Analysts predict heavy slowdown in cosmetics and perfumery consumption in Russia, insist on tough economical and political situation, rational consumption and sensitivity to prices and discounts… No doubt, geo-political tensions and oil prices have affected some company’s performance. However, decline in figures is not as radical as seems to some pessimists. According to forecast by the Russian Ministry of Industry and Trade, the 2014 market decline by 5%-7%, compared to 2013, up to about RUB500bn (US$14.2bn). So, Russia still the largest beauty and personal care market in Eastern Europe, accounting for nearly 50% of the region’s retail value sales.
Fears that Russia's economic difficulties will ravage European multinationals may have been overstated in some cases, with companies defying gloomy expectations. No single multinational company pulled out of Russia since the so-called “sanctions” were introduced. More over, many still invest in business in Russia. In February, one of the key market player Oriflame Cosmetics(Sweeden) inaugurated its production facility. After doing an investment of €150 m, Oriflame’s new production site in Noginsk, Russia, was officially declared opened. The site comprises production facilities, warehousing and a distribution center. The plan is to produce shampoos, deodorants, liquid soaps, lipsticks and other cosmetic products to serve the market in a more efficient way.
In order to consolidate production and logistics in one place, the company’s former site in Krasnogorsk was sold to X5 Retail group in October 2014, and the production of lipsticks was moved to Noginsk.
Oriflame’s facilities in Noginsk are built on a 26 hectar land plot, owned by the company, and with significant focus on sustainability. The environmental-friendly distribution center (42,000 sqm) is LEED certified (silver level), being the largest industrial facility with such a certification level in Russia.
Magnus Brännström, Oriflame CEO and President comments:
“The launch of our new factory in Noginsk is an important milestone for Oriflame, as the Russian market is, and will continue to be, essential for the company. The opening of a large production site will further support Oriflame’s sales and development in Russia and CIS. In addition, we are happy of course to contribute to the creation of hundreds of jobs in the region. We work hard to increase efficiency of our production and distribution in order to offer our consultants and consumers innovative quality products at affordable prices.”
Essential daily usage consumer goods including personal and beauty care will continue to grow in Russia, despite the problems, said Commerzbank analyst Andreas Riemann.
"Maybe we won't see a 10 percent growth for Henkel in Russia but we will still see a positive growth in the coming quarters," he said. "These companies are selling the things people really need."
The beauty business has long proved itself recession-proof, but this notion is especially true in today’s Russia.
CEO Estee Lauder Fabrizio Freda tells why he's still bullish in Russia despite recent problems. “We are doing very well there because we have a diversified portfolio of products there and of retail partners.”
“Russia is softening because the economy is softening. But in the long-term, I still believe Russia will be a superlative market because women there are enthusiastic beauty consumers.”
Even in 2009 – the stongest year for the world economy – the main Department Store TSUM in Moscow and its Cosmetics and Perfumery Department which sells more than 200 brands, mostly premium ones, launched three new luxury sections – Dolce & Gabbana makeup, Bobby Brown and MAC. All three turned out to be hits, helping TSUM rise to third place in revenues among the world’s department stores. Only New York’s Saks Fifth Avenue and Milan’s Rinascente were more profitable.
The premium beauty and personal care categories in Russia have more positive growth prospects between 2013 and 2018; premium colour cosmetics, bath and shower and baby and child-specific products, in particular, are expected to contribute to the anticipated positive growth in value sales. Premium beauty categories are considered a better potential avenue for growth for international companies with strong premium labels.
The main segments of the market are perfumed products (23%), skin care products (22.6%), hair care (19.2%) and make-up (15.4%).
According to Reports and Reports survey of the global cosmetics market, every second Russian woman uses masks and facial cleaning products (in the early 1990s – one in four), 40% use eye care creams, and the number of women willing to buy expensive cosmetics has risen. The rapidly increasing number of women attending beauty salons, from 4% in 2000 to 40 % in 2014, – the report says.
In parallel to the development of the market, the distribution system went through deep re-structuring process. Open markets, with their amounts of goods of questionable origin, which had become emblematic of the post-communist era now account for only a fraction of the overall distribution channels of perfumes and cosmetics (7.2%).
The city of Moscow is the leader in specialized retail with some 800 point of sales and their number is expected to continue growing in the nearest future. This is accompanied, however, by a significant concentration of retailers. In the selective distribution, the three major retail networks (L'Etoile, Ile de Beauté and Rive Gauche) are dominating the market, in particular in Moscow and Saint Petersburg, and are extending their network to regions.
Besides national retail chains some 25 regional specialized retailers operate in the market. The biggest are Seven days (Voronezh), Novex (Siberia), Podruzhka (Moscow), Alpari (Tatarstan). In parallel, the "drogerie" format has been developing actively. In October 2012, the number of "drogeries" increased by +25% (compared to the previous year). Among the biggest market players are Magnit Kosmetik, Ol!Good, Yuzhny Dvor, etc. This retail “convenient store” format is expected to be one of the most dynamic over the next years.
Refusing cosmetics will be the Russian woman last resort. With Russian rouble devaluation against euro/dollar the price of imported perfumery and cosmetics will have go up. However, retailers do not really want to lose the consumer and keep the price fixed as long as they can afford. In November-December 2014 an average increase was of 15-30%. At the same time all specialized chains announced Christmas sale up to 40%. "Manufacturers are well aware that, if they raise the price by half, according to the exchange rate, they can easily lose their market share, – says the top manager of one of the distribution company. - If our competitors raise the price of imported goods by 15-20% we can not do it it in sync with the exchange rate."
As a result, the New Year sales were no worse than in previous years. Perfume and cosmetic brands achieved budgeted sales plans for 2014 to 150-250%. And despite the fact that in April market experts expect a new wave of price increase, as a whole in 2015, almost all market players expect to maintain the same level of sales.
Everyone is interested in what will happen with the Russian perfumery and cosmetics market tomorrow. Some experts have calculated the slight decline in sales right up to 2018. These forecasts are hardly true in view of point key players like L’Oreal, Unilever, Beiersdorf, Procter & Gamble, Estee Lauder, Coty and etc.
And the reason is not only in the Russian women mentality who never, under any circumstances will stop using cosmetics. And not only in “red lipstick” effect”. The reason is in the Russian market, which is not emerging but matured. Scientific base and R&D, contemporary manufacturing capacities, high quality products, distribution infrastructure across the country with numerous channels, including modern format chains such as drogeries and specialized stores, the constant demand from the consumer – all these factors stimulate Russian beauty industry to develop dynamically and recover quickly from any crisis.