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RUSSIA:

The Jewel of the European Personal Care Market

A presentation at:

September 17, 2009

www.KlineGroup.com
© 2009 Kline & Company
Agenda

About Kline

Global Market Overview

Russian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 1


Agenda

About Kline

Global Market Overview

Russian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 2


About Kline

We serve clients around the globe

ƒ Global Headquarters
− Little Falls, NJ

ƒ Kline Europe
− Brussels, Belgium
− Oxford, UK
− Milan, Italy
− Prague, Czech Republic

ƒ Kline Asia
− Shanghai, China
− Tokyo, Japan
− New Delhi, India
− Dubai, UAE

ƒ Kline Latin America


− São Paulo, Brazil

© 2009 Kline & Company


3
About Kline

Kline has an extensive series of market research reports that cover


various markets

© 2009 Kline & Company 4


Agenda

Kline & Co.

Global Market Overview

Indian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 5


Global Market Review

The global personal care market surpassed US $280 billion at the


retail level in 2008

300
CAGR:
CAGR: 5.1%
5.1%
250
US$ Billion retail

200

150

100

50

0
2003 2004 2005 2006 2007 2008

© 2009 Kline & Company 6


Global Market Review

Growth has slowed considerably due to the economic crisis

12.0

10.0
Change, %

8.0

6.0

4.0

2.0

0.0
2004 2005 2006 2007 2008 2009-a

a- projected.

© 2009 Kline & Company 7


Global Market Review

Emerging markets are advancing at the fastest pace

ƒ Canada ƒ Argentina
ƒ France ƒ Brazil
ƒ Germany ƒ India ƒ China
ƒ Italy ƒ Mexico ƒ Russia
ƒ Japan ƒ Poland
ƒ Spain ƒ South Korea
ƒ United Kingdom
ƒ United States
DOUBLE-
MODERATE DIGIT
GROWTH GROWTH
BELOW
AVERAGE
GROWTH

© 2009 Kline & Company 8


Global Market Review

Russia has been moving up the ranks

2003 Rank 2008

United States 1 United States


Japan 2 Japan
France 3 China
Germany 4 Brazil
United Kingdom 5 France
China 6 Germany
Italy 7 United Kingdom
Brazil 8 Russia
South Korea 9 South Korea
Russia 10 Italy

© 2009 Kline & Company 9


Global Market Review

The emerging markets have significant upside potential when it comes


to per capita spending

Country Per capita spending (US$)


France 245.31
Japan 232.67
Spain 215.79
United Kingdom 215.44
Germany 189.63
Italy 184.98
Canada 167.61
United States 163.39
South Korea 155.46
Brazil 98.05
Poland 92.58
Russia 88.83
Mexico 79.84
Argentina 41.25
WORLD 40.51
China 11.94
India 5.40

© 2009 Kline & Company 10


Agenda

Kline & Co.

Global Market Overview

Russian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 11


Russian Cosmetics & Toiletries Market

Macroeconomic developments

ƒ High growth in GDP and real disposable


income
− Russian consumers are now prepared to
pay good money for good products
− Rising inflation is starting to slow down
growth and resulting in price hikes

ƒ Consumers have a higher purchasing power


since the majority own a house without the
burden of mortgage repayments, having
inherited housing from the state following the
collapse of communism

ƒ The wealth of the Russian population has


seen substantial growth in recent years
− Salaries have increased by 15% in the
past two years and are forecast to
continue double-digit growth for the next
several years

© 2009 Kline & Company 12


Russian Cosmetics & Toiletries Market

Drivers of the Russian personal care market

Increasing
prosperity

Highly effective Consumer


cosmetics expectation
becoming more
affordable
HIGH
GROWTH IN
PERSONAL
CARE Societal pressures
and increased
desire to look good
Marketing efforts
undertaken by
pharma companies

Aging population

© 2009 Kline & Company 13


Russian Cosmetics & Toiletries Market

Russia’s C&T usage is similar to the world, but skews slightly stronger
toward basic toiletries and oral care

