Vladimir Denisenko, General Director of the Russian shoe company Unichel, talks about the new market situation, the prospects for import substitution in the industry and the future of Russian shoemakers
Economic conditions have changed radically in recent months, but the full realization of the new reality will come later. For the time being, something continues to be done by inertia, on the basis of old stocks of components and materials, and production plans, current business tasks have not been canceled. Operational activities do not provide an opportunity to immerse ourselves in reflections on the uncertainty in which we find ourselves. About how much retail prices for shoes will grow, whether Russian manufacturers will be able to replace imported components and materials for shoes, what is dangerous for shoe companies parallel imports, about adjusting development plans, in an exclusive interview with SR, the CEO of the Russian shoe company Unichel spoke Vladimir DENISENKO.
Vladimir Stepanovich, against the backdrop of a general rise in prices, one of the most pressing questions is: how much has the price of Unichel shoes increased for the end consumer?
The price has of course increased throughout the footwear market and we are no exception. The reasons are quite understandable and known to everyone - fluctuations in the exchange rate, rising prices for materials and components, rising costs of logistics. But if for everyone else it has grown by 30-100%, then we have, on average, by 12-15%.
When pricing, we proceed from the fact that most of our materials are Russian, the import component is no more than 30%, and we reduce it. The work was started long before the events of the last two years, and its results have the best effect on both the cost price and the containment of price growth. Now we are forced to buy everything at new prices, change some suppliers - in general, we are thoroughly working with the cost price so that it grows within reasonable limits.
This will continue in the future, but the final price depends on the dollar exchange rate and the economic situation as a whole, on whether the consumer's solvency will remain. So far, our sales are going well, with a good increase compared to last year. What to expect next when the consumer runs out of money, and he starts to leave them only for food? This is still a question, and today no one will be able to tell you what the final price of shoes will be.
But in general, the balance in the market will be determined by the availability of shoes. And in the winter season, we predict that it may already be less, because delivery times are missed, enterprises are trying to buy less in advance, and in general they avoid big expenses, and on the other hand, the consumer is getting poorer.
Nevertheless, the Unichel factory produces a winter collection, about 50-60% of all materials for it were purchased before the special operation at an adequate rate, the rest will be paid at current prices and, I think, we can keep prices below the market.
Is it possible to completely replace imported components with Russian ones, or will it be necessary to abandon the production of some models?
We will change some of the components for Russian ones, but, basically, we are talking about another replacement here. If earlier we bought some items in Italy, now we are starting to try, for example, in Turkey - cardboard, interlining materials. And, in principle, this is the same import, but more reliable and less risky supplies appear. Although the price gain is small. Some materials were purchased in China, but this country scares us with uncertainty and delays in deliveries, it is necessary to start deliveries of materials a very long time ago. Now in production - a difficult period of restructuring of all processes.
But it is still impossible to completely replace imported components with Russian ones: there are simply no cardboards in Russia, high-quality threads, too - such that would be guaranteed to replace German and Italian ones. Therefore, for the time being, in terms of complete import substitution of components and materials for footwear, the prospects are vague, although we are looking and trying.
Finding a replacement is not the only problem. Today, the factory is equipped with the latest modern equipment, and, for example, German and Italian equipment works on Gutterman threads. We tried threads from other manufacturers, but somewhere the twist does not match, somewhere - the speed, and of course, “native” ones are better. Although in any case, you can replace it, but the sewing quality will not improve from this.
The most prosperous situation with leather: for a long time we worked with large volumes of Korean, Turkish, Spanish leather, but over the past two or three years we have almost completely gone towards Russian leather and, as it turned out, we were moving in the right direction. Domestic leather is also of decent quality - for men's, children's, and women's shoes. Another thing is that the Russian tanneries themselves began to change prices, referring to the increase in the cost of raw materials and chemicals. We work with everyone, adjusting the volume of orders, based on price and quality.
As for thermoplastic elastomers for the production of soles, they learned how to make granules in the Moscow region, partly in Kirov. Previously, we bought this raw material in Italy, now we are considering proposals from Russian enterprises. I think we will be able to work on domestic materials without loss of quality. Ceteris paribus, we will make a choice in favor of domestic companies, with foreign ones - complex logistics, indistinct deliveries, tense situation at the borders, strict prepayment requirements. But as for polyurethanes, we can say that the situation is hopeless, even if the factory is located in Russia, it carries all the components from Germany and Italy.
