WMT Walmart Inc

By Serena Ng 

Boxes of luxury perfumes from Dolce & Gabbana, Calvin Klein and Davidoff line a store shelf inside a suburban mall near New York City. The fragrances, which typically cost more than $50 each, have prices up to one-third less than what shoppers see in department stores like Kohl's or Macy's.

That's because the display is at a Wal-Mart Supercenter, where the designer perfumes are inside a locked glass case--across the aisle from $2 lipsticks and $4 eye makeup.

The Wal-Mart display is striking because the companies that make these designer fragrances don't supply them to the world's largest retailer. Instead, the perfumes come from the gray market, or what product manufacturers consider unofficial or unauthorized sales channels for their goods.

Big luxury perfume makers like Procter & Gamble Co. and Coty Inc. try to limit their products to official channels but have found it difficult to prevent unauthorized sales, according to people close to the companies.

Some industry insiders and analysts, say, however, that pressure to keep fragrance sales robust may have led manufacturers to turn a blind eye to the flourishing gray market for their products.

In the U.S., perfume makers typically sell their products directly to large retailers. In Europe and Asia, manufacturers don't have direct distribution arrangements with many retailers, including smaller perfumeries. As a result, brands often have to sell through wholesalers and distributors.

The result can be price markdowns of up to 60% when perfume makers sell their merchandise to overseas distributors, which could make a quick profit by flipping the products back to U.S. mass retailers that can buy in large volumes.

It isn't known how much luxury perfume is sold in the unofficial channels, but there is enough supply of some bottles, such as Dolce & Gabbana's Light Blue fragrance, that Wal-Mart features it in advertisements. It can also be purchased at Target, drugstores and online discounters.

A Wal-Mart Stores Inc. spokeswoman said the retailer works with "well-respected suppliers" to provide its customers with a broad assortment of fragrances. She declined to discuss sourcing of specific brands. A Target Corp. spokesman said all its fragrances are authentic and legally purchased and sold.

Designer perfumes have traditionally been the domain of department stores and specialty retailers, part of a strategy by luxury brands to cultivate an aura of exclusivity and status among consumers. Premium-priced fragrances make up the bulk of the $5.9 billion U.S. fragrance category, which grew 2% last year, according to Euromonitor International.

Consumer-goods giant P&G, which produces Dolce & Gabbana fragrances under a licensing agreement with the Italian fashion house, sells the perfume to high-end retailers like Bloomingdales, Nordstrom and Sephora. But P&G doesn't sell it to Wal-Mart or Target. The same goes for Coty, whose fragrance brands include Calvin Klein and Davidoff.

Some mass retailers have obtained designer perfume brands from distributors that weren't authorized to sell to them, industry insiders say. The practice could reduce the cache of some luxury brands and shoppers' willingness to pay a premium for their perfumes. "If you see the fragrance you love sold at Macy's and bulk-packed in a club store, it may diminish your feeling of the prestige of the brand," says Ann Gottlieb, a New York-based fragrance-industry consultant.

Fragrance sales have been sluggish in recent years, as Americans have soured on celebrity perfumes and cut back purchases of nonessential items since the 2008-2009 recession. Department-store traffic has also fallen as people increasingly shop online.

P&G, which has had a luxury fragrance business for more than a decade, earlier this summer said it would divest Dolce & Gabbana, Hugo Boss, Gucci and other perfume brands by merging them with Coty as part of a $13 billion deal that also includes makeup brand CoverGirl and Wella hair-care products.

The transaction will double Coty's size and annual revenue base to more than $10 billion, and make the combined company the world's biggest seller of fragrances, with $4.5 billion in sales from this area alone.

Both P&G and Coty have long struggled with their designer perfumes being diverted to unauthorized retailers. In 2009, Zino Davidoff SA, which owns the trademark for the Davidoff Cool Water fragrances, obtained a preliminary injunction against CVS Corp. after suing the drugstore chain for allegedly selling counterfeit and gray-market versions of its perfume in packaging that had been modified. CVS subsequently agreed not to sell Davidoff fragrances that were fake or in packaging that had been tampered with.

Today, CVS sells several variations of Cool Water and other luxury perfume brands on its website. "All fragrance products that we offer for sale are purchased--and are being sold--lawfully under all applicable laws," a CVS spokeswoman said. "These are genuine products in good and salable condition."

Brian Brokate, head of the intellectual property practice group at law firm Gibney, Anthony & Flaherty LLP, says it generally isn't illegal for retailers to sell gray-market merchandise if the products are authentic and approved for sale in the country. Mr. Brokate wasn't involved in the CVS case.

P&G has tried to plug leaks in its perfume distribution by cutting off firms that ignore or flout their selling agreements, according to people close to the company. But unauthorized sellers continue to pop up.

Elizabeth Arden Inc., which produces fragrances under its namesake brand and various celebrities and designers, has spent the past 20 months trying to tighten global distribution by cutting off wholesalers and distributors that have sold its products to unauthorized retailers.

Its fragrance sales plunged last year as a result, the company said, but in recent quarters some brands have started to grow again. Company executives hope the moves will have long-term benefits and limit discounting of the products. "A big part of the tightening of distribution is elevating the prestige element of the brands," Elizabeth Arden's chief executive, Scott Beattie, told investors last month.

Sarah Nassauer contributed to this article.

Write to Serena Ng at serena.ng@wsj.com

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(END) Dow Jones Newswires

September 25, 2015 20:23 ET (00:23 GMT)

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