EU membership applicants harbour useful markets but they will also introduce some potential competitors, as Mark Rowe reports
The next few years are likely to see several countries accede to the EU with significant implications for the personal care sector. Local producers of toiletries, detergents and cosmetics as well as multinationals in a number of countries are closely following the negotiations conducted by their governments.
EU membership is likely to occur in piecemeal fashion. Croatia heads the queue, with accession possible within three to four years, followed by Bosnia & Herzegovina, Serbia, Montenegro and Albania. Turkey is a potential candidate for accession around 2015, while Ukraine is not yet a candidate country. Kiev has begun a process to negotiate a range of free trade agreements with the EU, although its new government may prefer closer alignment with Russia.
| Table 1: Regional C&T Market Sizes, 2009 (US$m) | |||
| Country | 2004 | 2009 | |
| Albania | 46.5 | 76.4 | |
| Bosnia & Herzegovina | 180.6 | 239.3 | |
| Montenegro | 15.6 | 25.1 | |
| Serbia | 187.0 | 293.8 | |
| Ukraine | 839.5 | 1973.6 | |
| Turkey | 1670.8 | 2591.4 | |
| Croatia | 286.0 | 333.3 | |
| Source: Euromonitor International | |||
All these countries have thus far sought to negotiate Stabilisation and Association Agreements (SAA) that would lock them firmly into European orientation and into which European and international legislation on cosmetics, production and packaging are incorporated. However, all the potential accession countries have hurdles to overcome, whether it be a willingness to ratify fiscal and judicial reforms to EU standards, dealing with organised crime, corruption or political hostility from EU member states or Russia.
TRADE AGREEMENTS
The most important multilateral agreement on free trade in the region is the Central European Free Trade Agreement (CEFTA), which was re-ordered in 2007 to incorporate Albania, Bosnia & Herzegovina, Croatia, Kosovo, Macedonia, Moldova, Montenegro and Serbia. In practice, CEFTA has replaced most of the 32 bilateral free trade agreements that existed between these nations, which included agreements to facilitate trade in cosmetics. It also established the diagonal accumulation of origin of goods whereby all parts or ingredients made in any CEFTA country when incorporated into a product can be treated as a domestic product. CEFTA also creates a cohesive market of 20 million people which its proponents argue creates greater pulling power for outward investment into industries such as the toiletries sector.
The most significant recent development occurred in February when an Interim Agreement between the EU and Serbia entered force, providing for the establishment of a free trade area between the EU and Serbia. The agreement guarantees that the EU market will remain open to virtually all Serbian products as it includes the trade concessions that the EU has been granted to Serbia since 2000.
The key appeal to western cosmetics companies is that the Klondike era of expansion in central and near-eastern Europe is clearly over. The markets of the Czech Republic, Hungary and other countries that have joined the EU are generally saturated and Colipa, the European cosmetics association, believes the Russian market has peaked and will only enjoy slow growth over the next few years. That said, Colipa regularly reports strong growth in Bulgaria and Romania, the newest EU member states, and anticipates this would also be the case in nations on their borders. The perception for untapped markets appears also to apply to Croatia. “The domestic market in Croatia has relatively low production figures,” comments a spokeswoman for Euromonitor International. “There has been growth in sales but Croatian consumers still lag behind the average consumption in EU countries. The market could even double over the long term. Despite the strong presence of large international producers and cosmetics brands, a variety of small companies and artisanal producers with high quality products are also present but with marginal market shares.”
In 2008 health and beauty retailers were the strongest retail channel in Croatia, according to Euromonitor, accounting for more then half of the share of distribution, and the largest type of retailer was pharmacies. “This channel also has a strong presence in terms of private label alternatives, especially considering these products are cheaper than multinational brands,” says the spokeswoman.
Estimates for sales up to 2013, in light of global economic problems, are not as bad as may have been expected, according to Euromonitor. “It seems that consumers perceive cosmetics, and especially toiletries, as basic products and not luxury products,” says the spokeswoman.
