During a board meeting in October, the Russian financial market regulator set the benchmark interest rate at 21 percent, the highest figure in the country’s history. The move was an attempt to cool the economy, which was showing increasing signs of overheating. Over the past three years, the interest rate has been gradually rising from just 4.25 percent at the beginning of 2022.
Moreover, the Central Bank has signaled a high probability of raising the key interest rate even further, as inflation shows no signs of abating.
The strict monetary policy is taking a toll on the Russian sporting goods market, and the ripple effects of the interest rate hike are already being felt in the industry.
Maxim Vinogradov, co-owner of the Russian sporting goods retailer Kant, highlights that the terms of deliveries and payments are becoming increasingly stringent and pose a significant challenge for the industry.
“For a part of distributors, it is easier and more profitable to downsize the supply, reduce deferrals and increase prepayments for customers,” Vinogradov said, adding that this would eventually narrow the product range on the shelves of the sporting goods stores next year.
The current cost of borrowed funds makes commercial loans for the Russian sporting goods manufacturers non-affordable, according to a source in the Russian sporting goods industry who wished not to be named.
The source assumed that the Central Bank’s monetary policy would impede any import-replacement initiatives in the industry, indicating that sporting goods production is not even close to generating a profit sufficient to cover the interest rate on commercial loans.
“Quite a few companies halted their development plans, opting instead to put money on a bank deposit instead,” the source revealed.
For retailers, it looks increasingly appealing to lower inventory balances and lower the credit burden. “This means more aggressive marketing and more sales this season,” Vinogradov said.
For some companies, the high interest rate is becoming a matter of survival. Vinogradov forecast that heavily indebted companies in the sector that cannot show a high return on capital will go bankrupt and leave the market.
“Our credit load is significant but far from critical; return on capital still exceeds bank interest, so we are doing well. However, we plan to reduce inventory balances and the credit burden over the next year,” Vinogradov said.
He added that the company has not abandoned its plans to expand its retail chain but is approaching its mid-term development plans with great caution.
Sportmaster, the largest Russian sporting goods retailer, had not commented by press time.
Inga Mikaelyan, head of the analytical group at RBC Market Research, a Moscow-based think tank, said that the key interest rate hike will also affect the price of sporting goods on the shelves.
“The rise in the cost of borrowed funds, which businesses will inevitably continue to use, will lead to an increase in the cost of the final product, which market players will reflect in the price tag,” Mikaelyan said.
However, analysts do not expect market players to slow down or stop adding new doors to their chains.
“Fashion retailers have followed a strategy of qualitative rather than quantitative growth in recent years. The recovery of offline business was carried out through relocation: closing unprofitable stores and opening new outlets in more promising locations,” Mikaelyan said, forecasting that this process is likely to continue next year.
