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A Challenging Global Climate for Fragrances

Contact Author Rob Walker, Euromonitor International
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  • Consumers in Western markets are cutting back on high-end purchases, while spending patterns in BRIC are getting softer.
  • Six of the top 10 markets for mass fragrances in 2011 (by retail value) comprised emerging markets.
  • An aging global population is among key demographic factors that will increasingly impact mass and premium fragrances. As the battle for market share intensifies, age segmentation in fragrances could develop as a decisive point of competitive differentiation over the next five years.
  • If premium fragrances are overexposed in developed markets, then the same argument can be applied to mass fragrances in emerging markets. However, tighter discretionary spending patterns in developed markets could spark a windfall of new demand for mass brands.
  • The challenge for premium fragrances will be to work harder at justifying price points. Quintessential and high-quality ingredients will need to be more visible in marketing and advertising activity.
  • Internet sales are forecast to grow year-on-year, especially as consumers engage more directly on a day-to-day basis with fragrance brands via social media platforms.

Globally, retail sales of fragrances reached nearly $44 billion in 2011, of which premium brands accounted for 54%. Premium fragrances are heavily exposed to weaker consumer confidence in developed markets, however. And with softer spending patterns in BRIC, there is a risk that demand could get squeezed on two fronts. Mass brands have more resilience in the current operating environment, which could open new windows of opportunity as consumers trade down. Increasingly, premium brands will need to justify their price points and find innovative ways to stimulate demand.

Tougher Times Ahead for Premium Fragrances

It is, perhaps, a measure of the changing landscape for fragrances that Chanel No 5, the top-selling premium fragrance in the world, has unveiled Hollywood actor Brad Pitt as the face to front its new advertising campaign. It will be the first time the iconic French brand has used a man, and a 48-year-old man at that, in its lead marketing.

At first sight, there seemed little need of any radical shake up in the brand’s marketing strategy. In 2011 retail sales of Chanel No 5 increased 6%, at fixed U.S. dollar prices, according to data from Euromonitor International. That was the brand’s best performance in a decade, thanks to bullishness in North America and Western Europe, and strong new demand in China.

Indeed, demand for Chanel No. 5, and premium fragrances as a whole, has shown remarkable insulation from the economic storms buffeting most consumer goods markets. The top five markets in the world for premium brands (by retail value) were all in recession-hit Western markets last year, namely the U.S., France, Germany, the U.K. and Italy. And each of those generated year-on-year growth 2009–2011, according to Euromonitor International.

There are new signs that the insulation of premium fragrances could start to break down, however. Premium brand owners need only look at the latest financial results in the luxury goods industry (for example, at Tiffany & Co and Burberry) to see that consumers in Western markets are cutting back on high-end purchases, while spending patterns in the BRICs are getting softer.

In 2011, the U.S. and the U.K. generated almost $600 million of absolute retail value growth in premium fragrances, which was 42% of global growth. Were consumers in those markets to start drifting away from premium fragrances (and trends in luxury goods are a harbinger, in this regard), the strategic implications would be far reaching for L’Oréal, LVMH, Procter & Gamble, Coty, Estée Lauder and Chanel—the six biggest players in premium fragrances by retail value.

For example, in the specific cases of Chanel No 5 and LVMH’s J’adore, the U.S. and Western Europe accounted for more than 70% of retail sales in 2011, according to data from Euromonitor International.

The problem for these brands is that changes in premium discretionary spending patterns are beginning to manifest. Most poignantly, the treat-yourself and pampering culture that played out so well for premium beauty and personal care in Western Europe and the U.S., especially in 2010 and 2011, is starting to run its course.

This is because economic confidence has taken a turn for the worse. There is a prevailing sense that consumers believe their spending power will continue to weaken into the long term. It is not simply a blip to be weathered. As such, it is much harder to justify retail indulgences.

The Growing Importance of the Middle-aged Dollar

With a decrease in discretionary spending, a potentially risky new marketing campaign behind Chanel No 5 starts to make more sense. Irrespective of how the campaign develops, the endorsement by a middle-aged actor also brings into focus key demographic factors that will increasingly impact on mass and premium fragrances alike.

First, the world’s population is aging, despite youthful demographics in much of Latin America, the Middle East and Africa. The mean age of populations in France, Italy and Germany is now 40 or over, for example. By 2020, key consumption bases such as China and the U.K. will have a mean age of over 40 as well.

Secondly, middle class and middle-aged consumers in the West are the most immunized demographic in the world from bouts of macroeconomic contagion. This is the generation that built up fat pension pots, enjoyed easy access to credit and rode the upside of what ultimately became an unsustainable real estate boom.