Now many suppliers are trying to show their worth, either from their own naivety, or from the desire to seize the moment and not miss their own. Relationship stability is the most important thing that is valued. Payments, schedules, deferred payments - you have to meet everyone you can, and everything will be fine. And trying to drive partners into a corner in a difficult situation and prove your own indispensability is a road to nowhere. Stability will come, but no one will return to you, there will still be other channels.
It is in such situations that the decency of suppliers and the quality of business relations are determined. I don't like it when they twist their arms. I always build a business by playing for the long haul. We have lived through four crises and have come out of each with our heads up. We do everything to keep our feet on the ground. And so far we've got it.
I see that at the moment it is impossible to completely abandon imports. Rather, imports will simply change geography - from Europe to Southeast Asia. 80% of the shoes in the world are made in China, including good and expensive ones, from normal materials. It's a question of price, quality and time.
And the replacement of Italian components will not worsen the quality?
No. We have not been buying interlinings and accessories in Italy for a long time, because it is too expensive. They also gradually abandoned the purchase of soles, buying only individual styles, for example, winter “anti-icing” with spikes. Long before all today's events, we already had a natural process to reduce the volume of purchases from Italy, and now it has simply accelerated. I don’t see anything wrong here, the quality will not suffer, the assortment too.
Returning to the issue of import substitution in our industry: it is a myth that Russian components and Russian equipment will appear on the market right now. To create an efficient production from scratch, years are needed - work, investments, enthusiasm and nerves, specialists, equipment and, most importantly, the desire to do it profitably.
Today, it is more profitable to bring shoes to Russia than to sew here, because for Russian manufacturers in our sector, if the profitability of 5-7% is already great. But if you make even one mistake, you will lose. I have repeatedly said that we need to think about supporting the shoe industry, the production of materials and components, but it was believed that there is Chinese - and good.
It would seem that we are super-professionals, we do everything on our own: pads, blanks, insoles, we produce soles from polyurethane and thermoplastic elastomer - in fact, Unichel is a shoe empire that almost completely meets its needs, nowhere in Europe. We have been doing this all our lives, even in the most difficult conditions. And now, when the situation in the world seems to give odds to Russian manufacturers, we cannot increase production, launch new flows, and recruit new equipment is simply impossible. Keep what you have now...
I have no illusions that new domestic players will enter the market now. Maybe the market will turn white, it will become clear who "sewed in the dark" and who is official. But no one will grow up. If only by 10-15% - God forbid, and if by 20% in a year or two - they are just heroes. But I don't believe in it.
What is your opinion on the legalization of parallel imports. How might this affect the footwear segment?
This is a story about when, under a good pretext, smuggled products begin to be laundered. Russia has been littered with smuggling without parallel imports before, more than 60% of shoes on the Russian market were smuggled. And now we are in danger of getting the same thing. As it will be? Previously, for example, Adidas could be brought to the Russian Federation only with the permission of Adidas, but now they will take everything and say: “We don’t need permission, because this is Adidas.” And who will confirm the authenticity of the goods?
In fact, the legalization of gray trade may occur, which is very bad for everyone. Anyone who needs to buy a real Gucci bag will buy it, and this segment of buyers in Russia is the least of all to worry about. We have to worry about those 80% that everyone buys only fake, because there is no money for other goods. These people will be quite satisfied if the bag or shoes are of high quality and relevant, but from a different manufacturer, even if not a well-known one. The desire is quite normal, and marketplaces want to legitimize the status of dubious goods in order to make money on this business legally and on a large scale. From the point of view of the buyer, the advantages in the form of a breadth of choice and the availability of any brand are obvious. But I, as a production worker, am not a supporter of such innovations.
Will the company's development strategy change taking into account the current situation?
The fact is that now no one knows in which direction the situation will go, and how it will end. So it's premature to say anything now. Unfortunately, everything is tense. I can say that we are working, retaining staff, our shoes are in demand.
