Michael Porter’s Model Analysis of the Russia’s Color Cosmetics Industry

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Table of Contents

Introduction
Bargaining power of buyers
Bargaining power of suppliers
References

Introduction

Revlon is a global leader in the beauty and personal care industry, focusing primarily on color cosmetic products. Since its establishment in 1932 by Charles Revson, Joseph Revson along with a chemist, Charles Lachman, it has grown to be a leading global brand name with subsidiaries all over the world. It is now eyeing the vibrant Russian market on its expansion plan.

However, before venturing into this highly competitive market, as per business requisites, it is required to conduct an investment feasibility study of extending Revlon’s color cosmetics products into the Russian market.

In this report we will conduct a PESTEL analysis to understand Russia’s attractiveness as a country and use the Michael Porter’s Five Competitive Forces Model – with a bias on the two major competitive forces of the model, namely the bargaining power of suppliers and bargaining power of buyers – to understand the competition in the Russian color cosmetics industry in order to determine its attractiveness as a market for Revlon and analyze the intensity of competition in Russia’s color cosmetics industry.

But, first let us get a general overview of Russian cosmetic industry to understand the market. According to the “Russian Cosmetics Market Forecast (2008-2012),” Russia is emerging as one of the most vibrant cosmetics industry within Europe; figuratively, as ofo 2008 the industry enjoyed a growth of approximately 9-14 % annually (Global Impact 2010) and for the first time the industry hit the US$ 9 billion mark.

This trend can be attributed to factors such as growing per capita purchasing on cosmetics, promising consumer preferences, growing products creativeness and the attractiveness of the Russian cosmetic industry that has attracted many international players in the market, which have shown the sustainability of the industry even in the long run. Even during the 2007-2009 global recession the market remained strong and as of now is expected to grow at approximately 8.8 percent annually during the 2010-2013 period (BAC 2011).

Figure 2. growth in the size of russian cosmetic industry before 2007 source alexander aginsky the russian blog.

The Russian color cosmetic industry is dominated by foreign giants who enjoy a significant 53% of the market share and the rest by local companies which command a 43% percent of the market share while (Podsushnaya 2010). The largest segment of Russian cosmetic industry belongs to hair care and color cosmetics each enjoying a sales share of approximately 18 and 17.7% respectively.

Figure 1. A pie chart representing the segment share by sales value of cosmetics in russia in 2008

Enough been noted of the Russian cosmetic industry, which seems to be favor of Revlon, we will now look at the two competitive forces of the model, that is, the bargaining power of suppliers and the bargaining power of buyers within Russia’s color cosmetics industry.

Bargaining power of buyers

Business in an international or multinational scale is not an easy affair as an organization deals with different types of buyers. It is therefore necessary that managers and those who are in top decision making organs in commercial organizations to know that their goals such as profits, revenues, survival, and growth will be ultimately affected by the bargaining power of buyers combined with political, economic, social, environmental and legal forces within an industry (Anderson 1982: Frey 2008).

According to porter’s model, the bargaining power of buyers drives competition (Wheelen & Hunger 2002; Worthington & Britton 2009).

In the case for the Russian cosmetic industry, the bargaining power of buyers will often affect the floor and ceiling price within the industry. The ceiling price within the cosmetic industry can be said to be the highest amount possible that a company like Revlon can be able to charge for its products, while on the other hand the floor price is simply the lowest price that it can charge for its products (Ansoff 1995; Howard 1957; Stevenson 1985).

Commercial organizations will always search avenues and peruse strategies that often reduce the bargaining power of buyers to increase chances of charging higher prices and increase their gross profit margins while on the other hand rational consumers will always struggle to push up their bargaining power and therefore and save on funds (Camillus 1986). The following are variables that may end up affecting the bargaining power of buyers in either direction:

A buyer purchases a huge fraction of the sellers product or service

According to Aginsky Consulting Group, Russians spend about 11-13% of their income on cosmetic products. Cosmetic retailers purchase 29%,Departmental stores 24%,direct sales 20%phamacies 10% and concept stores 55% therefore buyer who purchases a large portion of the total inventory of Revlon is more likely to have a higher bargaining power than that a client who buys a small portion.

