Professional Documents
Culture Documents
1. OVERVIEW
The market for consumer goods is developing rapidly in Russia. The local
consumption of consumer goods has steadily increased since the early 1990's.
Survey of the local consumer trends by cosmetics publications show that
cosmetics products rank second in terms of volume of consumption, in the non-
food group, a market similar to European countries.
The surveys show that the Russian market for cosmetics is very receptive to
U.S.-made products. Products from such American companies as Mary Kay,
Revlon, Proctor & Gamble, and Johnson & Johnson have been well received by
local consumers and are increasing their sales in Russia. Male consumers use
such perfume brands as Denim and Harley-Davidson almost exclusively.
Competition in the Russian market is high with many of the world's largest
cosmetics companies operating in Russia. French products, especially perfumes,
traditionally considered to be the best in the world, are serious competitors to
U.S. products that have only recently entered the local market. Domestically -
produced cosmetics compete with imported products at lower prices. Other
foreign brands are well established in the market (Lumene, Finland; Dzintars,
Latvia; Lakme, India), or have aggressively expanded their market niches during
the past several years (Oriflame, Sweden; Doctor Nature, Israel).
As is true in Europe, the level of competition will determine the level of expenses
that the company faces in successfully entering the market. Television
advertising is the most effective means, though it is also the most expensive.
American and European cosmetics suppliers are competing with each other in
Russia in various other advertising media, including magazines,
billboards/posters, and live presentations.
Still, with this heavy competition, there are market niches that have not yet been
filled. In the perfume subsector, for example, the Russian market is just starting
to take off and has substantial room for expansion. According to local business
representatives, elite/luxury cosmetics are projected to grow rapidly in the years
ahead. Despite their high cost, these elite products are appealing to more and
more consumers, even though the majority of the population still cannot afford to
become regular consumers of these brands.
The distribution system in Russia has improved, compared to previous years,
and there are now literally thousands of wholesale companies operating in the
field of cosmetics products. Nevertheless, many well-known foreign companies
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Each of these large groups is represented by a wide range of brands, both for
men and women.
Cosmetic products can be also classified along the following lines:
It is the image of the manufacturer in the world market that helps determine the
price of the product, not just its actual cost. Luxury cosmetics, primarily those
produced in France, are the most expensive. The retail price of luxury lipstick, for
example, may range from USD 15 to USD 30, as compared to the mass
products' price of USD 2 - 10. Consumer market research shows that in Russia's
large cities, where spendable income is much higher than in the regions, only
about 10 - 15 percent of the population can afford luxury cosmetic products.
Further, even "mass market" products are often perceived as "middle class" by
the users of inexpensive consumer goods.
3. Market Segmentation:
Make-up:
Make-up products represent a major segment of the cosmetic market. According
to a survey taken by "Gallup Media" in 1998 and based on a qualified number of
interviews, more than 80 percent of Russian women over 16 years old use make-
up products, with the predominant use by women of 25 - 35 years old. The most
popular individual product is lipstick, which is used by 83 percent of women. The
second most frequently used product is mascara, which is used by 60 percent of
Russian women, followed by nail polish (50 percent). The lowest demand is in
facial creams. In terms of the market share of various make-up products, lipsticks
represent almost 50 percent of the make-up sector.
Perfumes:
In Russia, fragrances with long-lasting scents (up to 6 hours) are in greatest
demand. Eau de toilette come in second place. The Gallup survey results show
the following products are in the highest demand in the perfume subsector in
Russia's urban areas:
1. Deodorants
2. Perfumes
3. Eau de toilette for women
4. Eau de toilette for men.
Toothpaste:
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store assistant acts as a consultant and advisor to the customer on the products
offered and their use. That requires considerable staff training from companies
selling cosmetic products.
In general, any imported cosmetic product has strong prospects in the Russian
market if it can be offered at a competitive price and quality. The key is to avoid
unnecessary logistical and service costs, although a new-to-market firm should
be prepared for start-up costs. Many firms have found it sensible to test the
market with direct sales to local dealers, thus avoiding tax complications within
Russia. Others have chosen to begin operations in a regional market within
Russia, deliberately avoiding a Moscow presence. Still other firms have chosen
to market their products directly from overseas in order to minimize reliance on
intermediaries. This approach offers some cost advantages since compensation
of sales representatives is largely based on commission. However, this also adds
to transportation costs and extends the time of delivery, along with potential
delays at Russian Customs.
