Issue 40 — January 2006

Issue 40
Category		Title		Author
Cover Pictures		Russia’s cosmetics market growth is driven by women’s optimism and rising prosperity		Gregory Grischenko

According to the Swedish study by direct seller Oriflame and SSE Russia (subsidiary of Stockholm School of Economics), the younger Russian woman charged by growing economic prosperity and optimism is the driving force behind unprecedented growth of cosmetics consumption in Russia.

Boyarushka Cream-Shampoo by Dombitchim (Moscow)

The market for upscale cosmetics and other personal care products is developing at a rapid pace. Thanks to Russian women’s desire for beauty, the Russian market for cosmetics and beauty products was growing by 20% a year in the early 2000s (15% in 2004 compared with 2003 according to Staraya Krepost, Russian cosmetics market research group) and has already become one of the five largest in Europe. The retail trade in cosmetics is developing even more rapidly than the market as a whole, and today is expanding by 30 - 40% a year, second only to grocery retail (60 - 80% a year).

The entire Russian market for cosmetics, fragrances and personal care is estimated at over $5 billion in 2003 and characterized by stable, gradual growth in the retail area. Currently in Russia, a new specialized cosmetics and perfume store opens every three to four months. The typical store, with at least 1200 sq. ft. in floor space, boasts modern decor and spacious shop windows displaying the newest in cosmetics and perfumes from around the world. This type of store has won over a fifth of the entire cosmetics market. According to market projections by Lilia Moskalenko from Expert.ru, in the next two to three years the share of specialized retail stores will at least double.

Diva Liquid Soap by A.T.L. Kosmetika (Moscow) on the store display

Zolotaya Roza (‘Golden Rose’), the first specialized cosmetics store in Russia, was opened in 1989 by Temtrade, a Swiss company with worldwide reputation. Stores selling luxury cosmetics became a widespread phenomenon only five or six years later. They were opened by Russian distributors of luxury Western cosmetics brands such as Lancôme, Chanel, Christian Dior and Nina Ricci. Distributors like Arbat Prestige, Lux Holding (the Rivoli chain), Alkor (the L’Etoile chain), and Temtrade (owners of the L’Escale chain which includes Golden Rose) were forced to go into retail simply because in the past, there were no outlets that matched the quality of their products: cosmetics were sold in department stores, in open-air markets, in metro station kiosks, and even in regular grocery stores.

The rise in the number of specialized stores can be explained by consumers’ demand for not simply high-quality products, but a better shopping experience as well, where customers can be advised by skilled sales and make-up personnel. Specialized cosmetics stores take about 30% of the retail trade followed by supermarkets (19.7%), direct sales (17%), department stores (10%) and pharmacies (6.5%). The rest is sold in kiosks and open-air bazaars which are key sale channels for “grey market” cosmetics.

Cherny Zhemchug (Black Pearl) Night Cream and Aloe Lotion by Kalina (Ekaterinburg)

In the last two to three years, Russian cosmetic retail has expanded by almost five times, with turnover at the grandest stores tripling every year. The uncontested leader in terms of the number of chain stores in Russia is L’Etoile, which also runs about a hundred smaller retail outlets, while Arbat Prestige dominates Moscow with 14 stores. Arbat Prestige, Russia's most known cosmetics chain, is planning to invest $500 million in the next two years to expand its network and has signed a franchise agreement with the world's biggest cosmetics chain, France's Marionnaud in 2004. The company’s sales have exceeded $200 million in 2003. Several chains from outside Moscow have also grown, such as Ile de Beute. Today, almost 300 specialized cosmetics stores are doing business across Russia. This recent explosive growth belongs mostly to the capital cities of Moscow and St. Petersburg. The amount of luxury brands offered in Russia’s provinces is limited, but potential demand is extremely high, as every Russian town has its local share of affluent and therefore potential customers.

In the late 1990’s, the dramatic growth of cosmetics use, more than 20% a year, including high-priced exclusive brands, attracted the attention of big names such as the French company LVMH, the biggest producer of luxury brands like Christian Dior, Givenchy, and Kenzo. Estee Lauder Group’s President and CEO Fred Langhammer said in an interview to Expert.ru: “I haven’t seen eyes as hungry and excited as those of Russian women looking at cosmetics in any other country in a long time.”

