Groundbreaking Format in Russian Retail

A substantial evolution has already taken place on the Russian retail real estate market, which has gone a long way from outdoor markets and department stores with empty shelves in the early 1990s to 3.545 million sqm of quality rentable retail areas in Moscow at the end of 2010. In other words the current per capita retail space in Moscow is at the level of 336 sqm per 1,000 residents (according to Magazin Magazinov in association with CB Richard Ellis).

The crisis dramatically corrected the developers’ strategy. Many new construction sites were simply frozen. Developers delayed the time of commissioning and most of the shopping malls that opened this year are the projects launched well before the crisis.

In times of crisis developers discovered an the empty niche of outlet centers, and next year Moscow may see the inauguration of three outlet centers.

Outlet Village Belaya Dacha Hines and Belaya Dacha promise to finish the Outlet Village Belaya Dacha in Kotelniki (4 km southeast of the MKAD) by September 2011. The level of investments in the project will come to $160 million. The investors are Hines International Real Estate Fund (HIREF) and Belaya Dacha. The planned recoupment time is 4-5 years. Hines in a joint venture with the agricultural concern Belaya Dacha bought the plot of land in late 2007, i.e., the project is actually three years old already. Yet the crisis crippled this project and only over the past six months has construction work gained momentum again.

“The project concept is expressed in its name – the village. This is not necessarily a rural Russian settlement but a place where you want to spend some time. There is a central plaza here with a concentration of luxury brands and also cozy lanes and alleys where visitors can roam. We consider an outlet center to be a success if the buyer is interested in stolling through these alleys, for in this case he or she will spend more time and money here,” says Managing Director of Hines Russia and Hines Turkey, Lee Timmins, commenting on the project’s specifics. The Outlet Village Belaya Dacha Hines project is being developed in partnership with the eponymous agricultural firm. Hines holds a 51% stake and Belaya Dacha owns 49% of the shares. Belaya Dacha provides the plot of land; Hines provides most of the capital. “We benefit by this partnership,” continues Mr. Timmins, “because we share the risks with them and because they are tougher in raising the essential approvals and in creating all kind of infrastructure – roads, power grid and other utilities. We invest our money and experience in project development and management and they invest land, their experience in operating on this territory and infrastructure. What is also good about this partnership is that we dispense with bank loans and build everything on our equity capital.”

General Director of Belaya Dacha Vladimir Tsyganov clarifies: “Our principal specialization is land development, utilities, design and construction. To a certain extent our foreign partners are better versed in marketing and project positioning as well as property management.” Some market experts point to the fact that the developers have no experience in outlet management. In the opinion of Dmitry Burlov, Executive Director of Magazin Magazinov in association with CBRE, “Hines had no experience in outlet management, for this is their first property in such a format.” “We have rich experience in retail real estate, but you are right that this is our first outlet center. This is why we hire leading European experts in outlet centers,” comments Lee Timmins.

Fashion House Moscow Two months later another outlet center named Fashion House Moscow will appear in northwest Moscow not far from Sheremetyevo Airport. The project of Fashion House Development, costing 92 million euro, will be financed by Liebrecht & Wood Investment Fund. “We examined several parcels in the Moscow region but this site northwest of Moscow in close proximity to Sheremetyevo proved the best location for a future project. This land plot is located in a well-established retail area – 13.4 million people residing within a 90-minute drive, proximity to Moscow and Khimki and to the future high-speed freeway Moscow – St. Petersburg,” says Neil Thompson, Chief Commercial Officer, Fashion House Development, commenting on the site selection. Construction on Fashion House Moscow will commence in April 2011 and now necessary preparations are under way. Robust negotiations with tenants and refinement of the plan are being held in parallel. “Our outlet centers are notable for an unusual architecture concept which normally chimes with the national culture. In our Fashion House Moscow project we’ll capitalize on the best traditions of Moscow architecture which create an amazing ambience for buyers,” continues Neil Thompson.

