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Russia was, and still remains a very attractive and lucrative market for exporters and investors from all over the world, including the United Kingdom. Russia also provides a much favourable cross-sector opportunities which are considered unique, specially the shoes market.
In recent reports, the exports from the United Kingdom to the Republic of Russia equalled around 2.3 billion Sterling Pounds in 2009, making Russia the 23rd largest importer from the UK, which increased from the 12th largest in 2008; this was due to the economic crisis Russia suffered as well as other economic reasons. It is important to notice that most of the goods can be freely exported into Russia with exceptions on some products, but for shoes no strict regulations exist, making it easier for the exportation of the product.
Burberry Group is a very successful distributor of Burberry luxury goods in the British market, and they have started to export these products to foreign countries in order to boost revenues, market share, and participation in foreign markets. Their ongoing experience in their domestic market has boosted their confidence to successfully establish trading relationships with partners that are interested in importing Burberry shoes into Russia.
In the past decade, it has constantly become clearer the benefits of exporting and getting involved in the Russian domestic market for many reasons. One of the main benefits of exporting to Russia is the advantage of market diversification. Being able to work outside the UK’s domestic market provides the possibility to avoid many of the long term risks of changes in market conditions such as recessions and economic crises in which any business may be affected.
In addition, penetrating the Russian market provides additional sources of revenues for Burberry Group. With the establishment of reliable trading partners in Russia, in the long run it will provide a stable and constant inflow of revenues which proves to be beneficial. Also, it will encourage production until a very efficient level of production is achieved while affecting the amount of fixed costs positively. Moreover, most businesses suffer from revenue fluctuations due to season’s factors that countries experience, so having market share in a different country with the opposite seasons will encourage stability in Burberry ‘s operations globally. Besides, having the opportunity to compete in the international markets is considered an excellent source of learning opportunities for corporations to improve competitiveness in both, domestic and offshore markets, and ultimately develops the product.
This reports main purpose is to successfully examine the prospects of exporting Burberry shoe BB145654 from the United Kingdom into Russia by examining the most important variables that are needed to take into consideration when exporting this good. In today’s world, the Russian shoe industry consists of less than 22,000 companies and businesses; this number includes 3,000 large and medium recognized organizations with an average of 900 employees in the workplace. In addition, from the period of 20067-2007 the shoe industry share that such companies had decreased from 12% to 1.6%. Nowadays, the shoe’s related goods that are made in Russia consequently provide for less than a quarter of domestic demand. The other 75%-80% demand in the domestic market is satisfied with goods from foreign countries with turkey and china having the biggest market share of offshore shoes imported, even though that Russia has the complete capacity to produce enough goods to satisfy the domestic demand. These facts provide a very potential beneficial opportunity for Burberry Group to introduce and penetrate its product into the Russian domestic market.
According to official Russian government statistics, Russia’s GDP is $1.231 trillion (2009), with a growth rate of -7.9%. The country consists of 141.9 million citizens which descend from more than 100 ethnic groups. Exports from Russia totalled $301.6 billion through materials such as petroleum and petroleum related products, in addition to natural gas and wood related products, with their most important markets being the EU, China, and Japan. Imports by Russia totalled $167.4 billion; these included the importation of machinery and equipment, chemicals, and consumer goods. The Russian labour force consists of more than 76 million workers (2009) of very well educated and skilled workers. However, this labour force is undergoing remarkable changes due to the rapidly changing needs that the Russian economy demands. It is very important to note that the official unemployment dropped to its lowest rate in 2008, equalling to 5.4%.
During most of the 20th century, Russia was the leading member of the Soviet Union. However, after the December 1991 breaking-down of the Soviet Union, its successor state became known as the Russian Federation, it inherited its permanent seat in the United Nations it previously held, as well as most of its foreign debt and assets. Russia is still to these days the most industrialized nation of the former Soviet Union states. However, during a period of very low domestic and foreign investment in the country have left much of its industry antiquated and highly inefficient, but its working to update what is required in order to enhance efficiency.