100%
90%
80%
Fragrances
70%
Hair care
60% Makeup
50% Oral care
40% Skin care
30% Toiletries

20%
10%
0%
World Russia

© 2009 Kline & Company 14


Russian Cosmetics & Toiletries Market

Russia’s unique usage patterns

Facial
Facial treatments
treatments
World
World proportion:
proportion: 19.4%
19.4%
Russia
Russia proportion:
proportion: 8.1%
8.1%

Lipsticks
Lipsticks and
and lip
lip glosses
glosses
World
World proportion:
proportion: 3.8%
3.8%
Russia
Russia proportion:
proportion: 7.8%
7.8%

Toothpastes
Toothpastes
World
World proportion:
proportion: 5.6%
5.6%
Russia
Russia proportion:
proportion: 10.3%
10.3%

© 2009 Kline & Company 15


Russian Cosmetics & Toiletries Market

Consumer dynamics

ƒ Consumers are becoming less price sensitive, choosing quality


over price
− As regional centers develop, consumers are actively
switching from low cost generic products to higher cost
branded products
ƒ Consumers previously were drawn to colorful packaging but are
now more interested in the ingredients and functional
characteristics
ƒ Consumers consistently choose locally made skin care as they
believe they are more natural and better suited to Russian skin.
This belief is slowly changing.
ƒ Russian consumers can be characterized into two distinct
segments:
− The older generation believes natural ingredients are more
healthy, is skeptical of foreign-made products containing
chemicals, and does not trust advertising or salespeople
− The younger generation tends to want the advice of retail
store staff, is heavily influenced by western advertising
campaigns, and buys popular brands as a status symbol
ƒ There is increasing interest in health care, naturalness and new
technologies

© 2009 Kline & Company 16


Russian Cosmetics & Toiletries Market

The Russian C&T market reached $8.5 billion at the manufacturers’ level
in 2008. Growth has been robust over the past five years

$US Billion Mfr.


9,000
CAGR:
CAGR:13.2%
13.2%
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2003 2004 2005 2006 2007 2008

© 2009 Kline & Company 17


Russian Cosmetics & Toiletries Market

Russia outpaces world growth in all categories by a substantial margin


Percentage growth

Fragrances Hair care Skin care Makeup Other Oral care


toiletries
Change, % 2007 vs 2008

Russia World

© 2009 Kline & Company 18


Russian Cosmetics & Toiletries Market

Hot product trends and key new launches

ƒ Products with natural ingredients are increasingly in demand

ƒ Beauty salons and spas are becoming an increasingly


important part of the market

ƒ Major shift toward unscented deodorants, as consumers can


now afford to also buy a luxury fragrance

ƒ Value-added products in demand (e.g., color cosmetics,


men’s grooming products, baby care, anti-aging, and anti-
cellulite products)

ƒ More sophisticated and niche products are gaining market


share (e.g., shampoo and bath and shower products for men)

ƒ Baby fragrances from local manufacturers emerge as a new


segment

ƒ Lip balms containing a patented combination of ingredients


claims to curb appetite and leads to weight loss

ƒ Cosmeceuticals and nutricosmetics both gaining ground

© 2009 Kline & Company 19


Russian Cosmetics & Toiletries Market

Products with natural and organic ingredients are growing in popularity

© 2009 Kline & Company 20


Russian Cosmetics & Toiletries Market

HAIR CARE PRODUCTS: Snapshot

SALES GROWTH BY CATEGORY


Percentage
growth

12

10

2 SALES SHARE BY CATEGORY


0
Hair Coloring Hair styling Conditioners Shampoos Shampoos
Products products and
sprays
Change, % 2007 vs 2008
Hair styling
products
and sprays LEADING PLAYERS

