PRODUCT MARKET STUDY: COSMETIC PRODUCTS

Date: April 2004

1. OVERVIEW

The market for consumer goods is developing rapidly in Russia. The local consumption of consumer goods has steadily increased since the early 1990's. Survey of the local consumer trends by cosmetics publications show that cosmetics products rank second in terms of volume of consumption, in the non-food group, a market similar to European countries.

The surveys show that the Russian market for cosmetics is very receptive to U.S.-made products. Products from such American companies as Mary Kay, Revlon, Proctor & Gamble, and Johnson & Johnson have been well received by local consumers and are increasing their sales in Russia. Male consumers use such perfume brands as Denim and Harley-Davidson almost exclusively.

Competition in the Russian market is high with many of the world's largest cosmetics companies operating in Russia. French products, especially perfumes, traditionally considered to be the best in the world, are serious competitors to U.S. products that have only recently entered the local market. Domestically - produced cosmetics compete with imported products at lower prices. Other foreign brands are well established in the market (Lumene, Finland; Dzintars, Latvia; Lakme, India), or have aggressively expanded their market niches during the past several years (Oriflame, Sweden; Doctor Nature, Israel).

As is true in Europe, the level of competition will determine the level of expenses that the company faces in successfully entering the market. Television advertising is the most effective means, though it is also the most expensive. American and European cosmetics suppliers are competing with each other in Russia in various other advertising media, including magazines, billboards/posters, and live presentations.

Still, with this heavy competition, there are market niches that have not yet been filled. In the perfume subsector, for example, the Russian market is just starting to take off and has substantial room for expansion. According to local business representatives, elite/luxury cosmetics are projected to grow rapidly in the years ahead. Despite their high cost, these elite products are appealing to more and more consumers, even though the majority of the population still cannot afford to become regular consumers of these brands.

The distribution system in Russia has improved, compared to previous years, and there are now literally thousands of wholesale companies operating in the field of cosmetics products. Nevertheless, many well-known foreign companies

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prefer to distribute their luxury products through exclusive retail networks, although others use local dealers and large distributors.

Since most of the trade in cosmetics has been concentrated in large Russian cities such as Moscow and St. Petersburg, companies would be advised to consider expansion into the Russian regions over the next three to five years.

2. MARKET HIGHLIGHTS AND BEST PROSPECTS

With the increasing availability of imported products and the gradual rise in real incomes of the Russian urban population, purchases of all consumer goods have dramatically increased over the past five years. In contrast to the continuous decline in Russian cosmetics production, the market for cosmetics has grown considerably since 1993. To meet the growing demand for these products, imports have filled the gap, putting cosmetics on the top ten list of products imported into Russia since 1993.

According to the Russian Perfume and Cosmetics Association, the volume of sales of cosmetic goods in Russia in 1997 amounted to over USD 2.5 billion. Estimates of imports, about USD 280 million in 1994, show that they have grown by almost five times during the same period (1994 - 1997). The market for cosmetics in Russia continues to develop and grow, and it is estimated that the potential for this market in Russia, at present, could reach as high as USD 15 - 18 billion, surpassing such developed markets as Germany (about USD 10 billion).

The market for cosmetics began to emerge in 1992 - 1993, and has continued to develop rapidly, although not always consistently. Locally produced cosmetics are still in great demand and account for about 50 percent of the market, due to their relatively low prices, while imported products appeal to consumers with higher incomes. The latter segment is primarily concentrated in the major metropolitan areas in Russia, such as Moscow, St. Petersburg, and other large Russian cities. Provincial markets tend to rely more on lower-priced products.

Currently, thousands of large and small cosmetic wholesale companies compete in the Russian market, and the competition is still growing. According to representatives of local firms, it is relatively easy to enter the market but it is difficult to maintain a market share. A company's success does not necessarily depend on its size or its turnover. A small firm can be as successful as a large one as long as it is competitive in price and quality, and markets its product effectively.

The cosmetics market in Russia can be divided into several groups of products:

- hygienic products; - make-up cosmetics; - skin-care products; - hair-care products; - perfumes; and others.

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Each of these large groups is represented by a wide range of brands, both for men and women.

Cosmetic products can be also classified along the following lines:

a) elite cosmetics ("luxury"), including such worldwide recognized designers' trade marks, as "Christian Dior," "Chanel," "Cacharel," and "Estee Lauder"; b) middle class (consider good quality at medium prices); and c) mass market (lower quality, sold at lower prices).

It is the image of the manufacturer in the world market that helps determine the price of the product, not just its actual cost. Luxury cosmetics, primarily those produced in France, are the most expensive. The retail price of luxury lipstick, for example, may range from USD 15 to USD 30, as compared to the mass products' price of USD 2 - 10. Consumer market research shows that in Russia's large cities, where spendable income is much higher than in the regions, only about 10 - 15 percent of the population can afford luxury cosmetic products. Further, even "mass market" products are often perceived as "middle class" by the users of inexpensive consumer goods.

