Why fragrance is the new key to commanding a premium price tag

0:09Melissa Daniels:Hello and welcome to the Modern Retail Podcast. It's our show that covers the ways the retail industry is changing and modernizing. I'm Special Projects Editor Melissa Daniels. Fragrance is having a big moment. It's the fastest growing part of the beauty industry, growing 15 % in mass last year and 5 % in prestige. But this isn't just cologne and perfumes and body myths that we're seeing pop off. We're also seeing fragrance bleed into personal care and home essential categories in a really big way. Think about laundry care that smells like your favorite candle. We're seeing conglomerates like Unilever putting 100 million euros into building its own fragrance house.

0:49Melissa Daniels:Procter & Gamble has made scent a major marketing focus for products like Downey Intense. Basically, a great scent is becoming a key way that basic products are leveling up and leaning into premiumization. Here with me today to get into how fragrance has become such a differentiator is Diana Melancio, General Partner at XRC Ventures Brand Capital Fund. She recently published a really fascinating report on the category and has a ton of insights to share with us today into why and how fragrance is playing such a big role in all these different categories. Diana, welcome to the show. Thank you so much for having me, Melissa.

1:26Melissa Daniels:Oh, I'm so excited to get into this with you. You're like a CPG in-house wizard. I feel like you understand the guts of these companies in a way that not many people do. So I'm thrilled to get into it. But let's kind of start at the top. I mean, why and how is fragrance so big right now? Yeah, I think it's a couple of things. COVID really was a catalyst for people's interest in fragrance. If you follow things like fragrance talk and that younger men are getting into fragrance, anecdotally, a friend of mine has a 20 and a 21 year old. And instead of asking for cool sneakers, they're asking for designer perfume.

2:12So TikTok has really found a way to communicate how scent is expressed. And people are really using that to communicate who they are, whether that's a persona or how they want to feel for that day. and I also think that fragrance is really playing into that self-care and to your earlier comment it's not just in body it's not just in traditional you know fragrance perfumes and colognes but it's also bleeding into laundry and home care which is an area that we're particularly excited about

2:55Melissa Daniels:yeah I am too I think it's really fascinating it's also funny to me that something like Like fragrance talk can be so big because you can't smell through your screen. I think we've become experts on like communicating things beyond the screen because COVID really accelerated the interaction that we're having right now. So how do you communicate joy, humor, even scent now on a screen in a, you know, sub 30 second video on TikTok? Totally. I mean, we're sensory obsessed in so many different ways, right? You know, there's the visuals, right? Instagram did that to all of us as far as making sure we all want to look and feel our best and present ourselves that way.

3:46Melissa Daniels:But then it's also, oh, yeah, what is scent? And, you know, I think about sensory and like ASMR even and people's hearing and touch and the way that's all really big. We're just in like this big sensory moment. And when I think about fragrance, I think about it as an extension of like little treat culture almost. Like I'm going to do something that smells really good today. Yes. Yes. Yeah, it's I think why a lot of the conglomerates that you also mentioned that have lived in mass laundry, mass cleaning, are really leveraging fragrance as a way to premiumize their product offering. And it's a relatively low cost, low part of their COGS, their cost of goods sold, but disproportionately perceived as a way, like as the value of the product.

4:42Melissa Daniels:Yeah, you know, you mentioned this word premiumize, premiumization, you know, how do you sort of define that? Or in your mind, what makes a product go from basic or essential to premium? Yeah, so I think it's a named scent profile. So rather than fresh or lemon scented, it's amber santal or blushed bergamot or, yeah, it's like your own naming architecture versus something that is a little bit more generic. And that's how I think consumers are delineating between a sub -$20 laundry detergent and one that might cost over$30 or over a dollar per load. Santal, Bergamot. Does linen fall into this category or is linen pretty standard at this point?

5:45Melissa Daniels:Yeah, I feel like linen I see in anything. They're set in different ways. one of my favorite diffuser scents is clean white sheets. And so clean white sheets is different from fresh. It puts an image in your mind too. I feel like a good fragrance name suggests imagery. Yes. And then suddenly I feel like I'm doing something more fun than laundry. I'm elevating my life in a way. I'm doing something really good for myself. Yeah. Or you're walking into your bedroom and it's like, oh, this feels like a hotel. It's fresh, you know, it's clean white sheets. It's a very specific visual scent profile that just takes you to a different place.

6:29And I think as more, as people are spending more and more time at home or working out of a bedroom or your kitchen, you really want to find ways to elevate that everyday environment. it.

