With the taste of success still very much apparent in Russian C&T, the stakes are high for breaking onto the global stage. Intercharm 2006, held from 26-28 October at the Crocus Exhibition Center in Moscow, represented an industry ready to move onto the next level and a hunger to get in on the international action.
Though growth rates in the C&T industry in Russia are now showing signs of slowing down, ExpoMediaGroup Staraya Krepost estimates sales of perfume and cosmetic products at approximately $7m in 2005, with many sectors still showing potential for growth and plenty of opportunity to exploit unexplored niches.
Intercharm 2006, a three-day international beauty event, played host to 850 exhibitors in eight halls, all present to display the latest developments in innovation, technology, formulation, packaging and ingredients. Representatives from the C&T industry around the world – including China, Korea, Egypt, Israel and Turkey, along with most European counterparts – attended the exhibition, proving the Russian stage to be a popular one.
An arena for discussion and progression, Intercharm also provided an opportunity for Russian companies to demonstrate how they are gearing up to obtain a strong foothold in the global market. But whether the country has what it takes to compete with the multinationals, with their strong presence in the market and push them off pole position is a question that was addressed during Intercharm’s Cosmetique News Forum.
Taking the stage
Understanding how to push sales in Russia naturally involves understanding the consumer. The Russian people have been exposed to dramatic change, politically and economically, within a relatively small time frame and this has thus led to a rampant appetite for consumerism.
Eager to prove their status and success, which only the current generation are privileged enough to experience, consumers lead aspirational lifestyles, spending more than they can actually afford on luxury items. And, contrary to Europe’s cosmetic markets, Russia has not yet hit its full market potential.
Russians appear to be still in the early stages of their love affair with C&T and manufacturers are doing all they can to keep up with the latest in innovation beyond its borders. Novelty is a driving force on the European markets and this trend is also strong in Russia.
Though trends vary from country to country, Russian consumers are becoming more westernised and as the market develops, manufacturers increasingly have to conceive products which will catch their audience’s attention. Julia Bevzenko, partner of BPO Executive Search and Consulting, spoke on consumer psychotypes from a European perspective and how these types buy their C&T, choosing brands to suit their styles and attitudes.
Image is a combination of hairstyle, make-up and clothes which influence how friends, family and outsiders perceive us. The disposable income of Russian women is increasing as wages rise. The standard of living too is improving and women can afford to think about such issues, projecting their own lifestyle choices to the outside world. Trends sweeping over from the west are increasingly influencing women’s attitudes and upping consumer demand.
Bevzenko used the main characters of US TV series Sex in the City as an example to highlight the five different psychotypes and question whether these types affect the choice women make when buying cosmetics brands.
Women roughly fall into five broad categories: romantic, spectacular, classic, natural and gamine, and will typically buy specific brands to suit their character. The romantic is said to be spontaneous and feminine, choosing brands such as Guerlain, Estée Lauder and YSL to express herself. Her cosmetics bag will consist of Shiseido, Biotherm and Pharma products. She may experiment with aroma oils, in complete contrast to the aggressively sexual spectacular type who chooses to make a strong statement with Gucci and Chanel, stepping into the mass market to pick up brands such as Pupa. A woman secure in her sexuality and proving that she can compete in a man’s world, she may even wear a male fragrance.
The classic woman is conservative and has nothing to prove. She chooses her accessories and cosmetics carefully, such as Clinique, Lancôme, Clarins and private label products. A natural type does not pay too much attention to her looks and will choose the first product that she comes across. Her bathroom shelf will consist of L’Oréal, Estée Lauder and Garnier products. The last type is a reminder that differences still exist in the market. Gamine figures are rarely seen in Russia. Physiologically they are short and slim, Audrey Hepburn-esque and have an iconic sense of dress.
Analysing and grouping the consumer in this way gives some insight into the current status of Russian C&T. Whereas in Europe the demand is increasingly focused on customisation and offering a wholly individual service to each customer, Russian females – and males too – are still relishing self discovery and are seizing their role en-masse in contemporary Russia.
