Turkey is going through an exciting phase at the moment. In a period of global economic recession, Turkey has been the fastest growing economy in Europe for two out of the last three years, and is even expected to post a respectable GDP growth rate of 4% in 2013. What impact has this economic prosperity had on the retail sector?
Turkey is currently undergoing a great transition. First of all with respect to the global crisis and what is happening around the world, I would like to point out that the reason for Turkey’s success is that it has become immune. In the past, we used to have big domestic crises, but over the past ten years – with the stability and improvements in infrastructure, the restructuring of business portfolios in the country and the way the country’s funds are spent has changed – the country has become more immune to global shocks and the crisis. We have established a stronger banking system, and the country’s infrastructure has improved in many ways.
I believe that the point that Turkey has reached now is due to the fact that we have suffered a lot in the past, and that we have learnt from this experience. The Turkish people as well as the Turkish government officials are some of the most experienced around the world in terms of dealing with global crises and the financial crisis. We have learnt the hard way, by paying for all the lessons that we have learnt in the past, within the company as well as in the country.
When it comes to the respectable 4% GDP growth rate like you pointed out, I do not think it is doing any justice to the Turkish economy. We could be growing much more. I believe that if the world had fared better, the lowest GDP growth rate we would have achieved would have been over 6%. This could have been easily achievable, but the Turkish economy relies heavily on exports. Turkey’s largest export partner is Europe, and this has dragged us down big time.
Coming to Desa and the industry, the biggest transition that Turkey is trying to make is reducing its dependence on the European economy. Europe has been its biggest trading partner, but now this is starting to change. If you look at the split of Turkey’s exports over time, you can see that Europe has dropped from 60% just four or five years ago to 40% (I think it is 36% right now). Turkey has managed to diversify its export markets and this has helped the country diversify away from EU based market risk. The more the country moves away from that, the better balanced and the safer the economy will be in my opinion.
In terms of leather goods and the company, we are also in a transitional phase. Turkey is not a low-cost country anymore. In terms of manufacturing and exports, Turkey has always been the destination for Europe for opening price point businesses in textiles and leather goods. But now, with the average per capita income increasing in Turkey, costs are increasing, and Turkey has to move away from this.
People have to figure out how to sell higher value-added products, which firstly means concentrating on R&D. In the fashion business, we have to concentrate on design and innovation, and we have to ensure that we are not exporting only products anymore, but brands. This is the big transition that my company is trying to make at the moment.
I think you are absolutely right. If you look at the economic crisis, luxury goods were the only market that was not damaged as much.
Of course, because it relies on high-growth markets such as China and luxury consumption markets such as Japan and the tourist business originating from these countries. I always look at the tax-free numbers in Europe. First of all, the Chinese go on shopping safaris. The second biggest spenders are the Russians.
So it is very important that you cater to the tourist business in Europe. If you look at luxury companies, they are well diversified in terms of markets. They are spending more and more money in foreign markets than local European markets. So the strategy that everyone is trying to implement is investing money in China, Japan and new stores in those areas, compared to the Eurozone.
The new challenge right now for Turkish retailers and manufacturers is to sell higher added-value products and to export and sell branded products. This is the transition we are trying to make as Desa.
My company has been around for the past 41 years. It started as a family business – with my father and my uncles. After 41 years of manufacturing and retailing, (we are currently one of the largest retailers in Turkey with 90 retail stores) we have been the biggest exporter in Turkey for the past three years.
We are currently doubling the headcount of our closest competitor in our industry. But the challenge right now is to export the brand and branded products. We embarked on this journey five years ago. Desa has always been available abroad; not as a retailer, but as a manufacturer and wholesaler.
Before the first Gulf crisis, we used to have our own offices in the Empire State Building and we used to have a warehouse in New Jersey. We had over 500 accounts and more than 35 different department stores we used to sell to. However, after the Gulf crisis, Turkey also experienced difficulties. We had to pull back, because the US market had suffered substantially at the time.
