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Growth for the Long-term

By: Briony Davies
Posted: October 5, 2006, from the October 2006 issue of GCI Magazine.

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Eastern Europe managed average annual growth of more than 15%—a notable achievement in that it is twice the rate of the next strongest performer, the AME. Double-digit growth in Russia, Romania and Ukraine outweighed lacklustre performance from Poland, Bulgaria and Slovakia.

Consumer tastes in Eastern Europe do not differ greatly from those in Western Europe—in both regions the top two brands in women’s premium fragrances are Chanel No 5 and J’adore and Fahrenheit ranks highly in men’s. The AME is the only emerging region where sales of premium fragrances outstrip those of mass. This is most notable in Israel where the share of premium fragrances accounted for a weighty 88% of total fragrances sales, highlighting the fact that Israeli consumers perceive the high-end products as necessary status symbols.

Although Latin America has seen significant increases in sales throughout the past five years, growth is set to falter with only 3% compound annual growth rate (CAGR) to 2010 as masstige fragrances from local players such as Natura and O Boticario cannibalize sales. Eastern Europe and the AME will remain the two fastest-growing regions with Asia Pacific, buoyed by expectations for India and China, shooting up the ranks to join them. With absolute growth in all three regions accounting for in excess of half of global growth to 2010, players wishing to succeed on the world stage must adapt their strategies to suit these markets.

Luxury Moves Further East

Following sluggish growth since 2000, Asia Pacific looks set for recovery with 37% growth expected over the next five years. The lion’s share of sales will come from China. Many manufacturers also have their sights on India, and for good reason: China was one of the world’s top 10 countries in terms of gross domestic product (GDP) growth measured at purchasing power parity between 2000 and 2005, and India’s GDP rose by 70% during the same period. This newfound prosperity is putting more money in the hands of consumers who are proving increasingly willing to spend it. BMW sold more Bentley Mulliner 728 limousines, which at $1.2 million is the world’s most expensive car, in Beijing than in any other city in the world. In contrast to the West, conspicuous consumption is the done thing, and labels rather than quality prevail.

Focusing in on the sector, the tariff on premium fragrances in China was lowered from 30% to 10% at the beginning of 2005, enhancing the potential for stronger demand and encouraging new brands to enter China. Similarly, reductions in customs and excise duties on alcohol-based cosmetics and toiletries in India will see an increase in international and domestic manufacturers seeking to leverage the reduced barrier to entry. Marketing premium fragrances in these emerging nations will require manufacturers to employ different tactics to reach potential consumers—regardless of the relative sales gains to be made, such products are only within reach of an elite but growing consumer niche. The scent itself must then take a backseat with the emphasis on the name and its associations with luxury to attract the image-conscious consumer.