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Europe Offering Eastern Promise

Briony Davies, Euromonitor International

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.

The Making of Men’s Grooming

Another notable fast-moving sector in the region, although relatively small, is men’s grooming products. Despite accounting for only 6% of global value sales within men’s grooming products in 2004, Eastern Europe saw rapid growth compared to the previous year, up by 17% in value terms. Ukraine, Romania and Russia were the markets driving growth, with rapid expansion in some of the region’s more developed markets including Hungary, Slovakia and the Czech Republic. Growth was underpinned by a number of factors including rising disposable incomes, the growing sophistication of consumers, and the emergence of new products targeted specifically at men. However, behavioral change is needed before the sector can really develop, as it is still the norm for women to do all the shopping in Eastern Europe. Manufacturers that can groom men to actively choose their own products will be able to exploit the latent potential in this sector.

Direct Sellers Rise to the Top in Russia

Russia, with sales in excess of $6 billion, is the region’s largest market, almost three times the size of Poland that holds second place. With impressive growth of 14% in 2004, Russia is fast becoming a priority market for multinationals given its position among the world’s top 10 country markets for value and dynamism. Quality rather than price has driven purchase decisions here, with growth underpinned by improved consumer spending power. The most notable developments in the market were increased rivalry between multinationals and local players; the emphasis placed on natural products and the mushrooming of direct sales as a channel.

In 2004, P&G, traditionally the market leader, lost share to local players such as Kalina and Faberlic, and multinational direct sellers, Avon and Oriflame, who seized first and second position. Clearly distribution strategy and ability to tap into consumer needs are keys to success in Russia as exemplified by direct seller Faberlic’s astonishing sales growth of more than 500% between 2000 and 2004.

Last year, skin care grew more than 20% to reach $911 million. Products with antiaging properties became increasingly popular as Russian consumers were exposed to media messages that worked to build a desire for wrinkle prevention. Facial skin care currently accounts for almost 75% of the sector’s sales, but the emergence of low-priced products from local Russian manufacturers such as market leader Kalina is causing sector growth rates to slow in comparison to previous years. Direct sellers Avon and Oriflame also have influenced the direction of the market by increasing penetration via their wide distribution networks, and encouraging consumers to buy into a full range of products including cleansers and toners, rather than a single moisturizer. Traditional local leaders Kalina, Nevskaya Kosmetika and Svoboda repositioned their brands during 2004 and introduced more expensive products, thereby justifying increased unit prices. Russia’s depilatories and fragrances were the other sectors that saw greatest growth in 2004. In spite of dynamic developments in recent years, depilatories still account for a very small proportion of sales. In contrast to the developments witnessed in Russian cosmetics and toiletries as a whole, local manufacturers are notably absent in depilatories with multinationals Gillette, Energiser and Reckitt Benckiser taking 86% share of the market.

Skin care and Fragrances Rule in Romania

Romania, along with Ukraine, was the most dynamic market in the region. Romania showed rapid growth in 2004, with overall sales increasing by 19%, to almost $500 million. Key drivers are increasing disposable incomes due to the country’s economic recovery, the wider availability of products from multinationals and the increasing number of promotional campaigns that educate consumers. In contrast to Russia, local manufacturers are struggling to keep with the pace. Lacking the necessary funds for both technological improvement and marketing, the two major local manufacturers—Farmec and Miraj—that had almost total monopoly in the 1990s, saw their positions decline: Farmec now has only 2.9% market share and Miraj was split into numerous small companies that have not stood the test of time.

The most dynamic sectors in Romania are fragrances and skin care with 44% and 31% growth respectively. Fragrances benefited from a boost in both volume and value sales as both male and female consumers realized that deodorant sprays could no longer act as a substitute, and bought into mass fragrances. Facial care accounted for around 83% of total skin care value sales in 2004, and was worth more than most other cosmetics and toiletries sectors. The preoccupation with skin health grew in 2004 as multinationals offered more sophisticated products such as Avon’s Anew Clinical range including antiagers with added collagen.

Slowdown in Slovakia, Poland and Bulgaria

In U.S. dollar terms, growth in 2004 in Slovakia, Poland and Bulgaria was strong but in local currency, their growth was limited. Recession in Poland has led to a standstill in cosmetics and toiletries sales, and consumers increasingly are deferring to lower-priced goods. Supermarkets have become the most popular place for Poles to purchase personal care, due to competitive prices. Direct sellers also are popular, with Avon having a dominant position in the market. Despite the current economic climate, Euromonitor International expects Poland to experience growth between 2004 and 2009, particularly given its recent entry into the EU.

Since 2000, Slovakia saw sound growth in sales of cosmetics and toiletries but remains the poorest of the new EU member states. High unemployment rates, protests regarding food taxes, membership of NATO and an ambitious reform process are expected to leave consumers unable to afford luxury products. This is likely to result in weak industry growth forecasts to 2009.

Bulgaria saw moderate growth in 2004, as cosmetics and toiletries are considered more of a luxury than a necessity. New product launches and brand extensions contributed to growth in the sector. Improved distribution also helped cosmetics and toiletries sales to grow, but also led to lower prices as companies clashed for shelf space.

Bright Future

Euromonitor International expects Eastern Europe to be the world’s fastest-growing region, with growth of almost 50% to 2009. Russia’s size means that it will drive the market. Improving retail networks, including the development of the supermarkets/hypermarkets channel and the deepening penetration of direct sellers, and the geographic expansion of major multinational manufacturers are expected to introduce the region’s consumers to a widening range of products. Parallel to this, increases in the number of employed women are expected to boost purchasing power and stimulate demand for higher value cosmetics and toiletries.

Overall, the region presents huge promise. Developments in distribution networks will be the key to market growth. As the region enjoys increased disposable incomes, the supermarket provides the perfect platform for consumers to spend due to the breadth of choice and the availability of higher value Western cosmetics and toiletries brands, and could leap frog to become the preferred distribution channel for cosmetics and toiletries.

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