Post on 16-Jan-2017
Doing Business in Russia Project
Red One Hair Wax
Autumn semester 2015 Fitzka Alexander Kargl Dominik Van Lierop Jeremy
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Doing Business in Russia Project – Red One
Hair Wax
Table of contents
1. Executive Summary ................................................................................................ 2
2. Company Profile ..................................................................................................... 2
2.1 Company ........................................................................................................... 2
2.2 Product .............................................................................................................. 4
3. Market Analysis ...................................................................................................... 5
3.1 Survey ............................................................................................................... 5
3.2 PESTEL Analysis .............................................................................................. 6
3.3 Competition and trends ..................................................................................... 7
3.4 Key Success Factors ....................................................................................... 11
3.5 Porter’s five forces ........................................................................................... 12
4. SWOT Analysis .................................................................................................... 15
5. Financial Planning ................................................................................................ 17
6. Conclusion ............................................................................................................ 22
7. Appendix ............................................................................................................... 23
7.1 Results Questionnaire ..................................................................................... 23
7.2 Data set and variables ..................................................................................... 26
7.3 Calculation import duty .................................................................................... 27
7.4 Sources ........................................................................................................... 28
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1. Executive Summary
This business plan is related to give an overview about the start-up company “Red
One Distributions”. The team consisting of three motivated European Students plans
to sell hair care products of the Turkish manufacturer Red One in Russia. In the first
phase of the market entry, the company is going to focus on Moscow and the local
hairdressers. By approaching the final customers through two different channels, it is
possible to gain initial market share in the first time of the business activities. The
company will use two different sales channels: the first sales channel will be the point
of display sales at Moscow barbershops. The second sales channel will be an online
web shop; the shop will allow the company to reach more customers and serves also
as a plan B, in case for some reason, point of display sales at Moscow barbershops
fail to become successful.
With active marketing strategies aiming at the Key Success Factors of the market,
the brand awareness will be increased vastly in the first months. The capital, which is
needed to establish the business, is calculated in the financial part of the business
plan. Altogether, it is possible to finance the company with private deposits of the
team members and a bank loan of 10.000 Euros for the start. According to the plans,
the company should start to generate profits after the third quarter of its activities in
Moscow.
2. Company Profile
2.1 Company
The start-up company “Red One Distributions” is a partnership of Alexander Fitzka,
Dominik Kargl from Austria and Jeremy van Lierop from the Netherlands. The
company aims at being the largest distributor of Red One hair products on the
Russian market. The company is planning to start its first operations at January 1st
2016. The company will be financed by own savings and a bank loan of 10.000
euros.
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Mission statement
To unlock the potential of modern man by providing them the best quality hair
products for a fair price. Our aim is to make modern man feel confident, successful
and representable in every situation. We will realize this mission by becoming a
reputable distribution company, with personal service and high-standard Red One
products.
Vision
To become the Number-One distributor of Red One products on the Russian market.
Strategy
The company’s strategy is cornering a fledging market; a growing market of young
Russian men looking for hair products, which will allow them to look representable.
Red One Matte Wax will be imported and stored in large quantities from the
manufacturer Kırmızıgül in Turkey, before it will be redistributed to our Russian
customers.
Our team will use two different sales channels; Point of Display sales in barber shops
and an online web shop. In the first place, our strategy is to target barbershops where
a haircut for men costs no more than 500 Roubles, for the reason that these shops in
general are not yet engaged in contracts with expensive brands like L’Oréal, Hair
Mango and Kerastase. Companies with a contract are difficult to approach for Point
of Display Sales, since they have already made their commitment to competitor
brands. Less expensive barbershops can become committed to our brand. With
25.000 barber shops in Moscow and Moscow region, our target is to sign a contract
with one new barber shop every week.
Online sales by our web shop will become the most important sales channel ones the
awareness of Red One products has increased sufficiently. Both conventional and
online advertisements will help us to increase the popularity of Red One products. In
this digital era, a smooth-running, attractive and customer friendly website is the most
important asset of a distribution company like ours. Red One Matte Wax will also be
promoted and sold via the websites www.russia.tradekey.com and www.ru.all.biz .
