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World Wide Watch: Ukraine

Despite being hit hard by the global financial crisis, Ukraine's natural propensity for all things beauty related makes it a market worth watching.

Ukraine
Appeared In
Special Issue
Beauty Inc issue 02/13/2009

The financial crisis has affected shoppers’ habits in Ukraine in many of the ways cosmetics executives might expect. Consumers are cutting back on luxury purchases, like, say, that imported, laboratory-engineered unguent containing deep-sea minerals, and opting for cheap and cheerful brands instead.

But some reactions are more unusual. For example: stockpiling cosmetics because their value is less prone to fluctuation as the Ukrainian economy goes into free fall.

“People are spending money on just about anything that isn’t perishable,” says Mykola Golovko, a research analyst specializing in Ukraine with Euromonitor. “Prices are going to increase, and at exchange counters, people want to buy dollars and euros, but they’re often not available. So everyday items in the last month or so have become a last-ditch means to save their investments.”

 

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This isn’t just a curious story from a distant, little-known Eastern European country. Ukraine is one of the top cosmetics markets in this part of the world and growing rapidly— although, more than many other places, it faces tough times after  being hit hard by the financial crisis. Ukraine’s beauty sector expanded 28.7 percent between 2002 and 2007, and in terms of overall size, the market was forecast to be worth around $2 billion last year, ranking third in Eastern Europe after Poland and Russia, according to Euromonitor. By 2011, Euromonitor expects Ukraine to overtake Poland.

“It’s absolutely the fastest-growing market in Eastern Europe, but it’s starting from a fairly low level,” says Mats Palmquist, the managing director of Oriflame Ukraine, one of the most prominent cosmetics firms there. It’s true that, when it comes to the amounts they spend on cosmetics and grooming products, Ukrainians are hardly setting the world on fire. With per-capita spending predicted by Euromonitor to hit about $60 in 2008, Ukraine places below many other Eastern European nations, such as Russia ($88) and Lithuania ($92), and is on a level with Kazakhstan and the Dominican Republic.

But experts see this as a positive sign: If the market is growing so rapidly when consumers are spending relatively little, then an increase in purchasing should fuel future growth.

 

 

Ukraine is a sprawling nation of around 46 million people. Coal-mining and heavy industry are concentrated in the largely Russian-speaking east, Ukrainian is spoken in the west, while in the south, there’s a long Black Sea coast that was famed as a holiday destination during Soviet times.

In 2004, the Orange Revolution saw democratic reformers take power after holding protests in the capital, Kiev. Every country has its own ideals of beauty, though Ukrainian experts say women are held to particularly high standards there, a boon for beauty.

“According to one opinion, Ukraine is a patriarchal society, and in order for women to attract men’s attention, they have to look 100 percent at all times,” says Yelizaveta Savenko, who runs the Kiev-based industry magazine Cosmetics Market Today. “A secretary earning $500 a month might spend $100 on perfume.”

Adds Victoria Kharchenko, a spokeswoman for Avon in Ukraine: “If you talk to foreigners who have traveled to Ukraine, I am sure that most of them would share the opinion that there are a greater number of good-looking, well-groomed women on the streets of any Ukrainian city than you can see anywhere in the world.”

Some of the biggest brands are direct sellers, such as Avon, with 8.4 percent market share; Oriflame, 6.7 percent, and Mary Kay, 3.5 percent, according to Euromonitor. Products by Kalina and Faberlic, two Russian manufacturers, are also popular. The top five companies, according to Euromonitor, are Procter & Gamble, with 10.1 percent market share, followed by Avon, Beiersdorf, Oriflame and L’Oréal. The three biggest brands are Avon, Oriflame and Mary Kay.

Direct selling is big for historical reasons, explains Golovko. After the Soviet collapse, it appealed to inhabitants of the newly independent Ukraine as a way to support themselves in tough economic times, and sellers even hawked their products in traditional open-air markets.

