I’m always interested in the financial side of the fragrance industry, even though I sometimes can’t make heads or tails of the specific fine point and details. I recently found some numbers for a few of the corporate giants like Givaudan whose ingredients are often the building blocks for the perfumes we wear and whose perfumers create some of the many fine fragrances released each year. The numbers demonstrate something we already knew: traditional Western fragrance markets are weakening, and the future for many perfume companies lies in emerging markets. [Update: 2/25/14 — Last week, I took a more in-depth look at a number of Western perfume markets, from Germany to the Netherlands, France, Italy and the UK, but also examined the Indian perfume industry and the Middle Eastern one. There is also a look at the full 2013 revenue figures for various industry leaders like LVMH, Givaudan, and IFF. You can read all that at: The Global Fragrance Industry.]
What’s interesting is that Latin America is one of those emerging markets, but the Asian one isn’t quite as strong as everyone may think. In fact, analytical reports from the Euromonitor indicate both the Chinese and Japanese perfume sectors are impacted by socio-cultural issues regarding fragrance use. Still, some of the numbers involved in terms of overall, global perfume sales and revenues are astronomical. Please note, however, that almost all of the articles below focus on the more established and significantly larger commercial fragrance market, not the niche one.
U.S. SALES FIGURES:
According to a report from the Cosmetics Design group, U.S. fragrance sales slowed in 2012:
The US fragrance market has taken a hit as sales dry up due to low demand, and figures just simply can’t meet those driven by the exceptional growth seen in the previous year.
Having charted a solid performance in 2011, growth dropped off in 2012, as the market could not meet the high levels of demand and extensive product innovation that led to a good performance the previous year.
Fragrance sales the previous year had benefited from higher-income shoppers who felt more comfortable spending on others and themselves as the economy improved, but with no celebrity must-have perfumes on the market in 2012, it suffered.
As you will note, the report implies that it is celebrity perfumes that drive sales, a fact that underscores why industry-supportive groups like the Fragrance Foundation have such a focus on fragrances like that of Justin Bieber. It’s a symbiotic relationship that is necessary to sustain both groups, much like whales and barnacles. Oddly enough, after writing this paragraph, I subsequently came across a report from the Euromonitor International analysis group that specifically mentioned Justin Bieber’s fragrance as contributing enormously to U.S. market sales in the previous year! In fact, it’s the Euromonitor’s financial breakdown that is the basis for the Cosmetic Group’s report:
After growing by 9% in 2011, sales of fragrances grew by just 3% in 2012. It appears that an improving economy in 2011 combined with pent-up demand and extensive product innovation led to strong growth in 2011, but this was not able to be repeated in 2012. Fragrance sales in 2011 had benefited from higher-income shoppers who felt more comfortable spending on others and themselves as the economy improved. The 2011 blockbuster launch of Justin Bieber also contributed to strong growth in 2011 as teenagers and young girls pestered their parents to buy them the pop singer’s fragrance. In 2012, there was no must-have celebrity fragrance to entice consumers.
[UPDATE -11/18/13 — For an in-depth analysis and report on the money, astonishing sales figures, and profit leaders in the celebrity perfume industry, you can read my new article Celebrities, Best-Selling Fragrances, Sales Figures & The Perfume Industry.]
The Cosmetic Group report and the Euromonitor also add a few other details that are interesting and which I’ve summarized as follows:
- The Fragrance sector is expected to have the slowest growth out of the US Health & Beauty sectors in the upcoming years.
- Female fragrance remains the largest sector of the market, but male fragrances are expected to post better growth and numbers this year.
- Like last year, L’Oreal USA is the market leader. Its strength seems to lie in the mens market, thanks to the number one selling fragrance, Acqua di Gio, as well as Drakkar Noir and Ralph Lauren Polo For Men.
- In Premium Women’s Fragrance, it has strong sales from Lancome’s Tresor and Miracle, Viktor & Rolf’s Flowerbomb, and Ralph Lauren’s Romance.
On a positive note, the report states that niche perfumes are offering a glimmer of hope for a market heavily impacted by the recession. Unfortunately, it offers no numbers or details on the niche sector. The Euromonitor analysis report warns that fragrance companies need to do something to deal with over-saturation:
With the appeal of niche fragrances in the premium segment, affluent consumers appear to have regained their interest in fragrances. Premium niche fragrances that are sold in limited distribution channels allow affluent consumers to feel that they have made a discovery. At the same time, manufacturers of fragrances will need to address consumer apathy and confusion. There has been an explosion in the use of scents beyond fine fragrances, with everything from hand dishwashing soap to fabric softeners to women’s razor handles now infused with scents. As a result, fragrances have lost their mystique and become less “special” and commoditised. With more than 100 new launches of fragrances a year, the glut of fragrances in the marketplace has also created consumer confusion. The saturated environment in fragrances has arguably contributed to consumer confusion and apathy, making it very difficult to make a brand stand out.
