Five-Year Strategic View of the Fragrance Industry - Case Study Example

Five-Year Strategic View of the Fragrance Industry The global perfume market is estimated to be $24 billion in size. It has grown annually by about 2.5% until 2006. The largest market is in the European Union. Established markets now have rather flat growth rates, but there are large new potentials in countries such as India and China. There are other important change trends in this industry. Improved economic conditions in large parts of the world have changed the perception of perfume as a product category. Decades of comparatively high GDP (Gross Domestic Product) growth have created a stable base of demand. The market is expected to grow steadily until at least 2011. The economics of new product development have changed. Brand creation is no longer a restricted capability. Many expensive safety tests are no longer required-they are not allowed either, as they involve inhumane experiments on animals. Consumer preferences have moved in favor of natural ingredients, and away from laboratory chemicals. The heightened awareness of environmental issues and social consciousness reflect in personal preferences related to perfumes. Purchase decisions related to perfumes have expanded. They continue to be favorites as gifts, but individuals now routinely spend money on this product category for personal and regular use. Women, who are now financially independent, have emerged as a powerful new group of direct buyers. Though celebrities continue to hold sway over public opinion, the Internet offers new and cost-effective routes to communication with large numbers of consumers. This medium has also emerged as an alternative to the logistics chain of traditional retail outlets. Conventional perfume advertising has been in English and other modern European languages. The World Wide Web now changes this paradigm. Brands have to be built across continents and cultures. It may become necessary to develop local variations of umbrella brands. The market is expected to become more value-conscious. People will be aware of discount chains, and spatial differences in pricing as well. Consumers are more aware of competitive forces than before. They are likely to demand better pricing and regular deals for their purchases. Physical distribution chains are set to change. Specialized boutiques, shopping malls, discount stores, and large chains, will take large shares of the perfume market. The roles of traditional outlets such as duty-free stores at international airports may not disappear, but their importance will reduce, at least for some categories of consumers. The net effect of these trends is that the global perfume business will evolve considerably over the next five years. The nature, scale, and locations of demand will change. Old value drivers will become irrelevant, while new ones will emerge. Competition will increase. Established and newer players must both adapt their operations through enabling strategies. The global perfume industry, in five years from now, will shift substantially from its dependence on the first world, to significant levels of consumption in countries such as India and China. The Internet will substitute both mainstream media, as well as traditional retail chains, as a medium for communication with consumers, and as a system of logistics as well. Many new competitors will jostle for market share, leading to increased investments by today’s brand leaders. Consumers will become very environmental conscious, anti-chemicals, and will buy perfumes based on their natural values. These are the key dimensions of change in the world perfume industry that can be expected over the next five years. The Scents of Time brand is smaller and newer than Coty. It does not have the world-wide penetration of its rival. Neither does it have a matching organization structure or capital resources. However, it is a fresh and new brand, backed by creativity and enthusiasm. How should it compete against a formidable and entrenched competitor? Detailed Program to Take Advantage of Global Developments This section relates to a detailed program for the Scents of Time brand. It treats Coty as the prime competitor against which the action plan needs to be prepared. This program of action for the Scents of Time brand is based on the strategic analysis described in the previous section and in the annexure as well. It seeks to leverage the strengths of the Scents of Time brand. The Scents of Time brand must leverage its strengths while guarding its flanks against weaknesses. It should structure operations to take full advantage of the changing nature of the world-wide business. Strategy has to start with Segmentation and Targeting. The Scents of Time brand may like to target female adolescents and young adult women. Coty has brands in various price points, but it has not made any specific demographic focus. Therefore, the Scents of Time brand can occupy the large segment of young females. All elements of the Marketing Mix should now focus on the target segment. Physical aspect of the product should be enhanced through value-added services. There are four elements of the Product element of the Marketing Mix, and four additional dimensions for Services aspects: Product: the perfume should be natural and fresh, with packaging that has appeal for the target segment. It should not contain ingredients that require animal testing, or any chemicals that could cause irritation and related allergies. The company should try and develop a core brand with provisions for regional variations, and with potentials to sell at two different price levels as well. Such a distinction may be achieved by developing a disposable version that can be used to refill a durable container-cum-dispenser. Brands should reinforce