Luxury Industry

Luxury Industry

MARKET REVIEW

2010

Bulgaria

Introduction LUXURY MARKET BULGARIA

1. FASHION
2. ACCESSORIES
3. JEWELRY / WATCHES
4. HOSPITALITY
5. SPA
6. AUTO
7. OTHER LUXURY SEGMENTS

LUXURY MARKET BULGARIA

Third largest Eastern European market after Poland and Romania, Bulgaria’s economy has been one of the most affected by the current economic crisis. Although a full member country, Bulgaria, much like Romania, does not meet the economic criteria of the European Union, showing a high budget deficit, growing unemployment and a fiscal and justice system which still has a very high level of corruption. 2009 has also been a year with strong political turmoil, the current government only taking partial measures to counter fiscal fraud and corruption.

In 2009, there were several public exposures of corruption and fiscal frauds, many of high profile, and some connected to illegal and fraudulent registration of luxury cars (namely Bentley and Porsche) as well as yachts. Other such examples involved illegal cases of sales of property, including luxury villas, apartment and even five star hotels. Unfortunately many of these cases only made media headlines but were not followed up by authorities and resolved with a public transparency.

Real estate, construction and tourism remain the most affected sectors of the Bulgarian economy, the forecasts for 2010 being even gloomier than 2009. Recently, at the international Berlin Tourism Fair, one of the most important such fairs at an international level, Bulgarian tourism operators presented the lowest rates for package holidays in the entire E.U. region, a five star seven day package being priced as low as EUR 400 on an all inclusive basis. Mention should be made that Bulgarian tourism is mainly concentrated on the summer season which begins mid May and end late September. Bulgarian seaside resorts and hotels come in direct competition with Turkish and Romanian summer seaside offers. Unlike its neighbor Romania, Bulgaria has at least managed to have a very clear positioning of its tourism offering, being known on a European level as a low cost package destination with very competitive prices and a fair level of customer service. The Bulgarian Black Sea side coast is also very well connected to several E.U. destinations with charter and scheduled flights from the international airport of Varna.

As for luxury real estate, most of such complexes made up of apartments or villas are concentrated on the Black Sea side coast, the mountain resort of Bansko, the outskirts of Varna and the capital city of Sofia. Prices dropped in 2009 by more than 40%, many such complexes and units remain unsold. Unlike Romania’s similar real estate offering which has been targeting mostly nationals, the Bulgarian offering has become dependent on foreign investors, especially from the U.K. and Germany. The crisis has brought about a complete halt of such sales to foreigners, while nationals are no longer able to obtain reasonable financing from the banks.

Tourism and industrial manufacturing remain the two focal points of the Bulgarian industry. The wealth of the people is concentrated in four large cities – Sofia (also the capital), Varna, Russe and Burgas. Much as in Romania, Hungary and Poland, the wealthiest people live in the capital city, which also concentrates the majority of luxury businesses.

Bulgarians have a strong affinity for all luxury branded products or services. Luxury brands are means of standing out, showing off and differentiation. Much like their Romanian counterparts, Bulgarians favor Italian and French luxury brands, BLING being the main criteria when purchasing a luxury item. It comes as no surprise that brands such as Roberto Cavalli, Dolce Gabbana, Versace are still among the top selling luxury fashion and accessories brands in the Bulgarian market.

In comparison with the rest of the region, BULGARIA remains in 2010, along with Ukraine, one of the countries with a luxury market which is unlikely to show clear signs of recovery, which is only likely to happen mid to late 2011. Auto, jewelry, watches, hospitality, travel and fashion remain the most affected segments, while SPA, organic (gourmet) and accessories remain at relatively stable levels in 2010.

CPP Luxury Industry Management Consultants Ltd estimates the luxury market of Bulgaria at EUR 275 million in 2010, 10% lower than 2009. The figure includes: fashion, accessories, jewelry, auto, watches, SPA, organic/gourmet, travel, cosmetics and excludes hospitality and perfumery/fragrances.

General retail

The Sofia luxury retail presents the same issues as the Bucharest one. There is no street dedicated to luxury brands and services. Although in Sofia, there is the Vitosha street, it still lacks a coherent of mix of brands both in services and luxury goods. McDonald’s restaurant and the Rolex boutique are within meters from one another. Most disturbing aspect of Vitosha Street remains the fact that several an increasing number of boutiques with luxury counterfeited products are flourishing, authorities closing an eye on this matter.

The largest shopping centre in Sofia, offering 130 selected shops with luxury brand goods is the Mall of Sofia. The mall is four stories tall and has a total of 70,000 m² of built-up area, of which 35,000 m² belong to the commercial and entertainment sector.

The other shopping mall in Sofia - City Centre Sofia is another place of interest for visitors and citizens. It is spread on 3 floors and features more than 100 brand collections on a total built-up area of 44,000 m².

Several other Mall projects in Sofia and throughout Bulgaria have been put on hold indefinitely, the only major mall opening took place in Varna MALL VARNA in 2009 with the largest mall in Bulgaria covering more than 90.000 sqm.

