U.S. Retailers Spent the Past Year Rushing Into Russia. Now What? (The Sanctions Blowback)

By Kyle Stock, BloombergBW

Illustration by Steph Davidson

Tiffany & Co. (TIF) invaded Moscow nearly 10 months ago. The luxury jeweler set up a beachhead of bling on June 4, 2013, promising millions of potential customers dreamy diamonds—or at least a nice window view for an Audrey Hepburn-style doughnut breakfast. Now the 4,500 square-foot store is caught in an economic war zone as sanctions squeeze Russian payment pipelines and a rapidly escalating standoff with Western powers cripples the ruble.

Tiffany is just one of many U.S. retailers that recently bet big on Russia—both on its consumers and the stability of its markets. Over the past year, companies that belong to the Standard & Poor’s 500-stock index crowed about Russia at least 350 times during conference calls to discuss financial results, according to a Bloomberg analysis of transcripts. Russians have been driving demand for Apple (AAPL) iPhones, McDonald’s (MCD) burgers, Estee Lauder (EL) makeup,Fossil (FOSL) watches, andBeam (BEAM) bourbon, among other hot products.

At BorderFree (BRDR), a company that handles international e-commerce for such U.S. companies as J. Crew, Macy’s (M), and Williams-Sonoma (WSM), Russia is a top-five market, behind Canada, Australia and the United Kingdom. Just a few months ago, VF Corp (VFC), an apparel conglomerate, opened its first Moscow store to sell Van’s sneakers to would-be Russian surf rats. Mattel (MAT) reported a tripling of its Russian sales last year, which suggests that further U.S. sanctions abroad would threaten the sales of its American Girl dolls, surely an instrument of soft power.

Nike (NKE) has gushed about Russia for months, noting that business there has been sprinting along at a double-digit clip. “We are still the sports brand of choice in Russia and in Eastern Europe,” Trevor Edwards, president of the Nike brand, said in December.

MotionPoint, a Miami-based company that translates and optimizes websites for e-commerce companies expanding abroad, says its Russian business has doubled in the past year. “It’s just a really, really big country, and because of that it’s been pretty underserved,” says Charles Whiteman, senior vice president of client services.

The recent proliferation of broadband, in particular, has spurred sales. Many MotionPoint clients started building Cyrillic sites only after they noticed how many Russians were navigating their English-language sites.

As of now, U.S. sanctions on Russia are mostly confined to members of President Vladimir Putin’s inner circle and don’t stand in the way of iPads, Air Jordan high-tops, or the delicious bourbon pouring out of Kentucky distilleries. But it’s getting much harder for Russians to pay for them. Visa (V) and MasterCard (MA) stopped processing some Russian transactions in order to comply with new U.S. sanctions. And the ruble is getting crushed as investors worry about where the diplomatic standoff over Ukraine may lead.

Since Putin offered Ukraine a $15 billion stimulus package on Dec. 17, the value of the ruble against the U.S. dollar has slid by 25 percent. If Putin wants a pair of authentic University of Connecticut basketball shorts (go Huskies!), he’ll have to fork over 2,848 rubles, rather than the 2,640 he’d have paid in December. (Unless, that is, U.S. Secretary of State John Kerry throws him a pair as a peace offering.)

U.S. retailers that have watched the yen plummet in Japan know all too well how much that kind of exchange-rate turmoil weighs on commerce. The marketing choice is to watch transactions slow markedly or cut local prices just to keep people in stores or visiting websites.

For now, the Russian trade—like the standoff in Crimea—appears to be teetering on a brink of sorts. Elena Bychkovskikh, MotionPoint’s Russian specialist and a native of the country, says shoppers are in wait-and-see mode. “They just continue to monitor the situation,” she says. “But if they really need something, they’ll buy it.”

Nike, meanwhile, hopes those needs still include sportswear. Here’s Chief Executive Officer Mark Parker discussing the situation with analysts last week: “Obviously we’re hoping that a resolution comes to that situation peacefully,” he said. “And right now we’re focused on the things we can control, which is making sure we connect with our consumers.”

 

 

Tiffany Sees Sparkle in Overseas Markets

CEO Michael Kowalski on Building the Jewelry Giant’s Brand in Asia

By LAURIE BURKITT, WSJ.com 

A fixture on New York’s Fifth Avenue, jewelry giant Tiffany TIF 0.00% & Co. is aiming to improve its luster overseas and particularly in Asia, where demand for gold and gems appears to be insatiable.

‘We’re renovating stores and upgrading the quality in sales professionals,’ says Tiffany CEO Michael Kowalski. Bloomberg News

U.S. shoppers have largely driven sales for the New York-based high-end jeweler, but that picture is changing. For the quarter ended Oct. 31, comparable sales in the U.S.—at stores open at least a year—rose by a modest 1%, with the bulk of sales logged at the New York flagship store, which sells mostly to tourists.

Michael Kowalski, Tiffany’s chief executive, is looking for ways to turn those tourists into regular customers when they return home. Adding to Tiffany’s Japan-based stores, which the company first opened in 1993, the jeweler plans to open in markets such as Russia and in France.

