ANALYSIS OF COSMETIC RETAIL IN RUSSIA 1. General Trends in the Russian Retail Market for Cosmetics The primary characteristics of the cosmetic market development in Russia for the past two years are related to the recent changes in the retail sector: the share of the new format retailers is increasing, the competition between them is getting stronger, and, consequently, the market growth rate is slowing down. According to Staraya Krepost ExpoMediaGroup s research, in 2004, the market size for perfume and cosmetic products was $6.2 billion, which is 15% higher than in 2003. In 2005, the market growth rate was already much lower, however, in spite of slowing down, the market general dynamics look quite positive, and, according to local experts, the potential market size for the next several years is estimated at $15-18 billion. The statistics below are compiled by GosKomStat (Russian State Committee for Statistics) and Staraya Krepost, and shows the dynamics of the market for cosmetic and perfume products for the last 10 years: 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006(est) Market size, 3.8 4 3.65 3.4 3.6 3.9 4.3 5.2 6.2 7.0 7.9 In $bln A high annual growth rate has been maintained since the 1998 financial crisis in Russia dealt a blow to the cosmetics industry. The market has now stabilized. With stronger competition and higher energy tariffs expected should Russia joins the WTO, the annual growth rate is expected to slow to 5%. Another new recent trend in the market development is a shift in the market shares for Moscow and the Russian regions. In 1999, 80% of the sales of cosmetic products were in Moscow, 10% - in St. Petersburg, and 10% - in the regions. Currently, the ratio between the large cities and the regional cities is 50/50. In the retail sector, the most prominent trend is that cosmetic manufacturers are escaping from the open markets to western-type retail networks. The share of the open markets in the sales of cosmetics has recently dropped to 16%, compared to the 1990s when this share was as high as 90%. In 2004, the share of grey imports decreased by 17%. According to experts, the fact that large western retailers, such as Douglas, Sephora, and Marionnaud, are coming to Russia will stimulate the development of cosmetic retail chains, which will further decrease a share of open markets and grey imports. In 2004, the largest volumes of cosmetic products in Russia were sold through supermarkets (29%). Currently, more and more products are sold though specialized chains their share in 2004 was 23.7%. On the whole, the annual growth of retail chains in Russia is currently estimated at 40-50%, which provides a good opportunity for the promotion of new cosmetic brands. However, manufacturers must be prepared to pay a price for market entrance. The cosmetic retail shelf is
short enough and, considering quite a wide choice of products available on this shelf, the consumer is having a problem with his preferences and choices. Retail chains are not very much interested in promoting new brands since they are happy with what they have now, so manufacturers should invest in the promotion of their products. This competitive factor is most likely to hit Russian manufacturers who lack financing for entry to the western-type retail. Apart from the sales through supermarket/hypermarket retail chains, sales through specialized cosmetic chains, Internet shopping, and drugstores have been increasing. 2. Distribution and Retail At the end of the 1990s, various distributors and wholesalers of cosmetic products acted as intermediaries between manufacturers and retailers, and the manufacturers imposed their own ideas of price and delivery terms on the retailers, through their distributors. However, starting 2003, the market situation has drastically changed. The economic situation in Russia stabilized, and gradually an intermediary was no longer needed. Consequently, a distributor became a barrier between a manufacturer and a retailer. Major Russian cosmetic distributors reacted to these changes by developing their own retail businesses. For example, Arbat Prestige was one of the first Russian companies in the cosmetic market, which closed their distribution business and focused on the development of their retail chain of Arbat Prestige stores. Hermitage & Star Beaute (a part of Luxe-Holding Group) also stopped distribution and started a small retail chain Rivoli. In 2002, they sold 50% of their shares to their strategic investor, a German company Douglas-Holding. The result of this merge was Douglas- Rivoli chain, with 14 cosmetic boutiques. In 2004, the process of getting away from distribution channels and establishing direct links between a manufacturer and a retailer continued. According to KomCon Group research, over 30% of Russian women with high and medium incomes buy cosmetics in specialized stores, and only 7% of these group of customers with high income purchase cosmetic products in supermarkets. Here is some reference to where Russian customers buy cosmetic products: In Moscow Supermarket 9% Mini-market 1% Specialized store 55% Home depot 2% Drugstore 3% Open market 46% In Russia Supermarket 7.5% Specialized store 37% Open market 55%
