At the moment, the Russian retail market is experiencing a phase of deceleration or stagnation in sales. What was the reason for the formation of such a difficult situation for retail and which anti-crisis strategies are ineffective, argues Daria Yadernaya.
Daria Nuclear - Managing Director of the Esper Group.
Esper group Is a company engaged in market research, business analytics and consulting support in the field of corporate strategies and marketing.
Despite the fact that at the end of 2013 the turnover growth in the fashion market amounted to 4,4%, this growth is offset by significant fluctuations in the exchange rate at the end of 2013 and at the beginning of 2014, which even when adjusted for inflation in sales figures means the actual losses of most operators. The largest losses were incurred by the mass market segment (middle price segment in the lower and middle part of the spectrum) with price positioning from 30 to 100 euros per pair of retail shoes.
The crisis did not affect all market segments
Leading companies in the fashion market record retail growth at the level of 1-2% like-for-like and consider this indicator stable, since the losses of other companies are even higher. Indicators for footwear, however, do not look so deplorable, many have managed to increase sales in physical terms by 3-5%. In terms of value, the revenue growth was up to 15%. Thus, the ongoing recession for the shoemakers was not as tragic as one might expect. Moreover, to a certain extent, one can expect that for domestic shoe companies the recession will become the very opportunity in the Chinese interpretation of the concept of “crisis”, which will revive new and more effective concepts.
If we talk about the footwear market in Russia as a whole, traditionally the most dynamic segments today (as opposed to the clothing market) are those from the middle and above. Moreover, the most dynamic segment is the luxury footwear segment (16,64% was the increase in sales of this group in 2013, this year, according to forecasts, it will also exceed 15% in value terms). Sales in the middle price segment (from 100 to 250 euros per pair) are also growing at a significant pace - 11,76% in 2012, although this market is saturated faster and this year the growth will not exceed 7% (which, however, is radically different the picture compared to the clothing market, for which an increase of 1,5% is possible only under the optimistic scenario.
Decreased purchasing activity
Let's analyze the root causes of what is happening on the market from a macroeconomic point of view, in order to understand what the shoe manufacturers have on the Russian market, which was so lacking for the clothes during this recession.
2012 was a very successful year for retailers, the peak of a recovery year, when most companies reached their pre-crisis highs. During the pre-election period, an active stimulating monetary policy was pursued; against the background of low inflation, the refinancing rate was also low. This allowed a significant part of the population with middle and lower middle incomes (60% made up of state employees) to receive both additional payments before the elections as a result of direct and indirect "injection" of money into the economy, and to gain access to cheap lending for consumer needs. The expansion of disposable income was the driver of consumer demand. After the elections, the payment policy, accordingly, began to collapse, and the growth of inflation led to an increase in the refinancing rate, and, consequently, to a reduction in consumer lending opportunities. The expected increase in wages at the beginning of 2013 did not occur, and this imposed additional restrictions on consumer demand in the fall of 12/13. The first signs of a slowdown were noticeable back in the winter-spring of 2012, but this could partly be attributed to a seasonal factor: the unusually long winter certainly had an impact on the sales of certain categories of goods, in particular, clothing, footwear and accessories, since the range is spring -years collections of most brands did not match the weather conditions. How great the impact of this factor was, could be estimated from the data of the second quarter, when sales began to grow at a compensatory pace, but slower than expected. But already in May 2013, the market entered a clear cyclical stagnation not associated with seasonal impact.
While the traffic level of the leading retailers remained relatively unchanged (the average for the top 200 shopping centers reduced traffic by 3,5% over the year compared to 2012, and December 2013 compared to December 2012 showed -5%), the conversion rate in the mass market decreased on average by 44%. Unsurprisingly, this translates into reduced sales even with strong sales promotion.
The abundance of players on the market and the constant growth of supply against the background of limited demand (as a result of large orders of collections in anticipation of an increase in 2013), the pace of which does not keep pace with supply due to stagnation of income levels and high level of interest rates on loans , mean that consumers at all levels are becoming more price sensitive.
