Marketing U.S. cosmetics in the CIS - Commonwealth of Independent States - Russia & Ukraine

Chief Executive, The, June, 1992 by Sergei Glushko, Robert M. Donnelly

ICE last year introduced an American CEO to a Russian entrepreneur. The two joined forces to sell cosmetics in the Commonwealth.of Independent States. The Hazel Bishop line, manufactured by a subsidiary of Continental Health Affiliates, is even sponsoring a beauty contest. Who will be the first queen of Russian Red Lipsticks?

How do you make the transition from Marxism to a market economy in a country where the currency is virtually worthless, commercial technology is sparse, distribution systems are almost nonexistent and management talent is far from world class? That is the question I face as CEO of Kharkov, Ukraine-based Effect, the third largest manufacturer of perfumes and cosmetic products in the Commonwealth of Independent States.

In seeking to capitalize on a market of 290 million people with a pent-up demand for almost everything, we've begun the process of privatization, introduced our employees to Western-style marketing and accounting, streamlined our workforce and product lines and contracted with key suppliers of raw materials outside the CIS. But perhaps most important, we've launched joint ventures with Swedish and American partners to sell cosmetics and facilitate other deals.

RISK ENVIRONMENT

Following below is an account of Effect and its fledgling Western ventures. I hope it will prove instructive to other Western entrepreneurs hoping to do business in the CIS over the next several years.

Of course, newcomers to the business environment in the former Soviet Union continue to face considerable risk. There's still political turbulence here, the ruble isn't convertible, and as yet, there's no more than a bare-bones legal infrastructure in place. Nonetheless, innovative businessmen are finding plenty of ways to turn a profit. In the process, they are imparting considerable management expertise and helping us to become better partners.

One thing is for sure: Even in the midst of chaos and confusion, deals are being done. In the absence of an established business law, hordes of Western lawyers have descended on the CIS and are drawing up contracts ranging from shortform agreements for the sale of commodities to more complex contracts for joint ventures. Those favoring a rapid transition to a free-market economy

obviously are not waiting for the legal system to catch up. Russian entrepreneurs are being forced to go ahead of the law.

A NEW GOLD RUSH?

The pioneers in this new environment - which originated under the glasnost policies of Mikhail Gorbachev, the former Soviet president - were Western multinationals looking for big deals. Some, like AT&T, continue to buy stakes in emerging commonwealth enterprises. In fact, the giant telecommunications company just took a 39 percent position in a new company that will build, own and run the Ukraine's long-distance telephone network. Its partners are Dutch PTT Telecom (10 percent) and the Ukrainian Government (51 percent). AT&T plans to pay for its share by providing switching equipment. Some of the company's profits will come from hard currency payments on calls made into the Ukraine over the new network.

But many larger companies got cold feet, watched their early deals go awry, or were caught in the turmoil that last year swept away even Gorbachev himself. Typical deals now are smaller, simpler and easier to finance. Some shell-shocked veteran observers liken the business climate in the CIS to the U.S. "gold rush" of the 1800s. Some pioneers and entrepreneurs willing to take a risk are coming up big.

MOVING AHEAD

When Gosplan dissolved some time ago, I latched on with Effect. I began as an engineer, but later worked my way up to foreman, superintendent, managing director - and eventually "CEO." Effect has annual sales of around 250 million rubles (roughly $3.3 million). On average, it produces 800,000 items a day at a price of three rubles apiece.

Effect was part of the initial American-Soviet Trade Consortium. And with Johnson & Johnson, a member of the American Trade Consortium, it was one of the first joint ventures in the Soviet Union. In retrospect, it is clear the initial attempt by large American players to gain a toehold in our market was not feasible partly because of the lack of an infrastructure needed to sustain free-market enterprise.

On the lookout for new partners, I attended a meeting early in 1990 sponsored by Unilever N.V., the diversified Dutch multinational with more than $30 billion in annual sales. While at the meeting, I established a relationship with Emile Wolters, president of Parfusale ab in Uppsala, Sweden, an entrepreneur active in the worldwide cosmetics marketplace. This relationship led to another meeting, this one between the Swedish entrepreneur and his American associates. Subsequently, a new U.S.-based joint venture company, Peremena Russo-America, was formed. Co-author Bob Donnelly and I were both among the partners in this agreement.

Having established a vehicle to transact business outside of the Ukraine, I now had a base on which to build the Effect business. Then, in the Fall of 1991, Chief Executive editor J.P. Donlon introduced me to Effect's first real American partner, jack Rosen, CEO of Continental Health Affiliates in Englewood Cliffs, NJ. Rosen is also president of Hazel Bishop Cosmetics. We held initial discussions and compared notes on the business practices in our respective markets.