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Fine Fragrances Fight Back in 2006—Part 1

Posted: May 1, 2007

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Latin America and Eastern Europe led growth in the fragrances sector in 2006, with sales increasing by 21% and 13%, respectively, in US dollar terms. Both markets have a strong tradition of wearing scents, particularly Latin America, where there are products for babies and young children, as well as adults. In this region, mass fragrances were the engine of growth, as consumers are more concerned about the actual scent than the image of the product, and thus are more price conscious than in other markets. Innovation also helped this subsector, particularly efforts by domestic direct sales players, such as Natura and O Boticário, which increasingly focused on using local ingredients to create scents of a quality on a par with international products.

In 2006, direct sellers remained the dominant distribution channel for fragrances, accounting for 60% of regional value sales. Notable new launches included Lily Essence by O Boticário, which shot to the number one position in Brazil—the region’s largest market—shortly after an innovative launch including short message service (SMS) marketing. Going forward, Latin American consumers are likely to continue opting for national products over imported ones, due to their lower prices, which are a significant factor impacting purchasing decisions in a market where 50% of consumers have an annual disposable income of less than $1,000.

The growth rate of fragrances in Eastern Europe was only slightly impacted by the Russian law entitled “On State regulation of the turnover of alcohol and alcohol-containing products,” which brought about a crisis in that country’s market in 2006. The law, which came into force on July 1, 2006, required producers, distributors, and retailers of alcohol-based perfumes, cosmetics and household cleaners that contain more than 1.5% ethanol to obtain two new licenses: one for possessing and one for selling such products. In addition, the companies were required to report data on the movement of these products to the Federal Tax Service. The rule was intended to regulate the industry as part of efforts to curb counterfeiting. However, it appeared to be not only ineffective, but also left cosmetics companies unable to produce, import or distribute perfume or other products containing alcohol. This law has now been amended to reduce the impact on the industry, indicating that positive growth forecasts are likely to be realized in the future.

Mixed Fortunes in Asia Pacific

Euromonitor International has observed that, aside from Australasia, Asia-Pacific is the smallest regional market for fragrances, accounting for less than 7% of global US dollar value sales in 2006. Cultural and economic drivers are responsible for this distinction. With the exception of highly Westernized societies, such as Hong Kong and Singapore, where a high proportion of sales are made to expatriates, per capita usage remains limited, due to the perception of fragrances as extravagant luxury items. In countries such as India, sales are further hindered by the wide presence of black market and counterfeit goods, as well as the enduring popularity of traditional indigenous perfumes, such as attar. Fragrances are also a relatively novel concept to both China and Japan, where such products have a somewhat unsavory image due to their association with the elimination of body odor.