Luxury Love Unites France and Russia
- By Alexander Teddy
- Jun. 18 2010 00:00
The French luxury goods market has expanded rapidly in post-Soviet Russia, as wealth has let people express an age-old affection for top-end merchandise. Post-crisis, spending habits may change, but Russians still look set to covet France's famous brands.
Mikhail Gorbachev, French accessories model. Dior's Red Square boutique. Such notions, once oxymora, would have won a laugh 20 years ago; nowadays they ooze the reality of commerce.
For many Russians, France means art, indulgence, fashion and beauty, a recent survey by the Public Opinion Foundation showed, as many luxury goods seem affordable only to a small portion of Russia's population.
But this does not mean that only the wealthy covet such goods or indeed that French brands have trouble in Russia. "Since Soviet times, the unreachable dream of any Russian was to visit Paris. Any brand that has a French origin automatically acquires these associations in the Russian consumer's mindset," explained Yelena Karachkova, at BBDO Branding, a consultancy in Moscow.
While Gorbachev no longer wields power, luxury brands such as Louis Vuitton, which enshrined his photograph on glossy pages, are a considerable force in emerging markets: France provides much of the momentum for newfound expensive taste in Russia. It is the source of many of the world's luxury goods and has three times as many major elite brands than any other country.
Many large luxury French brands have moved into Russia over recent years to extend operations and capitalize on Russia's propensity for opulence. Watchmaker and jeweler Cartier, now part of Swiss conglomerate Richemont, opened a boutique in Moscow seven years ago as the oil boom took off and Yves Saint Laurent, the famous Parisian fashion house now part of the Gucci Group, opened its first shop in 1996, after its patron and namesake had visited the capital 10 years before.
The crisis flattened a lot of retail in Russia and the global market has also tapered in places like Japan, which made up 16.5 percent of total world demand for luxury goods before the recession, data from Verdict showed.
At least now, though, there are signs that the luxury segment is stabilizing again, said Dale Clark, retail and consumer practice leader at PricewaterhouseCoopers in Russia. French companies like independent Chanel have shown their optimism in fact by increasing their presence in Russia this year with a two-week, temporary boutique bringing the brand to St. Petersburg for the first time.
Indeed, luxury brands, still a relatively new phenomenon for post-Soviet Russia, will maintain their power over the next few years. "Luxury brands appeal to the general human need of status: asserting one's power, showing off, feeling superior. This need is more acutely felt by modern-day Russians compared to their Western counterparts because it was suppressed for so many years," Karachkova explained. But there will be a change in the way Russians use luxury, she warned: "As the Russian consumer gets more sophisticated, the show-off factor will diminish in importance. It will no longer be enough for a luxury brand to look and be expensive; brands will have to offer consumers a unique, personalized, indulgent experience. We are already seeing this trend in luxury travel, restaurants and in personal care."
Many large luxury French brands have moved into Russia over recent years to extend operations and capitalize on Russia's propensity for opulence.
Champagne is a clear symbol of France. In Russia, where for years the wine's sweet Soviet equivalent was the only option, it is currently a status symbol. In 2008, due to massively increased consumption in countries like Russia and China, the protected area for growing champagne grapes in eastern France was expanded under a law dating back to 1927. That same year, worldwide champagne sales were reported at $7.8 billion as companies such as LVMH dominated the market with its brands such as Moet & Chandon and Dom Perignon. Russia became even closer to the famous French winemaking district in June as oil trader Boris Titov's SVL Group bought Champagne d'Avize, previously owned by LVMH.
France's LVMH, the world's largest luxury holding group, is an example of how some analysts feel the luxury goods industry will move — the corporate consolidation of brands. Pernod Ricard, a French alcohol firm, in 1996 bought a Russian vodka company, Altai. Nearly 10 years later the company decided to add French luxury to its name by acquiring champagnes Mumm and Perrier-Jouet in 2005, straddling both Russian and French drinking markets as one of the world's biggest beverage companies. Such conglomerates are visible all over the luxury goods world and especially among brands from Europe — France, Italy and Switzerland.
Yet some politicians in Russia do not want the high level of luxury goods consumption that the country has developed. Members of the Communist, A Just Russia and Liberal Democratic parties in the State Duma put forward a bill to levy a federal tax on luxury items, not simply because of the foreign origin of such goods, but as much for anti-elite ideological reasons. The bill would have hit cars, yachts, precious metals and stones, and artwork, as well as residential properties worth over 15 million rubles ($485,000).
However, the law was rejected by the Duma in May and lawyer Dmitry Itskov of firm EPAM felt that it was never a realistic option. "Imposing a level on housing of 15 million rubles makes you ask, 'What is luxury?'" he said. "The initiatives that were begun do not fit in with the general logic of Russian lawmaking and contradict existing laws. It would be especially difficult to operate under and would increase the tax burden of all concerned. In any countries where there is a luxury tax, it is usually only comparable by name."
Such a tax may have hurt areas of the fragile retail segment. Given the steady devaluation of the ruble during 2008 and 2009, the price of luxury goods, most of which are imported, has increased quicker than individual consumer spending power.
"Even among the wealthier segment, we see a greater awareness by the consumer of prices and bargain hunting," said Clark. "The buyers that will be the slowest to return to the luxury brands segment are the young professionals and man in the street. Until they can feel a tangible increase in their spending power, it is unlikely that they will go back to previous spending habits. It is unlikely that this will happen before 2011, when buyers have had an opportunity to go through at least one cycle of salary increases," Clark added.
But the beauty industry, which the Paris School of International Luxury Marketing estimates at 24 percent of the overall luxury market, has weathered the recession in Russia, wrote RNCOS in its forecast of the sector up to 2012. It predicted recovery by the beginning of the second half of 2010, driven by economic improvement, rising consumption levels and a positive outlook on consumer purchasing power.
Perhaps surprisingly, French firms do not dominate the cosmetics and perfume market in Russia quite so much as elsewhere, with U.S firm Avon holding more of a market share than global leader L'Oreal or Yves Rocher, according to KM-Group data.
Chanel, which also makes cosmetics, said results over recent years had been very positive, with continuous growth. In Russia, the company attributes its success to its clientele being "very sophisticated — both traditional and trendy," explained Bruno Pavlovsky, president of fashion activity at Chanel in Russia. "Chanel's timeless items are among the best sellers in Russia," he added.
French luxury brands in Russia arguably have a royal legacy to draw on for their optimism: Members of the original Hermes family used to make saddles for the tsar; more recently, Russian oligarchs Boris Berezovsky and Roman Abramovich gave publicity to the company's London boutique, making it the sumptuous backdrop to a legal feud. As tycoon Viktor Vekselberg steadily builds his regal collection of expensively decorative eggs, the Russian people are reminded of their creator Carl Faberge's French heritage. Cristal champagne, now known as any Moscow mogul's drink of choice, was invented in 1876 for Alexander II.
China may be fast becoming the new sphere for luxury growth and is predicted to become the world's biggest luxury consumer. But even with no tsar left to buy up goodies, French luxury brands seem keen to serve Russia and its kings of business for some time to come.