Russian cosmetics market expected to bounce back

Published: 2-Feb-2016

Recession has forced a contraction in sales, but the outlook for 2016 is more positive

A year after the Russian rouble suffered its worst single-day drop in exchange rate value in 16 years, Russians are more cautious about buying cosmetics and are showing a tendency to downgrade to cheaper products or seek out sales items. Experts are expecting increased competition in these lower cost segments in the coming years, as well as growing consumer interest in local brands and natural cosmetics.

“There has been a noticeable redistribution of consumers between different price segments on the market,” says Tatiana Puchkova, Board Chairman of the Perfumery and Cosmetics Association of Russia (PCAR). “Overall, consumers have a more cautious attitude about new products and tend to be more rational when spending their money, buying sale or promo items.”

Russia, with its 143 million population, remains the largest market for cosmetics in Eastern Europe, despite the rouble crisis, and accounts for 50% of cosmetics retail in the region, according to the country’s Ministry of Industry and Trade. However, the devaluation of the rouble by 50% since early 2014 has noticeably increased the costs of imported raw materials, which, coupled with consumers’ growing tendency to save on non-essential products, has led to a drop in Russia-sourced profits for major international cosmetics manufacturers.

Moreover, with Russia in recession (its economy is projected by the World Bank to contract by 3.8% this year) because of the fall in oil and gas prices, in addition to foreign sanctions, consumers are buying fewer cosmetics altogether. The country’s cosmetics market grew by 11.7% in 2013, but with the onset of the economic crisis in 2014, it decreased by 3.2%, according to a report by Magram Market Research, a Moscow-based independent research company, published in November 2015. The company’s analysts predicted a further decrease of 3.3% to 3.4% in the size of Russia’s cosmetics market over 2015.

Market researcher Euromonitor International also predicts a contraction, forecasting Russian sales of beauty and personal care products of US$12.2bn for 2015, down 2.3% on 2014. L’Oréal’s profits in the Eastern Europe and Commonwealth of Independent States (CIS) region of former USSR countries fell by 2.6% to t803.2m in the first half of 2015. Regional sales also fell in the first half for Coty, Oriflame and Avon, according to their corporate reports.

Feeling the pinch

Sales decreased, in part, due to the escalating costs of raw ingredients for cosmetics. These raw ingredients did not fall under the sanctions imposed by Russia in August 2014, however, the devaluation of the rouble has made it more expensive for companies to import them. While many foreign companies have local production facilities in Russia, 95% of the ingredients they use to make the cosmetics are still imported, according to PCAR.

This increased spending on imported raw materials and the devaluation of the rouble forced companies to raise retail prices on their products in 2015.

The average retail price of a cosmetic item sold in a chemist/pharmacy was RUB225 ($3.12) in the first three quarters of 2015, which is 22% more than in the same period the previous year, according to DSM Group, a Moscow-based analytics company. Meanwhile, the sales of cosmetics in pharmacies – which feature brands such as L’Oréal’s La Roche-Posay and Vichy – decreased by 6% in monetary value and 24% in terms of units sold during this period. The number of packages sold decreased by 36% in the mass market segment, 16% for cosmeceuticals and 18% for premium cosmetics.

The increase in rouble prices was also felt across all segments. Prices for premium cosmetics increased by 13%, mass market products by 18% and cosmeceuticals by 20%. According to DSM Group, the average retail price for Bioderma, Lierac and Ducray products increased by 20%, while Vichy and Uriage raised their prices by an average of 15% in 2015.

Other cosmetics manufacturers, including Henkel, Beiersdorf, Mary Kay and Oriflame, were also forced to increase their prices by the year’s half mark. Although Oriflame opened a major factory in Noginsk (near Moscow) in February 2015 and is able to use some local packaging materials, the ingredients it uses for its cosmetics are still imported and have therefore become increasingly expensive with the fall of the rouble. “Our price increases correlated with the rouble exchange rate,” says Sergei Bolshakov, Corporate Affairs Director for Oriflame Cosmetics in Russia & CIS.

