Increasingly mature Eastern European markets still offer opportunities for efficient, creative cosmetics players. Mark Rowe examines the potential.
Following the extended frenzy that saw multinational companies move into Eastern Europe in the 1990s and early 2000s, several markets in the region are approaching the maturity of Western Europe. And while Russia lags behind in general terms, the micro-economies of Moscow and St Petersburg are similarly saturated by high-end brands and developed consumer choice and tastes.
Global brands dominate in these maturing countries. Leading brands by volume sales include Oriflame, Dove and Nivea Visage/Vital, with Avon taking the number one spot in Estonia, the Czech Republic and Hungary.
Major market segments vary. In Croatia skin care is the largest market, worth €56m in 2007, followed by hair care (€39m). In the Czech Republic hair care (€195m) exceeds skin care (€150m), while in Estonia, skin care, worth €30m in 2007, is the largest market, followed by hair care (€19m). Skin care (€39m) and hair care (€36m) are also the first and second largest markets in Slovenia.
SLOVENIA - MATURE PERCEPTION
Slovenia’s market is also perceived as mature by market analysts and those in the country. “It continues to be dominated by multinationals, with little scope for local companies,” says a spokeswoman for the Association of Cosmetics and Detergent Producers of Slovenia. “The market in Slovenia is relatively mature,” she says, adding that this situation was perceived as reasonably positive. “If you look at the general status of the population, there are no specific problems, and purchasing power remains strong. No big shifts in trends are anticipated. The luxury segment is doing well but is very small compared to international standards and there is scope for growth among certain sectors such as toiletries. The market is still growing, but you couldn’t say it is exploding.”
Scope for expansion within Slovenia appears limited, partly because of the size of the country. Drogerija, one of the leading Slovene companies in the cosmetics trade, employs only 100 people and operates out of just eight retail outlets, most of which are located in the centre of Ljubljana.
CZECH REPUBLIC - QUALITY CONTROL
In the Czech Republic, market saturation has not stopped some luxury items such as branded perfumes growing healthily as incomes continue to rise. But it has also brought a number of problems, chief among them being that of lookalikes, or products that ape existing successful international brands. “Branded goods are struggling with this,” says Jan Levora, chairman of the Czech Association for Branded Products. “Consumers are quite satisfied with localised products that provide them with similar quality at much lower prices.”
Maturity has also seen international companies launch products in the Czech Republic to see how the market reacts before pushing them further afield. “Maybe this is proof that our market is truly mature,” adds Levora. “International companies take the view that we are a mature, if relatively small market and that our consumers are a good way to test new products before expanding production across Europe.”
Among such moves, earlier this year Henkel launched an anti-greying shampoo in the country, the results of which it was reportedly satisfied. “The international companies seem to think we are a good laboratory,” says Levora. “Czech consumers seem to prefer branded markets. They are fairly discerning about what is local and what is international, which is quite different to the attitude you see in Poland.”
Yet maturity does not mean the market is wholly dominated by ubiquitous multinational brands. Despite an apparent predilection for branded goods from internationals, Czechs have also continued to hold some local producers, of toothpastes and dishwashing liquids, close to their hearts. “The international companies saw how popular some local brands were and tried to take that market, but they found people were quite resistant,” says Levora. “JAR is a brand of dishwashing liquid that goes back to the 1960s and is popular because of its quality and association with the country.”
“The Czech Republic is the most developed Eastern Europe market, with signs of maturation in some beauty sectors,” says a spokeswoman for Euromonitor. “However, the country does have a blossoming premium segment (10% growth in 2006) and is experiencing increased spending in emerging sectors, particularly sun care and men’s grooming products as well as luxury goods such as fragrance.”
Nevertheless, stability seems to be the key to the Czech market’s medium-term success. “The market has been mature for some time because the multinationals started to enter the market as soon as things changed in the early 1990s,” explains Levora. “It hasn’t changed substantially for a few years now. I would say that maturity has forced both international and the few local companies remaining to be more creative. Most of the products are pan-EU and manufactured here. I don’t expect any radical changes in the market in coming years. Things have become quite static and this is a very safe part of the cosmetics market for the foreseeable future.”
RUSSIA - DOMESTIC STRENGTH
While multinationals dominate Eastern Europe’s beauty market, local brands also play an important role in select countries, particularly in Russia, Ukraine and Poland. Firms such as Russia’s Faberlic and Kalina and Poland’s Laboratorium Kosmetyczne Dr Irena Eris are faring well against foreign competition, using local knowledge and acquiring smaller domestic players to build up consumer loyalty and market share.
