Beauty Climate Brightens in Eastern Europe

Oriflame billboard with local pop stars in Kiev-Ukraine

The post-crisis economic situation improves for the Eastern European cosmetics and toiletries market.

Written by Greg Grishchenko, Contributing Writer

The outlook for the Central/Eastern European cosmetics and personal care market in 2011 has brightened over the past three months, although there is still expected to be a slowdown in the pace of demand growth for individual countries compared to 2010. The improvement can be attributed mainly to better prospects for the general economy.

It still looks like Western Europe will be the laggard in the industry picture this year with projected flat development, while in 2010, the Central/Eastern European cosmetics and personal care market, which reached almost $25 billion, had shown modest growth despite some fluctuation into the negative area for several countries.

In the post-crisis period, several former Soviet-block countries accepted into the European Union in recent years (Czech Republic, Hungary, Lithuania, Latvia and Estonia) showed various levels of decline last year when compared with 2009. The regional leader of the cosmetics and toiletries (C&T) market, the Russian Federation (more than $12 billion), showed nearly 3% growth in 2010, as well as the No. 2 player, Poland ($3.9 billion), with nearly 1% and No. 3, Ukraine ($1.98 billion), with 2%. The other new members of the EU—Slovakia, Bulgaria and Romania—experienced growth in the vicinity of 1% as did Europe’s last dictatorship, Belarus. In the Balkan region, the former Yugoslavia’s countries—Serbia, Croatia and Bosnia—gained a growth of about 2-3%, which can be explained with the lowest consumption benchmark in the entire region and minimal losses during crisis times.

A significant number of countries in the Central and Eastern European region are still considered developing economies, and this explains the ongoing vulnerability of the regional C&T market during the crisis.

Russia

The economic slowdown did not significantly affect the C&T market in Russia, which enjoyed sales growth in 2009 and 2010. However, with the decrease of earned incomes during the crisis, the premium segment was affected. Russian customers changed their spending patterns and became price-sensitive, choosing lower cost brands; sales in the mass segment actually grew during the economic slump. Direct sellers Oriflame and Avon were the leaders in sales, showing the strongest growth in the Russian C&T market in 2009 and 2010. Well-organized distribution, convenient buying and pervasive availability across a huge country helped direct- sales companies increase their market share while most other manufacturers suffered during the recession. Key Russian manufacturers Kalina, Nevskaya Kosmetika, and Vesna OAO continued to increase their market share in the last two years (13%, 10% and 18%, respectively). On the contrary, almost all multinational companies lost share for the same period, and some, such as Amway and Mary Kay, actually experienced a sales decline.

While Russia accounts for about 1/8 of the Earth’s dry land in Europe and Asia, the lion’s share of its C&T sales, especially in key sectors like skin care, fragrance, hair care, color and premium cosmetics comes from Russia’s European cities, specifically from Moscow and St. Petersburg. Cosmetic sales in these two capital cities claim 34% of Russia’s total C&T sales volume.

Poland, Ukraine and the Rest

Poland happened to be the only EU country not very much affected by the world crisis, and the C&T market in Poland turned out to be quite resistant to the economic slowdown with total sales experiencing growth in 2009 and 2010. Driven by the growing importance of appearance, Polish consumers did not appreciably cut spending in many related categories while increasing demand for affordable luxury goods like fragrances and color cosmetics. Multinationals, with their well-established brand names, broad product offerings, availability, strong advertising support and big budgets for research and development, led cosmetics and toiletries sales in the country. Procter & Gamble, Avon, L’Oréal, Coty and Nivea are the top five players leaving behind struggling major domestic manufacturers such as Grupa Kolastyna, Dr Irena Eris and Ziaja. Poland is the major European cosmetics producer, but many local companies with low advertising budgets lack the ability to improve performance by further promoting more advanced products.

As a result of almost 60% local currency devaluation in 2008, Ukraine faced strong growth of consumer product prices. A drop in disposable income led Ukrainians to switch from premium to more basic cosmetics and toiletries; however, total sales increased by 9% in 2009. With the improvement of the general economy, Ukraine’s unsaturated C&T market, with major consumption categories like hair care, skin care, fragrances and color cosmetics, experienced modest growth in 2010, also helped by an ongoing baby boom. Multinational companies continue to lead cosmetics and toiletries sales in Ukraine with Oriflame being the most active company within C&T, with sales gaining an 11% share in 2009. Devaluation improved marketing position for local C&T manufacturers competing with multinational importers who were less flexible in product price policies. Despite ongoing political turmoil, Ukraine’s C&T market outlook for the next five years remains positive, supported by the current state of consumption per capita where Ukrainian consumers carry the highest potential. Before the crisis, Ukrainians spent $56 per year for cosmetics and toiletries if compared with $125 and $90 for Poland and Russia, respectively.

There is a similar development pattern of C&T markets for the other countries in the Central/Eastern European region. Multinationals dominate in all product segments with their well-known brands retaining a range of acquired local ones that gained popularity in previous years. The most positive news is coming out of the countries that entered the European Union just before the beginning of the economic crisis period (Romania and Bulgaria) and the countries of the Balkan region where consumer spending was much lower than in their higher GDP neighbors in the north. Also, sales of local organic and eco-friendly products based on natural ingredients are climbing upward, indicating a growing trend toward healthy lifestyles, where the elements of nature are incorporated in beauty products.

About the Author

Greg Grishchenko is a packaging consultant in New Jersey. A native of Ukraine, he has written a number of reports on emerging markets of Eastern Europe, including countries of the former Soviet Union. The focus of his reports is the market research of major consumer goods categories in this region including packaging. He can be reached at [email protected].