After years of negotiation, Russia has finally joined the WTO. Alan Osborn, Lena Smirnova and Keith Nuthall report on the likely impact of accession on Russia’s personal care industry
Russia’s personal care product industry is bracing itself for tougher overseas competition following its accession to the World Trade Organization (WTO) in December. Russian import tariffs will be capped at new lower levels with an average tariff for manufactured goods such as cosmetics, soaps and perfumes of 7.3%, compared with 9.5% today. These falls will be particularly steep for some personal care products, warned the Russian Perfumery and Cosmetics Association: the tariff on perfumes entering Russia, currently 15%, is expected to fall to 12.9% in 2013, 10.8% in 2014, 8.6% in 2015 and 6.5% by 2016. Tariffs on cosmetic goods will also decrease. For eye and lip cosmetics the tariffs will fall from the current 15% to 6.5% in 2017 (13.3% in 2013, 11.6% in 2014, 9.9% in 2015 and 8.2% in 2015).
The association’s chair Tatiana Puchkova told SPC that the Russian scent sector would be particularly vulnerable as a result of the changes: “Russian companies currently have a very strong position in the sector of inexpensive perfumes with a price of t20 per bottle. The reduction of duties, as well as the changes in the legislation on the turnover of ethanol, will inevitably reduce this level and give more opportunities to importers of cheap alcohol products.”
In addition, Russian producers will not benefit sufficiently from reduced import duties on chemical raw material inputs to counteract their increased exposure to foreign competition in the new low duty environment. “Consequently, local producers will be at a disadvantage to importers, who will be getting a reduction in customs duties,” Puchkova added.
That said, she did not predict major changes for the decorative cosmetics sector, where European brands dominate the luxury market segment while products made in China are leaders for cheaper lines. “The manufacture of colour cosmetics in Russia is weak so it’s unlikely that there will be any significant changes in this market,” she said. “International companies are traditionally strong here, in all price segments.”
Moscow has announced that it will try to protect domestic producers in certain industries. However, it will have to abide by global rules regarding import bans based on health concerns about certain products after it has been accused of behaving arbitrarily in the past. All trade charges and customs fees will henceforth have to be transparent and published in the Rossiiyskaya Gazeta. In addition, under Moscow’s commitments to join the WTO there will be six years’ protection of intellectual property for companies trading in Russia, a country with a poor reputation for IP protection.
Russian consumers of cosmetics, particularly in the key markets of Moscow, St Petersburg and Yekaterinburg, have shown a strong preference for high quality, high price goods in recent years, benefiting the main European, US and Japanese luxury suppliers, said Greg Grishchenko, a leading US based consumer goods marketing consultant on Russia.
“We expect that all these suppliers should gain with the country entering the WTO,” he told SPC. With import tariffs falling, “prices might fall a little” but growth in sales would not be drastic, he predicted. “The well paid and educated Russian middle classes who are the principal buyers of high end cosmetics do not really pay attention to price fluctuation in luxury brands.”
Grishchenko, however, was more optimistic about Russian manufacturers serving the lower end of the market: “Economy brands will [continue to] be manufactured locally and WTO membership might slightly improve the prices for ingredients purchased in the West.”
Also, international majors might be more inclined to invest in Russian production, he said. At 4.5% this year and next, economic growth will be more than twice the rate of the US and the EU and cosmetics spending has consistently outpaced this. The most striking proof of foreign interest to date has been the recent purchase by Unilever of 82% of the Yekaterinburg based company Kalina for almost $700m. Kalina is Russia’s largest personal care company owning the powerful brands of Black Pear, Silky Hands and 100 Recipes of Beauty.
None of the leading European or US cosmetics houses would comment on the WTO development, however. Unilever said it had been “constantly expanding its manufacturing facilities [in Russia] in order to meet growing demand for our products from Russian consumers,” adding: “Perfumery/cosmetic products produced by the company’s St Petersburg factory are exported to the majority of western and central European countries.”
Meanwhile, L’Oréal recently announced the opening of its first factory in Russia in response to local demand. The new plant will manufacture shampoos, hair conditioners and hair dyes. “With sales of t563m in 2009, L’Oréal Russia is the market leader with sales growth of 17.6% in the first half of 2010,” the company said.