Thus far, Russia has not introduced direct sanctions against any multinational beauty players or their products, but the ongoing tense geo-political situation in Russia and the Ukraine is expected to negatively impact a number of companies’ performances in 2014 and beyond. Category growth prospects are also expected to be dented in the short-to-medium-term future in Eastern Europe’s largest and third-largest markets, Russia and the Ukraine, respectively. Companies with significant operations in Russia, such as L’Oréal, Unilever and Oriflame, have already announced plans to mitigate the unstable environment; however, the full impact of the situation is largely out of their control.
Top 12 Beauty Companies’ Performance in Russia – 2008-2013
Source: Euromonitor International
Companies’ strategic response has limited results in a tense market environment
While both L’Oréal and Unilever only generate some 3% of their global beauty retail value sales in Russia, Oriflame is more reliant on the troubled market, with it accounting for nearly 30% of the company’s global retail value sales in 2013. Current uncertainties are adding to Oriflame’s already weak performance in Russia, with it registering a 1.4% CAGR fall in value sales over the 2008-2013 review period. In July 2014, the company announced plans to sell a lipstick factory in Krasnogorsk, Russia, as it is aiming to reduce costs. This came after the move in in May 2014, when it scrapped Q3 dividends, because it was facing challenging conditions in Russia and the Ukraine, its two biggest markets, due to the geo-political situation. Oriflame published plans back in 2010 to invest up to US$235 million in the construction of a second factory in Russia. The plant, scheduled to open at the end of 2014, will produce skin and hair care items, but the ongoing uncertainties may negatively impact future demand for its products.
Expecting a decrease in demand, Unilever has also put its plans to double production capacity in Russia on hold. Unilever has strongly focused on Russian expansion in the past, making a number of acquisitions and boosting both its food and beauty operations in the market. It purchased Kalina Concern OAO in 2011, making it the third largest beauty player in Russia.
Oriflame’s peer direct seller, Amway, also saw an underwhelming performance over 2008-2013, with a 2% CAGR fall in value sales in Russia. This might be indicative of the changing dynamics of the direct selling channel in the country, although Amway is less reliant on Russia than Oriflame, with it accounting for just 8% of its retail value sales in 2013. Amway, a flagship US label in Russia, may suffer further as a result of the current environment if Russia extends its sanctions from the energy and food markets to wider fmcg.
As all of the top 12 beauty players in the Russian market are international companies, any further expansion of official or un-official sanctions will have a major impact on the overall performance of the beauty market.
Category growth prospects
Russia is the largest beauty and personal care market in Eastern Europe, accounting for nearly 50% of the region’s retail value sales in 2013. Growth prospects for the 2013-2018 forecast period were bleak before the geo-political crisis with Ukraine started in 2014. Before this began, the beauty market is expected to shrink from US$14.2 billion in 2013 to just US$13.4 billion in 2018, representing a retail value contraction of US$766 million in constant value terms. All of the large categories, hair care, skin care and fragrances were expected to decline steadily, with value sales falling at 2% CAGRs during this period, while only a small number of niche categories, such as baby and child-specific products and oral care, were expected to see positive growth. This was all the result of the already weak economy and the lower exchange rate for the rouble against major currencies, which is likely to curtail consumer spending.
Albeit smaller in size, premium beauty and personal care categories have more positive growth prospects between 2013 and 2018; premium colour cosmetics, bath and shower and baby and child-specific products, in particular, are expected to contribute to the anticipated positive growth in value sales. Premium beauty categories are considered a better potential avenue for growth for international companies with strong premium labels.
However, given the current tense situation between Russia and the Ukraine, this forecast is likely to turn more negative over the next five years. Companies continue to have limited control over the market environment and category development, and innovation levels are expected to remain low.