NEW YORK — Revlon’s momentary honeymoon with department stores is over.
Six months ago, Revlon saw the department store fragrance business as a strapping white knight, capable of hoisting its mass market brand back into the world of glass counters, marble floors and high glamour.
Now, disenchanted with the business, the company has postponed plans to reenter department stores until 2007, citing a need to focus on mass market brands.
Revlon had planned to plough its way back into the category this summer after more than a decade’s absence, armed with an advertising and promotional war chest of as much as an estimated $25 million. But when it comes to the fragrance market, even the best laid plans are vulnerable to change.
As Revlon learned all too painfully, things have changed in the market while it’s been gone.
The industry — once predicated on longevity — has evolved into a rapidly changing cycle of one-hit wonders. A decade ago, a successful fragrance typically had a seven-year lifespan in department stores with sales rising in the first three years and tapering off in the next four. Today, a “hit” sticks for little more than a year before sales are crimped by new competing entries and the original is relegated to the mass market. It’s become a game of market share, and the game has stunted overall sales growth.
In fact, industry experts warn that the rising tide of fragrances is eroding profitability. In 1997 — the year scents like Acqua di Gió for Men by Giorgio Armani and Gucci Envy made their debut — department stores cleared room for 40 new scents, which fueled sales of 78 million units that year, noted Jack Wiswall, the outgoing president of the Designer Fragrance Division of L’Oréal USA, a business that includes Giorgio Armani and Ralph Lauren fragrances. Wiswall added that last year, despite taking in 150 fragrances, department stores sold 58 million units.
The size of the fragrance business has remained stagnant at $2.9 billion, almost level with 1997 sales of $2.8 billion, according to The NPD Group.
Industry consultant Allan Mottus noted that a decade ago, women’s fragrance sales accounted for 38 percent of department store beauty sales. They have dropped off to 28 percent. “It’s become a PacMan game, where each launch gobbles up the brand’s existing fragrance sales,” said Mottus.
The rapid-fire launch rate is downright dizzying for consumers, and perilous for fragrance manufacturers, which industry experts say are “living on the pipe,” or launching one scent after another to maintain market share.
This “treadmill of volume,” as one beauty executive coined it, has changed the business model, which in many cases now includes the mass market. For prestige fragrance marketers that eventually turn to the mass market, industry sources estimate that they depend on the parallel market for 20 to 30 percent of their business.
“The profit model has changed as the channel where fragrances are sold has changed,” said William B. Chappell, an analyst with SunTrust Robinson Humphrey Capital Markets. “The mass market has made the model more profitable, faster.” Chappell added that several companies — including Elizabeth Arden — put more emphasis on the mass market as a long-term growth vehicle.
To keep pace in the prestige market, companies are launching more fragrances with less investment. Industry sources estimate that 10 years ago, companies would spend an average of $12 million to $15 million to introduce a prestige scent (backed by promotional materials, sampling and advertising) to full department store distribution. They’d expect to swallow a loss of roughly $5 million in season one, and make a profit in season two or three. Today, there’s no guarantee they’ll get to season three so companies have trimmed launch budgets to $5 million to $7 million, pulling back on TV and print advertising. Last year, there were more than twice the number of fragrance launches than in 2000, according to NPD. Despite that activity, media support dragged behind, increasing 17 percent to $361 million in 2005 from $303 million in 2000, according to Nielsen Media Research. These days, very few companies are willing to lose money on a launch, report fragrance executives.
The industry’s prospects may be seemingly growing dimmer, but beauty firms still flock to the fragrance business.
In fragrance, the price of admission is one bottle, which is more affordable than a color cosmetics or skin care line, noted former fragrance executive Camille McDonald, who, prior to her post at Bath & Body Works as executive vice president of merchandise and brand development, headed up Parfums Givenchy and Guerlain Inc. at LVMH Moët Hennessy Louis Vuitton.
“If you are in the cosmetics business, fragrance is still a huge segment,” said John Demsey, global brand president of Estée Lauder for the Estée Lauder Cos. Inc. “If you win, you win big. And we’re all in the business to win.” Lauder’s Beautiful and Pleasures fragrances currently rank within the top three women’s scents this year, according to NPD. And its Unforgivable by Sean John is currently battling with Acqua di Gió for Men by Giorgio Armani for the top seat in the men’s market.
“The U.S. market is probably the least profitable for the fragrance industry,” commented Don Loftus, president and chief executive officer of P&G Prestige Products Inc. “P&G is very price-conscious in the U.S. and elsewhere, but there are companies that see the U.S. market as a window to the world,” said Loftus, adding the sheer volume of units sold here may keep a manufacturer’s factories running but not pad the bottom line. He estimated that the U.S. accounts for 20 to 25 percent of the world’s fragrance sales, and noted that scents often have more longevity in duty free and international markets.