3. Market Segmentation:Make-up:

Make-up products represent a major segment of the cosmetic market. According to a survey taken by "Gallup Media" in 1998 and based on a qualified number of interviews, more than 80 percent of Russian women over 16 years old use make-up products, with the predominant use by women of 25 - 35 years old. The most popular individual product is lipstick, which is used by 83 percent of women. The second most frequently used product is mascara, which is used by 60 percent of Russian women, followed by nail polish (50 percent). The lowest demand is in facial creams. In terms of the market share of various make-up products, lipsticks represent almost 50 percent of the make-up sector.

Perfumes:

In Russia, fragrances with long-lasting scents (up to 6 hours) are in greatest demand. Eau de toilette come in second place. The Gallup survey results show the following products are in the highest demand in the perfume subsector in Russia's urban areas:

1. Deodorants2. Perfumes 3. Eau de toilette for women4. Eau de toilette for men.

Toothpaste:

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Toothpaste is used daily by almost 100 percent of the population. Consequently, price is the major factor for the Russian customers. According to local market research data, only ten percent of users can afford to buy luxury brands of toothpaste. About 60 percent use toothpaste at medium prices, while the rest of the population prefers more "mass market" products. However, recent market research shows an increase in preferences for higher-quality products, which could make it difficult for domestic producers of toothpastes to compete with foreign producers, due to their obsolete technologies and lack of quality materials in Russia.

Hair-Care Products:

According to the Gallup survey, forty percent of respondents in Russia use balsam shampoos and hair spray. Thirteen percent use permanent wave at home, and about 25 percent of women do their hair using gel, or mousse. It was also noted that such products as hair spray, mousse, or gel are used primarily by younger women, while permanent wave are preferred by middle-aged women. The "Elseve" brand from France leads the market for balsams; locally produced "Utrennyaya Roza" and "Balet" fall just behind. The volumes of sales of the Russian-made "Prelest" hair spray approximate those of "Studio Line" and "Wella Flex".

Consumption of shampoos is much higher than any other hair-care product as it is used regularly by 87 percent of the population. According to statistics, almost 50 percent of adult women in Russia have their hair dyed. Natural dyes are preferred, although there has been recent growth in the sales of special shading products, such as color foams and shading shampoos. The most popular brands are German-made "Londa Color," "Wella Color," and "Blondoran".

4. Cost and Quality

With a much wider choice of new and traditional, and imported and domestic products on the Russian market, compared to the market several years ago, most consumers do not use one brand exclusively but often buy as many as five different brands. Less than 10 percent prefer only one cosmetic product. Since most consumers have limited spendable income, the majority, according to available statistics, buy cosmetic products at medium and low prices.

Consumption preferences between the metropolitan and regional markets are not often reflected in available statistics but should be noted. In Moscow and other large cities, customers are becoming more demanding in terms of product quality, and the quality of products may have a stronger impact on the customer's decision than the price. According to various social and marketing surveys conducted in large cities, the choice of make-up and skin-care products is based less on price (26 percent of the respondents) than on quality (57 percent).

Customers are becoming more aware and consequently more demanding of the services available at cosmetic retail outlets. It is now a common practice when a

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store assistant acts as a consultant and advisor to the customer on the products offered and their use. That requires considerable staff training from companies selling cosmetic products.

In general, any imported cosmetic product has strong prospects in the Russian market if it can be offered at a competitive price and quality. The key is to avoid unnecessary logistical and service costs, although a new-to-market firm should be prepared for start-up costs. Many firms have found it sensible to test the market with direct sales to local dealers, thus avoiding tax complications within Russia. Others have chosen to begin operations in a regional market within Russia, deliberately avoiding a Moscow presence. Still other firms have chosen to market their products directly from overseas in order to minimize reliance on intermediaries. This approach offers some cost advantages since compensation of sales representatives is largely based on commission. However, this also adds to transportation costs and extends the time of delivery, along with potential delays at Russian Customs.

New products, if professionally marketed, could enjoy significant opportunities in Russia. The markets for perfumes and skin-care products, for instance, have significant room for expansion. However, aggressive promotion strategies are necessary to compete and maintain market share with the traditionally well-recognized trade marks.

A previously poor distribution system in Russia has improved. Nevertheless, Moscow-based retailers and distributors still possess considerable market power. More information on the distribution networks in Russia that U.S. cosmetics suppliers may use is provided in the End-User Analysis section at the end of this report.

