Fragrances in the United Arab Emirates Questionnaire

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HEADLINES

• Fragrances grew by 9% in current value terms in 2009 as sales reached AED705 million

• The lower consumer confidence and lower tourist arrivals have taken their toll on fragrances sales

• In spite of the slowdown, premium fragrances was faster growing than mass fragrances with a 10% current value growth

• Unit prices were marginally effected during the year in light of the rising costs of raw materials

• Fragrances remained largely fragmented amid the continuous key launches

• Fragrances is expected to post a constant value CAGR of 5% over the forecast period

TRENDS

• The low consumer confidence has advanced sales through variety stores in light of their relatively lower prices. The latter is due firstly to their location as variety stores – unlike department stores and specialist beauty retailers – are not located in shopping malls and, accordingly, they are not charged high rents. Secondly, variety stores do not provide tester bottles of fragrances to shoppers. Accordingly, those savings on rentals and tester bottles feed through into lower prices compared to other retail channels.

• Fragrances grew by 9% in current value terms in 2009 as sales reached AED705 million. The registered growth in 2009 was lower than the review period CAGR of 12%, as the low consumer spending and declining tourist arrivals resulted in lower volume growth. Nevertheless, the United Arab Emirates continued posting one of the highest per capita expenditures on fragrances with AED153 in 2009, thanks to low taxation and wide product availability, coupled with high consumption rates among the local population.

• In spite of the low consumer confidence, premium fragrances was the fastest-growing area in 2009 with current value growth of 10%, compared to 9% for mass fragrances. In addition to benefiting from strong advertising budgets, premium fragrances rely on the lack of product substitution. Premium fragrances are mostly consumed by high-income earners who are highly unlikely to trade down to mass fragrances. Of course, the category posted a lower year-on-year value growth in 2009, but this was mainly due to the lower volume growth during the year.

• Mass fragrances also posted healthy growth of 9% in current value terms in 2009, but was less supported by advertising than the premium products.

• Fragrances are purchased across all demographics in the United Arab Emirates, but with variations depending on the socioeconomic group. Premium fragrances for example thrive upon the affluent local population, which purchases both premium international brands and Oriental fragrances. In general, fragrances are essential to the local population; they are part of the basic attire and consumed throughout the day and during any occasion or outing. Local nationals mainly consume Oriental fragrances like oud and sandalwood, which are also popular among GCC nationals flocking to the United Arab Emirates. As for other populations, fragrances are also popular among Arab expatriates, where middle- to high-income earners usually purchase premium brands, while lower socioeconomic groups demand mass brands.

• The United Arab Emirates sees demand for Oriental fragrances, which are a major part of the local culture. These fragrances are sold through specialist perfumeries, actually large local chains like Ajmal and Rasasi, to name a few of the various manufacturers and retailers of Oriental fragrances.

• Unit prices further increased in 2009, yet at a slower pace compared to the year earlier. The rising unit prices reflected a matching rise in the costs of raw materials.

• Fragrances in the United Arab Emirates is mostly premium – premium fragrances accounted for 72% of total value sales of fragrances in 2009. Premium fragrances are mainly available through department stores and specialist beauty retailers, which together accounted for 61% of total value sales in 2009. In addition, other retail channels like variety stores, supermarkets/hypermarkets and pharmacies are also active in selling fragrances. Although there are no rankings for premium brands, major department stores – like Debenhams and Harvey Nichols – and specialist beauty retailers – like Paris Gallery and Faces – regularly post a weekly ranking of the 10 best-selling fragrances for men and women. The list is posted on a separate stand along with a tester for each brand of the respective top 10 fragrances.

• The sophistication of premium fragrance products and retailers continues to increase to the extent that specialist perfumeries like Penhaligon’s and L’Occitane are well represented throughout the United Arab Emirates. In addition, limited edition extensions to existing popular brands are quickly launched in the United Arab Emirates.

