No ker-ching as bling loses zing

The luxury industry has been feeling the strain this year, and does not expect 2010 to be any brighter. Segments such as the hotel and car industries, jewelry and watches have plummeted. These are counteracted by a good performance and expected development of the spa market, with some new entrances possible. Business Review takes a detailed look at the luxury market this year and its prospect for future development.

By Otilia Haraga

Before the start of the recession, Romania was a luxury market with great development potential, being the second market by size in Eastern Europe. Oliver Petcu, managing director of CPP Management Consultants Ltd, tells Business Review the value of the market in 2009 reached EUR 325 million, and will remain constant next year. This includes all the segments of the luxury industry, except for hotels and perfumery.

“We are counting on a recovery for the luxury market from September 2010, and the signal will be an improvement in sales. But we can only talk of maturity for this market when most top names are present in monobrand stores,” says Petcu.

Fashion and accessories are generally sold in the multi-brand system, which no longer meets the needs and expectations of Romanians. Multibrand is a concept with negative connotations, since there were and still are many stores that sell new collections mingled with old collections of the outlet type, explains Petcu.

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Also, prices are generally 10-15 percent higher than abroad and the offer is limited. A third disadvantage of multibrand stores is the frequent changes in brand portfolio. “For example this year Giorgio Armani withdrew from the Mengotti portfolio and Burberry withdrew from the Victoria 46 portfolio,” he says.

There have been some new entrances this year. Paul & Shark and Belstaff entered through a monobrand franchise. Frey Wille has opened following direct investment. At the beginning of next year, Hugo Boss will reopen in franchise monobrand on Victoriei Avenue, but in a different location and with a different franchise partner.

However, monobrand franchises Versace Jeans Couture and M Missoni, monobrand La Perla and Ferragamo quit the market. “These withdrawals are partly due to the crisis and partly due to the unfortunate choice of brand for the Romanian market,” says Petcu. “As far as luxury brands are concerned, malls are a solution only if they have an area or wing dedicated to luxury. Location is also important.”

The crisis bit deep into segments such as the high-end car industry, which plummeted as much as 50 percent. The jewelry and watch market posted sales that were 30 percent lower in the first nine months of the year.

Diamonds, an investor’s best friend?

Micri Gold Bijuterii representatives expect diamonds to be the best sold products in the jewelry segment, since this is considered a safe investment even in periods of crisis. The evolution in the price of gold, which has increased by 30 percent since the beginning of the year, and growth estimations for the price of diamonds, with the simultaneous increase in demand in China and India, are factors for investors in this category of products, they say.

Fashion, accessories and cosmetics sales have fallen 20 percent in the same period, but those are the only segments where the decrease will lessen during the festive season, says Petcu.

Shopping abroad, which has been popular until now, will continue. “When it comes to watches and jewelry, Romanians will buy expensive items abroad, which will dampen performances in this segment,” says the managing director. He explains that many Romanians prefer to acquire their jewelry and watches elsewhere mainly because of the lower prices and greater choice. In Romania, most brands are present in multi-brand stores and the selection is quite limited,” says Petcu.

Spas massage the figures upwards

Among the least affected segments is spa treatments, which continue to have good development prospects. E’SPA, Shiseido and Buddha Spa are just a few of the big brands that are currently scouring the market. “This is because in times of crisis, people with money feel the need to take more care of themselves. Experts have noticed a trend of self-pampering. And let us not forget that the crisis is a continuous source of stress and spa services offer relaxation,” says Petcu.

Although the spa market has grown between 2008 and 2009, Liliana Paraipan, general manager of Eden Spa, tells BR that Romania is still behind other markets in the region, in spite of all the resources that the country enjoys and people’s relatively high appetite for spa treatments.

She says that often, clients decide to give up other luxury goods for spa services, since they has become a necessity in their life. “As far as the clients of Eden Spa are concerned, there has been a decrease at the corporate level but individual clients have retained their purchase volume from before the crisis.”

The market of luxury cosmetics has also remained constant in 2009, compared to 2008. “As far as organic cosmetics are concerned, L’Occitane continued its ascent this year, opening two new locations. Only two months ago, French brand Caudalie also appeared on the market,” says Petcu.