Many local market research specialists have forecasted rapid development in the cosmetics market in the regions of Russia in the near future. While a large number of wholesale companies distribute cosmetic products in large Russian cities, such as Moscow, St. Petersburg, Vladivostok, and Yekaterinburg, only a few large wholesalers represent cosmetic products in smaller cities, such as Rostov, Samara, Nizhnevartovsk, Murmansk, Vologda, and others. However, one-half of all domestic production facilities in Russia is located in the Moscow and Central Russian regions. Other regions must rely on the available distribution network.

The regional markets are experiencing limited choice of cosmetic products, both domestically produced and imported. Any cosmetic product line new to Russia's regional markets but able to move quickly into these markets has great potential. If average incomes in such developing industrial areas as Siberia, the Urals, Northwest, or the Volga region, continue to increase over the next several years, the market potential for luxury cosmetics that are actively promoted there could increase exponentially.

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The best prospects for suppliers of cosmetics in the next three years will be in new product lines for all categories of cosmetic products, specifically in women's perfumes and skin-care products containing natural ingredients. Also, as mentioned above, the luxury cosmetic market in Russia will begin to shift into the regions and provinces over the next three years.

On the whole, cosmetics companies looking to sell their products in the Russian market should be prepared to undertake the following actions:

- initial investment in advertising and promotion campaigns to establish the image of the product in the market;- registration of trademarks;- establishing a reliable distribution and sales network;- expansion of sales areas beyond the Moscow and the St. Petersburg regions;- expansion of range of products offered.

5. Companies in the market (Competetive analysis)

In general, the Russian market is very receptive to U.S. cosmetics products. The product lines of such American companies such as Estee Lauder, Avon, Revlon, Mary Kay, Proctor & Gamble, Colgate, and Johnson & Johnson are extremely popular and enjoy excellent reputations due to their high quality, attractive packaging, and range of products. The strongest competitors to American exporters of cosmetic products, especially in the perfume subsector, are French brands considered to be "traditional" leaders in the world cosmetics market.

The world's two largest producers of cosmetics, L'Oreal (France) and Proctor & Gamble (U.S.A.), (the latter represented by such product trade marks as Blend-a-Med, Max Factor, Camay, Old Spice, Head and Shoulders, Vidal Sassoon, Pantene ProV, and Safeguard), share 25 - 30 percent of the Russian market. Finnish and Swedish cosmetics manufacturers are also competitive due to their extensive knowledge of the Russian business environment, largely due to their long presence in the market.

Other well-known producers in the Russian market are Unilever (Netherlands), represented by brand names as Dove, Lux, Pepsodent, Signal, Sunsilk, Timotei, Impulse, and Rexona; Oriflame (Sweden); Avon (U.S.A.); Revlon (U.S.A.); Mary Kay (U.S.A.); Christian Dior (France); Lancome (France); and Estee Lauder (U.S.A.). Local producers and Eastern European firms from Bulgaria and Poland compete with Western importers primarily at the lower price levels, although they lack the quality of more expensive brands.

Let’s take a look at Countries' Share:

The Russian cosmetics market has seen intense competition among foreign producers. Table I below shows that French and local fragrances dominate the perfume market, with the former known for their excellence and tradition in this product line, and the latter, popular due to their low prices and relatively good

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quality. Since they are relatively new to the Russian market, American fragrances for women have not yet gained sufficient exposure to gain a major share.

On the other hand, as shown in Table II, Russian male customers seem to prefer U.S. fragrances to the exclusion of local products. Such brands as Gillette, Denim Tornado, and Legendary Harley-Davidson, have been heavily advertised on all Russian television channels for about three years, which has resulted in a wide recognition of these brands.

In the make-up subsector (Table III), French and Scandinavian brands actively compete with American products. U.S. skin-care products, while not leaders, are steadily gaining market share (see Table IV). For example, the American firm, Revlon, is comparatively new to the Russian market but is quickly increasing its sales due to its reputation for quality as well as an effective advertising campaign.

Scandinavian cosmetics are traditionally popular in Russia. Some analysts attribute this popularity to similar climate conditions in Finland and Sweden and the northern and central parts of Russia. The name of Lumene (Finland) has been known in Russia for decades and is still very popular in the make-up and skin-care sectors. On the other hand, the Swedish firm, Oriflame, introduced its products in Moscow about four years ago, and while its products have been actively sold in other Russian cities for only a couple of years, they are already well known to Russian consumers since the firm uses all available means of advertising and sales practices.

During the past three or four years, skin-care products, such as creams, face scrubs and bath salts made in Israel, have become popular with the Russian customers. Brands such as "Doctor Nature" are recommended by cosmetologists and recognized by consumers for containing natural solutions from the Dead Sea. However, Israeli-made cosmetics have not yet taken a significant market share in Russia.

