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Russia’s Luxury Mania: Stores Grab Real Estate To Build New Empires

When the going gets tough, Russians go luxury shopping — and right now there are just a handful of major retailers snapping up all the brands.

MOSCOW — When the going gets tough, Russians go luxury shopping — and right now there are just a handful of major retailers snapping up all the brands.

“During the big financial crash a few years ago when banks were collapsing, Russians took their cash and bought big luxury items. Sure, we are worried about terrorism right now,” acknowledged Evelina Khromchenko, editor in chief of the Russian edition of L’Officiel, referring to the hostage-taking early last month that killed more than 300 people, many of them school children, in southern Russia. “But that is what we do when there’s a crisis: shop.”

The expectation that Muscovites with means respond to political and economic uncertainty by investing in brand-name consumer goods is one of the forces behind a wave of massive real estate expansion by a handful of Russia’s luxury megacompanies. In the last few years, the Crocus International group has built Crocus City, a mammoth 656,598-square-foot upscale mall with 180 boutiques ranging from Lanvin to Celine that is located on the outskirts of Moscow. A stone’s throw from the Kremlin, the Mercury group has erected its own 107,639-square-foot luxury shopping street and opened Armani, Gucci and Prada boutiques there. Not to be outdone, Bosco di Ciliegi bought a 50.25 percent stake in GUM, the historic 753,473-square-foot retail property on Red Square, where it recently opened Corneliani and Moschino boutiques.

“What’s happened is that all the accidental players fell out of the luxury apparel market and now a few major groups have become professional retailers who hold all the brands,” related Mikhail Kusnirovich, president of Bosco di Ciliegi. His company owns 40 boutiques across Russia ranging from Max Mara to Givenchy, as well as its own Bosco brand multibrand department stores

“We started out wanting only to sell clothes and did not plan to diversify into real estate. But the top few retailers have evolved into powerhouses and, as our companies’ boutiques have become shopping destinations, we have all realized that real estate is an important branding symbol,” Kusnirovich said.

In uncertain times, diversifying into real estate also may serve as a hedge strategy for Moscow retailers. In the wake of a month-long series of terrorist incidents in Russia — which included, in addition to the school attack in Beslan, two airplane bombings and a Moscow subway and bus bombing — retail turnover initially stalled, just as it did in America following 9/11. Stunned citizens were reeling from the violence and from President Vladimir Putin's announcement that he plans to curb the democratic electoral process.
But within weeks the country had rebounded and Muscovites seemed to have returned to their regular retail routines. At Galleria, the trendy restaurant with the toughest scrutiny in Moscow, diners in D&G jeans, Hermès H belts and corduroy Etro jackets lounged on the patio, their Louis Vuitton satchels and cashmere scarves strewn across banquettes — and that was just the men. Across town at the tony, 12-table Vogue Café, the knee-high wooden purse stands were laden with Balenciaga saddlebags, Chanel totes and a sea of Kelly bags accessorized with Prada robot charms. The fact that, in mid-September, Russian police nabbed a would-be terrorist who had parked a car full of dynamite and grenades outside a popular Moscow museum was not keeping people at home.

“The government has warned people to avoid crowded places. But people are still going to work, doing business, going out and going shopping. We have to live,” pointed out L’Officiel’s Khromchenko.

In fact, in the midst of all the gloom, Russia’s second-largest oil company last month announced a fivefold increase in its estimated oil reserves — making the country potentially the world’s second-largest oil producer after Saudi Arabia. With oil, the mainstay of the Russian Gross National Product, continuing to command high prices, the economy is booming. But because of that oil and gas dependence, international credit-rating agency Standard & Poors warned last month that Russia has one of the world’s riskiest banking systems.

For retailers, it’s a complicated situation. On the one hand, the Russian minimum wage is about $20 a month and, as of this summer, wage arrears stood at $820 million. On the other hand, according to statistics from the Russian government agency Goskomstat, Russian retail turnover rose to $146 billion in 2003 from $121 billion in 2002. Meanwhile, a U.S. government report in June put the unofficial figure for last year’s Russian consumer spending closer to $270 billion. Of that figure, industry experts suggest Russians may spend between $2 billion to $3 billion annually on luxury retail. And consumer demand shows no sign of abating. Retail space in Moscow, most of it large shopping centers, grew by about 645,834 square feet in 2002 and 10.7 million square feet in 2003.
A few years ago, when the vice president and retail director of Mercury, Alla Verber, met Americans, she would tell them her goal for the brands (such as Jil Sander and Alberta Ferretti) she imported was to “build Madison Avenue along Kutuzovsky,” the eight-lane thoroughfare that is a 10-minute drive from the Kremlin where the company had a two-story flagship emporium called Moscow Trading House.