1. FASHION

The most important players on the Bulgarian luxury fashion market are local retailers MDL and SMG FASHION.

Retailer MDL currently owns in franchise the following brands: D&G, Trend Box, Ermenegildo Zegna, MaxMara, Furla, Marella, Max&Co., Marina Rinaldi. The best performing brands in 2009 remain Ermengildo Zegna, D&G, both in mono brand downtown locations. Furla, Sisley, Max Mara remained at stable sales levels in 2009. CPP estimates that, considering the evolution of the Bulgarian luxury market as well as the international trends regarding D&G, Marella, Max&Co, Marina Rinaldi, MDL’s overall sales and turnover will continue to decrease in 2010, with Max Mara and Zegna remaining the only profitable brands for the group.

MDL is also the local franchisee of mass market brands: Benetton, Penny Black, Motivi and Marc Cain, which have all shown negative results in 2009.

RetailerSMG FASHION LTD. is is one of the pioneers of the local luxury fashion market, having started its operations early 2003. By size and turnover, it is the second largest luxury fashion retailer after MDL.

SMG Fashion Ltd. is the franchisee of Escada Margaretha Ley, Escada Sport, Betty Barclay,Cerruti 1881Apriori Escada Group. SMG also distributes the home collections of Armani, Kenzo, Versace, Etro, Yves Delorme, Missoni. Much like MDL, SMG Fashion also operates mass market brands: Jeans Point (Kenvelo), Junior (multi-brand store for children's apparel), Satin (multi-brand home wear store)

SMG Fashion Ltd was also the first luxury fashion retailer to open a multi-brand store in Varna which sells Betty Barclay, Cerruti 1881Cerruti Jeans, Kenzo, Elle and Timberland for kids.

In 2009, SMG terminated its long term franchise agreement with GIANNI VERSACE SpA, closing the Gianni Versace monobrand store which was open in 2006. SMG also closed the Versace Jeans Couture monobrand store.

Judging from the retail exposure and reflected by our surveys is the fact that Italian luxury frashion brands dominate the local retail luxury market. Unfortunately, most of the diffusion lines D&G, Just Cavalli, Armani Jeans, Versace Jeans, GF Ferre sold on the local market are outlet merchandise mixed with counterfeit products. Such multibrand shops openly sell these brands throughout the major shopping malls and galleries in the capital Sofia. Most of these brands are aware of such overexposure and their logos being put on every multibrand ship, yet they motivate their lack of initiative to curve this issue, with the fact that some do not have a franchised monobrand presence and therefore it is more difficult to educate the consumer. Yet, the reality seems to contradict this statement. Although D&G now has a local franchisee and a monobrand location (Sheraton Sofia), the D&G logo is widely displayed at multibrand shops, most products being labelled Ittiere IT Holding, which no longer has the right to produce D&G apparel (since early 2008).

Canali remains second best selling men’s luxury fashion brand with a monobrand franchised store in downtown Sofia (approximately 150 square meters). A limited collection of Brioni is available at VMV multibrand store.

The only French brands present in monobrand representation are is Guy Laroche, Cacharel. The Marithe Francois Girbaud monobrand boutique at Kempinski Hotel was closed in 2009.

Pradaapparel is still sold in several multi brand stores, yet with limited collection pieces on Vitosha Street. The 2 stores are owned by the same retailers which franchised Emporio Armani.

Guess, Salvatore Ferragamo, Dior, Bottega Veneta, Yves Saint Laurent, Chloe, Tod’s are present in multibrand distribution within boutiques near the Sheraton Sofia hotel. According to the information CPP obtained from these brands directly, sales in 2009 were satisfactory given the challenging market conditions. It remains to be seen whether the local retailer which distributes the brands will manage to overcome the current crisis.

From a pricing point of view, all luxury branded fashion items prices sold in Bulgaria are 10% higher than in Italy and France, situation which developed late 2008 and then 2009 due to the crisis which put pressure on retailers. Before the debut of the crisis, pricing of luxury fashion goods was close to the German market, making it even lower than Italy and France, on select brands and product lines.

The estimated turnover for 2009 for a stand-alone franchised mono-brand location in Sofia was on average EUR 1,8 million. In comparison to 2008, there was a decrease of 25%. CPP’s estimates for 2010 are negative, especially for brands which are sold only with apparel lines. Those with accessories will see an improvement during the Christmas season of 2010.

Estimates for 2010

Major changes in 2010 include drop of sales by 20 to 25% for the first quarter, compared with the same period of 2009.The downfall will continue for the rest of 2010, we estimate a recovery Nov/Dec 2010

As some developers struggle for financing, certain projects are likely to be cancelled. Despite lower high street rents in 2010 (10 to 15% lower than in 2009), many downtown spaces remain empty.

The only luxury gallery project which could emerge in 2011 is the downtown located TZUM, a former Soviet style shopping centre situated downtown Sofia, near the Sheraton Hotel. The project could be developed only once owners and management realize the potential of the building and the fact it cannot remain profitable in its current situation which is a mix of medium and mass market brands, among many empty spaces.

