10th Global Conference on Business & EconomicsISBN : 978-0-9830452-1-2
THE METAMORPHOSIS OFTHE RUSSIAN LUXURY FOOD CONSUMPTION
IN TIMES OF RECESSION
By Dr. Nikolai Ostapenko, Washington, D.C.
Russians love to eat. Feasting is a beloved practice, an integral component ofthe Russian way of daily living, socializing, celebrating occasions, and making a conspicuous display. Sharing mealshas always been both asignificantprivate ritual and a special element of Russia’sphilosophical, literary, and socio-economic traditions.InThe Twelve Chairs, asatiricalnovel with a comic-grotesque flavor published by Ilya Ilfand Evgeny Petrov in 1929, one of the central characters famously screamed(fashionably,in French):"Monsieur,je ne mangepassix jours,"expecting to conveyadramatically persuasive,terribly pitiful impressionwhile begging for survival and blaming Fortune. Russian foodwaysdefine the nation’s citizens as hospitable and generous,never missing an opportunity to enjoy a plentiful anddelicious meal in companywhile observing lifeand chattingabout the latest episode in the never-ending political drama. For instance, Moscow’s fanciest restaurant, the Savoy, offers well-heeled customers an “imperial” menu of dishes such as Duck à la Boyarin, Tsar’s Veal, Old Monastery Sturgeon, Blinis Stuffed with Beluga Caviar, Cossack Ukha (a traditional fish soup), and Salmon Rose under gilded ceilings on elegantly settables around a marble fountain adorned with the original imperial carvings symbolizing love and fertility. Wish you were there…
Though the return to wild capitalism has not alteredthe nature and importance of the country’s food-relatedrituals, some manifestations of hospitality have been transformed. The “haves” at the glamorous dining tables have acquired refined and expensive tastes, while the “have-nots”are mainly sticking to what the neighborhood Western-style supermarket offers to perpetually inventive, patient working wives. In most Russian families, food expensesdominate the family budget, with other routine items representing a far smaller share.According to Russian sources, for 41% of Russians, food currently accounts for 25-49% of the family budget, while 39% spend 50-74% of their income on food. Public utilities take only 25% of the income in 36% of Russia’s households, and 25-49% of the income of 44%of them (Pravda, March 16, 2010). Let us focus our review on luxury consumption in general, and then on luxury foods in particular.
As we suggested in our prior work in 2009, an orientation toward luxury and affluent behavior patterns with regard to home, personal, and experiential luxuries have been evolving in Russia for a long time. Moscow is frequently referred to as the fifth fashion capital of the world, following Paris, Milan, London, and New York. In Russia, mainly in Moscow, there arean estimated 300,000 to 500,000 luxury consumers, including Russian millionaires, the upper classes, and members of the upper middle class. High-end clothing, footwear, leather goods, jewelry, and eyewear command an overwhelming 65% of the Russian consumer goods market value. It is common knowledge that Russians are highly attuned to explicit manifestations of wealth, and they interpret them as an expression of their newly acquired freedom from the political restraints and limitations on travel to Western countries that were so restrictive in the past.
Ekaterina Slavina of the Swiss Business Hub Russia explains this as a “psychological habit”: “Due to the shaky history in Russia in the XXth century, when the road from fortune to misery was something very short, putting money aside for the future was not a safe bet” (Russian Luxury Goods Market Report, 2007, p. 3). Such behaviorhas beenfueled in recent years by impressive macroeconomic growth and investment activity, low public debt, positive improvements in the banking and financial systems, the healthy general growth of consumption, and the unprecedented upward mobility of the elite upper middle class, up until the recent recession drama.
Russia is notorious worldwidefor its exorbitantly priced restaurants and fancy cars, and for the general addiction of the affluent elite to the most expensive luxury products available. Moscow buys more than 80% of Russia’s goods in a luxury clothing and accessories market estimated at $4.5 to $9 billion. The other two centers of wealth and luxury consumption in the country are St. Petersburg in northwestern Russia and Yekaterinburg in the Urals, where Moscow’s successful chains usually proliferate. Finally, Russia is home to the world’s third-largest concentration of billionaires (after the United States and Germany) and to more than 100,000 millionaires witha combined $300 billion of cash fordiscretional spending. Moscow, with its glamorous daily offerings, is by far the most expensive city in Europe,and more rich people reside therethan in New York, according to anAssociated Press report.To prove it, Moscow’s De Luxe Alliance publishes a catalogue of expensive gifts with a minimum price-tag of $1 million dollars each, targeting mainly “golden” young men between 25 and 30 years of age.
The global economic downturn of 2008-2009 presented major challenges to the commodity- and energy-price-driven Russian economy. Crude-oil prices, within a single year,declined from $150 a barrel (July 2008) to a miserable low of $40 per barrel (March 2009). Inflation exceeds 13% annually, and the ruble has lost about 30% of its value (Ernst & Young,Russian Food and Beverage Industry Survey 2009). The number of Russia’s billionaires was halved in the past year, and the Russian ruble started to fluctuate sporadically again. What impact does this have on luxury consumption?
