The economy is slowing, but the fragrance industry is not. Companies such as Coty have seen tremendous success in the fragrance industry, especially the celebrity fragrance category which has truly become a widespread phenomenon with Coty at the forefront of this trend.
Fragrance industry not slowing down in economic downturn
Special to FashionIndustryToday.com
May 2, 2008
By Samantha Rose, San Francisco
The economy is slowing, but the fragrance industry is not. Susan Sexton one of the owners of Blend Custom Parfum a distributor for Galimard, the oldest parfumerie in France est 1747. BLEND offers the individual consumer, bridal parties,groups and corporations the opportunity to create their own signature line of fragrance or sensory brands in our quaint European boutique. Susan stated, “We have found that the luxury fragrance category remains constant in times of economic downturn. People still feel the need to take care of themselves, their family and their friends. That’s why with our proprietary system of making your own custom parfum our sales remain steady. Custom fragrance is a way of expressing individuality. In trying times, making your own signature line is a true luxury experience that consumers find to be a realistic choice. With travel and other luxury items being downsized, our custom fragrance concept is in even more demand.”
Companies such as Coty have seen tremendous success in the fragrance industry, especially the celebrity fragrance category which has truly become a widespread phenomenon with Coty at the forefront of this trend. In the past six years Coty has more than doubled in size, growing from a $1.4 billion to a $3.5 billion company.
Out of her high-end perfume company Miller Harris located in London, Lyn Harris speaks of her decision not to follow behind the mass market route that other perfumers were taking. “We had no choice; we just didn’t have enough money.” Following the opening of her shop in 2000 Harris launched Nouvelles Editions, a limited edition product line including eaux de parfums. Packaged in beautifully designed and crafted bottles and updated yearly according to trends these bottles are sold in her shops for 95 (€132) per 100ml, £30 more than her other perfumes. “It was frustrating that it was so costly having to produce new concepts and packaging with each new launch,” states Harris. “[The new product line] was a turning point for the brand. Now the sky is the limit.”
Creating new product lines is a key concept to classically trained perfumers. It assists with their global expansion strategy. Companies sell to a small, private customer base in shopping Mecca’s such as London, Paris, New York, and Moscow. In addition to their limited edition collection the £7m startup now offers bespoke service (with a one year waiting list) for individually tailored perfumes retailing at £6,000 a bottle. Lyn recently added to her line the new popular (almost too popular to some) celebrity fragrance line when she created L’air de rien (Air of Nothing) for actress and singer Jane Birkin. “But Jane’s an icon, not a celebrity, right?” asks Harris, wanting to make sure that her premium perfumes are not compared to cheaper, mass-market fragrances.
Avoiding the economic downturn in the fragrance industry is simple. Some look on a individuals such as Harris as their businesses fail. Harris, and thousands of others have absolutely nothing to worry about. It’s a matter of not being a glutton. Harris keeps a tight leash on her fragrance launches whereas many other companies bleed the market. Harris sells her fragrances to stylish, upscale boutiques and perfume counters. She refuses to sell to discount chains or in drugstores. She doesn’t really market herself. Where most companies spend as much as 50% on expensive ad campaigns she uses her knowledge of the market and the industry to create exciting new fragrances.
Major players in the perfume industry wish to achieve “masstige”- they want to have the benefit of offering both exclusive, prestigious and luxurious products while still gearing themselves toward a mass market. CFO’s in the industry must learn how to utilize management techniques used by other sectors of the consumer-goods industry. These CFO’s must know how to compete in the areas of research and development, marketing and distribution.
“The fragrance industry is probably the most difficult part of the consumer-goods sector,” asserts Claudia D’Arpizio, a Rome-based partner at Bain & Company specialising in luxury goods. “It has to follow all the rules of fast-moving consumer goods, but with an intangible twist — attracting consumers to buy something that is not at all linked to real needs.”
Due to the challenges of the masstige companies such as Coty, LVMH, Procter & Gamble, L’Oréal, Estée Lauder and the their competitors have been producing perfume products “like Kraft makes cheese,” as Dana Thomas puts it in her new book, Deluxe: How Luxury Lost its Luster (Allen Lane, 2007). The number of perfume launches is growing higher and higher. Industry researcher Mintel reckons there were 220 launches of women’s fragrance in 2006, more than double than in the 1990s.
One of the major drawbacks is the declining lifespan of fragrances. Mintel reckons that only 5% of new perfumes will still be on the market two years from its launch — a remarkably short period given that a fragrance can take six to 18 months to develop.
Perfume companies are changing their business models in an effort to truly take advantage of the boom in mass marketing techniques. They use the price points that are associated with luxury goods while simultaneously using high-volume distribution methods.
The concept of joining together mass marketing and fine fragrances is not a new one. Coty, a $3.3 billion company has had tons of practice at this. Shortly after starting the company in Paris in 1904 Francois Coty started searching for ways to sell beauty products at prices that anyone could afford. By 1912 he opened subsidiaries in New York and London and a few years following he launched Chypre de Coty a one of a kind perfume that was a classic and maintained long- lasting appeal. It was ranked right up there with Chanel No.5.