Producers in Eastern Europe dominated foreign imports in the Soviet era, with products like Polish-made facial creams and Bulgarian toothpastes. The share of cosmetics products produced in Bulgaria, Poland, and Hungary has been steadily decreasing over the past five years. Nevertheless, many consumers are still devoted to these products, especially in the skin-care and hygienic product subgroups. These products are inexpensive, sometimes less expensive than locally manufactured cosmetics, but are traditionally considered by some consumers to be of better quality than those produced locally. On the whole, however, these cosmetics products hold only a minor market share.

6. Local production

Local production of cosmetic products has experienced a steady decline in recent years. The industry's problems reflect the general decline in the Russian economy as a whole following the disruption of the centrally planned links between suppliers and consumers that existed in the former Soviet Union.

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Financing often has not been available to help these companies during this period of difficult transition.

At present, local manufacturers are importing various components used in the cosmetics production process, in particular, fragrances and oils. As many of these components are sourced from foreign countries such as France, production costs for Russian cosmetic companies have increased considerably. As a result, retail prices have risen, and sales have decreased. The competitiveness of Russian cosmetics products is also hampered by unattractive packaging and limited range in their product lines. Consequently, domestic production, at this point, cannot satisfy the growing demand of the market.

Nevertheless, with the low level of income of the average Russian consumer, domestic manufacturers still command a large share of the cosmetics market in the middle and low priced segment. In some product subsectors, such local companies as Svoboda and Nevskaya Kosmetika have taken about 50 percent of the market, and are market leaders in the skin-care product sector.

Local producers are developing new product lines for the mass cosmetics market. Russian cosmetics research centers are well recognized locally for their scientific work. Several large research centers have established private companies that manufacture and market special cosmetic preparations; for example, the Nizar Joint Stock Company was established by the Russian Central Hematology and Blood Transfusion Institute in 1991.

A number of Russian cosmetics manufacturing companies were capable of overcoming the difficulties of the recent transition period and have gained recognition and success in the Russian market. In 1997, the Russian Perfume and Cosmetics Association initiated a local "product quality and performance" contest among the largest Russian manufacturers. The results of this contest showed that the most frequently mentioned brands were Severnoye Siyanie (in the perfume sector); Lans Cosmetics, Nizar, and April (for skin-care products); Linda and Nevskaya Kosmetika (for hair-care products and soaps); and Svoboda (for toothpastes).

7. Market balance indexes state

The following tables indicate the ten most popular brands in the four market subgroups.

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Table ILadies' Perfume:

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Table IIMen's Perfume:

Table IIIMake-Up Products:

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Table IVSkin-Care Products:

8. END-USER ANALYSIS

Wholesale Companies

At present, while there are about 150 large manufacturers of cosmetic products in Russia, thousands of wholesale companies are involved in the distribution of these products. However, the main distribution network is concentrated in Moscow, St. Petersburg, Novosibirsk, Vladivostok, and other large cities.

For the most part, most distributors have not expanded into regional industrial areas. The number of dealers and retail stores that are working with the large Russian wholesalers of cosmetics in small Russian towns and rural areas is very limited. The largest Russian manufacturers of cosmetics are located in nine regions of the country, with 16 percent of the manufacturing facilities located in Northwest Russia and 17 percent in the Urals. However, most of the production is in the central Russian region. So far, the distributors of locally produced cosmetics have tended to stay in regions close to the manufacturers. Wholesalers of imported products have also found it easier to work primarily in large cities.

Companies selling cosmetics products in Russia generally fall into two categories:

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1. Official exclusive distributors of foreign well-known companies. While these firms normally offer two or three brand names, a distributor may devote its efforts to a single brand, such as Unilever and Oriflame. Suppliers of elite cosmetics products prefer their products to be sold in exclusive stores, usually in their own or franchise stores. The range of products of exclusive distributors is not very large, generally not exceeding 150 products from the same company;

2. Large wholesalers, distributing up to 10,000 items. On the whole, these companies concentrate on the middle and mass market cosmetics, although, their product line may also include luxury cosmetics and perfumes in their offerings. Luxury products represent about 10 percent of these firms' product range.

The largest wholesalers of cosmetic products in Russia are the following companies: Uniland; NPO Alternativa; Iceberg; Gradient; Alkor; Finko; Mac-Dac; IBE-Moscow, and others. Their offerings range from 3,000 to 6,000 products. These companies have representative offices in the regions (for example, Uniland has more than 30 offices in Russia), or official dealers (Grand Cosmetics has more than 50 official dealers outside of Moscow).