the value of respect for nature. Physical features should be enhanced by large doses of customer engagement. Promotion: it is best for the company to stay away from celebrities and the mainstream media. These traditional approaches for perfumes are not relevant for young women, and they cost enormous amounts of money. The Scents of Time brand can be built through word-of-mouth promotion. Sampling at places where large numbers of young women spend time can be used for sampling, and for hosting local events as well. All off-line promotion should integrate with the web site. Price: the objective is to penetrate shares of entrenched brands. It is known that consumers value variety in perfume purchase decisions. Therefore, pricing should attract first time buyers, with handsome rewards for repeat purchases and for regular use as well. The company may also wish to experiment with differential pricing, introducing low cost variations with local ingredients in emerging economies, while milking the mature markets of the European Union with more expensive offers. Place: this will be the most important element of the Marketing Mix for the Scents of Time brand. There are two aspects involved. One is to make it easy for browsers to buy perfume online. The other is to retain the goodwill of conventional distribution channels. Electronic commerce and retail stores should reinforce each other. The best way for this is to use each channel to promote the other. Shoppers should be encouraged to visit the web site, and the web site should have sections on key stores. The web site should be replete with matters that young women enjoy, and should provide for easy interaction. Computer graphics and animation may be used to substitute expensive real-life celebrities for endorsements. Electronic commerce, branding, and social networking should blend seamlessly on the web site. Process: the most important business process on which the company should focus first is the smooth and integral delivery of products ordered online. Another process on which the company can concentrate relates to the organization of events for word-of-mouth promotion, with the most productive use of samples. Each of these complex transactions will have to be broken in to their elements, and detailed actions coordinated between responsible individuals and teams. People: the company should hire young women with web site skills and experience in hosting events. Technical personnel will also have to be recruited to strengthen the new product and packaging development processes. Some of these activities can also be outsourced during the early stages of business growth. Physical Evidence: web site graphics should reinforce the key elements of branding. Product presentation and point of purchase promotion should also reinforce the brand. Preferential Customer Services: local celebrities, key influencers, and store assistants should be treated as preferential customers. They should receive regular samples, and must be motivated to support the brand. The following table outlines key actions, approximate funding requirements and a time scale: Activity Cost in $ Earliest Finish in Days from Start 1 Website registration and hosting arrangements 100 7 2 Website design and site structure 1000 30 3 Primary data generation on consumer preferences 5000 60 4 Content development 10000 200 5 Electronic commerce infrastructure 5000 100 6 Translation and country variations 100000 200 7 Coordination with conventional logistic chains Nil 100 8 New product development 100000 250 9 Actual launch 10000 180 10 Periodic reviews 500 Every quarter The following details regarding the actions listed in the table should be kept in mind during implementation: The web site name should go beyond the trade-mark and be suggestive of the product category, key buying benefits, and popular search words as well. Latent extensions can be used if chosen words are not available. Search engines algorithms depend largely on Meta tags for ranking, and hence a web site name with just the brand name will not fare well. Site structure should allow for multi-media content and for responses from browsers as well. Censorship rules in countries such as China must be borne in mind. Web site content should rely on search engine optimization and inbound links for high rankings. The company will need to ally with indirect competitors, such as ones for other cosmetic product categories, to reach high levels of audience participation quickly. Web site development should proceed in tandem with off site Customer Relations Management matters. These should include free samples, deals for special occasions, and loyalty rewards. Issues That May Prevent Program Success Web site traffic may not build rapidly enough to support the investment. Therefore, the Scents of Time promoter should arrange for off-line promotion in territories near the home base. This will help to manage cash flows during the gestation period. Regulations are not the same in all countries. Hence, some import departments may not allow easy access to certain markets. The organization should select country-wise franchisees to oversee liaison with national authorities. Fragile packaging could get damaged in transit. The business will need a reliable courier service to support ecommerce, and packaging development should also address this issue. Conventional store chains may fight the tendency towards Internet business. Hence, the company may like to develop a separate set of brands for the Internet. The company should only use well-established natural ingredients of long standing from reputed sources. This will guard against product liability claims. The company should also be adequately insured in this respect, with proper delineation of liabilities. Reduced entry barriers imply that competition will