Moscow Business Magazine
Translated from Russian
There is a widespread belief that on many segments of the consumer market, Russian manufacturers do not stand a chance of attaining real success. “All the spots have been taken,” the thought goes, either by nimble Asian companies or by transnational behemoths with global sales built on a powerful foundation of across-the-board pressing through advertising. What’s a startup to do? Just trade in someone else’s product and don’t stick your neck out too far!
But not all entrepreneurs are ready to accept this “inevitability” lying down. The Russian market has examples of the opposite, of those who refused to surrender, and rather hopeful examples at that.
On the following page, you will find material about the fight with Chinese knockoffs led by entrepreneur Roman Shantar on the personal breathing equipment market. The opponent is strong. But as it turns out, there are ways of keeping even a strong opponent in check.
And on page 35, readers can discover the history of Sanitelle, a company which has managed to not only conquer the Russian personal hygiene market at the right time, but to become a lucrative object for investment by leading global players, allowing investors to realize the upside on their exit strategy.
Those thinking up the venture project met yet again, to determine the main idea behind the future business. They had gathered at a guesthouse near Moscow. But neither the birds’ warbling nor the abundant oxygen in the air were of help. An idea for the core product kept eluding the entrepreneurs. They needed something new. But what? Rouben Simonian took an imported hand skincare product out of his pocket and planted the bottle in the center of the table. They had their answer.
It is hard to say what’s more important for an American: expensive, gleaming shoes (first impressions, they say…) or clean, groomed hands (vital for negotiations with anyone, whether an employer or business partner). They are equally important, most likely. Vendors of gel-infused sponges made gleaming leather shoes de rigeur in the late 90s in Russia. The product could hardly be cheaper, but it is one with mass demand. And looking at circumstances in Russia, the demand is practically endless.
We are not exactly in some kind of Austria where the streets are washed down with detergent every day! But somehow everyone had forgotten about hands. That is, everyone except for Rouben Simonian and his confederates.
The idea took shape in 2003. By that time, Simonian had already spent several years in the U.S., in addition to substantial experience working in Europe. A man with a keen eye, he always was filing away promising projects in his mental file cabinet.
“They needed something new. Rouben Simonian took an imported skin care product out of his pocket and planted the bottle on the table. They had their answer”
Most often, these were goods and services which were already widespread in developed countries but were unavailable on the nascent Russian market. There were a number of these, from banking services to dining. Neither Simonian nor his partners were in a rush though. When making a big bet, one has to carefully weigh all of the pros and cons. And they wanted a surefire winner that would help them hit the mother lode – an everyday product in mass demand that Western consumers were already used to. A product that would be easy to adapt for Russian conditions.
This would be an opportune moment to introduce Simonian’s partners. His team is a clear case of synergy. Gaik Simonyan, current CEO of the company and Rouben’s eldest cousin, already had a fair amount of experience on the Russian market before the project was launched. The remaining partner, Mikhail Egiazaryan, was an experienced manufacturer.
This almost ready-made cocktail of competencies lacked only an understanding of market trends, the ability to model complex objects, and last but not least, managerial experience. These qualities were found in Rouben Simonian, a physicist by education who went on to receive an MBA from a prestigious American business school. Rouben had also managed to work in several major companies, including projects for promoting innovations. So should there be any surprise that at Bentus Laboratories, which was formed thanks to the successful brainstorming session at the guesthouse near Moscow, Rouben occupied a rather unusual post: Director for Marketing, Development, and… Science.
The answer to the question of where to put their money lay in Rouben Simonian’s pocket. The market for everyday hand sanitary products in Russia did not exist in any form. So the first condition was met: latent mass demand which was dormant solely due to a lack of smart supply.
But there were a number of other details to be contended with. In particular: should they go down the easiest path and distribute imported gels, or make the gels themselves? After long discussions, the second choice won out. Mikhail Egiazaryan was confident that he could get Russian production up and running. But most importantly, from the very beginning the project was set up as a venture with transparent, clear exits for the business founders after reaching a particular capitalization threshold.
A trading business, bereft of its own know-how, was no good for this. The investors decided to not only set up production in Russia, but to develop their own original product. A product, of course, which is 100% clean from a patent point of view. Only then with time could the company became attractive for the big-time strategist.
Rouben gave the foreign gel bottle to a group of Moscow chemists tasked with working on the project. The job (as it has been ever since Peter the Great’s time) was exceedingly simple: “Make something that’s at least as good, and if possible – better.”
While the scientists were concocting with flasks and test tubes, the partners thought up a Russian brand name: “Sanitelle.” This name had, on the one hand, clear “local” associations (consumers got the “sanitary” part of the brand name without reading twice), but on the other hand it also sounded “international.” As became clear, both of these factors worked, as shown by the rather favorable feedback from potential investors concerning the “philosophy.”
