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Dollars and scents.

Dollars and Scents

Outside the main entrance to Garfinckel's, in downtown Washington, a Viennese waltz wafts over the sidewalk gently beckoning passers-by to the store's groundfloor fragrance department. Inside, in white coats, assistants stand ready with advice behind glossy booths stocked with the latest bottled dream. On a typical day, no small number of limousines will brush the curb and dispatch their cargo--the well-heeled women of Georgetown--into this other-world to play out their fantasies, whether it's Beautiful (This is your moment to be beautiful) or Poison (Poison is my potion). Their presence in the store, of course, also serves another purpose. It signals the fragrance's cachet.

A block away is a less elegant perfume department. This one belongs to Abdul Majid, a Pakistani who touts scents from a sidewalk stall. Here, the only wafting rhythms are from the boom-boxes of passing black teenagers. Majid's specialty is surgical instruments, but he also has Nina Ricci, Opium, and Paco Rabanne.

Abdul may not know it, but his stall is a part of the "gray market"--a bizarre network that circumvents the limited distribution of perfumes to the top department stores and puts scents in the hands of "less desirable" vendors like Abdul and the many like him who stand near the department stores on Fifth Avenue, Rodeo Drive, and the Miracle Mile. The gray market also includes many discount drug stores and "cosmetics conventions," where thrifty noses meet. And while you might think it's a boon merely for street vendors and frugal shoppers, the gray market is actually a godsend for the perfume manufacturers. Here's why:

Selling scent is a tough business. For a number of reasons--including an aging clientele increasingly reluctant to spend $185 for an ounce of scent--sales of concentrated perfume at prestige outlets slipped from $231 million in 1980 to $208 million in 1985.

The market's not only shrinking, it's ferociously competitive. With some 800 fragrances, to sustain even those sales levels requires ever slicker and costlier promotions. Since the late 1970s, the cost of launching a new perfume has risen from $4-6 million to $11 million and up. Calvin Klein, for instance, spent $17.5 million in 1985 to launch Obsession in an advertising campaign that represented a new high in spending and a new low in sexual innuendo. In the Klein print ads, three blurred male figures pawed at the body of a naked female, while television commercials featured a young temptress breezily driving her boyfriend toward some unspeakable crime: "If Obsession is a sin, let me be guilty," he intoned as he was consumed by flames.

If your business is manufacturing clock radios or tube socks, there's a way to deal with a competitive market. You try to cut your prices or you hustle to get more stores to take your latest digital AM/FM model. But the perfume companies deliberately limit their products to fancy department stores (instead of discount drug and cosmetic outlets) to make them seem more chic. When Estee Lauder brought out the lithe Slav sensation, Paulina Porzikova, to model its racy new fragrance, Knowing, the company limited the distribution from the usual 2,000 outlets to just 168 stores to signal its "utter desirability." In New York City, Calvin Klein's newest scent, Eternity, is sold only at Saks Fifth Avenue. If the perfume were openly sold on Aisle 10 next to the Q-Tips and the Dr. Scholl's footpads, it would lose some of its panache. For the perfume companies, cutting prices would be equally gauche; half the appeal of these scents is their price.

Trapped in a straightjacket of their own creation, the perfume companies find the gray market offers an easy way out. By turning a blind eye to the diversion of perfumes from prime retail outlets to mass discounters, perfume companies can sell their potions widely and keep them prestigious.

Officially, of course, the perfume manufacturers wax indignant. They even went so far as to join other manufacturers in bringing a suit to the Supreme Court that would have outlawed imports to the gray market. Fortunately for Abdul, the Supreme Court rejected that argument. One of their lobbyists, Eugene A. Ludwig, a Washington lawyer representing the Coalition for the Preservation of the Integrity of American Trademarks (COPIAT), calls gray marketeers "unscrupulous businessmen, who pay no advertising or promotion costs, to ride off the brand-name investments of the perfume companies."

