Commercial Guide Fy2001_cosm

HUNGARY COUNTRY COMMERCIAL GUIDE FY2001 HUNGARY - COSMETICS INDUSTRY SUMMARY Over the past seven years the Hungarian cosmetics and toiletries market has expanded rapidly, between 1991-95 alone the market grew 40 percent. Better products and a larger selection, in the form of imports, were the catalysts for consumer demand. This development is surprising due to an overall drop of consumption over the same period. Further growth is expected over the coming years as consumption levels begin to increase. Competition has tightened, and quality and price now play a far more important role in consumers' decisions. The beneficiaries of the market expansion, foreign manufacturers and multinational companies, have been on the Hungarian market since the early 1990s. Since that time cosmetic imports have increased 50 percent. Foreign producers are making inroads in all sub-market segments; American companies such as Colgate-Palmolive, Procter & Gamble, Johnson & Johnson and Admark Kft, have opened up local operations and distribution outlets or import their products through local distributors. This study will give an overview of the Hungarian cosmetic market situation including major domestic manufacturing facilities and Western companies represented in the market; presenting market statistical data; discussing problems facing foreign companies; and explaining the licensing procedures for cosmetic products. As the Hungarian economy develops, the demand for cosmetics is still expanding. According to official statistics, total market size has increased from USD 100.3 million in 1995 to USD 109.6 million in 1996, and is expected to reach USD 113.6 million by the end of 1997, an increase of 11 percent. The statistics also reveal that market expansion is primarly coming from imports, while domestic production is increasing at a slower pace. The liberalization of imported consumer goods including cosmetics and body care products precipitated a noticeable increase in the ratio of imports vs. exports beginning in the early 1990s. As indicated above, U.S. cosmetics exports to Hungary is expected to nearly double between 1995 and 1997. However, the level of imported U.S. products is relatively small compare to the total value of Hungarian cosmetics imports. Imported products are mainly being sourced in Germany, France, Italy and Austria. Most of Procter & Gamble's products are coming from the Czech Republic and Poland where it operates manufacturing units. Unfortunately, official statistics do not provide the entire picture. It is estimated that the total market size is even larger than described above due to cosmetic products illegally entering the country and sold on the "black market". In general, it is estimated that overall black market activity account for 30 percent of Hungary's GDP. Hungary is rife with open air markets for small, private entrepreneurial vendors. These vendors avoid paying both tariffs on imported products and value-added taxes (VAT). Thus, these products are about 10 percent cheaper than in traditional retail shops or department stores. Currently, income levels and prices are the primary determinants in a buyer's decision to purchase both cosmetic and body-care products. In 1995, the average monthly income was HUF 33,000 (USD 220) per capita, while in 1996 it was HUF 38,000 (USD 260) per month. Hungary also experienced inflation in the mid-20s during both year, consequently disposable income dropped 17 percent. For many households, the standard of living dropped and there is little discretionary income after paying electrical, heating invoices and purchasing necessities. Necessary cosmetic goods are bought strictly on price. Real wages are expected to increase 3-4 percent in 1997 and even further over the following years. This recovery should result in some disposable household income and could stimulate further demand for body-care products and cosmetics.