Louis Vuitton, a reference for the maturity of a luxury market postponed indefinitely its initial estimated opening for 2009 and none of the other luxury fashion brands which expand with DOS (directly operated stores) such as Hermes or Prada expressed any interest to enter the Bulgarian market within the next two years.

The only major international luxury fashion brand which might enter the Bulgarian market (through franchising) is Burberry, but not earlier than 2011.

2. ACCESSORIES

Most of the accessories brands are included in multi brand concepts, the market leader being IT Holding with a presence in 6 multi brand stores (Ferre, Just Cavalli, D&G) – in comparison with 8 in 2009 and 10 in 2008.

Most of these multi brand stores are situated within malls – Mall of Sofia, City Center Mall, Central Department Store. IT holding is closely followed by Aeffe Group with several multibrand locations including Pollini, Moschino, Alberta Feretti

Market leaders are D&G, Versace, Ferre and Moschino. The only mono brand luxury accessories stores are Cesare Pacciotti and Furla, with stable sales throughout 2009. CPP considers that Furla has proven successful during crisis because of its lower pricing on Made in Italy leather accessories.

In comparison with Bucharest, there are no specialized shoes multi brand stores, most of the shoes collections being part of multi brand or mono brand stores.

Similar with what is happening on the fashion segment, diffusion lines sold on the local market are outlet merchandise mixed with counterfeit products, which also have a direct effect on the sales of accessories.

3. JEWELRY / WATCHES

Most luxury watches brands are present in the market in multi brand concepts. The most important luxury watches and jewelry retailers are La Tiara, with a boutique dedicsated to Bvlgari, Chopard and Vertu, Royal House (Rolex, Vacheron Constantin, Piaget, Hermes, Harry Winston etc) and Maestro (Audemars Piguet, Chopard).

La Tiara and Maestro each have 2 locations, with dedicated corners for their key brands. La Tiara is also the exclusive distributor of Vertu on the Bulgarian market.

Late 2008, early 2009, Sofia became the only Eastern European capital city with two top luxury mono-brand watches boutiques – Rolex and Cartier. While Rolex has registered stable sales, the Cartier mono-brand registered negative sales. CPP believes the Cartier mono-brand opening was done too soon in a market which has not yet reached a maturity level. The blame for the opening of Cartier in a mono-brand boutique in Sofia is not so much on the local retailer which was well intentioned but on the lack of market research and feasibility analysis by the Cartier company which agreed to this very early opening. By contrast, in Romania, a luxury market almost twice the size of Bulgaria, Cartier has been distributed within a single corner in a multi-brand shop for more than 10 years, a move, which before the crisis, could be considered as overcautious on the side of the Cartier company.

Sales of jewelry/ watches are still at a relatively low level, many Bulgarians still preferring to buy from abroad. Just like the case with Rusia and the Ukraine, we are facing a level of discretion imposed many times by wealth accumulated in unlawful ways.

Overall sales of luxury jewelry and watches on the Bulgarian market dropped by almost 30% in 2009 compared with 2008 and the first quarter of 2010 is likely to follow the trend.

4. HOSPITALITY

Sofia’s five star hotels are: Radisson, Sheraton, Kempinski, Hilton, Grand Hotel Sofia and Holiday Inn.

According to Bulgarian criteria, there are two more five-star hotels in Sofia – Anel and Arena di Serdika, but, price-wise, Anel is rather a four-star establishment, whereas Arena di Serdica’s marketing labels it a boutique hotel.

Many of the hotels such as Kempinski, Grand Hotel or Hilton have lost their shine due to the fact that many haven’t been renovated since opening. The Kempinski and the Sheraton are in the poorest condition, with the renovation process being very slow and in some part inexistent. Public spaces and restaurants fail to attract the local high class, who prefer independent restaurants. Sheraton Luxury Collection Hotel which apparently received a face lift in 2008, remains the worst five star rated hotel in Sofia, with standards that are lower than the Sheraton brand, let alone the Sheraton Luxury Collection brand.

The most important boutique hotels are: Le Fleur and Crystal Palace, with Le Fleur standing out. Its daring design and its central location on pedestrian Vitosha street makes it a favourite to discerning travellers.

Average rack rates for five star hotels in 2009 were lower by 20% in comparison with 2008 and will continue to drop

-150 euro for the new hotels or renovated rooms within the 5 star hotels

-90 euro for the un-renovated rooms within the 5 star hotels

-60 euro for weekends

Over 80% of travelers staying in five star hotels in Sofia are corporate – international and regional country visitor. The same applies to large cities such as Russe but it is reversed for other cities such as Varna or Burgas where five star hotels attract mostly foreign travelers.

Apart from expenses for their traditional activities, most of the five-star hotels (except Grand Hotel Sofia), have accumulated excessive outstanding debts. This explains why in 2008 and 2009 the owners of both Kempinski and Radisson have been trying to sell the properties, but with the financial crisis gaining strength and the time for such sales might not return before 2012.
There is little cause for optimism that 2010 will be any better: as companies cut costs, five-star accomodation is among the first to go. Business in Europe is expected to drop overall by almost 20 per cent, which is likely to be mirrored in Bulgaria.