26 August 2003 12:23
The Sweet Smell of Success
The Russian market for perfume and cosmetics is already one of the six biggest in Europe, and the retail chains are growing by 40-50% a year.
Lilia Moskalenko
 “I haven’t seen eyes as hungry and excited as those of Russian women looking at cosmetics in any other country in a long time,” Fred Langhammer, President and CEO of the Estee Lauder Group, told Expert in an interview. Thanks to Russian women’s lust for beauty (men’s products only make up 10% of the market), the Russian market for cosmetics and beauty products is growing by 30% a year and has already become one of the six biggest in Europe. The retail trade in cosmetics is developing even more rapidly than the market as a whole and today is expanding by 40-50% a year, second only to grocery retail (80-100% a year).
Currently in Russia, a new specialized cosmetics and perfume store, often with a French name and with at least 100 m3 in floor space, creative interior design, and huge shop windows displaying the newest in cosmetics and perfumes from around the world, opens every 3-4 months. This type of store has won over a fifth of the entire cosmetics market, estimated at $4.7 billion. According to market projections, in the nest two to three years the share of specialized retail stores will at least double.
From wholesale to retail
Golden Rose (Rus. Zolotaya Roza), the first specialized cosmetics store in Russia, was opened in 1989 by the Swiss company Temtrade. Stores selling expensive cosmetics only became a wide-spread phenomenon five or six years later. They were opened by distributors of luxury Western cosmetics (brands like Lancome, Chanel, Christian Dior, and Nina Ricci), companies like Arbat Prestige, Lux Holding (the Rivoli chain), Alkor (the L’Etoile chain), and good old Temtrade (owners of the L’Escale chain which includes Golden Rose).
These distributors had to go into retail because in the past there were no outlets that matched the quality of their products. Cosmetics were sold in department stores, in open-air markets, in metro station kiosks, and even in regular grocery stores. Interestingly, in creating a new store format, distributors simply saw retail as a business that went along with distribution. They successfully promoted their goods in non-specialized Russian stores like GUM and TsUM. It soon became evident, though, that cosmetics retail in Russia had a promising future, as show by the dramatic growth of cosmetics use, more than 20% a year, including expensive exclusive brands, in the late 1990s. At the same time, consumers were demanding not simply high-quality products, but a better shopping experience.
Russian women wanted to buy their lotions, lipstick, and perfume in a decent place with an attractive layout, lighting, and knowledgeable consultants. They wanted a specialized store that would completely vouch for the quality of all its products. As a result, cosmetics retail began to grow rapidly, along with the rest of the market, and gradually pushed distribution aside.
By turning away from wholesalers, foreign companies have often met with scandals. One of the biggest happened last year, when the exclusive distributor of L’Oreal, Temtrade, accused L’Oreal of shadily supplying some of the NIS countries. L’Oreal was found not guilty in court, but the exclusive contract between the companies was broken. At the same time, retailers changed their policy toward their stock. They began to “dilute” their exclusive stock with cheaper and more accessible products, so called mass market cosmetics, until they gained a 15-20% share in stores. This allowed them to attract more customers and increase product turnover.
In the last two to three years Russian cosmetic retail expanded by almost five times, and every year turnover at the biggest stores has tripled. The uncontested leader in terms of number of chain stores in Russia is L’Etoile, which today also runs around a hundred smaller retail outlets, while Arbat Prestige dominates Moscow with 13 stores. Several chains from outside Moscow have also gotten big, such as Ile de Beute. Today, almost 300 specialized cosmetics stores are doing business across Russia. Though Russia is still far behind Europe in terms of the number of specialized stores, in terms of factors such as efficient use of retail space, Russia is on par with developed countries.
The glamour advantage
The cosmetic retail market is far from saturated in Russia, but Russian companies have already started to prepare for the coming competition from foreign chains. Retailers see the fact that their stores cater specifically to Russian customers as their main competitive advantage. They believe their stores differ from Western ones in the way products are presented. They are more glamorous, with expensive, expansive interiors decorated with paintings and sculptures. In addition, according to Marina Krivenko, Vice-President of Edinaya Evropa Holding, Russian stores are carefully divided into zones. “In the West, brands are presented in a less clear-cut way,” says Krivenko. “There expensive brands can sit next to mass market makeup on the shelf. In Russia the shop floor is clearly divided into different price categories, which has a positive effect on demand. I think that the quality of the way exclusive brands are presented in Russia has outpaced that of leading Europe countries.”
Russian retailers are not merely relying on their existing advantages but are trying to develop various marketing strategies to keep their market share. For example, L’Etoile plans to focus on the market niche for elite cosmetics. “We have set ourselves a goal: to move in the exclusive direction and completely do away with mass market. By the end of next year, we plan to control 90% of the market for exclusive cosmetics,” states Alexander Epemeyev, Director of Public Relations at Alkor. For chains with most of their stores outside of Moscow, this strategy could really pay off according to market experts. The amount of luxury brands offered in Russia’s provinces is limited and potential demand is extremely high, as every Russian town has its local elite and therefore potential customers.
The opposite strategy is to strengthen the position of mass market products in stores. This is the approach Arbat Prestige, first and foremost, is taking, as it recently expanded the share of mass market cosmetics in stock by 15%. In order to make this idea work, the company has built huge stores several stories tall, supermarkets for cosmetics where all different price categories are offered. This particular cosmetics retail format, according to Arbat Prestige’s management, is what Muscovites are demanding most. Mr. Nekrasov at Arbat Prestige also gives another reason the chain decided to expand their mass market selection. These products took the place of some exclusive cosmetics in Arbat Prestige stores after a contract with the French company LVMH, the biggest producer of luxury brands like Christian Dior, Givenchy, and Kenzo, collapsed. A major scandal preceded the breakdown in relations between the two companies. According to Nekrasov, the contract broke down because LVMH allegedly offered its products at lower prices at various Moscow outdoor markets.
Expanding a store’s selection is not the only strategy for winning over the Russian market. Several companies have decided to improve their service rather than change their stock. “From the moment we opened our stores, we always emphasized professional training for our associates. We regularly hold trainings for sales representatives, consultants, and stylists. Now in Ile de Beute every consultant working with products to care for the body or face has at least some medical education,” says Krivenko. However, despite Russian retailers’ active preparation for an onslaught of foreign competition, many are not excluding the possibility of joining forces with some of Europe’s biggest chains.
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