Exclusive: VitrA Russia chief talks about business and economic trends in the European ceramic industry

Clay Building Materials November 03, 2017
Author: Kirill Bezverhi

ceramic tile market

To what extent will the ceramic and porcelain tile market expand in 2016? What factors are set to determine the future of the market? How do consumer taste preferences differ between Russia and Europe? Igor Chernyshev, Director of Sales and Marketing at Vitra Tiles talked about this and much more in an exclusive interview with IndexBox.

- What challenges has the company Vitra Tiles encountered in recent years?

Throughout all the recent crises, the Russian ceramic and porcelain tile market has seen a mixed development trend. We encountered challenges at each stage. The most important challenge we faced, however, was the process of entering the Russian market at the end of the 90s.

Promoting products was far more difficult here than in Turkey and Europe, where the Eczacıbaşı holding company, which includes Vitra Tiles, boasted a strong market position. As a result, Vitra is currently the only Turkish manufacturer to maintain an assured position on the Russian market.

The fact that we started to maunfacture tile products under the Villeroy&Boch brand name at our factory in Serpukhov, which were then sent as exports to Europe, presented us with yet another challenge. The challenge we faced here was gaining trust from European consumers in Russian manufacturing.

- The tile plant was launched in 2011. Did everything work out in line with the original business plan? How successful has the company been in receiving a return on its investment?

It has been a success. I can't really comment here on financial performance figures, but I can tell you that if investments in Russia had proved to be unsuccessful, then we would not have launched our second plant for the manufacture of sanitary hardware and bathroom products in 2014.

- Is the company's plant in Serpukhov working at full capacity? What is the plant's share on the Russian market?

Yes, it is operating at full capacity. The plant is quite small and manufactures only porcelain tiles; it has a capacity of 3 million square metres. If we estimate Russia's total ceramic tile market to be around the 200 million square metre mark, then the plant occupies only a tiny 1.5% share. If we estimate the market to be around 75 million square metres, then already our share of the market would be different. If you narrow down the market parameters to the segment in which Vitra Tiles operates, then the company's share in this segment is much higher.

- Has the sanitary hardware products plant, which the company built in 2014, justified its original investment?

Vitra sanitary hardware products appeared on the Russian market before Vitra tiles. Therefore, it was easier to sell items and products with the launch of the sanitary hardware plant. Launching the plant enabled us to become closer to the consumer and bypass the logistics process; as a result, we were able to cut the cost of some products.

- Since the company has Turkish origins, I would like to know: has the improvement in relations between Russia and Turkey had an impact on you?

Following the well-known occurrence of various events, were were pleasantly surprised by the reaction of our Russian clients and distrubutors. On a human level, everyone supported us and we didn't forfeit any clients.

From a business perspective, nothing has changed. A pool of Turkish companies was set up at state level and these companies remained unaffected by the situation. The companies that formed part of this pool were those which had outlaid capital investment into Russia and those which were involved in major infastructure-type construction projects, as well as a number of other companies. Our company was one of these.

When relations between Turkey and Russia started to improve, from a domestic perspective, the company gave a sigh of relief and we were pleased that everything had returned to normal again.

- IndexBox researched the porcelain tiles market for your company. What did you think?

Yes. There were sorume nuances, but it's like in machine tool operations – there are always tolerances. Actually, you are the only company to complete a high-quality study into ceramic and porcelain tiles. Other companies didn't perform so well.

- Our report indicated that the ceramic tile market grew by 12% in physical terms and by 20% in value terms last year. Did your company manage to outrun the market?

We managed to remain in the market. Our results matched those performance figures provided by IndexBox. For us, however, it was vital that we saw growth; for us this was secured by the significant expansion of the DIY channel in 2015. Unfortunately, the product we were working with was significantly less preferable in terms of profitability. From an efficiency perspective, therefore, the growth of the DIY channel led us to experience difficulties in our internal structure and not to positive changes. As a result, we did not work with this channel in 2016.

- What performance figures in terms of porcelain tiles did the company achieve over the last year?

Growth was recorded at 14% in physical terms. I think that for growth in value terms, it would be better to compare not sales in rubles, but the margins achieved from these sales. Last year the margins did not increase. This was mainly due to the DIY channel, which, I think, achieved significantly far less in terms of profits for most suppliers in Russia.

- According to our estimates, approx. 10% of porcelain tiles manufactured in Russia are sent for export. Do you think we can expect an increase in the export volume?

This will be the case essentially if the exchange rate situation improves. If we are not only talking about porcelain tiles, but ceramic products from Russian manufacturers in general, then two markets are relevant for them in global terms. The first of these are the CIS States and the second is Western Europe.

The CIS States have always been of interest to Russian manufacturers. We are more interesting for them in terms of market accessibility. If the CIS markets recover more robustly after the crisis than the Russian market, then it is fair to say that exports to mainly Kazakhstan and Ukraine will increase. If we are talking about the European market, then exports will increase if the Euro exchange rate changes.