But there's no shortage of people in the industry who will tell you that the perfume manufacturers' opposition is merely cosmetic. "The motivation is to control the gray market," said a former executive with American Cyanamid, which used to make Nina Ricci, "to put up enough barriers to stop it from getting out of hand."

After all, the gray market accounts for anywhere between 15 to 35 percent of the industry's roughly $3.9 billion in annual sales. Indeed, Sheldon Kasowitz, who analyzes the perfume industry for Goldman Sachs says that the gray market is actually the engine of industry growth. "Sooner or later," he says, "the industry has to turn to diversion."

Perfume reaches the gray market through one of two ways. Either those pricey little bottles are passed under the table from a prestige outlet (like a department store) to an unauthorized mass distributor who then moves it out to drug stores and street vendors, or they are diverted to the U.S. from overseas outlets, like cruise liners or tourist boutiques. For the department stores, it's worth it. They get a quick, big sale, albeit at a lower price than they would get had they sold it over the counter. But since manufacturers ply them with so many scents, and they have such limited counter space, there's always pressure to do some "off-loading."

What's more, perfume companies court the department stores with everything from easy payment plans to gifts for counter assistants. By off-loading a certain amount of fragrance through the back door at wholesale price, the retailers can get instant cash and still make a profit by pocketing the promotional and other expenses the manufacturer has paid him up front.

Ironically, the gray market can also be a cheap way of creating a groundswell of consumer demand. Christian Dior's Poison was a hot property in the U.S. a full year before the French perfume was officially launched here in 1986.

(It's worth making clear that the gray market is not illegal. No one is pulling up in a truck in the middle of the night.)

An attorney for the American Consumer Trade Council, a lobbying group representing discount distributors, says one of his clients used to buy perfume from a number of prestigious department stores. The attorney, Hank Hankla, said his client, whom he dubs "Acme," bought Opium (the perfume, not the drug) on the gray market after its manufacturer, Yves Saint Laurent, refused to provide it directly on the grounds that lowly Acme wasn't prestigious enough.

"YSL may say that it hurts their image to have products sold in small stores," says Hankla, "but my guess is that they are being consciously blind."

The perfume jihad

The gray market is fueled not only by department stores but from abroad as well. The trail starts with the export managers for the perfume companies. It's their job to chalk up new orders first and worry later, if at all, about whether the perfume is actually going to the intended customer. For instance, many European companies now export large quantities of perfume to Saudi Arabia and the United Arab Emerates, seemingly without regard to the fact that a great deal of it cannot possibly sell there. As Dr. Fernando Aleu, the president of Compair, New York, a perfume manufacturer, told Beauty Fashion magazine: "Even if every camel roaming the desert would be lavishly perfumed, there would still be an excess of fragrance in the region."

Information about how much perfume passes through the region, and through what hands is hard to come by, but during the Israeli invasion of Lebanon in 1982, one industry source claims to have seen thousands of bottles of Yves Saint Laurent perfumes pass through the Beirut airport. (More likely it was bound for the gray market than the cheeks of Druze militiamen.) And according to one fragrance industry attorney, private detectives have been hired by the perfume industry to investigate rumors that Iran is helping the Shiites to manufacture counterfeit perfume to finance their jihad.

But most perfume doesn't have to go on a ride to Mecca to get to the gray market. Instead, it is shipped from the perfume manufacturers in Europe to distributors who sell it to unauthorized stores.

Take a look at what happened to Oscar de La Renta. Just before Christmas, 1982, Parfums Stern, its parent company, loaded $40,000 worth of its Oscar de La Renta cologne onto a ship in France supposedly destined for Cancun, Mexico. I say supposedly because as soon as Stern executives parted with the perfume at LeHavre, it was shipped straight to Miami. How did it get there? By Parfum Stern's Panamanian affiliate, Dew S.A.

There it was discovered and seized by Customs Service agents, who noticed that it failed to meet the requisite Food and Drug Administration regulations. Because perfume destined for the gray market is intended for countries with less than exemplary labeling standards, it can be easy to spot when it shows up in the U.S. (In this case of Oscar de La Renta perfume, copies of the FDA detention notice show that it violated U.S. rules by not clearly stating the manufacturer's name.)