Today, 20 to 22 percent of total cosmetics sales in Ukraine are made through direct selling, similar to the volumes sold at supermarkets, says Palmquist of Orifl ame. In Western Europe, by comparison, direct sales account for 6 to 10 percent of the market, and supermarkets make up 40 to 45 percent. “It’s the second-biggest market now for Oriflame globally,” he says. “In the last three years, we’ve doubled turnover here.” Supermarkets account for 20 percent of sales; pharmacies, 17 percent; cosmetics retailers, 15 percent, and street markets, about 13 percent.

There are other idiosyncrasies that could present a challenge—or an opportunity—for companies. For one, many consumers still place a great deal of trust in home remedies, perhaps to the detriment of sophisticated lotions. “Even in expensive glossy magazines there are articles giving primitive recommendations of food products that can be used for skin care, such as kefir, vegetables, eggs and cottage cheese,” sniffs Oleg Katyukhin, president of Spani, a cosmetics manufacturer that specializes in spa products.

As a whole, color cosmetics and skin care are the most popular product categories in the country, while Kharchenko of Avon says anti-aging creams and men’s grooming are increasingly important categories.

Shifts in the market hint at a growing sophistication among consumers. It used to be the case that the provenance of a product would be enough to sell it. But now, “it’s not enough anymore to simply have the slogan ‘Made in France,’ ” says Alexander Roshchin, deputy director of manufacturer Bishoff, whose products contain bischofite, a salt mined 8,200 feet below the earth’s surface.

“In the last 10 years, consumers have become a lot more informed about cosmetics. More and more often, they’re not buying on impulse, but rather are analyzing the pros and cons of competing products,” he says.

Ukrainian manufacturers, such as Spani and Bishoff, are rare, and foreign players currently dominate the market. Katyukhin says that’s because consumers place limited trust in domestically produced cosmetics. He argues, for example, that Ukraine-based firms don’t benefit from a sales boost over the holidays, as their products don’t fit the idea of a quality gift. “In our first few years,” he says, “lots of cosmetologists [in spas] would put our products into containers that were used for imported products, as they were so ashamed of anything that was ‘ours.’ ”

There’s another challenge looming on the horizon: the financial crisis. The country’s economy shrank 14.4 percent in November year-on-year, Reuters reported, while its currency, the hryvnia, lost about 45 percent of its value since September. Ukraine has secured a loan of almost $17 billion from the International Monetary Fund.

The picture is bleak for retailers, says Golovko. “Most retail chains have ceased to expand,” he says. “If you look at the same time last year, we saw chains that were adding 50 stores and planning another 50, 20, 30, whatever. For 2008, these plans have all been resized down, and companies are actually downsizing, as well.” Bankruptcies are not out of the question.

“In the past, efficiency at chains was largely sacrificed just to increase volume or presence. The biggest shift now is that efficiency is going to come into focus,” he adds.

The mass market retailers Kosmo and Eva declined to comment, with Kosmo citing the firm’s “restructuring” as the reason. A spokeswoman for Brocard, another key player, could not say when the firm’s marketing director would be available.

Manufacturers and importers will be paying close attention to consumer  preferences, which already have begun to shift. Predictably, high-end products are out and mass market budget buys are in.

“There’s a slight slowing in the market,” says Marina Shulyak, deputy director of Comcon-Ukraine. “People are beginning to economize on things. Goods like hand cream, that are needed every day, shouldn’t be affected. But shoppers are cutting down on luxuries.”

Most say that, in the long term, Ukrainian women, like those elsewhere, will not stop wearing makeup or moisturizing their skin because of the credit crunch. “Historic data has shown that spending on cosmetics and toiletries is very inert,” says Golovko. “Things like lipstick—the cost remains low to the point where shoppers don’t even think about it.”

“Even though the growth rate will slow,” says Palmquist, “we think the market will continue to grow quite significantly—double digits, at least— for the next four to five years.”

And, just perhaps, as dollars become more expensive and the price of imports increase, Ukrainian cosmetics firms could go mainstream at home. Next stop: Western Europe?

Says Roshchin of Bishoff: “From our point of view, the financial crisis is not having an adverse affect on our profits. In fact, it’s strengthening our position.”


Click here to view a comparison with Poland’s Beauty market >>