At the same time, there is a developing and distinctly upwardly mobile entrepreneurial class which composes about 10 percent of the total population. This segment of the population has large amounts of discretionary income to spend on luxury goods and is less price-driven and places more emphasis on "foreign" origin of clothes, expensive cosmetics, and name brand. This group has little limit on the amount of consumer goods it buys. Another reason for a continuous demand on cosmetics and body care products is the new wide- selection of internationally well-known brand names available on the domestic market. Previously, limited only to products produced by Hungarian manufacturers, and based on simple East-European standards, consumers are now confronted with thousands of products -- anywhere from relatively inexpensive no-name nail polishes and soaps to designer fragrances. Moreover, foreign multinational companies conduct large advertising campaigns. Splashy ad campaigns appear on billboards and television throughout the country, along motor ways, at bus stops, and metro stations. The advertisements portray a western lifestyle and imply that cosmetics are integral to that lifestyle. Advertisements of imported products are generally the same as used internationally with the exception of being dubbed into Hungarian. The message is simple and persuasive -- and is addressed specifically to the credulous "simple-minded people" and the ambitious generation that is armed with discretionary income to purchase luxury items. Beside price, quality can be an important factor in determining consumer demand, although, in general, the key parameter is whether a product is imported or locally produced. This is the result of the long-time closed Socialist market that was finally opened to western products after 1990 and everybody wanted to buy "Made in Germany", "Made in the U.S.", "Made in Italy" etc. products. From the local manufacturers, Caola's "Helia-d" line is considered high-quality and is sold around the world including the United States. Finally, the packaging of the product can also have an indirect influence. In the first years after opening up the Hungarian market to western markets, foreign made products were packaged more attractively than domestic products. Today, after several years of catching up, domestic manufacturers have improved their packaging by adopting western technologies. Thus far, demand for cosmetics and body-care products is driven in the women's segment of the market. In general, Hungarian women are concerned about their outward appearance and take great care in dressing and projecting an image. Most women will dress up for nearly every occassion when they go outside the house. Men's cosmetics mainly cover basic toiletries (shaving foam, deodorant, shower gel etc.) and colognes. Moreover, brand name recognition for certain brans, has just developed recently among male shoppers for particular brands. Brand names such as Denim, City Man, Axe or Old Spice are well-known and more frequently purchased by Hungarian male shoppers than other brands or no-name products. Best Sales Prospects The best sales prospects in the cosmetics products are considered to be goods that are used and purchased frequently such as body-care products and face creams (HS 3301, 3302). Special, heavily-advertized brands sell better than no-name products or lessadvertized ones though price is still the decisive factor in purchases. Body-care products such as body lotions, face, hand or moisturizing creams are sold to all segments of the population, although differentiation is made between different income levels whereby poorer people buy no-name or lower quality goods, while the upper end of the society can afford to buy more expensive and brand-name products. Decoration cosmetics and fragrances (colognes) are less frequently used and purchased. Only a certain portion of Hungarian women use a limited line of decoration cosmetics or do not use make-ups at all. Generally speaking, body-care products and some decoration cosmetics items, should

expect increasing market share for the next couple of years given that a larger percentage of the population will be able to afford and will desire these goods. B. COMPETITIVE ANALYSIS: Domestic Production Prior to the overall transformation of the market the cosmetic market was nearly nonexistent and those products that were on the market were produced by only a few domestic companies. In the 1970s Caola was the only company in Hungary that marketed cosmetics. As years passed some pharmaceutical companies (Richter with Fabulon line, Biogal with Helia-D line) and other cooperatives (Florin, Anaconda) also joined the market. Beginning in the 1980s the black market started to flourish. Currently there are several small- and medium-size domestic companies producing cosmetics and body-care products in Hungary, however, most of the country's output of these products is attributed to a handful of the following large companies: Caola Cosmetics and Household Chemicals Co. ("Helia-D" cosmetics line) o Florin Chemicals Cooperative o Herbaria o Anaconda Cosmetics Ltd. Like the entire cosmetics market, the domestic industry has been in transition for the last few years and continues to be re-shaped. Companies struggle to maintain market share in the face of strong competition from foreign companies. Domestic manufacturers would benefit from continuing to improve technology and packaging, streamline their production, cut the manufacturing costs and develop marketing and sales teams. Over the past several years, Hungarian manufacturers have reduced their workforce due to poor productivity and overstaffing. Some of the companies underwent painful privatization processes which - in some cases - did not leave them equipped to survive the changing market situation. As the local manufacturers emerge from the current transition, it is likely that will focus on the low-income end of the market in an effort to supply good quality cosmetics and toiletries at an affordable price to customers. It is in this market segment where most consumers currently purchase their goods. Following are brief profiles of the major Hungarian cosmetics manufacturers: CAOLA Cosmetics and Household Chemicals Company Established in the 1960s, Caola emerged as a result of the amalgamation of several small companies and cooperatives. Until the end of the 1980s, Caola was Hungary's largest cosmetics producer. In December 1991, the government announced its intention to privatize Caola. Following one year of unproductive negotiations, Colgate Palmolive withdrew its USD 50 million offer. The market value of the company started to decline, and mainly because of market liberalization the company's market share dropped from 60 percent to 20-25 percent. The company was than sold to a group of private investors (Benko es Tarsai Kft.) and employees in November 1993 for USD12 million. Caola puts great emphasis on R & D and is working closely together with the Analytical and Chemical Section of the Budapest Technical University to develop products. Currently, the company employs 1,300 people. In 1993, Caola's turnover was HUF 4.5 billion. Caola has four factories (in Budapest and Zalaegerszeg) and a foreign trade office. Eighty percent of the manufactured products are sold in Hungary. Caola's products are exported to Romania, Moldavia, Slovakia, Bulgaria, Ukraine and the CIS countries. Caola manufactures 150 different types of body lotion, face creams, tooth paste, soap and shampoo as well as household detergents, liquid dish soap and face powders. Popular products include: Velmetina, Camea and WU-2 hair care products; Timea ladies' cosmetics