Loftus recalled that when he began his career in the late Seventies, department stores would battle to get a fragrance — say Oscar or Opium — on their counters first, and then dress their entire store to celebrate the launch. “Today, there’s no more drumroll,” he said. Of course, the YSL Beauté scents, Oscar and Opium, were two of only seven scents launched in 1977. Both fragrances still rank within the top 50 scents, according to NPD.
In a nod to days gone by, an undercurrent of practicality has emerged. It’s prompted a collective plea with the industry to begin to close the faucet on the steady product stream, but nobody seems to want to go first. Neil S. Fiske, ceo of Bath & Body Works Inc., referred to the scenario as the “Prisoner’s Dilemma,” explaining that many companies are trapped in the current business model. They are unhappy with their present predicament but are afraid to take action.
But fragrance executives surveyed are bursting with ways to break free. Their ideas include:
l Make more of an up-front financial commitment to research and development.
l Structure a tiered retail launch strategy — a slower rollout allows executives to monitor when a fragrance is a hit and when to call it quits.
l Abandon old proverbs for doing business, such as, “If you don’t open big, don’t bother coming back.”
l Calibrate advertising spending to sales, and be committed to long-term support.
l Be prudent about launch expectations.
Christian Courtin-Clarins, president and ceo worldwide of Clarins Group, gave a speech at the recent WWD Beauty CEO Summit, analyzing the business. He said that for 100 fragrances launched in a year, “80 will totally disappear in five years,” and three will rank in the top 30.
He called for retailers and manufacturers to stop arm wrestling over margins, and work hand in hand and use that margin money instead for advertising to draw people into the store.
“When we reduce our advertising budget in many countries we increase the number of promotions in the store. But we didn’t bring in new customers,” said Courtin-Clarins. “You don’t build a brand on promotion. You build a brand on advertising, on service, on know-how.”
The rate of launches has prompted several players to market their fragrance like a blockbuster film, which reaps the bulk of its sales within the week it premieres. But the chances of attaining blockbuster status — or reaching sales of $20 million to $60 million — are slim. Like Hollywood, the fragrance industry is now teeming with celebrities. After all, if celebrities can power sales of a stack of weekly magazines, they might be able to sustain department store fragrance sales. “The flurry of fragrances today follows the world’s fascination with celebrity,” said Wiswall of L’Oréal. He noted that celebrity concepts meshed with consumers’ pull toward the “warm and fuzzy” scents after the Sept. 11 terror attacks, and away from special occasion fragrances.
NPD stated that the spike in launches from 2001 to 2002 was a reaction to a sales slowdown that followed a dip in consumer confidence. In fact, prior to 2002, there were never more than 80 fragrance launches in a given year. Four years later, the number of annually launches regularly exceeds 100, according to NPD.
Coty Inc. reignited the celebrity trend — carved out by Elizabeth Taylor in the Nineties — when it introduced Glow by JLo in fall 2002, which generated $40 million in its first four months on counter. A gaggle of Jennifer Lopez’s peers — including Sarah Jessica Parker, Paris Hilton, Celine Dion, Sean “Diddy” Combs and, more recently, Mariah Carey — have followed.
Today among the top 100 women’s prestige fragrances, almost one in every four sold — or 23 percent — was either a celebrity scent or celebrity-endorsed, according to NPD.
“Fragrance has morphed into a fashion and entertainment business,” said Mottus. “But there’s nothing prestige about celebrity scents. They are just stoking the fire.”
In fact, other executives, speaking not for attribution, complain that by replacing the designer influence with a celebrity mania, a 15 minutes of fame mentality has gripped the business at retail.
Moreover, the sheer amount of launches, celebrity-focused or not, has shortened the average life cycle of a fragrance. “Dramatic declines have been seen in the longevity of a new launch in 2005, primarily in the women’s category,” said Karen Grant, senior beauty industry analyst for The NPD Group. Grant added that while prior to 2005 the average fragrance launch would continue to generate healthy sales for two to five years, last year the typical new entry saw sales nosedive to zero within 12 months.
Often, once a fragrance’s sales have dried up in department stores, it gets cycled into the mass market.
As the number of retail outlets has grown, the mass market has become more difficult for a prestige company, particularly one beholden to shareholders, to ignore. A decade ago there were 1,000 fewer Wal-Mart stores, Target had just opened its first supercenter and Kohl’s was a regional chain with roughly 120 stores.
“Fragrance is now a commodity,” declared Raymond Piergiorgi, chief operating officer of Quality King, a company that distributes prestige fragrance brands to the mass market. “You can go into any Target, Sears or J.C. Penney and find every brand that’s sold in department stores.”