How time flies. Now Mercury has reconstructed a 19th-century arcade, called Tretyakovsky Proyezd, and transformed it into its own 107,639-square-foot luxury shopping lane a five-minute walk from the Kremlin. Here, housed inside the classical lemon yellow and white facades of historic Moscow, there is a seemingly endless array of perfectly appointed stand-alone stores, including a three-story Armani palace with its own VIP dressing area; a Graff diamond boutique with gilded Empire chairs, and a two-story Dolce & Gabbana store complete with zebra rugs and gilded mirrors.

In the apparel and accessories category, there are also stand-alone Prada, Gucci, Roberto Cavalli, Yves Saint Laurent Rive Gauche, Brioni, Tod’s, Zegna, Bulgari and Tiffany & Co stores. Because Muscovites are developing an interiors obsession, Mercury has also opened separate Frette, Baccarat and Armani Casa boutiques. Meanwhile its Ferrari, Maserati and Bentley dealerships, opened last year, already have become the stuff of legend.

“I heard Mercury sold 12 Bentleys the first week they opened in Moscow,” British designer Paul Smith reported this summer. Smith, whose apparel already sells in multiple brand stores in Moscow and St. Petersburg, said he is impressed by how “the Russians and the Chinese are the world’s new big spenders. Moscow has 33 billionaires, more than any other city in the world.”

And, naturally, some of those billionaires frequent Mercury’s exclusive arcade. By day, Tretyakovsky Proyezd’s cobblestone thoroughfare is crammed with Mercedes SUVs disgorging shoppers hungry for Chaumet bobbles and Gucci handbags. By night, the place is thronged with partygoers decked out head-to-toe in Roberto Cavalli who come for dinner at Mercury’s stratospherically priced haute cuisine French restaurant called T-R-E-T-Y-A-K-O-V, or for parties the company throws to honor a visiting celeb, be it Giorgio Armani or Cavalli. The Cavalli party earlier this summer was announced by 30-foot advertising billboards posted around Moscow that said, in English: “Congratulations Roberto Cavalli on the opening of your new store!”
And along with the Class A real estate and A-list parties, Verber, of course, has upgraded her ambitions. Forget Madison Avenue. Verber’s sights are set on Italy, the Alps and the Hamptons.

“We are building Via Montenapoleone, like in Milan,” she explained as she walked into Vogue Café dressed in her signature Chanel black, deposited a vast quilted Chanel tote on a table and acknowledged various logoed diners in the room, most of them regular Mercury clients.

Asked to distinguish Mercury from Moscow’s other retail conglomerates such as Crocus and Bosco, she said immediately: “We deal only in luxury, luxury, luxury. That means luxury cars, luxury fashion, luxury jewelry, luxury food and luxury home products. We are a luxury empire.”

And that empire, she explained, has a manifest destiny to expand by acquiring more prime real estate in and around Moscow. To that end, two years ago the company bought TSUM, the rundown old Soviet department store next to the Bolshoi Theater that is across the street from Mercury’s luxury shopping street. The five-story, 387,500-square-foot behemoth has 150,694 square feet of retail space that Mercury plans to double in the next few years, as well as adding an underground parking garage. The ground floor, where instant photo developers and porcelain tchotchke booths once stood, now has various cosmetics counters along with Prada, Gucci and Bottega Veneta accessories corners. The third floor has sections devoted to an eclectic range of brands, including Diane von Furstenberg, St. John, Juicy Couture, Ellen Tracy, Ya Ya, Miu Miu, Polo Ralph Lauren, Laundry by Shelli Segal, Dana Buchman and Earl Jean. With TSUM, Verber says she is aiming to replicate Saks Fifth Avenue in terms of both brand variety and prestige. On the one hand, she hopes to create an entry point for middle-class Muscovites who might find the Gucci boutique intimidating. On the other hand, she wants to give Mercury’s upscale client base “a place to buy casualwear, a place to shop with their daughters, another place to buy a great bag.”