products; Gabi baby-care products; Ocean, Caomilla body lotions; Ovenal toothpaste, Bip and Comfort household soaps/cleansers, Barbon, Derby shaving products and Spor washing powder. The production of the Amodent brand of toothpaste was taken over by Unilever in 1995 while Caola purchased the licence for the manufacturing rights as well as the design for Helia-D face care products from the new Israel owner of Biogal Pharmaceutical Works in 1996. Helia D creams have been manufactured since 1982 which are moisture creams for dry, normal and oily skin, eye cream, toning and herbal freshener, and cleansing lotion from natural substances. Helia's products are unique because they only contain minimal, indispensable microbiological conserving compounds and fragrance that harmonize with the active ingredient. Helia products are sold in 14 countries throughout the world including Japan, the U.S., Turkey as well as Scandinavia, Greece, and the rest of Europe. Helia has modified its packaging and developed a new Helia Active brand which will presumably lead to bigger sales in both domestic and foreign markets. The Helia brand holds a 30 percent share in the cosmetics market based on good quality and acceptable prices for the average Hungarian consumer. Caola maintains a 35 percent market share in body lotion and 60 percent in shampoos. Caola is the only Hungarian cosmetics company that produces soap. FLORIN Rt: The household chemicals and cosmetics company Florin, located in southern Hungary, was established in 1992. The company entered into a cooperative arrangement with Wella AG (hair dyes), Ciba-Geigy (disinfectants) and in the past few years with Henkel and Schwarzkopf to perform product packaging. The company's main products lines are paramedicaments (products with healing effect), personal care, hair and body care, household chemicals, plant protection and industrial cleaning products covering about 6-7 percent of the domestic market. Cosmetics represent about 25 percent of the company's output and paramedical products account for the remainder. In December 1995, Florin launched its new cosmetics line "Yuvan" which is a face and body-care cream family both for dry and oily skin and delays skin's ageing process. The product was successfully tested and registered in the Benelux, Italian, Czech, Polish and Slovak market and expected to be distributed there in the near future. Florin employs 180 people with an annual turnover of USD 4.6 million in 1995. Florin holds 6-7 percent of the Hungarian cosmetics and household chemicals market. HERBARIA: Herbaria was established in 1949 and is a leading player in the Hungarian herbal products market. The firm is owned by Studium Herbaria Invest Kft. and 26 AFESZ (General Consumer and Sales Co-operatives) stores. The company operates a nationwide network of 6 manufacturing plants which use modern machinery, a research and development department, seven wholesale warehouses and 34 franchise retail shops. Nationwide, 330 people are employed by Herbaria. The company exports and imports products. Exports are going to Germany, Switzerland, Austria and Italy. Herbaria maintains a close relationship on a mutually exclusive basis with the Hungarian Research Institute of Medical Herbs. In conjunction with this institute it manufactures a wide range of tea mixtures, syrups, Banfi hair lotion, extracts made of burdock and saffron, a variety of bubble baths, anti-rheumatic jelly, baby cosmetics, Herbanat face cream. It also recently introduced a new facial cream and tooth paste gel for smokers which were well-accepted by Hungarian consumers. Ninety percent of the ingredients in Herbaria products come from natural ingredients.