Consumers who purchase large portions often end up demanding for large discounts as compared to those consumers who purchase smaller proportions (Kumar 1997; Hutt and Speh 1995).Therefore Cosmetic retailers will have a higher bargaining power than concept stores while pharmacies may have medium bargaining power.

Buyer has the potential to integrate backward

Backward integration is whereby a buyer can produce the product him/herself. When consumers either individual or institutional can produce the product itself i.e. products such as soap, lipstick, and other forms of products they in turn will increase their own bargaining power (Porter 1990).

Making cosmetics is a complex and expensive process, and the Russian industry does not have, or if there are very few, cottage industries or individuals who can make cosmetic products for their own subsistence consumption and therefore the bargaining power of buyers is low to this respect, therefore implying that companies such as Revlon enjoy a higher bargaining power (Podsushnaya, 2010).

Alternative suppliers

The number of participants within the Russian cosmetic industry is highly important, because the more the cosmetic companies the more the number of product options among the consumers. Consumers who are presented with a lot of options that come from Revlon’s competitors such as Svoboda, Ferberlia, Kosmetika, Nerskaya, Kalina and many others leave the consumer more empowered and consequently have a higher bargaining power (Waterschoot & Bulte 1992).

Consumers/buyers with a higher bargaining power serve as a threat to a commercial enterprises’ competitive advantage because they have the ability to push prices down. Conversely, when there are fewer options for consumers as it is the case for monopolistic businesses than their bargaining power is greatly reduced (Khermouch 2003).

Pyatyorochka, Perekryostok, Sedmoy Continent, Ramstore, Auchan, and Metro are some of the large retail outlet chains that interact directly with consumers by stocking mass market products therefore have the consumer’s freedom to choose to visit any of these stores making consumers enjoy high levels of bargaining power.

Changing supplier costs (switching costs)

Switching costs are the total costs that a consumer is expected to incur when he/she decides to move from one brand to another (Halinen 1995; Tait 2010). High switching costs translate to lower bargaining power for consumers and therefore intensity of competition within an industry increases.

For the Russian color cosmetics consumers, there are no switching costs for changing from one brand to another, thus new products it is easy to enter the market provided the products prove different from the rest and through the right marketing channel. Buyers therefore enjoy high levels of bargaining power (Tait 2007), making it suitable for free competition between industry participants.

A buyer earns low profits and consequently is very sensitive to cost and service differences

A buyer sometimes is a reseller, that is, somebody buys, say, Revlon’s products as a wholesaler/distributor who buys a product with the outright intention of reselling the products again to make profit (Anderson & Narus 1990; Dwyer, Schurr and Oh 1987).

These individuals and commercial enterprises in the market such as, Pyatyorochka, Perekryostok, Sedmoy Continent, Ramstore, Auchan, and Metro, become highly price sensitive because their purchases are based on future expected price margins. If their purchases mean that they will enjoy fewer profits then they may end up not stocking products of that supplier and therefore Revlon may enjoy moderate bargaining power and aim to those who stock their products (Ford 1990; Heide 1994).

Conclusion and recommendations

For Revlon to successfully penetrate the Russian market, given that the bargaining power of Russian cosmetic consumers is very high, it needs to find ways and means of reducing the bargaining power of buyers so that it can attain a significant market share, hence margins of Revenue. This can be achieved through strategic marketing, and promotions, pricing mechanisims and devise effective market penetration tactics.

Bargaining power of suppliers

According to the “Russian Cosmetic Industry Report”, the cosmetic market for mass section products is over-dominated by both local firms such as Kalina, Nerskaya Kosmetika, Svoboda, and Faberilic who enjoy a 43%-49% market share while 49%-53% market share belongs to foreign companies such as Procter & Gamble, Schwarzkopf & Henkel, Unilever and Beiersdorf.

The domestic manufacturers’ products are more preferred by the Russian consumers for foreign companies like P&G among others. Thus, for Revlon it is quite a challenge to penetrate the market though it is not impossible, and as a recommendation it needs to deliver to low end markets and pursue a cost leadership strategy (Kefela 2010).

Suppliers also consist of influential organizations or people; this is simply because the kind of products which they sell is raw materials. Without these raw materials than production will be disabled (Abell and John & Hammond 1979; Light and Laura 1992). Suppliers are individuals/companies who usually want or aim to maximize the profit margin of the product which they supply to their clients and therefore will always sell products at high prices.