The worsening of the macroeconomic situation in Russiahas triggered pessimism and confusion in the retail industry,even among Moscow’s luxury-store management. Alexander McQueen, Stella McCartney, and Lanvin closed their stores fewer than 18 months after their respective grand openings in Moscow. The sole Vivienne Westwood shop had a notice – “closed for repairs” – taped to the door for some time: less embarrassing than admitting that the firm was “pulling out” of the country. All Diesel stores in Moscowwere closed when the company “Vintage Technology” lost interest in maintaining the franchise. Fancy British stiletto heels, majestic gowns, and Italian-made woolen coats first disappeared and then were offered at a 70% discount in neighborhood stores last fall. The St. Petersburg Times predicted that around one-third of the profits normally earned on luxury clothes and accessories vanished in 2009 (The St. Petersburg Times, March 31, 2010).
One symbol of the times was the recent opening in Moscowof an H&M store in the former Alexander McQueen space, in a prime location. Some luxury customers were lured away by this new opportunity. Donatella Versace and Tom Ford have not jetted to Moscow lately to share their amazing plans for operational expansion with enthusiastic crowds,as they did in 2008. Moscow’s answer to London’s Bond Street, Stoleshnikov Pereulok, buzzed withrumors of crisis-spurred shutdowns. The Russian franchiser Aizel, working for Diane von Furstenberg, Marc Jacobs, and Agent Provocateur, admitted that sales dropped by 10% this spring.
The truth is that the consumer market is just slowing down and shifting: bigger discounts for the majority and über-luxury for the exclusive few. It takes time to adjust psychologically to the idea of bad times that affect even the wealthiest segment of the most affluent of the non-Western nations. Most of Russia’s traditional luxury consumers are presently feeling “guilty yet rich.” Things may get worse before they getany better. Finally, the Russian rich are Veblenian-effect consumers,in the classification of Vigneron and Johnson (1999). They attach greater importance to price as an indicator of prestige because their primary objective is to impress others. This attitude endures tenaciously. For instance, when the annual Millionaire Fair was held in Moscow in 2006, adiamond-studded cell phone was sold for $1.27 million (Herald Tribune, 2006). Just in case the glitter of the 120 carats of diamonds encrusting the white-gold phone failed to draw customers, there was a plaque declaring, “Certificate of the most expensive mobile phone ever.” The world’s largest exhibition of luxury goods continued at the Fair in 2007. Customers were eagerly buying $50million private jets, Bentleys, penthouses, and yachts, without apparent remorse.
Very “serious” luxury brands – Chanel and Louis Vuitton – are expanding rapidly in Russia. Chanel is opening a new boutique in Yekaterinburg and seeking more sales opportunities in Moscow, where it already has two stores. Louis Vuitton is also opening a store in the fast-growing city of Yekaterinburg, and the company’s further plans include new store openings in the Black Sea resort Sochi, host to the 2014 Winter Olympics, where Christian Dior and DolceGabbana are already situated. The Economist explains this counter-phenomenon as follows: “When people have less, they spend what they have on the best quality. Shoppers are going for fewer, more classic items. Vuitton always gains market share in crises” (The Economist, September 17, 2009).
Affluent Russian consumers have the greatest top-of-mind awareness of foreign luxury brands,in comparison with customers in other major emerging markets,China and India. The Russian luxury market is more developed and more European in nature. The following brands are recognized by Russians: Chanel – 39%, Giorgio Armani – 37%, Dior – 35%, DolceGabbana – 29%, and Versace – 27%. The best-known luxury brands in Russia are Versace, Dior, Chanel, Zaitsev/Russia, Yudashkin/Russia, and Giorgio Armani. When considering purchases, Russians look above allfor high quality (53%), good reputation (53%), and high fashion (44%).
The most popular luxury items in Russia are watches and jewelry, electronics, art and antiques, marine products (yachts, speedboats, marinas, and submarines), luxury cars and car accessories (including amphibious vehicles), private jets and helicopters, high-end real estate properties, interior design items and luxury furniture, exclusive spirits and gourmet food, luxury cosmetics, beauty and health products, designer clothes, and luxury travel and leisure opportunities (such as golf). Many well-educated Russians with good management jobs have sufficient financial security and like to buy beautiful things. The Russian mentality historically supports a carpe diem attitude, a tendency to spendmoney madly. Russian Vogue suggests that it is now “consumerism time” in Russia. According to the Russian Golf Association, the number of golf courses—20 at present—soon will double. The majority of them are located on the outskirts of Moscow. The golf market, growing by a remarkable 75% a year, was estimated at $1 billion at the end of 2008, and that amount was expected to double by the end of 2009.
The Russian luxury real estate market is growing by ahealthy 20% per year. Marketed homes are designed with private zoos, golf courses, and big aquariums. The most expensive Russian apartment sold in Moscowthus far was priced at $22 million, and the demand for luxury apartments exceeds the supply. Plenty of buyers are willing to pay more than $100,000 per square meter. New elite construction in downtown Moscow is expected to raise this price to $40 millionper apartment. Newly erected apartments will have indoor swimming pools, enclosed gardens, private yacht piers, and up to eight floors per unit, with private elevators for family members. New infill construction and land development in central Moscow is limited, and this boosts demand to an even higher level.
