Market Outlook For Luxury Goods In Russia
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320 SW Stark, Suites 417 & 418 Portland, OR 97204 USA Toll Free: 877-WITH-ACG Direct Line: 503-922-0818 [email protected] www.aginskyconsulting.com
LUXURY MARKET OUTLOOK: RUSSIA
March 4, 2009 Prepared by: Noah Wong Phone: +1 503.419.6431 Email: [email protected] www.aginskyconsulting.com
Page 1 of 3
AGINSKY CONSULTING GROUP
ACG Market Outlook Despite the current global economic downturn, the Russian luxury market is still primed for rapid growth due to solid macroeconomic fundamentals, robust consumption and investment expenditure. Yuri Soloviev, Global CEO of VTB Capital, explains, “Russia is still in good shape. Even as the financial crisis shows no signs of abating and deleveraging continues, our economy [Russia] remains strong because of very low levels of public debt.”1 Foreign direct investment continues to flow in with increasing international trade ties, massive capital influx into infrastructure development, and improvements to the banking system and financial services. Companies that aggressively expand global operations during this economic downturn will benefit in the long term due to the current low entry costs, and the positive outlook on consumption rates for luxury goods in Russia. At the 2008 Luxury Briefing Conference, despite the current global economy the overall outlook for luxury goods sales in the near future was very optimistic, especially for the BRIC economies. At the conference, Accenture’s Managing Partner, Richard Wildman, was quoted as saying, “Consumers from the emerging markets have driven the bulk of [luxury goods] sales in recent years, averaging around 23% of the total from 2003 to 2008; in comparison, developed markets were flat or declining. By 2010, some 40% of total luxury sales could be generated by BRIC market consumers.” 2 He also revealed “…the relative luxury market growth rates for Russia – forecast to grow fourfold by 2015; China, sixfold, from $2 billion to $11.2 billion; and India, where the luxury market is set to jump tenfold.”3 Companies with a strong commitment to growth during this global economic downturn will be positioned to take advantage of long-term potential of new markets. According to recent research conducted by McKinsey & Company, of all strategic moves companies can make to grow in a downturn, “an effective acquisition strategy [has historically] created significant value for shareholders,” while divestures in downturns created less value. They also went so far as to say that the best growth companies “view a downturn as a time to increase their leads and make acquisitions,” and “pounce” on opportunities to grow. 4 Russia’s retail market is primed for an influx of FDI due to its attractive rent values and increasing number of new mall openings.5 For example, increasing trade ties between Russia and India are prompting a number of Indian companies to expand global operations and invest in Russia. Just as 2008 was declared “the Year of Russia” by India, 2009 has been designated “the Year of India in Russia.”6 Both governments have increased cooperation politically, militarily, and economically - setting a goal of $10 billion in bilateral trade by 2010.7 Although there is much work to be done from both sides to achieve this goal, it is clear that continued efforts by both governments are providing an increasingly fertile environment for cross-boarder investment. From January to September of 2008, year on year trade volume between Russia 1
Soloviev, Yuri. Interview: Russian Capital Coming to International Markets. Institutional Investor. 30 Sep 2008. Available online at: http://www.vtbcapital.com/corp_communication/news/detail.php?ID=545 2 Pittilla, Mary Jane. “Customer Service is Key in Tackling Economic Downturn.” The Moodie Report. 26 Nov. 2008. Available online at: http://www.moodiereport.com/document.php?c_id=1115&doc_id=19250 3 Pittilla, Mary Jane. “Customer Service is Key in Tackling Economic Downturn.” The Moodie Report. 26 Nov. 2008. Available online at: http://www.moodiereport.com/document.php?c_id=1115&doc_id=19250 4 Baghai, Mehrdad, et al. “M&A Strategies in a Down Market.” McKinsey & Company. Aug 2008. Available online at: http://www.mckinseyquarterly.com/MA_strategies_in_a_down_market_2187 5 “Retailers Eye Eastern Europe.” Reuters. 10 Feb. 2009. Available online at: http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336553.html 6 “India-Russia Trade Target of $10bn Faces Major Hurdles.” Thaindian News. 30 Jul. 2008. Available online: http://www.thaindian.com/newsportal/business/india-russia-trade-target-of-10bn-faces-major-hurdles_10077908.html 7 Ibid
