Changes Are Coming to Russian Beauty Industry

Engineer and independent market and technology specialist Greg Grishchenko pinpoints several key trends in the Eastern European packaging market.

By Greg Grishchenko

What does it take to launch a successful cosmetic brand? Ads in glossy magazines, sexy commercials and eye-catching packaging…and, of course, quality stuff inside. Twenty years ago when the vast Soviet bloc collapsed, it was quickly conquered by free market capitalism. Western cosmetics and fragrance brands became instant successes, achieving annual growth in double and triple digits.

The former Soviet Union, Poland, Hungary and Bulgaria, in the communist past, had developed a very sizable beauty industry with a mix of decent quality ingredients, outdated manufacturing, advanced chemical research and a highly educated work force. However, a planned economic experience and bleak rudimentary packaging of well-known local brands could not match the glittering foray of Western brands and, ultimately, they were pushed to the low end of the category.

The major multinationals, with the advantage of many years of successful marketing experience, eventually purchased the best of local brands, giving them the necessary financial infusion and a new life. Remaining local manufacturers, who lacked funds for advertising campaigns and advanced packaging, were left to struggle for survival.

Poised for Growth

The latest proof of this trend is the recent purchase by London/Rotterdam based Unilever, the world’s second-largest consumer-goods company. Unilever agreed to buy 82% of the Russian concern Kalina, based in Yekaterinburg, for nearly $700 million. Kalina is Russia’s largest personal care company. It first sold shares in an initial public offering in 2004, and was purchased for almost double the price. This buyout proves the importance of the Russian market to Unilever, and why it is currently on a buying spree of Eastern European companies. Kalina’s strong brands Black Pear, Silky Hands and One Hundred Beauty Recipes have earned great confidence among local consumers.

According to Bloomberg data, Russia is set to report an economic growth of 4.5% in 2011 and, in 2012, a growth more than twice as high as the U.S. and Europe. The largest cosmetic markets of Moscow, St. Petersburg and Yekaterinburg always experienced rapid growth in the high-end cosmetics market, based on the traditional perception of cosmetics among Russian women: Quality comes with price.

WTO Impact

With the country entering the World Trade Organization, all major European, U.S. and Japanese luxury cosmetics suppliers are expected to gain financially. With the reduction of Customs duties, prices might fall a little; however, this will not drastically increase the growth.

One reason might be as follows – economy brands will be manufactured locally and WTO membership might slightly improve the prices for ingredients purchased in the West. The well-paid and educated Russian middle class—the principal buyers of high-end cosmetics—does not really pay attention to price fluctuation in luxury brands.

About the Author: Greg Grishchenko is an engineer and independent market and technology specialist based in the U.S. He has carried out extensive research in Eastern Europe and the countries of the former Soviet Union, and is the author of several reports on Eastern European packaging, converting and printing sectors. He can be reached at [email protected]