However, the footwear market, in contrast to the clothing market, is still undersaturated compared to the US and EU markets. With an average consumption of 4,4 pairs per year in Russia, this is about 2 and 3 times lower than in the EU and the USA, respectively. Thus, the progressive growth of the market continues at an outstripping pace, which allows it to develop countercyclically. In addition, footwear occupies a special position within the fashion industry, along with, in part, children's clothing and underwear. These are the categories that still retain their functional importance to a large extent, while garments and “fashion” as such are increasingly approaching the emotional motives of consumption. Accordingly, with a decrease in income, functional needs are nevertheless satisfied. Finally, the move down the price ladder for shoes is much less likely than for clothing. Footwear demand is price inelastic downward in the sense that consumers accustomed to footwear in a particular segment and the quality associated with it (whether real or imagined) will not be willing to return to a lower price level. For them, the functionality of such shoes will be significantly lower, and wearing them is almost unhealthy. In this context, even an increase in the credit burden does not lead to a drop in the cost of footwear - as well as for food, medicine and other factors associated with functionality. This means that in the moderate recession we are in, most likely, shoes will be able to maintain a stable position in the market, which can only deteriorate if the duration of the recession exceeds 18 months.
So, the whole of 2013 passed under the sign of a high level of debt load of the population, whose disposable income not only did not grow, but declined due to inflation, the need to pay interest on loans and repay the bulk of the debt from stable or falling incomes. Against the backdrop of a large volume of ordered goods, this led to an overstocking of retailers, which by the fall of 2013 began an active policy to stimulate sales, mainly by price methods. Shoe companies also experienced some overstocking due to the high expectations that amazed the entire fashion market.
Reducing prices is not a way out of the situation
The decline in the rate of growth of sales, of course, is beyond doubt. Another question is how difficult it is for nominal sales growth today, when consumers are showing heightened price sensitivity to fashion products and the temptation is to extend this approach to shoes by staging a massive sale of surplus goods. True, buyers today in polls note that they are ready to pay less and less for products, but expect more and more from him. They shop less often, make impulse purchases less often, and are less willing to purchase more than 1 item in a check. The average number of items per check on average for the top 20 mass market players decreased to 1,22 from 1,3 a year earlier. However, recalling the specifics of the footwear market, one should clearly assess the low effectiveness of price incentives. They can be effective in the short term and will affect the most financially vulnerable group of consumers, who are forced to deny themselves even what is necessary and functional during a crisis and make a purchase at a lower price. Nevertheless, in the long term, this measure is completely ineffective, moreover, it is dangerous. Consuming in excess of footwear needs will result in a subsequent “consumption cap” that retailers have already faced in 2010, when after an unprecedented 2009 sales consumers, even during the recovery phase, were not ready to spend again on clothes and shoes... Price games will not only interrupt this process in the long term, but also indirectly slow down the process of qualitative development of the market - and especially design, which still remains a weak competitive side of Russian footwear manufacturers, in particular.
Freeze on salaries for public sector employees reduced their purchasing power
At the end of 2013, another major development happened that put further pressure on demand - and ensured such poor sales at the end of 2013. The budget for 2014-2016 was adopted, where the freezing of public sector wages was declared, up to the refusal of indexation. Since 60% of mass market consumers are employed in the public sector (either consumers' parents or consumers themselves), this factor has a direct impact on retail sales and seriously reduces purchasing power. Speaking in this context about shoemakers, it is worth noting that this "karma" extends to them too - again, not without reservations. Indeed, state employees to a large extent buy footwear in the mass market segment, however, the requirements they place on them are higher. Since the quality requirements in the mass market run up against the natural limit of "quality for money" (small in the mass market), the appearance is compensated by the private renewal of pairs of shoes. Since most state employees have dress code requirements, they also need shoes of a certain classic formal and semi-formal type. Such shoes look decent in the mass market, but they wear out quickly, since they are not made from the most expensive materials and not in the most tolerant design. As a result, the frequency of renewal of pairs of shoes in the mass market (which, on average, is not higher than in the “luxury” or “premium” groups) is significantly higher among consumers from the public sector, which allows creating a countercyclical tendency during the crisis. Finally, relatives of public sector employees (especially children) tend to repeat the consumption pattern and also frequently update their shoes, especially if children attend public schools and kindergartens, where certain requirements are also imposed on the condition of the shoes, which they have to meet. Children of state employees most often do not stay at home with any of their family members, but attend the system of state preschool education, which expands the range of consumption of children's shoes in large quantities - again, regardless of the crisis.
All these reservations, of course, do not have an absolute impact on all shoe companies, since they are not comparable functionally, stylistically and in terms of price level, as well as in terms of the initial competitive position, but on their basis it is possible to build anti-crisis strategies that will not only not reduce sales in a difficult economic situation, but also to ensure their some growth, while avoiding overconsumption and not limiting the potential of its dynamic development on the upward wave of the cycle.
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