You have to feel sympathy for a department store that targeted its multi-million dollar investment at, and strategy around, Russia's emerging middle class – particularly when your opening date was November 1998.

This was the situation with Finnish-based Kalinka Stockmann as it found its target clientele for the Smolyenskiy Passazh store nearly wiped out by the financial crisis of three months earlier.

Not to be outdone, however, Stockmann – which has had smaller operations in Moscow for 10 years – abandoned its strategy and went up-market to ensure the viability of its new department store.

"Our customers now are wealthy Russians," said Maisa Hakola, Stockmann department store director. "That is a potential customer base of 1 million to 1.5 million people, and it is a lot different to what we had planned."

"It is nothing like the emerging middle class of 1997-98 at which we had geared our strategy," she added.

Stockmann has been in the retail trade for 135 years and began operations in Russia 10 years ago last October, opening a small stall that catered to Westerners and Russian officials in Moscow's GUM complex. It operated on a credit card or voucher-only basis.

From 1992, the company opened a number of small stores, each specializing in home goods, or fashion or food.

This was more of a temporary measure for Stockmann, which tends to incorporate all three in a department store, Hakola said. It wasn't until 1996-97 that the company managed to conclude a contract to establish a department store.

The multi-million dollar Stockmann store at Smolyenskiy has three floors –a basement supermarket at 2,000 sq. meters, a fashion level at 2,200 sq. meters and a children's section at 800-900 sq. meters.

‘Small' store

Hakola said that by company standards this is small (the Helsinki store is 36,000 square meters), but Moscow's large population means city center space is expensive.

One of the other problems the crisis brought for Stockmann was the difficulty in switching from the stock the company initially planned to sell to the middle-class to the stock it would need for the new target clientele.

Hakola describes the firm's target group as "wealthy upper-class Russians." She said that despite many expatriates frequenting Stockmann's Smolyenskiy store, the company's clientele is 90 percent Russian.

As a result, she said, there is a large difference in what the company offers in Moscow compared to even the Baltic states, where the middle-class is continuing to grow.

At a store level, Stockmann is also undergoing something of a transformation in its employee composition. The company employs a total of 550 people in Moscow, with 350 in the Smolyenskiy store. But the number of expatriates in the company is now down to four.

Hakola said most of the management staff have worked for the firm for eight years, and started young, so she has real confidence in them. "They really put their heart into it," she said.

She agreed the service culture in Russia is quite young and said that it was an advantage that Stockmann has a strong set of service guidelines to help the staff along. But she conceded it is a big challenge to teach Russians to show initiative and then follow it through.

"The result of Soviet culture is that people became passive – afraid to make the wrong decisions. They were afraid of negative feedback," she said, adding however, that most of her staff are young and so have been less affected by this background. She also admits that the Finns share the Russian tradition of not smiling enough.

Hakola said the retail business environment in Moscow is a very difficult one, particularly its speed and general instability. She added that Stockmann's experience can be characterized as one of "trial and error," citing the marketing strategy the company has adopted as just one example.

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Marketing studies

"That was difficult to find, because in Finland we would normally use direct mail, advertise in daily newspapers and use mail-outs to loyal customers – but never television or open air advertising."

"In Moscow, we do the opposite, and we are undertaking – still on a small scale at this stage – our own marketing studies, because there are none available here," she said, adding that the firm is already more able to reach its potential 1.5 million customers.

Hakola said another positive turn was that Stockmann's level of sales in January was around the same as November, something that was completely unexpected. But she said it will be some time before sales really pick up, because average Muscovites simply don't have a lot of money to spend.

The store is known primarily for its imported brands, and the shop's director said Russian products comprise some 10 percent to 20 percent of supermarket stock. She said she would like to increase this level – but it is not so simple.

"The problem is not finding the right quality – but the right quantity at the right time."

"The system of retail here is that you buy your meat from this guy, your fish from another and your flour from another again. There is no large-scale wholesaler to deal with, so you have all these little cars dropping in with products each day. But you really need someone to do the whole job – it makes things a lot simpler."

More local products

She said that the company wants more local products on the shelves, because Russian clients want to have the choice of buying what they know.

One of the general problems experienced by businesses in Moscow is the level of regulation and bureaucracy in the city government. In its early days in Russia, Stockmann was actually in partnership with the Moscow government – hence the name Kalinka Stockmann. Hakola says this, and the fact Stockmann has been in Russia for some time, has helped them avoid trouble.

"Essentially, you have to abide strictly by the rules, and that's what we do," she said. "There are a lot of inspections, but anything we've been told to improve has involved areas where Western inspectors would do the same thing."

She did note, however, some of the more obscure fire regulations. These include being required to lacquer wood with special anti-fire varnish (which the company had to scramble to do in the fortnight before opening at Smolyenskiy; and fire requirements for ceilings (forcing Stockmann to redo the ceiling three times before opening).

But Hakola said the company's experience in Moscow has helped it avoid most of the pitfalls.

She said the firm is not planning further investment in Russia in the near-term, adding the aim now is to "grow the store" and further improve marketing to reach its 1.5 million potential customers.