HBA Russia Presentation

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
Competition
Retail Distribution
Outlook

About Kline
We serve clients around the globe
Global Headquarters
− Little Falls, NJ
Kline Europe
− Brussels, Belgium
− Oxford, UK
− Milan, Italy
− Prague, Czech Republic
Kline Asia
− Shanghai, China
− Tokyo, Japan
− New Delhi, India
− Dubai, UAE
Kline Latin America

− São Paulo, Brazil

3
About Kline
Kline has an extensive series of market research reports that cover

various markets

Agenda
Kline & Co.
Indian Cosmetics & Toiletries Market
Competition
Retail Distribution
Outlook

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

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.

Emerging markets are advancing at the fastest pace
Canada Argentina
France Brazil
Germany India China
Italy Mexico Russia
Japan Poland
Spain South Korea
United Kingdom
United States
DOUBLE-
MODERATE DIGIT
GROWTH GROWTH
BELOW
AVERAGE
GROWTH

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

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

Agenda
Kline & Co.
Competition
Retail Distribution
Outlook

Macroeconomic developments
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
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
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

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

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

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%

Consumer dynamics
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
Consumers previously were drawn to colorful packaging but are
now more interested in the ingredients and functional
characteristics
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.
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
There is increasing interest in health care, naturalness and new
technologies

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

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

Hot product trends and key new launches
Products with natural ingredients are increasingly in demand
Beauty salons and spas are becoming an increasingly

important part of the market
Major shift toward unscented deodorants, as consumers can

now afford to also buy a luxury fragrance
Value-added products in demand (e.g., color cosmetics,

men’s grooming products, baby care, anti-aging, and anti-
cellulite products)
More sophisticated and niche products are gaining market

share (e.g., shampoo and bath and shower products for men)
Baby fragrances from local manufacturers emerge as a new

segment
Lip balms containing a patented combination of ingredients

claims to curb appetite and leads to weight loss
Cosmeceuticals and nutricosmetics both gaining ground

Products with natural and organic ingredients are growing in popularity

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 Henkel

products Procter & Gamble
Unilever
L’Oréal
Oriflame

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

product category
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
More than 50% of Russian women use colorants and have a preference for permanent
colors
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
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
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
There is little brand loyalty for hair care products among Russian consumers

MAKEUP PRODUCTS: Snapshot

Percentage
growth
18
16
14
12
10
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
Avon
Oriflame
L’Oréal
Faberlic

Makeup is the second leading category in Russia
Lipsticks and lip glosses account for more than 40% of category sales
Lipstick is considered by Russian women as the main feature of all makeup; it is the
most popular makeup product
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
Direct sales companies like Avon, Oriflame and Faberlic lead the makeup market in
Russia
Growth is mainly fueled by the improvement in the income of the Russian consumers

OTHER TOILETRIES: Snapshot

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 Evyap
Procter & Gamble
Unilever
Beiersdorf

Personal cleansing products is the leading product category while

shaving products are the fastest growing
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
Russian women comprise the largest group of consumers of deodorants and
antiperspirants
Aerosols, roll-ons, and solid sticks are the three product forms that are the most popular
among Russian consumers
Russia represents a large market for shaving products, as there are over 54 million
males in Russia over the age of 15

ORAL CARE PRODUCTS: Snapshot

Percentage
growth
16
14
12
10
8
6
2
0
Toothpastes
Toothpastes Mouthwashes Toothbrushes
Change, % 2007 vs 2008
Mouth-
LEADING PLAYERS
Toothbrushes washes
Colgate-Palmolive
Procter & Gamble
Kalina

The collaboration with dental experts and pharmacists in order to improve

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

SKIN CARE PRODUCTS: Snapshot

Percentage
growth
25
20
15
10

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 Kalina
Johnson & Johnson
L’Oréal
Beiersdorf
Mary Kay

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

FRAGRANCES: Snapshot

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
LVMH
L’Oréal
Procter & Gamble
Chanel

Fragrances account for more than 10% of market sales in Russia
Russian consumers purchase Western (particularly European) brands as a sign of

affluence
The luxury trade class is the largest with more than 75% of market share.
Eau de toilette products are the most popular format among Russian consumers
There is a continuing shift in the sales channels for fragrances in favor of

specialized shops that position themselves as boutiques
The markets in Moscow and St. Petersburg are the most important markets in
Russia, although there is increasing development in other cities and regions

Agenda
Kline & Co.
Competition
Retail Distribution
Outlook

Competition
On the competitive front
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
Local Russian manufacturers are fighting back against

foreign companies
Direct sales has traditionally had a strong position in the

less developed regions
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

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

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

Competition
Local manufacturers compete in the mass market and middle market

segments

Agenda
Kline & Co.
Competition
Retail Distribution
Outlook

Retail Distribution
Retail development
The Russian beauty retail market has been restructuring
since the nineties
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.
Open markets are constantly losing their market share to
other channels especially mass merchandisers
Department stores are facing tough times especially the
lower end ones
Specialty stores channel reshuffles as giant Arbat Prestige
left the market in 2008
New distribution channels for cosmetics and toiletries,
such as the Internet and drogueries or drug stores, have
appeared and are growing in popularity
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.

