A Tour of Eastern Europe – Part I

By Gregory Grischenko, Contributing Editor

In May 2004, eight former Soviet-block countries joined the European Union. This expansion of the EU has the potential to be one of the most important events in the Union’s social, political and economic history, since its inception in 1957. Millions of Eastern Europeans, dreaming of owning a car, computer or designer clothes, are realizing that they cannot even afford prestige cosmetics or a cell phone. This appears to be changing however, as the Eastern European consumer market for the last 12 years has revealed fast and sometimes explosive growth in the new economic climate.

The Eastern European cosmetics and personal care market is worth nearly $12 billion and has shown strong double-digit growth in the last two years, according to Frost & Sullivan, a global market consulting company based in New York City. The dynamic development of this sector may create new opportunities for raw material suppliers and cosmetic formulators despite the fact that this industry accounts for only 10-15% of the European total.

Consumers in the West, with disposable incomes that are four to five times greater than those of the newly joined members from the East, use products such as shampoos, deodorants and face creams as everyday grooming products. Today, in Eastern Europe products such as shampoos and conditioners are still regarded as luxuries by the great majority, making the large population of the region a huge untapped potential for the consumption of personal care and cosmetic products. Product categories that have reached maturity in Western Europe are now being introduced to a young and growing market in the East. These luxury cosmetic sales are booming, supported by the emerging middle class.
Multinational companies such as Dow Corning, National Starch, Unilever, Avon, P&G and Cognis are among the many U.S. and Western European manufacturers that have already established offices in Eastern Europe, formed partnerships with local manufacturing plants and purchased local companies with established brand names. In Eastern Europe, the largest retailer chains of super and hypermarkets (Makro, Ahold, Rewe, Carefour, Spar, Globus, Kaufland and Tesco) selling medium and low-priced cosmetics are foreign owned. Western brands’ presence in the exclusive cosmetic shops and beauty salons is overwhelming.

For Western manufacturers considering moving into the Eastern countries, the risk associated with economic ambiguity and weak infrastructure might be balanced with the gain of a low cost, skilled and educated labor force as well as an abundance of hungry consumers. Poland is presently the most established country for setting up the entire range of activities from manufacturing to direct sales (a report on Poland appeared in Cosmetic Packaging & Design’s July/August issue). The other countries that constitute the highest growth potential for the cosmetic and personal care industry are either existing EU members such as the Czech Republic and Hungary, or are candidates such as Bulgaria and Romania that are currently projected to gain EU membership in 2007.

In this installment, we will examine the Czech Republic and Hungary. In the November/December issue, we will look at the state of the beauty industry in Bugaria and Romania.

The Czech Republic

With total cosmetics and toiletries (C&T) sales of $810 million in 2003, according to Global Information Inc., an international market research firm based in Tokyo, the Czech Republic (pop. 10.2 million) sustained steady growth of nearly 5% in the last few years with the exception of 2002, when Euromonitor International reports that market saturation in some product brands caused a drop in prices.

Multinational companies dominate the Czech market in all cosmetic product categories with the biggest investments in cosmetics and toiletries coming from Unilever (Netherlands), Procter & Gamble (USA), Coty (France) and Beiersdorf (Germany). Procter & Gamble produces washing soap in a formerly state-owned factory located in Rakovnik. Unilever and Coty dominate the deodorant sector, while Beiersdorf is a leader in skin care.The top 10 companies that made 66% of total cosmetics and toiletries sales in 2003 were multinationals.

Czechs have considered their country as the industrial heartland of Europe dating back to the 19th century. Determined to capitalize on this tradition of quality at lower prices, domestic companies have started to overhaul their strategies. They do not pose any threat to multinationals with their aging manufacturing assets and lack of money for advertising, however, the domestic companies are in possession of well-recognized and developed brands where advances could easily be made by re-branding and repackaging.

There are presently several independent Czech companies operating in the cosmetic sector. According to the Czech Ministry of Industry and Trade, two of them, Setuza and Astrid, were among the top 15 C&T producers in 2003, with sales shares of about 5% each . They were established a century and a half ago as washing soap producers and evolved into diversified personal care product suppliers with a wide range of well-known brands.

Setuza is a leading producer of food and cosmetics (about 70% of the Czech market for edible oils and fats). Setuza’s personal care product division supplies toothpaste, toilet water and face lotion (cosmetic product brands Pitralon, Olimon and Don). Headquartered in Prague, Setuza employs 1,300 and operates production facilities in Usti nad Labem, Havirov, Olomouc and Mydlovary. About 20% of production goes to export, predominantly to Hungary, Poland and Slovakia. The former state-owned company was privatized in 1992 and about 40% of it still belongs to the Czech Property Fund (government body transferring state property to private owners). The company has gained ISO 9001 and 14001 certificates and recently invested over $9 million in new technologies and equipment. Currently Setuza is in the process of debt restructuring, however, with sales of over $150 million in 2003, it remains an important part of the industry.

