View From Within: Luxury Retail

The very first luxury shop opened in Moscow in 1993. The Torgovy Dom Moskva retail company offered goods by Chanel, Gucci and Jil Sander.

Nowadays, Moscow is one of the most fashionable European cities, with boutiques of all formats, ranging from traditional shops selling designer clothes, shoes, accessories, watches and jewelry, to gourmet boutiques, offering exquisite chocolates, elite wines and seafood operating across the city, says Konstantin Kovalyov, managing partner at Blackwood. There also shops selling luxury furniture, cars, textiles and other upmarket items.

“Today, approximately 120 famous international brands have already established their presence on the Moscow market,” says Irina Zadorozhko, head of a real estate agency, which is part of the Magazin Magazinov company. “Those include Louis Vuitton, Cartier, Van Cliff & Arples, Gucci, Prada, Armani, Chanel, Christian Dior, Hermes, Tod's, Versace, Jimmy Choo, Tiffany, Bvlgari, Ermenegildo Zegna, Brioni, Dolce & Gabbana, Chopard, Chaumet, Roberto Cavalli, Zenith, Graff, Rolex, Fendi, Jil Sander, John Galliano, Alberta Feretti, Hugo Boss, Calvin Klein, Givenchy, Marina Rinaldi, MaxMara, Nina Ricci, Kenzo, Mandarina Duck, Moschino, Carrera y Carrera, Byblos, Chloe, Cerutti, Gianfranco Ferre, and others.”

Concentration of Boutiques

Elza Rozental, commercial director at the property management company Torgovy Kvartal, notes that entering the Russian market is not easy, even for the world's leading luxury brands. International investors often fail to grasp the specifics of the Russian economy. In conversations with Russian businessmen and business associates from the upper crust Western investors examine living standards in Moscow, proceeding at this from their own experience, and are often astonished to learn official statistics on social and economic situation in Russian society.

Expansion into the Russian market requires considerable expenditure, most of which is covered through bank loans. But obtaining a loan on the basis of the official data on living standards in Russia is not always possible. Yet, the situation is changing gradually, as Russians' incomes are growing, prompting international fashion houses to rethink their attitude towards Russia. Nina Novikova, head of retail real estate research at CB Richard Ellis / Noble Gibbons, says that Moscow's luxury goods market is currently dominated by several key operators, such as Mercury, Bosco di Ciliegi, Crocus Group, JamilCo.

Yekaterina Soyak, general director at the Expofar company, explains that in Western capitals more popular are mono-brand boutique shops, with a separate entrance. Luxury goods consumers remain loyal to brands for generations. In Russia the situation is different, as the generation of people, who appreciate and are able to afford designer goods, is only being formed. “Besides, most major market players bring quite a large number of brands to Russia and it is much easier for them to concentrate those brands,” she notes.

“Bosco di Ciliegi has formed the luxury goods market in Russia from scratch and without anyone's help,” says Konstantin Andrikopoulos, development director at Bosco di Ciliegi. “The philosophy of that market lies in achieving the critical mass of supply. In other words, instead of offering one brand, one should offer a variety of brands under the same roof. Our objective is to offer a worthy choice of items both at mono-brand shops and multi-brand stores. Furthermore, the concentration of supply makes it possible for us to go beyond the boundaries of clothing and accessories market and offer other services as well, for example, a caf? and a drugstore operating next to our shops, as in Petrovsky Passazh. Thus, concentration strengthens our supply.”

Bosco di Ciliegi has opened over 50 mono-brand boutiques in Russia (Moschino, Marina Rinaldi, Max & Co, Etro, Kenzo, MaxMara, Alberta Ferretti, Ermanno Scervino, Pomellato and Mandarina Duck) and owns multi-brand Bosco shops (Bosco Family Donna, Uomo, Bambino, Bosco Sport and Bosco Scarpa). Bosco di Ciliegi also runs a chain of Articoli luxury stores selling beauty products, perfumes and accessories, which have brought to Russia such famous perfumes brands as Ermenegildo Zegna, Boucheron, YSL, Van Cleef & Arpels, Roger & Gallet, Alexander MacQueen, Rance, Stella M_Cartney, E. Coundray, L'Artisan Parfumeur, and others.

