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PART 7.

CONCLUSIONS AND RECOMENDATIONS

CONCLUSIONS AND RECOMMENDATIONS

ECONOMIC SITUATION

Starting from 2000, stable economical growth has been occurring in Russia, specifically:

§ GDP growth;

§ Industrial production growth;

§ Retail trade turnaround growth;

§ State budget’s stable surplus;

§ Population income growth;

§ Imports and exports growth.

And as the result: growth of population’s purchasing power.

According to the forecasts of the RF government, economics will retain these positive
trends in the medium-term future, that is, in the period from 2004 through 2008.

RUSSIA IS ATTRACTIVE AS AN INVESTEMENT


Russia economy is relatively unaffected by US and EU economic downturn

Recent upgrade in country ratings are:

§ Standard% Poor’s: BB+: Stable state and Positive outlook

§ Fitch: BB+

§ Russia remains in sub-investment grade category

Russia has a stable currency

Government boosting domestic demand

§ increased state spending

§ budget surplus (1.4% of DGP)

Rapid increase of MICEX (RTS) – more than 38% per year

WTO membership remaining on track (2004)

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MAIN TRENDS OF LEATHER GOODS MARKET

MARKET PECULIARITIES

The official import of leather goods to Russia in 2002 in money terms amounted to
207.9 mln. USD. Of this amount, 124.0 mln. USD correspond to leather footwear,
60.3 mln. USD correspond to leather fancy goods, and 23.6 mln. USD correspond to
leather garments.

In 2001, the import of leather goods in money terms amounted to 235.7 mln. USD.
Thus, the import of leather goods in money terms decreased by 12% in just a year.
Specifically, the import of leather footwear, which constitutes the main share of the
imports of leather goods to Russia, decreased by 14%; the import of leather garments
decreased by 26%; the import of fancy goods increased by 1.5%.

If the import of leather products is considered in volume rather than in money units, the
picture is different. In 2002, the imports of leather footwear to Russia have grown – by
28% (from 10.0 to 12.8 million pairs); the imports of leather garments have decreased
by 29% to become 597 tons instead of 844 tons. In 2002, the imports of (1) traveling
bags, suitcases, women’s handbags, cases, and briefcases; and (2) wallets, porte -
monnaies, and key purses have increased significantly (2.5-times). The imports of
gloves, gauntlets, have increased by 70%. Imports of waist belts and women's bags
with or without shoulder belts have remained almost unchanged.

According to experts, the market of leather goods is rather highly competitive, for
example, the supply of leather garments meets the demand completely. A wide range of
all categories of leather products is offered. There is virtually no lack in any goods.
There are few empty ‘niches’: “It is hard to surprise the Russian market with anything. Perhaps with
something really original or rare.”

There is almost no such concept as “large distributor” or “large manufacturer” on the


Russian market.

The main players are small isolated enterprises than deal with wholesales /
manufacture of leather goods. Many of these are second- and third-level wholesalers
which specialize in reselling. The majority of such enterprises prefer to stay in shadow
and conceal the location of their offices and warehouses out of fear to be noticed by the
tax police.

At this stage, the leather business is a more civilized stage of the “chelnok”1 business.
Numerous small businessmen went bust during the crisis of 1998, and only the
strongest players remained on the market. Business started to assume a civilized
shape. It became more and more profitable to use the services of professionals, namely
suppliers whic h have established a system of bringing goods to Russia, and the
services of transportation companies, rather than to bring goods on one’s own.

Russia has a number of establishments that unite leather professionals. They include:
The Union of Russian Tanners, Shoemaker Union, Russian Chamber of Commerce and
Industry, etc. These establishments are mostly engaged in the following activities:
1
For additional information see pp. 78-79.

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§ lobbying the laws which favor the development of domestic manufacturers;

§ attracting investments to Russian manufacturing;

§ supporting the export of Russian finished goods.

In the past few years, the demand in Russia has been shifting from cheaper goods to
elite-quality goods. Simultaneously, we observe a growth in demand in the medium-
price segment. Reorientation for higher-quality products incorporating newest modern
achievements occurs .

The leather market in Russia contains weakly branded. There are very few widely
known brands; they mostly present in the medium-price segment of the footwear market
(Monarch, Belwest, Salamander) and fancy goods market (Petek).

The trends are such that buyers primarily pay attention to the quality and style of goods.

GOVERNMENT

One of the main directions of the state regulation of external trade involves the
stimulation of domestic manufacturers. As a result, the state sets high customs duties
for the import of finished products and low duties for the import of raw materials.

It was found in expert interviews that the majority of Russian manufacturers which use
foreign raw materials and parts, as well as importers of finished goods, use “grey
schemes” for importing freights. This originates from the shortcomings of Russian
legislation in taxation and customs regulation. According to some experts, work under
official schemes results in an unjustified growth in expenses and a reduction in profits
nearly to zero.

The Russian market sometimes suffers uncivilized forms and methods of competition. In
these situations, the state and administrative agencies often assume a biased position
and lobby the interests of one of the market players and hindering the activities of other
players in every way; corruption and exploitation of state bodies (for instance, OBEP) to
resolve conflicts with competitors are widespread.

