Beguiling smell of the cosmetics market
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Beguiling smell of the cosmetics market Source: Retail Update Russia
May 2006
Beguiling smell of the cosmetics market
Selling cosmetics to Russian consumers is a business with excellent prospects, as the market is growing at a pace of 20% yearly. Over the same period, similar increases in the West were rarely greater than 6%. In fact, European cosmetic markets, characterized by an over-abundance of novelty, are experiencing stagnation, while the Russians remain fascinated by everything new. Not so long ago, the Russian cosmetics market was dominated by imported goods. In 1993-1994 Russian cosmetics manufacturers held only 8% of the total retail sales volume in the country. Paradoxically, it was the disastrous Russian crisis in 1998 that helped Russian companies to regain market shares. When the economy recovered, domestic producers appeared to have captured around 60% of the cosmetics market in Russia. This turnabout was due partly to the descent of purchasing ability among the population, which made them more prone to buy cheaper domestic rather than more expensive foreign products. Another reason for the growing market share of cosmetics “made in Russia” is the fact that international corporations have been moving their production to the country, both through the acquisition of existing production outlets and by building new ones. In the years 2000-2005, the value of the Russian perfumery and cosmetic market doubled, according to data of marketing company Staraya Krepost. Just as in the category of retail sales overall, growth in the cosmetics sector is fuelled by any increase in the disposable income of Russian consumers. But this is not the only explanation. Good quality cosmetics are a sign of high status and are symbols of a way of life to which many Russians, in particular young ones, aspire. In Soviet times, citizens of the USSR could hear and read about world-wide-known cosmetic brands, like Channel, Christian Dior or Lancome, but none of them were available in shops, and even if they did appear on shelves, they were too expensive for an average soviet citizen. In consequence, the demand for premium toiletries existed long before it could be satisfied. In 2006, production of cosmetics and toiletries in Russia remains very dispersed; Value of Russian perfumery and cosmetics market ($ bn), 2000-2005
3.5
3.8
2000
2001
Source: Staraya Krepost, 2006
4.3
2002
5.2
2003
6.2
2004
7.0
2005
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there are some four hundred companies manufacturing cosmetics, 40-50 of which may be considered significant. The three leading domestic producers are Kalina, Nevskaya Kosmetika and Svoboda, all with traditions stretching back to Soviet Union times and even earlier, to those of the tsars. Kalina, the market leader in skincare and oral care products, noted a turnover of RUR 2.98bn ($107m) in 2005. Petersburg-based Nevskaya Kosmetika
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Beguiling smell of the cosmetics market
managed to achieve turnover of $85m the same year. Sales of Svoboda, owner of what were once the most popular Soviet brands, may be estimated at some $50m. According to the website Cosmetics in Russia, there are seven foreign-owned companies among the top 10 producers of cosmetics in Russia: Procter & Gamble, L’Oreal, Gillette, Schwarzkopf & Henkel, Unilever, Colgate and Beiersdorf. These companies, however, have not revealed the sales of their Russian subsidiaries. Sales of cosmetics in Russia, by categories (%), 2004
Anti ageing 1
Foundation 1
Others 10
For children 2
Skin care 31
For men 9 Professional 10
Decorative 17 Source: Staraya Krepost, 2006
Hair care 19 www.pmrpublications.com
Better to buy less but more expensive The most popular cosmetics category is preparations for skin care, that constitute 30% of the market. Other important categories are hair care products and decorative (colour) cosmetics. A peculiarity of the Russian cosmetics market is that the structure of some sectors resembles a reversed pyramid, for example the value of premium perfumery sales is more than double that of mass products. Consumers seem to buy the top cosmetic brands from time to time almost regardless of their financial status. A similar occurrence may be observed on the market for colour cosmetics, but not other categories. For instance, in 2004 the value of premium skin care cosmetics accounted for only 13% of all skin cares, according to the Cosmetics in Russia web portal. Another peculiarity of the Russian cosmetics market is the low demand for antiageing cosmetics; these constitute only around 1% of the market. This is due to the fact that pensioners and people over 50 who have lived most of their adult lives in the Soviet Union are less adaptive to the market economy and so are less prone to buying novelties. In Western Europe the main group buying this category are people over 50 years old. In Russia this group shows only a slight interest in special anti-wrinkle products, probably for reasons both of low solvency and insufficient understanding of their advantages. As a result, Russian people over 50 still prefer an ordinary nourishing cream. The most neglected area on the cosmetic market is foundation products, with which Russian women are largely unfamiliar. With a few exceptions, these kinds of products are not manufactured in Russia, while those imported are popularly considered to have
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Beguiling smell of the cosmetics market
inappropriate structures and tones for Russian skin. As a consequence, costly and longrunning advertisement campaigns would have to be waged in order to create demand for foundation products. As for packaging, distributors have registered high popularity for the over-200ml volume packaging unit in Russian regions. Firstly, when judged by weight unit, products in large tubes are less expensive. Secondly, products in large volume packs are usually used by the whole family. On the contrary, in Moscow small formats are in great demand. A product in a 30-70 ml-pack is easily placed in a handbag and can be quickly used up and changed for a novelty item.