Herbaria recently acquired Classica Ltd -- a Hungarian inventor and manufacturer of herbal-based cosmetics and body-care products such as shower bath, face cream, liquid soap, shampoo and hand care gel. ANACONDA: Anaconda was established 12 years ago as a part of Csopak Taja Agricultural Cooperative where one of the chief chemical engineers invented the chemical components of what became a "peeling mask." Following start-up operations, Anaconda supplied peeling masks, shampoo, sun-tan lotion, etc., to wholesalers. Anaconda opened its new manufacturing unit in Veszprem in 1995 along with a laboratory and export packaging department. The company is currently owned by the former chemical engineer who invented the peeling mask, an investment bank and the Csopak Taja Cooperative Rt. In 1993, the company was divided into two smaller companies: the Anaconda Cosmetics Ltd. and the Anaconda Trading Ltd. During the past six years, Anaconda has suffered losses due to increased competition from foreign products. Anaconda Trading Ltd. domestically distributes its products through wholesale channels. Anaconda manufactures 52 different products for domestic consumption and nearly 100 other products for professional institutions (such as beauty salons and hairdressers). Anaconda imports emulsion material, oil, and plant extract from the Netherlands, France, Great Britain and exports 15 percent of its production to Germany, Great Britain, Czech Republic, Malta and Cyprus. FOREIGN COMPETITORS Liberalization of the market has resulted in an enormous inflow of imported cosmetics and toiletries. Foreign cosmetics producers are obtaining increasing shares of the domestic market, which currently reaches 70 percent of the market. Some companies have entered the market by establishing representative offices and distribution activities. Other companies have found Hungarian agents and distributors. Of the foreign companies active in Hungary, only a few have established manufacturing operations. These companies are Henkel (Germany) which produces soaps and washing powder, Procter & Gamble (P&G) which has a toothpaste joint venture with Pharmafontana and opened a manufacturing unit in Csomor to produce lady's hygienic products called "Allways". Colgate Palmolive has purchased the "Fabulon" cosmetics line from Gedeon Richter Pharmaceutical Works. Also, Unilever has production facilities in Hungary and produces "Amodent" toothpaste that was taken over from Caola. Imported cosmetics have devoured market share by offering a wide range of high-quality products. While on average these products are more expensive than domestically-produced products, some international cosmetics companies have found market niches in the midprice range. It is estimated that as much as 10 to 20 percent of foreign companies' revenues are expended on marketing and splashy advertising campaigns to win over consumers. 3rd-Country Competition Third-country competition for cosmetics and toiletries is significant. In general, European manufacturers have gained the largest market shares. French and Italian companies are selling primarily at the high-end of the market. Their products include designer fragrances and decoration cosmetics (cremes, lipstick, eye-shadow). Dutch and German companies concentrate on offering a wide range of basic toiletries such as creams and body lotion, shower gel etc. The following European companies are active on the Hungarian market: Company Source Country Product o Lancome France make-up, face creams • • •

Rochas France make-up, face powder Max Factor U.K. make-up Revlon U.K. make-up

• • • • • • • • • • • • • • • • • • • • • • • • • •

Georgio Armani France perfumes, fragrances Givenchy France perfumes, fragrances Guy Laroche France perfumes, fragrances Yves Saint Laurent France perfumes, fragrances Elida Faberge France Axe after-shave lotion, Denim after-shave lotion, Rexona Brut after-shave lotion, Sunsilkshampoo and balsam Laboratories Garnier France Neutralia shampoo, bath liquid L'Oreal France Elseve/Elnett/Studio Line shampoo and balsam, Recital hair-dye, shampooing color Henkel Hungary City Men Deodorant, after- shave Vademecum teeth cleaning liquid, Fa soap, Poly-Kur shampoo, balsam, Drei Wetter Taft Unilever Netherlands Lux soap, body lotion, Amodent toothpaste Schwarzkopf Austria Hattric after-shave lotion, Classis after-shave lotion and deodorant, Kaloderma face and body cream, Schauma shampoo BDF Germany 8x4 deodorant, Nivea Elida Gibbs Germany Signal toothpaste Wella Germany Design Styling hair spray, Wellaflex hair-dye, color creme Molnlycke Sweden Libresse hygienic care product, baby pampers

