Tuesday, October 7, 2003

Vanity products are a gamble for Procter

But P&G smells success with leap into high-priced perfume

By Cliff Peale
The Cincinnati Enquirer

GENEVA - Change the packaging and add $36 to the price. Genius.

It doesn't sound like a classic Procter & Gamble ploy. After all, the Cincinnati-based goliath built its business on homey product names such as Tide, Crest and Ivory with journeyman-like packaging.

But in 2002, when P&G began considering how it could enhance its Baldessarini Hugo Boss fragrance line, it settled on the bottle. A sharp-looking metal case stamped with the Baldessarini logo. The price, formerly about $53 per bottle, went up to $89.

The results? While P&G won't reveal specific sales numbers, the company does say the product sold at twice the company's expectations.

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"It's still half the cost of a Sony PlayStation (console)," says Paolo de Cesare, president of P&G's global prestige beauty business. "I don't think this is a consumer that's sensitive to a 10 percent premium."

This is P&G's fine fragrances unit, based in Geneva, perhaps the most cosmopolitan of western European capitals. In some respects, it represents the final frontier that Russian market chief Daniela Riccardi hopes to reach one day. For now, she knows that the average Russian's disposable income of $23 a week isn't likely to mean there will be a rush on $89-a-bottle perfume. But she also knows the seeds of potential have been planted.

P&G's current Russian offerings are largely home- and family-related - detergents, toothpaste and the like - the kind traditionally selected by the female of the household. Lower-priced beauty items are picking up steam in Russia, and market studies show that by the age of 10, most Russian females are buying beauty products.

One outgrowth of the Soviet system is that women already were an important segment of the workforce when P&G first arrived in Russia in the early 1990s. With personal income growing at a brisk clip of 20 percent a year, the potential for the Russian perfume market is a heavenly scent.

Since entering the perfume business in 1991 with the purchase of Laura Biagotti and Hugo Boss, Procter & Gamble has increased global sales tenfold to about half a billion dollars annually.

Fine fragrances is a fast-growing business that depends as much on glitz and style as it does on routine, everyday performance. For the past six years, sales have grown more than 10 percent.

In the new Procter, which is seeking a cachet in beauty care that will match its traditional strengths, fine fragrances is the perfect business model: low cost to produce, high profit margins and consumers willing to pay to be hip, cool and well scented.

"We want to create classics," de Cesare remarked from a conference room overlooking Lake Geneva. "We've focused on fragrances that will have a lasting presence."

Fine fragrances stands out as perhaps the only business in P&G's stable of brands where the company isn't looking for the average consumer.

Instead, it beckons to those who have plenty of money to spend and who willingly pay a premium price to wear this year's trendy scent. The ideal consumer, de Cesare said, spends about $200 a year on fragrances.

The market numbers, as P&G sees them, are compelling, particularly in Europe.

And the market is growing. The just-closed $5.7 billion acquisition of German giant Wella included nearly $800 million a year in perfume sales, much of it in Europe. Wella products can be found in shops in Moscow, so P&G acquired an immediate entree to the market not only in Western Europe but in Russia, too.

For now, the real competition plays out in Western Europe's finest stores. Nearly nine of every 10 consumers who buy fragrances try them in the store. So P&G's advertising might is a strength. But it's still building relationships with the perfumeries where many of the products are sold.

"Consumers feel a different way when they have to buy groceries than when they buy a treat," de Cesare says. "It's an emotional necessity, not a physical necessity."

If that sounds a bit ethereal for Procter & Gamble - after all, it's the home of the "quicker picker upper" - it's straight into chairman and chief executive A.G. Lafley's global strategy.

He thinks P&G can take the household names it acquires - LaCoste and Hugo Boss, for example - and apply P&G-type marketing discipline. By doing that, it can break out of the industry's traditional cycle, where there are 200 product introductions each year, most of them destined to disappear the next year when the latest trend hits.

It's low-cost. P&G doesn't sell fragrances directly, but instead depends on distributors worldwide.

It also fits into other P&G businesses. The company has long been the No. 1 user of fragrances in the world, inserting them into every bottle of Pantene shampoo or Ariel detergent.

"For us, in Europe, it's a business we grew up with," de Cesare says in Geneva.

Meanwhile, in Moscow, as Wella, LaCoste and other P&G fragrances begin to waft through homes, offices and restaurants, the battle of rubles and scents is only just beginning.


Europe teaches lessons about style
Cliff Peale reports from Russia: As Procter & Gamble Co. gears up its operations in Russia, the company is blending the experience of market growth in a post-communist state with the tough lessons learned from decades of battle against fierce competition in the upscale nations of Western Europe.
• Join Cliff Peale for an online chat at noon Tuesday at Cincinnati.com.
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