Rouble Trouble: Impact of Currency Volatility on Russian Apparel Market
Faced with sharp devaluation of the rouble, Apple has already halted its online sales in Russia while some luxury brands, including Cartier, are raising prices to counter deflation. If Russia’s financial and economic instability continues, fashion and sportswear brands are inevitably set to suffer too.
adidas Group under increased pressure
adidas clearly leads in Russian sportswear, over Nike. But what was once adidas’s significant advantage, is now becoming a hindrance. Russia accounts for almost 7% of adidas’s global sales compared to only 1% for Nike. Earlier this year, the company had already issued profit warnings, partly blaming the situation in Russia and its share price has slid by 25% since July.
The recent currency turmoil has deepened concerns for adidas, as profits will be put under greater pressure than previously expected. After years of making significant investments and prioritising Russia as a top international focus market, it comes as an unwelcome development. The upcoming 2018 FIFA World Cup (with adidas being the official sponsor), was meant to further strengthen the company’s position in Russia; however, preparations for the event have now become more of a gamble, as the environment for investment is far from favourable. From this perspective, Nike is in a better position, as for the time being it can keep a relatively low profile and adopt a wait-and-see approach. Either way, previous plans to expand store networks will be put on hold for both companies, until the rouble stabilises. In the meantime, the weak currency is likely to be an advantage for local brands, in particular Demix and Bosco Sport.
The fast fashion battlefield
As the majority of fast fashion merchandise is imported, retailers’ profitability equally suffers from currency devaluation. A number of international brands, including Esprit, New Look and River Island, have recently announced plans to close stores in Russia. Even the almighty Inditex closed its flagship Zara store in Moscow’s Tverskaya retail district earlier this month. Although not to the same extent as adidas, with 442 stores across the country, Inditex is also quite exposed to Russia’s vulnerability, and adverse currency effects are already starting to become visible. That said, the company’s bottom line is cushioned by a strong international presence in Asia and ongoing expansion in both North and Latin America.
Further price increases expected to dampen consumer confidence
Although the recent speed of the rouble’s collapse has not yet been reflected in price increases across the board, a number of multinationals including Apple, McDonald’s, Renault and Cartier have already shifted their price tags up. Similar efforts to offset the drop in the value of the sales fashion companies make in Russian currency are almost certain and will become more pronounced in the coming months.
This will have a dual effect on consumer spending. In the immediate term, shoppers are likely to rush to purchase any non-perishable consumer goods before further price increases take place. On the other hand, spiralling inflation will continue to dent consumer confidence, which is already at an all-time low. And fashion as a beyond need-based category is likely to take a hit.
Short-term risks vs long-term opportunities
Immediate challenges and risks have become a major headache for international brands betting on Russia. However in the long-term, Russia is still too big and too important a market to ignore. Most companies will continue to observe the Russian market and currency fluctuations and any significant investment will be put on hold. But there will also be a few audacious ones, such as Gucci, which earlier this month opened two new stores in Moscow’s most prominent locations to a great fanfare. Some retailers, swayed by the long-term opportunities, will continue investing despite the significant risk involved and if they do it right, they may well see a rich payoff.
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