COMPETITION

Domestic manufacturers

The production of Russian leather footwear, fancy goods and leather garments started
to grow during the past few years. The yearly increase in the production of leather
footwear and fancy goods is 10-15%; the growth in the manufacture of leather garments
is insignificant.

Rather often, Russian manufacturers of leather goods target their products for the
medium-price or even elite segment.

However, they often face many problems, the main ones being:

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§ the scarcity of own professional designers,

§ the lack of own diverse models; the weakness of the model series;

§ the lack of high-quality Russian raw materials;

§ the lack of modern equipment and technologies;

§ high expenses for paying workers and seamstresses, high level of expenditures;

§ high expenditures and hig h level of risks involved in opening a manufacturing


enterprise,

§ the process of creating new models takes a long time;

§ the inability to compete with Chinese and Turkish leather goods in terms of prices,
choice of models, quality, and timing of orders.

Foreign manufacturers

§ The import of leather goods to Russia grows faster than the domestic production.

§ Garments leather market: nearly 70% of leather garments sold in Russia is made
in Turkey. Turkey is a legal monopolist on the market: buyers know whose
products they purchase.

§ Footwear and fancy goods: as estimated by experts, leather footwear and fancy
goods manufactured in China (legal and illegal) constitute 70-80% of the entire
Russian market. China is a concealed monopolist: in the majority of cases, b uyers
do not know the actual country of manufacture.

In Russia, the attitude towards goods made in China is rather ambiguous. On the one
hand, end-consumers traditionally regard leather footwear manufactured in China as
low-quality and inexpensive. Thus, other conditions being equal, consumers prefer
products from other countries; this fact makes Chinese manufacturers mark their
products as goods made in different countries.

On the other hand, distributors have good trade contacts with Chinese manufacturers ,
established over many years. They know that over the past few years, there is a trend
to concentrate the major part of all world’s shoe factories in China, so Chinese
manufacturers presently make footwear of different brands and of vatious quality.
Distributors note that the quality of footwear made in China has been tending to improve
during the past five years, whereas the prices have been remaining invariably low.

A new importing country will have to face severe competition against Turkish and
Chinese leather goods.

The strengths of Chinese manufacturers include:

§ low costs of design and creation of own model series because Chinese
manufacturers copy (in fact, steal) the models of European (mostly Italian) stylists;

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§ up-to-date technologies and new equip ment;

§ large manufacturing facilities;

§ cheap workforce;

§ Chinese goods are sold under famous European brands without indication of the
actual manufacturing country: only an expert can discern them from goods made
in Italy;

§ good price-quality ratio (value-for-money): while the purchase prices are low, the
quality of leather goods is rather high;

§ established relations with Russian distributors;

§ using of illegal import schemes in order to establish system of escaping customs


duties and taxes;

§ prompt execution and delivery of orders to Russia;

§ the personal qualities of Chinese partners are attractive for Russian customers:
diligence, honesty, readiness for cooperation.

The strengths of Turkish manufacturers include:

§ established relations with Russian distributors ;

§ common opinion that Turkish products has a high quality;

§ possibility of the prompt manufacture of required consignment of goods “on order”


with low percent of defect in the consignment;

§ possibility of the fast delivery of goods;

§ Turkish manufacturers deliver goods to Russia on their own usually; in such way
they solve all transportation and customs problems;

§ favorable terms granted to Russian distributors (considerable discounts, privileges,


credits, possible delay of payments, promotion of products in cooperation);

§ support of Turkish exporting companies by the Turkish tanners union: they are
provided with various tax privileges and deductions, payment of tax duties, easier
paperwork related to contracts;

§ possibility of establishing a common documentatio n system;

§ personal qualities of Turkish partners: honesty, obligingness, thoroughness,


sociability.

§ majority of Turkish manufacturers know the Russian language.

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Although Chinese and Turkish goods predominate on the market, it is the goods
manufactured in Western Europe, for example, in Italy and Germany, that are
considered prestigious and of high quality.

There is a distinct stereotype among experts that it is Italy that is the main trend setter
and that the products made in Italy are quality standards for leather goods.

SUPPLY

§ Growth and active development of leather footwear and fancy goods markets;

§ Decrease in sales volume on the leather garments market in the past 1.5-2.0
years because leather garments becomes less popular; the growth of competition
of leather garments with garments, made of another materials;

§ Strong dependence on fashion trends. Delay of fashion trends in regions in


comparison with Moscow;

§ Strong seasonality.

Leather garments

The premium-segment is expanding; the leather treatment quality is improving; more


and more attention is paid to designer developments.

The cost effectiveness on the leather garments market is no less than 50%. Women's
leather jackets and coats and men's leather jackets are the most widespread goods
on the Russian market: they are offered in over 75% of the sales points, they sell better
than other goods, and they bring the best profits to the sellers.

The women’s clothes segment is most promising because women renew their
wardrobes more often than men; this res ults from the fact that women are more
interested in the latest fashion trends than men and strive to follow these trends.

In total, it can be stated that the target market of women’s garments is larger.

Children’s leather garments is almost lacking on the Russian market. Likewise, the
volume of sales of women's and men's leather pants is also very small.