Simultaneously, the scientists got results surprisingly quickly. It was now possible to proceed to the active phase of business growth. But instead of forging ahead, the founders had to take a year-long timeout. The reason for this, too, is a typically Russian story.
Clean red tape
The gel that was developed included ethyl alcohol among its ingredients, which in the eyes of regulators equated the company practically… to a vodka manufacturer.
The process for obtaining a license dragged on for nearly a year. The startup’s founders did not lose time, however: they sought out a favorable place for setting up production. The “alcohol factor” played a role here. Ethyl alcohol poses a fire hazard, and the numerous regulations and responsible agencies require that manufacturers using C2H5OH have the facilities and equipment to match.
The “open vat” had to be designed separately, in accordance with the “Instructions for the Receipt, Storage, Use, Transport, and Accounting of Ethyl Alcohol.” But there’s no need to worry about safety – an airlock separates the alcohol-related rooms from the other areas. In case of fire, the people there can huddle in the compartments for 45 minutes, just like on a submarine./p>
Would it not have been a better idea to try to get around alcohol entirely, and replace it with something else? Those behind the project say no, there was no alternative. Plus, they say, alcohol is the crux of the material, because it is the best ingredient for sterilization. Alcohol evaporates quickly without leaving traces, while doing a superb job of cleaning surfaces. So the bottles can be made small and portable – just the ticket.
“After all, we have another competitor by the name of ‘soap and water,’” laughs Rouben Simonian. “But every day, we all run into plenty of situations when these niceties of civilization aren’t at hand. Our product, by comparison, is always right there.”
Soon another surprising property of ethyl alcohol made its appearance, another “purely Russian” one. Companies working with this substance are subject to so many inspections that the arrival of new competitors is a far-fetched event. One could say that this is a sort of silver lining. It ends up that competing with existing players is an unprofitable venture. It is partly for this reason that Sanitelle, according to Rouben Simonian, quickly occupied 85 to 90% of the Russian market. “Our first competitors appeared only a few years ago. But by that time, we had managed to really get a leg up. Now we’re even receiving inquiries from major Western manufacturers about contract production for them on our equipment. Of course, we’re not talking about direct competitors here. These are companies who supply their products to Russia, for which our production chain would be an excellent fit. And our ability to work with ethyl alcohol is one of those reasons.”
So the year spent obtaining the license and looking for production facilities to build up capacity was far from wasted. Among other things, the founders were able to move from “gut feelings” to very concrete calculations which confirmed their hopes: entering the business was indeed profitable.
“We had been talking about very serious amounts of investment,” says Simonian. “We couldn’t mess up. So even at the very first stage of preparation we conducted several marketing studies. Above all, we wanted to know how the potential customer would react to the new product. Is the product in demand? Will our whole venture crash and burn? After all, at the time we didn’t even have competitors in Russia that would let us estimate the rough demand! But after careful analysis, we came away convinced: the product will be popular with most Russian customers. Plus we managed to figure out many other aspects ahead of time, down to the packaging shape, gel color and consistency, and smells.”
All of these “homegrown versions” still work, although Sanitelle has grown and changed significantly over the years. The lineup has broadened, with separate lineups for men and women. But the very first, simple bottle with a universal green-colored gel remains the most popular, according to Simonian. “That’s the one that everyone usually starts out with, and then they later move on to other more ‘advanced’ types.”
Simonian still sticks to the plans made while waiting for his “alcohol” license. Even at that time, the idea had been developed for promoting the product at restaurants. The program started with the Mu-Mu chain: when paying for an order, clients are offered a sample one-time use gel packet for five rubles.
“The idea here is both ‘mental’ and purely hygienic,” explains Simonian. “Money is dirty both metaphorically and literally. After touching it, people instinctively want to clean their fingers and palms. And here you can buy everything you need, in just one stop cleaning your hands in an ‘innovative’ manner.”
But it is impossible to foresee everything. Many ideas came up only later. For example, it was discovered by chance that one employee had long avoided handshakes because of excessive sweating. But it turned out that the company’s gel acted as an antiperspirant for a time after application. Handshakes become more pleasant. And the marketing department made quick use of this factoid. Smokers made their own discovery: the gel did an excellent job of removing the smell of tobacco smoke.
“There’s no way you can find all these nuances at the stage of quantitative and qualitative research,” avers Simonian. “In business, there’s always room for these happy accidents which let us find new approaches to consumers and modernize our production. Over time, for example, we came around to producing gel with silver ions, which help to temporarily keep sebaceous glands under control.”
Bentus Laboratories has good marketing communications too. Take, for example, their program for partnership with the Russian Red Cross. A portion of the sales for the gel is contributed to the Russian Red Cross, but the promotion of handwashing is a joint effort. And consumer trust in the product is rising: the Red Cross emblem can work better than any advertising. Their marketing colleagues have recognized these ideas, naming Sanitelle the “Brand of 2010” in one category. According to the Effie Effectiveness Index, the brand’s marketing strategy was the best in Europe and third worldwide in its category.