Since the company will be financed mainly by our own savings, we want to keep
costs low and start with a minimum of assets. For distribution for example, we do not
plan to buy or lease a delivery van. Instead, the cheap and extensive public transport
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network in Moscow will be used to transport boxes with 48 cans of Red One Matte
Wax to barbershops. At the start of the company, we will hire one dedicated
employee, who is responsible for deliveries to barber shops by using the tram, metro
and bus network.
2.2 Product
Red One Matte Wax Full Force 150ml has the perfect
formula; the Wax is enriched with vitamins and creates
natural and long-lasting styles. Clay content makes hair
look mat and natural. Oiliness and hardening does not
occur on your hair. It can be easily removed by combing.
Unlike other hair wax, this product will not result in
pimples on the forehead. It can just as easily be washed
out like a gel and it has a subtle perfume of apple.
Red One Serial for men has been developed in accordance with the standards of the
professional hair dressers by means of environmental and innovative technologies.
Red One Serial for men that has been developed as a result of long term laboratory
activities both in the country and abroad.
Red One Serial for Men has been produced
by advanced technology under the hygienic
conditions in the new plants by combining
latest technology machine section and
qualified human power thanks to the
experience of Kırmızıgül for more than 20
years. Together with many hair dresser salons
in Turkey; Red One has been working in
collaboration with hair dresser chains in
Europe, Gulf countries and the Balkans. Red
One Products have been produced according
to international standards and the certificates
of GMP, ISO 14001:2004, ISO 9001:2008,
OHSAS 18001:2007 .
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At the point of sale, acrylic stands will be
distributed among contracted barbershops.
The stands together with Red One posters
will increase brand awareness and sales at
barber shops.
The Red One Matte Wax will be sold to
Moscow hairdressers for 350 Roubles
exclusive VAT, which is equal to 5 euros at
current exchange rates.
The price of one acrylic stand will
approximately be 20 euro’s with delivery costs included. Displaying the products in
the stands is part of the contract. The stands will be therefore be free for our
customers.
3. Market Analysis
3.1 Survey
In Russian supermarkets and hair salons there are almost no hair products for man.
This can both be seen as an opportunity as a threat for our start-up. Hair gel and hair
wax are not so widely adopted in Russia as in European countries. Russia has a
more traditional and masculine culture than most European countries and wearing
gel or wax is seen by a large proportion of the Russian population as not necessary
and unmanly. According to the results of our questionnaire; 22,7% of our
respondents believe that real man shouldn’t wear hair products.
On the other hand, these results can also be seen as an opportunity: the market is far
from saturated and especially young people identify themselves with a more Western
Lifestyle, which includes Apple products, English movies and Starbucks. We believe
that youth cultures can change quickly and that the demand for hair products for men
will be a growing market in Russia. To the multiple-response question: “Who would
use Red One hair wax?” Respondents provided us with the following results: 77.3%
of the respondents answered “Young People”, 27.3% answered “Business men”,
“Modern men” and “Professionals”.
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Political
Economical
Social
45% of our male respondents use gel or wax on a regular basis. Note that the sample
size of this research is too small to draw any hard conclusions. Furthermore the
respondents were mostly students aged between 18 and 23. The results can only be
used to mirror our assumptions.
The average price our respondents were willing to pay for Red One Matte Hair wax is
432 Roubles. The average price that man are willing to pay is higher: 542 Roubles. If
our company sets the sales price exclusive VAT at 350 Roubles, this will give room
for a standard profit margin for the hairdresser. For more information about the
questionnaire: see appendix.
3.2 PESTEL Analysis
The PESTEL-Analysis shows external factors that influence on the industry in
general. According to our analysis, the increasing trend towards hairstyle products
among men, Russian government’s import policy as well as the exchange rate
between Turkish Lira and Russian Rouble seem to be crucial external factors.
Political cooperation between Russia and Turkey
Russian Government’s import policies
Russian Government’s influence on the national currency (exchange rate risk)
Possible regulation of number of haircutters in Moscow
Purchasing power of Russians
Demand for hair products for men.