Leather footwear

According to expert estimates, the capacity of the Russian footwear market is 210-250
million pairs per year, whereas the capacity of leather footwear is about half of this
amount, that is, 100-120 million pairs per year. The major part of footwear consumed in
Russia is manufactured or imported illegally.

All kinds of men’s and women’s footwear are equally widespread on the Russian
market: they are offered in 75-85% of the sales points. In the retailers’ opinion, it is
women's light boots and shoes that are sold the best and are most profitable. In

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general, women’s footwear is regarded as more quick-selling and profitable goods than
men’s footwear. Children’s leather footwear is offered by only one-third of the
enterprises examined.

According to customs declarations, the average invoice price for one shoe pair imported
to Russia was $12.81 in 2000; it increased to $14.47 in 2001 but decreased to $9.72 for
one shoe pair in 2002 (a decrease by 33%).

The average price for one shoe pair in retail shops in 2002 was (R-TGI data):

§ men's or women's boots – 45-55 USD.

§ men's or women's shoes – 30-40 USD.

§ autumn and winter children’s footwear – 20-30 USD.

§ summer children’s shoes – 10-20 USD.

According to experts, the consumption of footwear in Russia will increase every year
(the estimates of this increase range from 10 to 20% per year). It should be noted here
that the Russian’s preferences shift gradually towards more expensive, higher-quality
products.

In 2002, the imports of footwear parts to Russia increased four-times (from 8 to 32


million USD); specifically, the imports of footwear uppers and parts increased. Unlike
leather footwear itself, it si European rather than Asian countries that are the main
importers of shoe uppers used to manufacture footwear: Italy, Germany, Poland and
Finland taken together cover more than half of footwear uppers imports.

In general, experts note that, of all leather goods, leather footwear, especially women’s
footwear, is the most promising niche.

According to experts, the demand for youth’s sporting footwear or bright teenager’s
footwear is not yet satisfied completely, so this kind of footwear may be an additional
unoccupied niche.

Leather fancy goods

The manufacturer’s price is not significant for wholesalers, since the prices for fancy
goods from different manufacturing countries are virtually the same, whereas the
wholesalers’ markup is 100-200%. It is the higher the smaller the initial price of goods.
The average retailer’s markup can range from 40% (for more expensive goods) to 100%
(for inexpensive goods).

Leather bags and wallets are the most attractive fancy goods for retailers. These
goods are offered in the majority of stores (80-90%); they sell the best and are the most
profitable goods for a trading company.

In addition, sales points offer rather a broad range of the following goods: attaché-
cases , portfolios; gloves ; belts; covers for passport; and key purses. On the other hand,

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traveling bags, suitcases, covers for credit cards, covers for business organizers, and
business folders are much less abundant.

The average prices for fancy goods in retail shops were (R -TGI data):

§ suitcases and attaché cases – 40-50 USD;

§ portfolios and women’s handbags – 25-30 USD;

§ belts, gloves, wallets, business organizers – 10-15 USD;

§ business folders, shopping and cosmetic bags – 5-10 USD.


In general, the participants of this study (experts, distributors) agree that no significant
changes should be expected on the fancy goods market in the coming years. The
volume of sales will be approximately the same as that in 2002.
Of all the customers, young people and women constitute the most promising segments
on the fancy goods market, as they buy new articles more often and strive to be modish.

SEGMENTATION (according to the retail traders survey)

Retailers divide all buyers of leather garments, footwear and fancy goods into three
groups:

1. Buyers with high income – 10-20% – a gro wing market segment.

For this category, the following retail prices supposed to be recommended:

§ men’s and women’s leather jackets – 400-700 USD (in Moscow), 300-500
USD (in regions). Maximum price – 1,500 USD (in Moscow), 800 USD
(in regions);

§ men’s and women’s leather shoes – 100-200 USD (in Moscow), 70-170 USD
(in regions). Maximum price – 500 USD (in Moscow), 300 USD (in regions);

§ men’s and women’s leather bags – 150-250 USD (in Moscow), 100-200 USD
(in regions). Maximum price – 500 USD (in Moscow), 300 USD (in regions).

2. Buyers with medium income – 50-60% – a stable market segment.

For this category, the following retail prices could be recommended:

§ men’s and women’s leather jackets – 200-300 USD (in Moscow), 150-250
USD (in regions);

§ men’s and women’s leather shoes – 50-100 USD (in Moscow), 40-80 USD
(in regions);

§ men’s and women’s leather bags – 70-120 USD (in Moscow), 35-70 USD
(in regions).

3. Buyers with low income – 20-30% – a shrinking market segment.


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For this category, the following retail prices could be recommended:

§ men’s and women’s leather jackets – 100-170 USD (in Moscow), 70-150
USD (in regions);

§ men’s and women’s leather shoes – 25-50 USD (in Moscow), 20-40 USD
(in regions);

§ men’s and women’s leather bags – 35-50 USD (in Moscow), 20-35 USD
(in regions).

DEMAND (according to the consumers survey and TGI data)

Leather garments

At least once, 81% of the citizens have bought some leather garments. Of these, 35%
have made their last purchases during the past 12 months.

