Store Stalin Hated Extending Luxury Brands Across Russia

On rainy days, the GUM mall on Moscow’s Red Square swarms with tourists. Unfortunately for GUM, the hordes seeking shelter tend to do more looking than buying, in large part because the big-brand fashions there cost about 50 percent more than they do in Paris or London.

That’s a problem for GUM’s owner, a closely held Russian retailer called Bosco di Ciliegi. Without the reliable cash from tourists that fuels profits at department stores like Galeries Lafayette in Paris or London’s Harrods, Bosco has started to look beyond its flagship to new outlets across Russia, where it can win over local shoppers rather than visitors.

“Tourists don’t buy an Ermanno Scervino coat here” because of high prices due largely to import duties and value added tax, GUM Chief Executive Officer Teimuraz Guguberidze said while sipping tea in his office overlooking Lenin’s mausoleum on the third floor of the mall.

For the next five years, Bosco plans to focus on adding stores in four cities outside the capital -- St. Petersburg, Sochi, Yekaterinburg, and Samara -- because “future growth will come from the regions,” the CEO said.

The Russian fashion retail market expanded 11 percent last year to about $50 billion, of which Moscow accounted for $6 billion, according to researcher INFOLine.

Sochi Olympics

“Bosco’s expansion into regions looks logical,” said Anna Lebsak-Kleimans, head of the Moscow-based Fashion Consulting Group. She estimates the fashion market in Sochi, home to the Winter Olympics in February, is set to grow as much as 10 percent a year, more than twice the pace of Moscow.

Russia’s other two biggest luxury retail groups have followed a similar strategy, though they’re being more cautious. Mercury, which owns Moscow’s Tsum department store and represents brands such as Dolce & Gabbana, Giorgio Armani and Tiffany, opened a department store in St. Petersburg last year and has had shops in luxury hotels in Sochi and Yekaterinburg for several years. JamilCo, which represents DKNY, Burberry, and Escada, has stores in Yekaterinburg and Rostov. Neither company plans to enter more markets outside of Moscow.

Bosco di Ciliegi, which means Cherry Forest in Italian, a nod to Russian playwright Anton Chekhov, was founded by entrepreneur and Italophile Mikhail Kusnirovich in 1991. The company helped bring foreign brands back to the country after the fall of communism when it partnered with luggage maker Mandarina & Duck to sell upscale items such as $400 handbags. Ventures with fashion houses Nina Ricci and Kenzo followed, bringing luxury stores to a nation that had experienced little more than drab shops for seven decades.

Stalin’s Shutdown

In 1995, Bosco opened its first outlet in GUM -- the Russian acronym for “Main Universal Store,” though under communism the same name stood for “State Universal Store.” GUM, a series of arcades connected by vaulted glass roofs, has been shaping the way Muscovites shop since 1893. It survived the Bolshevik revolution and a decades-long shutdown by Stalin, who wanted to demolish the architectural treasure to make more room for parades.

After Stalin’s death, GUM reopened as a showcase of the best goods the planned economy could offer, and some areas -- with the best of the best -- were reserved for Communist Party officials. It’s now flourishing again as luxury stores mingle with Soviet-era throwbacks like an ice-cream stand that offers cones for an affordable 60 rubles ($2) per scoop.

In 2004, Bosco bought the shopping center aiming to improve the facility and buff up the service in its shops. Now, Bosco operates stores for itself and partners in about a third of GUM’s 30,000 square meters of retail space and rents out the rest to brands ranging from Samsung to Louis Vuitton.

Shop Clusters

Bosco also manages shopping centers across Moscow and in other Russian cities, including about 80 sportswear outlets called Bosco Sports. The group’s annual sales are about 500 million euros and the CEO said it’s profitable, though he declined to give details.

Outside Moscow, Russian cities have few malls or department stores with concentrations of high-end shops, Guguberidze said. So the company is developing clusters of single-brand shops in central locations in the four cities it’s focusing on. A new outlet for a global brand in Samara -- a Volga River port city of 1.2 million that has just a few fashion boutiques -- will attract far more attention and customers than one in Moscow, which has hundreds of similar shops, he said.

Red Square

Bosco isn’t giving up on Moscow, where its GUM flagship, just steps away from the Kremlin and St. Basil’s cathedral, attracts about 11 million people a year. To persuade the crowds to stick around, Bosco is adding more trees, benches, and dining options. In July, GUM hosted a flower festival, covering a large part of the Red Square with flowers in pots to celebrate its 120th anniversary, while in winter seasons in normally lays out a skating rink on the Red Square.

The company is also lobbying the government to offer value added tax refunds to foreigners, which would bring prices more in line with the European norm by returning 18 percent of the purchase price to them -- something tourists in most European countries have enjoyed for decades.

And Bosco is trying to create a more refined mix of stores, Guguberidze said, adding brands such as Max Mara, Moschino, Emporio Armani and Etro.

“In Russia, the consumption of good wine is increasing and consumption of vodka is decreasing because the consumer culture is growing,” Guguberidze said. “The same thing is true with fashion.”

Before it's here, it's on the Bloomberg Terminal.