Changing face
Tatyana Puchkova, chairman of the board at the Perfumery and Cosmetics Association of Russia and director of Kompania Russkaya Kosmetika a Russian manufacturer, highlighted the diversity present in the global skin care market and how the definition of cosmetics is now proving uncertain. Many relatively new developments, such as cosmeceuticals and nutriceuticals, defy current classification and are therefore not only causing a headache to manufacturers and retailers but confusing the consumer. As fashions tend to be cyclical, C&T, she argued, is coming back to a more natural approach.
James McCoy, senior consultant at Mintel, said that the number one products in the anti-ageing facial skin care sector have a botanical or herbal influence in both Europe and the US. He demonstrated that increased segmentation in the skin care sector has shown a glut of new product launches over the past few years. Anti-wrinkle creams is one of the most crowded categories, dealing with problems like elasticity, pigmentation and the eye area. Looking to the future, innovation will be the driving force as women demand products that address every single concern and allow them control. He also highlighted the blurring of the sectors and pointed to a future of anti-ageing body care products along with cleansing products such as anti-ageing face wipes.
Full capacity
One sector to have led the way in Russian C&T is hair care. Neal Whitfield, European marketing manager for Life Sciences at Dow Corning, an international raw materials supplier which opened an application centre in Moscow in 2005, spoke on this market.
Though it is the biggest and most mature sector, the sector still remains dynamic due to the increasing demand for more individualised and tailored products. Russian consumers are experiencing a freedom to choose like never before as income rises, and therefore require both good quality and highly specific products, no longer accepting a shampoo solely for dry hair, for example.
With the shelf life of new products being on average three months there is a real need for constant innovation. Styling and colouring hair is a popular part of Russian beauty regimes according to Whitfield, with more than 55% of Russians using colourants and 75% spending on various styling products.
This popularity is reflected in growing sales and is opening up opportunities for domestic producers, who can take inspiration from the multinationals. In turn, this should lead to an increase in the call for conditioning products and treatments as hair is exposed to heated styling appliances. Taking a chance on the younger generation’s need for gels, mousses and waxes to style their coiffure could also lead to potential growth as western influences spill into the country. And young or old, consumers see it as paramount to be able to trust and rely on their chosen brands. “The point of making product claims is to make the benefits perceivable to the consumer,” Whitfield stressed, suggesting that marketing should be clear and unambiguous.
To maintain a secure foothold in such a fiercely competitive market, he advised domestic producers to trade on quality rather than price or risk losing out, and offered encouragement that it is possible for a Russian brand to appear in the top 50 global manufacturers. Using P&G’s Pantene as a model, he said that the key to its success is strong brand image and extensive segmentation.
Expanding less developed areas will be the key to future growth in Western Europe, according to Euromonitor senior cosmetics and toiletries analyst, Briony Davies. Taking an in-depth look at the male market in Russia, she claimed that it is growing at twice the rate of the overall C&T market and is now the eighth most important market globally, set to close in on the oral care market by 2010.
ExpoMediaGroup Staraya Krepost predicted an optimistic 25% rise in sales to $680m for the Russian men’s market in 2006. Several factors are driving growth in this sector: Eastern Europe is gradually shaking off its reputation as Western Europe’s poor neighbour. Membership of the European Union is contributing to the growing westernisation across Eastern Europe and has also provided a welcome boost to the economies as trade boundaries are broken down.
Manufacturers, therefore, have room to convince men of the benefits of male grooming and persuade them that their needs are different to those of women. Davies questioned the saturation of the razors and blades category: “How much further can manufacturers go? It seems to be an end of the road for this category. How many more blades can you add?”
More research into the buying habits of men with greater disposable incomes may help to shift the focus away from shaving and onto areas such as added value skin care or hair care.
Alexey Kobyakov of specialist agency Symbol Communication Group, stated that almost 60% of Moscow’s male middle class do not buy skin care, one third do not buy shower gel and one in four do not wear fragrance. Manufacturers have room to tap into the Russian man who proves to be more adventurous through exposure to
western media – as he is heavily affected by brand publicity.