The most popular items are men's leather jackets (bought by 54% of citizens); similar
products for women occupy the second place (36%). Women's leather coats are on
the third place (26%). Children’s leather garment is not very popular among Russian
citizens: as little as 9% of the respondents have ever bought children's leather jackets
and almost no one has bought other garments articles (coats, pants, skirts). Leather
pants are the least-selling articles among garments for grown-ups: women’s pants have
been bought by 5% of the citizens, whereas men’s pants, by 4%.

As to the intentions of Russian citizens to make a purchase during the next 12 months,
men's and women's leather jackets remain the most popular articles: 12% and 8% of
citizens, respectively, intend to buy them. In general, women’s leather garments are
more popular among Russian citizens than men’s garments, and there is almost no
demand for children’s leather garments.

The average planned expenses for purchases amount to (median prices)2:

§ men’s leather jackets – 170-200 USD (in Moscow and regions);

§ women’s leather jackets – 200-220 USD (in Moscow and regions);

§ women's leather coats – 320 USD (in Moscow), 270 USD (in regions).

The factors of greatest importance for a consumer buying leather garments are as
follows: convenience, practicality, leather and sew quality. The price is of secondary
importance in comparison with the product quality.

According to customers, it is Turkish and Russian goods that have the optimum price-
quality ratio.

2
As a number of subgroups of the potential buyers in sample is rather small (on the average 40-60
respondents), so we use for the analysis not mean, but median price.

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Leather footwear

Footwear is in the greatest demand in Moscow and in the Central region, as well as in
the Volga region, Siberia, and Far East.

In total, 32.6% of Russia’s citizens have purchased some leather footwear goods during
the past half of the year. Russians buy women’s leather footwear most of all (22-24%);
men’s leather footwear is on the second place (14-15%), and children’s leather footwear
is on the third place (9 -10%).

The most selling goods are men’s and women’s shoes. In a half of a year 10-14% of
Russian citizens buy these goods.

Winter boots are the type of footwear which is the most necessary and is in the
greatest demand on the Russian footwear market: 32% of men, 28% of women, and
23% of families with children intend to buy them during the coming 12 months.

The average planned expenses for purchases (per pair) amount to (median prices):

§ women's and men's winter boots – 80-100 USD;

§ women's and men's light boots and shoes – 50-70 USD;

§ children’s footwear – 20-35 USD.

The differences between Moscow and regional cities are not significant.

The factors of greatest importance for a consumer who is going to buy leather footwear
include: convenience, practicality, and quality. The price is important, but the product
quality is even more important.

According to customers, it is Russian and Byelorussian goods that have the optimum
price-quality ratio.

Leather fancy goods

Four kinds of fancy goods are the most popular among the inhabitants of large Russian
cities: gloves (at least 76% of the respondents have ever bought them), wallets (61%),
belts (58%), and leather bags (57%). Other types of fancy goods are much less
popular: the number of respondents who has bought each of them does not exceed
15%.

In total, 28.8% of Russia’s citizens have purchased some fancy goods during the past
half of the year.

The most popular fancy goods in Russia were:

§ gloves (9.2%);

§ women’s handbags (7.8%);

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§ men’s belts (5.2);

§ shopping bags (3.6%);

§ cosmetics bags (3.6%);

§ wallets (3.2%).

As to the intentions of Russian citizens to make a purchase during the next 12 months,
again, the most popular articles are: gloves (19% of the respondents intend to buy
them), leather bags (13%), wallets (10%) and belts (9%):

The average planned expenses for purchases amount to (median prices):

§ gloves – 27 USD (in Moscow), 20 USD (in regions);

§ leather bags – 70 USD (in Moscow), 50 USD (in regions);

§ wallets – 20 USD (in Moscow and regions);

§ belts – 17 USD (in Moscow), 10 USD (in regions).

The least popular fancy goods which are in the smallest demand for Russian citizens
are: business folders and business card folders, covers for credit cards and covers for
business organizers. Almost no one feels any need to buy such goods, and three
quarter of the respondents claim they are never going to buy them.

When buying fancy goods, consumers pay special attention to three parameters:
manufacture quality, practicality, and leather quality. As with other goods (footwear and
garments), the price is important, but the product quality is more important.

The attitude of Russian consumers about countries producing fancy goods is distinctly
differentiated: European countries are preferred, most of all Italy and Germany; Asian
countries, especially China and Vietnam, are preferred the least. Russian citizens know
Indian leather fancy goods better than Indian footwear and garments. Of all the survey
participants, 10% of the respondents had experience of buying this category of goods,
whereas only 4-5% of the respondents had such experience with both garments and
footwear.

According to customers, it is Turkish and Russian goods that have the optimum price-
quality ratio.

Common trends

Russian consumers focus their attention on the quality of goods, whether they meet the
fashion trends, and whether they are original and unique. Prices gradually become less
important. More and more citizens are willing to buy expensive but high-quality goods
that meet worldwide standards. In this regard Italian and German products are
estimated as quality standard.

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The country of origin is less important than the product quality. Unless a product is
made in China or Vietnam, the majority of Russian citizens would buy it provided that
the price-quality ratio is satisfactory.

