Some companies are leaving Russia

American Esprit closed its stores in Russia.

American Esprit closed its stores in Russia.

AP
Around 60 well-known brands and companies have left Russia over the past two years, while several dozen others are considering quitting this market. Retail enterprises are leaving 1.5 times faster than they were during the 2008 crisis. Usually while departing, companies talk of “business restructuring,” but the real reason lies in the empty wallets of consumers and a lack of confidence, which could be temporary.

The British consulting firm Global Counsel released a report at the end of 2015 predicting that many international companies would leave Russia in 2016.

Their conclusion was based on an analysis of financial statements of the 46 major companies represented in Russia, including BP, Royal Dutch Shell, Deutsche Bank, Siemens and Lafarge. According to Global Counsel, most of these firms would cease operations in Russia.

The analysts note that this forecast mostly refers to companies from the finance and energy sectors, but does not apply, for example, to the pharmaceutical industry.

The first signs in these risk areas; energy and finance, were already visible in 2015. There were rumours that Raiffeisenbank would become the first foreign commercial organization to leave the market. It turned out, however, that it only decided to stop issuing car loans and exit Russia's Far East region.

The first Western oil company, however, did leave. After selling its stake in the Polar Lights project, the U.S. Company, ConocoPhillips, left Russia in December 2015, after 25 years in the country. Conoco, before its merger with Phillips, bought half a small oil company in the Nenets Autonomous Area as far back as 1992.

The company then acquired some shares in Lukoil, which it got rid of in 2011. Despite being one of the first companies to come to Russia, ConocoPhillips became one of the first international energy giants to leave it.

Unaffordable clothes

Giant firms have a safety net and do not have to take hasty steps, but smaller companies need to act swiftly, to survive. The most noticeable outflow of such smaller companies is in the retail sector, particularly in the mid-price segment.

During the first half of 2015, statistics registered a decline of 7.9 percent for retail turnover, a record for the period after 1991. Real incomes fell by 10 percent in the summer and according to Magazin Magazinov, a retail property consulting company, 991 retail outlets opened over the past year in Russia while 1,024 closed their doors. In comparison, 1,234 outlets opened in 2014, while just 314 of them were closed.

Many well-known clothing brands have left. According to the Fashion Consulting Group, the Russian clothing and footwear market decreased by eight percent to 2.2 trillion rubles (about $28 billion) in 2014, while it fell a further 20 per cent in 2015.

At the same time, as is often the case in a crisis, the storm has barely affected the luxury segment of the market. There has been some stagnation, with neither growth nor contraction, yet some brands are even increasing their presence. Hermes has doubled the area of its boutique in the GUM department store, Michael Kors has opened the world's first boutique for men, while Dolce & Gabbana has launched a huge new store on Tretyakovsky proezd, widely considered Moscow’s fanciest shopping street.

Low-end market expands

There is growth on the low end of the market as well. This is most apparent in the fast food market: KFC, Burger King and McDonald's led the number of newly-opened outlets in 2015.

According to Magazin Magazinov, 80 percent of the newly-opened outlets over the past year accounted for mass-market brands, while 90 percent of closed stores belonged to middle-price brands. Growth in the mass-market segment is because of more shoppers, who earlier dined in better restaurants and dressed in more expensive clothes, opting to eat at fast food outlets. The reduction and even erosion of the middle segment has been the main trend of the previous year and stratification is likely to continue in 2016.

The middle segment has been hit the hardest and most clothing retail brands that have left Russia come from this part of the market. Sales have fallen in this segment by 35-45 percent.

Moneks Trading, which developed the American Eagle brand in Russia, closed all three stores of this brand in Moscow last year, considering it unprofitable to develop the brand further. Britain's River Island brand left even earlier: the Maratex Fashion Retail Company, which developed this brand as a franchise, was unable to make a profit with this project. Maratex curtailed sales of the American Esprit and Italian OVS brands in Russia for the same reasons.

Britain's New Look brand, which had a retail presence in Russia beginning in 2009, closed its stores in this country because of franchise debts.

First published in Russian in Kommersant.

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