Although in the past ten years many of the multinationals – particularly P&G and Beiersdorf – have expanded into Russia, local companies such as Kalina, the current leader of the Russian market, can profess to a true understanding of Russian consumers and can therefore employ better focused strategies to target their audience.
Retail growth will come through internationalisation, says Davies, with the larger retailers crossing over into different markets. Tesco, for example has recently set up shop in Korea, Japan and the US. Foreign manufacturers are likely to consolidate with local companies so as to increase their share, just as smaller supermarkets will merge while local retailers, such as pharmacy chain 36.6 and cosmetics retailer Arbat Prestige, will continue to push C&T into the regions and increase awareness.
Davies spoke in broader terms about the developing markets of Latin America and Asia Pacific. Brazil, China and Russia are currently the fastest moving markets with China set to take the top spot by 2010. “Russia will contribute more to growth in the industry in 2010 than the US,” she predicted. As consumer sophistication grows and the Russian and Western European markets level out, sales of added value masstige and super premium brands, offering a lifestyle choice and not just a product, will experience a rise.
Brands such as P&G’s Olay and Unilever’s Dove have ensured sustainable future growth in the skin care sector, while doctor brands continue to gain momentum through professional endorsement and the inclusion of sophisticated ingredients that promise to help in the battle against ageing skin and cellulite. Products for ethnic consumers, value added colour cosmetics, depilatories and sun care also show potential, according to Euromonitor.
Eugeniy Sinyakov, general director of Pharmalogic Projects, a company specialising in logistics and outsourcing, spoke on retail supply chains and the logistical issues which need addressing. According to his research, every third customer will choose a different product or brand if his/her chosen item cannot be found on the shelf. Furthermore, every fifth customer will change stores.
Modern day retailing has witnessed a growth in product range, new products entering the market and cost-cutting all the way along the supply chain. But distribution is yet to catch up with the changing face of the Russian C&T industry. He suggested that communication from the factory floor up to retail level needs to show improvement and this can be achieved through better management of documentation and information, introduction of a monitoring system for key operation indicators by focusing on how to improve efficiency.
Behind the scenes
Looking to acquire new customers, Nils Mazgareanu, area sales director of contract manufacturer Schwan Stabilo, said that the company has the necessary patience to make contacts and learn how to behave in someone else’s territory. “There needs to be a chemistry between a customer and partner before you can build a success story. These are very interesting times, as Russia is a relative newcomer to the business. Schwan Stabilo is being asked for its opinions, so it is clear that companies are still learning,” he explained.
He continued that Intercharm continues to be the most important show for the Eastern European market. Schwan Stabilo admits to an 8% market share of the Russian market and is helped by the Russian confidence in German-made products. The incredible growth seen over the past eight years now makes for tough competition. “Only the strong companies will survive and keep market share. Russia has the potential to take over Europe’s C&T markets. If you want to do business in Russia, you have to have a presence here to take part. It’s also an important base to expand into the surrounding countries,” said Mazgareanu.
On the mark
Russian success story Krasnaya Linia, or Red Line in English, proves the virtues of patience and determination. The C&T manufacturer began distributing mainly Bulgarian mass market products and has now been on the market for 14 years. Alexey Baklan, main shareholder in Krasnaya Linia, explained that in 1993 the market was virtually non-existent with few products in stores.
According to Baklan, in Soviet times Eastern European companies celebrated a so-called economic union but after the break up of the Soviet Union it was a matter of taking a chance when investing in the market. At that time Bulgaria was the main supplier of toothpaste to Russia with Italian and Swiss companies also establishing themselves on the shelves. In 1999 Krasnaya Linia began to manufacture its own private label products in small volumes as the import taxes levied on foreign beauty products were proving increasingly expensive.
