International cosmetics manufacturers Avon and Oriflame are building factories in Russia to take full advantage of their position as leaders on the direct sales segment of the Russian market
Vera Krasnova, Antonina Sidorova
In late September, American Avon and Swedish Oriflame both celebrated the laying of the cornerstone at their new factories outside of Moscow. Avon will spend around $40 million on its new factory in the Naro-Fominsk Region, while Oriflame is setting up shop not far from Krasnogorsk to the tune of $35 million. They will begin production in 2004 and 2005 respectively. Both companies plan to produce hundreds of millions of dollars in products. Avon plans to sell $500 million by 2007, and Oriflame also sees this level of sales as a distinct possibility.
The companies also began planning the projects at the same time, last winter, possibly as both achieved similar success on the Russian market. Avon made $142 million, and Oriflame about 150 million euros. These were important thresholds. Once sales surpassed them, the companies began to see Russia as strategically promising. Their goal at present is to take full advantage of the current growth trend on the Russian cosmetic market, in particular the rapid growth of direct sales.
Russian surprise
Importantly, the American and Swedish companies founded this segment of the Russian market, bringing what was in the early 90s a new business approach to Russia, network marketing.
Avon is a world giant, which has been manufacturing and distributing cosmetics via network marketing for over 100 years. Today, it is a corporation with yearly sales of $6.2 billion and 14 factories. Its products are sold in 143 countries with the help of 3.9 million consultants. Oriflame was originally a European company and is still mainly based in Europe, with sales several times lower than Avon’s. However, recently Oriflame has entered the “regional” markets of Latin America and Asia. Overall, the company operates in 64 countries.
As a result the particular significance of the Russian market differs for the two companies. Oriflame earns almost a third of its revenue here, but Avon only 2%. However, this does not affect the companies’ strategy, which is focused on taking advantage of the Russian market’s potential. And this potential is truly stunning.
The Russian cosmetics market, which is estimated at about $5 billion, has grown at a fairly rapid pace in recent years. From the August 1998 crisis until as recently as 2001 its annual growth rate was around 20%. In 2002, growth fell to 10%, which was still better than Europe’s 6%. However, the real news came and continues to come from the direct sales segment.
This segment basically consists of three companies: Oriflame, Avon, and the Russian Faberlic. Its growth rates significantly exceed those for the industry overall. According to Magnus Brannstrom, the CIS, Baltic, and Asian Region Director for Oriflame, the company’s sales in Russia and the CIS have risen by 85% over the last year. Oriflame’s sales in the region are seven times what they were in 1999. Avon’s sales in the region increased by 6.5 times in the same period. But that’s not all: Faberlic’s earnings quadrupled in 2002 alone. A growth rate of 300% is impressive. In 2002, $460 million in cosmetics were sold via direct marketing.
No market analysts or companies will give growth forecasts for the specific area of direct sales in the coming years. However, more likely than not, their growth will continue to outpace that of the market as a whole. This trend could continue until the ratio of direct sales on the Russian market reaches world levels of 30-40%. In Russia, direct sales make up only 10%. The most telling prediction for future growth is the actions of the segment’s two leaders. They are actively promoting their networks not only in Russia, but across the CIS. Their plans to make a half million each in sales in the region appear completely realistic.
Overlooked market
Complacency dominates the reactions of those on the Russian cosmetics market to the Americans’ and Swedes’ plans. According to Vladimir Salev, Executive Director of the Russian Perfume and Cosmetics Association, the two new factories can only have positive consequences for the market, as they will give a positive signal to investors. Cosmetics companies, including those in direct sales like Faberlic and Mirra Liuks, are also unconcerned. President of Faberlic, Alexei Nechaev, stated that, “setting up production in Russia is an exclusively infrastructural move.” Locating production closer to consumers and reducing customs and transport costs allow companies to increase profits. However, it does not allow them improve their position on the market. Even without the new factories, Oriflame and Avon are already in the lead. For the market as a whole, however, they are only in 3rd and 4th place after Beiersdorf and Estee Lauder.
The Russian factories will also not effect pricing, which means there is no reason to fear the sudden drop in prices predicted by a few analysts to scare mass-market producers. The two companies have no such intention. Avon emphasized that price policies are directly related to product marketing and positioning in the middle-market price segment. Oriflame stated that in the future a slight price readjustment might occur, but that it was still too early to discuss it.
In general, peace prevails on the market. There is no reason to get upset when an impressive share of the market is already going elsewhere. Russian companies have practically overlooked direct sales. Only Faberlic of the few Russian companies in direct sales presents any real competition to the leaders. Faberlic is hot on their heels on the Russian and CIS markets and is growing faster than either of them.
The calm attitude on the part of companies selling their products through retail outlets is easier to understand. To change their approach, they would not only have to overcome the gap between them and market leaders (the majority of Russian companies have less than $100 million in turnover), but would also have to overcome the relative inertia of their segment. Leader of the “Russian contingent,”
Kalina, with sales of $132 million and a well-developed distribution network around Russia and the CIS, is completely optimistic and does not see the “networkers’” appearance as fatal. Recently,
Kalina has been restructuring its capital and increasing its capitalization in order to implement a new rapid growth strategy.
source :
Dynamic Duo - Russian News 
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May 10th, 2009
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