Eastern Europe is quickly developing an appetite for FMCG goods, and the cosmetics industry is wasting no time in the race to secure space on shelves across the region. Mark Rowe reports on the growing C&T market
Eastern Europe is an increasingly enticing prospect for the industry and has been singled out by major organisations and companies as a beacon for sales, investment and production. This comes at a time when sales have begun to stagnate in EU member states, only increasing 1% in 2005 on the previous year.
“Although market growth slowed in 2005, due to economic difficulties in key major markets, there are optimistic signs for the coming years, especially in the Central and Eastern European regions,” says Bertil Heerink, director general of Colipa, the European Cosmetic Toiletry and Perfumery Association. “Growth rates there remain higher than in Western Europe.”
According to Colipa, skin care products, toiletries, colour cosmetics, fragrance and hair care products continue to be the major product categories in those Eastern and Southern European countries which joined the EU in 2003. Colipa argues that these countries offer growth opportunities for manufacturers and are looking to revive slackening sales. But in many cases value gains are being made off a very low base.
For now, Eastern Europe represents a small, though growing, region for the industry. For example, France’s exports in 2005 totalled €3.489bn, dwarfing those in Eastern Europe. By comparison, Poland was the strongest of the new EU member states (the transfer of Western Europe production to Poland has been significant), with exports of €0.359bn, followed by the Czech Republic, Hungary and Slovakia.
Multinationals dominate many sectors in this region. Of the 20 top hair care players in Eastern Europe, none are locally owned, and the same is true for depilatories, where Gillette, which opened a factory in Poland in August, and other multinationals account for 90% of the market.
According to Euromonitor, the Czech Republic is the second largest market of the accession countries after Poland. The dynamism of recent years has led to a growing sophistication of product innovation along the lines of more developed Western European markets, indicating that perhaps the market is now fully westernised and mature. Premium, value-added benefits are selling well in skin care, particularly anti-ageing and anti-cellulite brands. The prestige segment is swelling in other categories too as younger consumers trade up.
“My feeling is that the cosmetics picture in the Czech Republic is similar to most of the older European Union countries,” says Jan Levora, executive director of the Czech Association For Branded Products. “We’ve had some mergers, while some local companies have succeeded in producing local goods and exporting them. I would say that strong is not quite the word to describe the industry at the moment, but it’s holding firm. It is difficult to say which way it might go.”
Hungry for success
A similar pattern exists in Hungary, where essential toiletries, such as bath and shower products, are highly penetrated and growth is slowing. In Western Europe, male cosmetics have been identified as a key driver, and this appears to apply to some Eastern European countries too. “The idea of men spending time and money on their appearance is not a developed one in this market and offers one route via which manufacturers could even stimulate sales in mature categories,” says a Colipa spokesperson.
Slovakia is another area that presents sizeable value potential. Consumer awareness and demand for cosmetics, toiletries and perfumes are expected to pick up as other countries (Estonia, Latvia, Lithuania and Slovenia) become more exposed to spending trends in EU markets. Several international companies have already set up home in the Baltic States, particularly Lithuania, where L’Oréal Baltics and Colgate Palmolive are in production.
Slovenia has also seen steady growth, according to Janez Furlan of the Association of Cosmetics and Detergents Producers of Slovenia. “The market is increasing but it is steady rather than quick,” he says. “We had a big jump in the 1990s but now the growth is not so dramatic.”
Styling agents are also doing well in Eastern Europe, according to Briony Davies, cosmetic and toiletries analyst at Euromonitor, bucking the trend in the developed markets of Western Europe. “In the west the trend is to put less gunk in your hair but in the east, styling agents are being driven by fashion at present.”
But Manfred Husslein, general manager for Central Eastern Europe at Ciba Specialty Chemicals, feels that the migration of cosmetic manufacturing from Western to Eastern Europe has slowed down. “Now the movement is mostly from higher cost countries in the region, such as the Czech Republic, to lower cost countries, such as Romania,” he says. “Overall, we expect these markets - especially Russia, Poland, Hungary, and the Czech Republic - to continue growing over the next few years as consumers’ disposable income increases.”
