1. The rising EU off-price tide
Thanks to recent steady growth, off-price across many industries is becoming too big for brands to ignore. According to one model, total revenue for the European Union’s fashion industry alone was €368 billion in 2021, with the off-price segment accounting for 11 percent, or €40 billion. Whilst the EU fragrance industry stood at a more conservative value of €17.5 billion in 2021, a similar segment size would still offer a potential market of €2 billion.
Because the fragrance industry is predicted to revert to its traditional pre-pandemic growth rate of 5 percent per year, off-price could be an important and dependable engine in the coming years. It represents a particularly valuable opportunity for fragrance brands to broaden their reach to customers who might not otherwise consider their full-price offerings.
Off-price shoppers have shown a particular interest in ‘masstige’ and luxury brands. These shoppers aren’t necessarily seeking out the lowest-priced items; instead, they tend to care more about brand selection and exclusive offers than the average customer. As a result, off-price players have been successful in attracting these medium and high spenders.
Off-Price represents a particularly valuable opportunity for fragrance brands to broaden their reach to customers who might not otherwise consider their full-price offerings.
Within off-price, the offline and online channels are growing at different rates. The offline channel has not been tapped into by fragrance brands in the way it has been within fashion. In the fashion sector, offline has had a huge head start thanks to the popularity of outlet shopping centres (in 2015, they accounted for 75 percent of the off-price fashion market). This success points at an opportunity for fragrance brands to develop a similar offline model, utilising the existing network of outlet shopping destinations.
Analysis suggests that there will continue to be significant growth in off-price through online channels in the coming years.
The growth trajectories of the two off-price channels reflects their different attributes. Fragrance brands need to really understand the dynamics of each, to craft an effective strategy.
2. Offline off-price: A destination and experience
Pioneered by the fashion industry, the managed offline off-price world has evolved over recent years and should be seen as an example of how, if buying experience and assortment are managed well, offline off-price can be leveraged for brand growth.
The first generation of off-price was all about ensuring that the channel didn’t undercut the full-price business. Off-price outlets were located outside of urban centres, and brands put little effort into creating a welcoming environment: goods were often piled onto tables and racks for consumers to sift through.
Now, fashion brands recognise the offline off-price channel as an important revenue source that requires a consumer experience to match. The best off-price malls and villages today have the feel of high-street premium retail. For example, Value Retail’s Bicester Village, located outside of London, has its own train stop, great restaurants, art installations, and carefully manicured foliage. All these elements combine to create an exciting customer experience—many shoppers plan special daylong excursions to off-price malls. Inside stores, consumers encounter many of the same elements as those in full-price locations, including the look, feel, and layout. Staff are often multilingual, so customers can get assistance from a salesperson in their native language. In many instances, once consumers make the long trip to outlet villages, the experience is on par with full-price flagship stores.
In such a setting, even some of the most highly regarded luxury and lifestyle brands have embraced the offline off-price channel to gain scale and increase profitability. Without eroding their full-price business, successful operators have been able to use off-price as a customer acquisition channel for their full-price goods. Customers shopping for luxury in off-price outlets are typically younger and more affluent than average; offering brands an opportunity to acquire new customer groups. These outlets are often the first point of contact for luxury brands in particular: because the barrier to entry of an off-price luxury store often feels lower to consumers than going to a pricey, high-fashion district, brands have increasingly found ways to protect their brand and attract customers who might otherwise not engage.
Such a model, if used selectively, can create an image of exclusivity that offsets any risk associated with the sale of off-price references, and could represent a significant opportunity for fragrance brands to tap into new audiences whilst ensuring the protection of brand equity.
These outlets are often the first point of contact for luxury brands in particular: because the barrier to enter an off-price luxury store often feels lower to consumers than going to a pricey, high-fashion district, brands have increasingly found ways to protect their brand and attract customers they otherwise might miss.
3. Online off-price: Increasing demand and supply
Fragrance is one category within the cosmetics industry where full-price products typically struggle to sell online, with most of the sales stemming from in-store product sampling. This means most online sales are product replenishment (i.e. repeat purchases), rather than consumers buying perfume for the first time.
The growing popularity of the online off-price channel puts better deals just a click away. A large part of its allure for customers is the chance to track down desirable at lower prices. Several online models have taken hold: Off-price players that base their sales models on flash sales, including Brandalley, Showroomprive and Vente Privee, offer products for a limited time. The gamification of hunting for the best bargains can lead the most engaged customers to check apps on a regular basis to see the latest offers from their favourite brands. However, this limited assortment is available only when flash sales are live.
Off-price players can also offer a standing assortment of fragrance items (for instance, Notino, All Beauty and Look Fantastic). Consumers can go to these sites year-round to find items, similar to the convenience of full-price players, even though some sizes and lines may have limited availability.
Luxury mystery beauty box platforms have emerged over the past few years. Companies such as Glossybox curate boxes of products and orchestrate surprise drops promoted on social media. By spreading discounts among the goods in each box, these companies keep pricing opaque to protect the integrity of participating brands.
These models can broadly be segmented by their assortment and openness. In terms of assortment, some models enable customers to buy certain products year-round, while other players offer items or products from a specific brand for a limited period of time. As for openness, players using the described online off-price models also offer closed, members-only clubs. Some even restrict access to invitation only, which protects brand equity, and others also require a minimum shopping value each year to ensure that customers remain active.
With the proliferation of ecommerce sites selling fragrances, has come an explosion in the secondary market for those brands. Consumers are often not aware of the provenance of a line they are buying online, and it therefore becomes difficult for the brands to maintain control of price, availability and brand management across these sites. Engaging in a carefully planned online off-price strategy with carefully chosen partners allows the brand to manage risk with far greater control than is normally available.
The accelerated migration of consumers to e-commerce during the pandemic fuelled the online off-price channel. Indicators suggest supply will follow a similar trajectory. More brands have recognized that even with more accurate, analytics-based forecasting, oversupply will remain for several reasons. Long lead times in production, fast-changing trends, and other factors influence demand and are largely beyond the control of brands. Because brands have complex product portfolios – 000s of SKUs, along with numerous size variations—managing order quantities at the SKU level is incredibly complex.
Many brands are now embracing a more strategic approach to the off-price segment to manage volumes, use price discounts without eroding brand equity, and gain access to new customer groups. Another favourable driver for increasing supply is rising demand for sustainability that prevents the destruction of potential oversupply and makes off-price sales a positive contributor to environmental, social, and governance (ESG) measures and brand image.
Although the off-price channel offers a great growth opportunity for brands, it should be treated as a complementary, rather than stand-alone channel. For example, select North American brands are managing dedicated production of inventory specifically for the off-price segment, a strategy that comes with pitfalls. We’ll cover this strategy in our next article.
Engaging in a carefully planned online off-price strategy with carefully chosen partners allows the brand to manage risk with far greater control than is normally available.
In the third part of our report, we will explore how to craft a strategy that can expand the overall business while fiercely protecting brand reputation.