Recession
Inflation
Exchange rate fluctuations (high price for futures due to fluctuation)
Competition
Lifestyle-trend
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Technological
Ecological
Legal
Awareness of styling among men
Purchasing power of Russians
Trend towards buying hairstyle products directly at the haircutter
Technological advantages of leading European competitors
Low production costs due to cheap labour in Turkey
Low awareness of ecological issues in Russia might be an advantage as the
firm does not pursue a “green” policy
Laws imposed by Russian government that aim at reducing imports
Restrictions of using certain ingredients in the production process
3.3 Competition and trends
In 2014, Henkel was also the most dominant market leader in the area of hair care.
Even more, they were able to expand their market share to 25%. This further
increase in market share can be ascribed to the firm’s portfolio diversity and new
product launches in numerous categories. All these launches were supported by
strong advertising and marketing activities. Schwarzkopf & Henkel remained the
undisputed leader within hair care in 2014 with a value share of 25%. The leading
position of the company was due to its strongly diverse portfolio, a presence in
various categories and new product launches supported by strong marketing
promotions. A hair gel that can be compared with ours is Taft, which is already a well-
established product line of the company.
According to our research, natural products were more demanded in 2014 and this
trend seems to accelerate even further. Russian consumers of hair products seem to
have become keener on healthy hair and have become prepared to spend more
money on such products. However, styling agents complained about a drop of one
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percent in terms of volume. Regarding trends in future, we found out that the health
and nature trend should continue. Consumers will be even keener on knowing more
about the ingredients of the products they buy.1
Competitor Analysis
1 https://teamvadim.wordpress.com/2013/05/18/industry-analysis-russian-hair-care-market-overview-
and-m-porter-5-forces/ 2 Research company websites
FIRM2
STRATEGY GOALS CHARACTERISTICS CONCLUSION
HE
NK
EL
Being global leader in brands and technologies
Outperform – Simplify – Globalize - Inspire
Increase sales in Emerging markets
Product diversity
Reputation
Big market share
Economies of scale
Strong corporate culture
Innovation
- Coordination due to size - Expensive staff
Henkel is a serious
rival for us due to its
market power and
innovation
capabilities
P&
G
Building a better company
Value creation
Strengthening Business Units
Portfolio transformation
Productivity improvements
Product range expansion
Innovation
Productivity
Long-established company
Experience
- Reluctance to change the firm’s core values and purpose
- Decreased net sales in 2015
- Decreased core earnings in 2015
Very strong and
experienced
competitor with
strong core values
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Now we focused on potential competitors already. The chart listed below shows the
current market leaders by value in 2011. It enables us to see who the big rivals are.
Furthermore, the market segmentation shows the relative importance of hair gel in
comparison to the whole hair care market. As we can see, about 56.2% of the whole
market share can be attributed to three players, which means, that the market is quite
concentrated. The main characteristic of the market is that almost all competitors
have high fixed costs. Almost all of them have their production facilities by
themselves. This increases rivalry and represents some kind of lock-in. This means:
once invested, you are somehow forced to stay in the market. For consumers it is not
difficult to change the brand. Retailers, however, seem to be quite reluctant to switch
brands, as their own clients often appreciate the existing product range they offer.
UN
ILE
VE
R
Double the size of business
Reducing the ecological footprint
Increasing positive social impact
Profitable volume growth
Cost + leverage efficiency
Innovation & Marketing Investment
Sales growth
Long-established company
Margin improvement
- Brand preference - Sustainability - Talent
Business player that
represents
competitive
advantage in
reputation due to
sustainability aspects
L‘O
RE
AL
Universalisation, respecting differences in traditions, desires and needs
Beauty for all - mission
Attracting a billion new consumers
Expertise
Capability to innovate
Broad brand portfolio
Increasing operating profit in 2014
- Decreased investments in 2014
- Sustainability
Competitor with very
strong financial
performance, thus
very powerful
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Market Shares 20113
3 Euromonitor International, Hair Care market in Russia Report (May 2012)
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3.4 Key Success Factors
Analysis of Demand
Analysis of Competition
Who are the clients?
1. Final consumers (B2C)
2. Haircutters (B2B)
What do the clients demand?
