30 November -1
Russian market-2006: part 2 – Retailer’s problems
Retail problemsThe changes in the market, have also affected the shops. Although on the whole the demand for watches in Russia is still good, and is even growing in a number of segments, the shops turnovers turned out to be lower, than they could be. First of all, it is the irregular deliveries and the increase in watch prices that have prevented it. The growth of a rent and the opening of new malls which entice customers from common trade centers, have also made life difficult for the owners of the shops.
As a result retailers had to search for the solutions of many new problems during the whole year of 2006. Whether to open a department in a new trade center, or the rent rate of 5000 Euros is too high and the shop will never become profitable? What to fill the empty show-windows with if there haven’t been any deliveries for already 8-10 months? Whether to buy watches which price has increased by 40 %, or wait for the situation to change for the better? What to say to the customer who refuses to make a purchase because the price for this model in Moscow is 2000 Euros higher than in Europe?
Up to last year the shops work scheme was simple. The distributor delivered the goods and formed demand by means of advertising. The shop only needed to buy a collection of demanded models and entice customers by offering discounts. At the same time, for example, the Swiss watch salons have got used to purchasing goods for 45-50 % of a Suggested Retail Price. Struggling for customers, the shops willingly offered discounts which made from 5 % up to 30 %. Such discount allowed to equal the price of the goods with that of other countries and was the main argument for buying watches in this very shop. Besides, even after giving a discount the shop had sufficient margin.
However, the present situation is different. The distributors offer to buy watches of well-known brands for 85 % of a Suggested Retail Price. At the same time the retail price in Russia should make 140 % of SRP. If we consider the discount of 10 % traditionally given by shops and the tax of 6 % the real margin appears to be equal to 39 % approximately. However, even if the shop has quite a high turnover of $100 000, having such a margin it proves to be unprofitable. Besides, if the shop used to take delivery at first, and then, in 2-5 months paid the distributor, now the distributors demand an advance payment from the shops because of the deficit in goods and in circulating assets. The increase of prices became a serious problem for the retailers as they cannot sell watches for 40 % more, than in Europe. There are many reasons for that. Sometimes the prices in Russia turn out to be considerably higher than in Europe. Besides, some brands became too expensive for the traditional customers, while some shops continue selling the remainder of the goods at old, lower prices. The grey market schemes continue working when cheaper goods are delivered to Russia from the Ukraine and UАЕ.
As a result many shops became unprofitable. The independent shops of Moscow and small networks have an especially tough time. Some points of sales have already been closed. The process of reducing the number of shops could go on more quickly if their owners could get rid of the rests quickly. Therefore we can at least expect a serious weakening of the independent shops positions on the market if not their full extinction. Only the companies which summarize the retailer’s and the distributor’s margins prove to be viable. They are large networks and a number of companies which deal with expensive goods. A leap in prices and a change of range usually throw the dealers into panic. Many of them allege that the customer is not ready to pay so much for watches. But the problem is actually concerned not with the customer, but with the shops, and a low qualification level of their staff. Actually, many dealers are not capable of selling the goods, and can only serve the customers. The owners of the shops are trying to rescue their business somehow and changing the range became one of the ways out. They include in their range fashion-watches and little-known brands which are present in a small number of shops. In this case absence of a price competition allows retailers to have greater margin.
The control of the market
During the last year the western producers who are aiming to take control of the distribution have become very powerful on Russian market. The troubles in the distributors’ work and the danger of losing a prospective market have forced them to open offices in Russia. The year of 2006 marked the appearance of Ulysse Nardin, Seiko and TAG Heuer representative offices. The company Weiner Watch (the distributor of Breitling-Zenith) has strengthened the office, while Chanel began to work independently. LPI, one of the new wholesale companies created in 2006, is also a representative office of a foreign firm.
At the same time, only few watch producers sell their goods in Russia independently. They include Richemont, Swatch Group (which sells only 2 brands – Swatch and Tissot) and Chanel. All the others deal only with marketing and analysis of the market. Most of proucers are afraid of operating independently in Russia and experience difficulties in selecting the staff for Russian offices. It was proved in practice that a long term of about one year is needed for the new employees to understand the market situation. During this period the brand position in the market worsens because of inactivity and wrong decisions made by the new managers. Besides, the support of a representative office costs a lot of money. Even the cheapest variant which does not mean trading operations require about $300 thousand a year. Only a few of independent brands have a turnover sufficient for the work of a representative office to be profitable.
However it was the producers that became the main players of Russian watch market in 2006. Today they are making terms to both distributors, and retailers. The advent of the representative offices had an impact on the distributors’ business, so that some of them found themselves out of play. The arrival of producers has a double effect on the shops. On the one hand, at last the goods becomes completely legal. On the other hand, the competition for the client between the distributors disappears, and the shops have to accept more severe terms of work with their suppliers. The activity of producers in Russia mostly showed itself in opening monoboutiques of the brands. The year of 2006 marks the opening of Chanel, IWC, Jaeger Le Coultre and Omega.
Fashion starts leading
Among all the segments of Russian market the segment of the most expensive watches shows the greatest rates of growth. So, in 2006 despite a decrease of 29 % to watch deliveries to Russia the cost of the imported goods increased by 7 %.
The segment of fashion-watches is the second intensively growing segment in Russia. It has occured partly due to the increase of the population incomes and growth of the demand for fashion-goods, and partly because the fashion watches distributors (such as Time&Technology) have managed to provide stable deliveries and compensate for the deficit of goods which has formed on the market. As a result even the shops which opposed to including the fashion brands in the range, had to deal with them.
A break in deliveries or a sharp increase of former brand-leaders has created favorable conditions for the growth of those brands which used to form «the second echelon» or had just come onto the market. The brands which were unknown as early as one year ago are taking more and more space in the shops. Their success could be even more rapid, but the inertness of the shops and limited financial and manpower resources of wholesalers are braking it.
The average price segment, which used to be the greatest even not long ago, experiences considerable difficulties because of the breaks in deliveries and changes in the prices mentioned above. Adapting for new conditions, the shops started to divide into several categories. They are moving up a price ladder, reducing the share of Tissot and adding to the range such brands as Richemont and LVMH. Others add to their shop windows fashion watches and independent marks which could provide stable deliveries and prove to be a protection from the networks pressure.
But it is the segment of cheap watches, that experiences the greatest problems. The official and even the illegal import of watches below $20 to Russia has almost stopped. As a result part of the shops were left without goods and had to close up or change their range. The other part is selling the goods which are delivered to Russia by the black market channels. However it is clear that they will also be blocked soon. The situation becomes complicated because Russian producers have almost stopped releasing cheap watches too.