Cosmetics flow through retail chains Another factor fuelling consumption of cosmetics in Russia is the development of modern retail formats. Cosmetics appear not only on the shelves of super and hypermarkets, but also in specialised stores which are mushrooming across the country. Producers eagerly sell novelties in chains of pharmacies, as it creates an impression that the product is good for health, as well as being scientifically advanced. Toiletries are also sold in specialised stores, like Arbat Prestige, which managed to make turnover of around $250m in 2005, or Alcor company, operator of two chains, L’Etoile and Sephora, that last year in Russia sold some $418 worth of cosmetics. Today, almost 300 specialised cosmetics stores are doing business across Russia. They operate mostly in the two biggest cities, Moscow and St. Petersburg. The amount of luxury brands offered in Russia’s provinces is limited, but there is a potential demand, as every Russian town has its local share of affluent inhabitants. L’Etoile runs about a hundred smaller retail outlets across all of Russia, while Arbat Prestige, Russia’s best-known cosmetics chain, dominates the Moscow market. Recently, the chain owner is planning to invest $500 million over the next two years in expanding its network and in 2005 signed a franchise agreement with the world’s biggest cosmetics chain, France’s Marionnaud. Several chains from outside Moscow have also grown, such as Ile de Beute. Currently the retail market is dominated by home-grown Russian chains, a development which is similar to most other retail sectors after all. On the one hand, the fast-growing Russian market is luring international retailers, on the other hand, they will more likely enter with the co-operation of local player, as did Marionnaud with Arbat Prestige. This is because Russian retailers are more experienced in dealing with both Russian customers’ habits as well as with Russian, regulatory agencies, law and taxation.
www.russiaretail.com
Beguiling smell of the cosmetics market
About PMR PMR Publications www.pmrpublications.com provides reliable market intelligence for business professionals interested in Central and Eastern European countries. Publications by PMR analyse the business climate in the region, in particular in the construction, retail, IT, telecommunications and pharmaceutical sectors. PMR Publications offers both free and paid subscription newsletters, internet news portals, and in-depth reports. To find out more about Poland and Central and Eastern European countries please visit www.polishmarket.com and www.ceemarket.com, as well as the regional and national sector portals dedicated to construction (www.constructionpoland.com), IT and telecom (www.ceeitandtelecom.com), retail (www.retailpoland.com, www.ceeretail.com, www. russiaretail.com) and pharma (www.pharmapoland.com).