Mercury owns boutiques and shops Armani, Dolce & Gabbana, Fendi, Gucci, Brioni, Tiffany, Bvlgary, Chanel and others. Beginning 2003 the company also sells luxury cars by Maserati, Ferrari, Bentley and Lamborghini in Russia. “While back in 2002 only Porsche ventured on launching a car dealership in Moscow, today the number of stores selling the most prestigious models is growing stably,” says Irina Zharova-Right, managing partner at Nordblom Group. “The Russian capital is becoming an increasingly successful market.” Crocus Group represents such brands as Sergio Rossi, Emanuel Ungaro, Iceberg, Pal Zileri, Lanvin, Vicini, Byblos, Calvin Klein, Chloe, Celine, Casadei, Emilio Pucci and others. JamilCo runs shops by Christian Dior, Burberry, Hermes, etc.

In the past years Moscow has also seen the arrival of boutique standard grocery shops. Those are Hediard, two Fauchon shops and Globus Gourmet. The Hediard chain was established in Paris in 1854 by Ferdinand Hediard who had built his business on sale of exotic fruit. Today, the chain runs over 400 shops in nearly 30 locations across the globe. Moscow's Hediard franchise is held by Arkady Novikov, founder of several popular restaurants in the city.

Fauchon is one of the most famous French brands, along with Chanel, Citroen, Chaumet, Notre Dame de Paris, Louis Roederer, Galoise, Comedie Francaise, etc., one of the national symbols of France. Experts say Fauchon is a store of edible gifts. “Over the past 2 or 3 years the number of luxury brands in Moscow has grown insignificantly, while sales soared,” says Yekaterina Soyak. “New arrivals are perfumes by Bottega Verde, Vacheron Constantin watches, clothes by Gieves & Hawks, Richard James, John Lobb and Schedoni.

Until recently, retail operators actively developed the luxury goods market in central Moscow while properties were still available, Konstantin Andrikopoulos explains. Today, with the majority of luxury brands having already established their presence in Moscow, the shortage of vacant space in the city center prevents new operators from entering the market.

Luxury Oases

“Moscow has several boutique zones - Tretiakov Proyezd, Kuznetsky Most, Petrovka and Kutuzovsky Prospekt,” says Irina Zadorozhko. Konstantin Kovalyov mentions Stoleshnikov Side-street and Bolshaya Nikitskaya Street. For example, Burberry, Umanuel Ungaro, Escada, Christian Dior shops are situated in Stoleshnikov. Ermenegildo Zegna, Giorgio Armani, Brioni, Roberto Cavalli shops are to be found in Tretiakov Proyezd, Gianfranco Ferre and Versace on Kuznetsky Most and Gucci and Prada on Kutuzovsky.

At the same time, market experts report that luxury brands are gradually leaving Tverskaya Street, Moscow's most prestigious location for expensive shops. However, only recently a jewelry store Arkada Grand Exclusive was launched at 6 Tverskaya. Ferre Forma opened at 27 Tverskaya. Sergei Lobkaryov, head of commercial real estate at MIAN, assumes that the reason why luxury retailers are leaving Tverskaya is in low turn-out of higher-income target audience, as Tverskaya is more popular with middle-class shoppers. Another reason is the shortage of parking facilities.

“Lack of retail space has brought about the development of new boutique corridors on Bolshaya Dmitrovka and Rozhdestvenka streets,” says Andrei Mashkov, leading retail real estate consultant at Paul's Yard. “It is quite possible that in the near future new investors will form new districts of such stores.”

Unlike their European counterparts, Russian boutique operators have already established a tendency, by launching their stores on the premises of class A shopping malls, says Yekaterina Soyak. GUM, TsUM and Petrovsky Passazh are seen as ideal locations for luxury goods stores.

Today, Moscow still has only a handful of boutique oases - formed of clusters of upmarket shops, whereas in most western big cities there are special streets, housing prestigious brand shops, e.g. Piccadilly in London, Rivoli and Osman Boulevard where Galerie Lafayette is situated in Paris, Milena Morozova, deputy general director at Santa Real Estate, says. Galerie Lafayette regularly hosts fashion shows on its premises, where designer collections are presented before they go on sale in the mall. Incidentally, cheaper shops at Galerie Lafayette are situated on lower floors, the most expensive boutiques are on the top.

In Hong Kong there are two streets running parallel to each other, one selling high-end luxury goods while the other offers their counterfeit replicas, at much lower prices. In New York, most boutiques are to be found on Fifth Avenue, Madison Avenue and Broadway; in Florida upscale retailers prefer large malls. In China there are special complexes for the rich, featuring exclusive restaurants, art galleries and thermal springs, Yekaterina Soyak has reported.

