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Making scents of the world's perfume industry.
Janet Kersnar, CFO Europe Magazine
December 10, 2007
"We had no choice; we just didn't have enough money." That's how Lyn Harris, owner of high-end perfume company Miller Harris in London, describes her decision not to follow the mass-market route of other perfumers. Rather, shortly after setting up shop in 2000, she launched Nouvelles Editions, a range of limited-edition eaux de parfums sold in beautifully crafted bottles, updated every year according to what's in fashion, and sold only in her shops for £95 (€132) per 100ml, £30 more than her other perfumes. "It was frustrating that it was so costly having to produce new concepts and packaging with each new launch," recalls Harris from her stylish boutique on Bruton Street in London's Mayfair. "[The new range] was a turning point for the brand. Now the sky is the limit."
The new range is just one part of the classically trained perfumer's global expansion strategy, selling her exclusive fragrances to a niche customer base at shopping hotspots such as London, Paris, New York and Moscow. And along with the limited-run range, the £7m startup now has a bespoke service (with a one-year waiting list) for individually tailored perfumes at £6,000 a bottle. She also recently dabbled in the industry's hugely popular — some would say too popular — "celebrity" fragrance lines, creating L'air de rien (Air of Nothing) for actress and singer Jane Birkin. "But Jane's an icon, not a celebrity, right?" asks Harris, almost as if to assure herself that her premium perfumes haven't crossed the line into the realm of cheaper, mass-market fragrances.
As their businesses languish, multinationals in the $30 billion fragrance industry have reason to be envious of Harris — she keeps a tight grip on launches while others glut the market; she sells fragrances to stylish boutiques and upscale perfume counters, not to discount chains or in the neon glare of drugstores; she foregoes marketing as others spend as much as 50% of sales on flashy ad campaigns; and she blends customer knowledge with technical expertise to create bold new fragrances while others — in the words of John Ayres, chairman of the Fragrance Foundation UK — play it safe and produce "bland, consumer-researched smells that don't offend anybody."
But there's a limit to their envy. The reality is that the major players want "masstige" — brands that capture the benefits of being both exclusive, prestige products and mass market. For CFOs in the industry, this means learning how to use management tactics employed by other parts of the consumer-goods industry to compete in disciplines such as R&D, marketing and distribution, says Luigi Feola, finance chief of P&G Global Prestige Products, the fragrance division of Ohio-based consumer goods company Procter & Gamble.
That is far from straightforward. "The fragrance industry is probably the most difficult part of the consumer-goods sector," asserts Claudia D'Arpizio, a Rome-based partner at Bain & Company specialising in luxury goods. "It has to follow all the rules of fast-moving consumer goods, but with an intangible twist — attracting consumers to buy something that is not at all linked to real needs."
Like Kraft Makes Cheese
Despite, or perhaps because of, the masstige challenges, Coty, LVMH, Procter & Gamble, L'Oréal, Estée Lauder and the like have been churning out perfume products "like Kraft makes cheese," as Dana Thomas puts it in her new book, Deluxe: How Luxury Lost its Luster (Allen Lane, 2007). Indeed, the number of perfume launches is skyrocketing. Industry researcher Mintel reckons there were 220 launches of women's fragrance in 2006, more than double than in the 1990s.
One major consequence is an ever-shrinking "lifespan" of a fragrance. Mintel reckons that only 5% of new perfumes will still be on the market two years from its launch — a remarkably short period given that a fragrance can take six to 18 months to develop.
Meanwhile, as many industry watchers fear the commoditisation of their products, squeezing money out of perfume is getting harder. Diana Dodson, senior cosmetics and toiletries analyst at Euromonitor International, notes that unit prices in the US — the largest perfume-buying country — were stagnant from 2001 to 2006 (in constant terms). She forecasts a global decline of 0.7% a year from 2006 to 2011, with prices in western Europe shrinking by 0.2% a year over the same period.
In response, perfume companies are adjusting business models to take advantage of masstige, including using the price points associated with luxury goods while also tapping into high-volume distribution channels.
The idea of combining mass marketing and fine fragrances isn't entirely new. One company that has had more practice at it than others is $3.3 billion (€2.2 billion) Coty.
Not long after founding the company in Paris in 1904, François Coty began searching for ways to offer beauty products at prices that even shop assistants could afford. By 1912, he opened subsidiaries in New York and London, and a few years later, the firm launched Chypre de Coty, a ground-breaking perfume that became a classic with long-lasting appeal, alongside Chanel No 5.
A century later, Coty positioned itself in the vanguard of the industry once again. After rival Elizabeth Arden launched a hugely popular perfume bearing Elizabeth Taylor's name in the 1990s, Coty unveiled its first "celebrity" perfume in 2002 under a licensing agreement with pop star and actress Jennifer Lopez. For Coty — now a New York–based private firm owned by Germany's Joh A Benckiser — it's been a major success, with J Lo's fragrance line generating a steady revenue of $100m a year since 2004, "no matter whether her personal commercialism rises or falls," says Michael Fishoff, who joined the firm as CFO in 2002.