On the other hand, the population has a very negative attitude towards Chinese goods:
they estimate its quality as low and do not want to buy it. However, the vast majority of
imported footwear and fancy goods are made in China and enter the Russian market
under European brands. Thus, consumers are misled as they obtain wrong information
about the true country of manufacture.

Retail markets are the most popular locations for purchasing leather goods (especially
in the regions): 50-60% of the people buy it there. Specialized stores take the second
place (25-30%) and general stores/department stores take the third place (15-20%).

INDIAN GOODS

When entering the Russian market, Indian manufacturers may face a number of
problems associated with the specifics of the perception of Indian leather products by
wholesalers and retailers. Such perception is sometimes based on the working
experience with Indian manufacturers, but sometimes it originates from prejudice
related to goods made in India.

About 40% of managers of Russian retail stores stated they would not buy leather
goods made in India anyway.

The respondents offered different explanations for their refusal to cooperate with Indian
manufacturers; the four most important reasons were:

§ absence of information on leather goods made in India;

§ bad image of leather goods made in India;

§ poor quality of leather from India (in many respects, this opinion is based on
the information about Indian religions, their important component being the
attitude towards cows as sacred animals in India. Respondents conclude
from this fact that rawstock in India is made of carrion cows’ hides);

§ poor sew quality.

Among other reasons, some sellers named the following:

§ manufacture is not focused on fashion;

§ poor assortment of goods;

§ high prices;

§ good relationships of traders with other countries;

§ low level of transportation.

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The population’s awareness about Indian leather goods is still very low. It is the main
reason that does not causes trustworthy attitude towards Indian production. It is a kind
of stereotype, i.e. “unknown is not good” which is related to everything new and
questionable.

At the same time, there is a lack of negative emotions towards Indian products. Thus, it
could be concluded that Indian leather products should be promoted in a proper way. In
case awareness will be higher, it could influence positively on distributors’ and
consumers’ attitude and demand.

LOGISTICS AND DISTRIBUTION

§ On the whole the ratio of “grey” import is rather high. As experts estimate, the
“grey” share is up to 65-70% of the leather footwear and fancy goods market and
about 80% of the leather garments market.

§ Tendency: the majority of distributors prefer relatively small wholesale volumes.

§ Many distributors have well established, stable relations with Chinese, Turkish and
other manufacturers.

The distribution chain includes three main members:

1. manufacturer

2. distributor, wholesaler, representatives in Moscow and in the regions

3. store, retail trade

A manufacturer releases goods at a certain price; a distributor (wholesaler) buys goods


at the manufacturer’s price. The distributor, wholesaler, and representative increase the
prices based on the delivery, storage, and other expenses and also on the profit the
company wishes to obtain.

Stores add their own retail margins based on a number of factors:

§ transportation expenses;

§ taxes (VAT);

§ rentals, etc.

The mark-up value at each stage is unpredictable and can vary from 30 to 200%,
whereas the final price can be a few times higher than the manufacturer’s price.

When working with manufacturers, wholesalers use three delivery schemes:

1. Delivery by the distributor: its representatives visit exhibitions in Italy,


Turkey, etc.; they choose models, place orders, and bring the goods to
Russia;

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2. The manufacturer makes the delivery using own transportation resources


and pays the customs duties. Distributors rec eive cleared goods in a
warehouse, complete with all documentation;

3. A professional transportation company working under a contract performs


the delivery. Such company takes upon itself not only the shipping but
also all the procedures associated with the execution of documents,
payment of customs duties, etc.

Of course, the second and third delivery schemes are much more convenient and
preferable for distributors.

The most attractive method of payment for distributors involves a delay of payment and
granting of credit for a specific consignments of goods.

The leather garments and fancy goods markets consist of numerous small distributors.
Large distributors operate only in Moscow. The distribution system for leather goods is
arranged in such a way that goods first arrive for sale in central Russia’s regions
(Moscow, Moscow Region, Saint Petersburg) and then distributed to the other regions.

The majority of large distributors are not only wholesalers but also retailers selling
goods through own store networks they create. This business arrangement allows them
to monitor the demand and place orders based on specific requests from their
customers.

RETAIL TRADE

Leather goods retailers usually work with several suppliers simultaneously. As the
interviewing of managers of Russian retail stores showed, only 25% of them have just
one supplier with which they work permanently.

Almost half of all suppliers (46%) are wholesalers, one third (33%) are manufacturers,
and 17% are distributors (for valid answers, without DK/NA).

As regards the channels for contacting suppliers, there are three strategies that are the
most popular and widespread:

1. Suppliers make offers for cooperation (this is more typical of Moscow and
St.-Petersburg) – 38%;

2. Contacts with suppliers are established at specialized exhibitions – 33%;

3. Suppliers are found through friends – 28%.

In most cases (60%), sellers deliver goods on their own. However, in 28% of all the
cases, goods are delivered by suppliers, and in 13% of the cases – by a transportation
c ompany (for valid answers, without DK/NA).

Half of all suppliers work with sales points under the terms of 100% prepayment. One
quarter of suppliers allow partial prepayment. In 20% cases, credit or delay in payment

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can be granted. In rather rare cases, consignation (4%) and payment after realization
(2%) occur (for valid answers, without DK/NA).