Several foreign cosmetics manufacturers, particularly those in the luxury segment of the market and concerned about their image in the marketplace, have chosen to set up their own distribution networks by establishing "daughter" distribution companies in Russia. Lancome, Yves Rocher, Christian Dior, and other famous producers have opened their own retail stores in Moscow and St. Petersburg. However, at the moment, most of the foreign cosmetics companies use the established distribution systems of large local firms in Russia. These companies have already secured distribution rights from various foreign suppliers through a tender process as they have significant market experience and good business contacts throughout the country. Thus, in most cases, the primary buyers of imported cosmetics products are wholesale companies that either purchase the goods directly from a manufacturer, or, in the case of well-known brand names, acquire them through official dealers in the country.

Several companies (for example, Oriflame, Mary Kay, Revlon) have chosen to use door-to-door selling practices, normally, in the initial stage of their marketing strategy. Hundreds of local individuals offer new brands to their relatives and friends, advertise new products at companies' offices during lunch time, and approach pedestrians in the streets in busy shopping areas. These individuals normally do it as a part-time commission-based job. However, companies make efforts to train them in product presentation techniques. According to companies' experience, the practice of door-to-door sales in each sales area/city is efficient for the first two years. Once the brand is recognized by customers, they prefer to buy these products in a store, rather than from a salesperson.

RetailersWholesale firms further distribute cosmetics products to retail stores. Cosmetics

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products in Russia are sold in specialized cosmetics stores, large department stores, supermarkets, and small drugstores and food stores, as well as in street kiosks.

Specialized cosmetics stores usually sell from five to ten well-recognized brand names. Normally, certain counters in these stores sell only one specific brand name and offer brochures and catalogs to consumers. In most cases, these stores enjoy prime locations in the heart of commercial districts or shopping centers, for example, Nevsky Prospect in St. Petersburg. Good location and, consequently, the high cost of space rent are reflected in the higher retail prices. These stores attract those customers in the higher income levels who expect high product quality, a relatively wide range of offerings, and reliable advice and assistance from the staff of the store.

Major department stores in Russian large cities have cosmetics sections that operate like specialized cosmetics stores. The largest and the most well-known department stores, such as GUM in Moscow or Gostiny Dvor and Passage in St. Petersburg, resemble western-type malls in terms of providing space to single brand name's stores.

During the past several years, a number of new department stores have opened outside the center of large cities, where customers can expect lower prices on quality cosmetics products. Currently, individual stores on the outskirts of cities belong only to those foreign brand names which are already well established downtown. The number of these outlets is rising rapidly.

Large and mini-supermarkets sell auxiliary goods, including cosmetics. The range of cosmetics products in supermarkets usually includes items used every day, such as shampoos, hygienic products, deodorants, shaving creams, other creams and lotions, hair-care products, a limited range of lipsticks and other make-up products, and occasionally eau de toilette. Prices generally fall in the "medium" range since these self-service outlets are frequented by customers with various levels of income, from the well-off to the poor. Supermarket visitors choose goods from the shelves without any assistance but are not allowed to test make-up or to open packaging. For success in such outlets, it is critical to have proper labeling and product descriptions in the Russian language since Russian customers are not likely to buy a new product if they are not sure how to use it.

Large supermarkets also are good locations for short-term advertising campaigns. Since ads presenting an individual brand are usually limited to a small poster in the supermarket, many companies hold product presentations and provide customers with free samples or discount prices for specific products. While these practices are more typical for suppliers of foodstuffs, cosmetics products are also successfully marketed in supermarkets where they can attract a wider range of consumers than in a luxury, but much smaller, store.

Russian pharmacies and drugstores almost exclusively specialize in pharmaceutical products and only recently have begun to offer a limited range of

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shampoos, toothpastes, and beauty products to increase their turnover. These outlets are very careful to make sure that all hygienic certificates for the cosmetics products are in place.

Small private stores and especially kiosks that are often open round the clock are not as selective in the quality of goods they sell, regardless of whether it is canned food, drinks, audio and video tapes, or lipsticks and facial powder. The cosmetics products sold in kiosks are usually the cheapest and lowest in quality. Consumers must also be aware that kiosks often sell counterfeits of well-known brands.

Several kiosks sell small lots of authentic cosmetics products available for customers at prices lower than in a specialized store. These are, in most cases, goods smuggled into the country by so called "shuttle" traders. However, during the past several years, the number of such goods, at least in the cosmetics sector, has drastically decreased, due to the increasing popular distrust of kiosk-sold goods.

Individual Consumers

The average consumer of cosmetics products in Russia is, on the whole, less predictable than his/her counterpart in other countries. Very few customers prefer a specific brand to the exclusion of all others. They are often drawn to products with the sign "new" on the packaging. While in other product sectors consumers often choose to buy only those products that they can afford, it is not uncommon for a Russian woman to economize on food and other essentials in order to buy quality cosmetics "to look nice".

