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bne October 2017 Eastern Europe I 43
that hurt the entire country (although total revenue was still up 1.6%, thanks to significant growth in the company’s wholesale operations).
Originally Obuv moved its production to China where eventually the company found partners that could make high quality, low-cost shoes that could com- pete in Russia on both counts against the expensive imports and the domes- tically produced shoes. Obuv has the mid-market price range as its niche.
But here too things have changed dramati- cally in recent years. The deep devaluation that followed the collapse of oil prices at
the company has invested in expanding its value offering by adding matching handbags and other accessories to the product lines.
But sales in Russia are lagging behind Western countries. Russian women buy on average two pairs of shoes a year, down from the three pairs a year pre- crisis. And even that was below the five pairs a German woman buys or market leaders the UK and USA, where women buy an average of eight pairs a year, according to data from Euromonitor. Titov says Russia’s sales should be close to Canada’s because of the similarities in the weather, around 4.5 pairs a year.
Obuv has focused on Russia’s regions where incomes are a fraction of those in Moscow and St Petersburg, but the two crises of 2008 and 2015/6 have had a very different impact on the company’s business.
“The 2015/16 crisis hit the whole coun- try, but didn't have a particular impact on the regions. Incomes fell uniformly everywhere,” says Titov. “The 2008 crisis was different. The so-called mono-cities [cities where one giant enterprise domi- nates the local economy] were especially hard hit, while cities with a more diversi- fied local economy did much better.”
About one in 10 Russians live in a monocity, which means the bulk of the regional market is unexposed to these problems. All Obuv is waiting for now is for people to feel the general economic revival that clearly started at the begin- ning of this year.
“The regional potential is huge,” says Titov. “We are in all the big cities and ones down to about 100,000 inhabit- ants. But that is part of why we haven’t pursued the high-end brands as they are too expensive for the regional market.”
The final step will be when the leading companies start to consolidate the sec- tor. The chaos of the 1990s means Rus- sia’s market remains high fragmented across the board. Some sectors are start- ing to consolidate now like telecoms, banking and supermarkets, but shoes is not one of them.
“The market is not consolidated. The top 10 Russian shoe shops account for only 13% of the market. In Germany the top 10 make up a 43% market share,” Titov says. In 2014, Obuv bought rival Rossita adding 83 stores to its network and clearly over the coming years more of these deals are in the pipeline.
“Obuv is focused almost exclusively on Russia’s regions”
the end of 2014 means the costs of labour in Russia are now less than the cost of Chinese labour. Titov has not moved all the production back to Russia, despite building a second factory in Russia.
“We decided to outsource to China and 90% of our shoes used to be made there as we needed a diversified product range,” says Titov. “We have five retail formats and five main brands. It is not possible to make all these different kinds of shoe in the same factory. So we use the Chinese partners to make many of our shoes.”
Eighteen months ago Obuv built a second Russian facility and doubled its production capacity to one million pairs of shoes a year, although it is currently producing about 500,000 pairs a year. With ample capacity in hand Titov says there is no need for any capex in the near future.
“We could make a million shoes a year if we just hired more workers,” Titov told bne IntelliNews. “We don't need to invest in new capacity.”
Bags and boots
Women make up eight out of 10 of Obuv’s clients so over the last five years
Another problem the company has to deal with is that relative incomes in Russia are much lower than in the West and sales are far more seasonal because of Russia’s extreme climate. A mother needs to buy shoes for her whole family in the spring and autumn, which can put a strain on household finances,
so the company launched a pay-by- installments plan five years ago that has proven to be hugely popular.
Together with local banking partners, Obuv allows customers to pay for pur- chases in 10 instalments. Today more than half of the company’s customers buy their shoes using these interest-free loans (although a small percentage
was introduced after the 2008 crisis). Titov says that the instalment plan also boosts loyalty and 80% of the custom- ers using the scheme come back to buy more shoes next season.
Find more Eastern Europe content at www.bne.eu/eastern-europe
Selected headlines from past month:
· Russia's Binbank asks central bank for help
· Russian oligarch Prokhorov sells Snob, his last media asset · Russia's Alrosa boasts biggest pink diamond of all time
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