Hair coloring Conditioners ƒ Henkel


products ƒ Procter & Gamble
ƒ Unilever
ƒ L’Oréal
ƒ Oriflame

© 2009 Kline & Company 21


Russian Cosmetics & Toiletries Market

Shampoos and hair coloring product represent 70% of sales in this


product category
ƒ Two-in-one products are declining in popularity and products addressing particular hair
problems, such as dandruff and hair loss are growing in strength in terms of sales
ƒ More than 50% of Russian women use colorants and have a preference for permanent
colors
ƒ Despite the fact that Russian consumers still consider imported to be of better quality
than those produced locally, the hair coloring segment sees increased interest in local
products due to new product launches, improvement in quality and increased
production volumes
ƒ The long Russian cold winters are an obstacle against the fast growth of the styling
products as people spend around 6 months of the year wearing hats to protect
themselves from cold
ƒ Russian consumers in the cities like to buy modern sophisticated products such as
gels, wax, cream and balm, whereas sprays are more preferred outside big cities
ƒ There is little brand loyalty for hair care products among Russian consumers

© 2009 Kline & Company 22


Russian Cosmetics & Toiletries Market

MAKEUP PRODUCTS: Snapshot

SALES GROWTH BY CATEGORY


Percentage
growth

18
16
14
12
10
8 SALES SHARE BY CATEGORY
6
4 Lipsticks and
2
lip glosses
0
Face makeup Lipsticks & lip Eye makeup Nail polishes
glosses
Nail
Change, % 2007 vs 2008
polishes

LEADING PLAYERS
Eye Face
makeup makeup
ƒ Avon
ƒ Oriflame
ƒ L’Oréal
ƒ Faberlic

© 2009 Kline & Company 23


Russian Cosmetics & Toiletries Market

Makeup is the second leading category in Russia

ƒ Lipsticks and lip glosses account for more than 40% of category sales
ƒ Lipstick is considered by Russian women as the main feature of all makeup; it is the
most popular makeup product
ƒ Russian women are becoming increasingly selective in choosing makeup products as
quality and reputation became the most important criteria when choosing a particular
brand of makeup products
ƒ Direct sales companies like Avon, Oriflame and Faberlic lead the makeup market in
Russia
ƒ Growth is mainly fueled by the improvement in the income of the Russian consumers

© 2009 Kline & Company 24


Russian Cosmetics & Toiletries Market

OTHER TOILETRIES: Snapshot

SALES GROWTH BY CATEGORY


Percentage
growth

25

20

15

10

5
SALES SHARE BY CATEGORY
0
Shaving Products Personal Cleansing Deodorants and Personal
Products antiperspirants cleansing products
Change, % 2007 vs 2008

Deodorants LEADING PLAYERS


Shaving and
antiperspirants
products ƒ Evyap
ƒ Procter & Gamble
ƒ Unilever
ƒ Beiersdorf

© 2009 Kline & Company 25


Russian Cosmetics & Toiletries Market

Personal cleansing products is the leading product category while


shaving products are the fastest growing

ƒ Bar soaps are the most significant contributor to sales in the personal cleansing
products category, however this market is already close to the saturation point and is
growing at the slowest pace of all personal cleansing product segments
ƒ Russian women comprise the largest group of consumers of deodorants and
antiperspirants
ƒ Aerosols, roll-ons, and solid sticks are the three product forms that are the most popular
among Russian consumers
ƒ Russia represents a large market for shaving products, as there are over 54 million
males in Russia over the age of 15

© 2009 Kline & Company 26


Russian Cosmetics & Toiletries Market

ORAL CARE PRODUCTS: Snapshot

SALES GROWTH BY CATEGORY


Percentage
growth

16
14
12
10
8
6
4 SALES SHARE BY CATEGORY
2
0
Toothpastes
Toothpastes Mouthwashes Toothbrushes

Change, % 2007 vs 2008

Mouth-
LEADING PLAYERS
Toothbrushes washes
ƒ Colgate-Palmolive
ƒ Procter & Gamble
ƒ Kalina

