Why did Theophanes choose Moscow exactly?
“There is money in Moscow, and people are prepared to spend it,” he says. “I started my business in Greece: at 28, I opened a jewellery shop in the resort of Loutraki outside Athens. Towards the end of the nineties, Russian tourists began to arrive. They bought more, and spent more freely, than others, and they all wanted...fur coats! I thought to myself: if there are four, or even five, cold months in Russia, then selling fur coats to Russians has to be more profitable than selling them jewellery. And even better to sell fur coats, not in Greece, but in Russia itself. That’s when I had the idea of starting a business in Moscow.”
But Theophanes did not come to Moscow straight away.
“I wouldn’t advise a small businessman to start working in Russia straight off,” he says. “The “rules of the game” are different here, there is a different mentality. To start off with, I turned the jewellery business into a fur business whilst still in Greece. I opened a shop, called Phaeton, selling fur coats, and then I came to Moscow a few times “on reconnaissance”. It was only some five years later that I decided to take a risk and opened a shop with the same name, Phaeton, in the Raduga shopping centre in Moscow, near to the Cherkizovskaya metro station. The coats are supplied by my Greek partner Sarianis’ company: he has his own factory outside Athens, and it is very high quality merchandise.”
If there are several months in Russia when it is cold, then selling fur coats to Russians has to be more profitable than selling them jewellery.
Theophanes has some advice for those wishing to do business in Russia.
“First of all, only send small batches of goods here, and do your market analysis,” he suggests. “Russians love anything new, so your merchandise has to be exclusive in some way. My second tip: don’t open your own shop straight away. For the early stages it is possible to rent premises in a large shopping centre, in a busy place. Finally, you need a reliable Russian partner: here it is very hard for a foreigner to run a small business on their own. One more thing: the small-scale retail fur trade in Moscow is a “seasonal” business, and not profitable all year round. It is better to trade in furs in Greece in the summer when there are a lot of Russian tourists there, and in Moscow during the winter and spring.”
The Greek entrepreneur believes that the market in furs in Russia is not going through the best of times at the moment.
“Five years ago trading in furs in Moscow was easier: there weren’t as many on display, there wasn’t the influx of ultra-cheap fur from China,” admits Theophanes. “The Chinese sell fur of a low quality but at a very low price. I’m constantly forced to lower my prices, and it is hard to survive under such circumstances. Virtually all the profits are “eaten up” by overheads. The contacts I established with Russian customers whilst still in Greece come to my rescue: they recommend my shop to their friends and relatives in Moscow...”
Yulia FIRSOVA, Аanalyst of the business planning and market studies department of Global Reach Consulting
The specific features of the Russian clothing market are an extremely low level of consolidation and a considerable proportion of unorganized trade. Its strongest positions are in the low-price (“shadow” imports from Asian countries) and medium price sectors (counterfeit “brand” products). At the present time, the share of Russian manufacturers in the structure of the Russian clothing market is negligible. According to data from the RF Ministry of Economic Development, in 2010 the share of Russian legitimate clothing manufacturers was 21.6% The proportion of imported products in the market in 2010 was more than 78%; only half of the total amount of clothing (about 42%) was imported into Russia on a legal basis. As for the operational efficiency of the various forms of clothes shops, the TP index (annual sales revenue for one member of staff) is interesting. According to this indicator, the leaders are the expensive fashion boutiques. The maximum for this indicator ($324,400 per head) is being achieved by the French PPR chain, followed by another French chain of clothing shops, Christian Dior, with $316,000. The average sum invested in the opening of a clothing shop with an area of 150-200 sq.m. in a commercial and amusement centre is about 9-11 million roubles ($290,000-355,000), not counting the purchase of the premises. The lion’s share of the investments goes on turnover capital – around 75% (50% on purchase of the range of clothes and 25% to cover day-to-day losses at the investment stage of the project). Another 25% is accounted for by investment in basic capital (equipment and so on). Average sales revenue per sq.m. of sales floor space for such shops is 180-250,000 roubles ($5,815-8,077) per annum. The average time for such enterprises to pay for themselves is 3-3.5 years, and the NPV at the end of five years is 2-3 million roubles ($64,000-96,000).
How profitable is such a business in the Russian capital?
“Recouping your outlay depends on the overheads, and here they are one and a half times higher than for the same in Greece,” says Theophanes. “My initial overheads in Moscow came to about $120,000. I only “turned round” that amount after eighteen months and such a long capital “turnaround” period in Russia is down to, first of all, large extra expenses which are hard to foresee. For example, rents in Moscow are directly related to the shop’s proximity to a metro station. I found premises in the Raduga shopping centre after two weeks of searching. My advice: don’t settle here for the proposed rent price straight away. Bargain – and the price may even drop by two times! I pay about 50,000 rubles, or $1,560, per month in rent for a sales area of 35 square metres. This isn’t expensive by Moscow standards, especially when you consider that this includes paying for security. What costs more is goods storage: I was asked 90,000 rubles a month for this, and that is nearly $3,000. But I negotiated with a Greek partner who has a warehouse in Moscow, and so I store my stock there.
