The fragrance industry is facing a test of faith.
The sales trend in the U.S. prestige market has provided little cheer. The NPD Group reported that the fragrance market dipped 2 percent, to $2.88 billion, in 2006 and took a steeper dive in unit volume. Moreover, month-by-month reports for this year have remained “tough,” according to Karen Grant, senior beauty analyst for the consumer tracking firm.
To make matter worse, the dynamics that have driven the business for the past three years — flanker fragrances and celebrity scents — are showing signs of maturation. “These strong trends are still continuing, but they are not fueling enormous growth,” Grant said, noting that the requirements of the game have stiffened. “It’s not enough now to have a celebrity name,” she continued. The celebrity has to be well-rounded, perhaps with a successful apparel or accessories line, like Gwen Stefani. Grant stressed the importance of keeping a name fresh in the public mind. Pointing to the success of Giorgio Armani, she said, “How do you keep a brand aspirational? You have to have a cool factor.”
Fall certainly will be a test of the genre, with Coty introducing Covet Sarah Jessica Parker, its second big launch by the actress; Stefani’s first scent; Kate Moss’ debut, and a Jennifer Lopez limited edition, as well as a second scent by David and Victoria Beckham. The other power in celebrity marketing, Elizabeth Arden, is rolling out its long-awaited big gun, Mariah Carey, and Britney Spears’ Believe. The latter celebrity may prove the resilience of the category. Industry analyst Allan Mottus speculated that Spears’ tempestuous personal trials have not seriously eroded her following. He drew a parallel with Elizabeth Taylor’s history of tabloid torture and how women ultimately rallied behind her. “She is getting a real dimension,” he said of Spears. “It’s not the Paris Hilton effect.” In addition, Parlux Fragrances Inc. is launching another Hilton fragrance, called Can Can.
Both Mottus and Grant agreed that Avon Products Inc. hit a home run with Derek Jeter’s Driven in the direct-selling channel.
While the attention has been on celebrity for the last three years, there seems to be a bit of resurgence in designer scents this season, with major launches by Gucci, Marc Jacobs, Tom Ford, Dolce & Gabbana, Giorgio Armani, Ralph Lauren, Hugo Boss, Jil Sander, Prada, Dior, Givenchy, Kenzo, Thierry Mugler, Azzaro, Lacoste, Donna Karan and Yves Saint Laurent.
According to NPD, the celebrity category grew by $103 million, from $93 million in 2003 to $196 million in 2006. But the designer fragrance business slightly exceeded that mark by growing $115 million, from $1.81 billion to $1.93 billion. Scents sold on store cosmetics counters, rather than on fragrance bars, dropped by $143 million, to $531 million, in the same period.
Now the future hangs in the balance and the fragrance market seems to be in a lull, waiting to catch the next wave. “We’re waiting for the new powerhouse launches of the fall,” Grant said, noting that profound forces are at work. “One thing that the world of celebrity did is to help anchor the idea of fragrance into the minds of the younger consumer,” she said. “So now we have 13-year-olds asking for Juicy Couture,” Grant said, adding that a similar phenomenon is happening on the men’s side with body sprays like Unilever’s Axe.
“That is a great place for the industry to be in,” she said. “It has helped spark a new generation of users.” The trick, Grant added, was “to leverage that and keep the excitement in prestige.”
Grant also sees pockets of excitement coming from the new niche-oriented artisanal fragrance projects, like the Les Exclusifs de Chanel collection of 10 fragrances and the Creed brand. “The smaller brands have an indie influence and are creating a new dynamic,” she said.
Also emerging are new olfactive families of scent, beyond the usual florals. New families involving different types of orientals are beginning to resonate with the consumer, she said. In addition to experimenting with niche projects, major manufacturers are reinforcing their classic brands. “What we expect to see for the fall is a resurgence of the classics,” Grant said. “You will see newness, but you will also see the strength of the classics.”
Mottus sees fragrance brands like L’Oréal’s Viktor & Rolf as niche propositions, marketed mostly in the 400- to 500-door high-end specialty stores. The celebrity scents he considers “high-end mass market” that play a role for department stores, similar to Jovan and Prince Matchabelli in the Seventies.
