ANALYSIS OF COSMETIC RETAIL IN RUSSIA 1.

General Trends in the Russian Retail Market for Cosmetics The primary characteristics of the cosmetic market development in Russia for the past two years are related to the recent changes in the retail sector: the share of the new format retailers is increasing, the competition between them is getting stronger, and, consequently, the market growth rate is slowing down. According to Staraya Krepost ExpoMediaGroup’s research, in 2004, the market size for perfume and cosmetic products was $6.2 billion, which is 15% higher than in 2003. In 2005, the market growth rate was already much lower, however, in spite of slowing down, the market general dynamics look quite positive, and, according to local experts, the potential market size for the next several years is estimated at $15-18 billion. The statistics below are compiled by GosKomStat (Russian State Committee for Statistics) and Staraya Krepost, and shows the dynamics of the market for cosmetic and perfume products for the last 10 years: 1996 1997 1998 1999 2000 ___________ _____ _____ _____ _____ ____ 2001 2002 2003 2004 2005 2006(est) _____ _____ _____ _____ _____ _____

Market size, 3.8 4 3.65 3.4 3.6 3.9 4.3 5.2 6.2 7.0 7.9 In $bln ______________________________________________________________________________ A high annual growth rate has been maintained since the 1998 financial crisis in Russia dealt a blow to the cosmetics industry. The market has now stabilized. With stronger competition and higher energy tariffs expected should Russia joins the WTO, the annual growth rate is expected to slow to 5%. Another new recent trend in the market development is a shift in the market shares for Moscow and the Russian regions. In 1999, 80% of the sales of cosmetic products were in Moscow, 10% - in St. Petersburg, and 10% - in the regions. Currently, the ratio between the large cities and the regional cities is 50/50. In the retail sector, the most prominent trend is that cosmetic manufacturers are escaping from the “open markets” to western-type retail networks. The share of the open markets in the sales of cosmetics has recently dropped to 16%, compared to the 1990s when this share was as high as 90%. In 2004, the share of “grey imports” decreased by 17%. According to experts, the fact that large western retailers, such as Douglas, Sephora, and Marionnaud, are coming to Russia will stimulate the development of cosmetic retail chains, which will further decrease a share of open markets and “grey” imports. In 2004, the largest volumes of cosmetic products in Russia were sold through supermarkets (29%). Currently, more and more products are sold though specialized chains – their share in 2004 was 23.7%. On the whole, the annual growth of retail chains in Russia is currently estimated at 40-50%, which provides a good opportunity for the promotion of new cosmetic brands. However, manufacturers must be prepared to pay a price for market entrance. The cosmetic “retail shelf” is

The economic situation in Russia stabilized. In 2002. Apart from the sales through supermarket/hypermarket retail chains. a distributor became a barrier between a manufacturer and a retailer. However. Arbat Prestige was one of the first Russian companies in the cosmetic market. This competitive factor is most likely to hit Russian manufacturers who lack financing for entry to the western-type retail. sales through specialized cosmetic chains. Major Russian cosmetic distributors reacted to these changes by developing their own retail businesses. so manufacturers should invest in the promotion of their products. the consumer is having a problem with his preferences and choices. The result of this merge was DouglasRivoli chain. the process of getting away from distribution channels and establishing direct links between a manufacturer and a retailer continued. considering quite a wide choice of products available on this shelf. a German company Douglas-Holding. which closed their distribution business and focused on the development of their retail chain of Arbat Prestige stores. and drugstores have been increasing. Distribution and Retail At the end of the 1990s. Internet shopping. through their distributors. with 14 cosmetic boutiques. According to KomCon Group research. Hermitage & Star Beaute (a part of Luxe-Holding Group) also stopped distribution and started a small retail chain Rivoli. various distributors and wholesalers of cosmetic products acted as intermediaries between manufacturers and retailers. Retail chains are not very much interested in promoting new brands since they are happy with what they have now. the market situation has drastically changed. For example.short enough and. over 30% of Russian women with high and medium incomes buy cosmetics in specialized stores.5% 37% 55% 9% 1% 55% 2% 3% 46% . and gradually an intermediary was no longer needed. Here is some reference to where Russian customers buy cosmetic products: In Moscow – Supermarket Mini-market Specialized store Home depot Drugstore Open market In Russia – Supermarket Specialized store Open market 7. In 2004. Consequently. and the manufacturers imposed their own ideas of price and delivery terms on the retailers. they sold 50% of their shares to their strategic investor. starting 2003. 2. and only 7% of these group of customers with high income purchase cosmetic products in supermarkets.