Other researchers (e.g., Staraya Krepost) provided different estimates in 2004 and stated that the share of open markets in the sales of cosmetics was 16%, while the total share of retail chains, including supermarkets, specialized cosmetic stores, and drugstores, increased up to 55%: 2003 2004 Retail chains 51.9% 55% Open markets 20.4% 16% Other channels of sales 27.7% 29% (single stores, beauty salons) In 2006-2007, the share of retail chains is expected to increase by 15-20%. Today, six leading Russian cosmetic retailers represent 65% of the retail market. They include: L Etoile (Russian company owned by Kurs Group); Arbat Prestige (jointly with Marionnaud (France); Rive Goshe (owned by Parfum-Standart in St. Petersburg); Ile de Beute (owned by Edinaya Evropa Holding); and foreign investors Brocard (Brocard Group Ltd, Germany); Douglas- Rivoli (owned by a German company Douglas Holding AG and a Russian company Luxe Holding); and Sephora (France, a master-franchise holder is Alcor Co). The rest of the market is shared by non-chain retailers, such as Articoli and Kalinka-Stockman. 3. Major Players in the Russian Cosmetic Retail 3.1. Domestic Companies Turnover of the Russian largest cosmetic retailers (in $ mln) Company 2002 2003 2004 No of stores L Etoile 90 105-180 N/A 130-150 Arbat Prestige 80 150-202 234 16 Rive Gaushe N/A 100-27 Ile de Beaute 10 15 35 23 Arbat Prestige is the leader in the cosmetic and perfume retail in Moscow. The company was established in 1996, when it became a sub-distributor of Christian Dior. Later the company became an official distributor of 20 more well-known brands, such as Jean Paul Gaultier, Dolce & Gabbana, and Fendi. In 2002, the company completed closed their distribution business and focused on the retail. Currently, Arbat Prestige operates 16 stores in Moscow (two of which are in VIP format) and 2 in the regions, Krasnoyarsk and Chelyabinsk. Arbat Prestige is the only chain in Russia, which opens cosmetic hypermarkets, with the trade space of over 1,000 square meters. For example, the company currently operates a five-floor cosmetic and perfume trade center, with total space of 5,000 square meters.
Several years ago, Arbat Prestige changed its product policy from elite cosmetics to mass market products. Due to recent focusing on mass market brands, such as Nivea and Maybelline, Arbar Prestige increased its market share up to 60%. In 2004, Arbat Prestige signed a franchising agreement with the French Marionnaud, and the two companies are currently operating under the joint signage. L Etoile operates 150 small stores in 25 cities of Russia. In Moscow, L Etoile owns 40 stores, which provides the company with an opportunity to compete with Arbat Prestige even in Moscow. L Etoile offers more high-end products and currently represents 120 brands (compared to 55 brands in 2003). The share of mass market products in this company is 7% and is not likely to go higher than 10-12% in the near future. L Etoile retail chain is owned by Alcor & Co (Kurs Group). Ile de Beaute (owned by Edinaya Evropa Holding) opened its first store in a regional town of Voronezh in 1999. Since that time the company specializes in the regional markets. Currently, out of the company s 29 stores, 21 are located in the regions. In 2005, the company is planning to reach the turnover of $75 million. Ile de Beaute represents all major cosmetic brands, including Seldico s brands (Christian Dior, Givenchy, Guerlain and Kenzo). However, to compete with other Russian leaders, the company is looking for a strong foreign strategic partner. Rive Gaushe (owned by Parfum-Standart) is a St. Petersburg-based chain, which started to operate in the retail market of St. Petersburg in 1995. The company currently owns 27 stores, 21 of which are located in St. Petersburg. In St. Petersburg, Rive Gaushe is the leading cosmetics retailer. Initially, Rive Gaushe represented elite brands, while now Rive Gaushe stores offer all brands available in the Russian market. 