Terms of accession are in the process of negotiation between the Russian state and the World Trade Organization. During the late 2006’s, the U.K and Russia concluded a bilateral World trade Organization accession agreement, and further negotiations are on the continuing process in order for Russia to meet the World Trade Organizations requirements for accession. Although it is noticeable that Russia did reduce or eliminate import tariffs on specific products during the 2007-2008 period, in an attempt to tackle the global economic crisis some import tariffs in key areas where increased. Furthermore, according to the 2010 U.K Trade Representative’s National Trade Estimates, there are a number of barriers in relation to imports that Russia continues to maintain, these include tariffs and tariffs-rate quotas. In addition, it imposes discriminatory and prohibitive charges and fees; it is also believed that it imposes discriminatory licensing, registration, and certification regimes. This lead to further discussion in the World Trade Organization about Russia’s accession, and to try to encourage Russia to either eliminate or modify these policies in order to consist with what is considered internationally accepted trade policy practices.
Furthermore, even though there are some barriers that an exported from the U.K might face while exporting to Russia, it is still recommendable and highly profitable to carry on the trades with minimum risks, also noticing that the benefits far outweigh the risks. For Burberry Group, these barriers can be overcome and the establishment of trading partners in Russia for the exportation of Burberry Shoes is recommendable, also noticing the high degree of confidence Burberry Group has with Russia.
The product that Burberry Group intends to export to Russia is Burberry shoe BB145654. This product can be considered a luxury product and provides complete confront and reliability to the wearer. It consists of a trainer with smooth leather and suede trim detailing. Also, it has a lace-up closure, pull tab at the back, and leather insole stamped with the Burberry logo. In addition to a flat rubber sole stamped with the Burberry trademark.
This product has had quite a strong demand in the domestic market of the U.K, and Burberry Group as well as their trading partners are confident that this product will be a success in Russia.
ESTIMATED MARKET POTENTIAL
Burberry Group found out the potential Russia has for its markets when they realized that the Russian shoes market is one of the most perspective markets in the world, and they are especially interested in Burberry’s Burberry shoe BB145654. In terms of territory, Russia is the world’s largest country, with a very lucrative consumer market of more than 140 million people, a highly educated workforce, and a remarkable growth potential. In addition, there are various investment opportunities that exist in almost every sector and region of the economy, and a very high support for investors.
Moreover, Russia offers one of the world’s most attractive and developing economies, noticing that since 1999 the GDP growth that Russia experienced was average 6.8% per annum. Also, due to the appreciation of the rubble (Russian Currency) in the past decade, it can be safe to state that in dollar terms, the Russian economy has grown an average of 26% per annum, which is far greater than many of the international growth rates.
As stated above, Russia offers investors one of the largest consumer markets in the world, in which consumer activity has had a positive effect on the growth in trade. Also, apart from the fact that Russia has over 140 million people, it is noticed that their disposable income increases every year, which leads to a higher consumption and spending capability. In addition to that, Russia was ranked in the A.T. Kearney Retail Trade index as the third among developing countries.
When it comes to analysing the political and social systems in Russia, it can be concluded that Russia incorporates a very stable social and political system which lead to the improvement of the economy. Also, it contributed in the achievement of strong microeconomics and macroeconomic systems. Therefore, the potential that Burberry Group has in Russia is endless, and the opportunity for growth is optimistic.
Since Burberry Group is exporting to Russia, other set of policies and regulations are applied since Russia is not a member of the European Union, which has another different set of policies and regulations. Therefore, Burberry Group has to make an export declaration to customs through the National Export System. In addition, it has to confirm that VAT, import taxes and duties in Russia are paid where necessary and follow the transport procedures required.
The National Export System is the system through which all declarations to countries outside the European Union are processed, and today is offered as an electronic processing system. It can be accessed through means such as Email, XML, and paper declarations. The VAT tax that Burberry Group has to pay is zero. Since Russia is considered a Third country, VAT is not applicable provided that evidence of the export is provided. Moreover, most goods can be exported to third countries without any restrictions, but some are controlled and regulated, and in need of an export license and other regulations. In Burberry Groups case, since its importing a product with the commodity code 6404 19 90 (section 68 of the Customs and Excise Management act 1979), no export licenses are needed. However, since Burberry is exporting such goods permanently, it must first submit an export declaration in an electronic form through the Single Administrative Document.