“Needless to say, I could have found a very cheap warehouse for, let’s say, $450-500 a month, but the safety of my goods wouldn’t be guaranteed. The usual minimum price is $1,300. This, on the whole, is for a warehouse with an alarm system and security guards, near to your shop. For the small businessman it is better to rent such a place together with somebody else.”
Nikita KUZNETSOV, Deputy Manager of the Department of Trade and Service of Moscow
Moscow does not have enough shop floor space for its shops. The total of such space for Muscovites is 784 sq.m. per 1000 inhabitants. It has increased by five per cent since the beginning of the year, but continues to fall far short of the requirements of a great city. For consumables, it is only about a third of what it is in Western European cities. The situation in the non-food goods shops is similar. This leads to excessive rates for renting premises. If we take comparable quality space on the main shopping streets of the European capitals, renting in Russia can be more than twice as expensive. In the final analysis, it is the customer who pays for this. Whereas in the West, marketing expenses form up to 30% of the price of goods (40% is something quite extraordinary), in Moscow they can be as much as 70%. In this situation, it is the individual entrepreneurs and small companies who find it most difficult, whereas the brand chains are more competitive. Why? Because their logistics expenses are lower. At the same time, Russians have now largely become used to a chain-consumer way of thinking (chain shops, fast-food restaurants and so on). This is a temporary consumption culture which has been forced on us, it will pass away as competition develops. But while it exists, and in order to win in this struggle, the entrepreneur must offer goods which the chain stores are unable to offer. What is being done to correct the situation? A decision has been taken radically to increase sales floor space. Since the beginning of the year, 14 new shopping centres and 683 shops have opened in Moscow. In the next few years, the introduction of new sales floor space will proceed at an increasing rate. By 2016, the provision of it for Muscovites will be 1,200 sq.m. per 1000 inhabitants.
By the time Theophanes had decided to open his shop in Moscow, he was already prepared for the difficulties.
“I only knew a few words of Russian, but for your business to succeed here you need to know both the language and the mentality,” the Greek emphasises. “I speak English myself but, unfortunately, very few people in Moscow know any foreign languages. A Russian manager came to my aid by recommending me to his friends. Another problem was adapting to the Moscow climate. I am, after all, from Southern Europe, and so I’m used to getting the kind of freezing weather you have here only every two to three years. By the way, getting used to the climate is not such a “minor matter” as you might think. I know Greek and Italian businessmen who couldn’t get used to the Russian cold and, eventually, wound up their businesses in Russia...”
Did the Greek businessman encounter many further problems in Moscow?
“Someone said, quite rightly, that in Russia the severity of the laws is counterbalanced by the inconsistency of their enforcement,” says Theophanes. “Russians are able to get round any problem.”
One way or another, Theophanes has to take all this into consideration. Although he is hardly enamoured by it all. And who would like it when, bringing their goods from the warehouse to the shopping centre, they have to…pay the guards to get into their own shop?! There were staff problems too...
But none of this was enough to break the resolve of this determined Greek. These days, incidentally, in Russia, he has to stand behind the counter himself more and more often: a salesperson costs 500 rubles, or about $20, a day, plus commission. Not much, you would think, but, together with other expenses, this makes the business more costly. Theophanes spends about six months in Greece, and the rest of the year in Russia.
But in the Greek entrepreneur’s opinion, expanding his fur business in Moscow wouldn’t be profitable.
“It would require additional outlay,” explains Theophanes. “We import furs from abroad, and to compete on an equal footing with cheap Chinese fur which is processed over there in Podolsk, outside Moscow, is impossible for me. Of course, I am maintaining my niche in furs but, to receive an appreciable profit, I have had to switch over to a parallel business.”
For Theophanes, this “parallel business” is supplying small batches of Greek olive oil to Moscow and the Moscow region.
“It is difficult to find high quality Greek olive oil in Russia. Here, generally, much lower quality oil from Italy, Spain and Tunisia, or “mixed” oil, as it is called, where Spanish oil is added to Greek, is on sale here,” Theophanes reveals. I import into Moscow oil from the province of Nemea, renowned for its organic produce. I came to an arrangement with my cousin who has his own factory in Nemea for the cold-pressing and bottling of high-quality olive oil. I didn’t have to start a separate business to supply the oil to Russia. My company Phaeton is registered in Greece: I simply started a Russian website where people order oil from us, and I began to import it in small batches to specific customers. Large Russian retail chains have no need of high-quality Greek oil: turnover is more important to them, which is why they buy cheap oil. So don’t waste your time walking round the offices of large trading companies. Limit yourself, at first, to small wholesale lots. The main thing is to have a partner producing such merchandise.”
Recouping your outlay depends on the overheads, and here they are one and a half times higher than in Greece.
Theophanes is optimistic about the future of his “olive” project. “We quickly forged links with Russian firms with small shops engaged in retail,” says the Greek businessman. “Next year we are going to begin importing into Moscow, not only olive oil, but also cheese, olives and vegetables. These small wholesale lots could turn out to be extremely profitable. And, although operating in Russian conditions is not straight-forward, I am not about to wind up my business here.”
The winter may be cold here, but what is warming is a profit which many now in sunny Greece can merely dream of...