Analytical release by Fashion Consulting Group. Issue No. 6

[ 28. May 2020 ]

FASHION INDUSTRY 2020.
NEWS & ANALYTICS

INFLUENCE OF PANDEMIC ON FASHION INDUSTRY MARKET

As of May 28, the number of confirmed cases of coronavirus infection in Russia increased to 379.1 thousand; during the day of May 28, it increased by 8371. In world statistics, Russia ranks third in the number of infections. It is too early to speak about the passage of the epidemic peak, nevertheless, quarantine regimes in the Russian regions are gradually softened in order to reduce the burden on the economy. The quarantine exit rules differ significantly in different regions.

Since Moscow remains the region with the largest number of detected cases of infection in the country, the lockdown in the Russian capital was once again extended until mid-June. At the same time, certain permissive instructions for manufacturing enterprises are gradually introduced into the lockdown regulations. These permissions have not yet affected the fashion retail. Moscow’s clothing and footwear stores keep on working online only, until mid-June in the least.

EXIT FROM THE QUARANTINE MODE IN THE REGIONS OF THE RUSSIAN FEDERATION. ACTUAL STATUS

A decision to remove quarantine restrictions is taken at the level of administration of each region separately. Currently, only five regions of Russia have begun to actively mitigate quarantine restrictions introduced against the background of the coronavirus pandemic. Other 21 constituent entities of the Russian Federation retained the quarantine mode in full and are not going to mitigate them in the short term, at least until mid-June / early July.

Regions with high rates of restrictions lifting include: Smolensk region, Kaliningrad region, Belgorod region, Tomsk region, and Tatarstan.

In these constituent entities, the authorities allowed to walk in parks and to play sports on the street, they open shopping centers, hairdressers and kindergartens. For instance, in the Kaliningrad region, shopping centers are allowed to work on weekdays from 10:00 AM to 6:00 PM. While in the Belgorod region, cafes in the veranda format, zoos, non-food shops in the shopping malls are to be opened from Monday through Friday.

In 21 regions of Russia, restrictions are maintained in the full scope.

First of all, the question is that of the constituent entities where large numbers of infected persons were recorded: Moscow, Moscow region, Ingushetia, North Ossetia, Kabardino-Balkaria, Nizhny Novgorod region, St. Petersburg, Kursk region, Karachay-Cherkessia, Yaroslavl region, Dagestan, Primorsky territory, and Chelyabinsk region.

Several regions with moderate infection rates also refused to mitigate any quarantine restrictions. Despite the fairly low statistics of the number of infected persons – less than thousand – these regions maintain the restriction mode in full scope: Nenets Autonomous District, Khakassia, Astrakhan region, Chechnya, Archangel region, Altai territory, Amur region, and Kurgan region.

A table with complete information for each region is attached to this release No. 6 in the Appendix format.

BRIEF INFORMATION ON THE STRATEGIES OF RUSSIAN FASHION RETAILERS

During the introduction of quarantine restrictions, the most difficult “blow” was hit exactly on large companies which had a large gap between online and offline sales before the pandemic, and whose balance included a significant amount of retail space, a large volume of goods produced for these stores, as well as a large number of staff who were left without work during the stoppage of stores.

Smaller-scale fashion brands have also suffered significantly, but they tolerate the situation of stopped business activity somewhat easier, as they have less “luggage” during the period of closed stores. However, unlike the United States, few companies have openly filed for bankruptcy in Russia still. So far, only Fashion House, a large Russian chain of stores of women’s and men’s clothing has filed for bankruptcy. This superficial “stress tolerance” of Russian fashion retailers is largely due to the particular unprotected system of “exit” from the business. In a situation of turbulence of all decisions made, many of which are chaotic, fashion retailers avoid making public statements to this regard so as not to “scare away” their purchasers or partners.

At the moment, the general strategy of the companies includes: reduction of offline sales outletss, reduction of purchases and orders, search for partners capable to carry out prompt deliveries “from the warehouse”. And, most importantly, an increase in online sales.

CERTAIN EXAMPLES OF STRATEGIES OF LARGE RUSSIAN FASHION RETAILERS:

— A clothing retail market leader:

Gloria Jeans network plans to increase its online sales 1150 % this year, to 2 billion rubles. The company is developing its online store and has entered into an agreement with Wildberries. Currently, Gloria Jeans sells 5 million rubles of clothing a day through its own online store.

— A leader of the children’s segment of the retail market:

According to its April 2020 results, Detsky Mir Group showed an explosive growth in online sales. The turnover of the Detsky Mir online store and the Detsky Mir mobile application increased 280 % year-on-year to 3.3 billion rubles (including VAT); 1.9 million orders for children’s goods were delivered in Russia. The leader in online sales was the category “Clothing and Shoes” (+ 480 %). As of May 20, 2020, most of the stores in Russia continue to operate, 62 of 729 Detsky Mir chain stores are temporarily closed.