U.S. Market Position As described earlier, American companies are becoming more active on the Hungarian market although their market share is still low, approximately 10 percent. For example, many American companies are exporting products to Hungary from their European subsidiaries and warehouses. Following is a brief description of American companies' activities in Hungary. ADMARK: Admark was established in Hungary in 1992 and currently employs 25 Hungarian citizens. The company sells face creams, body lotions, shampoos, baby-care products and deodorants, all in the medium price market range. The company represents Lander face and skincare products and has recently started a mail catalog order with Lander and Matisse products. The company is expanding to provincial cities outside Budapest and is selling to Skala, Centrum Department Stores, Azur, Drogerie Markt, Rossmann, Penny Market, Julius Meinl chain stores, Tesco and individual pharmacies. AMWAY: Amway entered the Hungarian market in 1991 with a wide range of products ranging from concentrated household chemicals/detergents, shampoos, skin-care products to kitchen utensils. Amway uses a multi-level marketing structure where employees work on a commission basis. The Hungarian subsidiary currently has a remarkable 60,000 product managers. In comparison, Oriflame Hungary Kft. has about 30,000 direct sales agents and Avon 15,000 to cover the whole market. Currently, the company distributes 300 different products which are imported from the US. Amway is planning to introduce the distribution of slimming powders and vitamins in 1997 in Hungary and also plans to appear in mail

catalogues services in two years. Amway is a member of the Direct Sellers Association along with Avon Cosmetics, Mary Kay Cosmetics, Oriflame Hungary, AMC, Jafra, Lux and Tupperware. AVON COSMETICS HUNGARY: Avon Cosmetics Hungary was established in 1990 and distributes different types of cosmetics and body-care products. The company has 51 sales leaders, 15,000 independent sales agents and a client base estimated has at 150,000. Avon has invested over USD 8 million in the construction of a new distribution center in Godollo (north of Budapest). The center will supply Slovakia, the Czech Republic and other former Eastern European countries. Avon also has operations in Poland, the Czech Republic and Slovakia. COLGATE-PALMOLIVE: Colgate-Palmolive products have been imported into Hungary since 1990. Initially, Colgate negotiated with the Government of Hungary to purchase the Hungarian personal care products manufacturer, Caola. After one year of unsuccessful negotiations, Colgate established a Budapest representative office in 1991. Until recently, Colgate-Palmolive imported all of its products (mainly toothpaste, cosmetics, beauty products). Thus far, products for oral care, body care, household cleaning and fabric care are sourced from Colgate's facilities in Western Europe, Scandinavia and elsewhere. These products are sold to traditional wholesalers and cash-and-carry chains such as Profi, Plus, Spar, Skala. Azur. The company has twelve agents throughout the country who receive orders from and ensure supplies to the wholesalers. In 1993, Colgate purchased "Fabulon" and "Richtofit" brands from Gedeon Richter. Currently the company is the exclusive manufacturer of Fabulon, Fabulissimo and Richtofit face- and hand creams, shaving foam, and body care products in Hungary. JOHNSON & JOHNSON (J&J): In 1990, J&J established its operations in Hungary which mainly focus on the importation and distribution of medical, pharmaceutical and consumer products (Carefree, Silhouettes and O.B. hygiene products). J&J markets Piz Buin suntan lotions, Reach toothcare, P.H. 5.5 body care and Johnson's baby care products. The company sells to traditional wholesalers and chain stores (Skala, Centrum, Azur). PROCTER & GAMBLE (P&G): Procter and Gamble has obtained a leading position in the Hungarian market by investing USD 50 million in the Hungarian market over the past five years. P&G established its wholly-owned affiliate in 1991. P&G successfully distributes 18 brand names in the Hungarian market including the following products: Blend-a-Med toothpaste, Pampers disposable diapers, Camay soaps and shower gel, Oil of Olaz beauty fluid, hydrogel, day and night creams, Kamill hand creme, Secret deodorants, Always hygienic care products, Ariel and Tix washing powders, Pantene-Pro, Vidal Sasoon Wash & Go, Head & Shoulders shampoos, balsam and Old Spice after shave, shaving foam. P&G has recently introduced the new "Fresh/Sensitive" and "Whitewater" fragrance in Old Spice after-shave products that enjoy more popularity among the younger generation than the "Original" line. Imported P&G products are coming from the regional detergent plant in the Czech Republic and Poland. P&G established a factory in Csomor (in the neighborhood of Budapest) that employs 500 Hungarians and manufactures Always hygienic care products and Pampers for the domestic market. Sixty percent of the locally manufactured P&G products goes for exports, a value of USD 40 million. P&G spent USD 9.5 million on advertising in 1995. P&G distributes its products to traditional wholesalers (groceries, pharmacies). "Van sales"