New products, if professionally marketed, could enjoy significant opportunities in
Russia. The markets for perfumes and skin-care products, for instance, have
significant room for expansion. However, aggressive promotion strategies are
necessary to compete and maintain market share with the traditionally well-
recognized trade marks.
A previously poor distribution system in Russia has improved. Nevertheless,
Moscow-based retailers and distributors still possess considerable market power.
More information on the distribution networks in Russia that U.S. cosmetics
suppliers may use is provided in the End-User Analysis section at the end of this
report.
Many local market research specialists have forecasted rapid development in the
cosmetics market in the regions of Russia in the near future. While a large
number of wholesale companies distribute cosmetic products in large Russian
cities, such as Moscow, St. Petersburg, Vladivostok, and Yekaterinburg, only a
few large wholesalers represent cosmetic products in smaller cities, such as
Rostov, Samara, Nizhnevartovsk, Murmansk, Vologda, and others. However,
one-half of all domestic production facilities in Russia is located in the Moscow
and Central Russian regions. Other regions must rely on the available distribution
network.
The regional markets are experiencing limited choice of cosmetic products, both
domestically produced and imported. Any cosmetic product line new to Russia's
regional markets but able to move quickly into these markets has great potential.
If average incomes in such developing industrial areas as Siberia, the Urals,
Northwest, or the Volga region, continue to increase over the next several years,
the market potential for luxury cosmetics that are actively promoted there could
increase exponentially.
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The best prospects for suppliers of cosmetics in the next three years will be in
new product lines for all categories of cosmetic products, specifically in women's
perfumes and skin-care products containing natural ingredients. Also, as
mentioned above, the luxury cosmetic market in Russia will begin to shift into the
regions and provinces over the next three years.
On the whole, cosmetics companies looking to sell their products in the Russian
market should be prepared to undertake the following actions:
- initial investment in advertising and promotion campaigns to establish the
image of the product in the market;
- registration of trademarks;
- establishing a reliable distribution and sales network;
- expansion of sales areas beyond the Moscow and the St. Petersburg regions;
- expansion of range of products offered.
5. Companies in the market (Competetive analysis)
In general, the Russian market is very receptive to U.S. cosmetics products. The
product lines of such American companies such as Estee Lauder, Avon, Revlon,
Mary Kay, Proctor & Gamble, Colgate, and Johnson & Johnson are extremely
popular and enjoy excellent reputations due to their high quality, attractive
packaging, and range of products. The strongest competitors to American
exporters of cosmetic products, especially in the perfume subsector, are French
brands considered to be "traditional" leaders in the world cosmetics market.
The world's two largest producers of cosmetics, L'Oreal (France) and Proctor &
Gamble (U.S.A.), (the latter represented by such product trade marks as Blend-
a-Med, Max Factor, Camay, Old Spice, Head and Shoulders, Vidal Sassoon,
Pantene ProV, and Safeguard), share 25 - 30 percent of the Russian market.
Finnish and Swedish cosmetics manufacturers are also competitive due to their
extensive knowledge of the Russian business environment, largely due to their
long presence in the market.
Other well-known producers in the Russian market are Unilever (Netherlands),
represented by brand names as Dove, Lux, Pepsodent, Signal, Sunsilk, Timotei,
Impulse, and Rexona; Oriflame (Sweden); Avon (U.S.A.); Revlon (U.S.A.); Mary
Kay (U.S.A.); Christian Dior (France); Lancome (France); and Estee Lauder
(U.S.A.). Local producers and Eastern European firms from Bulgaria and Poland
compete with Western importers primarily at the lower price levels, although they
lack the quality of more expensive brands.
Let’s take a look at Countries' Share:
The Russian cosmetics market has seen intense competition among foreign
producers. Table I below shows that French and local fragrances dominate the
perfume market, with the former known for their excellence and tradition in this
product line, and the latter, popular due to their low prices and relatively good
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quality. Since they are relatively new to the Russian market, American fragrances
for women have not yet gained sufficient exposure to gain a major share.
