Austrian cosmetics producer BEF-Handelsgesellschaft decided to win the Russian market with the help of local partners, as well as low prices and high quality

Lilia Moskalenko

A new perfume and cosmetics factory opened in Omsk. It was set up by Austrian BEF-Handelsgesellschaft and the New Medical Technologies Academic Center with support from the Omsk Province Ministry of Industrial Policy, Transport, and Communications. The factory owners have not revealed how much was invested into construction, but analysts estimate $30-40 million.
Despite the highly competitive market, investors reckon to see a return the project within 4-5 years, a relatively short term, thanks to an uncommon strategy for the market: franchise production of high quality, inexpensive cosmetics.

The right partners

According to Viktor Matko, General Director of the New Medical Technologies Center, BEF have been looking for business partners in Russia for a long time. For many years, the Austrian company has been a chemical division of Henkel Cosmetics. Today, it is currently on of the biggest suppliers of cosmetics bases, production technologies, and equipment in Europe. The Russian market’s high growth rates– about 20% a year – naturally attracted the Austrian manufacturer.
Omsk was chosen as a bridgehead. “Omsk turned out to be one of the most advantageous regions in Russia for developing cosmetics production. In the Soviet era, there were extremely advanced defense and chemical industries here. Therefore, the city retained great scientific and engineering potential,” says Mr. Matko. Austrian specialists are expected to deal mainly with quality control, raw materials, and market research, while their Russian colleagues will be responsible for scientific research and technologies.
The Omsk factory will produce both inputs for cosmetics production (bases and concentrates) and finished products, such as perfumes, cosmetics, and household chemical goods (for example, pet care products), all under the BEF brand. The factory’s management states that as many as 26 items will be launched before the end of 2004 alone, and within the next two years, the product line will expand to nearly 200 items. The installed facilities (filling lines and laboratories) have one of the highest production rates in Europe: they produce about 1,200 containers per hour. New Medical Technologies is BEF’s exclusive partner. The Austrian company intends to develop in Russia via franchise. “Today, there are a lot of local chemical laboratories in Russia that produce cosmetics under contract. The level of their performance is high, and they are quite able to be partners of a foreign company like BEF,” says Mr. Matko. At present, according to Matko, negotiations are already under way with chemicals producers from Krasnoyarsk, Tyumen, Perm, and other Siberian cities.  

A non-typical mass market

Western producers’ expansion is the most stable trend in the Russian cosmetics market. Over the last 2-3 years, imports have increased their market share by 5-7% a year. The Austrians should be ready for tough competition. In this sense, Siberia is the most convenient bridgehead for the launch of a business: the local market is less saturated than in the Central Russia. It will be much more difficult for BEF to advance westwards from the Urals.
It is clear that the company will try to gain a stable position on the Russian market, first of all, via attractive prices. Local production will enable it to reduce costs considerably. However, the price factor can hardly become a decisive competitive advantage nowadays: many foreign companies, such as Procter & Gamble, Unilever Group, Henkel, Avon and others, have their own production facilities in Russia.
According to BEF managers, they intend to place their bet on high quality. “Our products’ quality will be comparable to that of luxury cosmetics, while prices will remain mass market. For example, we’ll use all natural ingredients. They can only be obtained at the moment from Europe, and that’s why we’ll import fragrances from France and dyes from Germany,” says Mr. Matko. BEF is placing special emphasis on hair care products, where it has had the strongest position since its work with Henkel. According to available information, shampoos will account for more than half of BEF’s product line.
One could say that the by focusing on uncommon production processes, the Austrians have chosen a niche way of its development on the Russian market. “Today, in the context of increasingly severe competition on the market, the most reasonable strategy lies in a specialty and in finding a unique offering,” says Andrei Maslak, Chairman of the Board of Staraya Krepost Association.