3.2. Foreign retailers During the past three years, four major European cosmetic retailers (Douglas Holding AG and Brocard Group Ltd from Germany and Sephora and Marrionnaud from France) started their business in Russia. Most of them chose to merge or establish partnerships with existing local retailers. Sephora and Marrionnaud provided franchising to Alcor (owner of L Etoile) and Arbat Prestige, respectively. Douglas and Lux Holding established a joint venture Douglas-Rivoli. The presence of foreign cosmetic retailers in the Russian market considerably affects the operations of all players. Despite the fact that the Russian retailers annual turnover does not exceed $100 million, their trade space efficiency rate is quite good, not less than $4,000 5,000 per square meter per year, which is very close to European companies. Douglas-Rivoli currently operates 14 stores in Russia, including 9 stores in Moscow and 5 in the regions. They also have La Prairie Beauty Salon and GODIVA chocolate boutiques. The total trade space is 4,500 square meters. In its product line, the company is not looking to expand to mass market products. Sephora opened its first store in Moscow in 2003. Currently, there are three Sephora stores in Moscow and two in St. Petersburg. The company is planning to open 2-3 more stores in St. Petersburg by the end of 2006. Sephora and L Etoile, both operated by Alcor & Co, have two different formats, which is certainly a benefit for Alcor. However, the development of Sephora in Russia is too slow. Some experts attribute it to difficulties with availability of rental space.
Marionnaud signed a franchising agreement with Arbat Prestige in January 2004 for 10 years. According to Arbat Prestige, this is the first time in Marionnaud s strategy that they do not acquire a company in the foreign market but establish a franchising partnership. However, in 2005, Marinnaud itself was acquired by A.S. Watson. The leading cosmetic retailers in Russia use different market strategies, formats, and product lines. Some chains prefer small format stores. The average store space at Ile de Beaute and Douglas-Rivoli does not exceed 300 square meters, which is the best format for the promotion of elite cosmetics and perfume. To sell a much wider range of products, it is required to operate a more spacious store. Arbat Prestige s stores, with their diversified product range, have space of over 1,000 square meters each. Sephora also focuses on the hypermarket type of stores to offer 26,000 items (compared to 35,000 sell items at Arbat Prestige). According to local experts, it is feasible to open one medium store, with the space of 200 300 square meters, per every 300,000 inhabitants in large Russian cities, including suburbs. The cost of opening such a store is currently around $500,000. The pay-off period is normally about two years, and a good profit rate after 2 years of operation is considered to be $10,000 per 1 square meter per year. Major retailers choose between the three strategies of selecting their product lines: 1. a wide range of all price categories of products, including premium and mass market brands; 2. specific elite, premium-type brands; 3. a wide range of elite and middle-class brands, excluding mass market. Arbat Prestige, for example, has recently focused on offering more mass market brands, such as Nivea, Maybelline, Garnier (with a retail price of $4-7 per unit). L Etoile and Douglas-Rivoli, on the contrary, position themselves as premium product retailers. L Etoile officials announced that by the end of 2006, the company will represent 90% of the deluxe product market. To do that, they will certainly have to seriously compete with Douglas-Rivoli, which is currently offering such leading brands as Chanel, Shiseido, Christian Dior, Givenchy, Estee Lauder and many others and which is the only chain in Russia, which represents very unique brands, such as Clive Christian, Annick Goutal, Creed, and Aqua di Parma. Another competitive factor for all major players is personnel and professional consultants in store. It is generally acknowledged that none of the existing cosmetic retailers in Russia can boast of exclusively professional skills of their in-store staff. 4. Alternative Sales Channels Direct Marketing According to the Association of Direct Marketing, in 2003, the total turnover of direct marketing companies in Russia was $1.075 billion, and in 2002, total sales of cosmetic products through direct marketing were $460 million. Although DM companies in Russia also operate in the area of food supplements, household articles and other products, cosmetics represent 90% of the DM sales in Russia. In 2005, the market share of DM sales was around 13%, but this share is growing and is expected to reach 20% in 5-6 years.