Russia has become Europe’s second-largest market for luxury automobiles after Germany. Most transactions are made in cash and not on credit, as is typical elsewhere. An imported luxury car is a must-have accessory for any successful Russian businessman. Daimler-Benz’s latest Mercedes models are the market favorites, and sales jumped 90% in 2008. Russia is the third-largest market for company cars,after the United States and the ArabGulf countries. Rolls-Royce has a lengthy waiting list for the first golden-plated models (some are also encrusted with Swarovski crystals). In 2007, Bentley alone sold 240 cars in the country, and the company plans to double this number in the near futureby operating five dealerships in Moscow, Krasnodar, Yekaterinburg, Novosibirsk, and Rostov-on-Don. Bentley expects to make Russia the third-biggest market for the brand in the world, after China and Japan.
In the luxury timepiece category,the legendary firm Breguet successfully re-entered the Russian market after 200 years of absence. Tsar Alexander I of Russia, Napoleon Bonaparte, and Leo Tolstoy all owned Breguet watches. The new store location is right inRed Square. The cheapest item in the store costs $14,000, and watches from the Imperial Collection are priced up to half a million euros. The watch market is moving toward more distinct, art-oriented, intimate, and expensive pieces in the best traditions of the renowned jeweler Fabergé.
Luxury food consumption stands alone as an important, distinctsegment of luxury consumption, owing to the nature of the products. There are two ways to analyzethe luxury market. In tangible terms, the perishability of many food products makesitunreasonablefor wealthy individuals to purchase them abroad, as they domany other luxuries,and keep them in the pantry for an extended period of time. Second, even long-lasting items (such as alcohol, cigarettes, preserved or canned foods, and chocolates) are relatively heavy and definitely inconvenient for luxury travelers to carry home. Possible exceptions are goods purchased in the popular duty-free airport shops. Finally, some products that are “addictive” by nature, such as branded alcohol, cigarettes, candies, and chocolate, trigger periodic repeat purchases, which generates a steady demand for them among luxury retailers. Disappointing to those retailers is the fact thatmany luxury food products are subject to substitution by low-branded, local non-branded,or evenhomemade alternatives.
Non-tangible luxury food and liquor offerings (more precisely, combining both tangible and intangible elements) are available at restaurants, bars, hotels, bathhouses, various private clubs, casinos, and other entertainment establishments characterized by a state-of-the-art facility, high-caliber entertainment, and refined service. These outlets offer a mix of imported and locally prepared food and drink, and they normally are owned or controlled by the wealthy clan frequently in attendance, with friends and customers of a like kind. Interest and income-generated attendance are broadly based on the personal interests of the owners and can be manipulatedto suit the market situation and predominant societal sentiment. In this case, luxury food performs a supplementary function: it enhances the appeal of the entire service “package.”
In the past five years, retail sales of luxury foods have almost tripledin Russia(from about $82.5 to $251.2 billion). The market is still in the early stage of formation, owing to the low per capita annual income (averaging $380 nationwide, $1,163 in Moscow), measured by the Western standard (must exceed $1,000). Currently, a handful of premium elite-class retail grocery chains dominate this market in Moscow: Globus Gourmet(with6 shops and plans for expansion to 12), Kalinka-Stockmann (4 stores), Azbuka Vkusa (17 branches), and the Seventh Continent—Five Stars (17 shops).In addition, several foreign (mainly French-Belgian) gourmet boutiques have been operating there since 2004: Hédiard, Fauchon, Vatel,Provence, Baccarat Chocolatier, and Godiva, as well as the Russian Confael and A. Korkunov. Recent newcomers to Moscow are the Italian company Peck, the Russian premium caviar boutique Petrossian, and the Austrian gourmet firm Julius Meinl. It is widely expected that saturation of the luxury food segment is imminent. Within the next two to three years, the market potential will be largelyexhausted, owing to rapid stratification of customers by income and to overall post-recession uncertainty.
Another operational limitation onfurther expansion by premium grocery retailers is the absence of a well-run corporate-owned logistics network in Russia. Currently, supplies are being processed by the giant warehouses/importers, which are increasingly displeased by the low-volumecustoms clearance (less than 30% of the volume and far greater inconvenience) and thedifficulty of physical distribution. The warehouse profit margin in general is 25%, while the margin for high-quality unique seafood, fresh goose liver, bison meat, and truffles could reach 50-70%. That prospect may sound enticing, but the risk involved is much greater, as demand fluctuates from day to day.
The third problem is the narrow specialization of the suppliers and lack of communication between them and the gourmet boutique retailers. To survive, they must juggle multiple sets of relationships with seafood importers, resellers of French delicacies, suppliers of deep-frozen foods, and others, and also pay ever-changing premium margins to keep them satisfied. The largest importers with more or less broad specialization are Global Foods, Dimarko Trade, Marr Russia, Emborg AO, and MBF Products.There is no way for a small boutique to play by these suppliers’ rules.