A Tour of Eastern Europe – Part IV

The review of the state of the beauty business in the countries of the former Soviet Union ends with the Ukraine and Belarus, where the legacy of Communism lingers.

By Gregory Grischenko, Contributing Editor

hile some countries that made up the former Soviet Union have developed free market economies relatively quickly, the Ukraine and Belarus had been part of the Communist empire since 1918 and are still struggling to implement economic reforms and utilize their vast industrial base.

Ukraine Recovery Begins in 2000

Ukraine is the second largest country in Europe after Russia and used to be the most important economic entity of the former USSR, providing more than a quarter of the Soviet agricultural output. Its vast chemical and pharmaceutical industries produced a wide variety of ingredients and finished products for the local cosmetic and toiletries (C&T) market in pre-independence times.

The economic reforms that began after the 1991 separation from Russia were inadequate to ensure a commitment to a Western style business model. With its legal and political corruption, lack of clear tax, legal and licensing laws, strict government regulation and high import tariffs, Ukraine’s economy did not attract considerable foreign investments for much of the 1990s. However, according to The Repton Group, during the last four years the country’s economy has shown a 6+% annual growth, a positive trade balance and low inflation.

After the 1998 financial crisis in Russia, the Ukrainian beauty market fell from $700 million in 1997 to $490 million in 1999. By 2001, it had recovered to its 1997 volume, and in 2003, its C&T market was estimated at $1 billion, taking third place in Eastern Europe after Russia and Poland, according to Business Information Service for Newly Independent States, run by the U.S. Department of Commerce (BISNIS). Last year, two main cosmetics shows took place in Kyiv—InterCharm2004 in March and The Beauty Rumble in October, attracting over 60,000 visitors.

Approximately 70% of the Ukrainian fragrance and cosmetics market is represented by so-called mass market merchandise at the price of $1-$3 per item. Imported luxury perfumes and cosmetics account for nearly 5% of the entire market, and the rest is made up of quality imports made by multinationals. Large multinational corporations have already established local subsidiaries, with the top five (Procter & Gamble, Unilever, Beiersdorf, Schwarz­kopf & Henkel and Wella Group) being the most active in advertising, according to BISNIS.

BISNIS reports that there are two major distribution channels for C & T in Ukraine—open air markets (about 55% of retail revenue) and department stores/drugstores (about 20-30%). Approximately 15% of all cosmetics are sold in kiosks and street sales make up about 7% to 10%. The role of supermarkets, specialized cosmetics shops and outlets has gradually grown during the last three years. Supermarket chains such as Spar (Netherlands), Billa (Germany) and retail outlets Tiko Market, Fozzy, Furshet, Maxi, Brocard, Roksolana, Cosmo, DC, Mega Market, Begemot, EKO and Velika Kishenya (“Big Pocket” in Ukrainian) account for much of this growth.

Direct sales from Avon, Oriflame and Amway are gaining popularity. Avon Cosmetics Ukraine was founded in 1997 in Kyiv and has an annual growth rate of about 10%. It recently invested over $5 million in the construction of its 80,000 sq. ft. main office (according to Kosmetik International Journal/KIJ), the Ukrainian edition of Kosmetik International Verlag GmbH from Germany.
Imports make up 80% of the entire cosmetics market in Ukraine and presently dominate in high-end perfumes, make-up, deodorants, hair dyes and toothpaste. Local manufacturers supply a limited assortment of skin care, body care, bath products and essential oils. January 2004 was a record month for Ukrainian cosmetics exporters—$26 million, according to KIJ. Several major domestic companies that could be credited with 70% of the country’s exports keep up with the growing demand for popular low and mid-priced products by introducing new products and purchasing modern, Western made equipment.

Henkel Uzhgorod with sales estimated at $19 million, is the fastest growing cosmetics manufacturer in Ukraine. In 2000 the Henkel Group purchased the Sofora factory in Uzhgorod (the Zacarpathian region of Ukraine) and has invested heavily in new equipment and technologies. Production output (household chemicals and cosmetics) of this facility experienced double-digit growth over the last 2 years, according to company director Oleg Adamchuk.Henkel Uzhgorod provides wages for its several hundred employees that are 25% higher than the average in the region.

There are a number of medium and small cosmetics producers in Ukraine with already established value-priced brands, focusing on the region’s natural resources. Packaging concepts are limited and are dictated by sales price. However, with an abundance of highly experienced professionals in Ukraine’s graphic arts field that have very good computer skills and access to modern hardware, domestically designed and fabricated packaging are appearing.Some of these companies include:
• Elfa, with estimated annual sales of $3 million, was founded seven years ago in Kyiv. This privately-owned company began by importing Western made cosmetics and a year later started its own manufacturing of licensed products. Elfa is also a contract producer for the small private firm Beauty Alliance, Kyiv. Elfa makes the popular skin care line Mon Capris for Beauty Alliance, which is licensed from UK-basedAdmiralty Holdings Ltd.

Recently, Elfa invested over $1 million in a new 33,000 square foot production facility with processing lines from Italy, France and Switzerland. Cur­rently, Elfa employs 250 and manufactures approximately 400 products, including its own brands Zelenaya Apteka (‘Green Pharmacy’), Sun Energy and Fruktovoye Chudo (‘Fruit Miracle’).

• Alye Parusa, with estimated annual sales of $6 million, was founded in 1908 in Mykolayiv. The privately-owned company makes a wide variety of skin and body care products (over 80 types).Alye Parusa recently acquired modern packaging technology for its products that come in laminate aluminum tubes.