Over one hundred years later Coty is still an industry leader. Following the launch of Elizabeth Arden’s perfume named for Elizabeth Taylor, Coty launched their first celebrity perfume in 2002 with pop star Jennifer Lopez. This has been a tremendous success. J Lo’s fragrance line brings in a steady revenue of $100m a year since 2004, “no matter whether her personal commercialism rises or falls,” says Michael Fishoff, who joined the firm as CFO in 2002.
Many perfumers have started to utilize celebrities for their marketing campaigns. Celebrity perfumes have their very own challenges. With a few exceptions to this rule, “celebrity perfumes have a short, explosive life: they hit the market with a tsunami of publicity, sell vast amounts to the middle market and then disappear,” according to author Thomas in Deluxe.
In 2007, there were over 30 celebrity endorsed perfumes launched- this is five times more than in 2004. Consumers love them, and their popularity shows no signs of fading says Jeremy Seigal, managing director of The Perfume Shop, a UK retailer that sells some 1,500 products from 600 different brands. “In 2004, celebrity fragrances were about 1% of total sales at The Perfume Shop — today it is around 10%,” he notes.
Celebrity fragrances help the stars who lend out their name to labels. Most agreements offer celebrities between 5% and 10% of the fragrance’s revenues, not to mention the added exposure and press from large marketing campaigns.
When one relies heavily on pop singers and movie stars you run risks that mightbe tricky for CFOs to manage, says Fishoff from Coty’s base in New York. Think about it, how comfortable can it be to have corporate fortunes relying on the personal and professional exploits and misfortunes of Britney Spears (Elizabeth Arden), Paris Hilton (Parlux Fragrances) or Donald Trump (Estée Lauder)? “If they damage their reputation, they damage our business,” says Fishoff. “Exit clauses in the agreements just get you out of the business,” but don’t guard against damage to a brand or corporate reputation.
Celebrity endorsed fragrances currently make up around 10% of revenues at Coty, with the most rest of their revenues being from the “less risky, longer living” lifestyle brands. The Adidas brand, and deisgner lines such as Calvin Klein all are “safe”. Coty has no “predetermined percentage goal” for celebrity perfumes, Fishoff doesn’t expect these lines to exceed 15% of revenue, keeping the bulk of sales within the more stable designer and lifestyle portfolio.
A total of 80% of all of Coty’s perfumes fall under licensing agreements. “Finance is really a partner in this. We jump in when an agreement has been made, working closely with marketing on cash flow forecasting ]and the P&L,” Fishoff says.
Finance dictates ever perfume launch. “The big issues for CFOs in this industry is around ROI,” says Ali Dibadj, an analyst at brokerage house Sanford Bernstein. This is particularly true for companies with a “staggered profitability cycle,” he emphasizes. Companies shell out a tremendous amount of cash when marketing a new perfume. After six to nine months, Dibadj says, CFOs of fragrance firms need to ask themselves, “At what point do I pull back, and move the product into mass-market channels to maximize the whole cycle?”
At Coty, CFO Fishoff notes, “both channels — department stores and drug/mass — are important, and we launch new products separately in each channel. We have cascaded some of our SKUs from prestige channels to mass channels, but only when we replace the ‘lost’ SKU at prestige with a new ‘exclusive’ do we manage the channel transformation” to the next tier.
As for knowing when a fragrance has reached its full potential in a particular tier, “there is no magic formula,” he says. “You [just have remain] close to the commercial performance as well as the supply-chain implications.”
Dictating whether or not consumers will desire more Calvin Klein and J Lo scents is impossible. In the US, Fishoff notes, prestige brands are growing only 1% to 2% a year. Thus finance at Coty has a big role to play when it comes to identifying “the few untapped users,” including consumers in their teens.
Procter & Gamble epitomize the concept behind mass marketing. Launched merely15 years ago from P&G’s base in Geneva, the companies fragrance division has used it’s $68 billion multinational’s financial muscle — and its emmense supply chain — to dominate the fragrance industry.
A major part of CFO Feola’s job recently has been to integrate one of P&G’s biggest-ever acquisitions, Germany’s Wella — a deal he helped close three years ago while director of acquisitions and divestitures at P&G Global Beauty Care in Ohio. Courtesy of that acquisition, P&G’s portfolio of fragrance brands went from eight to around forty.
Feola knows the importance of developing a global expansion strategy that relies on exclusivity and luxury. “Our focus has been to reduce the number of brands,” he says. Proctor and Gamble’s reallignment strategy causes the company to focus on aiming for “fewer, bigger and better” brands, Feola says. D’Arpizio of Bain says “In the past, these conglomerates just bought market share,” she explains. “Now they’re using their brands to cover different consumer segments in a more complete way, serving as a cushion against a change in tastes or an economic downturn.”
The concept of fewer launches, controlled distribution and lavish branding probably isn’t always easy to sell to the head office back in Ohio, but it must certainly help that the prestige fragrance division is growing faster than many other parts of P&G — “at double-digits for the past few years,” says Feola, who declined to provide precise numbers. Not bad for a company whose group goal is to deliver annual sales growth of between 5% and 7% through to 2010.
The way Feola sees it: “The essence of the prestige business is to learn how to play with the rules. We’ve been learning fast.” The fragrance industry shows no sign of slow down- they just have to step it up when it comes to marketing, and targeting a proper market to ensure future growth and financial stability. Perfume will always sell, it’s a matter of positioning your product in the best possible manner to produce the highest level of consumer results.[]