In 1997, we started working with Marks & Spencer supplying leather garments, so that was the mid-market at that time. That is where Turkey was still able to cater to as a price point. Now this leather business has moved to India, Bangladesh and Pakistan, and those countries are supplying the lower end and department store end of the market.
From 1997 to 2005, Marks & Spencer was a great trading partner for us. From £300,000 turnover in five years, we have gone to £50 million with Marks & Spencer, being their only global supplier for leather garments. This has grown our manufacturing business. At the same time, we have also grown our retail side of the business.
As time has passed and the cost pressures increased we have changed the entire customer portfolio from department store business to luxury segment and started catering to the most prestigious luxury handbags and accessories brands in Italy and in UK as a manufacturer.
But as I said, this has been more about manufacturing rather than exporting our own brands whereas the challenge is to become an international retailer. We are the only company in the leather business that has been admitted to the Turquality programme. We have decided to build the brand internationally as a retailer and a consumer brand.
Since we had been based in the UK market with our own offices for the last 15 years we thought we had a pretty good idea about the market, so we decided to embark on the journey of international retailing with the UK market.
How do you follow the trends?
Following up trends comes naturally as part of the vision we have adopted after being admitted into the Turquality programme. It is such a great kickback in terms of helping the Turkish brands becoming more international. It helps you think of things you might not have before, and secondly, it gives you more courage to establish your brand internationally. We have set up an international design team.
We have offices in the middle of London, which is a great location, as most of the brands do not have that. It is great to get good staff on the team. We have run the design office from the UK for three years. We have the previous creative director of Zara, who had a great team around him. We have really tried to position the brand as a lifestyle brand, rather than a leather products brand. In Turkey, it is almost like a household name, but when you take it abroad, where consumers do not know it at all; it is a different ballgame.
So we had to go back to the drawing board and relook at the brand, the logos and the branding and the design team. We have reconfigured the DNA of the brand and invested all of these years of experience and know-how as well as funds into reshaping the brand so that it can stand on its own two feet internationally.
Turquality has given us the courage and pushed us off the cliff, and we had to learn how to fly. But of course, it is nice to have a safety net in a way to support you. If you make a mistake, at least you will have a 50% kickback from the Turquality program in terms of funds. It is painful of course, but making mistakes is part of the learning process.
Last year we worked with Graham Black from Scotland, who used to be the creative director of Armani prior to joining us. This year, last season and this season we are working with a gentleman called Yossi Cohen who lives in Milan and comes here once a week or two for a few days. He is the ex-creative director of Max Mara and Ballantyne.
I have a very strong handbag designer who is ex-Christian Dior etc. We are using an Italian head-hunter for this, and we are really trying to gather the best talent together here. At the same time, we are also putting young Turkish people here to work with them so we can bring the know-how inside. We have taken in these people and given them a great playing ground.
There are three or four different showrooms where they can work on different collections simultaneously and go downstairs to R&D to get their samples and prototypes made, and put it into the showroom the next day. After the merchandisers write the order, in three weeks’ time, we can hit the market. That is the strength of being vertically integrated. It can be even shorter sometimes.
The leather business is a very bizarre business. Lots of people are trying to focus on what they do best to outsource the bits of the business that they do not deal with, which would distract them. That is the American way of looking at it, which they teach you at business school. But in the leather business, you find lots of luxury companies integrating backwards.
Louis Vuitton has recently acquired a crocodile farm and Hermès has acquired a tannery last year. The strength of the leather goods business starts with raw materials – if you do not have these capabilities, in order to create what you would like to, you will be too dependent on other people’s skills and abilities.
Over time, we have integrated backwards as well. We have a tannery that tans sheepskin as well as double face and cowhide. This tannery does not only cater to our own needs, but we are also exporting quite a lot of leather for luxury brands. We are producing for all the good brands that you see on Fifth Avenue for instance (finished goods and/or leather).