The other target is China, where the company operates 24 stores and plans to open three a year for the foreseeable future, attempting to take on rivals in a competitive market and convince Chinese consumers that Tiffany has the best cuts, designs and service.

Mr. Kowalski recently traveled to China to show off Tiffany’s yellow diamond collection and spoke to The Wall Street Journal in Beijing about plans to build its brand in Asia.

Résumé

• Education: Bachelor’s in Economics, University of Pennsylvania, 1974; M.B.A., Harvard University, 1977.
• Career: Began career at Avon Products in 1978, a year before it acquired Tiffany. Avon later sold Tiffany, but Mr. Kowalski remained at the jewelry maker, helping to take it public in 1987. He was appointed president in 1996 and CEO in 1999.
• Extracurricular: Loves nature, enjoys Chinese food and hates having his picture taken.

WSJ: What are your goals for moving beyond the U.S. in the next three years?

Mr. Kowalski: We do believe there are wonderful geographic expansion opportunities for us. We’ve tried to build a diversified geographic portfolio so that we aren’t dependent on any one region or any one country. We’ve only recently become a stronger presence in the Middle East and we’ll open our first-owned-and-operated store in Russia this spring.

We’re also optimistic about potential in China. Our companywide plan is for Tiffany sales to grow between 10% and 12% for the foreseeable future.

Right now, we have 24 stores and will probably open three to four stores here per year for the future. We certainly want to be flexible and watch how the market develops. That’s our strategic objective. Clearly if we regard China as the fastest-growing market going forward, that implies a growth rate meaningfully in excess of that 10% to 12%. We’re reasonably confident about that.

WSJ: Some luxury companies are wary of China, where an austerity campaign has hit luxury sales. What makes you confident?

Mr. Kowalski: We think the growth curve in China will be something we’ll love in terms of slope. But it’ll also be volatile. In 2011, it was a fantastic year here and 2012 wasn’t so wonderful. [But] 2013 is stronger and we just had a great quarter here.

WSJ: What is behind the volatility?

Mr. Kowalski: It’s driven largely by consumer sentiment and reaction to economic conditions perceived—real or of the moment. Consumer confidence is less volatile in Europe. China is at the higher end, [while] the U.S. is in the middle. I don’t know what drives that, but it’s a continuing challenge here.

WSJ: Consumers are becoming increasingly global, particularly the Chinese consumer. How is tourism changing your approach?

Mr. Kowalski: [The] rise of the Asian consumers and tourism has caused us to change some of our store practices. We accommodate customers who are speaking other languages. It’s a struggle to find Mandarin-speaking sales professionals. We have to work hard to find them.

WSJ: What are you doing beyond language?

Mr. Kowalski: It has caused us to increase our store presence in markets that are heavily visited by Chinese customers. We’re building a flagship store in Paris on the Champs-Élysées.

We are enhancing the store experience in the U.S. and all over the world. We’re renovating stores and upgrading the quality in sales professionals and everything you see in the store.

We’re changing the ratio of selling space to provide more seating space. More casual sit-down environment, more private areas.

WSJ: What are some of the lessons you have learned by doing business in Asia?

Mr. Kowalski: One thing we’ve learned is the need for high standards of service and store experience. We learned that several years ago in Japan and it was critical to our success. Here, we operate in a more intense environment than back in the U.S. and we need even higher standards of service.

WSJ: What specifically have you learned in China?

Mr. Kowalski: We learned we need to be more overt about how we present our brand. A great example would be the store signage. If you were to look closely at the New York Fifth Avenue store, Tiffany & Co. is written in steel letters on both sides of the doors, perhaps two [feet] in length, six inches in height and it’s carved into the granite of the facade. And that’s the only signage there is.

When we first came to China, we were equally discreet and subtle in how we presented the brand and that created a problem. People simply didn’t see or couldn’t see the brand. They couldn’t understand what the store was about. We’ve had to be more direct and less subtle in how we communicate the brand. We need to do a better job of telling brand stories to give a deeper, richer more robust sense of brand. We’ve recognized that while there’s a broad awareness of consumers, we need to work very hard to increase the depth of that knowledge. There is limited understanding of our heritage and that diamonds are central to our business, that we cut our own diamonds. We need to work much harder to communicate that in China than in America or even in Japan.

WSJ: How are you changing your strategy based on what you’ve learned?

Mr. Kowalski: One thing we’ve started to do is use Tiffany blue far more aggressively in the stores and in the facade.

The other thing we’ve done in China is focus on diamonds. We are the world’s authority on diamonds and we’ve emphasized that more dramatically than anywhere else in the world. We’re also speaking more about the Tiffany heritage. We are 176 years old and more longer-lived than many of the luxury brands.

WSJ: You’ve had success in China recently, but what are some of the challenges?

Mr. Kowalski: Diamonds are seen as value items here, which is at the core of their attraction. But one of the challenges with them in China is the bridal tradition, the engagement ring tradition. It has developed some in the last 10 years. But that’s a core part of our business. We’d like to think our presence here is encouraging that development of the tradition.

Write to Laurie Burkitt at laurie.burkitt@wsj.com