For a corporate executive who's seen his cargo hijacked, Michael Stern, the company's president, is awfully forgiving. He acknowledges that the cargo was never intended for the U.S. but absolves his Dew S.A. affiliate. His explanation: the scheme had probably been devised by the distributor in Cancun without Dew's knowledge. "Cancun is a busy resort and this shipment was in November, just before the start of the winter holiday selling season down there," he says.

But if the company was truly hurt by the diversion wouldn't it have broken off its contracts with Dew? It didn't, which leads one to wonder.

There's no diversion in his company, Stern says. But he's quick to point a finger at others. (Of course, this is a little like Lee Iacocca saying all the lemons roll off the assembly line at GM, not Chrysler.) "It might not come from top management but from within a division or from within a country," he says. "Sometimes you get pressure within a division to pick up a quick sale."

Panama, for instance, is the home to many a gray market diversion. It's, well, the place for all kinds of illicit shipments. Virtually every major perfume company in the world has an affiliate there and according to a report last year by the French embassy in Panama, one of the most well-known diverters is Motta International, S.A. Yet despite the company's notoriety it retains exclusive distribution contracts with Yves Saint Laurent, Christian Dior, Guerlain, Givency, Paco Rabanne, and Nina Ricci.

A report on the U.S. gray market by France's leading perfume trade association said a number of manufacturers had simply ceased to worry about the problem. The French report concluded bluntly that "certain manufacturers have found in the parallel market a means of extending, in a period of relative stagnation, their distribution area and therefore their volume of sales." The report also quoted Giorgio's former chairman and CEO Fred Hayman's view that: "If the parallel market in the United States exists on such huge proportions it is probably because the manufacturers have only one eye open."

An anthropologist looking at all this would wonder what drives people to such lengths to preserve their sense of prestige. Fortunately, some Margaret Mead of cosmetics would also discover a few hopeful signs. In Canada, perfume manufacturers long ago gave up the pretense of prestige pricing and now sell direct to mass outlets, launching new perfumes whenever an old one loses its appeal.

Can it be much longer before Americans see through all this, too? Maybe, maybe not. Last year, for instance, perfume companies launched a record 33 scents, but the one that made women swoon was Passion--$35 million in sales in just a few months on the market. How did the manufacturer achieve this remarkable return? By getting Elizabeth Taylor, the biggest (slimmed down) celebrity available, to plug the perfume as her own. The sell line: "Be touched by the fragrance that touches the woman."

But Americans are also turning away from status and towards the perfume clone--pretty much the same smell, but at a much lower price. "If you love Giorgio, you'll love Primo," boasts Parfums de Coeur, whose reported retail sales of $100 million last year makes it the largest of the new copycat manufacturers. Founded seven years ago by Mark Laracy, a former Ritz executive who helped launch Opium, Primo from Parfums de Coeur costs $7.50 an ounce, compared to $135 for the "real thing" from Giorgio.

Although Laracy has run into trouble amidst charges of false and deceptive advertising--Giorgio succeeded in getting an injunction against his commercials running on cable TV--it is hard not to root for him. His copies of Opium and Poison, for instance, are mockingly named Ninja and Turmoil. William Fitzgerald, a cosmetics consultant based in Maryland, concludes that the jig is finally up. "The U.S. market is up for grabs," he says. "There's no cachet or mystique anymore. Women are bored."

It would be nice if he were right. But as long as the ladies of Georgetown keep bringing business to the prestige counters, the fragrance industry can always count on there being a gray market for their envious imitators. Meanwhile, Abdul is hedging his bets that there might be a day when Americans put aside some of their snobbishness. Tucked away in a corner of his stall, he has a box of scents in plain blue bottles. Just in case.
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Copyright 1988, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Scams, Hustles, and Boondoggles; gray market of perfumes
Author:Honingsbaum, Mark
Publication:Washington Monthly
Date:Jul 1, 1988
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