Fragrance Industry Term Paper

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Fragrance Industry

Business Environment of Fragrance Industry

Fragrance industry is suffering from the ruinous competition of foreign rivals who apparently are flooding the domestic market at an incredibly low price. The French industry, which once was considered at the pinnacle of the fragrance market, is loosing market from Asian competitors. Moreover, there has been a slow growth in revenue of large fragrance companies due to the mass marketing of fragrance sales from small competitors. The sluggish growth rates in the home fragrance market are due to a combination of factors. First, the fragrance industry is facing several major industry shifts that are causing changes on the bottom line. Faced with the challenges of low revenue and intense competition, innovative companies are looking to enterprise sourcing to both speed up time-to-market on new products and drive down ongoing supply costs (Chemical and engineering news, 2003).

Consumers today are making value-based decisions in purchasing perfumes so in the face of brand loyalty erosion, perfume industry are looking for ways to reduce product prices to compete with private label manufacturers without sacrificing the quality of the brand.

Since fragrance items are mostly seasonal items, a greater volume of inventory and supply-chain activity is required than is for other consumer-packaged goods for a preferable amount of time in the year. Toward this end, companies are looking ways to drive best-in-class product introduction cycles while carefully considering designed-in costs for raw materials, packaging and marketing materials.

Barriers to entry

There are variety of entry threats coming from chemical firms, candle firms, and cosmetic firms. For example, total home fragrance sales grew by only 4% in 2001 to $2.3 billion, up from $2.1 billion at the manufacturers' level. However, much of sales gains were largely due to the 21% growth of diffuser products. Meanwhile, candle sales continue to suffer, especially in mass-market outlets, as marketers shift their attention and promotional spending from candles to their oil diffuser products. Also too many new stores are openings in malls selling the alternative means of fragrance. Overall, lack of consumer traffic in malls is also contributing to weak sales.

Suppliers and Consumers

There have been threats from suppliers, because instead of high brand names, many new suppliers have entered the markets. The suppliers are making it possible to ship low end of fragrance products, as the consumers are looking for cheap products. Therefore, mass-market is flooded with the impact of private-label entries and foreign imports that have disrupted their longstanding retail partners. Private-label sales were up by nearly 20% in 2001, a source of great concern among branded marketers. Sales also continue to shrink at the specialty store segment, an important component in the home fragrance market, and a source of much growth over the past few years (Guner, 2002).

Sourcing fragrance items often involves complex materials, such as high-end plastics and glassware, and attention-grabbing labels and colors, to provide a luxurious look and greater shelf appeal. Therefore, sourcing professionals are under pressure to be cost effective but maintain the same standard of brand quality while competing with the low-end fragrance products.

New Trend in Fragrance Industry from Past four-five Decades

The trend from four to five-decade ago is the resurgence of potpourri through many marketers that have shied away from the category for several years. Potpourri has been on the decline for many years; however, with the rise in low end products, potpourri will surely stimulate interest.

Another notable performance trend unlike the past is that the fragrance industry is creating large distribution networks for selling fragrance forging new retail partnerships with large chain stores such as Linens 'N Things and Bed, Bath & Beyond. Some other companies are looking to improve upon their dull sales, employing several different initiatives like exploring new channels and entering new complementary categories to jump-start their sales.

Another difference from the past is the scope of the global competition in the fragrance industry. In today's increasingly global competition, enterprise sourcing demand aggregation and optimization capabilities, to leverage global buying power and identify best sources of supply on a worldwide basis. A fragrance company with business units based in North America, Europe and Asia can collect and aggregate demand easily through e-sourcing software. This enables the company to consolidate sourcing for increased savings. The company can then run various purchasing scenarios through an optimization engine to determine the optimal award allocation.

Finally, unlike the past, the present competition is not coming from Western counties. Most of the competition in the fragrance industry is coming from Central and Eastern Europe and China, as they are flooding the cheap brands products in the markets. Within Asia, China is slowly emerging as a player in the fragrance market. Japan is the leading market throughout that of second-placed China. South Korea, number two in value terms, is one of the smallest markets by volume. Thailand is the next largest market and Indonesia is very competitive.

To be competitive in such dynamic industry, effective marketing to specific groups and communicating product benefits to niche consumers with specialized needs will become increasingly vital for manufacturers to grow the market. Targeted marketing, by either age or ethnic origin, will help existing products to maintain market share and new products to gain a foothold in the market.

Boundary of Fragrance Industry

Defining boundary of the fragrance industry is ambiguous. For example, the fragrance industry includes the cosmetics and toiletries market, which is the most important for the competitiveness of America in the world. It is the most advanced in terms of products, distribution and marketing. However, it is also a very mature market with all of the negative connotations that this brings with it. In a mature sector such as cosmetics and toiletries, where product concepts such as soap have existed in their modern format for more than 100 years, it is drive of innovation that adds value to the sector. New product development aims to reconfigure personal care products to meet the particular demands of modern consumers. New technologies have been changing the shape of many markets and offering buyers new and exciting opportunities.

This is closely followed by hair care and skin care products. To add the complexity, at one end, the idea of natural and organic products continues to thrive in the fragrance industry. Therefore, at one end, there are synthetic chemicals and at the other end, there is a widespread demand for the organic fragrant products.

All cosmetic and toiletry markets are seeing the furthering of the eco-friendly, "green" product wave. It is now largely considered a given that major cosmetics and toiletries products will have some "green" component in their formulation. The term "green" can mean both products incorporating natural ingredients, and non-natural products, which include, recyclable packaging. New regulations drawn up by the FDA introduced specific guidelines for the first time clarifying use of the product claim "natural." The resulting definition requires that all "natural" products must be free of artificial colors, synthetic sweeteners, preservatives, additives, synthetic flavors and fragrances.

In hair care, products comprising all natural ingredients with vitamins, combined with UV protectors for healthy hair, and recommended by salons, fulfill multiple consumer needs and offer performance superior to single-need competitive products. Products containing conditioning ingredients such as wheat protein help to moisturize hair, retaining up to 35% more moisture than water control.

Within more traditional retail, new outlets such as The Body Shop and Bath and Body Works offer consumers value-based alternatives to drugstores. At the same time, clothing retailers such as The Gap and banana republic have been launching brand extensions into toiletry products. These products are presented as an "affordable luxury" to the consumer and have the backing and image of a well-established brand.

Electronic shopping is one of the key areas for development. The Internet offers a source of consumer…[continue]

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