— A leader of the shoe segment of the retail market:

Kari shoe retailer has expanded its online presence: in addition to its own online store, Kari launched sales on the AliExpress marketplace. At the launch, the Kari store will present more than 1000 different products, and the range will grow gradually.

— Examples of large local area networks:

Baon expects to start recovering operation of its stores wherever it is possible to agree on acceptable operating conditions with the shopping mall as soon as in June. At the same time, Baon is thinking about reducing store opening hours in regions with more stringent quarantine regulations.

As for Finn Flare, online sales accounted for about 30 % of the company’s revenue, which is the best indicator of sales digitalization among large chains. At the same time, the main sales were provided by marketplaces. After the introduction of the lockdown mode, the company introduced an expanded range of products at almost all major marketplaces, including Wildberries, Lamoda, Beru, AliExpress, Tmoll, Goods, Ozon, KupiVIP, Daughters and Sons, and Mamsy.

NEW MARKET CHALLENGES AND PRACTICAL SOLUTIONS.
HOW TO MANAGE RENTAL RELATIONSHIPS DURING THE QUARANTINE PERIOD

WAKE UP CONFERENCE FCG: “LOOKING FOR A BALANCE TOGETHER”.

THE BROADCASTS TAKE PLACE ON INSTAGRAM @FCGMEDIA, TUESDAY AND THURSDAY AT 11.00 AM.

Prompt practical solutions for fashion industry companies.

FCG. SPECIFIC FEATURES OF RENT PAYMENT HOLIDAYS

Relationships between tenants and commercial property owners have escalated to the bitter end. How can negotiations with the shopping mall be prepared? How can a reduction in the rent from the moment of lockdown be demanded? The bankruptcy procedure: what will happen if the tenant declares itself/himself/herself bankrupt?

In the current situation of the pandemic, landlords have a burden of ownership. It is associated with the necessity to bear the costs of maintaining property and paying taxes. Most often, shopping malls are secured by banks, so it is necessary to pay interest on loans so as avoid losing the property of the shopping malls. Repair costs and costs for ensuring fire safety are paid.

TWO STRATEGIES EXIST CURRENTLY FOR NEGOTIATIONS TO REDUCE THE COSTS OF TENANTS:

— for those who plan to end up with the least financial losses possible and with the possibility of reducing or canceling their rental payments;
— for those who want to close up their stores, to give the left-over stock to marketplaces and to exit.

THREE OPTIONS FOR REACHING A DIALOGUE WITH THE LANDLORD IF THE TENANT HAS DECIDED NOT TO CLOSE UP ITS STORES ALL THE SAME:

A dialogue with the landlord. It is necessary to prove your actual “inability to use the premises”, that is, to prove that the shopping center itself does not provide an opportunity to work and to use the premises. It is necessary to examine the lease agreement and to collect the evidence base: to request a permission to operate the store, or a permission to operate the store as a point for dispatching online orders. A refusal or absence of response to such application will be evidence for the cancellation of rental payments.

Force Majeure Circumstances. It is necessary to understand the definition of “force majeure circumstances” in your current contract; it is defined differently in different contracts. However, force majeure circumstances provide an exemption from sanctions (fines), rather than from obligations.

Reliefs for affected industries. The new Decree of the Government of the Russian Federation, No. 439 dated April 03, 2020, “On the establishment of requirements for the terms and conditions for deferral on payment of rent under property rental contracts”, gives the right to demand a deferral on payment of rental payments. The agreement on deferral is executed as a separate document. The company should be included in the register of “affected industries”, however, what is important, the contract should be concluded before the emergency situation. Currently, starting March 5, tenants in Moscow have the right to grant a deferral in an amount of 100 % of the rent for the period of emergency situation and, 50 % after removal of the quarantine mode, until October 1. The deferral does not include utility costs or property maintenance costs, therefore, the amount of such costs must be fixed separately.

OPTIONS FOR ARRANGEMENTS TO REDUCE THE RENT FROM THE TIME OF INTRODUCTION OF QUARANTINE RESTRICTIONS:

— The tenant pays a certain percentage of its real turnover;
— The tenant pays utility bills only;
— The tenant and the landlord agree on a specific amount of cash.

! Important: all arrangements must be documented.

BANKRUPTCY PROCEDURE

If the tenant declares itself/himself/herself bankrupt then the landlord can recover the debt through the courts. A Warrant of Execution, a decision on recovery, is drawn up; however, if the tenant has neither enough cash funds on its/his/her account to pay off the debt nor property then a deferral is given for 3 years, until the cash funds enter into the account or, after expiry of such period the case is closed.

ADDITIONALLY.
DATA ON THE REMOVAL OF QUARANTINE MEASURES AND RESTRICTIONS FOR BUSINESS BY REGIONS OF THE RUSSIAN FEDERATION