Domestic Companies Turnover of the Russian largest cosmetic retailers (in $ mln) Company 2002 2003 2004 No of stores _______________ _______________ ______________ ____________ ______________ L’Etoile Arbat Prestige Rive Gaushe Ile de Beaute 90 80 N/A 10 105-180 150-202 100 15 N/A 234 35 130-150 16 27 23 Arbat Prestige is the leader in the cosmetic and perfume retail in Moscow. specialized cosmetic stores. Rive Goshe (owned by Parfum-Standart in St.4% 27.000 square meters. such as Jean Paul Gaultier. and foreign investors Brocard (Brocard Group Ltd. and drugstores.. . In 2002. Currently. Arbat Prestige is the only chain in Russia. Later the company became an official distributor of 20 more well-known brands. Arbat Prestige operates 16 stores in Moscow (two of which are in VIP format) and 2 in the regions.Other researchers (e. The rest of the market is shared by non-chain retailers. six leading Russian cosmetic retailers represent 65% of the retail market. Staraya Krepost) provided different estimates in 2004 and stated that the share of open markets in the sales of cosmetics was 16%. DouglasRivoli (owned by a German company Douglas Holding AG and a Russian company Luxe Holding). The company was established in 1996. increased up to 55%: 2003 2004 _______________________ _________________ ________________ Retail chains Open markets Other channels of sales (single stores. which opens cosmetic hypermarkets.1. while the total share of retail chains. 3. They include: L’Etoile (Russian company owned by Kurs Group). Arbat Prestige (jointly with Marionnaud (France). For example. Petersburg). such as Articoli and Kalinka-Stockman. including supermarkets.7% 55% 16% 29% In 2006-2007. Krasnoyarsk and Chelyabinsk. with the trade space of over 1. with total space of 5.9% 20.000 square meters. Ile de Beute (owned by Edinaya Evropa Holding). the company completed closed their distribution business and focused on the retail. when it became a sub-distributor of Christian Dior.g. and Fendi. the share of retail chains is expected to increase by 15-20%. the company currently operates a five-floor cosmetic and perfume trade center. a master-franchise holder is Alcor Co). beauty salons) 51. and Sephora (France. Major Players in the Russian Cosmetic Retail 3. Dolce & Gabbana. Today. Germany).

In St. However. . which is very close to European companies.2. Rive Gaushe represented elite brands. out of the company’s 29 stores. including Seldico’s brands (Christian Dior. while now Rive Gaushe stores offer all brands available in the Russian market. Currently. Due to recent focusing on mass market brands. Petersburg-based chain. there are three Sephora stores in Moscow and two in St. In 2005. the company is not looking to expand to mass market products. The company is planning to open 2-3 more stores in St. L’Etoile operates 150 small stores in 25 cities of Russia. Initially. L’Etoile offers more high-end products and currently represents 120 brands (compared to 55 brands in 2003). The presence of foreign cosmetic retailers in the Russian market considerably affects the operations of all players. respectively. In 2004. the company is looking for a strong foreign strategic partner. Guerlain and Kenzo). Petersburg. such as Nivea and Maybelline. They also have La Prairie Beauty Salon and GODIVA chocolate boutiques. Rive Gaushe (owned by Parfum-Standart) is a St. Sephora opened its first store in Moscow in 2003. to compete with other Russian leaders. In its product line. and the two companies are currently operating under the joint signage. Arbar Prestige increased its market share up to 60%. Rive Gaushe is the leading cosmetics retailer. not less than $4. their trade space efficiency rate is quite good. Givenchy. Arbat Prestige signed a franchising agreement with the French Marionnaud. both operated by Alcor & Co. L’Etoile owns 40 stores. Currently.000 – 5. However. Since that time the company specializes in the regional markets. Sephora and L’Etoile. Foreign retailers During the past three years. which provides the company with an opportunity to compete with Arbat Prestige even in Moscow. 21 of which are located in St. including 9 stores in Moscow and 5 in the regions. four major European cosmetic retailers (Douglas Holding AG and Brocard Group Ltd from Germany and Sephora and Marrionnaud from France) started their business in Russia. Most of them chose to merge or establish partnerships with existing local retailers. Despite the fact that the Russian retailers’ annual turnover does not exceed $100 million. The company currently owns 27 stores.Several years ago. Douglas-Rivoli currently operates 14 stores in Russia. Petersburg by the end of 2006.500 square meters. Arbat Prestige changed its product policy from elite cosmetics to mass market products. the company is planning to reach the turnover of $75 million. The share of mass market products in this company is 7% and is not likely to go higher than 10-12% in the near future. Douglas and Lux Holding established a joint venture Douglas-Rivoli. L’Etoile retail chain is owned by Alcor & Co (Kurs Group). In Moscow. Sephora and Marrionnaud provided franchising to Alcor (owner of L’Etoile) and Arbat Prestige. 3. 21 are located in the regions. Petersburg. the development of Sephora in Russia is too slow.000 per square meter per year. which is certainly a benefit for Alcor. Petersburg. Ile de Beaute represents all major cosmetic brands. Ile de Beaute (owned by Edinaya Evropa Holding) opened its first store in a regional town of Voronezh in 1999. The total trade space is 4. Some experts attribute it to difficulties with availability of rental space. which started to operate in the retail market of St. have two different formats. Petersburg in 1995.