We have two manufacturing units. One of them is here, where we manufacture handbags, small leather goods and leather garments. A couple of years ago I set up a new factory on the way to Ankara. This city, called Duzce, was hit very badly by the earthquake in 1999 and 30,000 people passed away. Our factory was the first investment in that region after that earthquake. We have taken people in from farms and trained them, and now they are working for one of the best Italian luxury businesses making handbags. That factory is 100% dedicated to that brand and they are manufacturing full time.
We are also partners with several companies around the world. We distribute Aerosoles in Turkey, an American brand. We are also the joint venture partner of Samsonite. After 26 years of distributorship, five years ago we became partners with them and we are managing the Turkish joint venture, although we are the smaller part. It is a hub for Turkey and the six surrounding countries. We are operating a retail chain and a distribution business for that joint venture. That is the global aspect.
The biggest challenge for us is to make our brand more international and to sell branded products internationally. We set up the infrastructure over the past five years, and we opened up two shops, which we have had for the past two and a half years in the UK. The idea is to open another one in Shanghai by the end of this year. I am in Russia next week, as we have a potential partner there and we are thinking about opening two shops there, too.
But before we open too many shops around and hoping that it will work, we have to position the brand internationally, which is a very expensive exercise. Coming from a PR background and working in publishing, you know that. We have created a capsule collection, and two weeks ago I was in Milan launching it. It was really well received. I am going back there this weekend for the pre-collection fashion week, where we will be doing another event. At the first event we had Italian boutiques that sell luxury brands such as Givenchy or Fendi. A good number of them have bought into the collection, which is great. During the next fashion week we will be getting all the international firms.
How would you gauge the competition in the retail manufacturing sector, and how will you differentiate yourselves from others?
The challenge is to position the brand next to all these beautiful brands, so that the customer can see that this is a great brand that belongs next to them. Normally, it is not enough in this age, where people are bombarded with the Internet and everything going on. You have to convince people of the brand, and to do this, you need many years under your belt until you can really call yourself a brand.
Now it is becoming even more difficult with all these ads and information. That is why we are approaching it in a ‘guerilla’ marketing way, where we approach all the boutiques that are not financially significant, because we will not be able to sell thousands of pieces. I produce more than 10,000 luxury handbags per week and each of them retail in the stores for 2,000 euros on average.
But surely the manufacturing costs are low that they are giving you a good enough deal, which then acts as a cushion for you to sell your product at a low enough price point for entry?
Because of the requirements of the brand and the strength of their brands, the luxury brands are selling their products to their clients for a much higher price, even at the wholesale price, than we are currently selling to these boutiques. Therefore if you have a quality luxury product in terms of manufacturing and materials and leather, but you are selling it at a premium retail price, then it is a great deal for everyone, and everyone jumps on it.
That is why the collection was so well received. Everybody would like to have it, but now we are trying to ensure that we limit the distribution, so that there is a scarcity element and luxury feel around it. It is not about money; I am not after selling tens of thousands of handbags in one season – but it is about placing the brands in the right market and position. It is a long-term strategy. Once this happens, it will be much easier to open flagship stores around the world, in the right cities and places. It will be much easier to establish the brand afterwards. It is the right time to do it for us, as well as many other companies in the country.
Turkey has to make the conversion from being a product exporter to being a brand exporter. We have to convert to a branded economy. If you look at Italy, look at how much manufacturing and exports there are – there is a huge disparity. They are importing quite a few pieces, and they are exporting them 90% of the time. 10% of them re consumed in the country. If they are bringing it in for 100 euros, they are selling it for 1,000 or 2,000 euros. So there is a big economic shift that Turkey has to make and I think we are a good example of it in the leather industry as a company.
How would you gauge the importance of the British market?
That is a good question. The reason why we set up in the UK is that we know about the UK market and our infrastructure. But more importantly, there are three fashion capitals in the world (or four if you push it) – Paris, Milan, London and New York. You have to establish credibility in one of these cities, which you can sell to the whole world and engage the growing markets, and the more interesting markets such as China and Japan or Russia.