Surprisingly, the ambitious projects of Russian retailers, who moved to launch luxury goods stores not only outside central Moscow but as far as beyond the city's outer ring road, have proved successful. According to Torgovy Kvartal's analysts the development of Crocus City Mall on MKAD was fraught with unforeseeable risks. It remains unclear whether the project would have succeeded in attracting enough tenants to the shopping arcades had it not been for relationships established by top executives and owners of high fashion brands and franchises secured. Nowadays, says Irina Zadorozhko, Crocus Group is the most rapidly growing luxury goods retail company. 80 percent of shops operating on its premises belong to the group. “Mr. Agalarov, the owner of the company, has secured franchises and runs the shops on his own,” she notes.

Barviha Luxury Village, a landmark project by Mercury, houses all world's famous brands of clothes, shoes, accessories and jewelry. “[Barviha] is the first luxury retail quarter in Moscow countryside,” adds Andrei Patrushev, public relations director at Knight Frank. D&G and Gucci, Bentley and Ferrari-Maserati are expected to open their shops in Barviha.

Seeking Privileges

Opening a luxury goods store requires retail space of corresponding quality. There are two traditional approaches towards property search, Anna Savenko, retail real estate consultant at Jones Lang LaSalle, says. Usually, retail operators or their distributors either look for suitable properties on their own or hire professional brokers. Practice shows that independent search proves more successful. To begin with, a retailer knows better what exactly he wants; secondly, he uses personal contacts, gets acquainted with landlords, which means it is easier to come to terms with them later on; besides, not all consultants have a clear understanding of luxury operators' requirements.

“Last year one of our clients was Ciro Paone, head of the well-known Italian company Kiton (luxury men's clothing),” says Andrei Mashkov. “He arrived in Moscow with a view to launch his first boutique here. The client wanted a property specifically in Stoleshnikov. He was offered several alternatives - in Tretiakov Proyezd, on Tverskaya and Kuznetsky Most streets, but Mr. Paone resolutely rejected all those offers saying he would wait as long as necessary for a shop in Stoleshnikov, but since the day the application was filed no vacant space have appeared there.”

“For the most part, properties are provided by distributors who have space in shopping arcades and retail centers,” says Andrei Patrushev. “When new brands arrive in the capital their distributors, of course, count on vacant space available on their own premises, where famous companies are already present and a large client base is formed.” “We are not guided by our partners' requirements alone, as such approach may prove unreasonable and even destructive. Before making any specific offer to our potential partners we examine each project ourselves, its location, range of goods and market environment. In other words, we will never opt for some site where, even if it appeals to the brand operator, we see no potential,” says Konstantin Andrikopoulos. “As to the interior, the priority, of course, is set on the firm's requirements and standards.”

Most of Bosco di Ciliegi stores are in shopping malls - GUM, Petrovsky Passazh and Vesna. In the near future the company plans new shops on the 1st floor of Smolensky Passazh. “Of course, there are such examples as MaxMara on Kutuzovsky, but such projects are viable only in highly popular locations, with large pedestrian flow, and hence, large commercial potential,” Andrikopoulos adds. Haled Jamil, president of JamilCo Group, says: “We are the developers of luxury zones. Our approach lies in creating spaces with a special atmosphere whereto we could later invite brands. This is important both for Moscow and St. Petersburg, as well as for other Russian cities. A luxury zone may be created either on a street - in Stoleshnikov, for example, or in a shopping mall, such as GUM.”

Milena Morozova notes that international brands have universally adopted marketing standards, which determine the choice of location of brand shops, their relations with neighboring outlets of rival brands, organization of retail area, etc. Depending on the type of goods, some companies attach importance to the presence of rivals in immediate proximity, which is absolutely unacceptable for the others. For example, stores selling clothes, shoes and accessories may co-exist peacefully, complementing each other. Furniture and car dealers are less compatible. “Expensive home appliance brands (Miele, Bang & Olufsen, etc) cannot tolerate rivals in their proximity, in the same shopping mall or retail corridor,” she says.

“We are quite flexible in what concerns our retail space requirements. That could be a detached building, retail center, or a shop at the corner,” says Alexander Shabanov, development director at Ruchka.Ru chain. “The neighborhood and environment, of course, play their role, luxury boutiques are not necessary, but well-known respectable brands must be present nearby.” Ruchka.Ru runs 14 outlets in retail centers Atrium, Petrovsky Passazh, Smolensky Passazh, Nautilus, Galereya ZAR, Druzhba, in Novinsky Passazh office center and other locations.

Nina Novikova says that representatives of exclusive brands show interest in detached shops on prestigious retail streets or first floors of prime hotels, and retail areas within shopping centers catering to high-income consumers. “Luxury brands cannot be sold in conventional retail centers, they need specialized properties, created or built especially for the purpose,” Irina Zadorozhko notes. “I am absolutely sure that none of the above mentioned companies would agree to open an outlet in a newly built office and residential estate providing 100 to 200 apartments, nor in a house adjoining another boutique offering similar goods,” Irina Zharova-Right adds.