However, with Russia’s economy projected to stabilise this year, he adds: “We anticipate that in 2016 price increases will not be as dramatic as they were in 2015.” Local production of ingredients for cosmetics is growing, and Russia already has its own manufacturers of extracts and essential oils. However, as Bolshakov notes, local production volumes are still not sufficient or versatile enough to substitute for foreign imports.

“The possibilities to replace raw materials are quite limited,” he says. “There are practically no manufacturers of high-quality specialty ingredients for cosmetics in Russia. Also, to be able to export products from Russia, we need to use raw materials that correspond not only to Russian, but also international requirements. That is to say, our company does not reject Russian ingredients in principle, but for objective reasons, our ingredients are imported.”

Customer cutbacks

Customers have reacted to the price increases by downgrading on some cosmetic products and buying less overall. About 9% of Russians say they are forced to save on perfume and cosmetics, according to Magram’s November report.

The same study noted that cosmetics in the low-price category have been least affected by the economic crisis. This category grew by 3.4% in monetary value in 2014 and analysts expected to see a further growth of 2.8% in 2015. The mid-price category was, on the other hand, the worst affected. It fell by 14% in 2014 and was projected to fall by an additional 15.2% in 2015. Premium cosmetics also saw falling sales, a decrease of 8.2% in monetary value in 2014 and an expected decrease of 8% in 2015. In the mass market, the decrease was 9% and in 2015 this category was expected to fall by 10.5%.

“Consumers of luxury cosmetics are switching to medium-priced brands, while those who typically use medium-priced cosmetics are turning their attention to mass market products,” explains PCAR’s Puchkova, adding that there has been an increase in demand for cosmetics and hygiene products in the cheapest price range of up to RUB100 ($1.38). Sales of professional cosmetics for home use are also on the rise.

However, experts note that the switch to lower-priced cosmetics is a necessity rather than a preferred choice for Russian consumers, who tend to be reluctant to downgrade to cheaper brands and may even cut spending in other categories to be able to afford the cosmetics they want. “We see that, despite economic developments, Russian consumers are not interested in compromising on the quality of the beauty and personal care products they buy. Some buy less. Some feel forced to buy cheaper products,” says Bolshakov.

Maxim Rakov, Senior Communications Manager for Avon in Eastern Europe, noticed similar buying habits among his company’s clients. “Consumers are paying more attention to promotional items and are more careful about their spending. This trend could even be observed in the period leading up to the New Year’s holidays,” he says. “However, it should also be noted that Russian buyers are trying to choose products that are sold at reasonable prices, but are also of good quality.”

However, one segment where Russian consumers have been keen to maintain personal care product spending has been decorative cosmetics, according to Synovate Comcon, a Moscow-based research company. Russian women spent an average of RUB1,174 ($16.30) on decorative cosmetics over three months at the end of 2014, while at the end of the first quarter of 2015 this spending amounted to RUB1,160 ($16.12).

This determination to continue buying colour cosmetics gave investors the confidence to continue introducing new products to the market in 2015 despite the challenging economic situation. Notable arrivals include France’s Jardin d’Oléane and Ioma brands; the US’ Urban Decay and Elizabeth Arden PRO; Spain’s Bella Aurora; and Switzerland’s Neocutis.

Meanwhile, Asian cosmetics brands have continued their global expansion with brands such as South Korea’s Dr. Jart+ and Kicho making their debuts on the Russian market. Analysts note that South Korean and Japanese cosmetics are becoming increasingly popular among local consumers because of their favourable price-performance ratio and the innovative nature of their products, and are expecting to see increased competition with these brands in the coming years.

Local brand resurgence

The ongoing economic crisis has also attracted interest for local brands, which tend to be strongest in the low-price segment and are therefore particularly attractive to consumers with decreased purchasing power. The percentage of Russians that prefer locally produced cosmetics grew from 15% to 21% between September 2014 and February 2015, according to research by Synovate. “Russian brands have a great potential for development. Our market has many honest Russian companies that value their reputation, and manufacture safe and high-quality products in different categories based on their own research and development initiatives,” says Puchkova.

