New domestic shoe manufacturers need to enter the Russian footwear market so that it can revive and reach a new level. And the state should support them

Maxim Borisov and Lina Kalyanina

The problem of finding the right shoes is omnipresent even in the off-season: the footwear situation in Russia is truly terrible. Despite the seeming abundance of shoes on the shelves, buyers in most cases are being offered goods of unwarranted quality and obscure origins at inadequate prices. They have to choose from either featureless cheap shoes or overpay by as much as three times for something fashionable and high-quality.
It is obvious that the Russian footwear market is stuck at an early stage of development. There is a lot of evidence to support this claim: the lack of large market players, the limited number of retail chains, the weak presence of Western companies on the Russian market, minimum advertising for footwear, and the expanding stock at sellers and manufacturers with every passing year. The few systematic market players admit that for the time being, the market is wide open for new companies and brands.

Shoes for kids and soldiers

Why does the lion’s share of Russian shoes not meet customer expectations? The established structure of the footwear market helps explain this. Thus, for example, the bulk of goods are sold by hundreds of different-sized wholesale and retail importers who simply purchase finished shoes from foreign manufacturers (mainly in Southeast Asia). Literally on the way to Russia, they contrive names for their “collections” or even often do without them altogether. These companies supply huge footwear centers, small shops, and open-air markets. In the main, they are all the same kind of shoes with prices ranging from cheap to medium-expensive.  These importers account for about 60% of the market today.
The domination of imports has resulted in domestic factories, which became slightly more active after the 1998 crisis, are losing their market share again. Their actual market share doesn’t exceed 10%, and the growth of production volumes of the Russian factories fell from 28% in 2000 to about 5% in 2003. Russian factories are unable to influence the market and get it moving from its current state. They have failed to learn how to work under present circumstances. “Russian manufacturers have come to a conclusion that the post-crisis advantage will last forever,” Yaroslav Zhivov, General Director of Palmira Co., says.
On the whole, Russian manufacturers’ footwear is characterized with poor design and limited assortment. They are unable to offer collections of interest to retailers. Italian equipment, considered advanced at the time, which came into the possession of domestic shoe manufacturers during perestroika has now become obsolete and needs to be replaced. The factories save on raw materials and have to purchase imported parts. Their leaders think little about marketing, brands, or promotion. Distribution is prehistoric. Often, it is limited to few shops owned by factories, and some factories set up “mutual exchange of assortment” between their shops.
The domestic factories still hold their positions (as a rule, in the regions where they are located) in the segments of cheap shoes for adults, mainly men, and for children. They are also actively involved in fulfilling government contracts. Russian shoe manufactures seem to have abandoned fashion trends, especially in women’s footwear, for good. Experts see the domestic factories’ future in the segment of simple adults’ and children’s shoes, as well as for government contract footwear.

Hidden advantages

Until recently, many hopes have been pinned on the development of outsourcing. Outsourcing companies make up the third group of players on the footwear market with a share of around 25-30%. Among them are such companies as Tervolina, Zh (formerly K-S), Palmira, Ekonika, M-Shoes, and Alba. Today, outsourcing companies are the main driving force on the market: they develop collection by themselves, place orders for their production and sell finished footwear on the market either wholesale or retail, including through their own retail chains. After 1998, outsourcing companies began to place orders with Russian producers, and this led to a revival in domestic production. Today, most of them are placing orders for their collections abroad, predominantly in China, which is more profitable.
Yet the new Russian manufacturers placing outsourcing orders are not in position to have a significant impact on the market, either.  On the one hand, by placing orders with mobile foreign productions, they gained an advantage and could focus their efforts on brand development and distribution. However, instead of concentrating on promotion of their brands and on the development of their retail outlets, outsourcing companies have to streamline complex footwear logistics, since due to placement of production orders in foreign countries it is impossible to adjust the orders, which results in a large stock.
The great majority of companies are somehow connected with import. They either purchase finished shoes from or place production orders with foreigners. The fact that the overwhelming volume of shoes is manufactured far from the place of distribution seems to be the main reason why the market is so poorly developed. The abundant supply is out of proportion to the demand and as a result, the market has become overstocked, and companies are wondering what to do with their stock not what they should offer next season.

New motivation

Footwear companies maintain that make a breakthrough, they have to stand out in a sea of other products. This can be done today via brands, both purely retail (for example, Zh chains) and those created by manufacturers (for example, Ralph). A distinct brand would enable companies to develop retail rapidly, since it would allow them to franchise. Brand orientation is also pressing as the market changes and players want to enter higher niches.
But brand orientation requires changes in the production basis so that companies manufacture shoes at their own facilities. Only in this case could they respond to changes in market demand quickly and properly guarantee the quality of their brands. However, most manufacturers are facing a number of problems.

Vicious cycle

No one wants to place orders with currently operating plants any longer. “When placing orders in Russia, I don’t get the same quality as abroad. In Russia, I am confronted with failure to meet delivery deadlines and with quality that differs from that of samples. There are a few manufacturers with their own production programs and distribution network, but they are not interested in outside orders,” Ekonika’s vice-president says. The “Soviet” mentality inherited by the factories’ leaders adds to this situation. “In Russia, they think production is the primary thing, and the market is something secondary designed to sell what they sew, and due to all this, it’s not in their interest to work. We failed to retrain manufacturers and overcome this mentality even during the period of revival in 1999-2001,” Mr. Zhivov says.
Footwear retailers could solve these problems by acquiring or setting up affiliated production facilities in Russia. However, not all want to get involved with production.
High taxes are the main reason why footwear dealers don’t want to set up their own factories in Russia. It’s impossible to manufacture footwear above the table (and a serious manufacturer can only operate this way) and remain profitable in Russia. Obsolete production facilities are the second problem potential manufacturers face. No new equipment is being manufactured and thus equipment has to be imported after paying high import duties. Third, there are no shoe parts or materials markets in Russia and everything has to be ordered abroad, which increases costs. In addition, in the opinion of Andrei Berezhnoi, General Director of Torgovy Dom Belka, another problem of no small importance is that the market lacks large wholesale-retail companies, which could unite products from different factories and offer retailers ready-made assortment “packages.” To make mass shoes production profitable, a factory must manufacture a few models but in large volumes. Only in this way can the required price-to-quality ratio be achieved. It is beyond the factory’s capacity to sell such large volumes of the identical products on its own. “Mega-distributors” are required exactly for the purpose of uniting and coordinating products.

No such thing as miracles

Experts’ viewpoints on the prospects for the Russian footwear industry vary. Some believe that the pre-conditions exist for fundamental change in Russian production and on the market as a whole. But assistance from the state will be required to make them a reality. China’s “footwear miracle”, for example, is merely the result of a clear-cut state policy aimed to develop this industry. However, most players have a skeptical view of the authorities’ ability to take steps of this kind: “In general, the ideas are right but there are no organizational levers or forms of realization. And the most important thing is that there is not a single word about financing anywhere. Where funds are not available, the result is not there, either,” shoe retailers have commented on Roslegprom’s program to help the industry out of crisis.
Others hold that the Russian fashion footwear market will only develop via footwear manufactured outside Russia, primarily in Asia. It’s a global trend, and the crisis of footwear production in Russia indicates that Russia has joined this process. If so, despite state measures Russian factories will only retain the niche of footwear for children, soldiers, and pensioners.

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