Further, the psychology of the Russian middle-class consumer is often based on the idea that it is more economical to buy high-quality products than to waste money on a cosmetics product of lower value which he or she may not like, or will not measure up to their satisfaction. Many Russian consumers with relatively low incomes, who live in large cities and have access to information on the world of fashion, choose consumer goods on the principle, "We are too poor to buy cheap things."

Cosmetics products are also often chosen as gifts, and an ordinary customer is often prepared to spend much more on a gift for someone else than he/she can ever afford to buy for him/herself. Sales of cosmetics often increase with seasonal gift-giving, particularly during the last two weeks of December; before New Year's Eve (in Russia, on December 31); before February 23, historically, Soviet Army Day, which is now seen just as Men's Day when women present men with gifts; and the weeks before one of Russia's favorite holidays, Women's Day (March 8). St. Valentine's Day is not yet popular in Russia, although more people have recently begun to recognize it as a gift-giving holiday.

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Finally, another consumer of high-quality cosmetics products is the beauty parlor. In St. Petersburg alone, there are about 500 hairdressers and beauty salons, typically having 10 - 15 seats for clients. Large parlors are still more typical for Russian cities than small private salons able to accommodate a couple of clients at the same time. According to local representatives of the beauty industry, hairdressers purchase hair-care products, nail polish, creams, and other cosmetics products either from a wholesaler, or, more typically, at retail stores at discount prices for bulk purchases. Beauty parlors use exclusively imported products of medium to high quality. First-class hairdressers and cosmeticians working for reputable parlors visit or participate in various international contests and presentations, and thus keep informed of recent fashion trends in the area of cosmetics products.

A beauty parlor can be an excellent place to test and advertise a product that is new not only for Russia but for Europe as well. According to local contacts, hair-care products that represent such recent developments as hair dyes containing natural silk, with protein treatment effect, have been offered in various first-class beauty parlors in Moscow and St. Petersburg at the same time, if not earlier, as in Western Europe. Through this kind of test marketing, a U.S. manufacturer of new cosmetics products can educate local consumers in the hope of obtaining wider sales of this product in the future, without the need to launch a massive advertising campaign.

With the market for cosmetics developing in Russia and with greater consumer knowledge and experience in various brand products, popular tastes in cosmetics are likely to become more established and, consequently, sales and sales patterns more stable.

9. MARKET ACCESS

There are no insurmountable obstacles to entering the Russian cosmetics market. However, the competitive factor presents a substantial challenge to American companies wishing to establish themselves in Russia.

Import duties on cosmetics products are 23 percent. That includes an additional three percent import tax recently imposed on all imports by the Russian Government as a part of the "anti-crisis" package. Also, Russian importers must pay a value-added tax, which is currently set at 20 percent.

Product Certification

Russian laws "On Certification" and "On Protection of Consumer's Rights" and related Government regulations impose strict safety requirements on imported cosmetic products in Russia. These laws require that imported cosmetics must have a special safety certificate issued by the appropriate local certification

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center. Since these procedures take time, local experts recommend that foreign exporters and/or their Russian partners begin preparations for obtaining the proper documentation before any sales contract is concluded. If a product has not been certified and safety certification has not been received, Russian customs may suspend shipment at the point of entry. Consequently, pre-contract certification is a safer and a significantly cheaper way to import and distribute products in Russia.

Certification centers accredited by GOSSTANDART, the national standards agency, are in charge of issuing safety certificates for virtually all products to be used by the Russian public. A safety certificate issued by any official certification body is valid throughout Russia. Companies can obtain safety certification through the issuance of a hygienic certificate from a Sanitary Epidemiological Control Agency (Sanepidnadzor) of a given area.

Sanepidnadzor carries out microbiological, chemical, toxicological and clinical-laboratory tests on imported shampoos, nail polishes, toothpastes, perfumes, lotions, powders, and other products. To conduct these tests, Sanepidnadzor requires product samples, a certificate from the country of origin, data on product ingredients, and the application itself.

A company is therefore required to submit the following documentation to the certification center: the hygienic certificate; a certificate from the manufacturer; a certificate of ingredients and applications (in Russian); a certificate of the country of origin; application for certification in a special format available at the local certification centers; and four samples of the product.

Foreign quality marks (for example, those "clinically tested" in another country) with the exceptions noted below or a "good manufacturing practice" (GMP) label on the product, do not substitute for a Russian safety certificate. Therefore, foreign firms must complete the certification process in Russia, regardless of what products they plan to distribute or the reputation of the exporter. The only foreign quality certificates accepted in Russia are of the German DIN-GOST-TUV and of the Swiss SGS, or other foreign certification agencies that have mutual recognition agreements with GOSSTANDART. Foreign products holding such certification need not be re-certified in Russia.

The costs of the testing procedures may vary, depending on the number of tests required, but usually averages USD 100. If the results of these tests are positive, Sanepidnadzor will produce a hygienic certificate for the product. According to local certification specialists, in Russia, the cheapest cosmetic product for testing and certification is nail polish; the most expensive one is toothpaste.

