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New Strategic Challenges for Fragrance

By: Rob Walker, Euromonitor International
Posted: November 1, 2011, from the November 2011 issue of GCI Magazine.

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The two non-Latin American countries making up the top five growth stories in the post-Lehman Brothers era were South Africa and, rather more surprisingly given its exposure to the banking crisis, the U.K. A burgeoning black middle-class, characterized by its youthfulness and high aspirations, was at the core of robust sales in South Africa, while growth in the U.K. came from increased demand for premium fragrances. What is striking is that trading up in fragrances seemed to fly in the face of the UK’s weakening middle-class spending power.

Spendthrift Generation Y

The U.K. and Brazil, the two strongest performing fragrance markets in the world between 2008 and 2010, actually have more in common than one might think. The first point to consider is that Brazilian consumption culture is geared to spending rather than saving, despite some of the highest interest rates in the world. It is a trait rooted in the hyperinflation era of the 1980s and 1990s when the value of wages eroded rapidly, encouraging households to off-load their disposable income quickly.

The parallel in the U.K. is seen in trends among young middle-class adults—in the 17–34 age group, and often referred to as Generation Y. They are, similarly, spenders rather than savers, which marks a shift in U.K. consumption culture since the 2008 financial crisis when it became much harder, for example, to secure a foot on the property ladder. Indeed, the concept of home ownership itself, once the bedrock of material ambition in the U.K., lost its appeal among young people as the real estate market went into meltdown.

The U.K.’s increased spending on premium fragrances between 2008 and 2010 was, therefore, indicative of a Generation Y culture that had become skeptical about the macroeconomic future, or at best had been impacted by the financial crisis enough that it preferred to enjoy today what it might not have tomorrow. In short, in both the U.K. and Brazil, consumers are reluctant to save or invest their money, but possess a penchant to maximize their quality of life in the present.

Eyes Wide Shut

The big question is how the fragrance market will continue to evolve in the event of a potentially more acute period of global economic instability. The economies of the emerging markets could, for example, prove less insulated than in 2008, not least because inflation is a global problem, driven by rising commodity costs. Even China’s domestic spending, a lynch pin of global economic growth in the post-2008 period, is under downward pressure from higher inflation rates.