Russian manufacturers are particularly strong in the categories of facial skin care, shower gels, shampoos, deodorants, hair care and hair styling products. Local brands Barkhatnye Ruchki, Cherniy Zhemchug and Chistaya Liniya are already leaders in the skin care sector in Russia, according to a 2015 report from market researcher TNS. Another local brand, Moscow-based Natura Siberica, which specialises in skin and hair care, is one of the strongest brands in Russia’s mass market segment and has recently started producing decorative cosmetics, a category traditionally dominated by foreign brands. 

Many Russian brands make an emphasis on their use of natural ingredients and some even cite traditional recipes. In addition to Natura Siberica, this marketing practice can be observed among the most prominent local brands including Teana, Kleona, GreenLab, Organic Shop, Agafia, Planeta Organica and Green Mama.

Euromonitor has noticed an increased interest in local cosmetics and ingredients among Russian consumers, such as Siberian grasses. This dynamic has assisted the arrival of natural cosmetics brands AYA Magic (drawing on ingredients from Israel) and Ausganica (sourcing inputs from Australia) to the Russian market in 2015, and encouraged mainstream cosmetics manufacturers to incorporate more natural products into their line-ups.

For example, the two fastest growing Russia categories for direct sales specialist Amway are its premium care and decorative cosmetic products and its Nutrilite ones, which include vitamins, minerals and dietary supplements. The company stresses to consumers that it uses ecologic ingredients in its cosmetics while the ingredients for its vitamins line are grown on organic farms.

“In Asian markets, particularly in China, we are best known as a manufacturer of goods for healthy eating. This is not the case in Russia yet, but demand is growing due to the popularity of active and healthy lifestyles,” says Anna Soshinskaya, spokesperson for Amway in Russia. “We believe that the portion of products devoted to maintaining health and beauty will continue to grow in Amway’s total sales in Russia.”

Green goddesses

The outlook for natural cosmetics in Russia is strong enough that some entrepreneurs are launching new businesses despite the challenging economic conditions. One example of this is Green Studia, which opened in St Petersburg in autumn 2015. It doubles as a salon and a store of natural cosmetics, the most popular of which are shampoos and hair masks.

“We decided to open this business in the wake of growing popularity of healthy lifestyles and proper self care,” says Natalia Sklyar, co-owner of Green Studia. “Right now the mass market is filled with pseudo-organic cosmetics, which are in great demand among consumers.” The target audience for Green Studia is women aged 20-45, who lead active lives, practice yoga, subscribe to healthy eating and are concerned about global ecology. Their earnings are average, or just higher than average and they can afford to go to a beauty salon once every two or three months. Currently, 95% of its clients are women.

Green Studia relies on word-of-mouth, partnerships with other health-oriented businesses and social networks to attract clients. “The popularisation of natural cosmetics [in Russia] is a matter of time,” Sklyar says. “We believe that women – and not just women – will feel the difference and switch to organic cosmetics.”

Organic cosmetics is one of the categories in which experts anticipate seeing the biggest growth in coming years. Among the other recent trends on the Russian market is the growing use of the internet to buy cosmetic products. The Nielsen Global Survey of e-commerce, published in late 2014, showed that among the products Russians are more likely to buy online, cosmetics were chosen by 26% of the respondents. The share of online sales in Russia’s cosmetics market was then around 4%.

A Hermes NexTec research report from June 2015 also showed a steadily growing interest in cosmetics among Russian internet users in the period from 2013-15. The report noted that while the 120 cosmetics brands present on the Russian market attract seven million online queries each month, only 37 of them, or 31%, had their own online stores. In addition, growth is expected in the Russian market for decorative cosmetics, and cosmetics in the medium and mass market price ranges, while skin and hair care products are projected to maintain their leading positions.

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