BrandCity The third project is reconception of the Waymart mall located on the 26th km of MKAD. The existing shopping mall will supposedly be redeveloped into the BrandCity outlet center by Rosital, hired by the owner and investor WAY M. The reconception project is being implemented by the owner in partnership with Core Group, which also acts as a brokerage agent. Executive Director of Core Group, Dmitry Khechumov, explains the need for reconception by the emergence of strong competition in close proximity, namely Vegas Mall. In the opinion of market experts, the owners of Waymart felt an outflow of tenants after inauguration of the successful Vegas. “Redevelopment of Waymart into the BrandCity outlet is quite a logical evolution of a property with such a location,” stated Mr. Khechumov.

Incidentally, BrandCity’s location (on the Ring Road near residential developments with high population density) distinguishes this project from the two other outlets located at some distance away from the Ring Road (MKAD). The project announced later than others will open its doors already in March 2011. “Since the center already exists and needs only to be reconstructed, the delivery times are shorter – we plan to open it already in the late first – early second quarter of next year,” adds Marina Minasova, Director, Retail Real Estate Department, Core Group. In her words, initial interest in the project will be ensured by the already formed pool of loyal visitors and buyers. In addition, the presence of large nearby malls will create some synergy and attract extra flows of buyers.

True, some experts are skeptical about reconception of Waymart and its redevelopment into an outlet. “Most likely, this will be just a discounter, but not an outlet center, given its format, conceptual development and structural peculiarities,” opines Dmitry Burlov. Following the Moscow example For Hines and Fashion House Development, the current Moscow projects are pilot ones. If they are a success the developers plan to launch more outlet projects in other cities.Hines plans to construct its second outlet center in St. Petersburg in 2012 and the third one in Moscow West, 2013. Fashion House Development also plans to open an outlet in St. Petersburg in 2012. The company has already bought a 12.4-ha plot in southwest St. Petersburg on the first line of Tallinn Highway within a 10-minute drive from Pulkovo Airport. The company contemplates the creation of 11 more outlet centers in Russia.

Russian-style outlet In many respects Russian “first robins” will emulate their European counterparts. Developers try to create conceptual projects with similar architecture, a certain brand mix, tough sales management, high display density, discounts, promo-events to attract visitors to some concrete sales, and special training for shopping assistants. “The conceptual approach and the approaches to spatial arrangement should not be different from the Western ones,” comments Vera Setskaya, President of GVA Sawyer.

The underlying idea of an outlet – the sale of branded goods at reduced prices – will also be realized. But, in the opinion of Ms. Setskaya, the price range of the merchandise will differ from the Western one by the amount of customs duties and transportation expenses. Marketing approaches may also be different and take into consideration the specificity of the Russian market and consumer.

The tenant mix is also different in the Russian outlets. In traditional European outlets only clothing brands are normally represented. In the Russian outlets, such as Outlet Village Belaya Dacha, jewelry, perfumery and household goods will also be part of the merchandise. “Perfumery stores may not sell their items at the minimum discount of 30% like clothing and footwear stores, and yet the shopper will always be able to find some interesting offer there,” comments Julia Kachur, leading consultant with Retail Real Estate Department at Cushman & Wakefield.

Time has come There are many reasons why the outlet center format is now in demand among developers. Russian economy is recovering after the crisis and macroeconomic parameters are going upward again. As estimated by the Russian Ministry of Economic Development, GDP increased by 4.2% in H1 of 2010 YoY while industrial output grew by 10.2%. However the main reason, according to experts, is that the outlet format was missing in a rather versatile retail property market.

Six years ago when Hines was only planning an outlet project the key problem was that the leading brands were not prepared to get involved in such a project. According to Andrew Muzzlewhite, Development Director of Hines for the Outlet Village Belaya Dacha project, “now the situation has changed and with the opening of extra full-price stores many brands feel a redundancy of merchandise and/or want to get rid of leftovers from the collections of previous seasons which can be sold if a brand opens a point of sale in a Moscow outlet center.”