© 2009 Kline & Company 27


Russian Cosmetics & Toiletries Market

The collaboration with dental experts and pharmacists in order to improve


the awareness of dental issues helped to grow sales within the product class

© 2009 Kline & Company 28


Russian Cosmetics & Toiletries Market

SKIN CARE PRODUCTS: Snapshot

SALES GROWTH BY CATEGORY


Percentage
growth

25

20

15

10

5 SALES SHARE BY CATEGORY


0
Men's skin Sun care Facial Hand/body Baby care
care treatments lotions
Facial treatments
Change, % 2007 vs 2008

Men’s
skin care

Sun care LEADING PLAYERS


Hand/body Baby care
lotions ƒ Kalina
ƒ Johnson & Johnson
ƒ L’Oréal
ƒ Beiersdorf
ƒ Mary Kay

© 2009 Kline & Company 29


Russian Cosmetics & Toiletries Market

Growth in income, an increase in the Russian birth rate, and the aging
of the Russian population are the main factors of growth in this sector

© 2009 Kline & Company 30


Russian Cosmetics & Toiletries Market

FRAGRANCES: Snapshot

SALES GROWTH BY CATEGORY


Percentage
growth

14.5

14

13.5

13
SALES SHARE BY CATEGORY
12.5

12 Fragrances for women


Fragrances for Men Fragrances for Women

Change, % 2007 vs. 2008

LEADING PLAYERS
Fragrances for men
ƒ LVMH
ƒ L’Oréal
ƒ Procter & Gamble
ƒ Chanel

© 2009 Kline & Company 31


Russian Cosmetics & Toiletries Market

Fragrances account for more than 10% of market sales in Russia

ƒ Russian consumers purchase Western (particularly European) brands as a sign of


affluence

ƒ The luxury trade class is the largest with more than 75% of market share.

ƒ Eau de toilette products are the most popular format among Russian consumers

ƒ There is a continuing shift in the sales channels for fragrances in favor of


specialized shops that position themselves as boutiques

ƒ The markets in Moscow and St. Petersburg are the most important markets in
Russia, although there is increasing development in other cities and regions

© 2009 Kline & Company 32


Agenda

Kline & Co.

Global Market Overview

Russian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 33


Competition

On the competitive front

ƒ Multinationals are increasing their presence in Russia,


including in-country manufacturing
− Foreign companies report larger sales than Russian
brands across all beauty segments, with the exception
of skin care

ƒ Local Russian manufacturers are fighting back against


foreign companies

ƒ Direct sales has traditionally had a strong position in the


less developed regions

ƒ As competition in both Moscow and Saint Petersburg


intensifies, both specialty retail networks and
manufacturers are seeing new growth opportunities open
up over the coming five years in Russia’s vast and often
untapped regions

© 2009 Kline & Company 34


Competition

Procter & Gamble is the leading player in the Russian market.


Multinational companies account for more than 60% of industry sales

Procter &
L’Oréal Avon Gamble

Schwarzkopf
Henkel

Oriflame

All other

© 2009 Kline & Company 35


Competition

Local companies account for 38% of total market sales

TOP 10 LOCAL MARKETERS

1 Kalina
2 Faberlic

3 Svoboda

4 Nevskaya Kosmetika

5 Novaya Zarya

6 Krasnaya Linia

7 Fratti

8 Rokolor

9 Unicosmetic

10 Arnest

© 2009 Kline & Company 36


Competition

Local manufacturers compete in the mass market and middle market


segments

© 2009 Kline & Company 37


Agenda

Kline & Co.