www.aginskyconsulting.com
Page 2 of 3
AGINSKY CONSULTING GROUP
and India grew 54.7% with Indian exports growing 36.5% over the same time period. 8 Speaking at the Russia-India CEOs Council meeting in December 2008, Union Commerce and Industry Minister Kamal Nath said, “Indian companies are quickly establishing themselves in Russia and the cumulative Indian investments in the Russian economy amounted to $744.1 million.”9 Clearly, there is great opportunity for Indian companies wishing to enter the Russian market. Rapid growth in Russia’s diamond jewelry market combined with attractive retail prices and high per capita spending among Russians also make 2009 a great time to establish a presence in major consumer markets there. In addition, with Russia currently positioned as one of the world’s top producers of rough diamonds (in volume) and its recent increase in diamond exports10, there is the potential for diamond jewelry companies to develop strong relationships with Russian diamond producers for outsourcing manufacturing and processing services.11 The recently planned tax imposition on Russian lapidary companies will also help to promote outsourcing of diamond jewelry production. “In 2008 the Russian Federation planned an imposition of a tax to the added value of diamonds and diamond raw materials for Russian lapidary companies, that will cause a price increase on jeweler production and brilliants.”12 The market size for jewelry in Russia in terms of retail value in 2007 was $4 billion, 13 compared to $13 billion in India, which is a remarkable feat given that Russia has about a tenth of the population of India.14 The Russian jewelry market grew at an impressive rate of 20-30% in 2006-07 to $4 billion.15 Even though India is considered to be the world’s largest consumer of gold, Russian per capita spending on jewelry ($28.37) in 2007 was approximately two and a half times more than that of Indian per capita spending on jewelry ($11.41). Though Russia currently has a smaller jewelry market, inflation worries often discourage Russian consumers from saving and stimulate them to spend their money on luxury goods items such as jewelry. The current financial crisis has been a boon for the Russian jewelry market, as many Russians are investing in jewelry, considering it to be one of the most stable investments available. 16 We believe that now is an excellent time for entry into the Russian luxury goods market. Despite the current global economic conditions, the long-term forecast for the Russian luxury goods market remains optimistic.
8
“India, Russia to Boost Bilateral Trade, Diversify Cooperation.” The Information Company Pvt. Ltd. 4 Dec. 2008. Available online at: http://www.domainb.com/economy/trade/20081204_dimitri_medvedev.html 9 Joshi, Sandeep. “India, Russia Sustain Business Ties: Kamal Nath.” The Hindu. 6 Dec. 2008. Available online at: http://www.hindu.com/2008/12/06/stories/2008120656761500.htm 10 “Russia Increased Diamond Exports by 7.4%.” Diamonds and Gold of Russia. Available online at: http://www.almazzoloto.com/archive/?mid=102&id=899 11 “Top Diamond Producing Countries.” DeBeers, BHP Billiton and Rio Tinto. Available online at: http://www.cheap-diamond.com/Countries/index.php 12 “Russian Diamond Market.” IRUE:National Center of Marketing and Price Study. Available online at: http://www.export.by/en/?act=s_docs&mode=view&doc=64&id=1606 13 “Russian Jewelry Market to Expand to $4 billion.” IDEX online. 5 Aug. 2007. Available online at: http://www.idexonline.com/portal_FullNews.asp?id=27970 14 “Retail Reality.” IndiaBiznews. 2 Jan. 2009. Available online at: http://www.indiabiznews.com/biznews/categoryNewsDesc.jsp?catId=12737 15 “Russian Jewelry Market to Expand to $4 billion.” IDEX online. 5 Aug. 2007. Available online at: http://www.idexonline.com/portal_FullNews.asp?id=27970 16 CNBC special edition on Russia. 28 Dec. 2008.