COMPETITIVE LANDSCAPE

• Fragrances remained largely fragmented amid the continuous key launches, with fragrances leader L'Oréal Middle East FZE holding a retail value share of only 10% in 2009. The share of L'Oréal Middle East FZE declined by nearly half a percentage point in 2009 in light of fewer launches from flagship brands like Armani, Dunhill and Lancôme. Armani’s latest launches, for example, were back in 2008, including the Diamonds and Attitude ranges during the first and fourth quarters respectively.

• Dolce & Gabbana was one of the brands that saw a remarkable increase in its retail value share in 2009, thanks to extensive advertising campaigns.

• Domestic manufacturers and perfumeries play a significant role in fragrances in the United Arab Emirates. In 2009, the three largest domestic manufacturers – Ajmal, Rasasi and Designer Shaik – together accounted for 21% of total fragrances value sales. Domestic manufacturers benefit from strong demand for Oriental perfumes from the affluent local population, given that such demand is not susceptive to economic cycles like demand from other consumer groups. Oriental perfumes are exclusively popular among GCC nationals in general. Ajmal International Trading held a retail value share of 9% in 2009, the second largest in fragrances after L'Oréal Middle East FZE. Ajmal remains one of the most active launchers of fragrances in the country, regularly promoting limited edition line extensions.

• Fragrances typically welcomes tens of new launches every year and 2009 was no exception. The year’s key launch was Dolce & Gabbana’s The D&G Fragrance Anthology, which was launched in September 2009 and advertised through print media. The line’s global print advertising campaign featured three female supermodels – Claudia Schiffer, Eva Herzigova and Naomi Campbell – that are iconic for both young and old women, in addition to two male supermodels. The Anthology is made up of five scents; Le Bateleur 1, L’Imperatrice 3, L’Amoureaux 6, La Roue de la Fortune 10 and La Lune 18. The scents were created without target, age or gender barriers; and each was inspired by a different tarot card. The new line took into consideration the current economic hardship, with a lower pricing than most premium brands.

• In women’s premium fragrances there were a number of key launches during the year like Estée Lauder Private Collection Jasmine White Moss; however, its relatively high price of AED600 for a 100ml bottle limited its penetration. There were similar expensive launches like Guerlain Idylle and Loewe Aire Loco. There were, however, other less pricey launches like The Body Shop’s Love, for example.

• In 2009, colour cosmetics brand Benefit introduced its Crescent Row Trio of Fragrances: Laugh with me LeeLee, Something about Sofia and My Place or Yours Gina. All scents have come packaged in a 1-ounce bottle, which is a relatively smaller pack size compared to the regular 50ml and 100ml bottles.

PROSPECTS

• Competition between local producers and international players is expected to intensify. Retail space could play a significant role in the new landscape as availability and presence will be relevant to the purchasing of fragrances throughout the country. All players are expected to continue to expand rapidly and marketing budgets will increase in order to provide support to new products launched onto the marketplace, all of which will be competing for consumer spending.

• Fragrances is expected to post a constant value CAGR of 5% during the forecast period, which would exceed the equivalent review period CAGR of 4%. Competition between local producers and international players is expected to intensify, with higher marketing budgets in order to provide support to new launches aiming to grab a larger slice of sales. In addition, retail landscape will play a significant role as availability and presence will be relevant to the purchase of fragrances throughout the country.

• Fragrances relies on demand from tourists given that fragrances in the United Arab Emirates are relatively cheaper than other parts of the world. However, sales of fragrances might be threatened by the expected slowdown in arrivals to the United Arab Emirates in 2009 and 2010.

• Prices are expected to increase in line with inflation and consumer demand for new products, together with the high disposable income of status-conscious people from the United Arab Emirates, wealthy expatriates and tourists prepared to spend on luxury items.

• Out of the 2009 launches, it is anticipated that Dolce & Gabbana’s The D&G Fragrance Anthology will continue to perform well in the short term. In addition to its strong advertising campaign, the new line capitalises on its attractive pricing that should secure demand from high-income earners, and might trigger some occasional purchases from middle-income earners.

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