which represents very unique brands. Alternative Sales Channels Direct Marketing According to the Association of Direct Marketing. Creed. it is required to operate a more spacious store. and Aqua di Parma. According to local experts. including suburbs. but this share is growing and is expected to reach 20% in 5-6 years.Marionnaud signed a franchising agreement with Arbat Prestige in January 2004 for 10 years. It is generally acknowledged that none of the existing cosmetic retailers in Russia can boast of exclusively professional skills of their in-store staff. premium-type brands. for example. Garnier (with a retail price of $4-7 per unit). in 2005. The average store space at Ile de Beaute and Douglas-Rivoli does not exceed 300 square meters. this is the first time in Marionnaud’s strategy that they do not acquire a company in the foreign market but establish a franchising partnership. specific elite. Shiseido. have space of over 1. such as Nivea. Watson. Major retailers choose between the three strategies of selecting their product lines: 1. cosmetics represent 90% of the DM sales in Russia.S. However. The pay-off period is normally about two years. To sell a much wider range of products. Marinnaud itself was acquired by A. in 2003. 2. The cost of opening such a store is currently around $500.000 per 1 square meter per year. and product lines.075 billion. total sales of cosmetic products through direct marketing were $460 million. the total turnover of direct marketing companies in Russia was $1. formats. Christian Dior. Annick Goutal. 4. which is the best format for the promotion of elite cosmetics and perfume. Estee Lauder and many others and which is the only chain in Russia. . position themselves as premium product retailers. Maybelline. To do that. excluding mass market. Although DM companies in Russia also operate in the area of food supplements. Arbat Prestige. such as Clive Christian. In 2005.000 inhabitants in large Russian cities. Another competitive factor for all major players is personnel and professional consultants in store. a wide range of elite and middle-class brands. on the contrary. with their diversified product range. and a good profit rate after 2 years of operation is considered to be $10.000 square meters each. it is feasible to open one medium store.000 sell items at Arbat Prestige). Some chains prefer small format stores.000. According to Arbat Prestige. L’Etoile officials announced that by the end of 2006. a wide range of all price categories of products. with the space of 200 – 300 square meters. L’Etoile and Douglas-Rivoli. Givenchy. including premium and mass market brands. Arbat Prestige’s stores. which is currently offering such leading brands as Chanel. 3. and in 2002.000 items (compared to 35. the market share of DM sales was around 13%. per every 300. household articles and other products. Sephora also focuses on the hypermarket type of stores to offer 26. The leading cosmetic retailers in Russia use different market strategies. the company will represent 90% of the deluxe product market. they will certainly have to seriously compete with Douglas-Rivoli. has recently focused on offering more mass market brands.