are also used in Hungary when products are sold in bulk to wholesale units in provincial cities. C. END-USER ANALYSIS As cosmetics and toiletries belong to consumer products which are purchased regularly, the entire Hungarian population is considered to be potential customer of these products. The only difference is that customers either purchase these products in retail shops and stores or go to the "black" market and procure the products there avoiding the payment of VAT and extra profit margins. The average Hungarian consumer spends about monthly HUF 700 (USD 5) on cosmetics. This amount covers a medium quality soap, sampoo and one bottle of toothpaste. Due to the significant drop in the living standards in Hungary, consumption of cosmetics and toiletries decreased by 10-15 percent with the exception of "luxurious" cosmetics and fragrances where the high-end of the society is buying more and more cosmetics. About two-thirds of the population uses soap in Hungary and only one third uses shower gel. As a result of educating advertisements the consumption of shower gel increased from 80,000 liters in 1995 to 260,000 liters in 1996. The most popular brands among customers are Old Spice which has more than 50 percent of the shower gel market followed by Fa, City Men and Axe. Regarding deodorants for women, sprays rule the market with 60 percent followed by stifts with 40 percent. The most popular brands are Fa, Rexona, Impulse, Limara, 8x4, Secret and Nivea in this order. Two-thirds of the cosmetics market is controlled by local operations of multinational companies and only one-third is ruled by Hungarian manufacturers. Multi-level marketing started in Hungary in the early 1990s when international giants such as Amway, Oriflame, Avon entered the market applying direct sales. They all sell cosmetics and beauty treatment products but have different usage profiles, with Amway performing well in the important mean income bracket (HUF 40,000-70,000/USD 200-400), while Avon and Oriflame is ranked highly in the income brackets over HUF 100,000 (USD 525) covering about 10 percent of the market. Home distribution is particularly popular amongst the 30-39 age group. The 40-59 age group do not usually purchase cosmetics by this method. Home distribution of cosmetics and body care products is a very powerful channel in the Hungarian market as it provides a relatively easy opportunity for a "second job" to supplement family income. Prices for "luxury" items such as Vichy and Dior were viewed as "high" by the majority of a recent poll. Respondents considered Herbaria, Fabulon and Anaconda brands to be "low" priced which means that these brands can probably increase their pricing without significantly affecting the demand. About 68 percent of respondents would prefer making their purchases for body care products in retail stores to department stores. Those that do purchase cosmetics and toiletries in department stores tend to do so only on an infrequent basis, less than once a month. The department store is not therefore a good channel for impulse frequently used items but may be appropriate for high-end luxury products such as perfumes and fragrances. Over fifty percent of the two younger age groups (15-29 and 30-39) use a special store (or at a special location) on a monthly basis. This indicates in general that body care and cosmetics products are usually considered worthy of making a longer journey. Supermarkets and speciality stores are used by all age groups, the most frequently on a weekly basis. The key reasons for doing so is location convenience - supermarkets in Budapest tend to be located in the city center - and maintain a wide range of products. Shopping for body care products is often combined with general shopping trips to the supermarkets, whereas large purchases, such as perfumes warrant a separate trip to a specialist store which would hold more prestige brands.

Television is by far the most powerful source of new product information available in Hungary. The older age group (40-59 years) in particular use TV as their key resource of product information. Radio plays a very marginal role in cosmetics/body care products purchases. Satellite TV is also a very marginal media in Hungary for information on cosmetics products. On the other hand, seeing new products in the shops is a very powerful source of new product information, particularly among the younger age groups. This reinforces the importance of good and attractive point of sales displays and of ensuring that the retail outlet selected is appropriate to the product and its intended market.