A glance down the list of membership of national cosmetics trade associations in the region indicates that western companies began to make their moves some time ago: Unilever, Procter & Gamble, Beiersdorf, L’Oréal and Avon among others have a presence in most of these nations.
To an extent, the mergers of big western companies with smaller players and their place in the market have already begun in Turkey – members of Turkey’s Cosmetics and Toiletries Industries Association (KTMD) include most household names, such as Henkel, Cognis, Colgate and L’Oréal, and KTMD is now an associate member of Colipa. Nevertheless local companies are taking steps towards greater economic unity, holding joint working group meetings with more frequency with EU officials.
TURKEY SERIOUS INTENT
Turkey’s Soaps and Detergents Industry Association (SDSD) has appointed a technical committee which has started to hold meetings more frequently with EU counterparts. In moves towards EU harmonisation, SDSD representatives have participated in national governmental meetings in order to bring the local legislation in line with the EU.
Burc Ustun, marketing director of Evyap, one of the major Turkish cosmetics companies which produces 300,000 tonnes of soap and 40,000 tonnes of personal care liquids and cream products a year, says the key benefit of EU membership will be a universal improvement in standards. “Companies will have to obey the new regulations on standards for chemicals, packaging and formulation,” he says. “At the moment some do not. It means the field will be level for everyone. That’s good news for consumers because competitors will have to stand out to increase their sales.”
Turkey exported nearly 440 Euros worth of soap, cosmetics and fragrance in 2009
According to KTMD, Turkey exported nearly t440m worth of soaps, cosmetics and fragrance in 2009. Several companies generate a large percentage of their turnover from exports; Arkimya, which produces perfume waxes, attributes 80% of its income to exports. Soap exports could be increased with EU membership, according to Ustun. “Liquid and bar soap is split 50/50 in the domestic market and there are some strong products that can be exported. The challenge will be marketing. It’s not a question of technology or quality but the amount of investment in marketing in the EU will be too high for some Turkish companies.” Turkey has limited mineral reserves and few raw materials of its own but has a highly educated manufacturing base. Its strong ties with central Asia – and access to raw materials that are found there – are further enticements to western companies, suggests Ustun. “The skill base is very strong in Turkey,” he says. “There are a lot of private label brands in western Europe that will look to Turkey for new production bases.”
SERBIA PHARMA STRENGTHS
Serbia’s cosmetics industry may benefit from the strong international standing of its pharmaceutical industry. According to the Serbia Investment and Export Promotion Agency (SIEPA), the projected annual market growth of the pharmaceutical market, which comprises 50 companies, is 8% until 2012. The Serbian pharmaceutical industry exports around 20% of its annual output and meets approximately 60% of the local market’s needs. The remaining 40% is being met by imported pharmaceuticals, mainly originating from EU countries. Exports of Serbian pharmaceuticals are growing at an annual rate of around 25%. “Companies that are short of in-house manufacturing capacity and want to outsource small batch production, reduce manufacturing costs, delay or avoid capital investments in manufacturing should consider contract manufacturing in Serbia,” says SIEPA spokesperson Igor Novakovic. According to a spokesperson for Serbia’s Association of Detergent and Cosmetics Producers and Importers, leading companies include Luxol which specialises in hair and body care produces for both internal and external sales, and has two production bases; Zrenjanin in northern Serbia, and in the province of Vojvodina.
Western C&T companies are encouraged to outsource to Serbian contract manufacturers
BOSNIA RETAIL REVOLUTION
Bosnia meanwhile is seen as one of the most dynamic markets of the region, driven by increases in the disposable income of consumers and a retail revolution. Key to this process has been the emergence of large chains of retailers and supermarkets that offer a wider range of products at a lower cost than previously available at specialist beauty outlets. The market is already dominated by products imported from the EU; import taxation on products imported from the EU including C&T products, was waived in 2009.
