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Facing Challenges, Russian Beauty Maintains Potential

By: Greg Grishchenko
Posted: September 3, 2009, from the September 2009 issue of GCI Magazine.

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Speciality beauty stores account for approximately 30% of retail sales, followed by direct sales (20%) and pharmacies (10%). The number of kiosks and open-air markets dropped from 40% to 9% (see Figure 3). In addition to existing channels, totally new Russian sales concepts have surfaced—notably hypermarkets, the Internet and drogeries, a Russian version of the European retail concept, similar that of British chain Boots UK, where beauty products are sold along with pharmaceutical and hygiene products. The early attempts to develop an American model of a drugstore, combining a pharmacy with a grocery, were not successful. But the pharmaceutical channel is a large one, with the fastest growing Russian pharmacy chain, 36.6, currently operating 750 stores across the country. In addition, Russian retailers are demonstrating operational improvement as they work to cut sales channels for “gray market” cosmetics, mostly attributed to kiosks and open-air markets.

Improved Retail Experiences

Russia, however, is still far behind Western Europe in the number of specialized stores, and this channel is far from being saturated. Having been neglected in the Soviet era, it has (until a slight slump in 2007–2008) grown significantly and shows no signs of slowing down.

The rise in the number of specialized stores can be attributed to consumers’ demand for both higher quality products and better shopping experiences, in which customers can be advised by a skilled sales staff and makeup advisors. In the last four to five years, Russian cosmetic retail has expanded almost five-fold, with sales at the largest stores in Moscow and St. Petersburg gaining 200–300% annually. Out of the four major retail players, the uncontested leader in terms of the number of chain stores in Russia is L’Etoile, which dominates Moscow with 150 stores, and operates nearly 600 stores nationwide. Ile de Beaute (100 stores in Russia), Rive Gauche (32 stores in St. Petersburg and more than 40 across the country), and European chain Douglas (with 15 doors in Moscow) are the most developed retailers. Arbat Prestige, the former number-two chain, used to be Russia’s best known beauty chain, holding a number of agreements with global beauty brands. It, however, closed its last door in February 2009 due to liquidation, with its owner in prison for tax evasion.

Local Players—Leveraging Historical Success for Ongoing Growth

Currently, Russian brand owners, many of which also produce pharmaceuticals and household goods, are gaining market share. According to the data from a number of local sources, these companies account for 25–40% of the beauty market, operating primarily in the middle and low price range. There are a number of large, medium and small beauty companies in Russia (notably Kalina, Nevskaya Kosmetika, Svoboda, Nouvelle Etoile [formerly Novaya Zarya], Green Mama and Krasnaya Liniya) with established economy-priced brands—however, their products typically rely on imported ingredients.

A number of Russian beauty companies have long-standing operations, and are taking steps to maintain or improve their position in the market. The Kalina Consortium was founded in 1942 in Sverdlovsk (now Ekaterinburg) when the then oldest Russian cosmetics factory was evacuated from Moscow—an apt example of a Russian beauty company adjusting and thriving. Owner of the Black Pearl, Clean Line and Little Fairy brands, Kalina is the first Russian beauty company to gain ISO 9001 certification, and owes its rapid growth to economic reforms that changed the entire face of the Russian beauty industry. Now with production facilities in Russia, Ukraine and Uzbekistan, the company produces products in the skin care, hair care, oral care, makeup and perfume categories.