Introduction
Companies within any industry always desire to maintain a high market share and therefore wish to develop mechanisms that will enable them minimize the number of entrants who often join the industry. According to the Angel on the web the Russian cosmetic industry forecasts has shown that Russia has emerged as one of the fastest
Growing cosmetic markets in the world and especially Europe and even during the recession the industry managed to grow annually by 8% furthermore even during the recent recession of 2008-10 women of Russia seemed unwilling to give up their makeup (Angelontheweb.com 2010).
It therefore becomes highly logical for an individual to deduce that many new entrants will be interested to enter into an industry that manages to grow even when there is a recession/ economic downturn. Furthermore there is evidence according to the Market Overview of the Russian Cosmetics Market, suggest that there exists a high degree of competition between industry participants are over 40 in number who struggle to get the largest market share.
With participants ranging from Cosmopack Pro Group, EMG Staraya, Krepost, Faberlic, Garmonia plus Jazz-Smell Kalina, Revlon, Avon, Procter & Gamble and many other competition who are either local or foreign. It is clear that the Russian cosmetic industry has attracted a lot of participants and will continue to attract more due to its growth pattern and constant demand by the consumers in Russia as suggested by (PNCOS industry Research Solutions 2010).
According to Michael porter 1990 p 34-52 the threat of entry depends on obstructions/barriers which are placed within a particular industry. When such barriers are minimal then companies existing within the industry are faced with a larger threat because new entrants can easily join the industry as compared to when such barriers are many. Euromonitor data, “Russia was in 2006 the fourth fastest growing cosmetic and toiletries market in the world.
According to Alexander (2008) Russians retail industry has been growing steadily since 2000 and therefore a Russians income is 70% disposable as compared to other European counterparts who have a disposable income of around 39-41%.Meaning that the Russian retail industry is highly attractive and therefore many companies especially in the color cosmetic industry would desire to enter this market and have a share of the pie.
Euro monitor’s forecasts expect the global cosmetics industry to have grown to global sales of $ 300 million by 2010-11 which will also mean increased sales of color cosmetics; furthermore world banks forecasts suggest that due to the increasing strength of the Ruble the Russian retail industry will increase its market size up to $ 800 billion (Aginsky 2007).
Economies of Scale
The larger chunk of companies within the Russian cosmetic industry including Revlon have huge factories that allow them to enjoy economies of scale as far as production is concerned and furthermore, buy their raw materials in large volumes therefore enjoying quantity discounts (Anderson 1982) furthermore these companies distribute products in very large batches ant therefore also get the chance to enjoy economies of distribution and therefore save on costs enabling them to maximize their profits.
It is through this process that such companies are able to enjoy economies of scale and consequently lower production costs which would normally be hard for emerging companies (Wheelen & Hunger 2002).
It therefore in turn becomes hand for prospective companies which have not achieved production efficiencies to enjoy economies of scale themselves and therefore incur huge costs when producing. Therefore it only becomes possible for companies such as Revlon who are known tom have capacity to enjoy economies of scale to operate within the industry (BAC 2011).
Therefore small companies who do not enjoy economies of scale and therefore may be faced with incremental costs during the process of production and distribution see this as a barrier to entry which reduces the level of competitive intensity within the industry by reducing the number of companies which can participate In selling color cosmetic to the Russian population (Worthington & Britton 2009).
Product Differentiation
Revlon has the ability to spend millions in research and therefore produce highly differentiated products. Recently Revlon has launched Revlon Eye Spy shadow which is a highly differentiated and designed product that has been developed as a result of a superior marketing mix by the staff of Revlon.
It is therefore appropriate to conclude that it will become highly difficult for those companies who do not have the basis of differentiating products to successfully enter the market (Camillus1986). Companies like Revlon who have the ability conduct research and development to highly differentiate and brand their products therefore increase the intensity of competition and can easily remain dominant in such an industry.
The same is the case for other industry participants such as Cosmopack Pro Group, EMG Staraya, Krepost, Faberlic, Garmonia plus Jazz-Smell Kalina, Revlon, and Avon who strife to highly differentiate their products and make them unique for their target market, this makes it harder for new entrants who lack the capacity to do so avoid that industry by placing higher entry barriers.
Capital Requirements
The color cosmetics industry is a highly capital intensive industry. The industry usually requires a lot of funds to conduct product research and develop a perfect marketing mix. Furthermore production of cosmetics involves rigorous testing which is done in expensive laboratories which are done by extremely learned scientists who apply their tests to subjects, this process is not cheap and ensures make sure that cosmetic products are safe and good for human use.
Revlon is capable of raising such funds because it is a publicly listed company and has total assets worth over $ 750 million and an operating income of $ 180 Million (Revlon website 2010).
Furthermore it has over 6000 employees who are quite able of assisting it conduct its multinational operations. With such Resources Revlon will easily enter into this industry and operate well, while other prospective entrants may see the barriers to entry as very high within that industry and shun away from it, therefore the intensity of competition within the industry may either be lowered or moderate due to existing capital restrictions that are present ( Revlon website 2010).
When capital requirements of an industry are low then competition becomes cutthroat but in this case high levels of capital investments required in manufacturing, distribution and human capital reduces the intensity of competition (Wheelen & Hunger 2002).