B2C B2B
Availability Quality
Attractive prices Attractive prices
Quality
Diversification
Consumers have a growing
interest in products and their
ingredients and review
products from all available
sources.
High degree of competition due to
large number of competitors
Pressure to stay innovative and meet
current trends
Lucrative market due to changes in
values
Country in recession but positive
outlooks for following years
Almost 65% of market share
attributed to 4 firms
Key Success Factors
Costs Differentiation
As low fixed costs as possible,
to maintain flexibility in the
currently changing market
Economies of Scale
Efficient production
management
Cash-Management
Diversified high quality
products offering a good value
for money
Packaging must be an eye-
catcher
Promoting sustainability
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3.5 Porter’s five forces
Market definition
The target market for the product should be defined clearly, before it is examined in
detail. In case of Red One, the targeted group are hair dressers and their final
customers in the low and middle class segment. As shown in the market analysis
before, the premium hairdressers are already in long-term contracts with the big
producers of hair care products and thus offer no profitable business opportunities for
a new entrant like Red One. The market is further restricted to the city of Moscow,
which enables the analysis to give exact data about the local circumstances in this
region. The needed information was gathered through the survey and interviews with
local hairdressers in Moscow.
A common instrument for analysing the market conditions is the concept of Porter’s
five forces. With this framework, it is possible to examine the different relevant factors
in a target market and the findings of the analysis enables the company to develop
suitable entry strategies for different situations. In the following picture, you can see
an overview about the framework and the evaluation of each market force.
Subsequently, every force is described in more detail.
Porter’s five forces, red – strong market force, yellow – medium, green – not strong
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Bargaining power of customers
The company’s customers can be divided into two different parts. On the one hand,
the product is sold to hairdressers, where it is used for every-day business as well as
disposed to the final clients. On the other hand, people can also buy directly from
Red One, if they want to skip the intermediate for buying the product at a lower price
or in bigger quantities. Both customer groups have a big variety of potential hair care
producers and therefore quite a big choice when deciding what product to buy. This
choice can be diminished by contracts with hairdressers. These contracts can restrict
the number of different products in the assortment in the shop. In view of all that, the
bargaining power of customers can be seen as quite high. Therefore, this market
force should be considered while developing the best market entry strategy with Red
One products.
Bargaining power of suppliers
The company works as an intermediary to import the products from Red One Turkey
to Russia and hence this market force has to be examined in a special way. If it is
possible to establish an exclusive selling contract for Red One’s product in Russia,
the manufacturer has no other option to bring his product to the Russian market.
Therefore, the bargaining power after signing the contract can be described as low or
medium. As long as it is profitable for the manufacturer to work with the company as
an intermediate, there should be no problems with this market force.
Threat of new entrants
The threat of new entrants is connected with established barriers in the market. The
question is, if there are any factors, which prohibit companies to enter this market. In
the case of hair care products, such barriers can be hair care regulations and or
standards for cosmetic products. In 2012, Russia launched a new standard for
cosmetic products, which replaced the older very complex regulations for entering the
local market. The changes are meant to harmonize the Russian legislation with the
European Union’s and made it therefore much easier for European companies to
enter the market. To sum up, the market force can be considered middle, because
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there are still a lot of import regulations and the Russian bureaucracy is a further
barrier to new entrants.4
Substitutes
This market force relates to the amount of different products, which are designed to
satisfy the same customer need. In this case, different hair care products can be
considered, which are all produced by the big market players. Examples for that
would be hair sprays or fluid hair waxes, which people use to style their hair.
However, the force is not relevant for the market entry strategy of Red One and can
therefore be neglected.
Rivalry among existing market players
The last examined force reflects the current market situation in Russia. The findings
of the data gathering process show, that there are a few big market players, who
especially rule the business with premium class hairdressers. The most important
company is Schwarzkopf & Henkel, with a market share of approximately 25% in
2014. The contracts with the hairdressers are very strict and make it very hard for
small companies to enter this distribution channel. The competition in the target
segment is smaller but still an important factor and should be considered for the
further strategy of the business.5
The findings of this analysis can be transferred to the development of the market
entry strategy. It will be very important to challenge the existing players on the market
by very active marketing through different channels. There are cost effective
possibilities like online marketing, including marketing campaigns on Facebook or
Twitter. With these specific actions, it should be possible to attract new customers
and to gain market share. Furthermore, the unique benefits of the product should be
communicated to the target group in order to compete with the big amount of different
products on the market. Admittedly, there are threats in the Russian market for hair
care products and the competition is quite high. However, with the right actions, it
should be possible to overcome them and to establish a profitable new business.
