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Fragrance stood out in the 2006 cosmetics and toiletries market, showing strong growth in 2006, with an increase of 7% to reach $30.7 billion—making it the third largest sector after sun and baby care. In 2005, fragrance was the sixth most dynamic sector, bested by emerging categories such as men’s grooming products and skin care, where value-adding has been aggressive. Euromonitor International looks at what’s driving this change by examining key regions and markets and looking at trends over the past year.
Reverse Meltdown; Direct Sellers
Together, Western Europe and North America account for almost 60% of global fragrances sales in value terms. In spite of these markets’ formidable size, average annual growth since 2000 had, until 2006, been somewhat disappointing, with both regions consistently registering rates below the global average.
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Euromonitor International’s 2006 data, however, indicates that fragrances is coming out of the doldrums, with both markets showing growth of over 2%. The premium sector in these markets is driving growth, however, this is somewhat deceptive in that it is in the lower end of premium or discounting that is fuelling sales. In the U.S., for example, manufacturers are exploiting the migration of consumers toward the mass retail environment with innovative strategies geared to this arena. Elizabeth Arden introduced its Curious Britney Spears premium fragrance into the mass-market channels with specially designed smaller packages at price points under $20 to attract younger consumers, which proved a great success. Similar tactics were employed in the U.K., illustrating that creativity and perseverance can go some way toward reviving an ailing category.
Latin America and Eastern Europe led growth in the fragrances sector in 2006, with sales increasing by 21% and 13%, respectively, in U.S. dollar terms. Both markets have a strong tradition of wearing scents, particularly the Latin American market where there are fragrance products marketed for babies and young children, as well as adults. Here, mass fragrances were the engine of growth, as consumers are more concerned about the actual scent than the image of the product; thus, are they more price conscious than those in other markets.
Innovation also helped this subsector, particularly efforts by domestic direct sales players such as Natura and O Boticário, which increasingly focused on using local ingredients to create scents of a quality on a par with international products. In 2006, direct sellers remained the dominant distribution channel for fragrances, accounting for 60% of regional value sales. Notable new launches included Lily Essence by O Boticário, which shot to the number one position in Brazil, the region’s largest market, shortly after an innovative launch that included SMS* marketing.
Going forward, Latin American consumers are likely to continue opting for national products over imported ones, due to their lower prices—a significant factor that impacts purchasing decisions in a market where 50% of consumers have an annual disposable income of less than $1,000.
The growth rate of fragrances in Eastern Europe was only slightly impacted by the Russian law, brought about by a crisis on the Russian market in 2006, regarding the turnover of alcohol and alcohol-containing products. The law required producers, distributors and retailers of alcohol-based perfumes and cosmetics, and household cleaners that contain more than 1.5% ethanol, to obtain two new licenses: one for possessing and one for selling such products. In addition, the companies were required to report data on the movement of these products to the Federal Tax Service. The rule was intended to regulate the industry, in part to curb counterfeiting. However, it appeared to be ineffective, in addition to leaving cosmetics companies unable to produce, import or distribute perfume or other products containing alcohol. The law has now been amended to reduce the impact on the industry, indicating that positive growth forecasts are likely to be realized in the future.
Mixed Fortunes in Asia-Pacific
Euromonitor International observes that, aside from Australasia, Asia-Pacific is the smallest regional market for fragrances, accounting for less than 7% of global U.S. dollar value sales in 2006. Cultural and economic drivers are responsible for this distinction. With the exception of highly Westernized societies, such as Hong Kong and Singapore where a high proportion of sales are made to expatriates, per capita usage remains limited due to the perception of fragrances as extravagant luxury items. In countries such as India, sales are further hindered by the widespread presence of black market and counterfeit goods, as well as the enduring popularity of traditional indigenous perfumes. Fragrances are also a relatively novel concept to both China and Japan, where they have a somewhat unsavory image due to their association with the elimination of body odor.
However, sales of fragrances in Asia-Pacific grew by 5% in U.S. dollar terms in 2006, a slight increase on the previous year. Growth was driven primarily by advances made in developing markets such as China, Vietnam and India, underpinned by rising affluence. In addition, enhanced media exposure raised consumers’ awareness of the various international premium fragrance brands, spreading Western beauty norms. In Japan, however, value sales of fragrances declined in 2006, by almost 1% in current value terms. The main reason for this was that many fragrances, especially imported products, were sold at discounted prices through department stores, drugstores and discount outlets.
