Political unrest, falling oil prices, increased interest rates and western sanctions have hit GDP and weakened the value of the rouble in Russia. This is unsettling consumer willingness and ability to travel and spend, impacting retailer expansion and investment plans in the region. The luxury market will not be immune to these challenges, with spend on luxury goods in Russia forecast to fall 9.3% in 2015, against a double digit drop of 13.9% in 2014.
With western sanctions remaining until 2017, the political instability of the market has made Russia a high risk country for international brands to operate in. Meanwhile, a weakened currency has caused branded products to retail at a much lower value, with Apple halting online sales in Russia as a result.
Retail consultancy Verdict expects global luxury brands to hold off supplying products to the region via direct retail and wholesale in order to protect margins, as well as to reconsider market entry and expansion plans, with store closures also likely.
Alongside weakened consumer confidence, strict custom duties and online purchase restrictions in Russia (goods ordered over the value of â‚¬150 cannot enter Russia) will impact the luxury goods market.
Verdict analyst Jessica Fioriti suggests that “To combat weak domestic demand, rather than targeting Russia, luxury brands must target the consumer and capture their spend overseas, especially in the likes of Paris and Dubai, which are key holiday destinations for affluent Russians.”
Luxury brands that continue to trade in Russia will need to raise prices in order to protect margins against adverse currency fluctuations. It is important that higher prices are justified via quality and craftsmanship to encourage domestic consumers unable to travel overseas to spend on non-essential items that heighten looks, such as perfumes, cosmetics, jewellery and leather goods – 68.8% of consumers in the region view personal appearance as important, according to Datamonitor Consumer‘s 2014 lifestyle survey, 8.8 percentage points higher than the European average.
Though 2015 is set to be another challenging year for luxury retailers in Russia, Verdict forecasts the Russian luxury market will grow 21.6% in the five years to 2020, with a recovery forecast toward the back end of the period. This will underperform the total global luxury market by 18.9 percentage points. Luxury players operating in the region must protect their margins quickly and aim to capture Russian consumer spend overseas in order to lessen the impact of a crumbling market.