Piergiorgi added the lag time between department stores and the mass channel of six to 12 months is becoming compressed and more planned: “It’s the only way for companies to stay profitable and to stay ahead.”
For Quality King, the glut has led to more “opportunistic buys” and allows the company to cherry-pick which prestige fragrances are ripe for the mass market.
“The [prestige] brands that make it into mass are very limited, because if they are successful in department stores they sell through,” said Piergiorgi, adding that flankers aren’t much use other than to keep a brand alive.
The masterbrand has taken on the role of industrial-strength scaffolding, designed to support many tiers of flankers. These flankers, or product extensions, were originally intended to prop up sales of the masterbrand, but now experts say they regularly cannibalize their predecessors’ sales.
Neil Katz, president and ceo of Gemini Cosmetics Inc., said flankers help build brand awareness, but that in recent years many companies have resorted to “protecting flankers with flankers.”
With brands jockeying for space, the number of companies that can afford to play in the space has dwindled.
“Four giants and Chanel control 90 percent of the business,” declared creative consultant David Horner of Horner Enterprises Inc. Those giants, armed with bulging brand portfolios, include L’Oréal, Lauder, P&G Prestige and Coty. “What’s wrong with the business today is that it is done by committee,” said Horner, who credited smaller fragrance houses with injecting creativity and controversy into the business.
Coty upped the competitive ante dramatically in May 2005 when it acquired Unilever’s prestige fragrance business, including the Calvin Klein and Vera Wang brands. It also has had great successes mining Tinseltown talent. Eric Thoreux, president of Coty Beauty Americas, said, “Celebrity scents have created curiosity. They’ve given consumers a reason to stop at the fragrance counter.” Coty has shifted its marketing efforts to target the fan base of its stable of celebrities. For instance, the company includes scented strips in CD cases for Shania Twain albums, promotes its Mary-Kate and Ashley Olsen scents on mary-kateandashley.com, and piggybacked off Celine Dion’s Las Vegas act by outfitting the lobby of the venue with interactive scent machines.
“Our launch model is changing, and we are trying to decrease our up-front risk by changing the media mix,” said Thoreux, adding that Coty has not pulled back its media spending, but rather reallocated it. “As a result of market and consumer trends, Coty has increased its number of launches over the last three years by 50 percent,” said Thoreux.
Meanwhile, P&G Prestige (formerly Cosmopolitan Cosmetics) continues to look to fashion houses for fragrance acquisitions, and will officially add the Dolce & Gabbana fragrance license to its portfolio July 1.
P&G employs a three-tiered rollout strategy for many of its fragrances, launching them first in specialty stores, and then six to 12 months later into “better department stores,” said Loftus. He added that department store chains, such as Carson’s, mark the scents’ final destination.
However, P&G’s fragrances baring the names of couture fashion houses, such as Valentino and Gucci, never reach the third tier, and luxury fragrances like Jean Patou remain exclusive to specialty stores.
These giants have cast a shadow on smaller players, many of which have since deemed the cost of doing business too great.
Some industry watchers wonder if the frenetic pace of launches will stifle new classics from emerging. Also, with the cost of goods used to create fragrances rising, perfumers have had to learn to do more with less, and are increasingly turning to aromatic chemicals to replace natural ingredients. The industry is vulnerable to the fluctuating price of natural crops, which in some cases — namely patchouli and vertiver — are overcultivated and costly. The costs of ingredients may be increasing, but in some cases development budgets are skrinking. “Projects are getting cheaper and cheaper daily,” said one industry source. “It’s a cycle. The fragrance house puts pressure on the perfumer to keep costs low and then he in turn puts the squeeze on the supplier of raw materials.”
The creative process is feeling pressure as a result, said Carol J. Viñals, senior perfumer at Takasago International Corp. For oil houses, like Takasago, the number of fragrance projects has skyrocketed. But once sales of a scent start to fall off, the company must quickly make up the loss by winning another fragrance submission. Viñals noted that 20 years ago, a perfumer might have a year to develop a juice. Today, extreme cases warrant turning around a fragrance within two or three months.
“To hit the magic of a potential classic is a lot harder today,” said Viñals, referring to the stepped-up pace of the business.
“There was a wonderful charm to the business that just — poof — went out,” commented Mottus, adding that the industry used to be predicated on longevity. “Now, when fragrances go south, they go south very quickly,” noted Mottus.
To add stability back to the business, many fragrance houses are looking to the luxury accessories as a model for how to expand their own businesses. They have put a good amount of elbow grease into sending the message to women and men that they need multiple scents to suit their lifestyle.
“As a manufacturer, you want to appeal to people’s different fragrance needs,” said Katz of Gemini. “Fragrance is a flexible [business] model.”
Editor’s note: This article is the first of a weekly feature called Adding Up Beauty, which will contain marketing and financial analysis of the beauty industry.