PMR Publications is a division of PMR Ltd. (www.pmrcorporate.com) a publishing, consulting and market research company providing information, advice and services to international businesses interested in Central and Eastern Europe. With highly skilled staff, top ranked web sites and over ten years of experience, PMR is one of the largest companies of its type in the region. PMR Ltd., ul. Supniewskiego 9, 31-527 Krakow, Poland tel. /48/ 12 618 90 00, fax /48/ 12 618 90 08, www.pmrcorporate.com www.russiaretail.com
www.russiaretail.com
Beguiling smell of the cosmetics market
Contact PMR Customer service tel. /48/ 12 618 90 30 e-mail: [email protected] Customer service hours: 8:00am to 5:00pm CET Monday through Friday Marketing tel. /48/ 12 618 90 20 e-mail: [email protected] You are welcome to contact the author of the article: Marcin Szaleniec, Retail Market Analyst PMR Publications tel. /48/ 12 618 90 62 e-mail: [email protected]
www.russiaretail.com
www.russiaretail.com
Beguiling smell of the cosmetics market Source: Retail Update Russia
May 2006
Beguiling smell of the cosmetics market
Selling cosmetics to Russian consumers is a business with excellent prospects, as the market is growing at a pace of 20% yearly. Over the same period, similar increases in the West were rarely greater than 6%. In fact, European cosmetic markets, characterized by an over-abundance of novelty, are experiencing stagnation, while the Russians remain fascinated by everything new. Not so long ago, the Russian cosmetics market was dominated by imported goods. In 1993-1994 Russian cosmetics manufacturers held only 8% of the total retail sales volume in the country. Paradoxically, it was the disastrous Russian crisis in 1998 that helped Russian companies to regain market shares. When the economy recovered, domestic producers appeared to have captured around 60% of the cosmetics market in Russia. This turnabout was due partly to the descent of purchasing ability among the population, which made them more prone to buy cheaper domestic rather than more expensive foreign products. Another reason for the growing market share of cosmetics “made in Russia” is the fact that international corporations have been moving their production to the country, both through the acquisition of existing production outlets and by building new ones. In the years 2000-2005, the value of the Russian perfumery and cosmetic market doubled, according to data of marketing company Staraya Krepost. Just as in the category of retail sales overall, growth in the cosmetics sector is fuelled by any increase in the disposable income of Russian consumers. But this is not the only explanation. Good quality cosmetics are a sign of high status and are symbols of a way of life to which many Russians, in particular young ones, aspire. In Soviet times, citizens of the USSR could hear and read about world-wide-known cosmetic brands, like Channel, Christian Dior or Lancome, but none of them were available in shops, and even if they did appear on shelves, they were too expensive for an average soviet citizen. In consequence, the demand for premium toiletries existed long before it could be satisfied. In 2006, production of cosmetics and toiletries in Russia remains very dispersed; Value of Russian perfumery and cosmetics market ($ bn), 2000-2005
3.5
3.8
2000
2001
Source: Staraya Krepost, 2006
4.3
2002
5.2
2003
6.2
2004
7.0
2005
www.pmrpublications.com
there are some four hundred companies manufacturing cosmetics, 40-50 of which may be considered significant. The three leading domestic producers are Kalina, Nevskaya Kosmetika and Svoboda, all with traditions stretching back to Soviet Union times and even earlier, to those of the tsars. Kalina, the market leader in skincare and oral care products, noted a turnover of RUR 2.98bn ($107m) in 2005. Petersburg-based Nevskaya Kosmetika
www.russiaretail.com
Beguiling smell of the cosmetics market
managed to achieve turnover of $85m the same year. Sales of Svoboda, owner of what were once the most popular Soviet brands, may be estimated at some $50m. According to the website Cosmetics in Russia, there are seven foreign-owned companies among the top 10 producers of cosmetics in Russia: Procter & Gamble, L’Oreal, Gillette, Schwarzkopf & Henkel, Unilever, Colgate and Beiersdorf. These companies, however, have not revealed the sales of their Russian subsidiaries. Sales of cosmetics in Russia, by categories (%), 2004
Anti ageing 1
Foundation 1
Others 10
For children 2
Skin care 31
For men 9 Professional 10
Decorative 17 Source: Staraya Krepost, 2006
Hair care 19 www.pmrpublications.com
Better to buy less but more expensive The most popular cosmetics category is preparations for skin care, that constitute 30% of the market. Other important categories are hair care products and decorative (colour) cosmetics. A peculiarity of the Russian cosmetics market is that the structure of some sectors resembles a reversed pyramid, for example the value of premium perfumery sales is more than double that of mass products. Consumers seem to buy the top cosmetic brands from time to time almost regardless of their financial status. A similar occurrence may be observed on the market for colour cosmetics, but not other categories. For instance, in 2004 the value of premium skin care cosmetics accounted for only 13% of all skin cares, according to the Cosmetics in Russia web portal. Another peculiarity of the Russian cosmetics market is the low demand for antiageing cosmetics; these constitute only around 1% of the market. This is due to the fact that pensioners and people over 50 who have lived most of their adult lives in the Soviet Union are less adaptive to the market economy and so are less prone to buying novelties. In Western Europe the main group buying this category are people over 50 years old. In Russia this group shows only a slight interest in special anti-wrinkle products, probably for reasons both of low solvency and insufficient understanding of their advantages. As a result, Russian people over 50 still prefer an ordinary nourishing cream. The most neglected area on the cosmetic market is foundation products, with which Russian women are largely unfamiliar. With a few exceptions, these kinds of products are not manufactured in Russia, while those imported are popularly considered to have
www.russiaretail.com
Beguiling smell of the cosmetics market
inappropriate structures and tones for Russian skin. As a consequence, costly and longrunning advertisement campaigns would have to be waged in order to create demand for foundation products. As for packaging, distributors have registered high popularity for the over-200ml volume packaging unit in Russian regions. Firstly, when judged by weight unit, products in large tubes are less expensive. Secondly, products in large volume packs are usually used by the whole family. On the contrary, in Moscow small formats are in great demand. A product in a 30-70 ml-pack is easily placed in a handbag and can be quickly used up and changed for a novelty item.