The most important factors for choosing a supplier include acceptable prices,
fashionable leather assortment of the goods and high quality of goods.

According to retailers’ estimates, the average trade markup for leather goods is (in
comparison with the purchasing prices):

§ 35% – for leather garments;

§ 30% – for leather footwear;

§ 40% – for leather fancy goods.

However, the majority of experts (distributors, wholesalers) note that the trade markup
of retail stores can be 100% or more. They make this conclusion based on their own
experience of retail sales and on the knowledge of the prices offered by manufacturers
and wholesalers, as well on the permanent monitoring of prices for different categories
of goods.

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PART 7. CONCLUSIONS AND RECOMENDATIONS

PREFERRED STRATEGIES FOR INDIAN MANUFACTURERS ON THE RUSSIAN


MARKET

POSITIONING:

INDIA
Premium-
class
European
countries

Medium-class
Turkey, China

Low-class
China, Viet Nam

§ Taking into account market share of Chinese and Turkish leather goods the
MEDIUM-TO-HIGH segment is the most promising for Indian companies.

§ The latest fashion trends should be taken into account.

§ Indian origin could be established in a new way: good, proven quality with
affordable price.

PRODUCT:

§ Fancy goods segment is the most promising.

§ Footwear could be considered as a second targeting segment.

§ According to experts, the Russian leather garments market is overstocked, and


the prospects are most likely to be unfavorable for Indian products in the nearest
two years. This is suggested both by imports reduction and by fashion trends. The
competitive position of Turkish importers on this market is extremely strong.

§ There is no need to use the scheme of Chinese manufacturers which copy and
replicate the models created by European stylists. Instead, it would be worthwhile
to arrange cooperation with European or Russian designers and develop unique
model series.

§ In addition, Indian producers might be advised to use individual national styles


(folklore motives) or to cooperate with European style designers.

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§ It would be profitable to create a complex stylish line of leather goods which would
include garments, handbag, and footwear design.

§ Since the state agencies in Russia tend to stimulate domestic manufacturers,


supplying rawstock for Russian manufacturers from India, e.g., pretreated leather,
shoe uppers and so on, could be promising.

§ Yet another promising variant could involve organizing an own manufacture in


Russia and sewing leather goods from imported Indian rawstock.

PROMOTION:

Unfortunately, India belongs to those countries whose products are not highly valued by
Russian citizens, retailers, and distributors. A lot of delusions and prejudices against
Indian goods are widespread among the consumers, retailers, wholesalers, and
distributors. This situation is rather dangerous, because the population is now tending to
buy more expensive and high-quality products.

However, the position of India on the Russian market is far from prospectless: this
country has a great potential that can be realized in a medium-term future (3-5 years).

India should move either to the medium price segment now dominated by Turkey and
China, or to the high price segment where European products are represented.

This requires that energetic information activities be undertaken and that incorrect
impression of potential buyers about Indian goods be dispelled. Distributors,
wholesalers, retailers and buyers should be convinced that the quality of Indian
products is high. It is necessary to inform all the market participants that many large and
famous Western companies open their manufacturing facilities in India and thus
consider the quality of Indian leather and the quality of sewing leather goods as
sufficiently high.

An Indian producer needs to convince distributors and wholesalers that their materials
are of high quality. To achieve this, it is necessary to perform personal presentations
showing both the products and the materials they are made of. In addition, it is desirable
to have a rather wide range of various leather materials.

Possible Three strategies for an Indian manufacturer to enter the Russian market:

1. Creation and promotion of an own Indian brand and positioning it in the medium
–to-high segment;

2. Creation and promotion of an own brand having a European (best of all, Italian)
sound and positioning it in the premium-class and medium-to-high segments
without mentioning the true country of origin;

3. Entering the Russian market under European brands already established in the
market without mentioning the true country of origin.

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PART 7. CONCLUSIONS AND RECOMENDATIONS

Since the Russian leather market is not highly branded, a new brand has a chance to
occupy a comparatively large section of the market provided that it receives a broad
information support.

On the other hand, it is possible to use special PR actions towards the competitors
which brin g goods from China under European brands. It is possible to arrange a series
of articles in popular Russian media, indicating which companies manufacture goods in
China. The dominance of Chinese products on the Russian market should be
emphasized. Though Chinese goods had been relatively cheap before, now sellers add
200-300% mark-ups and consumers no longer feel any difference. To overcome this
situation, it can be suggested to use Indian leather, which is much better but
inexpensive.

Effective ways of promotion: exhibitions and direct sales.

§ It is recommended that Indian manufacturers participate in such exhibitions as “Mir


Kozhi”, LeShow, Mosshoes, Mosleather (Moscow), and Lenexpo (Saint
Petersburg).

§ Publishing advertisements and informational messages in the journals “Tovery I


tseny” (Goods and Prices ) and “Optovik” (Wholesaler) is recommended.

§ It is recommended that a Russian-language Internet site dedicated to Indian


leather goods and Indian manufacturers be created.

DISTRIBUTION:

There are four possible schemes for Indian companies to enter the Russian market:

1. Representative office. Each of them opens its own representative office in


Russia and creates its distributor network. Distributors and sales points work with
Indian companies directly, that is, they place orders and then receive goods in
the customs warehouse. This variant does not appear to be promising; it is
unprofitable because of high expenses involved.