50% of the sales items in Russian drugstores are non-medical.$100 million per year each. total sales of cosmetic products in beauty salons was approximately $1. It shows that more consumers trust the medical application of the cosmetic products. 10.ru . and the total market size for this business in Moscow was around $1. which is sold only in drugstores. and not for decorative cosmetics. and nail treatment and hair care products.500 beauty salons in Moscow in 2004.3 billion. which one can find in Russian drugstores: mass market cosmetics. There are two major groups of cosmetic products.06-10. Major local trade shows. in 2004. However. Since 1999. which is sold through drugstores only.. Currently. and Faberlic (Russia). the sales of cosmetics through drugstores was relatively small. and medical cosmetics. nail studios. Beauty Salons It is difficult to estimate the number of beauty salons in the Russian market. Avon (USA). only 5-6 new salons open every year. almost the same number of beauty parlors close due to very tight competition. The distribution of cosmetic products through beauty salons is growing but still not very large. Alexander Todchuk Studio). Another trend. Avon has also increased sales by 6. include: Cosmetic products: Intercharm. both brands have approximately equal sales . the Russian market is one of the most important.8%. annual. Persona.5 times for the same period of time. The most popular product categories include skin care and mouth care products. the growth rate of such sales reached 15%. It is expected that the major growth of sales on-line will be for perfumes. which currently represent about 10% of the Moscow market. is Vichy (L’Oreal). there were about 9. Other well-recognized brands include Mary Kay (USA) and Green Mama and Mia (Russia). image salons). One of the recent trends in the beauty industry is the development of chains in Moscow (e. Oriflame has increased sales in Russia by seven times.intercharm. Currently.06. In 2004. Sales On-Line Sales of cosmetic products through the Internet is not yet as popular in Russia as in the U. Moscow.. where U. is the development of specialized salons (e. 15-20 new salons open each month in Moscow.The three major players in this market segment are Oriflame (Sweden). Currently. A very successful example of the brand. According to some experts. Mysin Studio.g. In 2003.S.S. For Oriflame. cosmetics for kids. Drugstores Quite a recent development of the cosmetic market in Russia is increasing sales of cosmetic products through drugstores.26. www. SPA.g. because a customer still prefers to select the colors and the texture of the products personally. or Great Britain but it is expected that this distribution channel will soon become an important trend. 3. which can be distributed both through drugstores and other retail stores. and it is estimated that this growth will continue.29. which is also more typical for large cities. however.8 million. In the regional towns. suppliers can meet prospective customers and advertise their services. Aida.

We invite you to visit our website at: http://www.expobeauty. annually in January-February. your contacting us will enable us to alert you of other targeted business opportunities that may arise in the future.S. e-mail: mdi@messedi.gov/russia/en for more information about how we can help your company succeed in this market. If you have any questions about our services. e-mail: expo@rusretail. companies' business ventures in this country and to ensure the successful achievement of their goals. which is usually held in March . please contact: Marina Kamayeva.doc.S. For specific information about Northwest Russia please visit: http://www. fax: 7 (812) 326-2561 e-mail: Marina.gov Contact us for assistance entering the Russian market! The U. e-mail: retail@adamsmithconferences.ru Adam Smith Institute annually organizes a conference “Russian Retail”. Moscow.ru Retail Sector trade shows: MALL. Moscow. Commercial Specialist U.com. www. Our aim is to facilitate U. We like to learn if we succeed in helping U.com For more information on the Russian cosmetics retail market.gov/russia/en/overview_nw.gov . www. Petersburg.rusretail.Office. firms increase their international business. If the information contained in this report alerts you to a commercial opportunity in Russia that leads you to obtaining new export business for your company. please let us know. please do not hesitate to contact us at StPetersburg. annually in March. Commercial Service in St. organized by Messe Dusseldorf Moscow.S. This is the leading forum on the issues surrounding retail development in Russia and is attended by the key players in this market.buyusa.buyusa.April. In addition. Russia Phone: 7 (812) 326-2560.asi-conferences.html .S.ru. www.Kamayeva@mail. organized by Russian Retail Solutions Ltd. Russia has designed many products and services specifically to assist companies such as yours enter or expand their business in the Russian market.- Cosmoprof. Moscow. Consulate General St.S. Petersburg.doc. in Moscow. annually in September.ru Shop Design. Commercial Service U.ru. www.Box@mail.messe-duesseldorf.

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