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. Last Updated: 07/27/2016

Firms Miss Out on Cosmetics Boom

MTNew regulations aimed at cracking down on illegal alcohol production also affect perfumes containing alcohol.
Russians are expected to spend nearly $1 billion more on deodorant, perfume, lipstick and other personal care items this year than they did in 2005, but domestic producers are unlikely to cash in on this heightened attention to self-grooming, market research firm Staraya Krepost said Thursday.

Stiff competition from foreign companies, together with tougher licensing and tax rules, will likely push domestic producers' share of the cosmetics and perfume market -- worth $7 billion in 2005 -- to below last year's 40 percent, Staraya Krepost president Andrei Maslak told reporters.

"The first reason is the huge spending on marketing and research. Another important reason is Russian legislation," Maslak said.

Ironically, the Russian cosmetics industry is under pressure due to new legislation that is ostensibly aimed at cracking down on illegal alcohol production, but also catches in its net perfumes containing alcohol.

The 1998 economic crisis spooked foreign producers and helped Russian-made cosmetics win a 70 percent share of the market in 1999, but hard-nosed foreign competition returned with the economic upswing. In 2005, foreign products accounted for 60 percent of the market, according to Staraya Krepost.

"Western companies have more aggressive marketing tactics, greater resources," said Yelena Borodenko, Alfa Bank's consumer goods analyst. On average, they also have more advanced manufacturing equipment than domestic producers, she said.

U.S.-based Schwarzkopf & Henkel, with 6.1 percent, has the biggest share of the country's cosmetics market, followed by Procter & Gamble and France's L'Oreal with 6 percent each, and Sweden's Oriflame with 5.7 percent, Borodenko said.

Kalina, Russia's largest cosmetics producer and the only one that is publicly traded, is fifth, with 4.6 percent, Borodenko said.

Competition on the market will likely intensify after Russia completes its accession to the World Trade Organization, which is widely expected to happen this year.

The pressure on domestic producers has already begun to mount, however, in the form of changes to tax regulations and a new law regulating products that contain alcohol, which came into effect in January.

"The government has instituted strict controls [over alcohol], but it did not take into account how this will affect the cosmetics and perfume industry," said Vladimir Salev, executive director of the Perfumery and Cosmetics Association of Russia, which represents 70 member producers and retailers.

About 30 percent of cosmetics and perfume products contain alcohol, so new licensing and tax rules for alcoholic products mean big losses for domestic producers, he said.

New licensing rules for distributors, set to come into effect in July, will require them to pay 250,000 rubles ($9,000) per license to sell alcohol-containing products. This measure will dissuade many distributors from selling products containing alcohol, Salev said.

"Just compare the prices for hand creams and liquor sold in stores," he said. The license may not be too costly for liquor distributors, Salev said, but it is too expensive for cosmetics distributors, many of which are small and mid-sized businesses.

Foreign manufacturers will also be affected, but the new headaches may hit domestic producers hardest, as they already struggle to compete with foreign giants.

Salev was skeptical that new licensing rules would succeed in combating counterfeit liquor, but said that these and other changes were already translating into serious losses for cosmetics and perfumes manufacturers.

In addition, beginning this January, new excise taxes for products with more than 80 percent alcohol content more than doubled costs for some perfume producers.

Perfume sales, at 12 percent of Russia's personal care products market, lag behind hair care products (18 percent) and decorative cosmetics (17.7 percent).

Deodorant sales (5 percent) are second from the bottom, just above children's cosmetics (2 percent), according to Staraya Krepost.