The story of Astrid begins in 1847, when Frantisek Procháska from Prague. opened a shop making and selling toilet soaps. With help from French essential oil producers and perfume experts, the Procháska company grew and became the first historically acknowledged cosmetics company in the Austria-Hungarian Empire. It survived name changes, nationalization and different forms of state ownership, while producing world famous children’s foaming soap and women’s beauty products. Astrid made cosmetics under licenses from Beiersdorf (Nivea), Schwarzkopf and Dior. In 1991, the state-owned company was privatized and in 1996 became a corporation. Today, with over 100 employees still located in Prague, it produces highly successful Astrid and Femina facial and body cosmetics, Adam and Diplomat men’s toiletries and Astrid/Solara, the number one sun tan lotion on the Czech market.

Ryor is a privately-owned company founded in Prague only 13 years ago amid currents of economic liberation by the entrepreneurial chemical engineer Eva Stepánkova. The Central and Eastern Europe Business Information Center (CEEBIC), a U.S. government organization that providesinformationto U.S. firms with an interest in the region, reported that Ryor currently draws 10% of the overall Czech cosmetic market. Ryor is the country’s largest producer of herbal cosmetics made from natural ingredients and herb extracts. It employs 100 and exports about 15% of its product to Germany, Sweden, Japan, Russia, Slovakia and countries of the former Soviet Union. In 2001, Ryor achieved record sales of nearly $4.7 million. In 1997, its Exory line of cosmetics received a Packaging of the Year award from a Czech and Slovak Republic Packaging contest affiliated with Brno Packaging Exhibition. According to the company’s marketing research, typical Ryor customers, thrifty women between the ages of 40 to 50, will choose a $3 cream from Ryor over a similar L’Oreal product with a $12 price tag. With the recent release of Ryoherba face creams, Ryor remains one of the most recognizable Czech brands in the country.

There are also a number of smaller companies that produce herbal cosmetics. Employing fewer than 100 employees, companies like Dermacol (repair creams with seaweed extracts) and Barecol (natural herbal creams) manufacture high quality products for the domestic market. The company ForLife from Brno, established in 1993, makes Seaside and Magada , herbal professional cosmetic treatment products. ForLife uses the latest technology from the West, quality control according to ISO standards and raw materials and active ingredients from Merck, Goldschmidt and Neuber Brentag.

A History of Fine Glass Production

The Czech Republic has a strong glassmaking tradition going back centuries, according to Petr Novy of CzechDesign.cz. The production of fine cut and polished crystal containers for perfume along with the other fine glass products began in the Jizera Mountains at the end of the 19th century. The trend of making custom-designed and mass-produced flacons for expensive perfumes was initiated in 1908 by French glass artist Rene Lalique, who supplied scent jars to the Francois Coty perfumery. Concentrated around the town of Jablonec nad Nisou, glassmaking increased after 1918, when 250 small crystal glass factories and numerous households employed thousands of craftsmen.

Czech cosmetics makers initiated production of artistic quality glass packages created by famous Czech designers C. Schlevogt, H. Hoffman, R. Rabic and others. After 1949, glass manufacturing in the Jablonec region went through numerous transformations and changes including nationalization, privatization and restructuring. There were periods of enormous success such as an artistic renaissance in the 1950s and the commercial gains of the 1970s when crystal glass from Jablonec Glassworks was exported to Western Europe, the U.S. and Canada. After the collapse of the Eastern Block, following the Velvet Revolution, which divided Czechoslovakia into two independent countries, numerous private glassmaking companies emerged. The largest is Ornela a.s., founded in 1992 and headquartered in Zasada, with two manufacturing plants in Zasada and Desna. It employs 1200, and at the present time does not make commercial glass packaging, concentrating mainly on jewelry glass bead production. Ornela, with its two hundred years of glassmaking traditions, remains an untapped source for luxury perfume packaging in Europe.

Hungary

In 2002, the cosmetics and personal care market in Hungary (pop. 10.1 million) was estimated at almost $400 million, according to the Hungarian Ministry of Economic Affairs. The annual market growth rate over the last five years has shown fluctuations between a few points and double digits. Explosive growth of image and brand awareness for the C&T market has driven imports from leading world suppliers to a near saturation level in recent years.

With quality cosmetics in demand, imports of top international brand names dominate not only the higher end of the market but almost any C&T sector. According to Euromonitor International, the products from foreign multinationals made up over 90% of the total cosmetics market in Hungary while the share of local companies in the business steadily declined between 1998 and 2003. The amount of imports, valued at about $350 million in 2002, reveals a large untapped market in the country given the relatively high disposable incomes when compared to other Eastern European nations, according to Global Information. CEEBIC reported that the majority of the 1,600 companies in the Hungarian market (about 80%) have been involved in importing and distribution only.