According to official documents, most of the different types of goods can be freely imported into Russia, although for some products such as pesticides, explosives, self-defence items, jewels, and electronic materials, a licensing system exists which is solely issued by the Ministry of External Economic Relations and its controlled and regulated by the State Customs Committee. In addition to this, the imported has the obligation to fill a customs freight declaration statement. Also, conformity certificates and certificates of origin have to be presented to the customs.
Moreover, Russia in fact applies the Harmonised Customs System, and the duty charged by the customs is calculated Ad valorem on the CIF value of the individual goods. The State Customs Committee imposes all the duties and taxes. In Russia there is one single external tariff (general tariff) that varies within 5% to 30% depending on the goods. Therefore, according to the customs tariff regulations of the Russian Federation, the importer of this good must pay a 15% charge, since the Burberry Shoes fall into the 6403 20 000 0 category. Also, customs may impose some excise duties depending on the nature of the good that varies from 20% to 570%.
FOREIGN EXCHANGE REGULATIONS
In order for trade transactions to occur between the U.K and Russia, the importer in Russia has to pay the exporter in the U.K in the currency of the exporter. In one hand, in the U.K the official currency that is accepted is the Sterling Pound. On the other hand, the Ruble is the official currency in the Russian Federation. Nowadays, the exchange rate between these two currencies is 1GBP = 49.0895RUB. The Ruble is handled by the Russian Central bank, while the sterling by the Bank of England. These institutions are in charge of regulating monetary and fiscal policies in their countries; these include concepts such as the money supply in the economy as well as interest rates. The biggest risks that both importers and exporters face are high fluctuations of their currencies in the foreign exchange markets. Thanks to the development of the financial sector, it is now possible to reduce the risks involved in fluctuations by the purchase of financial instruments to hedge against such scenario. Such financial instruments include the use of foreign exchange forward contracts and foreign exchange options contracts, which exist abundantly in the global financial markets.
Due to the costs involved, Burberry Group chooses to transport the exported goods into Russia through sea freight. By means of sea freight, it is noticed that it s the most cost-effective method of transportation. The freight company chosen to carry on the transportation is Blackthorne International Transport, which is a company registered and based in the UK and offers freight transportations to most parts of continental Europe through road, air, and sea. In this case through a containerized sea cargo. Currently, there is only one direct line from the UK to Russia, in which the vessel sails from Deeside in the UK and carries on a 5 day journey to St. Petersburg in Russia, this freight usually leaves every week. Furthermore, after Burberry Group ultimately decided to carry on the transportation through sea, it was required to create a document that shows the evidence of a contract and receipt, this document will be a CMR Consignment Note. In addition to this, some other documents that are required for the bank and insurance company involved are: the CMR, commercial invoice, insurance certificate, and certificate of manufacturer.
CONTRACT AND PAYMENT TERMS
Burberry Group is a very famous British luxury fashion store, which is involved in the manufacturing of clothing, fragrance, and fashion accessories for their domestic and international markets. It currently operates a series of branded stores and franchises all over the world; these include concessions in third party stores. Furthermore, due to the high demand for their Burberry shoe BB145654, they have decided to export this product to Russia through a distributor called Barvikha Luxury Village. Barvikha Luxury Village is a company that established a mall-like store project in which the highest-end fashion brands are sold. The mall is targeted for the high spenders of Moscow and offers Burberry Group a high opportunity to boost sales, revenues, etc. This Luxury Village will provide customers with the Burberry good in a retail sell manner.
The marketing methodology that Burberry Group, with the co-operation of Barvikha Luxury Village, implements highly depends on the marketing departments of both companies. Due to the high experience and influence Burberry Group has in the global market, they assured Barvikha that they will try to increase awareness of the brand and its strength on the global perspective. However, due to Barvikha’s experience and knowledge in the Russian domestic market, their marketing strategy applied will try to increase the brand awareness within Russia.
The pricing strategy that Burberry Group applies is product oriented, and it is structured as follows:
Factory Cost/Unit – £50.00
Freight Loading Cost/Unit – £2
Sea Freight & Insurance/Unit – £30
Selling Price to Importer – £145
Russia VAT Rate (15%) – £
Importer Estimated Mark-Up (15%) – £82.9218
Final Selling Price – £635.7343
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