The Scent of New Horizons

Worldwide spending on fragrances summed $43 billion in 2012, up 6% on 2011, and this reflected a year of transition and ambition for this beauty industry category. Brazil overtook the U.S. as the biggest market, mass brands accelerated at twice the rate of premium brands, age segmentation grew in profile (especially in the teen/tween segment), and global players foraged for new emerging market positions to offset disappointing results in Europe.

Some of these trends are consolidating in 2013, while others are reversing. Premiumization is back on the agenda in Western Europe, albeit with an affordable twist. Currency devaluation is impacting sales in Brazil, which could result in the U.S. regaining top spot. And segmentation is gathering momentum as more products look to satisfy the demands of specific consumption cultures. Meanwhile, the emerging market battleground continues to intensify.

Growth Stories In the Making

There are still pockets of the planet where fragrances remain conspicuously undeveloped. Emerging Asia accounted for less than 5% of industry sales in 2012 even though China, India and Indonesia have been three of the fastest-growing consumer markets in the world over the last five years. Collectively, those three countries fueled 16% of global retail sales in 2012, according to data from Euromonitor International. It begs the question as to why fragrances lag so far behind the curve.

China is key to the future opportunity. The Chinese government’s clampdown on extravagant consumption (and luxury gift giving) has potential to play out well for premium fragrances because well-heeled consumers are opting increasingly for less showy products. An expensive scent is not as ostentatious as a Rolex watch, after all. China’s vast interior regions are also potential hotbeds of growth for mass brands. In 2012, Chanel and LVMH spearheaded China’s fragrance rankings with shares of 12% and 11%, respectively.

Stronger industry investment in Africa and the Middle East is expected too. Saudi Arabia, South Africa and Nigeria were three of the fastest growing markets for fragrances in 2012, albeit from low bases. Youthful demographics and a burgeoning AB class are crucial in these markets. In Nigeria, for example, the average age of the population is 22 compared with 32 in Brazil, 38 in China and 40+ in many developed markets. Its social classes A and B are forecast to swell by around five million people between 2012 and 2020. Globally, only India and China are forecast to see stronger expansion in real terms.

To tap into these emerging market opportunities, brands will need to be tailored to regional tastes and consumption cultures. Estée Lauder’s Wood Mystique was created specifically to satisfy Middle Eastern consumers, for example, and its success has led to the launch of follow-up brand Amber Mystique this year. We likely will see more of this type of regional and even country-specific branding going forward. It could prove an especially important point of competitive differentiation in China, where preferred flavors and smells are often radically different to those in Western markets.

Affordable Luxury On the Rise

Sales of premium fragrances were around 18% higher than those of mass fragrances in 2012, when only five years ago the difference was 44%. The mass segment has been gaining on the premium segment for some time, but the acceleration was particularly strong last year with mass brands growing at virtually double the speed of premium brands. This reflected lackluster sales of premium brands in the key developed markets of France, Italy and the U.K., as well as softening growth in the U.S.

Affordable luxury is coming back into fashion in Western Europe, however, as evidenced by the soaring sales of fashion houses Michael Kors, Coach, Ralph Lauren and Burberry. It is a trend that bodes well for premium fragrances. Indeed, fashion houses themselves are becoming important drivers of the premium segment as they look to carve out new positions in fragrances.

France’s Hermès, which makes some of the most expensive handbags in the world, recently launched Eau de Narcisse Bleu and Eau de Mandarine (in 100 ml and 200 ml spray formats), for example. Tory Burch is another fashion designer ramping up exposure in fragrances, in this instance through a partnership with Estée Lauder.

The newest trend among the fashion houses is to offer affordable luxury scents that are light enough to be used as body sprays. Their accessible price points, and the size of their packaging, put them in a different category to the more traditional fashion house perfumes. But they are perceived as luxury brands, nonetheless. This segmentation of the premium segment could not have been better timed for Western Europe, which is still hemorrhaging economic confidence.

Celebrity Branding

The teen/tween demographic continues to be the target of significant new product development, driven by a range of new celebrity fragrances from the likes of Justin Bieber, Rihanna, Lady Gaga, Taylor Swift, Nicki Minaj and, most recently, teen pop idols One Direction.

The world’s population might be aging, but young consumers are more engaged with beauty and personal care than ever before due mainly to the popularity of social media platforms and mobile Internet connectivity. Growth in shopping mall culture and so-called "retailtainment" is also fueling brand awareness.

Innovation, as always, is at the hub of the global battleground. It is as key to the teen/tween market as it is to capturing a bigger market share in China.

A Pleasing Outlook

After a sticky period, there is a sense that global market conditions are looking up. Middle-class confidence is returning in the U.S., and to some extent in parts of Western Europe too. China’s consumption engine continues to steam ahead despite recent jitters concerning a cooling economy, and new frontiers are opening up in Africa and the Middle East. The clouds have not lifted altogether, but the horizon is definitely clearer. Cue a burst of new opportunities.

Rob Walker is a senior fast-moving consumer goods analyst with Euromonitor International. He can be contacted at [email protected].

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