Specifically, the winter collection, which is now being produced at the factory, has undergone any changes in the number of models, in their appearance?
The collections are sewn according to the previously planned plan, we have corrected no more than 5% of the collection: we have combined some models, revised the color schemes taking into account the situation - slightly reduced the number of white and beige models. For the collection of the next autumn and winter, everything was purchased and charged in advance. Models are developed, orders are made, equipment is available or on the way. But for the spring-summer 2023 collection, which is now in development, we are already taking into account the optimization of supplies, materials, weighing what we can really do and what we can’t do because of the supply problems that are now looming.
Will new Unichel stores open?
Today the situation is such that our franchise network sells without any transformation what we produce. And sales are growing - partly due to the rush demand, the change of seasons in March-April, partly due to our prices, which we keep below market prices. The entire volume that we produce is sold and in demand. In the current situation, we have slowed down the work on opening stores in shopping malls, as it is not yet clear whether all the brands that have temporarily suspended their work will leave, and how this will affect traffic.
But I must say that landlords have become more understanding and accommodating: we continue to cooperate with those who meet halfway, and in general we are working on the efficiency of trade. Now we are investing less in advertising campaigns, because the best advertising is a nice store, a good seller and your friend who said that he received good service when buying at Unichel, he liked the shoes themselves, and he bought three couples. This is the best advertisement.
Opening a store in a shopping center requires serious investments, and we are forced to save money, we need money to pay salaries to the teams. We have already indexed and increased the salaries of each employee. These costs are strategically more important for us now. Times are difficult and unstable, we understand that our people need to be helped.
The possible withdrawal of Western players from our market is carte blanche for Russian brands…
Russian brands have never been hindered by Zara, H&M or anyone else. They did not sell some sky-high shoes, but ordinary models, maybe more intelligently made, more daring in design, coming complete with clothes in a single capsule. But they cost an order of magnitude more expensive than our products.
Our competitor has always been illegal China, from which shoes were brought, but many and often "gray" ways, trucks, through Kazakhstan. And only he competed with us on price. Recently, thanks to the introduction of labeling, the market has whitened, although not completely. There are fewer such Chinese products, so it has become a little easier for us to sell.
In our country, there are very low duties on the import of shoes from abroad, with such duties there will never be production in Russia. It is necessary that the duties on the import of shoes from abroad be at least 10-15%, as is done all over the world, then it will be profitable for Russian manufacturers to work. And only then the domestic manufacturer will be able to invest in development and build a business for the future. And now, I repeat, it is more profitable to bring from China and sell it, so we can say this: is it profitable to produce in Russia? - Not; Trade? - Yes.
What changes will be in online trading?
Unichel is represented on the main marketplaces, we feel quite confident and systematically grow every year, these are good prospects for us, more in terms of image, increasing brand awareness, including in neighboring countries, where, for example, our offline - there is no difference.
If we talk about marketplaces in general, then if supplies of cheap products from China are established through them, and all this will be sold in crazy volumes, because there are no taxes, no labeling, no control over the environment, over materials, over the veracity of the information indicated, there is no, if synthetics are passed off as leather, then online trading will flourish.
What is your forecast: how can the alignment of forces in the Russian shoe market change? Who will dictate the rules, and what share can Russian producers take?
Smuggling, if any, will dictate the rules, as well as gray and black imports - mass deliveries of such shoes. Unfortunately, they determine the rules of the game in the mass market today. If all this continues, then nothing will change: as it was hard for domestic shoemakers, it will be so. It has always been difficult for them anyway, and now there are added difficulties with logistics, interruptions in supplies, and the requirement for prepayment.
Until there are normal conditions for taxation for Russian producers in the light industry, nothing will change. Now we pay 30% of social taxes, while enterprises with half the number of employees than ours pay 15%. The conclusion about how it is better for Russian big business to live suggests itself. But I don't want to play these games. It turns out that all our laws are not aimed at supporting large enterprises. Today we have 6% of real production - in small and medium-sized enterprises, the rest are intermediaries, and we are growing them. But it is necessary to create conditions for industrial enterprises so that it would be profitable for production workers to develop, and not go into the shadows.
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