The Smell of Money

Making scents of the world's perfume industry.

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.

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