On the other hand, as shown in Table II, Russian male customers seem to prefer
U.S. fragrances to the exclusion of local products. Such brands as Gillette,
Denim Tornado, and Legendary Harley-Davidson, have been heavily advertised
on all Russian television channels for about three years, which has resulted in a
wide recognition of these brands.
In the make-up subsector (Table III), French and Scandinavian brands actively
compete with American products. U.S. skin-care products, while not leaders, are
steadily gaining market share (see Table IV). For example, the American firm,
Revlon, is comparatively new to the Russian market but is quickly increasing its
sales due to its reputation for quality as well as an effective advertising
campaign.
Scandinavian cosmetics are traditionally popular in Russia. Some analysts
attribute this popularity to similar climate conditions in Finland and Sweden and
the northern and central parts of Russia. The name of Lumene (Finland) has
been known in Russia for decades and is still very popular in the make-up and
skin-care sectors. On the other hand, the Swedish firm, Oriflame, introduced its
products in Moscow about four years ago, and while its products have been
actively sold in other Russian cities for only a couple of years, they are already
well known to Russian consumers since the firm uses all available means of
advertising and sales practices.
During the past three or four years, skin-care products, such as creams, face
scrubs and bath salts made in Israel, have become popular with the Russian
customers. Brands such as "Doctor Nature" are recommended by cosmetologists
and recognized by consumers for containing natural solutions from the Dead
Sea. However, Israeli-made cosmetics have not yet taken a significant market
share in Russia.
Producers in Eastern Europe dominated foreign imports in the Soviet era, with
products like Polish-made facial creams and Bulgarian toothpastes. The share of
cosmetics products produced in Bulgaria, Poland, and Hungary has been
steadily decreasing over the past five years. Nevertheless, many consumers are
still devoted to these products, especially in the skin-care and hygienic product
subgroups. These products are inexpensive, sometimes less expensive than
locally manufactured cosmetics, but are traditionally considered by some
consumers to be of better quality than those produced locally. On the whole,
however, these cosmetics products hold only a minor market share.
6. Local production
Local production of cosmetic products has experienced a steady decline in
recent years. The industry's problems reflect the general decline in the Russian
economy as a whole following the disruption of the centrally planned links
between suppliers and consumers that existed in the former Soviet Union.
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Financing often has not been available to help these companies during this
period of difficult transition.
At present, local manufacturers are importing various components used in the
cosmetics production process, in particular, fragrances and oils. As many of
these components are sourced from foreign countries such as France,
production costs for Russian cosmetic companies have increased considerably.
As a result, retail prices have risen, and sales have decreased. The
competitiveness of Russian cosmetics products is also hampered by unattractive
packaging and limited range in their product lines. Consequently, domestic
production, at this point, cannot satisfy the growing demand of the market.
Nevertheless, with the low level of income of the average Russian consumer,
domestic manufacturers still command a large share of the cosmetics market in
the middle and low priced segment. In some product subsectors, such local
companies as Svoboda and Nevskaya Kosmetika have taken about 50 percent
of the market, and are market leaders in the skin-care product sector.
Local producers are developing new product lines for the mass cosmetics
market. Russian cosmetics research centers are well recognized locally for their
scientific work. Several large research centers have established private
companies that manufacture and market special cosmetic preparations; for
example, the Nizar Joint Stock Company was established by the Russian Central
Hematology and Blood Transfusion Institute in 1991.
A number of Russian cosmetics manufacturing companies were capable of
overcoming the difficulties of the recent transition period and have gained
recognition and success in the Russian market. In 1997, the Russian Perfume and
Cosmetics Association initiated a local "product quality and performance" contest
among the largest Russian manufacturers. The results of this contest showed that
the most frequently mentioned brands were Severnoye Siyanie (in the perfume
sector); Lans Cosmetics, Nizar, and April (for skin-care products); Linda and
Nevskaya Kosmetika (for hair-care products and soaps); and Svoboda (for
toothpastes).