The three major players in this market segment are Oriflame (Sweden), Avon (USA), and Faberlic (Russia). Other well-recognized brands include Mary Kay (USA) and Green Mama and Mia (Russia). For Oriflame, the Russian market is one of the most important. Since 1999, Oriflame has increased sales in Russia by seven times. Avon has also increased sales by 6.5 times for the same period of time. Currently, both brands have approximately equal sales - $100 million per year each. Drugstores Quite a recent development of the cosmetic market in Russia is increasing sales of cosmetic products through drugstores. It shows that more consumers trust the medical application of the cosmetic products. A very successful example of the brand, which is sold through drugstores only, is Vichy (L Oreal). Currently, 50% of the sales items in Russian drugstores are non-medical. In 2003, the sales of cosmetics through drugstores was relatively small, 3.8%. However, in 2004, the growth rate of such sales reached 15%, and it is estimated that this growth will continue. There are two major groups of cosmetic products, which one can find in Russian drugstores: mass market cosmetics, which can be distributed both through drugstores and other retail stores; and medical cosmetics, which is sold only in drugstores. The most popular product categories include skin care and mouth care products, cosmetics for kids, and nail treatment and hair care products. Beauty Salons It is difficult to estimate the number of beauty salons in the Russian market. According to some experts, there were about 9,500 beauty salons in Moscow in 2004, and the total market size for this business in Moscow was around $1.3 billion. Currently, 15-20 new salons open each month in Moscow, however, almost the same number of beauty parlors close due to very tight competition. In the regional towns, only 5-6 new salons open every year. One of the recent trends in the beauty industry is the development of chains in Moscow (e.g., Persona, Mysin Studio, Aida, Alexander Todchuk Studio), which currently represent about 10% of the Moscow market. Another trend, which is also more typical for large cities, is the development of specialized salons (e.g., SPA, nail studios, image salons). The distribution of cosmetic products through beauty salons is growing but still not very large. In 2004, total sales of cosmetic products in beauty salons was approximately $1.8 million. Sales On-Line Sales of cosmetic products through the Internet is not yet as popular in Russia as in the U.S. or Great Britain but it is expected that this distribution channel will soon become an important trend. It is expected that the major growth of sales on-line will be for perfumes, and not for decorative cosmetics, because a customer still prefers to select the colors and the texture of the products personally. Major local trade shows, where U.S. suppliers can meet prospective customers and advertise their services, include: Cosmetic products: - Intercharm, annual, 10.26.06-10.29.06, Moscow, www.intercharm.ru
- Cosmoprof, annually in March, Moscow, www.expobeauty.ru Retail Sector trade shows: - MALL, annually in January-February, Moscow, organized by Russian Retail Solutions Ltd, www.rusretail.ru, e-mail: expo@rusretail.ru - Shop Design, annually in September, Moscow, organized by Messe Dusseldorf Moscow, www.messe-duesseldorf.ru, e-mail: mdi@messedi.ru Adam Smith Institute annually organizes a conference Russian Retail, which is usually held in March - April, in Moscow. This is the leading forum on the issues surrounding retail development in Russia and is attended by the key players in this market. www.asi-conferences.com; e-mail: retail@adamsmithconferences.com For more information on the Russian cosmetics retail market, please contact: Marina Kamayeva, Commercial Specialist U.S. Commercial Service U.S. Consulate General St. Petersburg, Russia Phone: 7 (812) 326-2560; fax: 7 (812) 326-2561 e-mail: Marina.Kamayeva@mail.doc.gov Contact us for assistance entering the Russian market! The U.S. Commercial Service in St. Petersburg, Russia has designed many products and services specifically to assist companies such as yours enter or expand their business in the Russian market. Our aim is to facilitate U.S. companies' business ventures in this country and to ensure the successful achievement of their goals. If you have any questions about our services, please do not hesitate to contact us at StPetersburg.Office.Box@mail.doc.gov. If the information contained in this report alerts you to a commercial opportunity in Russia that leads you to obtaining new export business for your company, please let us know. We like to learn if we succeed in helping U.S. firms increase their international business. In addition, your contacting us will enable us to alert you of other targeted business opportunities that may arise in the future. We invite you to visit our website at: http://www.buyusa.gov/russia/en for more information about how we can help your company succeed in this market. For specific information about Northwest Russia please visit: http://www.buyusa.gov/russia/en/overview_nw.html