Cosmetics in the New Old World of Central and Eastern Europe
The breakup of the Soviet block resulted in the creation of new independent states turning to free markets and gaining access to better personal care. Now the region represents an untapped potential for the consumption of beauty products—and re-branding and re-packaging are helping to bring the local industry to a global level.
By Greg Grishchenko, Contributing Writer
The European Union (EU) currently includes 10 former Soviet-block countries, and its expansion, since its inception in 1957, has the potential to alter social, political and economic history. Millions of Eastern European consumers are changing their shopping habits, and are rapidly reaching spending levels of the “old” Europe, in which quality and appearance of cosmetic products took precedence over price.
The majority of countries in Central and Eastern Europe, except Poland, have rarely been thought of as major cosmetics producers; however, they possess a unique range of local brands and a highly educated, low-salaried labor force. These attributes, as well as the gradual, strong growth of both foreign and domestic investments in this business segment, are bringing the cosmetics industries of these countries to levels similar to other regions.
The Central/Eastern European cosmetics and personal care market is worth nearly $16 billion, and has shown strong growth in the last decade. The dynamic development of this sector creates new opportunities for packaging and raw material suppliers in the West despite the fact that this industry accounts for only 20-25% of the European total. At present, the large population in the region embodies an untapped potential for the consumption of cosmetic products. Product lines that have reached maturity in Western Europe are now being introduced into a young and growing market in the East where products like shampoos and conditioners are still regarded as luxuries by the great majority. In Russia, the largest market by volume, luxury cosmetic sales, supported by oil and gas profits, topped all records.
Multinational giants such as Johnson & Johnson, P&G, Unilever, Avon, Oriflame, Beiersdorf and L’Oréal are among the many U.S. and Western European manufacturers that have already set up production facilities in Eastern Europe, acquired local manufacturing plants and purchased local companies with established brand names. With the exception of Russia and Ukraine, where national retailers have a strong presence, the largest retail chains of super- and hypermarkets in Central and Eastern Europe that sell medium and low-priced cosmetics have foreign ownership. Western brands’ presence in the exclusive cosmetic shops and beauty salons is overwhelming.
Max Factor, “the father of modern makeup,” was born in the Polish city of Lodz in 1870. This city was and still is a place where thriving cosmetics trade made the country famous. After parting with communism in 1989, Poland experienced average growth rates of more than 5% along with massive influxes of foreign capital. Indeed, this country is the favored location within Eastern Europe for major players in the world’s cosmetics market, such as Beiersdorf and Unilever, which outsource production to these countries due to lower costs. Johnson & Johnson, L’Oréal, Avon, Schwarzkopf, Taft and Oriflame have all built new production facilities here. According to Euromonitor International, the share of Western producers in the Polish cosmetics market is nearly 65%.
Gerovital products represent 90% of Romanian cosmetics exports, and are sold in Spain, Italy, Sweden, Japan, Germany, France, Denmark, Asia and Latin America.
In 2007, the cosmetics market in Poland was estimated at $3.05 billion. Out of 400 cosmetics manufacturers in Poland, only about 25% employ more than 100 people. This structure makes the country quite competitive in the EU due to the availability of a skilled labor force with an average lower hourly rate. Local producers of skin care cosmetics control about 60% of this segment in the country. Many small and medium size private companies were established in the 1980s and ’90s, such as Dr. Irena Eris, Dax Cosmetics, Oceanic, Dermika, Ziaja, Bielenda, Joanna, Soraya and Farmona. The leader of the Polish cosmetics market, Kolastyna Group ($35 million turnover in 2006), owns well-known traditional local brands like Miraculum (Pani Walewska) and Juliette Essayer.
Poland’s cosmetics exports were estimated at $300 million in 2007, and were going mostly to EU countries. Recently, Dr. Irena Eris skin care products were included in duty-free stores and catalogs in Poland, and remain the only Polish brand competing with world-class cosmetics.
The packaging business for cosmetic products in Poland is in the process of being acquired by major multinational producers like Rexam. There are small Polish companies with foreign capital such as Jannel and Dafo Plastics, making high-quality plastic packaging for cosmetics. The leader of domestic cosmetic packaging, Pollena S.A., belongs to the group of the most dynamic developing companies in Poland.