Labeling

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Today, as Russian shelves are full of a wide range of imported goods, proper labeling has become an important factor in order to sell cosmetic goods successfully. Basically, the rules for selling goods in Russia are the same as those practiced elsewhere. Therefore, foreign companies are advised to use the same practices that they use in their countries. Taking into consideration the excellent reputation of foreign-made cosmetics in the Russian market, these brands are likely to be sold on a wide scale once the labels are adapted to Russian standards.

The Antitrust Law of the Russian Federation requires that all the labels should be either in Russian or both in a foreign language(s) and in Russian. According to the Russian Federation Law on Protection of Consumers Rights, consumer products must be labeled with the following information:

- all required standards met;- primary consumer features of the product, including composition and ingredients, the amount of potentially harmful ingredients, as well as weight/volume;- instructions for use (many firms prefer that the packaging of the product contains the initial instructions made in the language of the country of origin, while the instructions translated into Russian are enclosed in the packaging box or affixed to the outside);- expiration dates or limits to product utility, and instructions for proper disposal of expired product;- information on possible reactions to a given cosmetic product and their consequences.

Advertising

Advertising is the primary medium to promote sales of cosmetics products in Russia. Local business representatives report that they are usually reluctant to work with an exporter who has not yet advertised the product in Russia, or who is not prepared to provide significant advertising support.

Cosmetics in Russia are primarily advertised by means of mass media and in print (brochures, posters). Along with food products, pharmaceuticals, and financial services, cosmetics is one of the product groups most frequently advertised on television. The leading company advertisers on Russian television are L'Oreal, Proctor & Gamble, Wella, Johnson & Johnson, Colgate, Gillette, and Garnier. These companies are prepared to pay the highest advertising rates of Russian television channels.

Television advertising rates depend on the channel, the most expensive being those channels based in Moscow or in St. Petersburg that broadcast nationwide, and on the time of airings. The best, and the most expensive, airings during the week are the prime time hours from 7 p.m. till midnight. Cosmetic companies

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also sponsor various popular television shows and other events that attract local attention.

Street posters are widely used to advertise cosmetics products in large cities. However, a visitor to a provincial Russian town would immediately notice significantly less public advertising there, as compared to Moscow or St. Petersburg. Advertising on the Metro (subway) in major cities is a relatively new phenomenon since the management of the municipal Metro networks in Russian cities have been reluctant to allow for too many posters in Metro stations, in order to preserve the traditional individuality of each Metro stop. Only a few advertising agencies in big cities have access to agreements with the Metro management.

10. SWOT ANALYSIS

STRENGTHS, OPPORTUNITIESImageTraditionally, Malaysian products in Russia generally have a higher quality perception than similar products from other South East Asia countries and China. The quality of Malaysian-made products bearing multi-national brands is a testimony to the Russian consumers. USD-denominated contractsDuring last year, Euro gained 20% in value against the USD, which makes Euro-denominated products and services less competitive in Russia. Importers prefer to deal with companies, who denominate their contracts in USD. In this connection, Malaysian companies, most of which quote their contractual prices in USD have a strong advantage and may win over new customers. Political and economic stabilityRussia had recovered from the 1998 crisis already by 2001. Since then, the country’s GDP is growing at approximately 5% per annum. The country has a surplus in trade with other countries, brought forth by revenues from exports of oil, gas and minerals. Incoming currency revenues encourage imports (+22.3% in the first 6 months of 2003 compared to the corresponding period of the year before).Moscow and St. Petersburg account for the biggest share of merchandise trade in the country.Political risks of doing trading business in Russia are minimal. Import tendenciesSince 1999 import volumes of cosmetics product group has increased significantly (according to the data obtained from State Statistics Committee).

WEAKNESSESLow level of awareness Malaysian cosmetics can be found only in a few specialized stores, web sites of major distributors.

