Moving out of Russia tears down H&M’s profits by 89%, while rival Zara thrives on parallel imports

Russia’s war on Ukraine raging on since February has caused ripples globally, triggering panic amidst a market still recovering from the pandemic, and affecting oil as well as food prices. Big western brands from McDonald’s and Starbucks to Nestle and Ikea have pulled out of Russia after it was slammed with sanctions and their brand image, as well as investment, were at risk. But the decision to halt operations in the country with more than 14 crore people has hit retailers including H&M, as its profits crashed by 89 per cent after the exit.

The timing couldn’t have been worse

The conflict disrupted the apparel chain’s business in Russia shortly after it clocked the highest sales in the country since 2009 at $867 million in 2021. But its global profits in the third quarter have fallen to $60 million, from more than $500 million during the same period a year back. The process of shutting down stores in Russia hit the Sweden-based firm with a one-time bill of more than $185 million. But it’s not just Russian sales that hurt H&M, as record energy prices and inflation across Europe, left people worried about staying warm instead of scrolling through its winter collection.

Rival Zara’s alternate path to Russia

As H&M among other brands suffers the consequences of Russia’s invasion, its rival Zara is still enjoying a presence in Russia through parallel imports. This means that while the Spanish brand has shut 502 stores and online sales in Russia, locals are importing Zara’s clothes and selling them individually. This is possible because Russia has allowed citizens to resell products bought abroad, and its trade with neighbours such as Kazakhstan has continued. Hence Russians are bringing in Zara goods from countries they can still travel to, and then selling them at their own shops back home.

India provides hope

But the scenario isn’t entirely gloomy for H&M, as the apparel market in India also bounced back to $72 billion in FY22 after falling during the pandemic, and earnings may go up by 23 per cent in FY23. Here, H&M stands to benefit as India’s largest fashion brand, driven by affordable rates and more physical stores.

This explains why Russia-Kazakhstan trade has registered record growth in the first six months of 2022, with a year-on-year rise of more than 9 per cent. India also has a chance to export goods worth $5 billion to Russia once a Rupee payment system through SBI picks up.