4 http://www.premiumbeautynews.com/en/russia-the-new-cosmetic,3765
5 http://www.euromonitor.com/hair-care-in-russia/report
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4. SWOT Analysis
The SWOT (Strengths-Weaknesses-Opportunities-Threats) framework is the
connection between the internal analysis of the company and the findings of the
external market analysis. After investigating every field of the framework in detail, it is
possible to deviate strategy recommendations for the company. Red One should be
aware of all the threats of their business model, in order to set the right actions when
entering the Russian market.
Strengths
The biggest strength of the business model is the high quality product. Because of
low production costs in Turkey, the company is able to produce an excellent product
at a low selling price. Even with a quite high profit margin for the local seller in
Russia, it is possible to sell the product at better conditions than the competitors are
doing. The selling price of 350 Russian Roubles targets the middle class section of
the customer group and reflects a very good value for money. Moreover, the
exclusive selling contract with the manufacturer in Turkey enables the company to be
the only contact point for interested Russian customers. It should be possible to
establish strong relationships with the customers, in order to enable a stable demand
for the hair wax.
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Weaknesses
The company should be aware of the fact, that the products are produced in Turkey.
Even though the reputation of Turkish products is in Russia better than in middle
Europe, there are still doubts about the quality of these products. However, the
company has to show the customers the real quality of the product and the very good
value for money ratio.
Opportunities
The Russian market represents a big business opportunity for Red One’s products.
The market analysis showed that the expensive hairdressers are already in closed
contracts with the big market players like Henkel and P&G. Nevertheless, there is a
much bigger amount of medium to low class hairdressers, which have no contracts or
just a few products in their assortment. This is the target group of the company and
the strategy should focus on these customers. Starting in Moscow, the activities
could be expanded to other big Russian cities in order to further increase the
customer base. With an exclusive selling contract, the company is able to be the only
contact of Red One in Russia, which is an important advantage.
Threats
Of course, there are also threats for Red One in the Russian market. The big amount
of different products in the hair care sector is an important factor for new entries. The
customers have a big variety of different solutions and the hairdressers can work with
many different brands. It is very important to distinguish from competitors by
communicating the benefits of the product to hairdressers and final customers.
Another threat would be the legislation regarding the Russian cosmetic market. Every
market player has to respect these regulations and every change, which will maybe
appear in the future. A close contact with the manufacturer in Turkey is necessary to
control the recipes of the product and their fit to the Russian regulations.
Strategy Recommendations
In conclusion, the SWOT analysis leads to two major recommendations for the
market entry in Russia. Firstly, the company should focus their marketing to the
excellent value for money ratio of the product. The communication to the customer
groups should explain the benefits of the product especially for the middle and low
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class of the hair care segment. Customers can buy Red One hair wax and get very
good quality for a low price. The big amount of small hairdressers in Moscow, which
are not in contracts with the big market players, support this strategic decision and
reflect a very attractive target market. Secondly, the company should be aware of the
quality reputation of Turkish products. The customers have to be convinced by the
benefits of the product, otherwise they would not buy it. Again, it is recommended to
establish an active marketing campaign, in order to spread the brand name in the
target group.
5. Financial Planning
The following section shows a detailed financial planning for the ramp up phase of
the Red One Distribution Start-up. The income is planned for the first year quarterly
and shows the amount of needed capital. In order to finance the company, all three
partners provide each 10.000 Euros equity on their own and in addition, the company
will seek for a 10.000 Euros bank loan. This capital is sufficient to start the business
in Moscow.