- Is the exchange rate really that bad at the moment?

I can only talk about our company. We have quite a large client pool in Europe, mainly in Germany, France and the UK. We manufacture a volume of tiles here and then export them there. The better the exchange rate, then products for the European market assume a larger share in our company's output.

Entering the European market for other Russian producers of ceramic and porcelain tiles requires significant investment. This process essentially requires both effort and time. You need a sales channel to promote the product in Europe. In addition, now is not really the right time.

- Please can you explain why?

When ceramic and porcelain tiles enter the Russian market from Europe, the cost of the product increases significantly as a result of transportation and storage costs and customs duties. Tiles that retail at a factory price of 5 Euros in Spain, sell here for 20-25 Euros on the shop floor. This price level is indicative of the Russian market. As a result, the sale price of Russian tile products depends on that for tile imports and it is often higher. Prospects for Russian manufacturers, therefore, in terms of competing in Europe, retailing tiles at 5 Euros or lower, appear doubtful. Most Russian manufacturers are satisfied with their position on the Russian market and are not intentionally making efforts to conduct business outside Russia.

Despite the recent crises, the Russian market has grown over the past decade and I think that it will continue to grow.

Russian per capita ceramic and porcelain tile consumption is 3 to 5 times less than that of Europe. This discrepancy is due to the fact that we have different climatic conditions and traditions for using ceramics. Tiles and porcelain tiles are traditionally used in warmer climes.

The situtation is changing, however and I'm confident that the Russian market has significant potential for growth.

- Please explain in what other ways the Russian market differs to its European counterpart?

The Russian market prefers certain design styles. European consumers prefer a minimalist style with very little decoration and these tiles are mainly used along with background tiles. In terms of colour range, calm shades are usually preferred, more often than not, some shades of beige or some stone-type shades of grey.

It's different in Russia. We mainly like the product to look rich, with lots of decoration. In terms of colour, Russians prefer diversity and brightness.

- What do you expect from the ceramic and porcelain tile market this year?

In physical terms, I think that the market will grow slightly by several percent – to a peak figure of 5%. In value terms, everything depends on the extent to which imports are set to decline.

Most Russian manufacturers increased their prices at the beginning of 2017. Therefore, in ruble terms, I think that there will be growth of up to 10%.

- What are the current market trends?

I would note a pronounced redistribution of the market share. If, a decade ago, the share of imported products in Russia was 35%, then now this figure is significantly lower. This process represents the most prominent trend prevailing on the ceramic and porcelain tile market this year. There are very few tiles available from Spain. Even less of a product choice is available from Italy. There are also very few tile products from Poland. This is all down to the fact that foreign tiles are losing out to Russian tile products in terms of price and quality.

There is also a current trend with regard to a reduction in the share of ordinary floor ceramic tiling in favour of porcelain ceramic tiles and an increase in the dimensions and size of the tile products being manufactured and sold. 

- What factors are set to determine the development of the ceramic and porcelain tile market?

In global terms, the main consumers of tiles are essentially new construction projects or the reconstruction of existing buildings and sites. I do not envisage any noticeable fluctuations or changes with regard to the latter. People will still continue to repair their flats and houses. In terms of construction, once the market starts to grow, there will be a surge in the commissioning of residential and commercial premises, and this will in turn impact on the ceramic tile market.

In addition, the forthcoming Football World Cup that is being staged here in Russia is also a factor. The impact of this was already tangible this year and I think it will peak next year. Hotels, stadiums and other premises related to the event are all set to be commissioned.

- Do you think this because of the Olympic Games in Sochi?

Yes, this was evident to everyone at the time. It's likely that the Football World Cup will make a similar impact.

- Is construction the only factor affecting the market?

No, the emergence of new market niches that have previously remained unpenetrated by tiles and ceramic tiling is yet another factor. People are gradually expanding the uses for tiles and tiling.

Now tiles are not only used in kitchens, corridors, bathrooms and balconies, they are also used in residential housing projects and in room design. Tiles are also used on the exterior of buildings. For example, tiles with a thickness of 20mm are now being laid on a sand or gravel surface in gardens and various parking facilities etc.

- If we think about your main competitors, Rovese has announced the construction of a new plant for 5.7 billion rubles, and KOF Tiles for 5 billion. What plans do you have?

We envisage expanding our tile production. The company plant has proved that it is an interesting and financially viable project. The Russian market forms part of the company strategy for Eczacıbaşı and Vitra, thereby market expansion by the company is set to continue.

The Group has developed a strategy in Europe to offer clients complete bathroom solutions. The manufactured Eczacıbaşı and Vitra range consists of ceramic tiles, bathroom and sanitary hardware products and mixers. The production of ceramic tiles and bathroom hardware products is currently based in Russia. As part of the strategy, this is to be given greater impetus. I am unable to say any more at the moment regarding the company's plans for localisation.