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Europe Offering Eastern Promise
By: Briony Davies, Euromonitor International
Posted: October 3, 2008, from the March 2006 issue of GCI Magazine.
The industry’s leading manufacturers—L’Oréal, P&G and Unilever—as well as key direct sellers, have been present in most Eastern Europe countries for years. However, the entrance of more specialty players such as UK pharmacy chain Boots, which has partnered with Russian retailer Apteka 36.6 to bring private label brands including Botanics, Natural Collection and No7 to Russia at the end of 2005, indicate that everyone is getting in on the act. Recent changes in Avon’s global management structure to create a Central and Eastern European unit as a stand-alone division further reflects the strategic importance and long-term potential of the region to major players in the cosmetics and toiletries arena. In this article, Euromonitor International explores the drivers of the region’s vigor, pinpoints developments in key sectors and markets, and comments on where and what to watch out for in the future.
Russia Runs the Region
The growth of Eastern Europe’s cosmetics and toiletries sales by almost 70% over the past five years has been driven by a number of macro factors. First, local and multinational manufacturers, as a result of enlarged demand due to rising consumer spending power, have launched more premium products en masse. Parallel to this, an increasing number of women in the labor force, changing lifestyles and the influx of women’s magazines, which disseminate Western trends, also have helped to propel sales. Moreover, the strong performance of Russia, which accounted for some 44% of value sales in Eastern Europe in 2004, assisted the region’s expansion. Some of the foreign investment brought about by the stabilization of the Russian economy was used to better distribution networks; direct sellers in particular have done their best to improve penetration by pushing the sector out of the major cities of Moscow and St. Petersburg and into more rural areas. Growth in the remainder of Eastern Europe was positive in 2004 as the Ukraine, Romania, Hungary and the Czech Republic all exhibited substantial value gains, thereby outweighing the uninspiring performance of Poland, Slovakia and Bulgaria.
Fascination with Frivolities
Hair care, skin care, fragrances and color cosmetics, each with sales of more than $2 billion, are similarly important across Eastern Europe as a whole. Hair care generates the most sales across Russia, Hungary and the Czech Republic, making it the largest sector in the region. Foreign manufacturers dominate, with P&G, L’Oréal and Henkel taking more than 50% market share. Their ascendancy is even more apparent at brand level, with no local players featured in the top 20 hair care brands. Although shampoo has reached a relatively high level of penetration, with per capita spending in some countries such as Czech Republic and Slovakia as high as in Western Europe, sectors such as colorants and conditioners have untapped potential.
Skin care, alongside fragrances, is one of the largest and fastest-moving sectors in the region. Key technological advances drove the sector forward, with the growth of firming/anticellulite products whose added value properties helped lift unit prices. In Russia, domestic manufacturers such as Kalina and Faberlic are strong in the market, given their understanding of local consumer needs such as the preference for products formulated with ingredients that are more natural. Ukraine, Romania and Hungary all enjoyed strong growth in 2004 derived from a continuing stream of new product launches. While the key growth drivers in this area—nourishers/antiagers and firming/anticellulite body care—are relatively new to these markets, they quickly are becoming an integral part of beauty regimens.
In 2004, fragrances displayed double-digit growth in Eastern Europe for the fourth consecutive year. Growth was driven by the rising trend among women to experiment with a wardrobe of fragrances, in line with increasing wealth and spending power. In Russia, the expansion of chained specialist outlets such as Arbat Prestige, L’Etoile and Douglas-Rivoli impacted growth, especially for premium brands. However, mass fragrances remained the larger and more dynamic category with 66% of sales, with premium fragrances remaining out of reach of many. Fragrances also benefited from the prevalence of direct-selling companies, such as Avon and Oriflame who hold the top two brands. Their dominance derives from their ability to provide products that are perceived as high quality, at affordable prices.