www.aginskyconsulting.com
Page 3 of 3
LUXURY MARKET OUTLOOK: RUSSIA
March 4, 2009 Prepared by: Noah Wong Phone: +1 503.419.6431 Email: [email protected] www.aginskyconsulting.com
Page 1 of 3
AGINSKY CONSULTING GROUP
ACG Market Outlook Despite the current global economic downturn, the Russian luxury market is still primed for rapid growth due to solid macroeconomic fundamentals, robust consumption and investment expenditure. Yuri Soloviev, Global CEO of VTB Capital, explains, “Russia is still in good shape. Even as the financial crisis shows no signs of abating and deleveraging continues, our economy [Russia] remains strong because of very low levels of public debt.”1 Foreign direct investment continues to flow in with increasing international trade ties, massive capital influx into infrastructure development, and improvements to the banking system and financial services. Companies that aggressively expand global operations during this economic downturn will benefit in the long term due to the current low entry costs, and the positive outlook on consumption rates for luxury goods in Russia. At the 2008 Luxury Briefing Conference, despite the current global economy the overall outlook for luxury goods sales in the near future was very optimistic, especially for the BRIC economies. At the conference, Accenture’s Managing Partner, Richard Wildman, was quoted as saying, “Consumers from the emerging markets have driven the bulk of [luxury goods] sales in recent years, averaging around 23% of the total from 2003 to 2008; in comparison, developed markets were flat or declining. By 2010, some 40% of total luxury sales could be generated by BRIC market consumers.” 2 He also revealed “…the relative luxury market growth rates for Russia – forecast to grow fourfold by 2015; China, sixfold, from $2 billion to $11.2 billion; and India, where the luxury market is set to jump tenfold.”3 Companies with a strong commitment to growth during this global economic downturn will be positioned to take advantage of long-term potential of new markets. According to recent research conducted by McKinsey & Company, of all strategic moves companies can make to grow in a downturn, “an effective acquisition strategy [has historically] created significant value for shareholders,” while divestures in downturns created less value. They also went so far as to say that the best growth companies “view a downturn as a time to increase their leads and make acquisitions,” and “pounce” on opportunities to grow. 4 Russia’s retail market is primed for an influx of FDI due to its attractive rent values and increasing number of new mall openings.5 For example, increasing trade ties between Russia and India are prompting a number of Indian companies to expand global operations and invest in Russia. Just as 2008 was declared “the Year of Russia” by India, 2009 has been designated “the Year of India in Russia.”6 Both governments have increased cooperation politically, militarily, and economically - setting a goal of $10 billion in bilateral trade by 2010.7 Although there is much work to be done from both sides to achieve this goal, it is clear that continued efforts by both governments are providing an increasingly fertile environment for cross-boarder investment. From January to September of 2008, year on year trade volume between Russia 1
Soloviev, Yuri. Interview: Russian Capital Coming to International Markets. Institutional Investor. 30 Sep 2008. Available online at: http://www.vtbcapital.com/corp_communication/news/detail.php?ID=545 2 Pittilla, Mary Jane. “Customer Service is Key in Tackling Economic Downturn.” The Moodie Report. 26 Nov. 2008. Available online at: http://www.moodiereport.com/document.php?c_id=1115&doc_id=19250 3 Pittilla, Mary Jane. “Customer Service is Key in Tackling Economic Downturn.” The Moodie Report. 26 Nov. 2008. Available online at: http://www.moodiereport.com/document.php?c_id=1115&doc_id=19250 4 Baghai, Mehrdad, et al. “M&A Strategies in a Down Market.” McKinsey & Company. Aug 2008. Available online at: http://www.mckinseyquarterly.com/MA_strategies_in_a_down_market_2187 5 “Retailers Eye Eastern Europe.” Reuters. 10 Feb. 2009. Available online at: http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336553.html 6 “India-Russia Trade Target of $10bn Faces Major Hurdles.” Thaindian News. 30 Jul. 2008. Available online: http://www.thaindian.com/newsportal/business/india-russia-trade-target-of-10bn-faces-major-hurdles_10077908.html 7 Ibid