intensify. Investments in market share growth may be lost to new entrants. Young women are also known to switch perfume brands frequently. The company can respond proactively to these threats by viewing branding as an intensive and continuous process. The new product development process should also produce a rich pipe-line of creative launches. Coty may attack the Scents of Time brand. This could either by announcing special deals, or by introducing new brands aimed at the same segment chosen for the Scents of Time brand. The company should take the preventive measure of test marketing its plan in a secondary market, and in a low-key manner before it extends marketing on a global platform. Launch phasing should always keep the capital constraint in mind, so that the company does not run out of cash during a campaign by Coty. Annexe on Analysis SWOT is the chosen method of analysis. Scents of Time is the company chosen for strategy formulation. Strengths: 1. Novelty is important in the perfume buying decision model. Scents of Time, as a new industry entrant, relative to Coty, may appeal to regular users because of a fresh branding approach. It can also attract new consumers in to the segment. 2. Since Scents of Time is relatively small compared to Coty, it can adapt to changing market and consumer preferences and requirements faster than the competition. It also has the potential to complete new product development cycles faster. 3. Customer integration is stronger than in the case of Coty. The practice of providing the histories of perfumes is novel, and may appeal to consumers. It is likely to strengthen emotional bonds between users and the brand, and encourage regular use as well. 4. The packaging design of Scents of Time makes it attractive as a gift. Perfume purchase may also be perceived as a self-gift by an individual. Thus, the packaging enables the brand to participate in two separate perfume purchase situations- that is buying for oneself as well as buying for others. 5. The Scents of Time brand has strong intellectual resources. The human resource can develop variations of umbrella branding, and build a portfolio to participate more productively in the market. Weaknesses: 1. The company lacks the financial resources of Coty. It is more vulnerable to withstand downturns in economic cycles. Similarly, penetration of shelf-spaces in physical stores is more difficult for Scents of Time than for its principal competitor. 2. Company organization is poorly developed compared to Coty. The business is overly dependant on a single individual. It will suffer from inadequacies in areas relatively unknown to the promoter. The brand may also suffer from a lack of credibility amongst members of traditional distribution chains. 3. The Scents of Time organization has to be sharply focused to leverage its relatively small resource base fully. This will force the company to act as a niche player. Mainstream consumers and traditional perfume users may shun the brand. 4. The Scents of Time organization lacks resources to document and to preserve critical business processes. This limits its capabilities with respect to archiving, and being able to replicate exact product specifications on a distributed or extended time basis. 5. The Scents of Time brand cannot afford celebrity endorsements of the same genre which Coty may deploy through its superior capital resources. Consumers may therefore reject any of the new products it launches. This entails grave financial risks for Scents of Time. Opportunities 1. Emerging economies, especially India and China, represent large and growing markets that were not available when Coty started business. The Scents of Time brand has the advantage of entering a much larger market space. 2. The Internet effectively levels the playing field for smaller and newer competitors such as Scents of Time. The limitations of capital scarcity are no longer as debilitating as it used to be in the past. The World Wide Web welcomes newcomers regardless of background. 3. Working women have emerged as a new class of perfume users. They have always been recipients of gifts of this product category. Now, large numbers can buy perfumes from their own disposable incomes. 4. Development costs have been cut significantly with the move against animal testing. Safety trials were imposed by regulators. They can only be conducted by certified laboratories. It is an advantage for the industry to have this hurdle removed. 5. Perfumes are so widely used now that demand levels are largely stable. This is especially the case with the lower price points. There may be some seasonal and economic upswings, but a base level of off-take has become reasonably assured. Threats: 1. Traditional markets have matured. Growth is marginal or non-existent altogether. Brand owners have to invest in new territories or face stagnation. This will affect cash flows from the business sector. 2. Selecting inappropriate celebrities can destroy fledgling brands. Their capricious behaviour may also affect positioning of established brands. The public personae of celebrities change over time, leaving brands they endorse vulnerable. 3. Global branding is difficult for a product category as intimate as perfume. Consumer preferences will vary with culture and language. Even celebrities may not have universal appeal. Manufacturers may have to develop country variations of their brands. 4. The absence of animal testing data opens the door for product liability claims. Customers may slap manufacturers with class action suits related to dermal toxicity and inhalation allergies from perfume brands. 5. Barriers to entry have come down. New entrants may take away market shares rapidly. Consumers may also tire of a brand after major and sustained investments have been made in them. Read More