Moscows Luxury Goods Market Collapses

Moscow, once the bastion of excessive displays of extravagance, fueled by easy credit and increasing commodity prices has come back to earth with a bang as the financial crisis hits hard.

A "bag" lady sells fake designer bags outside Alexander McQueen and Stella McCartney in Moscow

Hankerchiefed women peddle fake Louis Vuitton handbags in front of the now-empty Alexander McQueen and Stella McCartney stores, both of whom have had their signs scratched off by hand less than 18 months after their grand openings. The British designers' stilettos, diaphanous gowns and Italian-made wool coats were stuffed to the back of the adjoined stores and sold at a 70% discount before the financial crisis closed them down for good this month. Like many cities across Europe, the fake designer bag "industry," is Mafia run and only a tiny portion of the profits go to the sellers.

Moscow, notorious worldwide for its exorbitantly priced restaurants, expensive real estate, gridlocked traffic of SUVs and love of excess is taking a massive hit as recession bites. The Russian capital is (was) the world's fourth-largest luxury goods market, buying more than 80% of Russia's luxury branded goods. Analysts say this year's profits will be slashed by around 35% in the country's luxury clothes and accessories industry, which is estimated to be worth between $4.5 billion and $9 billion. Donatella Versace and Tom Ford jetted in just last year to talk of their expansion plans in Russia to enthusiastic crowds and those plans are now history. Hennes & Mauritz, famed for its low retail prices and Wal Mart seem more appropriate now.

Commercial director of Russia's Crocus Group, Emin Agalarov, which owns a palm tree-lined shopping center selling diamonds and limousines and around 100 luxury boutiques in Russia and Azerbaijan said:

Agent Provocateur Feels the Chill

In Moscow we have started to experience the slowdown and I must say it is substantial. Overall, my expectations are very pessimistic so I will not scare anyone with the figures, but trust me in the first half of 2009 we (retailers) will all suffer."

Cobbled and dainty Stoleshnikov Pereulok, Moscow's answer to London's Bond Street, is awash with industry rumors of crisis-spurred shutdowns. A single sheet of paper taped on the whitewashed windows of Vivienne Westwood's sole Russian store says it is closed for 'repairs'. Its London-based spokeswoman said the Russian agent for the store had pulled out of retail.

Russian franchiser Aizel, which manages a group of boutiques including U.S. designers Diane von Furstenberg and Marc Jacobs and British lingerie firm Agent Provocateur said sales at its stores are falling and there is no end in sight.

The fashion shows tell a similar story. Organizers of the biannual Russian Fashion Week, which opened on Saturday, said they would scale back the number of shows by 20% from October due to fewer participants. That's a ripple effect from Paris welcoming fewer Russian jets at this month's fashion week than previous years.

Crisis hits Fashion Shows

"We decided… to concentrate on quality. With the crisis, you have to put everything you have into production," said Olga Sorokina, creative director of Russian luxury label Ifre. The former model nixed debut catwalk shows in the French capital and Moscow and instead presented her collection of python skin bags, leather bustiers and fur coats in a modest showroom in Paris.

As the chairman of Emanuel Ungaro, Mounir Moufarrige, put it backstage at his Paris show: "Russian clients are buying less."

A recovery in the Russian luxury market is unlikely in the near future. Even when commodities and energy prices on which the Russian economy heavily depends begin to increase, the Russian oligarchs are so indebted to the government, they are unlikely to remain in private hands, and whether the government will start pouring money into personal luxuries remains to be seen.

"How quickly commodities and energy prices recover will determine the pace for luxury," said independent consumer analyst Andrei Verkholantsev in Moscow.

Russia's equity market has been in recovery mode for the last three weeks as crude oil prices have nudged back from devastating lows below the $40/barrel level crucial to Russia's budget, fuelling a rise in the ruble rate. Recent rallies at Moscow's two main bourses have started to reassure investors, and oil's rise to over $50 this week has lifted on ruble assets. But the overall economic downturn suggests oil's recovery will be more of a slow crawl than a sprint to last July's record peaks of near $150 a barrel.

Magram Market Research, which analyzes the Russian luxury market, believes it will get worse before it gets better.

"It's only the beginning," warned Marina Malykhina, the firm's chief executive.

Though the number of Russia's billionaires halved in the last year, some luxury brands are surviving and even flourishing.

Karl Lagerfeld/Chanel Nail Polish market holding up

"The behavior of our Russian clients has not changed recently," the president of fashion at Chanel, Bruno Pavlovsky, told Reuters. "We have witnessed more and more very young women buying their first Chanel bag or accessory."

He said the century-old fashion house, which recently laid off 200 temporary workers, is about to open a new boutique in the Urals city of Yekaterinburg, home mainly to machine-building and defense industries and one of Russia's richest and fastest-growing cities.

Chanel is also seeking more business opportunities in Moscow, where it has two shops, and across the country.

Accessories are usually profitable because they take up less store space than clothes, which also come in awkward sizes that tend to need discounting at the end of the season.French fashion and leather goods company Louis Vuitton, whose signature monogram brown and gold bags are often flaunted by the Moscow elite, is also opening a store in Yekaterinburg in late April as Russian demand for its accessories is stable. Over the next few years the firm, part of French luxury goods group LVMH, plans to open a string of new boutiques in the Black Sea resort town of Sochi and the southern cities of Samara and Rostov on Don, so perhaps a few more stable makers will survive the downturn.