Indeed, the key to the new Moscow retail diversification is location. The more locations Russian retailers open — whether the doors be clothing boutiques, restaurants, bars or spas — the more time and money their clients spend in those environments. Perhaps the apex of this strategy is Mercury’s gigantic new project: a six-kilometer-long shopping development in Zhukovka, the pastoral summer destination an hour’s drive outside Moscow likened to the Hamptons, where Russia’s new rich have been competing to erect McMansions. Mercury is building a luxury hotel there with an entertainment complex, restaurants and a dozen stores ranging from Armani Casa to Prada so that, Verber said, “in the winter everyone who used to go to St. Moritz can enjoy the snow here at home.”
To translate the Mercury scenario to American terms, it would be as if Bergdorf Goodman’s success might hinge, in addition to its flagship, on also building and owning Rockefeller Center, Spice Market and Nobu, the Marquis Club and the Maidstone Club. Welcome to Moscow.

But Mercury isn’t alone in its diversification strategy. Crocus International made its first major foray into Russian retailing in 2001 when it built and opened Tvoi Dom (Your House), a 538,195-square-foot home supply store that seems like a combination of Home Depot and Kmart. A 484,375-square-foot Expo Center soon followed. But the jewel in the company’s crown is Crocus City, a 688,889-square-foot mall opened in 2002 that echoes Miami’s Bal Harbour with its water decor and lush greenery. The upscale mall, 30 minutes’ drive from downtown Moscow, contains 180 boutiques — including Versace, Emilio Pucci, Stephane Kelian, Cerruti, Les Copains and Bruno Magli. Crocus International owns and operates 60 of the units, among them the first JLo store in the world, which opened this summer.

“Before we designed Crocus City, we went to Bal Harbour and Short Hills, [N.J.] and we visited luxury malls across Europe. Then we combined everything we liked together in one vision,” said Crocus International’s co-owner and commercial director Emin Agalarov.

“Crocus City is a place where you can walk in on a cold day and find yourself in a tropical paradise where you can shop, relax and be entertained,” he added. “There’s a huge swimming pool with professional synchronized swimmers who do shows every three hours. There’s a river that streams down the limestone hallways.”

When Crocus International announced in 2001 that it was planning to build the gargantuan mall with 4.5 miles of aisles, its competitors were skeptical. At the time there were about 150 single-brand freestanding designer stores in Moscow and the idea that Crocus City would double the number of Moscow’s luxury stores in one fell swoop seemed ludicrous. Crocus’ downtown competitors were also skeptical of the mall’s suburban location lacking a subway stop.

Three years later, foot traffic is indeed limited. But Agalarov reported that his dedicated clients are big spenders.
“We don’t get that many visitors,” he agreed, “maybe 4,000 to 5,000 people per day. But when they each spend $500 to $600 — the price of Crocus City’s average sale’s ticket — that adds up over the course of a year.”

In terms of retail significance, Moscow is like Milan, Agalarov suggested, “a shopping mecca where people come from all over Russia to buy luxury brands as well as from neighboring countries like Kazakhstan and Ukraine.”

To capture those diverse audiences and keep them busy with entertainment options, Crocus International is in the midst of a building boom. It is planning to build another 1.1 million square feet of retail space to add 120 boutiques to Crocus City Mall in the next few years. In addition to prestige labels, Agalarov said he hopes to entice midpriced brands such as Banana Republic and Victoria’s Secret.

Also, the company is tripling its adjacent Expo space to 1.6 million square feet and planning to build a 1,000-room hotel that Agalarov likens to “the Venetian or the Bellagio, with Russia’s biggest casino, and then we’re also planning to build Russia’s biggest movie theater with 20 to 25 screens.”

When Crocus International’s grand plan is finished, its “city within a city” should total more than 10.8 million square feet of real estate, which the company hopes to have completed by 2010. The Crocus City subway station should be open by then as well.

In the meantime, when the upscale mall’s shoppers tire of the designer catwalk shows and the synchronized swimming, they can repair for cocktails nearby at the company’s exclusive Shore House yacht club, which opened this summer. The club has already hosted shows by elite yacht companies such as Pershing and Ferretti. And for those luxury shopping mavens who must avoid Moscow’s rush-hour bottlenecks at all costs, the yacht club conveniently has a helipad.

Crocus City may have a helipad, but Bosco di Ciliegi has GUM, the historic 753,473-square-foot galleria parallel to the Kremlin on Red Square that has been Russia’s most famous shopping address since its construction in 1893. Even before that, in the 18th century, the site housed 1,200 small wooden trading stalls under one roof until the place burned down in 1825. In the Communist era, millions of shoppers, both Muscovites and visitors from neighboring Soviet Republics, strolled down its marbled halls under the Victorian glass ceilings in search of government-issue shoes, suits and ice cream. In the last decade, GUM has become a big attraction for brands such as Reebok, Benetton and Estée Lauder that responded to the siren call of Russia’s highest foot traffic.
“GUM is a national symbol that, in significance, could be compared to Galeries Lafayette or to Harrods in terms of a shopping destination. But then you have to factor in the country’s most famous address —3 Red Square — across from the Kremlin,” noted Timur Guguberidze, the new commercial director of GUM. “So GUM is like Harrrods if Harrods happened to share a courtyard with Buckingham Palace. From a Russian retail standpoint, that makes GUM more important than Harrods.”