It is a great window to be in London, because the entire world flows through London. Everybody goes there; it is a huge tourist destination. The same thing goes for Paris and Milan. There is even more fashion and luxury. We started with the UK not just because of the strength of the UK market (although for the last couple of years it has not been doing so well) but to showcase ourselves to the rest of the world, and to use those stores as a window to tell the world that we are there.
What advice would you give to UK investors (companies or individuals) who are looking to enter the Turkish retail and manufacturing sector?
First of all, Turkey is a great market, for several reasons. We have people who understand what you are talking about, who have the same outlook on life and mentality, who you can really agree with. The business culture is not different from what you have in Europe. If people say yes, they mean yes and vice versa. It is not the same in all countries around the world. Secondly, it is very close to Europe.
It is practically part of Europe. In three and a half hours, from one end of Europe in London, you can be in Istanbul. That is the longest distance you can face. You can even do day trips. I go to Italy for the day for a meeting. It is simple, and easier than commuting out of London on a train. It might be cheaper as well. If you think about it, it is a great advantage.
Thirdly, the country is very strong. It is a very dynamic country and the market is very interesting. If you do something with Turkey, it is not just about getting manufacturing out of Turkey and selling it around the world – it is also about selling in the Turkish market. If you compare the per capita spending and debt per capita, the amount of internet usage and credit card usage etc., you will see that it is a very attractive market with a very young economy and population. There is a lot of room for growth. It is growing, and it is important to get a foothold early on in the process, so that you will be easily recognised in the future.
Fourthly, in terms of manufacturing, the capabilities are huge. There is nothing that Turkish manufacturers cannot do. You can get great value in Turkey in terms of price and quality. For institutional investors, of course it is a very interesting country, because it is still growing at a rapid pace compared to the more mature markets. It is less risky.
Turkey’s credit rating is doing no justice to the Turkish economy. Its credit rating should be much higher. If you look at the fundamental numbers, the strength of the economy is very obvious compared to other countries that have a higher or the same credit rating. From that perspective, you will see that it is an undervalued country and there is still value to be generated.
As one of the pioneering brands that are building this Made in Turkey stamp of excellence and quality, do you feel a responsibility to the Turkish people?
Of course. I feel responsible as a person as well as institutionally. I am sitting on the board of Turquality and the Leather Exporters Association, and the Turkish Retailers and Brands Association. So it is a great responsibility to deliver what we are promising to achieve. I believe that Turkey is a big country and it has to continue manufacturing.
We cannot make this entire country a service country – we are not 5 million. There are 5 million people living in just a 5 km radius in this area. We are a country with a population of 75 million, and this country has to continue manufacturing. In order to be able to stay in the manufacturing game, we have to provide an excellent service and excellent quality at good prices to the clients. Turkey can achieve all of these things, and it can still compete with China and countries such as India, Bangladesh, Pakistan, etc. in terms of price points. Turkey has its own China itself I think, with new financial kickbacks and incentives that the government is providing already.
Considering the government’s policy of backing up companies, I think there are lots of opportunities for local and international companies who would like to invest in Turkey. I strongly believe that when you sit down and make cost comparisons, Turkey as a whole is cheaper than China (Eastern Turkey is cheaper than Eastern China in particular). Even I am thinking about making another investment close to the Syrian border for a new factory, which I am probably going to do a joint venture with one of our global partners. There are lots of opportunities. Turkey has to continue manufacturing and everyone realizes that, including the Ministers. Therefore I think the opportunities will remain for the next ten to twenty years.
The political situation in general is improving and becoming more stable. I think there is a bright future for Turkey. It is very important to take the right position of a country in the middle of a “crisis”. Everything is cheaper, including investment. If you invest now, you are set up for growth when things become much more stable again, as it has been for the past ten years.