A Russian revolution in rouge: COSMETICS: A boom in direct selling of make-up products is empowering hundreds of thousands of women, reports Christopher Brown-Humes:
It is just after 9amon Monday and several hundred Russian women are queueing
outside the Moscow headquarters of Oriflame, the Swedish cosmetics group.
Inside the building a few hundred more snake round a large room on the second
floor and down the stairs, many of them clutching order forms and catalogues.
They are placing and collecting orders but numbers are bigger than usual
today because Oriflame has just started a new promotion. In one corner, a
group of women is testing the company's latest lipsticks and face
powders that in a few hours' time they will be delivering to their
friends, family and work colleagues.
This is the face of cosmetics selling in modern Russia. About 500,000 people
- 90 per cent of them women - have sold Oriflame's products in Russia in
the past three months, more people than belong to the Communist party. Avon,
the US company that is Oriflame's biggest rival, had 330,000 sellers at
the end of last year after adding 110,000 during 2003. For both companies
Russia has been a compelling growth story in the past five years, as have
many eastern European and former Soviet states.
Russia is by far Oriflame's largest market, accounting for about a
quarter of the group's sales of Euros 652m (Pounds 439m) last year, and
is also its most profitable. It is a growth story the company is keen to
share with outside investors: its shares are expected to be listed on the
Stockholm Stock Exchange next week.
The success of western cosmetics companies in Russia says much about the
country's transition from communism to a quasi-market economy and the
emergence of a middle class that is slowly gaining the wherewithal for
life's luxuries as well as its necessities.
The Dollars 5.4bn market is led by international groups such as L'Oreal,
Procter & Gamble and Beiersdorf, according to data from Euromonitor in
London, but the direct sellers are growing fast. Their share of the cosmetics
and toiletries market has climbed from 4.7 per cent in 1998 to 12.3 per cent
in 2002 and 14.2 per cent last year.
"The market has developed far faster than anyone would have anticipated
in terms of consumer confidence and spending," says John Higson,
Avon's vice-president for central and eastern Europe.
Partly that is because of Russia's strong gross domestic product growth
at a time of higher oil prices. But disposable incomes have been growing
faster than GDP and while Russians still find it hard to afford big-ticket
items such as household appliances and cars, smaller purchases such as
cosmetics are increasingly within their reach.
The desire by Russian women to look their best appears to be as deep as if
not deeper than in other countries. Robert af Jochnick, one of
Oriflame's founders, says: "There are two products in Russia. One
is vodka for the men, the other is lipstick for the women."
While satisfying this basic craving, companies such as Oriflame and Avon have
provided Russian women with a business opportunity they would not have had in
Soviet times. Many already have another job, or are bringing up a family.
Selling cosmetics offers flexible hours and a chance to see friends and,
above all, gives them more control over their lives. And they need to invest
little to get started.
Average salaries in Russia are only about Dollars 250 a month, with about a
third of the population of 145m living below the poverty line. Many people in
good jobs are badly paid and need extra income to survive.
No wonder so many teachers, doctors and academics opt to sell cosmetics as a
sideline. And they seem to be effective. "Teachers and doctors have high
credibility - people are used to listening to them," says Magnus
Brannstrom, the Arnold Schwarzenegger lookalike in charge of Oriflame's
Commonwealth of Independent States and Asian operations.
The market is already developing. Although colour cosmetics remain the big
sellers - items such as mascara, lipstick, face powders and nail varnish -
more sophisticated products such as perfume and skincare are becoming popular
as disposable incomes grow. "At Avon, the skincare market is as big as
the colour market," says Mr Higson.
The business model works as follows. What Oriflame sells for a notional 100
roubles, its consultants can sell for 130 roubles - the price their customers
see listed in a catalogue. Most are selling to their families, friends and
work colleagues, although cold calling is becoming increasingly common. There
is an opportunity to earn large sums because when you recruit others, you get
a small percentage of their sales too, and even of the sales that their
recruits sign up. Some people build up networks of thousands of people right
across Russia and earn salaries of thousands of dollars a month.
Nikolai Perminov, a 29-year-old Muscovite who is already one of
Oriflame's top sellers, says: "Whenever I see someone who I think
could do with some extra money, whether I am out buying petrol or in a shop,
I give them an Oriflame catalogue or my business card."
When he was in McDonald's recently he handed 17-year-old Lena Dobran his
card while she was cleaning the floor. She called him the next day. She has
been selling Oriflame products for only a few weeks but has already handed in
her notice at McDonald's. "I can earn 500 to 600 roubles an hour
selling Oriflame products, but I only earn 55 roubles an hour at
McDonald's," she says. The danger is that the model is considered a
rather disreputable pyramid scheme.
"It's not a pyramid scheme," Mr Brannstrom insists.
"Everyone has their own individual relationship with Oriflame."
Avon takes a different approach. It puts managers in charge of specific
geographic areas. This enables it to maintain tighter control over its
network, it says.
Both Oriflame and Avon let their consultants buy on credit, which may seem
risky in a country where it is hard to enforce debt collection through the
courts. But the amount available is small and a new credit line is given only
once an existing one has been repaid. Oriflame reports that doubtful debts in
the CIS region - it does not consider Russia separately - are just 0.3 per
cent of sales, than in most of its other markets.
Avon and Oriflame went into Russia after the collapse of communism in the
early 1990s and they stuck with the market after the currency crisis of
August 1998.
Today they are reaping the advantage of being first movers and of having
well-known brand names. They have also built huge networks of distribution
centres and warehouses. Oriflame's branch network stretches from St
Petersburg in the west across 11 time zones to Khabarovsk in the far east of
the country.
But they are starting to see a much stronger challenge from local producers,
companies such as Kalina, Nevskaya Kosmetika, Faberlic (a direct selling
specialist) and Svoboda. The 1998 currency crisis gave these groups a
significant cost advantage because all their production was in roubles.
"It priced imported goods out of the market and gave the locals a big
chance," says Camilla Butler, Euromonitor's senior research analyst
for eastern Europe.
The quality of Russian cosmetics is also improving. Ms Butler is not
convinced that there is any strong brand loyalty to western companies:
"Russian consumers are quite patriotic and there is a general belief
that Russian cosmetics are more natural," she says.
Both Oriflame and Avon are building production facilities outside Moscow,
which should improve their cost competitiveness against local manufacturers.
The structure of the market is also changing. "You can buy more and more
cosmetic-related products in pharmacies and supermarkets. We are having a
tougher time in Moscow than the rest of the country," says Johan
Rosenberg, general director of Oriflame's Russian operations.
Outside the Russian capital, however, the retail infrastructure is much less
well developed. That should provide good growth opportunities for direct
selling companies for some time.
Noting that Avon's Russian sales grew last year by Dollars 99m to
Dollars 240m, Mr Higson says: "We would hope to add the same kind of
dollars to our sales this year as last year. And we have said we will get to
Dollars 500m in Russia by 2007."
He is not worried about the internet taking over as a sales channel.
"People like to try out cosmetics. And while you may be able to order on
the internet, you still need combined deliveries to make the economics
work."
The main threat to progress in Russia remains an unexpected political or
economic development: a new currency crisis, perhaps, or a jolt caused by the
country's over-dependence on high oil prices.
One thing is certain - few western companies have had a bigger impact on
women in eastern Europe than Avon and Oriflame. Mr Brannstrom notes with
pride that he has been awarded a medal by the Women's Association of
Mongolia for the opportunities that Oriflame has given to the country's
budding female entrepreneurs.
|
RUSSIA IN FACTS