The purely artisanal projects, like Chanel Exclusifs and Memoire Liquide at Studio at Fred Segal, “is a nice return to the Thirties, the days of Jean Patou and Caron. It’s a new beginning for people who want fragrance for themselves,” he noted. This combines what Mottus sees as another bright spot — Internet sales, which he estimates as generating 5 percent to 7 percent of the market. It’s an outlet for old classics that department stores no longer stock and gives younger consumers a chance to connect with the past.
Regeneration is an inviting subject, since the current data is anything but. Wal-Mart Stores Inc., which controls 25 percent of the mass beauty market, has been cutting back and drugstore chains have made dramatic retrenchments, he noted. Department stores have shortened the selling life for seasonal fragrances, flankers and the weaker launches to six to eight months. “The brands are getting smaller and there are more of them,” he noted. The average price point of fragrances, which have gone from $49 to $55 for a Macy’s customer, has been increasing by 5 percent to 7 percent a year since 1997, while consumption dropped 20 percent. Add to this the retrenchment by Macy’s Inc. (formerly Federated Department Stores) in closing at least 80 doors in the wake of the May Co. merger. But Mottus pointed out that the most critical move was when then-Federated slashed inventory by increasing stock turns from two-and-a-half times to three-and-a-half to four.
“Everybody is looking for return on investment,” Mottus said, pointing out that among the two best companies at lowering launch overhead and increasing staff productivity are Coty and Arden. Considering that the celebrity category “is not growing in total sales,” efficiency becomes key for the entire industry. “The fragrance category is running at full speed into a narrower and narrower crevice,” Mottus observed, adding, “Celebrity can only survive as long as the economic model supports it.”
According to the NPD data, women’s fragrances dropped by 3 percent, to $1.91 billion, while men’s scents remained basically flat at $970 million. As one bright spot, the sales of juices were up in 2006 — plus 1 percent in women’s and 2 percent ahead in men’s. But gift sets, a prime engine of department store fragrance merchandising, continued their long-term slide. “We are seeing a drop-off in the number of sets on counter and the productivity of sets,” NPD’s Grant said. There are more sets on counter than there were a decade ago, she said, but there are fewer sets than there were three years ago and they are generating fewer sales. The fall in unit volume has been eased by price increases.
Sets, however, are key to a brand’s survival. According to NPD, sets generated 35 percent of women’s sales in 2006 and 39 percent of men’s sales. More important, they are increasingly critical to the vital December business. In 1997, sets were responsible for 39 percent of the women’s business in December. In 2006, it was 45 percent. On the men’s side, sets represented 41 percent of the December business in 1997 and 49 percent in 2006.
The significance of this becomes clear when the concentration of the business is examined. Twenty percent of the entire year’s volume is done during the two weeks before Christmas, making that two-week volume bigger than the revenues of September, October and November combined, according to NPD. Grant described this dynamic as “an extremely precarious method of doing business.” She added, “There is a constant need for more excitement throughout the year.”
In the fragrance category’s over the last decade, growth has been largely illusory. In dollar terms, the U.S. department store fragrance business grew 3 percent, to $2.88 billion in 2006 from $2.8 billion in 1997. But the number of units sold decreased by over 16 million, to 54 million by 2006. The plunge was offset by an average price increase of $13.50, to $53.13 a unit by 2006.
In discussing challenges faced by the industry, Grant noted that the men’s category is doing somewhat better than the women’s, partly because its seems driven by newness.
NPD ranked the top five men’s brands for 2006 as Giorgio Armani’s Acqua Di Gio and Armani Code, Sean “Diddy” Combs’ Unforgivable and Ralph Lauren’s Polo Black and Polo Blue. Only one of those fragrances, Acqua Di Gio, could be considered a classic.
The women’s ranking for 2006 contains older scents: Estée Lauder’s Beautiful, Chanel No.5, Lauder’s Pleasures, Cashmere Mist from Donna Karan and Calvin Klein’s Euphoria. As for the top launches of last year, NPD listed them as Unforgivable, Lancôme’s Hypnose, Vera Wang Princess, Armani Code Woman and Lacoste Essential.
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