2. Russian company. However, Indian manufacturers are represented by a


Russian company a company takes upon itself such activities as the search for
clients (distributors, wholesalers, retailers), conducting negotiations, conclusion
of contracts, taking orders, controlling the deliveries and dispatching of goods.
According to experts, it is desirable that Russians rather than Indians represent
Indian companies on the Russian market. These people should be experts in the
Russian market specifics and understand the mentality of domestic sellers and
buyers.

At present, this is the optimum method of doing business in Russia. Otherwise,


they are likely to face a lot of problems at all stages of their work. The vast
majority of these problems are related to the specific features of Russian
business:

Ä Indians will always remain foreigners in Russia. In order to work normally they require Russian
partners, representatives who understand how to business in Russia. They need it to avoid
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PART 7. CONCLUSIONS AND RECOMENDATIONS

problems with tax bodies and with all those wishing to rob them of money or cheat them (ILG,
Moscow, distributor).

3. Indian companies join efforts to enter the Russian market and promote their
products. Together, they rent a commercial warehouse, organize shipment and
perform advertising actions. This approach would allow them to cut expenses
considerably.

4. European partner. European partner companies established stable long-term


cooperation with Indian companies can enter the Russian market indirectly.
Indian companies may use European representatives as intermediate parties.
This scheme could be considered as rather promising as the attitude towards
European suppliers and distributors is extremely positive in Russia.

Almost all experts said they were opened for new contacts and would consider
offers from Indian suppliers.

The following features are convenient for Russian distrib utors and retail traders:

§ the optimum price-to-quality relationship which is competitive with Chinese and


Turkish goods – high quality and acceptable price;

§ fashionable models;

§ credit / delay of payment;

§ possibility to supply minimum delivery amount;

§ orders can be executed quickly;

§ relevant information about the product;

§ transparent working scheme;

§ personal presentations of goods with visiting the locations;

§ possibility to become exclusive distributors of elite-grade products;

§ consignments are possible.

Furthermore, experts note the importance of the following factors for cooperation with
suppliers:

§ The possibility of building a common system of documentation, labeling of goods,


and software used.

§ Knowledge of Russian. This factor is important for establishing contacts with a


supplier. Some Russian businessmen are not very good in English; it is best to
communicate in Russian with this category. It is possible to use an interpreter but
it is not advisable.

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PART 7. CONCLUSIONS AND RECOMENDATIONS

In addition to supplying goods to dealers, it is desirable for an Indian company to have


its own retail store where sales would occur on a regular basis. In this way, it would be
possible to monitor the demand and respond promptly to any changes in the customers’
requirements.

The manufacturers of leather garments would also find it promising to work with
networks dealing with the sales of knitwear rather than leather garments. In this way,
these networks would expand their range and enter new market segments.

The most promising regions for the delivery of leather goods include Moscow, North -
West region (Saint Petersburg, Murmansk region, Karelia) and West Siberia (Tyumen
region, Khanty-Mansi autonomous area, Krasnoyarsk region). These regions have the
following features:

§ high paying capacity of the population;

§ comparative proximity to Moscow and hence a decrease in transportation


expenses for the delivery of goods;

§ weather conditions requiring warm garments and footwear for at least six month a
year;

§ weaker competition from both domestic and foreign manufacturers (except for
Moscow and Saint Petersburg where competition is strong).

If Indian manufacturers would be supported by the India’s tanning union and the India’s
Board of Trade (granting tax privileges and deductions, compensation of customs
duties, easier paperwork related to contracts) in the way it is now done in Turkey,
exporting companies could successfully compete with Chinese and Turkish companies
on the Russian market.

LOGISTICS

It is recommended to bring goods using grey schemes, because the profits will come to
naught otherwise. The following schemes can be used:

§ To decrease customs duties, goods can be imported as parts (jackets without


buttons) or as different goods (e.g., plasticine).

§ Importing goods as humanitarian aid. Such goods are exempt from custom duties.

§ “Cargo transportation”: at the customs the cargo is treated as goods for individuals
and is subject to preferential tariff treatment. The duties are determined by the
cargo weight.

The rates of import customs duties for leather goods are as follows:

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PART 7. CONCLUSIONS AND RECOMENDATIONS

§ Footwear with outer soles of rubber, plastics, leather or composition leather and
uppers of leather (6403) – 15% plus 1.4 Euro per one pair;

§ Parts of footwear (6406) – 10%;

§ Traveling bags, suitcases, women’s handbags, business paper folders, briefcases


(420211), women’s bags (4202210000), articles usually carried in a pocket or in a
woman's bag (4202310000) – 20 %, but no less than 1.9 Euro per 1 kg;

§ Leather garments (4203100001) – 20%, but no less than 7 Euro per 1 kg;

§ Gloves (420329), sashes , belts (420330) – 20%, but no less than 5 Euro per 1 kg.

The majority of foreign companies deliver freights to Russia by planes or in ship


containers. If sea transport is used, the cost of delivering a 40-feet container with
leather goods will be $ 22,000 (according to an expert), including transportation and
customs clearance. The delivery period from India to a warehouse in Moscow Region
amounts to 45 days.