7. Market balance indexes state
The following tables indicate the ten most popular brands in the four market
subgroups.
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Table I
Ladies' Perfume:
4,70% 3,00%
15,70%
4,70%
Flowers of Russia (Russia)
Poison (France)
9,70%
Climat (France)
Red Moscow (Russia)
13,70%
Zlato Skifov (Russia)
Kenzo (France)
9,70%
Salvador Dali (France)
Miss Dior (France)
Opium (France)
13,50% Magie Noir (France)
11,80%
13,30%
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Table II
Men's Perfume:
Gillette (USA)
Table III
Make-Up Products:
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Table IV
Skin-Care Products:
Svoboda (Russia)
Nivea (Germany)
11,00% 6,50% 6,20% Avon (USA)
13,00% 6,20% Oriflame (Sweden)
5,70%
Pond's (USA)
Mary Kay (USA)
13,50% 5,40%
5,40% Linda (Russia)
27,00% J onhson's PH 5.5 (USA)
Florena (Germany)
J ohnson's Baby (USA)
8. END-USER ANALYSIS
Wholesale Companies
At present, while there are about 150 large manufacturers of cosmetic products
in Russia, thousands of wholesale companies are involved in the distribution of
these products. However, the main distribution network is concentrated in
Moscow, St. Petersburg, Novosibirsk, Vladivostok, and other large cities.
For the most part, most distributors have not expanded into regional industrial
areas. The number of dealers and retail stores that are working with the large
Russian wholesalers of cosmetics in small Russian towns and rural areas is very
limited. The largest Russian manufacturers of cosmetics are located in nine
regions of the country, with 16 percent of the manufacturing facilities located in
Northwest Russia and 17 percent in the Urals. However, most of the production
is in the central Russian region. So far, the distributors of locally produced
cosmetics have tended to stay in regions close to the manufacturers.
Wholesalers of imported products have also found it easier to work primarily in
large cities.
Companies selling cosmetics products in Russia generally fall into two
categories:
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Retailers
Wholesale firms further distribute cosmetics products to retail stores. Cosmetics
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Individual Consumers
The average consumer of cosmetics products in Russia is, on the whole, less
predictable than his/her counterpart in other countries. Very few customers prefer
a specific brand to the exclusion of all others. They are often drawn to products
with the sign "new" on the packaging. While in other product sectors consumers
often choose to buy only those products that they can afford, it is not uncommon
for a Russian woman to economize on food and other essentials in order to buy
quality cosmetics "to look nice".
Further, the psychology of the Russian middle-class consumer is often based on
the idea that it is more economical to buy high-quality products than to waste
money on a cosmetics product of lower value which he or she may not like, or
will not measure up to their satisfaction. Many Russian consumers with relatively
low incomes, who live in large cities and have access to information on the world
of fashion, choose consumer goods on the principle, "We are too poor to buy
cheap things."
Cosmetics products are also often chosen as gifts, and an ordinary customer is
often prepared to spend much more on a gift for someone else than he/she can
ever afford to buy for him/herself. Sales of cosmetics often increase with
seasonal gift-giving, particularly during the last two weeks of December; before
New Year's Eve (in Russia, on December 31); before February 23, historically,
Soviet Army Day, which is now seen just as Men's Day when women present
men with gifts; and the weeks before one of Russia's favorite holidays, Women's
Day (March 8). St. Valentine's Day is not yet popular in Russia, although more
people have recently begun to recognize it as a gift-giving holiday.
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9. MARKET ACCESS
There are no insurmountable obstacles to entering the Russian cosmetics
market. However, the competitive factor presents a substantial challenge to
American companies wishing to establish themselves in Russia.
Import duties on cosmetics products are 23 percent. That includes an additional
three percent import tax recently imposed on all imports by the Russian
Government as a part of the "anti-crisis" package. Also, Russian importers must
pay a value-added tax, which is currently set at 20 percent.