• Zorya, established in 1996 and located in Kyiv, was recently acquired by FreshUp Cos­metics from Varna, Bulgaria. Zorya is mostly a contract manufacturer for other Ukrainian suppliers. Notably, it has modern lines that produce toothpaste.

• Himpro is a corporation with over 30 years of experience in cosmetics research. Founded in Kyiv as a central research institute for the entire Soviet Union, Himpro was in charge of the development of household cosmetics. It later evolved into a producer of distinctive brands of sea weed and other natural body care cosmetics products such as Bio-More and Zoloto Laniv (‘Field of Gold’).

There are also small Ukrainian private firms including Multipack in Kharkiv, and Plotnik in Kyiv, making plastic packaging and dispensing accessories for cosmetics.

According to the KIJ report, domestic glasswork companies in Gostomel and Buyek (the latter recently built with a $7 million investment in construction and forming machinery from Glasmaschinenbau Freital GmbH, Germany) mostly export their production due to the decrease in low-end fragrance manufacturing (perfumes and toilet water) in the last three years.

Belarus Struggles With State Control

Belarus, bordering Poland, Latvia, Lithuania, Russia and Ukraine, is a nation about the size of Kansas. It was the most industrious region of the former USSR with a highly educated and skilled work force. The country’s chemical industry was launched in the 1970s with significant help from Western companies from the UK, Germany and Italy. After gaining independence, economic and political reforms began in 1991, but were hindered in 1994 when current Pre­s­ident Luka­shenko was elected. According to The Repton Group, about 80% of all industry is currently under state control, the government having power over product pricing, asset ownership and business practices. Under U.S. and World Bank sanctions, Belarus is at present the lowest recipient of foreign investments among the republics of the former Soviet Union.

Eighty percent of retailing and distribution in Belarus is privatized. Without significant investment from multinational chains this industry remains far behind its neighbors, with the majority of cosmetics and toiletries sold through open-air markets, small kiosks or privatized former state stores. There is virtually no presence of major direct sales companies such as Avon and Oriflame, however there is some activity in this field mostly through Russian channels.Although there is a lack of independent statistical data, Greol Engineering has estimated the Belarus C & T market was $180 million for 2003.

Ten years ago cosmetics manufacturing as well as cosmetics packaging did not exist in Belarus. Left alone by a government trying to control “major/ strategic” industries, this small but growing sector is shaped by small privately owned companies, sometimes wisely utilizing the country’s neglected chemical industrial resources.

The largest Belarus cosmetics company, Belita/Vitex was established in 1992 in the city of Minsk as a Belarus-Italian joint venture, spurred by the country’s demand for hair care products that were considered an imported luxury. Belita introduced its first manufactured cosmetics products in that same year. Currently, the Belita/Vitex enterprise makes about 33% of Belarus cosmetics, offering 400 products in body care and skin care (including brand name Sealine Aphrodita), hair care (brand BioActiv) and men’s toiletries (Oliver brand). ISO 9001 certified, the company operates two research labs and exports 30% of its output to Russia and other Easter European countries.

Of the estimated 40 cosmetics producers in Belarus, the strongest companies were founded in the 1990s when economic reforms helped to find local sources for ingredients and polymer processors for plastic packaging.

• Belkosmex in Minsk makes face, body and hair care products. Founded in 1998, the company exports to Europe, the U.S. and Canada. Belkosmex uses quality ingredients from Dragoco GmbH, Austria, Clariant GmbH, Germany, BASF, Germany, and International Specialty Products, U.S.

• Exclusivkosmetik in Minsk produces ecologically correct face, body and hair care products under a license from H. Reynaud & Fils (France) with ingredients from Dow Corning (UK), BASF (Germany), Dragoco GmbH (Austria), Rhodia (France), Manro (Belgium), Clariant GmbH (Germany), Unger Fabrikker (Norway) and Alban Muller (France). The company buys plastic packages and boxes from Poland and Russia.

The packaging business for cosmetic products in Belarus is represented by two key producers. The giant Industrial Group, Minsk, made up of four companies—Plastika, Mitra, Gromin and Pakoplast—is the largest specialized company in Eastern Europe that manufactures bottles, flacons and jars for cosmetic products in a variety of plastics. The company operates with ISO 9001 certification, is equipped with modern, Western made process equipment and runs a full production cycle from design to testing including decoration.Industrial Group exports 90% of its production to Russia, Ukraine, the Baltic States, Italy, Israel and Bulgaria.

Sarafanoff & Co., a private, family-owned company, has been supplying high quality plastic packaging for cosmetics since 1993. The company exports to Poland, the Czech Republic and countries of the former Soviet Union. In 2002, a package designed and manufactured by Sarafanoff won the highest award in the Russian Golden Kernel annual packaging contest.

According to Kosmetik International Journal, the highest European annual C & T spending per capita is $282 (Switzerland). The European Union averages $176. The leader among the Baltic nations is Latvia with $57; Russia and Ukraine are estimated at $37 and $24 respectively. Looking ahead, investment in the Baltic Republics as members of the EU has obviously grown more attractive.However, the non-EU status of Ukraine and Belarus should not be a deterrent to those looking for export or cautious venture capital opportunities.

About the Author

Gregory Grischenko has 26 years experience in packaging machinery design. A native of Ukraine, he has written a number of reports on the emerging markets of Eastern Europe, including the former Soviet Union. The focus of his reports is the growing consumption of all packaged goods categories in this region. For more information: (201) 886-8962.