Global Market Overview

Russian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 38


Retail Distribution

Retail development
ƒ The Russian beauty retail market has been restructuring
since the nineties
ƒ Retails focus shifted to the regions as a new market to
conquer, leading to fast expansion and many door opening
especially in the last three years.
ƒ Open markets are constantly losing their market share to
other channels especially mass merchandisers
ƒ Department stores are facing tough times especially the
lower end ones
ƒ Specialty stores channel reshuffles as giant Arbat Prestige
left the market in 2008
ƒ New distribution channels for cosmetics and toiletries,
such as the Internet and drogueries or drug stores, have
appeared and are growing in popularity
ƒ Pharmacies are increasing their focus on
parapharmaceuticals, in particular skin care products, with
non medical products reaching as much as 40% in some
pharmaceutical chains.

© 2009 Kline & Company 39


Retail Distribution

Direct marketing: the biggest winner

ƒ The bulk of sales is generated by person-to-person sales represented predominantly


by Avon and Oriflame.
ƒ Makeup is the leading product class in this channel followed by skin care.
ƒ The economic crisis has had a positive effect on the direct sales channel as many
manufacturers such as Avon and Faberlic have witnessed a significant increase in
the number of their consultants.
ƒ The boom in sales through the Internet as a way of direct marketing also played a
role in the growth of the channel.

© 2009 Kline & Company 40


Retail Distribution

Specialty stores: fast expansion through the regions

ƒ Second largest distribution channel for


cosmetics and toiletries in Russia
ƒ The big expansion in the regions and the
increase in the income of the Russian
consumer were the main drivers for the
channel’s growth
ƒ Offer a special shopping experience as
well as in-store beauty treatment corners
and beauty institutes
ƒ Professional aestheticians, consultants,
and makeup artists provide clients expert
advice on various products
ƒ Big focus on online sales and loyalty
programs
ƒ Main channel for sale of prestige brands
ƒ Share of mass brands is growing

© 2009 Kline & Company 41


Retail Distribution

Department stores: interesting format but losing popularity

ƒ Specialty department stores repositioned


themselves as luxury destinations

ƒ Traditional department stores are facing


many difficulties in Russia mainly the
lack of interest among the Russian
consumers to such store formats as it
reminds them of the “Univermags” of the
Soviet era and the poor quality of
products that these were offering

ƒ Lower end department stores,


“Univermags”, are facing increasing
competition from shopping centers and
mass merchandisers

ƒ Other toiletries and hair care products


are the dominating product categories in
this channel and they are sold mainly in
low end department stores

© 2009 Kline & Company 42


Agenda

Kline & Co.

Global Market Overview

Russian Cosmetics & Toiletries Market

Competition

Retail Distribution

Outlook

© 2009 Kline & Company 43


Outlook

Plenty of potential left

ƒ The increasing wealth and purchasing power of the Russian consumers will boost the
sales of cosmetics and toiletries
ƒ Beauty retailers will continue expanding in the regions and differentiating themselves
ƒ Big opportunities in emerging channels of distribution such as drogueries and mass
merchandisers
ƒ Expansion of mass merchandisers and supermarkets in the regions will provide
additional opportunities and convenience for consumers to purchase products
ƒ More opportunities for private label, exclusive, and niche brands

© 2009 Kline & Company 44


Outlook

Economic prosperity will drive further changes in buying patterns

ƒ The aging of the Russian population will


further boost the demand for anti-aging
products

ƒ Interest in niche brands will continue


increasing

ƒ Interest in natural and organic cosmetics will


keep on growing

ƒ Men’s products will continue to grow as an


important target segment across categories

ƒ Demand for added value products at


competitive prices will further grow

ƒ With changes in the lifestyle, spa procedures


and professional hair care and skin care
products will become even more popular

© 2009 Kline & Company 45


Questions
& Answers

© 2009 Kline & Company


46
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years. For more information, visit www.KlineGroup.com.

If you require additional information about the contents of this document or the Europe
services that Kline provides, please contact: ___________
Carrie Mellage Kristy Altenburg
Director, Consumer Products Client Relations Supervisor, North America
Phone: +1-973-435-3412 Phone: +1-973-435-3367
E-mail: Carrie.Mellage@KlineGroup.com E-mail: Kristy.Altenburg@KlineGroup.com

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