Product Certification
Russian laws "On Certification" and "On Protection of Consumer's Rights" and
related Government regulations impose strict safety requirements on imported
cosmetic products in Russia. These laws require that imported cosmetics must
have a special safety certificate issued by the appropriate local certification
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center. Since these procedures take time, local experts recommend that foreign
exporters and/or their Russian partners begin preparations for obtaining the
proper documentation before any sales contract is concluded. If a product has
not been certified and safety certification has not been received, Russian
customs may suspend shipment at the point of entry. Consequently, pre-contract
certification is a safer and a significantly cheaper way to import and distribute
products in Russia.
Certification centers accredited by GOSSTANDART, the national standards
agency, are in charge of issuing safety certificates for virtually all products to be
used by the Russian public. A safety certificate issued by any official certification
body is valid throughout Russia. Companies can obtain safety certification
through the issuance of a hygienic certificate from a Sanitary Epidemiological
Control Agency (Sanepidnadzor) of a given area.
Sanepidnadzor carries out microbiological, chemical, toxicological and clinical-
laboratory tests on imported shampoos, nail polishes, toothpastes, perfumes,
lotions, powders, and other products. To conduct these tests, Sanepidnadzor
requires product samples, a certificate from the country of origin, data on product
ingredients, and the application itself.
A company is therefore required to submit the following documentation to the
certification center: the hygienic certificate; a certificate from the manufacturer; a
certificate of ingredients and applications (in Russian); a certificate of the country
of origin; application for certification in a special format available at the local
certification centers; and four samples of the product.
Foreign quality marks (for example, those "clinically tested" in another country)
with the exceptions noted below or a "good manufacturing practice" (GMP) label
on the product, do not substitute for a Russian safety certificate. Therefore,
foreign firms must complete the certification process in Russia, regardless of
what products they plan to distribute or the reputation of the exporter. The only
foreign quality certificates accepted in Russia are of the German DIN-GOST-TUV
and of the Swiss SGS, or other foreign certification agencies that have mutual
recognition agreements with GOSSTANDART. Foreign products holding such
certification need not be re-certified in Russia.
The costs of the testing procedures may vary, depending on the number of tests
required, but usually averages USD 100. If the results of these tests are positive,
Sanepidnadzor will produce a hygienic certificate for the product. According to
local certification specialists, in Russia, the cheapest cosmetic product for testing
and certification is nail polish; the most expensive one is toothpaste.
Labeling
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Today, as Russian shelves are full of a wide range of imported goods, proper
labeling has become an important factor in order to sell cosmetic goods
successfully. Basically, the rules for selling goods in Russia are the same as
those practiced elsewhere. Therefore, foreign companies are advised to use the
same practices that they use in their countries. Taking into consideration the
excellent reputation of foreign-made cosmetics in the Russian market, these
brands are likely to be sold on a wide scale once the labels are adapted to
Russian standards.
The Antitrust Law of the Russian Federation requires that all the labels should be
either in Russian or both in a foreign language(s) and in Russian. According to
the Russian Federation Law on Protection of Consumers Rights, consumer
products must be labeled with the following information:
- all required standards met;
- primary consumer features of the product, including composition and
ingredients, the amount of potentially harmful ingredients, as well as
weight/volume;
- instructions for use (many firms prefer that the packaging of the product
contains the initial instructions made in the language of the country of origin,
while the instructions translated into Russian are enclosed in the packaging box
or affixed to the outside);
- expiration dates or limits to product utility, and instructions for proper disposal of
expired product;
- information on possible reactions to a given cosmetic product and their
consequences.
Advertising
also sponsor various popular television shows and other events that attract local
attention.
Street posters are widely used to advertise cosmetics products in large cities.
However, a visitor to a provincial Russian town would immediately notice
significantly less public advertising there, as compared to Moscow or St.
Petersburg. Advertising on the Metro (subway) in major cities is a relatively new
phenomenon since the management of the municipal Metro networks in Russian
cities have been reluctant to allow for too many posters in Metro stations, in order
to preserve the traditional individuality of each Metro stop. Only a few advertising
agencies in big cities have access to agreements with the Metro management.
STRENGTHS, OPPORTUNITIES
Image
Traditionally, Malaysian products in Russia generally have a higher quality
perception than similar products from other South East Asia countries and China.
The quality of Malaysian-made products bearing multi-national brands is a
testimony to the Russian consumers.