Cosmetics flow through retail chains Another factor fuelling consumption of cosmetics in Russia is the development of modern retail formats. Cosmetics appear not only on the shelves of super and hypermarkets, but also in specialised stores which are mushrooming across the country. Producers eagerly sell novelties in chains of pharmacies, as it creates an impression that the product is good for health, as well as being scientifically advanced. Toiletries are also sold in specialised stores, like Arbat Prestige, which managed to make turnover of around $250m in 2005, or Alcor company, operator of two chains, L’Etoile and Sephora, that last year in Russia sold some $418 worth of cosmetics. Today, almost 300 specialised cosmetics stores are doing business across Russia. They operate mostly in the two biggest cities, Moscow and St. Petersburg. The amount of luxury brands offered in Russia’s provinces is limited, but there is a potential demand, as every Russian town has its local share of affluent inhabitants. L’Etoile runs about a hundred smaller retail outlets across all of Russia, while Arbat Prestige, Russia’s best-known cosmetics chain, dominates the Moscow market. Recently, the chain owner is planning to invest $500 million over the next two years in expanding its network and in 2005 signed a franchise agreement with the world’s biggest cosmetics chain, France’s Marionnaud. Several chains from outside Moscow have also grown, such as Ile de Beute. Currently the retail market is dominated by home-grown Russian chains, a development which is similar to most other retail sectors after all. On the one hand, the fast-growing Russian market is luring international retailers, on the other hand, they will more likely enter with the co-operation of local player, as did Marionnaud with Arbat Prestige. This is because Russian retailers are more experienced in dealing with both Russian customers’ habits as well as with Russian, regulatory agencies, law and taxation.
www.russiaretail.com
Beguiling smell of the cosmetics market
About PMR PMR Publications www.pmrpublications.com provides reliable market intelligence for business professionals interested in Central and Eastern European countries. Publications by PMR analyse the business climate in the region, in particular in the construction, retail, IT, telecommunications and pharmaceutical sectors. PMR Publications offers both free and paid subscription newsletters, internet news portals, and in-depth reports. To find out more about Poland and Central and Eastern European countries please visit www.polishmarket.com and www.ceemarket.com, as well as the regional and national sector portals dedicated to construction (www.constructionpoland.com), IT and telecom (www.ceeitandtelecom.com), retail (www.retailpoland.com, www.ceeretail.com, www. russiaretail.com) and pharma (www.pharmapoland.com).
PMR Publications is a division of PMR Ltd. (www.pmrcorporate.com) a publishing, consulting and market research company providing information, advice and services to international businesses interested in Central and Eastern Europe. With highly skilled staff, top ranked web sites and over ten years of experience, PMR is one of the largest companies of its type in the region. PMR Ltd., ul. Supniewskiego 9, 31-527 Krakow, Poland tel. /48/ 12 618 90 00, fax /48/ 12 618 90 08, www.pmrcorporate.com www.russiaretail.com
www.russiaretail.com
Beguiling smell of the cosmetics market
Contact PMR Customer service tel. /48/ 12 618 90 30 e-mail: [email protected] Customer service hours: 8:00am to 5:00pm CET Monday through Friday Marketing tel. /48/ 12 618 90 20 e-mail: [email protected] You are welcome to contact the author of the article: Marcin Szaleniec, Retail Market Analyst PMR Publications tel. /48/ 12 618 90 62 e-mail: [email protected]
www.russiaretail.com
