RUSSIAN COSMETICS: FALSE TEMPTATIONS OF LOW PRICES

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MOSCOW, October 29 (RIA Novosti's political commentator Yana Yurova) - In the last five years the Russian cosmetics market is considered the fastest growing in the world: the yearly increase in sales volume constitutes 20-25 percent. Meanwhile, the European market shows only a less than 3 percent increase each year. In terms of the overall production volume, the Russian market has already surpassed markets of Eastern European countries and only lags behind Germany, France, the UK, Italy and Spain.

Each year, hundreds of new cosmetics brands are imported from abroad. The most interested in the Russian market are the transnational companies: Beiersdorf, L'Oreal, Procter & Gamble, etc. At present, these companies successfully penetrate the Russian cosmetics market, increasing their sales volume by 3-5 percent yearly. Overall, a per annum turnover of the Russian cosmetics market is estimated at $4-5 billion. However, Russian manufacturers of cosmetics secure only 40 percent of the market. The remaining 60 percent are either imported, or manufactured in Russia as international brands.

Today, the Russian manufacturers dominate only the cheapest segment, where, according to data from the Russian Cosmetics Association, they hold about 70 percent of the market of hygiene products (especially soaps and shampoos). There are about 250 domestic manufacturers of cosmetics, at present. However, Russian brands are way behind their foreign rivals in terms of recognition and prestige. Nevertheless, in the last three years, the number of domestic manufacturers has grown significantly, and the quality of their products has noticeably improved.

According to the leading analyst of the cosmetics market Andrei Maslak, the quality of packaging, labeling and products, including makeup, has become significantly better. Meanwhile, low prices allow the Russian manufacturers not only to compete with their foreign rivals, but also to penetrate certain foreign markets - in CIScountries, UAE, India.

Some experts consider the Kalina concern in Yekaterinburg the largest Russian cosmetics manufacturer. Its brands include Cherny Zhemchug, Mia, and Chistaya Linia. The enterprise earns up to $130 million a year. This summer, the Kalina concern signed an agreement on cooperation with the German company Kosmetic & Rasierwaren Solingen. As a result, the Russian company became an exclusive distributor of products of the German firm on the territory of Russia and other CIS countries.

Following the Kalina is the Faberlik company. Lately, its products have been in high demand, and the overall sales volume surpassed $100 million. It is possible that this company might become a new leader on the domestic market in the near future.

Recently the Faberlik opened its representative office in France.

Among other large manufactures the St. Petersburg-based cosmetics giant Nevskaya Kosmetika, with revenues of about $70 mln, is also worth mentioning.

However, it is becoming more difficult for Russian companies to compete with foreign firms that manufacture cosmetics in Russia. Thanks to cheaper than in Europe work force and decreased customs and transportation tariffs, international cosmetics giants significantly increased their profits. An indirect evidence of this tendency is the noticeable increase in the amount of their spending on advertising. According to experts, it went up 5 times for three years and reached $1 billion at present. For example, using the facilities of the famous Russian factory Svoboda, Procter & Gamble started the local production of such well-known brands as Camay, Safeguard, Wash&Go, Head&Shoulders, Pantene. Another international cosmetics giant Unilever (Sunsilk, Timotei, Rexona) established a foothold at the Severnoye Siyanie factory in St. Petersburg. Schwarzkopf developed cooperation with Arnest company in Nevinnomyssk. American Avon company and Swedish Oriflame are building production facilities in the Moscow region. According to Direct Sales Association (Russia), the strength of both companies is almost equal - their respective sales volumes reach $100 mln a year.

Meanwhile, manufacturing costs for Russian companies, following the strengthening of the ruble, continue to grow significantly. For example, in 1998, in order to support the increase in sales volume, a domestic manufacturer had to spend only $500,000. Today, it is necessary to spend at least $10-12 mln. As a result, due to the shortage of circulating assets many well-known "old" domestic brands, including Svoboda, Novaya Zarya, Rassvet, Linda, M-Gelios, experience serious difficulties and their sales volumes are dwindling.

In order to compete with foreign rivals, Russian companies need advanced business technologies, in other words - increased quality of production, innovative marketing models and precise positioning on the market. Those companies that fail to meet these demands face only two options: either to introduce contract-based production models or to explore unique market segments inventing new advanced products. It seems that Russian manufacturers prefer choosing the second option.

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