6:43Melissa Daniels:Yeah. I'm curious, you know, you mentioned some of the bigger companies that are playing in this space, but, you know, those are places where introducing new ideas is like trying to turn a battleship around, right? It can't be easy. I'm kind of curious what your perspective is on what the larger, you know, CPG companies are doing in this space and, you know, what the sort of, I guess, challenges or opportunities that they have on fragrance premiumization is. Yeah, so the beauty conglomerates have caught on to this fragrance bug for some time. But it was actually the commentary that I heard at Cagney, the Consumer Analyst Group of New York annual conference.

7:25It's every year at the beginning of the year. It's really when the largest CPG companies, after they report their fourth quarter or end of year results, they come and they communicate a vision for what's ahead. and nearly all of them were talking about premiumization and innovation through fragrance. I think the problem and challenges that they might have is they spent, you know, 20 years, 30 years communicating that their product is worth, you know, 10 bucks. It's 10 bucks on the shelf. It's 20 bucks. It will take a meaningful amount of time and investment to re-educate the consumer that it's now worth, you know, a premium to that.

8:11So I believe and have proof and I'm engaging in strategics that they will likely have to acquire their way into that permission.

8:24Melissa Daniels:Right. So they'll, you know, if you're in laundry, maybe you have to acquire a laundry business. if you're in toothpaste, you'll acquire a, you know, oral care system, um, rather than trying to expand your brand to a premium that they might not be able to reach. Like if, you know, no offense to Tide, but if like Tide did like a collab with the nose of Comme des Garcons, which is like a premium, no, that's, that, that's a thing. That's a premium nose. Whoever ever created the Comme des Garcons perfume, even if they combine those things, you have taught the consumer at Walmart that your product is 20 bucks.

9:07You're not all of a sudden going to get to charge $40 for it. So I do think that the incumbents have to buy their way into premium.

9:16Melissa Daniels:I'm thinking about what like a Dawn Power Wash, but like with La Labo would look like. It's not that hard to imagine because if you go into La Labo, I think they're testing home. Deep Teak is testing home. The Grove in Los Angeles is something that's close by. So I get my steps in there and I was in Deep Teak and La Labo and they all have some kind of cleaning product that costs a lot of money, the upper end of that key curve economy. Yeah, exactly. It's like a Verizon bill, but instead it's a dish soap. It's a dish soap. I kind of love it though. And I feel like it speaks to what we were talking about earlier, that it's just like, it's something fun.

10:04Melissa Daniels:It's something a little special and maybe it's not for everybody and maybe it's not for every day either. Right. Um, you know, it's what you use to clean your house when you have company coming over or before you have a party, you know, like I wish I could be one of those people who had really fancy hand soap in my bathroom all the time. I can tell you that I want to make an investment in this in this category. And and so I've been testing a lot of laundry. I've been testing a lot of like all of these things and switching from like a really nice multipurpose cleaner for my kitchen and then going back to Clorox bleach was like a hard turn.

10:47It was like, I don't want to, I don't want it to smell like that. It's all it's, it's, you know, like upgrading your lifestyle. You just don't want to go back.

10:56Melissa Daniels:Yeah. Yeah. That's the trap that we fall into then. Once you get into these things, I had a similar thing with when I switched to just sort of like more non-toxic and better for you cleaning supplies and doing a lot of making my own and using our local refillery. And I'm just like, oh, it smells better. It feels better. The only mass product I will say that still has me in its clutches is Dawn Power Wash. That thing cannot be beat. Yes. Yes. It's a good product. But I think for people that are seeking solutions, for example, I was talking to a company and one of the reasons why they started this premium household company was because I think their veterinarian or their pediatrician was like, hey, just make sure like your, you know, your dog or your baby can't get a hold of this stuff.

11:50And so they started to question, wait, if it's not good for my pet and it's not good for my baby, maybe I shouldn't be using it. But doesn't question their cleaning or efficacy ability, because I do think that the conglomerates have done a really good job of making sure that their products are efficacious. But again, to that premiumization point of how can you marry cleaning efficacy with premium ingredients and something that feels good to use every day in a chore that you might not love doing.

12:26Melissa Daniels:Right, right. Well, this is why I like your point about, you know, them having to acquire their way into that space and into that category and customer category, because that's where I see, you know, digitally native or direct-to-consumer brands really doing interesting things, right? And that they have that newcomer, fast mover, disruptor edge to them. You know, talk to me a little bit about when you are looking for companies to invest in and you are trying out all these wonderful new products, you know, what stands out to you? You know, what are the things you look for where you're like, yeah, that's a really cool fragrance model that that could work?