The company now produces six million items a month and in December 2006 launched an improved manufacturing line able to produce nine billion items each month to deal with the overwhelming number of orders it receives. Some 30% of the products that the company manufactures are produced for other brands, leaving 70% of its production capacity for Krasnaya Linia’s own branded products, launched just five years ago. A massive advertising campaign has ensured that Red Line is a household name in Russia and at present the brand claims up to 60% of Russians recognise the brand.
Krasnaya Linia claims to have opened up the intimate soap category in Russia and it now dominates this sector. Turnover of the soap has grown from an initial 10,000 units a month to an estimated 400,000 units a month and continues to grow. On the back of this success, the company extended the line and in 2006 retail sales stood at $70m according to Baklan, second only to Kalina. The company is hoping for a 30% increase on last year’s sales in 2007.
And so the company is driving full speed ahead, exploring export opportunities to the surrounding CIS countries (Commonwealth of Independent States) and is specifically targeting Turkmenia, the Ukraine and Kazakhstan and aiming for the same success in each of these markets.
Three years ago the company took up residence in a production plant in Bulgaria, now producing 1.5m cosmetic products a month, proving a strategic move before Bulgaria’s entry into the EU. It acquired Kompania Russkaya Kosmetika last year, though Baklan does not believe there are any other companies on the market worth bidding for. Instead it will continue investing in its manufacturing capabilities and wants to create a manufacturing line capable of producing 20m items a month in the space of the next two years. This is especially important as both retailers and Russian brand owners grow and produce more private label lines, such as the 36.6 own label range.
Taking advantage of the visiting public, the company took up a large stand in the exhibition hall, sending out a strong message to both professionals and locals. Its strategy is to continue strengthening brand image and expand further so that once the market has matured, the name Krasnaya Linia will not only be well known but also trusted and welcomed in Europe.
Another opportunity to display home-grown abilities was the Novelties Gallery, open to the general public and making its debut at the exhibition. The area gave Russian companies a chance to showcase unseen niches in many of the different sectors. Gineral presented its Amina cosmetics line, aimed specifically at muslim women. Olga showed off its Veique brand of teenage make-up products and Torn introduced Ono, a line-up including shampoos, conditioners and bath and shower products, said to contain 50% moisturising cream.
Taking the initiative
Martine Muller-Lesaffre, president of business development and consulting agency Explosive Beauty, gave an insight into niche products on the global market which could permeate into Russia and the growing trend in biocosmetics or natural/organic products.
In her view, small brands such as Frédéric Malle, Serge Lutens and Crème de la Mer have all proven successful as they offer a feeling of luxury, greatly sought after in this decade. And as the trends for well-being, health, nature and freshness continue to gather steam, brands like Du Plessis’ Amazonia Viva, a Brazilian botanical line using essential oils native to the Amazon, and Doux Me, a natural and 100% organic cosmetics line founded by Caroline Wachsmuth, are seeing their initial efforts pay off. Industry experts predict that the organic market will put on 9% growth a year between 2003-2008.
ExpoMediaGroup Staraya Krepost set out its predictions for the future of the Russian C&T market. Due to new legislation, many manufacturers will find themselves required to alter their formulations to exclude certain ingredients. This could have an adverse effect on future sales, with some industry experts predicting a 60% cut in volume and value sales, which in turn will drive retail prices up by around 35-40%. But others say that the huge potential yet to be exploited through the niche market will make up for any losses. Inevitably, consolidation will follow as many smaller local companies will not be able to afford necessary changes, leaving room for foreign brands to step in.
Holding out
With such a disparity between the many Russians living in rural towns, so far removed from the capital in both lifestyle and income, Russian C&T manufacturers have the advantage in their own territory of being recognised and trusted in the regions. But, with the multinationals snapping at their heels, local companies may not enjoy their monopoly for long. For the bigger companies it appears that there is everything to play for and Russia too is ever eager to show it can compete on an international level.
With such a rapid rate of expansion, does the industry have its feet firmly on the ground and, in the long term, can Russia pay the price? Though taking a lead in the global C&T market seems a fairly distant hope for the future, this year’s Intercharm conference proved that Russian manufacturers are hungry for recognition and will continue to prove that they aren’t prepared to just step aside.