www.aginskyconsulting.com
Page 2 of 3
AGINSKY CONSULTING GROUP
and India grew 54.7% with Indian exports growing 36.5% over the same time period. 8 Speaking at the Russia-India CEOs Council meeting in December 2008, Union Commerce and Industry Minister Kamal Nath said, “Indian companies are quickly establishing themselves in Russia and the cumulative Indian investments in the Russian economy amounted to $744.1 million.”9 Clearly, there is great opportunity for Indian companies wishing to enter the Russian market. Rapid growth in Russia’s diamond jewelry market combined with attractive retail prices and high per capita spending among Russians also make 2009 a great time to establish a presence in major consumer markets there. In addition, with Russia currently positioned as one of the world’s top producers of rough diamonds (in volume) and its recent increase in diamond exports10, there is the potential for diamond jewelry companies to develop strong relationships with Russian diamond producers for outsourcing manufacturing and processing services.11 The recently planned tax imposition on Russian lapidary companies will also help to promote outsourcing of diamond jewelry production. “In 2008 the Russian Federation planned an imposition of a tax to the added value of diamonds and diamond raw materials for Russian lapidary companies, that will cause a price increase on jeweler production and brilliants.”12 The market size for jewelry in Russia in terms of retail value in 2007 was $4 billion, 13 compared to $13 billion in India, which is a remarkable feat given that Russia has about a tenth of the population of India.14 The Russian jewelry market grew at an impressive rate of 20-30% in 2006-07 to $4 billion.15 Even though India is considered to be the world’s largest consumer of gold, Russian per capita spending on jewelry ($28.37) in 2007 was approximately two and a half times more than that of Indian per capita spending on jewelry ($11.41). Though Russia currently has a smaller jewelry market, inflation worries often discourage Russian consumers from saving and stimulate them to spend their money on luxury goods items such as jewelry. The current financial crisis has been a boon for the Russian jewelry market, as many Russians are investing in jewelry, considering it to be one of the most stable investments available. 16 We believe that now is an excellent time for entry into the Russian luxury goods market. Despite the current global economic conditions, the long-term forecast for the Russian luxury goods market remains optimistic.
8
“India, Russia to Boost Bilateral Trade, Diversify Cooperation.” The Information Company Pvt. Ltd. 4 Dec. 2008. Available online at: http://www.domainb.com/economy/trade/20081204_dimitri_medvedev.html 9 Joshi, Sandeep. “India, Russia Sustain Business Ties: Kamal Nath.” The Hindu. 6 Dec. 2008. Available online at: http://www.hindu.com/2008/12/06/stories/2008120656761500.htm 10 “Russia Increased Diamond Exports by 7.4%.” Diamonds and Gold of Russia. Available online at: http://www.almazzoloto.com/archive/?mid=102&id=899 11 “Top Diamond Producing Countries.” DeBeers, BHP Billiton and Rio Tinto. Available online at: http://www.cheap-diamond.com/Countries/index.php 12 “Russian Diamond Market.” IRUE:National Center of Marketing and Price Study. Available online at: http://www.export.by/en/?act=s_docs&mode=view&doc=64&id=1606 13 “Russian Jewelry Market to Expand to $4 billion.” IDEX online. 5 Aug. 2007. Available online at: http://www.idexonline.com/portal_FullNews.asp?id=27970 14 “Retail Reality.” IndiaBiznews. 2 Jan. 2009. Available online at: http://www.indiabiznews.com/biznews/categoryNewsDesc.jsp?catId=12737 15 “Russian Jewelry Market to Expand to $4 billion.” IDEX online. 5 Aug. 2007. Available online at: http://www.idexonline.com/portal_FullNews.asp?id=27970 16 CNBC special edition on Russia. 28 Dec. 2008.
www.aginskyconsulting.com
Page 3 of 3
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