Retail Distribution
Direct marketing: the biggest winner
The bulk of sales is generated by person-to-person sales represented predominantly

by Avon and Oriflame.
Makeup is the leading product class in this channel followed by skin care.
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.
The boom in sales through the Internet as a way of direct marketing also played a
role in the growth of the channel.

Retail Distribution
Specialty stores: fast expansion through the regions
Second largest distribution channel for

cosmetics and toiletries in Russia
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
Offer a special shopping experience as
well as in-store beauty treatment corners
and beauty institutes
Professional aestheticians, consultants,
and makeup artists provide clients expert
advice on various products
Big focus on online sales and loyalty
programs
Main channel for sale of prestige brands
Share of mass brands is growing

Retail Distribution
Department stores: interesting format but losing popularity
Specialty department stores repositioned

themselves as luxury destinations
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
Lower end department stores,

“Univermags”, are facing increasing
competition from shopping centers and
mass merchandisers
Other toiletries and hair care products

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

Agenda
Kline & Co.
Competition
Retail Distribution
Outlook

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

Outlook
Economic prosperity will drive further changes in buying patterns
The aging of the Russian population will

further boost the demand for anti-aging
products
Interest in niche brands will continue

increasing
Interest in natural and organic cosmetics will

keep on growing
Men’s products will continue to grow as an

important target segment across categories
Demand for added value products at

competitive prices will further grow
With changes in the lifestyle, spa procedures

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

Questions
& Answers

46
Kline is a worldwide consulting and research firm dedicated Americas
to providing the kind of insight and knowledge that helps ____________
companies find a clear path to success. The firm has served
the management consulting and market research needs of
organizations in the chemicals, materials, energy, life Asia
sciences, and consumer products industries for nearly 50 ___________
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
Kline & Company, Inc.

Overlook at Great Notch
150 Clove Road
Little Falls, NJ 07424-0410
Phone: +1-973-435-6262
Fax: +1-973-435-6291
www.KlineGroup.com

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RUSSIA:

The Jewel of the European Personal Care Market

September 17, 2009

Global Market Overview

Russian Cosmetics & Toiletries Market

© 2009 Kline & Company 1

Global Market Overview

Russian Cosmetics & Toiletries Market

© 2009 Kline & Company 2

We serve clients around the globe

 Kline Latin America

© 2009 Kline & Company

Kline has an extensive series of market research reports that cover

© 2009 Kline & Company 4

Kline & Co.

Global Market Overview

Indian Cosmetics & Toiletries Market

© 2009 Kline & Company 5

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

© 2009 Kline & Company 6

Growth has slowed considerably due to the economic crisis

© 2009 Kline & Company 7

Emerging markets are advancing at the fastest pace

© 2009 Kline & Company 8

Russia has been moving up the ranks

2003 Rank 2008

United States 1 United States

© 2009 Kline & Company 9

The emerging markets have significant upside potential when it comes

Country Per capita spending (US$)

© 2009 Kline & Company 10

Kline & Co.

Global Market Overview

Russian Cosmetics & Toiletries Market

© 2009 Kline & Company 11

 High growth in GDP and real disposable

 Consumers have a higher purchasing power

 The wealth of the Russian population has

© 2009 Kline & Company 12

Drivers of the Russian personal care market

Highly effective Consumer

© 2009 Kline & Company 13

© 2009 Kline & Company 14

Russia’s unique usage patterns

© 2009 Kline & Company 15

 Consumers are becoming less price sensitive, choosing quality

© 2009 Kline & Company 16

$US Billion Mfr.

© 2009 Kline & Company 17

Russia outpaces world growth in all categories by a substantial margin

Fragrances Hair care Skin care Makeup Other Oral care

© 2009 Kline & Company 18

Hot product trends and key new launches

 Products with natural ingredients are increasingly in demand

 Beauty salons and spas are becoming an increasingly

 Major shift toward unscented deodorants, as consumers can

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

 More sophisticated and niche products are gaining market

 Baby fragrances from local manufacturers emerge as a new

 Lip balms containing a patented combination of ingredients

 Cosmeceuticals and nutricosmetics both gaining ground

© 2009 Kline & Company 19

Products with natural and organic ingredients are growing in popularity

Kline Latin America

High growth in GDP and real disposable

Consumers have a higher purchasing power

The wealth of the Russian population has

Consumers are becoming less price sensitive, choosing quality

Products with natural ingredients are increasingly in demand

Beauty salons and spas are becoming an increasingly

Major shift toward unscented deodorants, as consumers can

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

More sophisticated and niche products are gaining market

Baby fragrances from local manufacturers emerge as a new

Lip balms containing a patented combination of ingredients

Cosmeceuticals and nutricosmetics both gaining ground

Hair coloring Conditioners Henkel

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

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

Multinationals are increasing their presence in Russia,

Local Russian manufacturers are fighting back against

Direct sales has traditionally had a strong position in the

As competition in both Moscow and Saint Petersburg

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

Second largest distribution channel for

Specialty department stores repositioned

Traditional department stores are facing