Average retail prices for various cosmetics in Hungary Product

USD

Body-lotion

2-4

Make-up

4-22

Lip stick

2.5-7

Shampoos

2-5

Nail polish

2-7

Creams

2-7

Perfumes Hair Spray

23-95 2-5

D. MARKET ACCESS The import and trade of cosmetics/body-care products and toiletries is completely liberalized in Hungary. Imports are only limited by consumption. Special consumption tax for perfumes and face/lipcare products was eliminated as of January 1, 1997 (it was 70% of the commercial invoice for perfumes and fragrances and 20% for face and lipcare creams). o Testing & Certification of Cosmetics Products All cosmetic items imported to and distributed in Hungary must be tested and approved by a special institution called Orszagos Elelmezes- es Taplalkozastudomanyi Intezet (National Institute of Food Hygiene and Nutrition) abbreviated as OETI and the Kereskedelmi- es Minosegellenorzo Kft. (Commercial Quality Control Ltd.) abbreviated as KERMI. OETI: OETI is involved in the examination, testing and certification of various food products as well as cosmetics. The Institute also prepares various reports on these items and provides advice to lawmakers. The Decree No. 7/1994. issued by the Ministry of Health and signed by the Minister of Health determines the required procedure prior to the distribution of cosmetics in wholesale and retail trade in Hungary. The present decree regulates the distribution of domestically-made and imported cosmetic products that have not been distributed in wholesale and retail channels before. The producer of the cosmetics is responsible for the stable quality of the approved product and has to observe the ingredients and raw material used for the production.

An application must be submitted by the domestic manufacturer or the importer to the Institute for the necessary analytical, toxicological and efficiency tests. After a product successfuly passes the tests it is given a registration number that has to be used on the packaging/label of the product. The certificate issued by the Institute is valid for three years. The certificate must be renewed to continue distribution of the product. Product packaging must contain the following information: the name of the producer, country of origin, the name of importer/distributor, registration number issued by the OETI and short instructions for using the product. The following documents/information must be presented to OETI: o exact name of the cosmetics, name and location of the manufacturer and the country of origin, o draft of the Hungarian label including the applying instructions, o the Health Certificate of the product not older than three years old, issued by the competent and authorized health institute in the country of origin. The Health Certificate should contain the following: - name of the product, - name and location of the manufacturing company, - name and content in percentage of used chemicals, coloring materials (identification letter and number used by FDA) - declaration of the innocuity of the product, - name and location of the issuing agency, - date of the issuing of the Certificate. o description of the technology used to produce the given cosmetic article, o Clinic Experts' Opinion about the product issued in the country of origin, o two of the smallest, originally packed samples that will be distributed in domestic trade (in case of cosmetics it should be 2-2 samples, in case of different packaging it should be 1-1 sample from each type of packaging. The cost of the procedure depends on the quantity and percentage of the tested chemicals and ingredients but is a minimum HUF 40,000 (USD 200). The costs for issuing the certificate has to be covered by the applicant. Length of the procedure is approximately 812 weeks dating from the payment of the check. KERMI: The most important tasks of KERMI are the testing and approving of the products as well as registering imported and domestically-made consumer articles prior to entering the distribution channel. A large number of consumer goods are obliged to be tested according to the Hungarian rules. This procedure is regulated by Decree 5/1994 issued by the Ministry of Industry and Trade. KERMI activities include: technical testing and analysis, technical and scientific research, market research and public opinion polls, professional counseling etc. KERMI requires the following documentation for the registration procedure: o o o o

exact name of the product, the producer and the country of origin, draft of the label and the application instruction in Hungarian, content of the product, Health certificate issued by the Ministry of Health or the authorized agency,

The information/documentation provided to KERMI should contain the name of the product, name of the producer and its location, chemical ingredients of the product, declaration about the innocuity of the product, name and address of the issuing agency. The applicant will also be required to submit samples for testing (until 300 milliliters - five samples, from 300 to 500 milliliters - three samples, above 500 milliliters - two samples). The cost of the procedure is HuF 20,000 - 40,000 (USD 100-200) plus 25 percent VAT. The exact fee is based on sample; a quotation price will be given to the applicant. A twenty percent discount can be given in case of serial tests. Length of the test: 30 days upon the arrival of

samples, documentation and the quoted fee but additional fees will be charged to the client in the case of urgent testing which can be reduced to 15 days. Financing The Hungarian Forint (HUF) is fully convertible for business purposes. Since March 1995, the forint has been attached to a crawling peg devaluation exchange rate policy. The HUF is devaluated monthly at the rate of 1 percent which could be reduced even further by the end of 1997. Most import contracts are secured by an irrevocable letter of credit (L/C) bank guarantee or involve a bank for remittance against documents. Many U.S. commercial banks provide financial services in Hungary for long-time corporate clients; however the cost of local financing tends to be high (over 25%). Among the major international financial institutions, the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC) and the World Bank have various project financing programs. Citibank and Western Union in addition to several U.S. financial service institutions and consultants are present in the market, including G.E. Capital which bought preivously state-owned Budapest Bank. Hungary is eligible for all U.S. Eximbank programs available to American equipment exporters. Demographics & Market Reports