Lots of other perfume makers have hopped on the celebrity bandwagon for the quick-hit revenue appeal of masstige. But even for CFOs familiar with the rapid turnover of products in the world of consumer-goods manufacturing — such as Clairol, the hair-products company where Fishoff previously worked, or Procter & Gamble, where his CEO Bernd Beetz spent 20 years — celebrity fragrances bring their own idiosyncratic challenges. With few exceptions, "celebrity perfumes have a short, explosive life: they hit the market with a tsunami of publicity, sell vast amounts to the middle market and then disappear," according to author Thomas in Deluxe.
The More, the Merrier?
Not all players in the fragrance supply chain see that as a problem. With some 30 celebrity perfumes launched in 2007 — five times more than in 2004 — their popularity among consumers shows no sign of waning, says Jeremy Seigal, managing director of The Perfume Shop, a UK retailer that sells some 1,500 products from 600 different brands. "In 2004, celebrity fragrances were about 1% of total sales at The Perfume Shop — today it is around 10%," he notes.
Celebrity fragrances are also good business for the stars who lend their names to the labels. Under typical agreements, celebrities receive between 5% and 10% of the fragrance's sales, not to mention the additional exposure from large marketing campaigns.
Of course, relying heavily on pop singers and movie stars carries risks that can be tricky for CFOs to manage, says Fishoff from Coty's base in New York. After all, how comfortable can it be to tie corporate fortunes to the personal and professional exploits of Britney Spears (Elizabeth Arden), Paris Hilton (Parlux Fragrances) or Donald Trump (Estée Lauder)? "If they damage their reputation, they damage our business," says Fishoff. "Exit clauses in the agreements just get you out of the business," but don't guard against damage to a brand or corporate reputation.
Celebrity fragrances now account for around 10% of net revenues at Coty, with the rest coming from "less risky, longer living" lifestyle brands — such as those that carry the Adidas brand — and designer lines, the largest being the Calvin Klein licence, which Coty inherited with its €800m acquisition of Unilever's fragrance business in 2005. While Coty has no "predetermined percentage goal" for celebrity perfumes, Fishoff doesn't expect these lines to exceed 15% of revenue, keeping the bulk of sales within the more stable designer and lifestyle portfolio.
In all, 80% of Coty's perfumes fall under licensing agreements. "Finance is really a partner in this. We jump in when an agreement has been made, working closely with marketing on cash flow forecasting and the P&L," Fishoff says.
After that, finance watches every launch like a hawk. "The big issues for CFOs in this industry is around ROI," says Ali Dibadj, an analyst at brokerage house Sanford Bernstein. This is particularly true for companies with a "staggered profitability cycle," he emphasises. Companies spend a huge amount on marketing when a new perfume line is launched in traditional prestige channels, but after six to nine months, Dibadj says, CFOs of fragrance firms need to ask themselves, "At what point do I pull back, and move the product into mass-market channels to maximise the whole cycle?"
At Coty, CFO Fishoff notes, "both channels — department stores and drug/mass — are important, and we launch new products separately in each channel. We have cascaded some of our SKUs from prestige channels to mass channels, but only when we replace the 'lost' SKU at prestige with a new 'exclusive' do we manage the channel transformation" to the next tier.
As for knowing when a fragrance has reached its full potential in a particular tier, "there is no magic formula," he says. "You [just have remain] close to the commercial performance as well as the supply-chain implications."
Whether consumers will want more Calvin Klein and J Lo scents remains to be seen. In the US, Fishoff notes, prestige brands are growing only 1% to 2% a year. Thus finance at Coty has a big role to play when it comes to identifying "the few untapped users," including consumers in their teens.
If there's one firm that understands the "mass" of masstige, it's Procter & Gamble. Launched just 15 years ago from P&G's slick, modern base in Geneva, its fragrance division has used the $68 billion multinational's financial muscle — and its vast supply chain — to become one of the largest perfume companies in the world.
A big part of CFO Feola's job recently has been to integrate one of P&G's biggest-ever acquisitions, Germany's Wella — a deal he helped close three years ago while director of acquisitions and divestitures at P&G Global Beauty Care in Ohio. Thanks to that acquisition, P&G's portfolio of fragrance brands jumped from eight to around 40.
But Feola — just like Lyn Harris in London — is honing a global expansion strategy that relies on exclusivity and luxury. "Our focus has been to reduce the number of brands," he says. Faced with a sprawl of overlapping distribution, manufacturing and sales networks, the past year or so has been spent closing redundant warehouses and the like, and even selling some of the perfume businesses it inherited, including the classic Cologne-based 4711. In terms of what the CFO calls "the brand growth potential" of each fragrance in the portfolio, "4711 just didn't fit."