After the 1998 financial crisis in Russia, the cosmetics market in Ukraine fell from $700 million in 1997 to $490 million in 1999, but by 2001, it had recovered back to 1997 volume, and with the double digit growth rate, had reached an estimated $2.61 billion in 2007, taking third place in Eastern Europe after Russia and Poland.
Viorica is the only cosmetics manufacturer in Moldova.
Imports make up 80% of the entire cosmetics market in Ukraine and presently dominate in high-end perfumes, makeup, deodorants, hair dyes and toothpaste. Local manufacturers supply a limited assortment of skin care, body care, bath products and essential oils. A number of medium and small cosmetics producers in Ukraine, some with foreign capital, established their own economy-priced brands.
Inexpensive cosmetics and fragrances (mass-marketed merchandise priced at $1-3) account for nearly 60% of the Ukrainian market. Imported luxury perfumes and cosmetics represent nearly 10%, and the rest comes from quality imports made by multinationals. Global corporations have already established local subsidiaries, with the top five (Procter & Gamble, Unilever, Beiersdorf, Schwarzkopf & Henkel and Wella Group) being the most active in advertising.
The structure of cosmetics distribution channels in Ukraine shows the country is changing. From open-air bazaars, supermarkets and department stores that used to account for nearly 80% of cosmetics retail revenue, the country is moving to specialized cosmetics shops and chain outlets.
Plastic packaging and dispensing components for cosmetics made locally come from local manufacturers and sources in Russia, Poland and Belarus.
Czech Republic, Hungary, Slovakia
With 2007 sales totaling $1.07 billion (Czech Republic), $420 million (Hungary) and $300 million (Slovakia), cosmetics in these countries have shown various growth rates with fluctuations between a few points and double digits over the last few years (with the Czech market having the most gradual increase of around 5%).
In 2007, the cosmetics market in Poland was estimated at $3.05 billion.
With quality cosmetics in demand, imports of top international brand names dominate not only the higher end of the market, but almost any cosmetics and fragrance sector in these countries. The products from foreign multinationals made up over 90% of the total cosmetics market in Czech Republic and Hungary while the share of local companies in the business steadily declined between 1998 and 2005. Multinational companies dominate the Czech market in all cosmetic product categories with the biggest investments in cosmetics and toiletries coming from Unilever, Procter & Gamble, Henkel, Wella and Beiersdorf. Unilever and Coty lead the deodorant sector, Johnson & Johnson prevails in baby care, while Beiersdorf is in front in skin care.
Combined imports to Czech Republic, Hungary and Slovakia, valued at about $1 billion in 2006, reveals a large, untapped market in these countries given the relatively high disposable incomes when compared to other Eastern European nations. The majority of the 1,500 companies in the Hungarian market have been involved in importing and distribution only.
Local companies possess well-recognized and developed brands where advances could easily be made by re-branding and re-packaging. Many traditional Czech, Hungarian and Slovak brands were acquired by multinationals and reintroduced with a new image supported by advertising and state-of-the-art decorating and packaging. Among them were well-known Hungarian brands Helia-D (see sidebar, page 40) and Caola.
There are presently several independent Czech and Slovak companies operating in the cosmetic sector. There are also a number of smaller companies that produce herbal cosmetics. Companies like Ryor, Dermacol and Botanicus (Czech Republic) manufacture high-quality products for the domestic market and exports. Small Slovak companies AB Kozmetika, de Miclen and Herba Drug are popular among domestic consumers.
Retailing plays an important role in the region. There are two major growing distribution channels for cosmetics and toiletries—local chains like DM Drogerie Markt and hypermarkets. The rapidly expanding network of supermarkets such as Tesco, Carrefour, Auchan and Billa, with their abundance of shelf space and wide selection of brands, has surpassed pharmacies as the most important retail channel for cosmetics. Local subsidiaries of direct sales companies Avon, Oriflame and Amway make up nearly 10% of the overall cosmetics market, while specialist stores such as Yves Rocher, Douglass, Marionnaud and Lush Cosmetics have begun to assume an increasingly larger role in cosmetics distribution.
Czech and Slovak cosmetics exports are about $100 million and destined mostly for Russia and countries of the former Soviet Union; a smaller portion goes to Germany, Sweden and Japan.
