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- 20 Oct 2010
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Decoding Ukraine’s Mixed Messages


Ekaterina Petukhova, CEO of the Moscow-based Esper Group, explains why a seemingly saturated luxury market in neighbouring Ukraine is in fact ripe for new entrants

The international luxury industry has been optimistic about Ukraine’s potential as an attractive luxury market for quite some time now but is Eastern Europe’s giant really as lucrative as it seems at first glance? The simple answer is that it’s a bit more complicated than it seems. In the first nine months of this year, the Ukrainian luxury market gained 2.5% against the backdrop of a 3% growth rate of the overall apparel and accessories market. Such dynamics are uncharacteristic of a segment with such low elasticity of demand and are due to favourable conjuncture for luxury brands in the national market.

One reason that luxury fashion suffered much less during the crisis than the mass market apparel sector is because the vast majority of the autumn-winter season’s deliveries were realized at a favourable exchange rate for Ukrainian agents. The strong hryvnia helped to fix advantageous prices at both the wholesale and retail level. Secondly, in terms of volume, the luxury market didn’t lose at all. In fact, luxury sales grew during the crisis in contrast to middle market brands which fell in sales volumes and tried to offset their losses by increasing pre-sales period prices and the frequency of deliveries at various currency rates.

It’s worth noting that, in general, it’s more characteristic of the luxury segment to grow slow (7% in 2007, 3% in 2008 and 5% in 2009) and Esper Group experts forecast that 2010 will end with a real growth in the segment of 4%.

Such inadequate overall growth dynamics can be explained by specific circumstances in Ukraine’s apparel market composition. Unusually, the extreme high and low segments serve as engines of growth rather than the middle segment, meaning that either open air markets or luxury retailers make the greatest contribution to growth. The main reason is down to the absence of a middle class per se and a distorted price perception of such global mass-market leaders as Zara and Mango.

Their exceptional visual merchandising, shop window design, wide range of goods and sound branding efforts often make a counter-intuitive impression on the ordinary consumer: that these products must be too expensive so it’s therefore better to go shopping at the flea market. But if one does a price comparison in the main trading categories, it proves that this is not actually the case and that what is really going on is a psychological phenomenon of distorted price perceptions.

 What is really going on is a psychological phenomenon of distorted price perceptions 



As the overall economy of the country recovers from the crisis, luxury is also confidently regaining its pre-crisis sales indicators thanks to lower risks. While the mass-market and upper middle segments of the apparel market are mostly operating out of monobrand stores, luxury brands are largely consolidated into multibrand retailers which allows operators to diversify their risks and makes growth more stable. In fact, the market is controlled by two major operators in the premium to luxury segment– Helen Marlen Group and Sanahunt which have divided up exclusive rights for luxury brands and organize their distribution through multibrand stores.

It’s interesting to note that a lot of brands continue to work exclusively with these operators, actively denying themselves any chance of working in a monobrand format. However, it is understandable bearing in mind the rather limited volume of the market – too limited to absorb the entire range of many luxury collections and too limited to provide a good ROI apart from the accessories category which accounts for a high proportion of sales. In a multibrand, on the other hand, limited representation of the brand’s merchandise gets guaranteed narrow segmented demand from a particular operator’s client which lowers the stocks to the sort of minimal level which would be impossible for a monobrand.

Certainly the Ukrainian market has developed in the last five years but it would still most likely be unprofitable for one of luxury’s megabrands with several second and diffusion lines to launch a chain of monobrands as they do in other emerging markets. There remains a question over its volume. Ukraine’s total market capacity is $10.4 billion whereby luxury accounts for $0.86 billion, which is only a quarter of that in Russia, for instance.

 It would be profitable to expand on this market with a compass mostly oriented toward accessories 

As a result it would be profitable to expand on this market with a compass mostly oriented toward accessories such that the Louis Vuitton store in Kiev’s Khreshchatyk Street or to work through franchising which is more characteristic of upper middle market players such as Max Mara. Some luxury titans are represented in the country even through monobrand stores but with the help of a local operator – and again, one of the most prominent is Helen Marlen Group. The company represents 10 multibrand and 8 monobrand boutiques in Ukraine – including the shops for Gucci, Burberry, Roberto Cavalli, Bottega Veneta, Salvatore Ferragamo, Yves Saint Laurent and Dsquared2.

The fashion market in Ukraine was cleansed of its less efficient and smaller players thanks to the crisis, which helped increase demand elsewhere. On the one hand, the luxury fashion market in Ukraine is rather saturated but, on the other hand, it has not been growing fast enough recently to match the general increase in prosperity of the well-off population which, in itself, creates new niches on the market, in particular for concept stores and ‘rational luxury’. These niches used to be empty but the crisis and the recovery together shaped a new consumption pattern and a new group of consumers who may become engines of growth attracting investment for new players in the country.

This article has been published courtesy of Esper Times and first appeared under the headline, ’Just Luxe!’ in issue #22.


Ekaterina Petukhova is CEO of Esper Group, a Moscow-based firm that provides market intelligence and consulting services to clients in the fashion industry. Its territorial area of expertise is the Russian, CIS and Central/Eastern European markets.