Looking forward, Euromonitor International predicts that the Chinese market will be a key source of growth in the region, driven by rising disposable incomes and improved distribution. China was one of the world’s top 10 countries in terms of GDP growth measured at purchasing power parity between 2000 and 2005. This newfound prosperity is putting more money in the hands of consumers who are proving increasingly willing to spend it. In contrast to the West, conspicuous consumption is the done thing, and labels, rather than quality, prevail. In addition, the problem of counterfeiting is being taken more seriously by the Chinese government, due to the lobbying efforts of the leading manufacturers and the EU. Legislative changes will also be influential in the medium- to long-term. Firstly, the tariff on premium fragrances was reduced from 30% to 10% at the beginning of 2005, thereby encouraging new brands to enter the market. In addition, international specialist perfumeries such as Watson’s, Sasa and Sephora have all indicated their commitment to expand further in China. The slashing of the ban on direct sales in 2006 should also assist the growth of fragrances as companies such as Avon, Oriflame and Mary Kay spread the sector into rural areas through more affordable products.
Celebrity Future Not Certain; Artisanal Fragrances Step Up
The cult of celebrity has helped drive sales in fragrances in recent years, with more and more shelf space devoted to pop stars, actors, fashion labels and even authors. Although the risks of celebrity endorsement are apparent—the selling power of a particular icon is only as strong as their image, which can easily be tarnished by bad behavior or a new flavor of the month—the trend currently shows no sign of abating. Kate Moss is the latest star to jump on the bandwagon after signing an agreement with Coty, which also works with Kylie Minogue, Jennifer Lopez, Sarah Jessica Parker, and Victoria and David Beckham. Cozying up with celebrities has also proved successful for Elizabeth Arden, which uses carefully chosen stars to generate appeal among a range of consumer groups. With Britney Spears and Hillary Duff targeting the teens to twenties segment, the company is hoping for a hit among baby boomers with its Danielle Steel fragrance. However, this type of marketing does not appeal to every demographic, and will never become all pervasive as manufacturers look to specifically target every consumer segment.
In France, for example, the rich and famous do not have the same level of notoriety as they do in the U.K. and U.S., and consumers are more sophisticated in their fragrance selection, putting scent above image. As such, celebrity fragrances have not been a major trend in France. The coming year could also see the beginnings of what some industry sources suggest is an inevitable backlash against the celebrity trend. Consumers themselves will drive this change in demand, as their growing sophistication makes them more likely to be persuaded by high-tech ingredients and innovative delivery formats rather than savvy marketing campaigns.
Manufacturers may also start pushing for this shift. Although attaching a famous face to a fragrance provides it with a ready-made image and eliminates the need for full-scale brand building, celebrity brands do not tend to have longevity. In fragrances particularly, extending shelf life has become vital in an increasingly fickle market.
Specialty fragrances are becoming available to a wider audience and are emerging as a fast-growing industry niche. In November, beauty boutique Studio Fred Segal launched a store-within-a-store called Memoire Liquide, offering bespoke scents at accessible prices (between $30 and $75 for a three-pack). Scent Design also sells custom fragrances on a budget ($20–$30 per ounce), as well as offering online advice about blending and layering scents. Even upmarket perfumery Roja Dove—which offers both bespoke services and rare, top quality perfumes—has expanded from its Harrods home to the less exclusive House of Fraser department store in Manchester in the U.K.
Artisanal fragrances are helping to revive the industry’s status as an art form, bringing it back to its apothecary roots. Memoire Liquide, for example, consists of a library of 160 scents contained in glass vials complete with stirring rods. Bespoke perfumery, in particular, also helps to educate consumers about the craft—how scents are created, the types of ingredients used and how they react with the body’s own perfume to smell different on different people. This again adds prestige to the industry, potentially on a level comparable with the wine industry. Some consumers have already begun collecting rare scents, and some Web sites offer tips on how to source and store them. For the industry, this means a more discerning consumer, a reinvigoration of the premium fragrances segment and willingness to trade up for quality. The trend towards less concentrated eau de toilette varieties will also be reversed, with a resurgence of eau de parfum launches. Product life should also increase, bucking the present trend of high launch activity, and advertising budgets could also be cut, with funds instead being more heavily focused on the development side. There may also be a move away from the idea of a fragrances wardrobe as consumers seek out scents with which they have a more personal connection. Roja Dove is heading this trend, offering a service which helps the consumer to identify their signature scent.
According to Euromonitor International’s latest data, fragrances will grow as fast as the overall cosmetics and toiletries market—a rosier view than that presented this time last year. Manufacturers will need to carefully think about their strategy in emerging markets to keep ahead of the game. China, for example, has a number of pitfalls—the most significant being the lack of entrenchment of fragrances in the culture of the country—that need to be considered in parallel with the obvious potential that exists. Wider industry trends, such as the focus on the consumer and the drive for natural/ethical products, which will be covered in next month’s column, all need to be kept at the forefront of minds alongside those that are specific to the category—including the possible backlash against celebrity and the rise of a more educated consumer.