This realignment forms part of a new strategy that is aiming for "fewer, bigger and better" brands, Feola says. Similar restructuring elsewhere in the industry is a sign of the increasing maturity of the perfume business, as companies get smarter about targeting customers, says D'Arpizio of Bain. "In the past, these conglomerates just bought market share," she explains. "Now they're using their brands to cover different consumer segments in a more complete way, serving as a cushion against a change in tastes or an economic downturn."
A key segment that P&G is going after is the luxury line, a consumer segment not often associated with a company more known for laundry detergents and pet food. That explains the fashion-house fragrances — including those licensed from Hugo Boss, Valentino and Dolce & Gabbana — found in its portfolio.
For someone like Feola, whose background is in M&A, fashion-house fragrances adds a new complexity to the CFO role. "These licensing deals are much more complicated [than an acquisition]," he says. "It's not only the pricing, but also defining how you're going to work together. When you buy a company, you're integrating it. In a licence agreement, you have to plan for a long-term relationship." And the name of the game, says Feola, is to build these relationships around fewer fragrances that sell for longer. "We want to create more classics in a way that maximises the rate of success for every initiative and satisfies consumer craving for newness."
One of P&G Prestige's more recent licensing agreements has been with Gucci. The Florence-based fashion house and P&G have just launched their first fragrance, a trendy, cyprus scent called Gucci by Gucci. Nothing about this fragrance, launched in October, reveals its association with P&G, and the mass-market implications that would entail. Priced at €90 for 75ml, it's sold in a slick package that houses a beautifully crafted flacon featuring a little Gucci belt dangling from its neck. It's being sold at first in a limited number of shops before wider distribution in 2008. Adding to its cachet is the television advertising campaign with catwalk models shot by director David Lynch.
The concept of fewer launches, controlled distribution and lavish branding probably isn't always easy to sell to the head office back in Ohio, but it must certainly help that the prestige fragrance division is growing faster than many other parts of P&G — "at double-digits for the past few years," says Feola, who declined to provide precise numbers. Not bad for a company whose group goal is to deliver annual sales growth of between 5% and 7% through to 2010.
The way Feola sees it: "The essence of the prestige business is to learn how to play with the rules. We've been learning fast."
Janet Kersnar is editor-in-chief at CFO Europe.
Sell the Smell
What's the first thing that comes to mind when you think of your favourite perfume? Sexy? Exciting? Provocative? What about chemistry? Molecules? Scientists in lab coats? Welcome to the flavours and fragrances industry, or FnF for short. The hundreds of researchers employed in the $18 billion FnF industry concoct not only the majority of perfumes that we associate with fragrance houses such as Coty and LVMH's Christian Dior, but also the vast range of smells and tastes in our food and household products.
As the fragrance houses feel the strain of trying to sell more perfumes to more people, so too are the FnF firms. Amid their own industry consolidation — today the top five FnF firms handle about 70% of all outsourced perfume-making globally — competition for the big multinational "briefs," or perfume assignments, is growing more intense.
"We have very demanding multinational customers," says Dominique Yates, CFO of Symrise, the world's number-four FnF firm. "And if you're not good at [capturing the largest customers], you won't survive." That's not a problem at Symrise at the moment — sales grew 7% to €989m in the first nine months of 2007, a satisfying result as it completes its first full year as a Frankfurt-listed firm.
The way to continue growing at Symrise — as well as its competitors such as Givaudan of Switzerland and IFF of the US — is to land a place on as many multinational "core lists" as possible. Once on a list, an FnF firm will work closely with the multinational, with the ultimate aim to win briefs. While briefs once used to be as vague as, "We want something sexy, exciting and provocative," they are now far more detailed, demanding intense market analysis and consumer research, and winning them "can be a big burden" for FnF firms, says Fabian Wenner, an analyst at UBS Investment Bank.
"The thing that makes you successful in our business is whether you really understand what the consumer is after," says Yates. "We pride ourselves on that, despite the fact that we don't sell products directly to consumers...and therefore when we interpret briefs, we're always looking for that extra added bit of value."
Paying greater attention to end consumers requires constant innovation and heavy investments in R&D — the top FnF players devote on average around 7% of their revenue on R&D and employ an army of scientists. In Symrise's case, says Yates, the battle for briefs has also driven a wide range of recent initiatives — setting up a perfume academy, making small acquisitions, signing co-operation agreements with biotech companies and investing in new talent, hiring "three of the world's top ten perfumers in fine fragrances."
But a peculiarity of the FnF industry is that these firms get paid only when a manufacturer buys the finished product as an ingredient. "Briefs can take 18 months to two years to turn into a product from which we can then generate sales," Yates explains. And while Symrise has secured a place on some core lists, "we haven't seen the full benefit of that coming through in sales." What's more, even though "there are still three or four lists that we're trying to gain," there's an element of risk every time a brief is won. "The last thing you want to do is gain core-list status and not live up to customer expectations."