Quite simply, consumer expenditure by people in the 40-plus age band will become increasingly important for the fragrances industry, both in mass and premium categories.

It is no coincidence that Avon Products Inc., the world’s biggest player in the mass fragrances category, has signed Jon Bon Jovi as the face for its Unplugged line. Bon Jovi, who at 50 is two years older than Brad Pitt, will appear in both the Unplugged for Him and Unplugged for Her advertising, set to be rolled out later this year.

Age segmentation is common in the skin care category. L’Oréal, for example, operates six different age band categories for its skin care line. But, age differentiation has often been blurred in fragrances. As the battle for market share intensifies, age segmentation in fragrances could develop as a decisive point of competitive differentiation over the next five years, especially in marketing.

Mass Brands Heavily Dependent on Emerging Markets

In the current climate, mass fragrances ought to be more resilient, which, in turn, implies new opportunities from down trade activity as consumers opt for more affordable scents. Indeed, the global composition of the mass market is completely different from the premium market.

Six of the top 10 markets for mass fragrances in 2011 (by retail value) comprised emerging markets, namely Brazil, Russia, Mexico, Colombia, Poland and Argentina. Furthermore, emerging markets accounted for the top 12 markets in the world in terms of absolute retail value growth (2010–2011). Brazil, Argentina and Venezuela alone accounted for 55% of that total.

If premium fragrances are overexposed to developed markets, then the same argument can be applied to mass fragrances in terms of the emerging markets. However, tighter discretionary spending patterns in Western Europe and North America could play out attractively for mass brands, sparking a windfall of new demand.

Adidas was the top-selling mass fragrance brand in Western Europe in 2011, according to data from Euromonitor International. This is precisely the type of brand to benefit as cash-strapped consumers look for lower cost alternatives to their favorite premium fragrances. Adidas, in particular, will have been boosted by its brand exposure in the London 2012 Olympics.

Still Opportunity Aplenty for Premium Brands

The challenge for premium (and super premium) fragrances will be to work harder at justifying their price points. For example, quintessential and high-quality ingredients will need to be more visible in marketing and advertising activity.

The Internet could be another lifeline for premium brands, due to its greater flexibility on pricing. Best deal purchasing culture is notably gaining momentum in Western Europe, and it is not only applicable to mass brands. Rather, affordable luxury is currently one of the biggest growth categories.

In 2011, Internet retailing accounted for 5% of total sales of fragrances in Western Europe, up from 3% in 2006. That share seems set to grow year-on-year, especially as consumers engage more directly on a day-to-day basis with fragrance brands via social media platforms and the blogosphere.

Manufacturers of premium fragrances will need to build stronger positions outside their comfort zones of Western Europe and the U.S., however. For example, Russia, Saudi Arabia, Argentina, South Africa and China have been key engines of new business in the past year, according to data from Euromonitor International. The industry needs to build on these results. Now is not the time to be risk averse, despite the jitters in China and Brazil.

That slower spending in emerging markets, notably China, that is squeezing luxury consumption could also present an opportunity for premium fragrances. Specifically, there is evidence that China’s new middle class is spending more on affordable luxury goods while spending less on higher-priced goods, such as jewelry, watches and designer handbags. That has potential to translate into a consumption dividend for premium and super premium fragrances.

Furthermore, China’s GDP might be posting slower growth, but its economics fundamentals are still strong. Crucially, its middle class is getting bigger, with dispersal from the coastal cities into the interior. There are parallels, too, in Brazil, where the middle class is continuing to expand in the northeast and the center-west, despite sluggish economic growth in the country as a whole. And it is the middle class that will drive demand for fragrances in both these markets.

Mass Fragrances Have Slight Edge Going Forward

The growth prognosis going forward is mixed. It seems likely that premium fragrances will start to feel some downside in developed markets, but the emerging markets still present myriad untapped opportunities for premium brands, and there could be a surge in demand on the back of trade down activity as consumers rein in spending on high-cost luxury items in China.

Equally, mass brands have the capacity to make up ground on premium brands thanks to changing purchasing patterns in Western Europe and the U.S. The end result is that we could begin to see a more even retail value split between premium and mass brands over the next five to 10 years.

Euromonitor International forecasts that the global fragrances market, as a whole, will grow at an average annual rate of 3% over the next five years. Based on current trends, mass brands are projected to generate around 18% more absolute growth than premium fragrances. There is everything to play for.

Rob Walker, senior fast-moving consumer goods analyst, Euromonitor International, can be contacted at rob.walker@research7.euromonitor.com.

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