The Cincinnati-based consumer products giant has become a world player in high-end perfumes mostly behind the combined sales of three top-tier brands not usually associated with P&G: Dolce & Gabbana, Gucci and Hugo Boss.
P&G's "prestige fragrance" business now generates an estimated $2.5 billion in sales a year – accounting for more than 10 percent of the company's total beauty unit revenue. Prestige brands, which also includes SK-II high-end skin care, have tripled sales and quadrupled profits since 2000.
P&G's success in the category comes at an
opportune time. The company has been struggling to re-ignite sales growth for its two marquee beauty brands: Pantene hair care and Olay skin care. Pantene sales have been stuck at about $3 billion a year, Olay at $2 billion.
At the same time, Americans are turning to upscale fragrance brands. U.S. sales of high-end scents have grown by double digits in the past five years. Analysts say fragrance is a luxury item, but an affordable one.
"Fragrance is aspirational. You may not be able to afford the $4,000-$5,000 designer outfit, but you can wear a designer fragrance," said Karen Grant, vice president and global beauty industry analyst with research firm NPD Group.
Fragrance also is a highly visible category in department stores, which provide P&G more venues for capturing customers. The company traditionally relies on mass discounters like Wal-Mart and supermarkets like Kroger to sell most of its brands.
P&G chief executive A.G. Lafley showcased the company's prestige business as a strong performer, in its otherwise sluggish beauty unit, in a presentation to more than 600 analysts and investors last month.
"These leading brands are winning the consumer value equation in their segments and creating value for our shareholders," Lafley said. P&G has no plans – and no need – to make a ! splashy beauty acquisition, he said.
The sweet smell of fragrant success
This spring, P&G is pushing growth in its Dolce & Gabbana brand with a new scent, Dolce. The fragrance just became available in select Saks stores and launches nationwide at multiple retailers in a few weeks.
It's not cheap: $90 for 1.6 ounces, $112 for 2.5 ounces.
Sweet and floral, the new scent is the latest under the Dolce & Gabbana brand, which is licensed from the famed Italian designer. P&G already has made its mark with the name: Dolce & Gabbana's Light Blue is the No. 3 perfume among women's and men's fragrances; The One is No. 7 for men, according to NPD Group.
P&G has dabbled in fragrance since 1992, but it started growing rapidly after the company acquired the Gucci license as part of a $5 billion takeover of Wella in 2003. Three years later, P&G licensed Dolce & Gabbana.
P&G executives wouldn't comment for this story, but they have said the company plans on further growth in the high-end fragrance business, licensing other big names. Last year, P&G announced it had signed with designers Stella McCartney and Alexander McQueen to develop new fragrances.
Standard & Poor's analyst Gerald Phelan says the $5.1 billion-a-year U.S. fragrance industry is appealing to P&G because it's a lucrative market with no dominant leader. "They're a big player in fragrance, but the industry is very fragmented," Phelan said.
In the U.S., P&G is the No. 5 player with nearly $600 million in sales and 10 percent of the market. But industry data show P&G is not that far behind fragrance leaders: The company's market share is less than 1 percentage point behind No. 3 Elizabeth Arden and No. 4 Estee Lauder.
No. 1 L'Oreal holds less than 17 percent of U.S. fragrance sales with $975 million, according to industry tracker Euromonitor. Coty is No. 2 with $740 million in sales, or almost 13 percent of the market.
Worldwide, high-end fragr! ance sale! s are flat or slightly down at $30 billion a year, but U.S. sales have climbed 15 percent in the last half-decade, according to NPD Group and Euromonitor.
"Fragrance has struggled in the U.S., but it's waking up," NPD's Grant said.
Department stores offer risks and rewards
The industry offers unique opportunities and risks for P&G.
Selling fragrances in department stores makes the company an indisputable force in the beauty industry, expanding P&G's $20 billion beauty business beyond shampoo, hair coloring and skin care sold mostly in discount and grocery stores. Analysts say it's a shrewd way to diversify and nab high-end customers.
"It's not that complicated: Sell to people with the money," said Howard Davidowitz, chairman of New York retail consultant Davidowitz & Associates. "The middle class is a lot poorer than it was five years ago."
Theo Spilka, vice president of new business development at perfume maker Firmenich Inc., said fragrance also offers P&G and competitors prime department store real estate to sell in.
"Fragrance drives traffic at department stores," Spilka said. "It's a so-called 'impulse purchase.' "
Given P&G's expertise in skin care and makeup, Oppenheimer analyst Joseph Altobello doesn't rule out the company's expanding Dolce & Gabbana or Gucci brands into those categories. "It would seem to make sense for P&G to follow the lead of other large beauty companies and expand one or more of its prestige fragrance brands into other categories," he said.
Not helping are sputtering sales at mass discount retailers and supermarkets that move most of P&G's consumer products. Total Wal-Mart revenues rose just 1.5 percent in 2013, while Target sales dropped 1 percent.
"I don't think P&G sees department stores as a sideshow at all, but rather a key channel to reach consumers – I don't see this changing anytime soon," Altobello said.
Analysts caution selling in department stores isn't a slam ! dunk, and! P&G is going up against smaller but nimble competitors.
"Estee Lauder and L'Oreal are much more focused – they are pure plays where P&G is an $84 billion company," Phelan said.
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