According to Staraya Krepost, Russian Cosmetic and Toiletries Market has reached $6.2 billion (see pie chart) with the highest growth rate in decorative cosmetics and perfumes (17%). The relatively small sector of sun screen cosmetics ($47.1 million) has followed with 16.9% and men’s cosmetics took third place with the 13.5%. Skin care cosmetic products with three major sectors in facial care (73%), body care (16%) and hand care (11%) have experienced comparatively modest growth of 10-12%.

According to Euromonitor International, the leader in Russian skin care market is Beiersdorf with its trade mark Nivea (about 15%) followed by the group of both foreign and Russian companies with quite smaller share of this market: Oriflame (9%), Kalina (8%), L’Oreal (8%), Avon(7%), Green Mama (6%) and others. There is a wide price range in this market with the 60% of economy price brands made by local producers and the rest being exported.

Enlarged version

Russia is still far behind Western Europe in the number of specialized stores, and the cosmetic retail market is far from being saturated. Having been neglected in the Soviet era, it has grown up significantly and shows no signs of slowing down.

Russian companies have already started to prepare for the coming competition from foreign chains by boosting the store’s image with paintings and sculptures, making it look more glamorous with expensive interior designs and even purchasing cosmetics producers in the Western Europe.

Kalina Corporation, an undisputed leader in Russian cosmetics, recently announced the purchasing of additional 30% share in Dr. Scheller. Combining it with previously owned 27%, the company will assume control in the 60 year old German company (over $100 million in 2004 sales).Kalina was founded in 1942 in Sverdlovsk (now Ekaterinburg) when the oldest Russian cosmetics factory Novaya Zarya was evacuated from Moscow during World War II. The company is the first Russian cosmetics business that gained ISO 9000 certification. Kalina owns its rapid growth to economic reforms that changed the face of the Russian cosmetics industry. With the production facilities in Russia, Ukraine and Uzbekistan, the company makes cosmetic products in the skin, hair and dental care, make-up, and perfume categories.

Historically, Russian perfumes were created and later influenced by the French who settled in the country in the late 1700’s. At that time the empress Catherine the Great was infatuated by French culture and encouraged a number of skilled craftsmen to move to and start a new life in Russia. One of the French “Russians”, Henry Brokar founded the first domestic perfume factory in 1864 and soon became an exclusive supplier for the royal family. After the Socialist Revolution in 1917, when all businesses were nationalized, the Brokar Factory was renamed to Novaya Zarya (New Dawn) and its most famous brand, The Empress’ Favorite Bouquet, became the best selling Soviet-era perfume Krasnaya Moskva (Red Moscow). The fragrance that was developed in 1913 to celebrate 300 years of Romanov’s Czar Dynasty is still very popular in Russia.

Krasnaya Moskva (Red Moscow) Eau de Toilette by Novaya Zarya (Moscow)

Global beauty event with Russian flavor

The 11th annual exhibition in a row, Intercharm-2004 was organized by the Russian marketing holding Staraya Krepost (Old Fortress) at Sokolniki Culture & Exhibition Center in Moscow. This international show, the main cosmetics event in Russia, took place October 28 - November 1, 2004. The organizers stated a 10 times (from 70 to 728) increase in the number of exhibitors and 15 times increase in exhibition space (from 9,000 to 140,000 square) for the 10 years history of the show. Despite the relatively low attendance if compared with the similar events in the West (approximately 90,000 visitors), the show’s significance was evident by the presence of all major cosmetic brands.

Intercharm-2004 included exhibitors from 28 countries with national pavilions from France, United Kingdom, USA, Germany, China, Poland, Italy, Bulgaria, Korea and Taiwan. The show has long been a proactive leader in working with exhibitors and industry trade associations to raise the status of the cosmetic business in Russia. Having been neglected in the pre-perestroika era, it has grown up significantly and shows no signs of slowing down.

Author

Gregory Grischenko



Gregory Grishchenko is an engineer and freelance marketing consultant in the state of New Jersey, USA. The native of Ukraine, he has written a number of reports on emerging markets of Eastern Europe, including the former Soviet Union. The focus of his reports is the growing consumption of all consumer goods categories in this region. He can be reached at gregrishchenko@aol.com.