What happens to last season’s clothing that big fashion retailers can’t sell? Landfill is not the only choice for sellers who overestimated demand. Enter off-price retailers, who buy the end-of-season surplus from fashion houses and sell it at knockdown prices. The sector is booming globally, but a combination of social and economic factors make it ideally suited to the Russian market. 

Off-price retailers allow fashion houses to recoup some of what would be losses by buying the surplus for low prices and selling it to a hungry public that doesn’t mind wearing last season’s clothes. In an exclusive interview with bne IntelliNews, Svetlana Mozhaeva, CEO of off-price Familia, discussed why this model is such a good fit for Russia. 

Familia is Russia’s pioneer and leading off-price player. It is often described as being similar to TK Maxx in the UK or TJ  Maxx in the US, offering customers the chance to find unique branded items for up to 85% below their original price.

“We’re very different from other retailers here in Russia as well as our peers on the global market,” she explained. “We were founded in 2000, when we opened our first store in Moscow. In 2006 we started moving into the regions. Now we have over 370 stores across Russia. We are the only off-price retailer operating across Russia, and we don’t have any direct competitors on the federal level.” 

Whereas the off-price share of the apparel market in the US is 10%, it is around 1% in Russia. The market in Russia is also highly fragmented, so there’s significant potential for growth, Mozhaeva explains. She considers Russia particularly suited to the off-price segment, because six years of falling real incomes have forced Russians to search for bargains, creating a niche, which the off-price sector caters for. “Here in Russia we have 145mn people, and about 75% of citizens have per capita incomes below RUB45,000 ($628) a month based on official statistics. This 75% of citizens is hence by definition value oriented.” 

There are social factors behind the growing popularity of Russia’s off-price segment too. “I believe that many Russians are more brand-conscious than people in most other countries.” Mozhaeva commented. “That’s due to the history of the Soviet Union. I remember that in my childhood, we had nothing in terms of choice and variety of brands. That’s maybe why Russians now tend to be so brand-conscious.”

The result is a Russian off-price sector that is growing faster even than the global market. “We’re growing very fast.” Mozhaeva emphasises. “This year, we’ve opened 53 stores since the beginning of the year. By the end of the year, we’ll have at least 390 stores, which is a growth of over 20% when compared with the end of 2020.”

This raises an obvious question: does Familia have any plans to go abroad? With stores in 111 towns across Russia as well as one in Minsk, it seems the obvious next step is to follow the likes of Russian e-commerce major Wildberries and expand into Western Europe. Mozhaeva was reserved: “We plan to grow step by step, in a sustainable manner. We may go to some other countries in several years. Perhaps growing in Belarus, or going to Kazakhstan. But our first and clear priority is the Russian market.”

In a country with 11 time zones, logistical efficiency is key. This is a key part of Familia’s business model. The company has a network of 370 stores and a large distribution centre, providing it with a robust infrastructure backbone. Moreover, Mozhaeva explained, they manage to keep their debt level very low. “We have a positive cash flow from our current activities, and we always invest our current profit to grow the new stores. There’s a short payback period for our new stores.”

Another quirk of this sector is the reliance upon bricks and mortar. Russia’s e-commerce is booming, but Familia specifically has no online sales at all. Familia is investing heavily in stores, and the only thing it sells online is gift cards.  

Mozhaeva explains the phenomenon: “Firstly, we don’t want to go online because we don’t want to compete with our suppliers. We have a special discount price. When it’s offline, this merchandise doesn’t compete with sales from the brand. Also, when the season finishes, the brand needs space for the new collection, and we utilise the old collection through our chain. This is very convenient for the brands.”

The issue is that the discounts that Familia can offer are very big indeed. The high street top fashion companies have invested very heavily in their brands and use their brand strength to justify their high prices. If Familia offers the same brands at knockdown prices, the producers are afraid it could devalue their brand and hurt their primary sales. On the flip side Familia is happy to oblige, as a shopper who can find a famous brand at bargain-basement prices is delighted at their discovery. Putting Familia’s inventory online makes it altogether too easy to make side-by-side comparisons. 

Familia’s potential hasn’t gone unnoticed by international investors and global peers – its shareholders include high-profile financial investors, such as Goldman Sachs and Baring Vostok, while American off-price giant TJX is a strategic investor. When asked whether an IPO was on the horizon, Mozhaeva demurred: “It may happen at some point, but it’s too early to say either way at the moment.”