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A Challenging Global Climate for Fragrances

By: Rob Walker, Euromonitor International
Posted: October 26, 2012, from the November 2012 issue of GCI Magazine.

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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.