Rouben Simonian long ago intuited that gels need to be showcased near supermarket cash registers. The logic here is the same as in the restaurants. All the more so that in any other place, these products would simply be lost in the enormous stores. Encroaching on the domain of chewing gum, cough drops, candy bars and nearby shelves was from easy. Chain stores are a tough bunch. And they know their strength. So if you ask Simonian about the main tool for sparking interest from category managers at major retailers, the answer would be “your head.” That is, presentations that are well thought-out and convincing, proving that hand gel is a successful product for the checkout area.
TV advertising proved very useful in negotiating with major retailers. “As soon as we started talking with the chains,” Simonian recalls, “usually they showed us to the door. Or as soon as we stepped in, they started asking: ‘Just who are you? Somehow we haven’t heard of your brand before.’ We had to film a clip and launch a TV campaign, even though at the time our product was practically absent from retail. But the mere fact of our campaign being on the air quickly changed the buyers’ attitude towards us.
A the next meeting, fully aware of the usual questions, I told my counterpart to turn on the TV that evening and get all of the information he needed about our product.” The company uses various other tools at its disposal: subbrands for different consumer categories and retail chains and flexible pricing. There is another curious bit too. Retail sales account for 50% of the total. But then where does the other half come from? Even while developing “horizontal” sales, Simonian is simultaneously tackling another, equally lucrative niche. But this niche is the “vertical” one: the segment for disinfectants for professional use.
“Testing the recipes for this market took a long time,” Simonian recalls. “It was even tougher going, I think, with them than with the retailers. But the upside is huge. For a long time now we’ve been providing our products to many Moscow clinics, and some time ago we handed off distribution to a major international player. I think the demand in Russian medicine for these products will grow as well. Just take the problem of hospital-acquired infections (HAIs). There aren’t just isolated incidents, but a real headache for the government, which has to spend a lot of money to treat a person twice. At the same time, international studies show that handwashing by (above all) nurses reduces the risk of these HAIs by around 40%. But the nurses are constantly attending to different patients and there isn’t always a handwashing basin in each ward. So what is there to do? In other countries, this question has already been answered with water-free skin antiseptics which should be in every hospital ward.”
To be a confident player on this market, the company had to not only master the complicated art of participating in government tenders, but turn into a vendor of all sorts of antiseptics which are used at hospitals: from those used during surgery to those for cleaning the operating theater. But after the “alcohol” saga, Simonian and his team made short work of these challenges.
Any successful business one day gains its first investor. “We’re no deviation from the normal pattern,” says Simonian. “As soon as it became clear that a market had been created and now we need to grow quickly, RMG (Rye, Man & Gor Securities) invested capital. These are our first investors and good friends who actively participate in running the business. The deal happened in 2008. And with our new investor, we began to search for money and even reached preliminary agreements with major venture funds. But the crisis broke out soon after, so things fell through. We didn’t stop looking though, and at the height of the crisis, we met VTB Asset Management, who took an interest in the project. So a fund under VTB Capital’s management became our fifth shareholder.”
Bentus Laboratories is currently in negotiations with leading transnationals, hammering out the conditions for a strategic partnership deal. “So now I’m responsible for marketing, science, and also exiting the business,” Simonian says with a smile.
How did this business interest Western players? In Simonian’s view, it is all explained by market trends, or simply put, the growing interest of people in their hands as an infection vector. “This topic has became big in the last three years,” he explains, “with all these stories about bird flu, swine flu, and other strains. We had a serious uptick at the time, which increased the popularity of products such as ours.” The worldwide demand for antiseptics grew such that even leading manufacturers could not meet demand.
“When epidemics were breaking out, a number of European clients came to us,” continues Simonian. “Unfortunately, at the time we couldn’t furnish them with our production because we lacked European certificates.”
Now these documents are on hand, only increasing the asset value. So negotiations are ongoing. And the investment cycle which was started in a guesthouse near Moscow is gradually coming to an end.
Is this a typical story of a successful startup? Quite. The idea, product development, establishment of production, appearance of a first investor, expansion of sales, a second-wave investor, growth in business capitalization, and then a final exit – a sale to the “strategist.” Everything went “by the book.”
If Bentus Laboratories is acquired by a transnational giant, the business by no means will cease to function as an independent entity. Potential partners have already calculated that preserving Russian production will maintain competitiveness in terms of both quality and price. Nor does the company rule out retaining some segments of the B2B market.
And once the founders have cashed in, what will they do? They may well go on to their next venture experiment. “It goes without saying that we’ll keep on doing business with clean hands,” Simonian throws out in conclusion, before extracting a small bottle from his pocket.