USD-denominated contracts
During last year, Euro gained 20% in value against the USD, which makes Euro-
denominated products and services less competitive in Russia. Importers prefer
to deal with companies, who denominate their contracts in USD. In this
connection, Malaysian companies, most of which quote their contractual prices in
USD have a strong advantage and may win over new customers.
Political and economic stability
Russia had recovered from the 1998 crisis already by 2001. Since then, the
country’s GDP is growing at approximately 5% per annum. The country has a
surplus in trade with other countries, brought forth by revenues from exports of
oil, gas and minerals. Incoming currency revenues encourage imports (+22.3%
in the first 6 months of 2003 compared to the corresponding period of the year
before).
Moscow and St. Petersburg account for the biggest share of merchandise trade
in the country.
Political risks of doing trading business in Russia are minimal.
Import tendencies
Since 1999 import volumes of cosmetics product group has increased
significantly (according to the data obtained from State Statistics Committee).
WEAKNESSES
Low level of awareness
Malaysian cosmetics can be found only in a few specialized stores, web sites of
major distributors.
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Distance
Long time of delivery is one of the most acute problems faced by importers of
Malaysia-made products. Often importers prefer to buy from EU companies just
because they offer considerably shorter period of delivery to Russia. For
example, a container loaded in France will reach Russia in just 5-7 days,
whereas Malaysia will be shipping it more than 1 month. Longer delivery time
affects turnover and increases other related expenditures of importing
companies.
Lack of goods EX-WAREHOUSE in Russia or EU countries
At the present time there are few Malaysian companies able to supply their
products ex-warehouse in Russia or EU countries. Delivery from warehouse
would considerably reduce time and transportation costs. However, a
warehousing project involves certain risks and investments. Malaysian
companies venturing to start such a project should find a reliable Russian partner
first. An alternative to setting up a warehouse in Russia would be to use
neighbouring countries (Finland, Estonia) as gateways to the Russian market.
Payment terms
The most common method of payment for foreign trade transactions in Russia is
TT.
However, importers are often unable to use the TT as a form of payment due to
the regulation #519 of the Central Bank of Russia, prescribing importers to
deposit 100% of prepayment until the goods have been shipped into Russia. This
regulation affects not only Malaysia but also other far-away countries like China,
the USA and others, since delivery from these destinations takes more than 1
month and the amount equal to the prepayment is tied up with the bank for all
this time.
An alternative mode of payment would be LC. However, the cost of opening LC
for Russian companies is very high as banks are charging a very high interest
rate and commission.
Nevertheless, we recommend Malaysian companies to request for a 30%
prepayment for the trial order, the balance to be covered by LC at sight. Other
methods of payment are also practiced. Terms are negotiable.
Language barrier
The official language in Russia is Russian. Business people prefer to use
Russian as well. Therefore, it is strongly recommended that promotion literature,
brochures and catalogues should be translated into Russian (a must for
participation in international trade fairs in Moscow). Often the companies fail to
reply to correspondence if the initial letter is written in any language other than
Russian.
THREATS
Competition from EU countries, China and Taiwan
The main competitors of Malaysia in this market sector are EU (France,
Germany, Italy, Austria, Sweden, Finland) companies and suppliers from USA,
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India, Poland, Bulgaria, Hungary, China, Japan, Latvia. Often EU traders have a
better position in the market, since they can offer quick delivery and extended
payment terms. Products from China and Taiwan dominate the low-end market.
Taiwan and China are Malaysia’s main competitors as suppliers of cosmetics.
Japan is defending the policy to be on the high-end market along with France.
11. Conclusion
The primary keys to success in the market for cosmetics products in Russia are:
1. Aggressive promotion of new products
2. Large-scale advertising
3. Cooperation with reputable and knowledgeable local distributors; and
expansion into regional markets with a wide range of products offered.
On the whole, Malaysian cosmetics companies looking to sell their products in
the Russian market should be prepared to undertake the following actions:
1. Initial investment in advertising and promotion campaigns to establish the
image of the product in the market
2. Registration of trademarks
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1. Hygienic products
2. Skin - care products
3. Hair–care products