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Fine Fragrances Fight Back in 2006—Part 1

This feature originally appeared in the May 2007 edition of our sister publication GCI Magazine (

According to Euromonitor International’s ( latest data, fine fragrances put in a surprise appearance as a top performer in the cosmetics and toiletries market. The sector stood out as showing particular growth in 2006, coming in third after sun and baby care with an increase of 7% to reach $30.7 billion. In 2005, fragrances were the sixth most dynamic sector, beaten out by emerging categories such as men’s grooming products and skin care, where value-adding has been aggressive. This article focuses on the drivers of this change in fortune by examining key regions and markets and monitoring trends over the last year.

Mature Markets Reverse Meltdown

Together, Western Europe and North America account for almost 60% of global fragrance sales in value terms. In spite of the category’s formidable size, average annual growth since 2000 had, until 2006, been somewhat disappointing; both regions consistently registered rates below the global average. Euromonitor International’s 2006 results, however, indicate that, in both markets, fragrance is coming out of the doldrums with each clocking growth over 2%. In both markets, the premium sector is driving growth. However, this is somewhat deceptive in that it is in the main the lower end of premium or discounting that is fueling sales. In the United States, for example, manufacturers are exploiting the migration of consumers towards the mass retail environment with innovative strategies geared to this arena. Elizabeth Arden introduced its Curious Britney Spears premium fragrance into the mass market channels with specially designed smaller packages at price points under $20 to attract younger consumers—to great success. Similar tactics were employed in the United Kingdom, illustrating that creativity and perseverance can go some way to reviving an ailing category.

Direct Sellers Drive Emerging Markets

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. 

Sales of fragrances in Asia-Pacific grew by 5% in US dollar terms in 2006, a slight increase on the previous year. Growth was driven primarily by advances made in developing markets, such as China, Vietnam and India, underpinned by rising affluence, especially amongst white collar workers. In addition, enhanced media exposure, in the form of cable television and fashion magazines, raised consumers’ awareness of the various international premium fragrance brands while spreading Western beauty norms. In Japan, however, 2006 value sales of fragrances declined by almost 1% in current value terms. The main reason for this was that many fragrances, especially imported products, were sold at discounted prices through department stores, drugstores and discount outlets.

China Shows Promise

Looking forward, Euromonitor International predicts that the Chinese market will be a key source of growth in the region, driven by rising disposable incomes and improved distribution. International specialist perfumeries such as Watson’s, Sasa and Sephora, have all indicated their commitment to expand further in China. China was one of the world’s top 10 countries in terms of GDP growth measured at purchasing power parity between 2000 and 2005. This newfound prosperity is putting more money in the hands of consumers who are proving increasingly willing to spend it. BMW sold more Bentley Mulliner 728 limousines, which at US$1.2 million are the world’s most expensive car, in Beijing than in any other city in the world. In contrast to the West, conspicuous consumption is the done thing, and labels rather than quality prevail. In addition, the problem of counterfeiting is being taken more seriously by the Chinese government, due to the lobbying efforts of the leading manufacturers and the European Union. Legislative changes will also be influential in the medium to long-term. First, the Chinese tariff on premium fragrances was reduced from 30% to 10% at the beginning of 2005, thereby encouraging new brands to enter the market. At the same time, the repeal of the ban on direct sales in 2006 should further assist the growth of fragrances as companies such as Avon, Oriflame and Mary Kay spread the sector into rural areas and offer more affordable products.

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