According to the Cosmetics Design group, the fragrance and flavouring giant, IFF, is doing well with second-quarter sales up 5% to $757.6 million compared to $721.3m for the corresponding period in 2012.
IFF has reported strong growth for its second quarter, driven mainly by an exceptional performance in the fragrance division, together with gains in all geographical regions including Europe.
A Market Watch article has more specific quarterly numbers:
— Reported sales increased 7% to $383.6 million, compared with $359.9 million in the second quarter of 2012. Excluding the impact of foreign currency, local currency sales increased 8%.
— Fragrance Compounds achieved local currency sales growth of 10% in the second quarter, more than offsetting a 1% decline in Fragrance Ingredients this quarter.
— Within Fragrance Compounds, our Fine and Beauty Care category had local currency sales growth of 13%, driven by double-digit growth in Latin America, North America and EAME. Functional Fragrances had local currency sales growth of 7%, led by double-digit growth in Latin America and Greater Asia and solid growth in EAME. This marks the 20th consecutive quarter of growth in Functional Fragrances, due to a strong level of new wins as a result of our three-pillar strategy.
— The emerging markets represented 52% of Fragrances Compounds sales this quarter. Within Fragrance Compounds, the emerging markets grew double digits in the second quarter over the prior year quarter, reflecting broad-based geographic and category growth. The developed markets, which represented 48% of Fragrances Compounds sales, also had strong growth.
— Fragrances segment profit increased 13% to $71.9 million in the second quarter of 2013, up from $63.6 million in the second quarter of 2012.
The interesting bottom-line conclusion from all that is that emerging markets were the real source of revenue. While all markets reported a double-digit growth, the Cosmetics Design group emphasizes that “52% of the fragrance compound sales came from emerging markets.” Furthermore, fragrance compounds grew by 10%, while the sale of actual perfume ingredients dropped by 1%. A perfume guide I found on eBay explains “a fragrance compound” as follows:
All perfumes are composed of both a base and a fragrance compound. The perfume compound will account for 20 to 50 percent of the fragrance and is made from essential oils and synthetic fragrances. Perfume bases, which account for 50 to 80 percent of a fragrance, are generally made from liquids such as alcohol and water. They also include a variety of stabilizers, which are used to fix a perfume’s scent and ensure that ingredients do not separate.
In short, it seems that IFF’s main source of revenue was a pre-existing compound base for a fragrance, as opposed to a more specific ingredient such as, say, lavender oil or jasmine oil.
According to a report by the Cosmetics Design group, Givaudan controls 25% of the global fragrance and flavouring market. And, in 2013, a good portion of its revenues came from the Latin American sector. The report states:
- International fragrance, consumer products and flavor giant Givaudan reported a 5.7 percent growth in sales for the first half of 2013, with a solid performance bolstered by high growth in Latin America and other emerging markets.
- In particular, the company’s fine fragrance unit, which had declined 5.5% in the first quarter, recorded growth of 2.5% in 2013 due to new wins and volume growth in Latin America.
- The company pointed to Brazil as a particularly strong area for fragrance sales growth, with overall fine fragrance sales in the region described as “double digit.”
- Givaudan’s overall fragrance sales increased by 5.5%, to CHF [Swiss Franc] 1,047 million. [My note: a Google currency conversion shows that “1047 Swiss Franc equals 1135.70 US Dollar.]
GLOBAL FRAGRANCE MARKETS:
A long time ago, I posted an article on Cultural Differences in Perfume Tastes between the U.S. and European markets. One of the issues that article addressed was the question of the hottest or biggest perfumes in each market for a specific year. In a discussion that ensued in the comment section, I referenced some U.S. market statistics that I had found for the fragrance sector from the Statistic Brain. I think it would be useful to repeat it again here. Relying on numbers from “NPD”, the 2012 numbers for the fragrance industry break down to:
|Perfume Industry Statistics||Data|
|Annual global perfume industry sales revenue||$27.5 billion|
|Annual US perfume industry sales revenue||$5.2 billion|
|Percent of American women who don’t use perfume||17 %|
|Number of perfume brands carried by US department stores in 2002||756|
|Number of perfume brands carried by US department stores in 2010||1,160|
|Percent of fragrance market held by Coty Inc||13 %|
|Percent of designer perfume brands priced at over $75||46 %|
|Percent of celebrity perfume brands priced at over $75||1 %|
The Cosmetic Group has some global numbers for the fragrance market, though they’re from 2009:
|Table 1: Fragrance market sizes by region, 2009 (US$m)|
|Middle East & Africa||2652.3||13.8|
|Source: Euromonitor International|
|Table 2: Fragrance market sizes by country, 2009 (US$m)|
|Source: Euromonitor International|
|Table 3: Premium global fragrance market vs mass global fragrance market|
|Source: Euromonitor International|
|Table 4: Leading fragrance brands, 2009|
|Avon||Avon Products Inc|
|Natura||Natura Cosméticos SA|
|Calvin Klein||Coty Inc|
|Giorgio Armani||L’Oréal Groupe|
|Estée Lauder||Estée Lauder Cos|
|Hugo Boss||Procter & Gamble Cos|
|O Boticário||Botica Comercial Farmacêutica Ltda|
|Yves Saint Laurent||L’Oréal Groupe|
|Source: Euromonitor International|
THE JAPANESE & CHINESE PERFUME MARKETS:
Finally, I found a Cosmetic Design article from 2010 discussing the Asian fragrance market:
According to Euromonitor International, the fragrance market in Asia Pacific grew 5% in 2010, reaching US$2.7bn and the outlook shows a similar level of confidence for the next few years. Despite its economic woes Japan remained the largest consumer market ($585.9m, -2.6%) but the devastating tsunami that hit the country in March this year will undoubtedly have caused additional problems spanning raw material supply, logistics and retail.