Ciba says its business is responding to the wider appeal of the region. “Eastern Europe and Russia are driven mainly by global customers of ours who are expanding their businesses in the region,” says Husslein. “We have moved company support structures into Eastern Europe with a base near Budapest to be closer to our customers in the region. We also rely heavily on local distributors.”
Meanwhile, Bulgaria and Romania are both expected to join the EU next year and consumers in both countries are demanding increasingly better quality products: the premium and upper mass segments are particularly vibrant, especially in fragrance, skin care and colour cosmetics. Multinationals already monopolise the upper ranks of the cosmetic, toiletry and perfumery market, despite the presence of strong local players, particularly in Bulgaria, which accounts for about 70% of global production of the perfume ingredient attar of roses.
Russia’s increased exposure to western consumerism has kick-started new demand for international beauty brands. Regulatory, retail and distribution arrangements are improving, thus enabling better access to products. The Russian premium segment is particularly well developed, according to Colipa, and is showing signs of slowing in terms of value growth.
Euromonitor predicts that Russia should enjoy a 60% overall market boom in the personal care sector over the next few years, with the skin care sector expected to achieve the most dynamic value increase of 98%. A key factor is the dramatic improvement of Russia’s distribution network and local players eschewing counterfeited goods.
The premium sector is one of the key areas for potential growth, and at present is far from mature. “Growth demonstrated the first signs of slowing down across most cosmetics and toiletries products with the exception of depilatories, premium cosmetics, skin care products and fragrance,” says Davies, who predicts a rise in the premium segment thanks to a rising middle class. “Consumers in this segment want more than they can actually afford and purchase premium perfumes and colour cosmetics as aspirational products.”
Multinationals such as Beiersdorf, L’Oréal and Procter & Gamble have expanded into Russia in recent years, forcing local companies to perfect their business methods. But Davies explains that only a few large Russian companies, such as Kalina or Faberlic, have succeeded in mastering these methods. “Local firms survive by knowing their market. They produce high quality products at affordable prices for the masses.”
Yet it seems unlikely that Russian innovations will be capable of competing with western products. “Without the money necessary to develop wholly new products, Russian companies such as Faberlic, Green Mama and Emansi are forced to create innovative offerings by finding new combinations of well-known ingredients,” says Davies.
Despite these challenges, Russia’s retail market appears buoyant. “The hair care market is growing well compared with the rest of Europe,” says Katya Monakhova, group account manager for AC Nielsen Russia. “But the peak has passed and it is growing less quickly. Conditioners account for around 15% of the market and that is growing as salaries increase.”
In the past 12 to 18 months, specialist chains have expanded into Russia’s regions, providing opportunities for the penetration of premium and imported cosmetics and toiletries. Some retail chains were acquired by foreign players, others signed exclusive marketing agreements with multinational dealers.
Niche players have been another development in the market in the past two years. “The multinationals have been in Russia and Eastern Europe for five or ten years,” Davies points out. “Now companies like Boots and Body Shop are carving out niches, that’s where people going in there are looking.” The only nationally operating pharmacy chain in Russia, 36.6, secured exclusive rights to market Boots products and in 2005 almost doubled its turnover to more than $300m.
Despite political uncertainties, multinationals are venturing into former Soviet Central Asia, with most interest in Kazakhstan. According to Procter & Gamble, Max Factor, Hugo Boss and Clairol hair colourants are attracting interest there. Davies concurs with this idea. “What we’ve noticed is there are very few local players. The Russian brands have been in there and the multinationals are eyeing it up. But while the market is growing, it’s not as quick as we thought it was going to be.”
There also appears to be an emerging niche in the region for the manufacture of key perfume ingredients. In June, Ciba Specialty Chemicals formed a joint venture with Virchow Drugs. Under the agreement, Ciba will supply technology and expertise to upgrade existing manufacturing facilities for triclosan, which is used in a variety of consumer and personal care products. The move aims to increase production levels of triclosan and improve quality so that it is compliant with US Phamacopoeia specifications. The aim is to supply the rapidly expanding Asian market with US grade triclosan, guaranteeing the purity and supply of an ingredient that has proved difficult to source in this region.