When earlier this year the Bosco group, which already owned the Max Mara, Hugo Boss and La Perla boutiques and its own Bosco brand multibrand specialty store in GUM, purchased a controlling stake in the building, the company also gained control of satellite retail properties that GUM owned throughout Moscow.

“You can’t imagine how much real estate we ended up with in this deal. GUM has 24 separate addresses in total that, apart from GUM, add up to 1.6 million square feet valued at $200 million,” related Bosco president Kusnirovich. Bosco plans to sell some of GUM’s Moscow properties and rent out others. Next year, Kusnirovich said, Zara will be opening big boutiques both in GUM on Red Square and in the GUM satellite store on Tverskaya, Moscow’s main shopping street.

But the company’s real priority is restoring GUM to its original grandeur. Before Bosco took over the entire three-story colossus, it had already renovated an entire row of ground-floor shops by opening Max Mara, Marina Rinaldi, Max & Co, Kenz and Iceberg boutiques there. It also opened its own high-end perfumery, called Articoli, its own multibrand Bosco department store with women’s fashion, men’s wear and children’s clothes, and Bosco Café, an Italian eatery with views of the Kremlin. This summer, Bosco opened Moschino and Corneliani stores in GUM, along with Bosco Bar, a stylish retro futuristic locale with clear plastic bubble chairs hanging from the ceiling. This summer, Louis Vuitton also opened its own store in the same row.

Like its luxury competitors, the theme for this Moscow retail conglomerate is geographic and entertainment diversification. In GUM, Bosco also owns a Dior cosmetics boutique with two treatment rooms, and in Petrovsky Passage, a historic mall not far from GUM, Bosco runs a restaurant, a cafe, an old-fashioned apothecary and a clinic that is home to Russia’s top cosmetic dentist. In addition, it owns freestanding Etro, Givenchy, Nina Ricci, Alberta Ferretti, Ermanno Scervino and Pomellato boutiques in Petrovsky Passage.
“The majority of Russian capital is concentrated in Moscow and people have to spend it somewhere, whether it’s at boutiques or at restaurants or both, because you need to buy new clothes to go out to restaurants,” theorized Guguberidze of GUM. “So the more a retailer throws promotions, parties and events, the more you help create a society that needs to dress up. And the more diverse events you stage — and why not, by the way, hold them in the retailer’s own restaurants? — the more you can diversify into formalwear, eveningwear, casualwear, outerwear, jewelry and sportswear.”

In fact, Bosco has a somewhat different diversification strategy than most of its competitors. For one thing, it has ventured outside of Moscow to open Max Mara and Kenzo boutiques in St. Petersburg, as well as introducing freestanding Max Mara stores to cities including Samara and Novosibirsk in far-flung Siberia. For another, apart from the single brand designer stores, Bosco has built itself into its own luxury brand, known for multibrand department stores with an eclectic mix of Italian and French labels. Each season, Bosco creates its own branded advertising campaigns that appear in Russian magazines and on Moscow billboards, and the company also launched Bosco Sport, with a red-and-white logo that appeared in Athens on every Russian Olympian’s tracksuit. Taking a page from the Canadian company Roots, Bosco sponsors the Russian Olympic team and sells similar sportswear and merchandise to Muscovites in its Bosco Sport store in GUM.

“I think one of the reasons for the real estate acquisitions is that the future of retail in Russia is no longer just about rich clients. It’s about customers who not only want a wide choice of high-quality fashion, but who also care a lot about where they are shopping,” said Kusnirovich. “Therefore, luxury retailers are no longer only product- and brand-oriented, we are environment-oriented. I want our clients to walk in and know immediately that they are in a sophisticated, refined, stylish environment. I want them to know immediately that they are in Bosco.”

If Kusnirovich is right, the massive expansions by Russia’s luxury retailers are only in their initial stages. Years from now, Moscow retailers will look back on the turn of the century as their Early Russian Empire period.
Editor’s Note: This is the second in a series examining the growing market in Russia for fashion and luxury goods.
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