1st shipment scheme:

1. Freight shipment to Finland (offshore zone)

2. To Moscow (customs terminal)

3. Warehouse in Moscow Region

2nd shipment scheme:

1. Freight shipment to Saint-Petersburg

2. Warehouse in Moscow Region.

Air transportation is an ideal but the most expensive way of delivering consignments of
goods. According to experts, the optimum period of time (including customs clearance,
paperwork, and other required procedures) should not exceed two weeks since the
ordering date. This time schedule cannot be met if sea transportation is used to bring
goods from India.

Experts consider that, of the Russian air companies dealing with cargo transportation,
the East-Line company based in Domodedovo (a Moscow airport) is sufficiently
experienced in cargo delivery using “grey schemes”3.

To minimize costs and risks, the Finland offshore zone is preferable. It is close to the
Russia’s border, therefore goods can be brought from Finland by motor transport or by
railway.

3
For additional information see pp. 78, 93.

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PART 7. CONCLUSIONS AND RECOMENDATIONS

WAREHOUSE

The work of suppliers and distributors can be organized in two ways:

1. Arrangement of an own warehouse with an own system of distribution in Russia.


Distributors choose and buy goods in a permanent storage warehouse rented by
an Indian supplier. In such case, the cost of goods increases due to rent and
transportation expenses. Distributors conclude contracts with a Russian
company that acts for Indian suppliers.
This scheme can be profitable if there is an extensive network of distributors and
large consignments of goods are supplied. According to expert interviews,
distributors buy goods in small consignments (up to 500 articles). Therefore, the
second scheme can be preferable.

2. Distributors conclude agreements directly with an Indian supplier and fetch goods
from a temporary storage customs warehouse.

It would be the optimum way for Indian suppliers of different leather goods to associate
and rent a class B or C wholesale warehouse together. In the former case, the rentals
for a warehouse of 500 sq. m area would amount to 3,000-4,500 USD per month; in the
second case, it would be 2,100-2,700 USD per month.

It is better to search for a warehouse through realtor companies. It is virtually impossible


to contact a warehouse or office lessor directly, since realtors instantly intercept any
offers on this market.

A warehouse should be located in the near southern part of the Moscow Region.
Locations in the southern part of the Moscow region (Podolsk, Serpukhov, Vidnoye,
etc.) are most attractive due to the milder administrative conditions in this area.

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PART 7. CONCLUSIONS AND RECOMENDATIONS

ACCOUNTING

Vneshtorgbank is the most suitable bank through which Indian suppliers of leather
goods can perform financial operations. It has well-established relations with India and
with one of the largest Indian banks.

To obtain financial credit, it is better for Indian companies to approach Indian banks. In
Russia, the credit terms are rather severe and the interest rates are high.

STRATEGY

The Russian market of leather goods is characterized by:

1. Positive perception of consumers and their interest in buying leather goods;

2. Diversified structure of demand for goods;

3. Price competition;

4. Insignificant share of consumers’ expenses intended for buying these products in


the budgets;

5. Undeveloped product differentiation strategy in the given sector.

In this case, the most effective strategy for the behavior of Indian manufacturers is the
product differentiation strategy. This strategy makes it possible to reach the following
advantages in competition:

1. Additional growth in the sales volume and making excess profits by winning the
preferences of various consumer groups owing to better technologies and higher
quality, as well as a wider range of products or attractive low prices.

2. Strengthening the position on the market due to disturbing the competitors’


strategies by lowering the self-cost of standard products and by localizing the
market owing to the diversity of the goods offered and owing to the consumer’s
loyalty.

3. Reducing the number of competitors by tightening the conditions of entering the


market sector owing to the existence of steady consumer preferences.

4. The availability of resources in cases if prices for raw materials, parts and semi-
products increase.

5. The guarantees that enterprises which use only the services of the given
company would make profits from selling their products.

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PART 7. CONCLUSIONS AND RECOMENDATIONS

6. Possibility of driving away competing goods by strengthening links with the


consumers.

7. Good conditions for creating the image of a scrupulous and reliable partner which
cares for the consumers and their specific needs.

The footwear and fancy goods markets are very promising and are developing
dynamically; the footwear market is developing especially quickly.

Suppliers from India should adhere to the following rules on this market:

§ to analyze and reduce expenses;

§ to take the competitors’ prices into account;

§ to introduce innovations that reduce expenses;

§ to increase the sale of services to old clients;

§ to search for competitors who are candidates to be driven away from the
market.

The leather garments market is nearly saturated; the competition is rather high;
this market is stable.

In this area, Indian manufacturers should pay attention to the following:

§ finding a growing segment in the leather garments market and


concentrating in that segment;

§ introducing innovations that start a non-price competition of services;

§ decreasing the self-cost of services.

Indian manufacturers of leather goods have a strong competitive position on the


Russian market. The following methods of competition appear to be most promising for
them:

§ searching for an unoccupied niche with weak competition;

§ adapting to the selected target market;

§ creating an ideal service;

§ imitating the leader’s actions;

§ absorbing small competitors;

§ creating a distinguishing image.

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