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Talking Turkey

WWD's Pete Born examines the rocky road to growth in a key emerging market.

Searching for future growth in the emerging world is sort of like cultivating a garden of wild roses, thorns and all.

Take Turkey, for instance, which is viewed by a growing number as an emerging hot spot. But growth often comes with turmoil.

That was the case in June, when the country was symbolized by tear gas, rubber bullets and water cannons and the image of massive protests, touched off by Prime Minister Recep Tayyip Erdogan’s plan to demolish popular Gezi Park in downtown Istanbul and replace it with an Ottoman-era artillery barracks that would include a shopping center. Objections to the plan quickly morphed into widespread discontent over what is widely seen as the Islamic-oriented Erdogan’s heavy-handed rule, in which he has been viewed as imposing fundamentalist doctrine on what has been a secularist society since modern Turkey was founded by Mustafa Kemal Ataturk in the early Twenties. “The younger middle class are afraid of where that Islamic journey is going,” observes Carsten Fischer, representative director and corporate senior executive officer of Shiseido.

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Ironically, many of the protest organizers quoted in news accounts appear to be young urban professionals, the very class that has risen up in the decade of economic boom that has marked the rule of Erdogan’s Justice and Development Party. But now that the smell of tear gas has subsided, Istanbul appears to have gotten its retail groove back. Pinar Hosafci, the local analyst for Euromonitor, reported in a blog that retailers estimate that the impact of the June protest will be “short and modest.” Driven by the appetites of young, upwardly mobile consumers, in-store retail sales for this year are expected to gain 6 percent. According to Euromonitor, Turkey’s overall beauty and personal-care business— dominated by multinationals like Procter & Gamble, Avon Products, L’Oréal, Unilever and Beiersdorf—stood at about $3.8 billion in retail sales for 2012, a 6 percent increase over 2011.

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Moreover the industry’s interest in doing business in Turkey has not seemed to wane. On Oct. 3, the European Academy of Dermatology and Venereology is due to open its annual conference in Istanbul. One of the speakers will be Dr. Tom Mammone, executive director of skin physiology and pharmacology at Estée Lauder Cos. Inc., and a squad of Clinique executives are expected to turn out in support. Lauder is not alone.

Shiseido recently signed a deal setting up a joint venture with Vepa Group, a distributor of beauty, fashion and lifestyle brands. Fischer is bullish on the market, citing the youthful demographics and a “very strong, broad-based economic development.” Istanbul, he says, is “a crossroad of East and West.”

Ricardo Quintero, senior vice president and global general manager of market development at Clinique, makes an analogy drawing from a speech he made two years ago based on a 2007 McKinsey & Co. study entitled “The Granularity of Growth.” “There is growth everywhere, there is opportunity everywhere,” he says. “This is a huge population shift and also a link to urbanization and the rise of the middle class in this era of knowledge. These consumers become an emerging [population], [they] merge into consumption. Beauty is the first category that they want to participate in.”

And they are young. Quintero notes that the average age of the 75 million people in Turkey is 28 years old. That bodes well for the future, since young women, who are now largely using functional beauty products, are stepping onto the evolution escalator at an early age. Fischer adds that 92 percent of the population is under age 60, and 37 percent is between the ages of 25 and 49.

Clinique estimates that the average per capita spend on beauty products in Turkey is $40 a year. Quintero says Turkey’s traditional beauty market is $1.3 billion—both mass and class—with prestige accounting for only $200 million. But the upper market is growing 12 to 14 percent a year. Clinique, which bills itself as the prestige leader, is chalking up gains around 24 percent.

Like most Middle Eastern countries, fragrance is the biggest segment with 45 percent of the business. Skin care follows at 35 percent and makeup lags at 20 percent. “This has a lot to do with cultural issues because it’s a Muslim country,” Quintero says. “There is still a portion of the population that is very careful about makeup usage.”

One advantage Turkey has is a small but well-established distribution infrastructure, starting with two midtier departments stores—Boyner, with 38 doors, and the 30-store YKM, with the former chain acquiring the later. A new powerful force is the rise of the multi-unit specialty store, the Turkish equivalent of Ulta. One chain is Tekin Acar with 76 stores, many in second-tier cities. “These emerging cities are where middle-class consumers are residing,” Quintero says. Another local chain, a perfumery called Sevil, has 44 doors. Sephora has 19 stores and Douglas, 14. Added to this is the rise of malls and shopping centers, as well as freestanding stores. “What you end up having is a very modern, fast-growing distribution mix,” Quintero says, noting that it took 10 years for other markets to develop this level of retail sophistication. “In Turkey, things are happening in three, five years,” he says, adding that the e-commerce business is growing faster in Turkey than in some developed markets.

Due to the influx of Russian and other tourists from the East, Turkey also does a brisk business in travel retail. Eric Henry, chief operating officer of Beauté Prestige International, says that Istanbul airport ranks in the top five of European travel retail hubs. Remi Julliand, regional sales manager for Europe at BPI, points out that the entire select market in Turkey adds up to only 274 doors. There is also a concentration of wealth, with Istanbul ranking fourth in the world in number of billionaires (34). “There is a lot of wealth in Turkey, but it’s concentrated in a few hands,” he says. Turkey’s total gross domestic product amounted to $789 billion in 2012, making it the 17th-largest economy in the world. But in terms of GDP per person, the country’s rank drops to 64th when the wealth is divided by the diverse population, Julliand says. Fischer also picked up on the theme of the two Turkeys—the secular elite and the masses. He said that one challenge the market faces it that “it’s very concentrated in a few cities [Istanbul, Ankara and the Coastal region]. It’s not a broad-based development.”

But when the conversation returns to the young, urbanized middle class, Fischer’s enthusiasm boils up. “They have strong purchasing power, they’re moving up, they are well-educated in a stable economy,” he says. “Their prospects are about spending and having a better life.”