Start-up costs and cost per product
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Forecasted start-up balance sheet
Income planning
Desk Research shows that 10% of the revenue of hair salons comes from the sale of
hair products. With an average monthly revenue of 5000 euro, this means that hair
salons earn assumingly 500 euro per month with the sale of hair products. We
assume that female customers account for most of the sales of hair products,
whereas man are less likely to buy hair products at a salon. Based on this
assumption, we expect a modest demand of 24 cans of Red One hair wax a month,
or 6 cans a week.
In order to obtain sufficient sales volumes, the best option seems to be to sell our
product to as many hair salons as possible and additionally to open our own web-
shop, which would allow us to increase our customer base.
For the first year, we set the following targets:
o Target 1: Open one new hair salon every week
o Target 2: After opening the web-shop, a minimum demand of 14 cans a week,
with a gradual increase in demand.
o Target 3: A weekly increase of online sales of 10% for quarter 1 and quarter 2.
o Target 4: A weekly increase of online sales of 5% for quarter 3 and 4.
Target 1 is based on the assumption that with our team of three sales representatives
and one employee responsible for delivery, it should be possible to visit multiple new
hair salons a day and to sign a contract with at least one new hair salon a week.
Target 3 to 4 are based on the assumption that a web shop will have rather low sales
in the first few weeks, but will show a steady growth trend as customers make re-
orders, and as the brand awareness increases due to our regular advertisements and
customers word-of-mouth advertisements.
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The following table shows the expected weekly demand and revenues for both hair
salons and the web shop based on our assumptions:
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6. Conclusion
With the gathered information it is possible, to get an in-depth understanding of the
hair care market in Russia and the target customer group of the Red One Distribution
company. The market entry strategy derives from the combination of internal factors
regarding the company and the external circumstances on the market. The most
important challenge for the start-up team will be, to grow market acceptance next to
already existing big brands. With active marketing at the Point-of-Sale and through
various online channels, it should be possible to spread the new brand very quickly.
Subsequently the sales are going to grow, when the awareness in the target group
will rise and the first hairdressers have entered into contracts with Red One
Distribution. Due to the calculated income plan, it should be possible to start making
profit after the first three quarters. The needed capital for the ramp-up phase is
provided by the project members and an additional bank loan. In conclusion, in can
be said, that the distribution of Red One Hair Care products is an attractive business
opportunity in Russia and it is possible, to start that business with a small amount of
capital.
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7. Appendix
7.1 Results Questionnaire
24 respondents: 8 men, 16 women age 18-23
$who Frequencies
Responses Percent of
Cases N Percent
Who would use gel or
hairwaxa
Young people 17 27,9% 77,3%
Businessman 6 9,8% 27,3%
Celebrities 5 8,2% 22,7%
Skaters 3 4,9% 13,6%
Men with problems with
hairdo 4 6,6% 18,2%
Gay 5 8,2% 22,7%
Modern men 6 9,8% 27,3%
Students 5 8,2% 22,7%
Professionals 6 9,8% 27,3%
Hipsters 4 6,6% 18,2%
Total 61 100,0% 277,3%
a. Dichotomy group tabulated at value 1.
$culture Frequencies
Responses Percent of Cases
N Percent
Which youth culture would use
thisa
Tennis players 4 7,3% 28,6%
Footbal Players 4 7,3% 28,6%
Students 6 10,9% 42,9%
Professionals 6 10,9% 42,9%
Celebrities 9 16,4% 64,3%
Hipsters 6 10,9% 42,9%
Stylish men 6 10,9% 42,9%
Skaters 5 9,1% 35,7%
Theater 6 10,9% 42,9%
Fitness guys 3 5,5% 21,4%
Total 55 100,0% 392,9%
a. Dichotomy group tabulated at value 1.
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Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
How much would people be
willing to pay for this
product?
24 50 1,000 432.29 252.001
Valid N (listwise) 24
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7.2 Data set and variables
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7.3 Calculation import duty
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7.4 Sources
https://teamvadim.wordpress.com/2013/05/18/industry-analysis-russian-hair-
care-market-overview-and-m-porter-5-forces/
Research company websites
Euromonitor International, Hair Care market in Russia Report (May 2012)
http://www.premiumbeautynews.com/en/russia-the-new-cosmetic,3765
http://www.euromonitor.com/hair-care-in-russia/report