MONTENEGRO RIPE FOR INVESTMENT
Montenegro has a relatively developed manufacturing base for toiletries and its market is already dominated by western companies, with products sold through discount supermarkets rather than direct selling. Niche and quirky products appear to appeal to the local market such as caviar-based face creams and packaging that incorporates silk. The market appears ripe for investment from western Europe particularly because the country is marketing itself strongly as a seaside holiday destination, a trend that has led to the establishment of several discount cosmetic stores in holiday locations, including Cosmetic-Market, managed by the wholesale distributor MDM.
UKRAINE RUSSIAN CONNECTIONS
Ukraine’s prospects of joining the EU appear more distant of late, not least because of elections in February that sought to play down the prospect in favour of stronger ties with Russia. Nevertheless Ukraine is negotiating free trade agreements both with the EU and local agreements with Balkan countries. The view of Colipa is that the country’s cosmetics industry is far from developed, traditionally heavily dependent on Russian imports, though offering the prospect of low cost manufacturing bases. Ukraine has been identified by Colipa as a key “frontier market,” and the association says that Ukraine can expect to see “phenomenal” growth over the next five years. “Economic growth is accelerating at a pace in such markets, and amid optimism that more governments will embrace capitalism they have become lures for foreign investors,” says Colipa. “The frontier markets, being less exposed to swings in the global economy, can also be a way for cosmetics firms to reduce their risk.”
Colipa has identified Ukraine as a key frontier market over the next five years
According to Colipa the Ukrainian cosmetics and toiletries market has seen consistently high year on year growth in the last five years, an average year on year growth of 19%. It was worth over US$2bn (€1.5bn) in 2008 and is expected to attain a similar size as Russia which had a value of around US$2bn in 1998 but boomed to reach US$12bn (€8.8bn) by 2008.
“The Ukrainian market has been affected by the global financial crisis but this has had an unusual effect – consumers have been buying up cosmetics and toiletries products in bulk as they are less likely to decline in value than money,” adds Colipa. Among Ukrainian companies to catch the acquisitive eye of western companies is the Maryanovsky Glass House Corporation, which produces glass bottles for perfumes, cosmetics and medicines. The company dates back to the 18th century but restructured as a private company and updated its equipment and technology in 2004.
Another company that may appeal is Fitodoctor, based in Kharkov. The company’s range includes some organic products based on spa water, along with sun care products, children’s cosmetics, anti-mosquito creams and gels, liquid soaps, hair styling products and air fresheners. The company has also recently redesigned and modernised its packaging, according to a company spokesperson. The company argues its strength is in regularly producing new items which last year included a range of shampoos based on the company’s thermal spa waters and baby soap.
ALBANIA RELIANCE ON IMPORTS
According to data from Colipa, Albania has a vibrant and flourishing distribution toiletries network with many cosmetics suppliers vying to market foreign cosmetics. Among the largest is Iris Cosmetics, based in Tirana which markets high-end make-up products such as those from Deborah Milano. Imported cosmetics and toiletries account for 95% of local demand as there is very little domestic production. According to a spokesperson for Iris, Albania’s C&T market is divided into four main levels: feminine products (5% of market share) sold in high profile spas and beauty salons; high-end products (8% of market share) sold in supermarkets and cosmetic shops, and which include L’Oréal, Kanebo and Clarins; brand name products (25% market share and a growing trend) sold in supermarkets, hairdressers, chemists and cosmetics shops and which include Amore, Nivea and Max factor; and popular products (40% of market share) sold in grocers and open markets. A further 22% of the market is filled by value products which can be manufactured by local enterprises, made by beauty salons or imported illegally from China. “People are very western-oriented and look to Italy for their trends,” comments the spokesperson. “They appreciate and buy imported beauty goods and they’re willing to pay extra for those that are aesthetically pleasing. They value quality and professional products relative to mass produced goods.”