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The 67 countries that constitute the region of Africa and the Middle East (AME) are markedly different in economic, religious, social and cultural terms. Several countries, especially those in the Middle East, have high levels of per capita income and strong growth prospects, while some parts of southern Africa are impoverished. Such discrepancies mean that country markets for consumer packaged goods are vastly different; this is apparent via analysis of the fragrance sector, which varies greatly from country to country. In this global report, Euromonitor International explores the region’s key markets of South Africa, Saudi Arabia, Morocco, Egypt and Israel, and highlights how fragrance manufacturers and retailers need to be aware of country-specific customs to ensure success.
Bridging the Gap in South Africa
With sales of $300 million in 2005, the South African fragrance market is the foremost in AME, and is almost twice the size of the next largest, Saudi Arabia. Fragrance also is one of the fastest-moving sectors in the South African market with consistent double-digit growth recorded over the last five years. The mass segment clearly is driving sector expansion as the emerging empowered black female middle class trades up from body sprays (classed as deodorants) to “bridge fragrances.” Particular to South Africa, bridge fragrances blur the gap between perfumes and body sprays and, according to Euromonitor International’s definitions, are classified as mass.
Indigo, a local player, is exploiting the potential in this area and has seen its share of the fragrance market increase rapidly from 18.5% in 2004 to 21.1% in 2005. This is attributed to its distribution of six of the top 10 fragrances on the market. In contrast, expansion of the men’s market has been promulgated by the premium segment—men in South Africa tend to view fragrances as noncommodity items, although the decision to stock fragrances made by Markhams, a leading men’s clothing retailer, has increased awareness of the sector.
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Changes in the retail distribution structure in South Africa also are providing impetus to fragrances as a whole. Edgar’s, a leading department store, has increased both its number of outlets and floor space dedicated to fragrance sales. Further expansion of stores that offer credit—including Edgars, Markhams as well as Truworths and Foschini’s—are likely to drive sales given that fragrances are considered too expensive to purchase with cash. According to Nielsen’s global Consumer Confidence Index, South Africans show a very different spending pattern to the rest of the world when it comes to the use of spare cash. Once consumers have paid off essential living expenses, the average global consumer puts money away as savings. In South Africa however, more than 50% of consumers’ primary use of surplus cash flow is to pay off debts, credit cards and loans. As a result, department stores will triumph over pharmacies in the five years to 2010, and are expected to take the lion’s share of sales in AME’s largest and most dynamic fragrance market.
Seizing the Share
With 2005 sales of $194 million, fragrances are similarly important to the Saudi Arabian cosmetics and toiletries market, accounting for 14% of total sales in 2005. In contrast to South Africa, the premium fragrance sector is almost twice the size of mass, with premium making substantial gains over mass (7% year on year growth in 2005 vs. 4.5% for mass) as per capita incomes rise as a result of increased GDP. In 2005, fragrance manufacturers attempted to exploit increased consumer confidence via a flurry of new product launches from both international and domestic players. Dramatic changes in shares occurred in 2005 as Mahmoud & Abdel Khalel Saeed, owner of the largest production facility in the Middle East, increased its share of sector sales by 1.6 percentage points to knock LVMH Moët Hennessy–Louis Vuitton off the top spot. The Body Shop performed well in mass fragrances in 2005 due to its “masstige” repositioning and the popularity of its customized initiative, indicating that Western trends are being transferred to Saudi Arabia. Indeed, many products are launched in the Gulf before Europe due to high demand by upper-class Saudi consumers.
Mass fragrance sales grew 4.5% in current value terms on 2004. The rise in visitors during Haj and Omrah seasons contributed greatly to this growth as lower-end fragrances were the gift of choice for family members that had not made the journey. Religious and cultural influences also shape the fragrance sector in Saudi on an ongoing basis—oriental perfumes such as oud, sandalwood and amber account for a high proportion of sales as they are permissible in Islamic tradition.