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DistanceLong time of delivery is one of the most acute problems faced by importers of Malaysia-made products. Often importers prefer to buy from EU companies just because they offer considerably shorter period of delivery to Russia. For example, a container loaded in France will reach Russia in just 5-7 days, whereas Malaysia will be shipping it more than 1 month. Longer delivery time affects turnover and increases other related expenditures of importing companies. Lack of goods EX-WAREHOUSE in Russia or EU countriesAt the present time there are few Malaysian companies able to supply their products ex-warehouse in Russia or EU countries. Delivery from warehouse would considerably reduce time and transportation costs. However, a warehousing project involves certain risks and investments. Malaysian companies venturing to start such a project should find a reliable Russian partner first. An alternative to setting up a warehouse in Russia would be to use neighbouring countries (Finland, Estonia) as gateways to the Russian market.Payment termsThe most common method of payment for foreign trade transactions in Russia is TT.However, importers are often unable to use the TT as a form of payment due to the regulation #519 of the Central Bank of Russia, prescribing importers to deposit 100% of prepayment until the goods have been shipped into Russia. This regulation affects not only Malaysia but also other far-away countries like China, the USA and others, since delivery from these destinations takes more than 1 month and the amount equal to the prepayment is tied up with the bank for all this time.An alternative mode of payment would be LC. However, the cost of opening LC for Russian companies is very high as banks are charging a very high interest rate and commission.Nevertheless, we recommend Malaysian companies to request for a 30% prepayment for the trial order, the balance to be covered by LC at sight. Other methods of payment are also practiced. Terms are negotiable.Language barrierThe official language in Russia is Russian. Business people prefer to use Russian as well. Therefore, it is strongly recommended that promotion literature, brochures and catalogues should be translated into Russian (a must for participation in international trade fairs in Moscow). Often the companies fail to reply to correspondence if the initial letter is written in any language other than Russian.

THREATSCompetition from EU countries, China and TaiwanThe main competitors of Malaysia in this market sector are EU (France, Germany, Italy, Austria, Sweden, Finland) companies and suppliers from USA,

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India, Poland, Bulgaria, Hungary, China, Japan, Latvia. Often EU traders have a better position in the market, since they can offer quick delivery and extended payment terms. Products from China and Taiwan dominate the low-end market. Taiwan and China are Malaysia’s main competitors as suppliers of cosmetics. Japan is defending the policy to be on the high-end market along with France.

Tariff and non-tariff barriersRussian and Malaysian importers contacted by MATRADE Moscow in 1999-2003 identified Russian customs administration was the most difficult trade barrier to deal with. Among the most common problems are non-transparency of customs regulations, bribery and the so-called “grey” imports schemes, which importers have to use and the customs generally support. The main reason for duty-dodging and improper declaration of goods are exorbitant import duties on certain manufactured products, such as furniture. However, in many cases, even if the importing company wants to be transparent and declare goods properly, the customs suggest they should use the “grey” scheme and pay a bribe to the customs officer. Otherwise, clearance of goods becomes a long and tedious process, whereby all products have to be counted manually and verified against the supporting documents.There are 2 scales of duties in Russia – ad valorem, whereby duties are based on declared value of goods and a fixed rate based on the weight of goods. By default all furniture imported into Russia is liable to a 20% ad valorem import duty. However, Russian customs legislation specifies that in case the fixed rate based on the cargo weight is higher than the ad valorem rate, the customs should apply the former. Since furniture is quite heavy cargo, in most cases the Russian customs apply import duties based on the weight of furniture imports.A 20% VAT is levied on top of the contract price and import duties payable.Non-tariff measures are always an obstacle for exporters on the way to the Russian market. If Russian Government will undertake domestic-manufacturing protection policy in this certain sector, such measures as import quantity limits, additional licensing points, establishing of minimal pricing, import taxes changes and other customs formalities could hinder the export development opportunity of Malaysian cosmetics to Russia as well.

11. Conclusion

The primary keys to success in the market for cosmetics products in Russia are:

1. Aggressive promotion of new products2. Large-scale advertising3. Cooperation with reputable and knowledgeable local distributors; and

expansion into regional markets with a wide range of products offered.

On the whole, Malaysian cosmetics companies looking to sell their products in the Russian market should be prepared to undertake the following actions:

1. Initial investment in advertising and promotion campaigns to establish the image of the product in the market

2. Registration of trademarks

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3. Establishing a reliable distribution and sales network4. Expansion of sales areas beyond the Moscow and the St. Petersburg regions5. Expansion of range of products

The cosmetics products market offers good opportunities for Malaysian companies to develop its Russian direction.Malaysian cosmetics producing and trading companies are highly recommended to penetrate Russian market in next product groups.

1. Hygienic products2. Skin - care products3. Hair–care products

The main reasons are:1. It is certain that some market niches are not enough explored yet, and most essential items are not produced in Russia.2. The import of mentioned-above cosmetics is growing very fast. Russian importers are looking for new markets because currently imported items meet high quality standards but are very expensive in comparison with products made in South-East Asian countries.3. Current inability to create Russian competitive product group.4. Malaysian products in Russia generally have a higher quality perception than

similar products from other South East Asia countries and China. 5. Competitive pricing policy of Malaysian companies in this area.  6. Predominance of USD-based contracts. Euro-denominated products and services are becoming less competitive in Russia. Importers prefer to deal with companies, who denominate their contracts in USD. In this connection, Malaysian companies, most of which quote their contractual prices in USD have a strong advantage and may win over new customers. 7. There is a tendency to economic and political stability in Russia.

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