“The competition is of course getting tougher in these mature markets due to the fact that all the big international companies are already fighting for market share,” says Georg Höbenstreit, vice president cosmetics and toiletries for Henkel. “The market approach to these mature markets is of course changing. But this has been an ongoing process – the challenge is the same as we have to face in Western European markets.” And according to Höbenstreit, these challenges include working closely with retail customers. “We also need to launch excellent innovations to meet the needs of the consumers and adapt marketing concepts to local needs. We need to be very sharp with promotions and advertisements. There are opportunities and chances in every single market and not only in special market segments.”
Kalina is the largest of the local firms, with a 2% share in Eastern Europe in 2006. It has also expanded tentatively into the Western Europe market through its purchase of Germany’s Dr Scheller Natura Vital. Direct seller Faberlic more than doubled its regional brand share over the 2001-2007 period to more than 1% and is a top ten seller in Russia and Ukraine.
HUNGARY - DENSE DEVELOPMENT
The Hungarian market also poses some difficult questions for companies looking to expand what is perceived as a mature market. In 2007, the country’s cosmetics industry estimated its own value at around €500m. The greatest share of this was taken by body cleansing products (26%), followed by hygiene products (25%), body care and beauty (23%), deodorants and fragrance (13%) and baby care (13%). Body care and beauty products grew by 7% in value terms in 2007/2008 compared with the previous year’s growth of 4%. Deodorants and fragrance were up 9% in value terms, compared with 7% in 2006/2007, while hygiene products grew by 7%, down on growth of 8% the previous year. Baby care products have grown by 8% value over each of the last two years.
“The market is very developed and is very dense,” says Istvan Muranyi, secretary general of the Association of Hungarian Cosmetics, Detergents and Cleanser Industries. “The presence of the international players and their structures is very developed. Every day I get several enquiries from companies asking for links and networks within Hungary but only a couple of enquires a year from Hungarian producers looking for European distributors. It is very dense so companies are going to have to be creative and thoughtful to succeed and expand. When our market was liberalised all the international brands invaded and it was very dramatic, but things have changed. We can now be compared to any of the medium sized countries in the EU.”
But there are a number of sectors in the market that do have potential for further expansion. “The difference with Western Europe is that the market is mature but the buying power of people is still at a lower level than elsewhere in the EU, so consumption per capita is lower too,” explains Muranyi. “We are still below the pan-EU growth figures for the industry. That means there is big potential for the market to grow but the challenge is that it is not growing very fast at the moment.”
Hungary’s cosmetics market is a curiosity, according to Muranyi. “Hungarians particularly favour decorative cosmetics,” he says. “Fragrance and similar products are doing well compared to toiletries, which are stagnating. This is a complete reverse of the rest of the EU; we use more decorative products and fewer everyday products.”
Muranyi anticipates growth in two particular areas in the next few months and years as companies seek to manoeuvre in a crowded market. Chief among these are organic, or bio products. “We are looking at a boom in this market in the future,” he says. “Hungarians are no different to other Europeans and there is increasing interest in this area with fewer products in the sector than in any other. But there is a challenge. The term ‘bio’ is not registered in the country so anyone can call a product ‘bio’ even if it isn’t organic. That needs to be addressed by legislation.”
Manufacturers also attest to organic products being a growth area. Henkel reported a 6.1% growth in organic sales for 2007/2008, which it attributes in large part to significant double-digit growth of organic products in Eastern Europe. “Organic sales of the home care segment underwent a substantial increase with the greatest impetus again coming from Eastern Europe,” says a Henkel spokesman. “The main contributors to this sales improvement were our dishwashing detergents and WC cleaning and hygiene products.”
Companies such as Dior have also increased their presence in Hungary in recent months, which Muranyi believes is a signal that the luxury end still has room for growth. “The potential is there, but there are a lot of companies so they are going to have to be creative,” he says.
ROOM FOR GROWTH
Areas for exploitation in Hungary and other countries in the region include baby care, depilatories and dental hygiene. The baby care market in Slovenia was worth €3m last year (€2m in 2002); €7m in Hungary; €1.2m in Estonia; €13m in the Czech Republic; and €4.3m in Croatia. In all these countries, baby care is the smallest, or second smallest market segment.
In Croatia, the dental market is worth €18m, ranking seventh out of all cosmetic and toiletries products in the country. In the Czech Republic the figure is €65m, in Estonia €5.2m, in Hungary €68m and in Slovenia €16m. “A lack of diversification away from toothpaste and manual toothbrushes is limiting the oral hygiene sector,” comments a Euromonitor spokeswoman. “Eastern European consumers have not yet been persuaded to experiment with oral hygiene accessories such as dental floss and mouthwash.”
A similar picture emerges with depilatories, worth just €1.1m in Slovenia, €8m in Hungary, €600,000 in Estonia, and €5m in both the Czech Republic and Croatia. “Depilatories is not a high value sector in any regional market but is particularly small in Eastern Europe due to cultural traditions that do not favour hair removal as a path to beauty,” says Euromonitor. So there are still areas with potential – it’s a question of careful selection and creativity in development.