Israelis Prefer Premium
Israeli fragrance sales eclipsed $130 million in 2005. Economic recovery through 2004–2005 stimulated growth, especially in the premium category. In 2005, the share of premium fragrances accounted for a weighty 88% of total sales, illustrating the fact that Israeli consumers perceive the high-end products as necessary symbols of status. With a current value growth rate of about 5.9% in 2005, men’s premium fragrance was the most dynamic subsector. In addition to the economic improvement that was responsible for this growth, there were supplementary factors that stimulated value sales.
Israel’s position as the third largest market for fragrances in AME will be sustained to 2010 as economic recovery fuels fragrance development. Growth rates are expected to be stimulated by two additional factors. The first, retailers will continue to implement large scale discounts on premium fragrances, especially during holiday periods, in order to increase footfall into their stores. This strategy is most likely to be adopted by the supermarkets/hypermarkets channel, many of them started to invest heavily in developing in-store pharmacies over the last year to stave off competition from the pharmacy/drugstore channel. The global trend for discounting is extending to the AME region. The second factor is that major players in the fragrance environment will continue to introduce new brands at a rapid rate to take advantage of Israeli consumers’ high awareness of new product development and Western fashion trends.
Cause for Concern
Multinational manufacturers across the region are increasingly aware of the threat posed by counterfeit cosmetics on brand value and consumer safety; this makes them eager to rally for tighter regulations to inhibit grey market sales in AME where counterfeiting is endemic. Indeed, counterfeiting appears to be on the increase in global terms with an 800% annual increase in the number of fragrances seized at the EU’s external borders, according to the European Commission. In South Africa, a concern for the established cosmetic houses is the flow of cheap Chinese imports onto the fragrance market. The strength of the rand has given locals an opportunity to bring in these cheap brands to attract the lower-income groups.
Some of these are exact rip-offs of established brands, but because the names are slightly different, they are legal. The high price of fragrances in Egypt, where the devaluation of the Egyptian pound against the dollar has caused a bottle of Chanel No. 5 to retail at more than the average monthly salary, is driving the contraband/parallel fragrance market forward. Those who can afford to purchase premium products still prefer to buy from retailers that sell cheaper smuggled fragrances.
In Morocco, fragrances is the sector most affected by imitation and contraband, and is hugely lucrative for smugglers—the combined black market and duty-free revenue represent more than 40% of the fragrance market. This prompted one of the largest importers of fragrances to withdraw from the local market (Cinquième Sens, importer and distributor of Yves Saint Laurent, Guerlain and Boucheron) as they witnessed a year-on-year decrease in sales.
Unisex fragrances are unpopular in the majority of countries in the region, where sharing fragrances with your partner is seen as unacceptable and contrary to traditional gender divides. In contrast, mass unisex fragrances in Egypt led the entire fragrance market in terms of size and dynamism with 35% of overall fragrance sales.
A number of factors are driving this trend. Firstly, mass unisex perfumes retail at low prices, and are affordable to the bulk of the population, that suffers major economic constraints. Secondly, they can be used by several members of the family, further reinforcing their value. It also is notable that unisex fragrances appeal to veiled or conservative women who view scent as a forbidden means of attracting men. Unisex fragrances suit them perfectly because they tend to be light. These fragrances are less tempting and, therefore, more suitable for daily wear. Lastly, mass unisex perfumes are sold everywhere in Egypt, not just beauty specialists. They can be found in pharmacies and in some supermarkets and grocery outlets.
Smell the Money
AME presents great opportunity for fragrance manufacturers with value sales set to increase by $770 million in the next five years. Premium fragrances will witness the greatest growth, and are forecast to contribute a total value sales gain of almost 60%. Although AME currently is one of the smaller markets for fragrances, fragrance sales are expected to overtake those in Asia-Pacific for the year 2006.
South Africa and the other non-core markets of AME will drive overall value growth. The UAE will see the highest total value growth with forecast value sales exceeding $89 million by 2009, with its advanced economic climate a significant draw to multinational fragrance manufacturers. Leading global fragrance manufacturers such as Natura Cosméticos, Limited Brands and Botica Comercial Farmacêuticas are most likely candidates for expansion into the region—they currently hold negligible market presence in AME—however, they will need to consider each country market individually, as their ability to gain share depends heavily on their grasp of local traditions and cultures.