China’s burgeoning consumerism looks set to help the country take the number one spot very soon however; it posted a 7.8% sales increase to reach $553.3m in 2010. Strong growth was also recorded in Vietnam (+21.2%, $21.5m), India (+20.2%, $139.8m) and Indonesia (+15.6%, $146.1m).
In a separate report from May 2013, the Euromonitor has some interesting assessments about the Japanese fragrance market. Given how some niche perfume houses like By Kilian and Tom Ford seem to be targeting the Asian luxury market with releases like Flower of Immortality and the Atelier d’Orient collection, the numbers for Japan don’t seem to bode well:
- Current value sales of fragrances declined by 7% in 2012. Although Japan has the second biggest market for beauty and personal care, and carries one of the most developed and mature cosmetics markets around the world, Japan’s fragrances is still in its infancy, totalling mere a ¥42 billion in 2012. Japan ranks 45th for per capita consumption of perfume and this demonstrates low penetration of fragrance use among local consumers.
- Competitive Landscape:
- Fragrances is fragmented in Japan. ‘Various distributors’ parallel import foreign fragrances with 83% value share being sold through store-based retailing in 2012. ‘Various distributors’ accounted for 24% value share in 2012, with the leading distributor, Bluebell Japan, leading the field. Bluebell Japan has been operating in Japanese fragrances since 1954 and the company distributes 25 international fragrance brands, including Bvlgari and Gucci.
- Fragrances is anticipated to decline by a constant value CAGR of 5% over the forecast period. Lack of experience in using or even seeing fragrances during childhood is one of the biggest reasons for a continuous contraction of fragrances in Japan. Although consumers are demonstrating growing awareness towards smell in general, much attention has been paid to deodorants and other scented products such as laundry detergent among consumers. As Japanese consumers have a core value to prioritise group needs and pursue harmony, troubling others should be avoided by any means. Such traditional values shared among the Japanese might have discouraged the regular use of fragrances because the majority of consumers prefer a light scent and one could offend another by wearing a different or stronger fragrance. In addition to unfamiliarity to fragrances, Japan’s traditional culture may continue to hamper sales of fragrances over the forecast period.
The perfume market isn’t huge in China, either. In April 2013, Euromonitor‘s breakdown for the Chinese fragrance market was as follows:
- Given the value sales of RMB4.6 billion in 2012, fragrances in China remained a relatively small category; around one 18th of skin care in value terms. The year-on-year current value growth was 9% in 2012, compared with 12% in 2011, mainly due to the negative impact of the economic downturn. Apart from economic reasons, the lack of new launches in 2012 also explains the relatively lacklustre performance of the category. As a whole, product penetration is quite low in even top-tier markets, and fragrances are just seen as unnecessary products by most consumers. No remarkable changes have been seen in consumers’ acceptance of fragrances – the Chinese account for 20% of the world’s population, but only contribute 1% to value sales of fragrances. The average Chinese person is not used to wearing perfume, unless they are extremely particular about their image, usually those who work for international companies or as high-ranking executives.
- Despite the large number of brands present in the market, fragrances in China continued to be dominated by international companies in 2012 in value terms. Chanel accounted for a 12% share of value sales in fragrances, followed by Parfums Christian Dior with 8%. Calvin Klein Cosmetics, Hugo Boss and L’Oréal China were in third, fourth and fifth place respectively. These world-famous companies have established high brand awareness amongst Chinese consumers, as they have in international markets, mainly thanks to continued investment in advertisements on television and in fashion magazines. A report on Chanel N°5 about its allergy-inducing ingredient triggered a possible sales ban from the European-based Scientific Committee on Consumer Safety in late 2012. Therefore, more fragrance enthusiasts may become cautious about choosing products, yet the impact on Chanel’s sales in China would be minor in 2012, given the fact that the incident occurred in November in the year of 2012.