Czech Republic remains an untapped source for luxury perfume packaging in Europe with a strong, centuries-old glassmaking base. More than100 years ago, Czech cosmetics makers initiated production of artistic quality perfume glass; however, at present, the country does not make commercial glass containers for cosmetics.
Bulgaria and Romania
In 2007, Bulgaria and Romania joined the EU. Both countries have rarely been thought of as major cosmetics producers; however, they possess a unique range of local brands and a highly educated, low-cost labor force.
There is a strong cosmetics manufacturing base in Bulgaria based on an abundance of locally processed aromatic and essential oils. More than 50 cosmetics producers operate in the country. After slow growth in the early 2000s, the Bulgarian cosmetics market reached $320 million in 2007.
While imports of cosmetics and toiletries are rapidly growing, domestic companies keep up with the growing demand for popular mid-priced cosmetics, and additionally, are increasing exports to the former Soviet Union countries and the Middle East. There are two leaders in Bulgarian cosmetics that are far ahead of the industry’s small producers–Alen Mak and Aroma. They can be credited with 80% of the country’s exports.
Despite Bulgaria’s still quite low purchasing power, retailing and distribution channels in Bulgaria have experienced a significant change, from the selling of merchandise through open-air markets, small kiosks or privatized former state stores to modern super- and hypermarkets run by major foreign chains. Big cities recently started to attract major retailers from Europe and the U.S., such as Metro, Wal-Mart and ENA (Greece). Direct sales companies Avon and Oriflame reported growth in cosmetics.
As Romania was preparing for EU membership, positive reforms were implemented to lower import duties and expedite privatization of government-owned industrial assets. These initiatives helped grow the Romanian cosmetics market in 2006, bringing it to over $430 million.
Large multinational companies dominate Romania’s cosmetics market, with the top five (Unilever, Beiersdorf, Colgate-Palmolive, Procter & Gamble and L’Oréal) accounting for over 60% of market value in 2005.
Cosmetics production in Romania is highly fragmented, with only one dominant producer. The largest Romanian cosmetics company, Farmec S.A produces 80% of Gerovital anti-aging cosmetic products—the country’s best known worldwide contribution to cosmetic science. Dr. Ana Aslan from Bucharest, a top researcher in the field of cytology, has designed and developed GH3, a special formulation of a procaine drug with “amazing anti-aging properties” that later became a base for Gerovital cosmetics.
The breakup of the Soviet block resulted in the creation of new independent states turning to free markets and gaining access to better personal care. Looking ahead, investments in these countries have obviously grown more attractive. With the exclusion of Belarus, the states of Latvia, Lithuania, Estonia, Croatia, Serbia, Slovenia, Bosnia-Herzegovina, Moldova and Albania import almost 100% of cosmetic and personal care items for local consumption.
There are several local producers with established brand names and lines of products, such as Latvian company Dzintars; Viorica, the only cosmetics manufacturer in Moldova; Grace Cosmetics from Belgrade; and Apipharma from Zagreb.
The most industrious region of the Soviet Union with a highly educated and skilled work force, Belarus is now isolated from major multinational cosmetics companies. With almost 80% of manufacturing currently under state control, Belarus has managed to develop a significant cosmetics industry. Twelve years ago cosmetics manufacturing did not exist in Belarus. Left alone by a government trying to control major industries inherited from the USSR, this small but growing sector is shaped by small privately owned companies, sometimes wisely utilizing the country’s neglected chemical industrial resources. Of the estimated 35 cosmetics producers in Belarus, the strongest companies like Belita, Belkosmex, Floralis and Markell were founded in the 1990s when economic reforms helped to find local sources for ingredients. Although there is a lack of independent statistical data, Greol Engineering estimated the Belarus cosmetics market at over $220 million for 2007.
Market analysts indicate that, despite a few remaining administrative, political and economic setbacks associated with the transition period, the countries of Central and Eastern Europe, with average monthly salaries ranging from $300 to $1,000 (depending on the country), are decreasing the gap between their living standards and those of the rest of the European Union. For the past decade, high-end perfumes, makeup and skin care products show constant gradual growth due to a larger share of disposable income spent by local women with the belief that the higher quality products must have a stronger effect.