Expert interviews given by spokespeople of 100 brands to Hines revealed that 80% of the survey participants think the Russian market is ready for outlet centers as a new retail format. Participation in an outlet center is a good opportunity for retailers to attract those buyers who are striving for a higher level but cannot always afford paying the full price for the products from leading luxury brands. “This retail format opens new sales markets for a brand, creating potential for selling quality products under a given trade mark, since the outlet’s target audience is different from that of regular boutiques,” comments Anna Shiryaeva, General Director of Magazin Magazinov in association with CB Richard Ellis.

Apart from a possibility to broaden the number of potential buyers, outlets also help retailers solve the problem of bulky stocks, says Mr. Thompson, but most of them do not have off-price shops as part of their strategy, where they would be able to sell their surplus goods without impairing the brand, while existing discounters are scattered all over Moscow. The format where almost 200 such shops are brought together under one roof is not only Russia’s first but also an ideal solution for both consumers and retailers. “Tenants are definitely interested in this format – this is why it is so popular in the West. As for the advantages for retailers, this is first of all an excellent chance for manufacturers and retail operators to sell their surplus merchandise, keeping this process under control and not affecting the brand integrity,” says Ms. Shiryaeva. But there are some snags too. They are related to the attraction of top-notch retailers as tenants. In Russia most such brands develop on the basis of franchising agreements and the given franchises are owned by a limited number of companies. Apart from stock sale, outlets will also offer items specifically created for them. Nobody knows whether the Russian franchisees of the luxury brands will want to develop this format.

Experts suppose that it is real to figure the number of outlets to be built in Moscow. “While in UK one outlet center is needed for every 1.5 million of population, in Moscow 3-4 million residents are needed per outlet. So three-four outlets would be more enough for Moscow and one or two would be enough for St. Petersburg. One outlet center would suffice for such big Russian cities as Yekaterinburg or Rostov-on-Don,” believes Lee Timmins.

Rental payment The rental payment in a classical outlet center is calculated solely as a turnover percentage as the managing company is interested in the success of tenants. The rent charged by Hines is linked to a turnover percentage or to the base rent. According to Julia Kachur, the tenants contemplating areas in the Outlet Village Belaya Dacha first discuss a turnover percentage with the developer. In this type of project the developer is more interested in the success of tenants, who are more like partners here. Prelease agreements have been signed with 60% of tenants.

“We are holding robust negotiations with another 30% of tenants so I believe by the end of this year we’ll let 70% of all areas and by the inauguration date – 80-90% and maybe even 100%.

The process is carried forward vigorously and rather successfully,” comments Lee Timmins.

Fashion House Development, having rich experience in implementation of outlet projects abroad, uses its own approach in the dealings with potential tenants. “At our first meeting with a potential tenant we collect necessary data and prepare an individual offer for a given retailer with terms depending on network size, sales volumes, redundant stock and other parameters,” says Anna Shiryaeva. The tenant mix of BrandCity is currently being developed and approved. This is why they do not disclose either the names or possible terms of lease at Core Group. The only thing known is that there will be no luxury brands in the outlet.

The last word belongs to buyers “The outlet format is very enticing for the consumer,” believes Ms. Shiryaeva. “Russian consumers are already accustomed to quality merchandise and comfortable shopping, but today’s conditions force them to save. This is exactly what the business model of outlet centers implies – an excellent combination of such factors as price, quality, merchandise diversity and comfort.”

“The culture of consumption that has developed in recent years and the economic recession have corrected the conduct of buyers and redistributed their items of expenditure. Today value for money is the top priority, but the brand is also a rather important factor. This is why outlets are a truly interesting format for the consumer as they offer quality goods from favorite brands at acceptable prices and in a comfortable setting,” opines Marina Minasova.

Developers certainly run some risks… Having no Russian precedent, they can easily be mistaken in their forecasts. But on the other hand, pioneers always skim the cream off a growing market in case of success.