Revlon sources its raw materials from multiple sources including farmers, pharmaceutical companies, plastic manufacturers and labs who manufacture chemical compounds. Each and every one of these supplier therefore aims to maximize his/her bargaining power while on the other hand Revlon wishes to pay less for raw materials and save on funds (Spekman & Johnston 1986).

It therefore becomes necessary for Revlon to formulate and implement strategies that will in turn reduce the bargaining power of suppliers and reduce the prices that they charge for raw materials (Kourdi 2009; Na. 2006).

It is important to know the cost of inputs can be used as a source of key company competencies as it is the case for Toyota motors. Toyota has successfully found avenues of reducing costs by sourcing the highest quality of raw materials from the cheapest sources within the industry. The following are factors that can affect the bargaining power of suppliers: (Weetman 2006).

If the supplier industry is subject to a few companies

When an entire industry has only a few suppliers and many buyers, the demand of raw materials increases tremendously and consequently the bargaining power of suppliers increases (Kitchen 2005; Jaber 2009).

The Russian cosmetic industry has many participants and numerous suppliers ranging from laboratories, farms and pharmaceutical manufacturers therefore suppliers have a lower bargaining power. The increased number of supplier options means that participants such as Revlon and others are entitled to a higher bargaining power when negotiating with suppliers.

If a product supplied by a supplier is unique or highly differentiated

Some suppliers produce highly differentiated raw materials to sell to their clientele. A good example is pharmaceutical products that are made from mixing numerous chemical compounds that are supplied to Revlon by leading world pharmaceutical companies that are used to make hair, oil and skin lotions.

These products are highly differentiated and come around as a result of high levels of differentiation that can only be obtained by scientists who spend a lot of resources and their time in laboratories and therefore pharmaceutical as suppliers gain more bargaining power (Lancaster & Withey 2006). Therefore suppliers who supply these products to Revlon have a high bargaining power.

Availability of substitutes

The availability of substitutes often means that there are more and more options on the table for those who purchase products (Lim 2009; Hiles 2010). But when there are no substitutes in an industry then suppliers are placed in a better competitive position.

Revlon being a multinational company, it sources its raw materials from numerous suppliers and has a lot of options for formulating cosmetics and therefore consequently has a high bargaining power when entering into contracts of supply with other suppliers. Therefore lowering the bargaining power of these suppliers.

The ability of suppliers to integrate forward

Sometimes suppliers are able to produce products that compete at the same time with their customers (Sinkovics & Ghauri 2009; Koontz & Weihrich 2009). For example pharmaceutical companies are able to produce products which at the same time compete with the products that are produced by Revlon therefore driving down the bargaining power of Revlon.

Some Participants within this industry act as suppliers of raw material and at the same time also produce end products therefore increasing the level of competitive intensity within the industry and their bargaining power as suppliers and consequently lowering the bargaining power of Revlon when they enter into contacts of supply (Alexander 2010).

When the purchasing industry buys only a small portion of the supplier’s product

Figure 3. An illustration various industries and the respective portions of the supplier’s product ( i.E cosmetics) that they purchase.

Suppliers may consider some of its customers unimportant simply because the customers who consist within this industry only form a very small portion of their sales (Charles et al 2009; Kotler & Keller 2006).

When suppliers are in such a position they may threaten their customers by either stating that the desire to exit from such industry and therefore increasing their bargaining power (Campbell et al 2002). Consequently, they will charge more for their products and services. In the case of 2.9% pharmacies industry represent a small portion of the total purchases that are bought from cosmetic companies.

Cosmetic companies who supply to this industry will have a higher bargaining power, conversely cosmetic companies serving Departmental store will have reduced bargaining power. When suppliers enjoy such high levels of bargaining power then industry participants like Revlon may often suffer by paying higher prices for supplies and hence proper material sourcing is required.

Conclusion and Recommendations

Looking at the high bargaining power of buyers and a low bargaining power of suppliers, it seems the Russian color cosmetics industry still has a lot of potential even for new entrants into the market, like Revlon. Revlon has plenty of resources at hand and it needs to exploit other means and mechanisms that will reduce the bargaining power of suppliers, while maintaining the bargaining power of suppliers.

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