency. And during the fall season, store turnover dropped
by 20-30%, while the value of the currency rose by 40%.
What to do? Raising the price means completely losing the already "quiet" buyers. To lower the price is to completely “bleed” the business. Simple arithmetic: here you had a purchase, for example, for 100 thousand dollars. You spent 3.4 million rubles on it in the spring, and now you need 5.4 million rubles for the same volume of goods, while all your expenses have been preserved, and turnover has dropped by 20%. Thus, 10–20%, which was a profit, with a fall in demand for many turned into zero with a minus. In such a situation, the stores, at best, remain in the "zero" idle mode. Do not forget that the mark-up factor is even
3.5 times with all discounts and sales turns into 1.8-2.2.
Overcoming the crisis and new prices
Lack of working capital is pushing chains to reduce purchases and close some stores. But you need to remember: you buy less, sell less - a vicious circle. If the spring season is the same as this fall, many companies will not have enough funds to maintain the same scale and quality of their business, simply to pay salaries, rent and other necessary costs.
In any case, now everyone has to cut costs: reduce the amount of advertising, cut employees. Many brands are beginning to skimp on quality: choose cheaper fabrics, simplify designs, and give up details and treatments. The first thing retailers are doing now is putting pressure on landlords to get discounts on rent, defer payments, fix prices in rubles, and renegotiate lease agreements for a percentage of sales. Landlords are forced to give in, because they do not want to be left with empty premises. Here and the new law on fees from retail space, which comes into force on January 1, 2015, has ripened completely out of place.
Many companies are actively looking for "safety cushions", for example, investors who are now ready to buy a stake in a business at "dumping" prices, much cheaper than before. Another option for a "safety cushion" for large holdings is to support a weakened "fashion company" with funds from business in another area, for example, in real estate. It is important to keep working, even at zero, in order to survive the recession and not collapse. Those who survive will become leaders in the next phase of the ascent.
New indexed stamp collections will be available from January 20th. Prices for them will be set closer to this date. Now we are talking about an increase of 20-30%. If the course takes off more, there will be a collapse. Companies and shops will be closing massively. Luxury and cheap rags - that's what we are likely to expect.
About risk areas
From the point of view of business organization, the high-risk group includes distributors, representatives and buyers of European and American brands: department stores like TsUM and Tsvetnoy, multibrands and concept stores. They buy collections from suppliers of the euro-dollar zone, invest in them and are directly dependent on the exchange rate. And such connections are already beginning to crack both in the mass and premium segments. Distributor Maratex has closed and River Island are entering the market on their own. Gucci in 2014-2015 opens stores directly, without Mercury.
The average risk level is for Russian companies and brands like Sela, InCity, Kira Plastinina, Savage, Baon, Modis, which are created for sales in Russia and depend on the Russian consumer, his tastes and purchasing activity. The income of these companies is in rubles, but the expense is mainly in foreign currency, since their business is tied to the import of finished products from abroad, mainly in Asia. An intergovernmental agreement on trade in the yuan has already been adopted, but as a result, the market reacted specifically to this agreement - only the yuan rose, while the ruble remained where it fell. Nevertheless, the situation is better for these companies. These networks are vertical retailers with their own points of sale. They can make decisions flexibly and quickly, for example, close less profitable stores, reduce the cost of collections: produce more basic items, cut costs for parts, choose cheaper fabrics and accessories.
Large foreign brands are in the safest position, for which Russia is only a small share in their global turnover. For example, for the Inditex group (Zara, Bershka, etc.) it is less than 5%, for H&M and Uniqlo - less
one %. They can quite afford to work at zero for some time due to stable turnovers in other, more profitable regions. Moreover, the outflow of competitors will allow them to take a larger market share and expand on more favorable terms. These companies will also benefit from the widespread rent cut.
If we talk about price segments, then the hardest hit will be on the middle and especially the “middle plus” segments - on such brands as VASSA & Co, Sarah Pacini, Luisa Cerano, Karen Millen, Benetton. Their buyer will save money and either go to the mass market or, conversely, start to rationally “invest” in purchases: buying things less often, but more expensive. Relatively safe, again, the boundaries of the market - luxury and mass market. The main consumers of the top luxury may buy less - but yachts, not bags. This is confirmed by the fact that during the global crisis of 2008, the sales of Hermès and Louis Vuitton only increased.
About what we will wear
during the crisis
Always in a period of economic downturn, a trend of unification arises, that is, clothes acquire fewer trimmings and details. The main thing is its versatility and low cost of production. The dress, for example, should be such that you can go to work, and to the cinema, and to the store. Accordingly, functionalism and pragmatism begin to dominate fashion. I want to note that you should not confuse and equate minimalism and functionalism. Minimalism is a verified and elitist style: graphic cut, monochrome, expensive fabrics, flawless seams. Functionalism, on the other hand, is a striving for practicality, when everything unnecessary is swept aside: unnecessary seams and details. What is useful becomes beautiful.
It is also worth remembering that values are changing now. The values of health, balance, traditional and stable family relations, the cult of childhood, a return to simplicity and naturalness are becoming priorities. For example, the fashion for sports is associated not only with the multifunctionality of sports items, but also with the trend for new wellness. New wellness implies that wealth is not measured by the number of diamonds, but by investment in health and natural beauty. This is the value of prolonging youth through a healthy lifestyle, not through investment in plastic surgery.A sporty and fit look becomes the rule of good manners for a wealthy person at any age.
Thus, even people far from sports want to look involved in it, and such attributes of sports life as sneakers and leggings are included in everyday life. Functionality and a course towards sportiness are the two most important trends now, which it makes sense to focus on for Russian fashion brands.
Photos: TSUM Department Store Moscow / Facebook, KUZNETSKY MOST 20 / Facebook