Premium luxury telephone brands such as Armani, Samsung, Prada and LG have held their own from 2008 to 2009. “On the top luxury segment, we only have Vertu in Romania. Brands such as Dior and Tag Heuer/Meridiist are missing. In Romania as well, consumers of luxury products such as handsets (Vertu) seldom upgrade,” says Petcu.

Too much room at the inn

The hotel market was definitely one of the two-three luxury sectors that have been worst hit by the crisis. “I can give a strictly estimative percentage, but in total, there has been a decrease of around 30 percent in revenues, some have suffered more and others less,” Tinu Sebesanu, CEO of Trend Hospitality, tells BR.

Some developments have been halted. “There were projects that were in an incipient stage which were stopped entirely, and projects that were already advanced and had construction authorization but did not obtain financing, so they were put on hold. Over the last three-four months, they have re-entered the market. Those who had financing by September last year have continued their projects and are completing them. In two-four years we will start to see the main impact of the crisis, because no new projects have been launched in 2009,” says Sebesanu.

He adds that next year there will not be any new large project “worth mentioning.” While there are schemes for small hotels, of 20-40 rooms, no large project on the five-star market has been announced for the future.

The market of high-end hotels has been on the wane since the summer of 2008. Bucharest has the greatest number of rooms in the country – almost 80 percent of the country’s total capacity of luxury hotels.

“While 2007 was the best year in Romania for luxury hotels, from the summer of 2008, the market started to decrease slowly. From January 2009, the effect was rather brutal and continued until October. In October the market started to stabilize,” he says.

There are two causes for this. First, in spring 2008, the recession struck Western markets. Over 70 percent of guests of luxury hotels in Bucharest were foreign business clients. Therefore, since the crisis affected large corporations in the West, one of the first measures they took was to cut travel expenses.

Another phenomenon also hit the market. In 2008 there was an explosion of low-budget airlines, which opened new destinations and created a lot of traffic, much to the detriment of traditional airlines. This meant that business people could come and go on the same day, which did not happen before, says Sebesanu. Due to these two factors combined, overnight stays decreased dramatically year on year.

“In 2007, the overnight stay indicator in luxury hotels (which means how many nights a client spends on average a year) was 1.8. In 2008, it fell to 1.4. The situation became more severe in 2009, where the indicator fell to 1.25-1.3. So, not only did traffic fall, but also the duration of stays,” says Sebesanu.

Property problems put off the big operators

He believes that the market is far from saturated. As an example, Bucharest has only half the number of branded hotels that Sophia does. However, luxury brands do not come on the Romanian market because there are no properties at adequate standards in which they can operate.

“It’s not that they do not want to come. Just think, there are chains such as Starwood, one of the largest in the world, which does not have a single property in the entire country. They have been trying to come to Romania for years and haven’t been able to do so,” he says. The reason is that they cannot find properties up to their standards.

“Generally, developers and owners develop 90 percent of the property as they wish, without proper consultancy, and they build properties that, when ready, cannot be operated by a brand because the space is not built to the standards that a brand finds acceptable,” he says.

For instance, one of the main reasons why properties are not considered by brands are safety criteria (both as far as customers and employees are concerned), which are not respected in Romania. “No brand will take responsibility for this,” says Sebesanu.

When will the market of luxury hotels recover? “This is the million- dollar-question. Nobody can say for sure,” he says. “Estimations are that sometime after the second semester, the market will start to have a one digit growth. I think we will reach a normal level – the level of 2008 – only three years from now,” he says.

The crisis has plunged operators in this industry into a price war. “Both the average room rate and the occupancy rate have decreased. While occupancy could recover quickly, it is hard to raise prices. They have fallen by up to 30 percent, which is significant – it will probably take three years for them to reach the same level as before,” predicts Sebesanu.

The bubbly goes flat…

Another luxury segment that has declined, though not as drastically, is that of premium drinks. Consumers of these beverages have been severely affected by the crisis and have consequently reduced their outlay on this segment. Premium drinks are also suffering because the gift market has dropped significantly. “If premium means a shelf price of at least EUR 25, then I estimate this market is worth EUR 20 million,” Tudor Furir, general manager of Pernod Ricard in Romania, tells BR.

The worst hit categories are premium whisky and champagne,” says Furir. He estimates a fall of 25-30 percent in volume and 10-15 percent in value compared to last year. In the other countries in the region, the impact was less significant because this category is significantly less developed than in Romania,” says Furir.