Russian cosmetics retailer to expand into smaller cities

The beauty retail chain is aiming to raise approximately €65 million, the estimated market price of up to 20 per cent of its shares for an IPO next year, Svetlana Ivanova, spokesperson for Arbat Prestige was reported to have said in The Moscow Times yesterday.

In recent years the Russian cosmetics sector has reported world leading growth in sales of cosmetics products, however, as with most of the retail sector in the country, this growth has mainly concentrated on the urban areas of Moscow and St. Petersburg, which until very recently were the only key cities with highly developed retail and distribution infrastructures.

As increased wealth created by a stabilized economy in Russia slowly trickles out into the smaller towns and cities in this vast country, both retailers and consumer businesses are now realizing the huge potential represented by the still relatively undeveloped urban areas beyond Moscow and St. Petersburg.

Arbat Prestige​ says it is interested in all Russian cities with a population of 1 million or more, where the retailer can see 'good potential'.

Currently the retailer has 20 stores in Moscow and its suburbs, as well as a further five in St. Petersburg, but with the potential growth in the Russian cosmetics market seen to be vast, a significant part of future growth is expected to come from urban populations further afield.

In line with these expectations, the cosmetics retailer is anticipating massive growth. In 2004 Arabat reported retail sales of $236 million (€200m), but it is is expecting that with its expansion into smaller cities that figure is set to more than double to $500 million by 2006.

Earlier this year, a report from Euromonitor International​ pointed out that between 2002 and 2003 the Russian market for cosmetics had grown by 14.3 per cent, with the skin care category showing growth of 30 per cent. Likewise the research company is predicting 60 per cent market growth in the course of the next five years.

Currently the Russian cosmetics market is valued at approximately $6.2 billion.

Like many cosmetics retailers and manufacturers, Arbat Prestige is pinning its expansion hopes on the improvement of distribution networks in Russia. In turn, this is allowing the industry to tap impressive growth in their geographic range by moving out to smaller cities, giving Russian consumers easier access to cosmetic products from shops.

Until now a great deal of the growth in the Russian cosmetics market outside the main metropolitan centres has been driven by direct sales. Euromonitor research shows that direct sales players such as Avon, Oriflame and Faberlic seized a share of 14.2 per cent of total cosmetics and toiletries sales in 2003.

But with cosmetics retailers now arming themselves to do battle in the smaller cities, the direct sales players could see a new challenge on their hands.