- Fragrances is expected to witness stable growth in China over the forecast period, with a CAGR of 8% in constant value terms. Considering the currently low penetration, as consumption is still at the preliminary stages, fragrances is expected to have huge potential in the forecast period. Increasing incomes and the rising attention paid to personal image will lead to higher acceptance of the use of fragrances in China. However, most consumers consider that fragrances are not a daily necessity. Therefore, direct selling companies may have more advantages in engaging beauty advisors to influence customers, by convincing customers how important it is to wear fragrances to boost one’s image.
ALL IN ALL:
I don’t like to inundate people with numbers, but I think the breakdowns listed above are interesting for a few reasons.
First, it seems that the fragrance giants who create the ingredients and building blocks for perfumery are doing very well, but the market as a whole has softened. Over-saturation is an obvious problem; Forbes magazine listed over 600 new fragrances just for women alone in 2012. If one assumes that the men’s division gets even half of that number, that would be over 900 fragrances released in a single market year. And who did the best in 2011? It might be Justin Bieber, horrifying and repugnant as that thought may be, and the company which produces his creations (Elizabeth Arden).
Second, the Asian luxury market may not prove to be the financial savior that some perfume houses expect. If the European or Western markets are suffering due to recessionary (or other) concerns, the Asian ones have other problems. General stereotypes about different cultural perspectives in the East may be backed by the financial numbers of perfume use or sales in such markets as China and Japan. The niche and commercial fragrance houses who hope to shore up soft Western sales will have to deal with such socio-cultural issues as consumers unused to fragrance from childhood (“Lack of experience in using or even seeing fragrances during childhood,” as the Euromonitor put it), or the thought that fragrance isn’t a daily necessity. In some ways, therefore, you might see the current generation as the foundation for future sales growth. Results down the road will yield a benefit, but how much will they increase revenues in the immediate future?
Lastly, when you take all the various issues and compile them together, the main question for me personally is this: how can the market sustain the increased prices that we’re seeing every year? Chanel just raised its prices for Les Exclusifs: a 2.5 oz bottle of Coromandel that was just $130 a few months ago is now $160. Dior’s Privée Line went up from $155 for the smallest size (4.25 oz) to $170. Tom Ford’s smallest size of 1.7 oz increased from $205 to $210. Niche perfumery may be a “glimmer of hope” for some fragrance groups, but, given the prices in question, how can the overall consumer market handle things in the long-run?
On a parallel tangent, when the more established, big houses like Chanel increase prices to such an extent, what does it mean for truly niche perfumery? One doesn’t see parallel sort of price jumps in houses like, say, Neela Vermeire Créations, Andy Tauer, Parfums d’Empire, or Vero Profumo. Yet, those brands hardly have the same financial backing as a LVMH brand like Dior, or the deep-pockets of Kilian Hennessey. The smaller, truly niche houses don’t have the same sort of retail exposure or high-profile, even though they are increasingly better value for the money and quality in question.
And how does the whole IFRA/EU situation impact their chances to compete? This summer, in June, Andy Tauer’s personal blog talked about how it was becoming increasingly hard for artisanal perfumers to function within the EU. He linked to a 2009 EU regulation, No. 1223/2009, on cosmetics which detailed everything from packaging to the ingredients therein. It’s enormous and, even as a lawyer myself, it was a chore to glance through it. As Mr. Tauer noted, “Please have a look at the pdf file and imagine what it must feel like, for a young entrepreneur, somewhere in one of the EU countries, who wants to start a perfume = cosmetics business. […] Basically, you cannot do artisanal perfumery in the EU.”
When I was younger and learning Latin, I learnt “Fortune favours the brave” (or the bold). The famous phrase “Fortuna audaces iuvat” (variously attributed to Virgil, the playwright Terence, or Pliny the Elder) always seemed a little glib to me. There is more than boldness, bravery, or good luck that is required to succeed in life, though they certainly help. Actual money drives things, too. As globalisation continues full-force and conglomerates expand their reach, consuming many smaller companies within their path, truly niche perfumers will have a harder time of things by virtue of comparatively reduced resources and opportunities. Yet, obviously, it’s these niche artists who are the true engines of innovation, change, progress, and quality, not the Estée Lauder or Elizabeth Arden creations that are the primary focus of groups like the Fragrance Foundation with its FiFis.
Clearly, I’ve strayed from my main point about the state of the mass, commercial, perfume market in 2012 and 2013. And the state of the union is extremely strong, thanks to perfume addicts like you and me. Together, we have contributed to global sales figures in excess of $27 billion — BILLION — in 2012. One can only imagine how those numbers will increase in the years to come.