Government policy
The Russian government intends to protect local industries and therefore imposes certain rules, procedures, tariffs, number of licenses and taxes for foreign cosmetic manufacturers, such as Revlon, Avon, and Beiersdorf. General importation duty and VAT of 15% &18% respectively are put on colour cosmetics (Alexander 2008).
Furthermore there are high quality standards and licensing procedures which are set to sustain high good manufacturing practices have made other foreign participants to prefer the option of partnering to export products color cosmetic products into Russia that preferably build factories.
According to leading sources in Euromonitor an Analyst stated that, “numerous western companies are exporting to Russia however the principal participants have invested in local production, Avon and Procter and Gamble are illustrating that indeed Russia is major focus for the global players”.
Russian certification is a must and compulsory for all companies, and whole entire process of certification & registration is usually long and tiresome and therefore the government advised companies to partner up with local companies (i.e. consultants, distributors, local representatives) so that the process may be hastened (Alexander 2008).
Industries with limited government intervention may usually end up overcrowded and saturated and may be subject to unfair competition which makes it hard for companies within the industry to enjoy super profits (Heide 1994). Therefore government policy is there to protect the industry from unfair competition and unnecessary saturation therefore regulating their intensity of competition within the industry while protecting local companies. Such procedures reduce and lower threats from new entrants.
Access distribution channels
Manufacturers of color cosmetic products depend on various distribution channels for them to sell their products, some of these distribution channels in the Russian market include Supermarkets who handle 9% of the total manufactured cosmetic products, pharmacies 3%, specialized retail outlets 24%, department stores 29%( PNCOS industry Research Solutions 2010).
Sometimes many distributors prefer working with existing clientele and may often deny new entrants shelve space and therefore placing barriers of entry making it hard for new entrants to enter the market (Heide 1994).
In the biggest retail cities of Russia such as Moscow’s, St Petersburg and other growing towns such as Novosibirsk, Nizhni Novgorod, Ekaterinburg, Samara, Omsk, Kazan, Cheliabinsk, Rostov-on-Don, Ufa, Volgograd, Perm are becoming hot sports and opportunities for business growth and therefore many companies selling color cosmetics are concentrating their efforts there, many retail stores within these areas are willing g to partner up with new entrants and stock their products and therefore lowering trade barriers and increasing the intensity of competition within Russia (Alexander 2008).
Direct marketing and sales is also becoming popular and is among the leading way of distributing products, infact In 2009, they accounted approximately 21% of total sales and revenues almost double the previous figures of 2008.
Prices and distribution are favorable for Russian consumers. Direct marketing is a distribution channel that is easy to establish because companies only need to set up a website, therefore such a technique can be followed by any participant s within the Russian industry therefore making competition more intense by allowing companies which find it more difficult to follow the traditional distribution channels.
Conclusion
A good industry therefore protects companies that operate within that industry by ensuring that barriers to entry are high and therefore any new prospective entrants find in hard for them to enter the industry (Wheelen & Hunger 2002). Then therefore this way companies like Revlon can reap the benefits of their investment within the Russian market and make returns.
The Russian cosmetic industry involves highly differentiated products that come around as a result of constructing an extensive marketing mix (Waterschoot &Bulte 1992) which is a capital intensive process. Therefore companies like Revlon which are known to have suitable core competencies can enjoy and earn good returns if they enter this market with suitable strategies.
Threat of substitute products or services
Substitute products are the kind of products that can be used by consumers and consequently satisfy the same need as the original product. Sometimes products such, as lipstick, eye liners, mascara, make up, concealed, powder and lip products may have substitutes. The numbers of substitutes in the Russian industry are very few and therefore the level of competitive intensity as far as competition between main products and substitutes is low.
Furthermore research shows that the women of Russia are addicted to color cosmetics and even during the recession they still maintained a high demand of these products, the demand of foreign brands is high due to a high level loyalty that Russian women exhibit towards well known foreign brands According to Global Impact Consulting.
According to the Aginsky consulting group research of 2007 an in-depth study revealed that Russian women start using color cosmetics and other cosmetic products when they turn 16 years old, while those in southern Russia start using these products when they hit 14 years old, while back in the 1980’s women started using these products when they attained majority.
Furthermore it is claimed by research done by the Aginsky consulting group that Russian women value their looks and always aim to look glorious and elegant and therefore this may be the main the reason behind their expenditure patterns. Salons and beauty parlors in Russia especially Moscow dominate the streets with highly colorful posters.
Therefore women of Russia prefer the real products because they trust them simply because they bring out the beauty and elegance in them and therefore they see substitutes as products which may be somehow phony and untrustworthy.
While other hand cheaper substitutes such as petroleum jelly can serve as substitutes of products such as lip balm and face make up they end up not satisfying the needs of Russian women, and therefore Russian women continue to spend more in color cosmetics this is according to the article crazy about cosmetics 2008.
Therefore since the available substitutes cannot satisfy the needs consumers usually will go for the real products which give them then thrill (Usunier1996). Therefore since there is little number of available direct substitutes in the Russian colour cosmetic industry then the intensity of competition is lowered.
According Aginsky Consulting Group 2007 the number of substitutes that can act as direct substitutes for color cosmetics within the Russian industry are very few, furthermore Russian women demand for products which come from cosmetic companies and have a high degree of loyalty that backs their need and demand patterns therefore making it hard for substitutes to break ground in that area. Therefore the intensity of competition in the Russian industry is reduced making it much better for participants who operate within the industry.
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