Boutiques are popular at centrally located first class and luxury hotels bustling with commercial activity. Nikolai Shekhovtsev, president of Bonita Group, says that Marriott welcomes top quality clothing and shoe stores; the Golden Ring hotel houses a jewelry store and a watches shop; Radisson SAS Slavyanskaya features a gallery of all sorts of boutiques, he says. “The key requirements of luxury retail operators are a prime location, respectable environment, the size of property as agreed, a long-term lease and payment transparency,” says Anna Savenko. Brand operators prefer properties at beautiful historic buildings, with large storefronts, high ceilings (of 5 to 6 meters), a quiet area and availability of convenient parking facilities, adds Andrei Mashkov.

Major luxury brands attach importance to architecture and design of their retail outlets. Designers, on their part, are working on the development of the modern luxury image, which is impossible without hi-tech illumination technologies. Interestingly, experts believe that Barviha Luxury Village is going to be the only place in the world where the general spatial and lighting concept has brought together such a great variety of leading brands. Architect Yuri Grigoryan (Project Meganom, author of the illumination design for Illuminator Group) is the author of the Luxury Village project.

Unique Retail

Mono-brand shops are gradually expanding their presence in the capital. Importantly, the interior of such shops is designed in line with uniform standards adopted by their owners, regardless of the country where they operate. For example, the decoration style of all the 80 stores by Caf? Cotton (manufacturer of men's skirts, ties and accessories) is the same, says Elvira Antonova, retail real estate consultant at Novoye Kachestvo realty. All are located in historic parts of the cities where they operate, with no discounter shops or outlets of retail chains around. Caf? Cotton prefers opening mono-brand shops.

In such shops, there are no mirrors in dressing rooms. Mirrors are installed in a specially illuminated hall. That is why retailers place emphasis on power capacity and height of ceiling. The retail area may be quite small, but measuring a least 25sqm. Interior colors are predominantly black. Furniture is made of special Sapelli wood. In Moscow, the company still has not found a suitable property that would meet its requirements. Caf? Cotton's first boutique opened at Galereya Aktyor (Actor Gallery) shopping center. Novoye Kachestvo has reported that recently Caf? Cotton was offered another property at Dvoryansky Dvor.

In late 2005, Chaumet's boutique re-opened in Stoleshnikov after renovation. The retail area has been expanded to 300sqm. Redesigned by French architect Jean Michel Wilmotte, the boutique's interior now features aged bronze finish, unique Louro Faya wood, Burgundy stone flooring and wall panels made of white fluted glass.

Size Counts

Yekaterina Soyak says that as a rule luxury brands do not need too much space and are quite satisfied with areas of 30 to 200sqm for clothes, or from 16 to 80sqm, for watches or tobacco. But sometimes mono-brand shops take up space of up to 400sqm, for example, the 3-storied Prada in Tretiakov Proyezd. “Much depends on the range of goods and location,” Irina Zharova-Right explains. “For example, if a shop sells jewelry at a first class hotel, one counter is enough.”

“The smaller is the area, the more important is the concentration of supply,” notes Konstantin Andrikopoulos. “The larger is the area, the more important it is to expand supply by offering services, entertainment, catering to medium-income earners.”

Moscow witness a tendency towards enlargement of stores, Magazin Magazinov's analysts report. Crocus City Mall measures over 60,000sqm. The complex features a swimming pool and a winter garden with over 5,000 species of tropical plants. Crocus City houses boutiques of the world's leading fashion designers, such as Versace.

Too Expensive for Luxury

“Suitable for luxury brand shops are prime properties where rents may go as high as $5,000 per 1sqm per year,” says Sergei Lobkaryov. “But supply is limited,” Anna Savenko adds. For example, a shop on Petrovka, next to Stoleshnikov, measuring a total of 400sqm would cost a tenant $100,000 per month. A 200-square-meter property on Tverskaya costs $50,000 per month, she says.

“The main problem retailers face in Moscow is soaring inflation for properties let or sold,” says Konstantin Andrikopoulos. “The inflation rate for real estate does not correspond to the potential of the luxury market, rather it reflects some inner logic of the property market.”

“One of the factors that impedes promotion of luxury brands in Russia is high prices of their goods pushed up by high rents,” Alexander Shabanov agrees. “Shoppers go to Europe where the same goods are available at much lower prices.”