According to Trade Development Council, a Hong Kong based global marketing group, the key exporters to Hungary are France (18%), Germany (16%) and Great Britain (12%).The imports from the US were about 9% in 2002 but are showing signs of greater growth. The remainder comes from the rest of Europe and Canada. The list of international supplier companies includes Proctor & Gamble, Unilever, Colgate-Palmolive, Beiersdorf, Henkel, Gillette and L’Oreal (all of which established Hungarian subsidiaries years ago).

The dynamics of growth for the different sectors of the Hungarian cosmetic market are driven by local traditional fashion awareness and rapidly increasing disposable income. For the past decade the hair care sector has been declining, having once had the largest market share, while upper-end make-up and skin care products show constant gradual growth. CEEBIC judges the shift is due to Hungarian women’s belief that the higher quality products must have a stronger effect.

Hungary’s perfumes and fragrances sector is the most fragmented and unpredictable in the entire cosmetics market, with all key international brands available for sale. This is the only sector where consumers’ daily earnings and the country’s economic situation directly relate to actual sales numbers. Premium perfumes (for both women and men) represent the fastest growing segment (200% in the last 5 years, according to CEEBIC market research. However, about a quarter of it enters the country illegally attracting shoppers with a 30 -40% price reduction.

There are two major distribution channels for cosmetics and toiletries in Hungary –pharmacies/drugstores and supermarkets/hypermarkets. The share of department stores has gradually declined during the last four years. In 2003, according to the Trade Development Council, the fast expanding network of hypermarkets with their abundance of shelf space and wide selection of brands has surpassed pharmacies as the most important retail channel. Retail chains such as Azur (Hungary), the Rossman and Drogerie Markt chains (Germany) and hypermarket outlets Cora, Tesco and Auchan account for over a 50% share of the C&T market.

Hungarian subsidiaries of direct sales companies Avon, Oriflame and Amway make up nearly 10% of the overall cosmetics market, while specialist stores like Yves Rocher, Douglass, Marionnaud and Lush Cosmetics have begun to assume an increasingly larger role in the distribution of C&T.

The manufacturing of cosmetics and toiletries in Hungary is a part of the dynamically growing Hungarian chemical industry, which includes the production of pharmaceuticals and household goods. The participation of foreign capital in this industry is stunningly high (over 75%), according to Dr. Laszlo Felfoldi, editor-in-chief of Pack+Log, a Hungarian packaging magazine. Many traditional Hungarian brands were acquired by multinationals and reintroduced with a refreshed, new image supported by heavy advertising and state-of-the-art decorating and packaging.

Major pharmaceutical companies in Hungary such as G. Richter and Biogal have often been involved in cosmetics manufacture. Gedeon Richter Ltd is a one hundred-year-old Hungarian pharmaceutical giant with sales of $500 million in 2003. G. Richter owns a unique market position. It is present in 30 countries with four foreign production sites in Russia, Romania, Ukraine and India, and has two domestic plants in Budapest and Dorog. As a result of privatization, foreign investors hold 63% of company shares, while the rest belong to domestic investors and the government. G. Richter previously produced the Fabulon cosmetics brand and remains the only Hungarian pharmaceutical company operating without a strategic foreign investor.

Competition has changed the market position of former domestic leaders in cosmetics. Caola, a 170-year-old company, was once a monopoly in the cosmetics and household chemicals sector, remaining under Hungarian control after privatization in 1993. The company failed to accomplish its ambitious development plans and sold the most important brands to Unilever in 1998 (among them was Helia-D, a cosmetic line with a beauty recipe based on a 400 year-old legend and very popular in Europe). Some other brands, including Caola and WU2, were sold to EVM (Hungarian maker of cosmetics, toiletries and household chemicals). After going through bankruptcy and spinning off the Research and Development Division in 2000 (now KHV Ltd Hungary), Caola was reorganized into the new company Caola-Alpha. However, without its time-honored brands, especially Helia and Caola lines, the company remains a secondary market player.

Located in the southern city of Szeged, Florin is among the top ten privately owned cosmetics makers in Hungary. The company, which started operation in 1957, employs nearly 200 and produces a variety of cosmetics that claim healing effects (Yuvan and Charme lines). After privatization in 1991, Florin moved to a new modern facility and improved packaging in collaboration with Henkel and Schwarzkopf, gaining ISO 9001 certification in the process.

Herbaria is a leader in the Hungarian herbal cosmetics market. Founded in 1949, the company operates six production facilities with modern equipment across the country and offers cosmetic products composed of 90% natural ingredients.

An interesting ongoing development from Ilchi Beautifying Herbs is the Eminence line of natural skin care products.Promoted as handmade organic skin care of Hungary, this brand was created by Ilchi Molnar, one of the most prominent names in the country’s professional skin care industry, and used in numerous domestic salons. Attractively packaged Eminence products are sold in Switzerland, Japan and the United States.

Hungary has rapidly changing lifestyles and increased consumer spending. The country’s recent introduction to the European Union will further assure a bright future for the C&T industry.