13:07Yeah. So first it has to work just as good as the, as the originals is the very first thing, because if you're a mom, like we, we both are, you're not going to continue to do something that doesn't actually clean things, whether that's your kitchen counter or your laundry. So I think evidence or proof that it is as effective at cleaning is a baseline. It's also what I think strategics would require instead of just putting a scent on top of a generic white label product. Additionally, it's not different from what I look for when it comes to consumer products full stop, which is customer love. And you can assess that through repeat purchase, through, well, primarily through repeat purchase, but also what customers are saying about the brand.

14:03Are they, how are they talking about it on Reddit? There's all of these niche, like Reddit threads on, for example, like laundry and laundry enzymes that we've been spending our time, spending our time reading. And then it's, you know, trying it. I don't know if other investors approach it this way, but I really stand behind the products that I've invested in. I'm an investor in a company called Naked Sundays and I wear that every day. And so I want to be really proud of the companies that I back and I want to be a truthful user of it.

14:43Melissa Daniels:You know, you mentioned brand loyalty and And I'm curious the connection between loyalty and fragrance because I know folks who are just like diehards for a certain scent. Like this is the perfume I wear every day. This is the candle I light every time I sit down to journal. You know, scent can be a very routine-based thing. You know, I'm curious if that's something you see or that these companies are trying to gauge or develop. So I think there's the scent loyalty is bifurcated depending on age. So, for example, there's a certain demographic that's really fond of the fabulosa cleaning smell. It reminds them of their grandmother's home.

15:26There's nostalgia there. I think to reach a younger consumer, you have to position the brand in a way that speaks to them. I think once you win an older consumer and you prove that it is just as effective as what they were using before, but better for you, non-toxic for your children, non-toxic for your dogs, then that's a way to gain loyalty. The reason that traditional fragrance has been really difficult for us to invest in, I would really like to because, you know, to your point, it is a fast-growing consumer product category, but it's really difficult in traditional fragrance to build loyalty, particularly around the younger consumer.

16:16So the consumption level and the replenishment is not as high as, say, a household product that you tend to use on a more regular occasion than potentially a cologne or fragrance that you might use. Okay, if I'm having a date night, then I'll use this. And that might not be, you know, for some of us toddler moms, that's not necessarily like an everyday occasion.

16:42Melissa Daniels:No. Those were the days, huh?

16:48Melissa Daniels:I do keep my Santal still on the shelf ready to grab, you know, when I'm really trying to be somewhere and be out and about. I like this idea of different fragrance for different occasions, though. I really think there's something there. And I think that ladders up into the home space really well because it's like seasonality comes to mind, right? when you want your house to smell like a Christmas tree or you want it to smell like summertime. Yeah. You know, how much is seasonality a part of these companies? You know, when you think about these newcomers in this space who are using fragrance to, you know, premiumize basics and essentials, how much is seasonality a part of their strategy?

17:34Well, I think seasonal products bring nostalgia and a halo effect and a reason for consumers to come to that product at holiday time or summertime or springtime, whatever occasion you want to be communicating or marketing against. But ultimately, what I think we slash I as an investor am after is a product that people buy over and over again. Ideally, a product that they're using, if not every day, then multiple times a week. our current thesis, our current approach to that is really more in the home than a traditional fragrance or cologne, largely because of the sort of like trend nature. Like for example, like gourmand has been on a really big kick the last few years, gourmand being food scents, specifically vanilla, but cherry is having a moment right now.

18:35I don't know if you've seen Martha Stewart's latest fragrance ad, but also if you step into Sephora's fragrance section, there's cherries everywhere. And so I think good brands create these of the moment products that then create a halo effect to also revisit the core skews that you love.

19:02Melissa Daniels:Yeah. And that's thinking, yeah, it's not just the seasonality as far as the seasons as we think of them, but also what's sort of in the zeitgeist. You know, every year around this time, actually, I think Pumpkin Spice just came out as we were recording this at Starbucks. So we're officially in Pumpkin Spice. That's also another Martha advertisement. She's just everywhere. God bless her. Dream podcast guest for me. But when I see pumpkin spice, I always think, okay, well, what's the next one? Because some people really, really don't like it. And then I always lean to like, there's apple people.

19:40Melissa Daniels:And there's also like pine people and like tree people. And I feel like we can get into like the autumn scents that are beyond pumpkin spice. And that That is such a differentiator for me as someone who's a little bit over it. Yeah. I mean, I think, again, like these trends come and go from a taste perspective. Now, I don't really invest in food and beverage. But for example, I'm Filipino and Ube was having a moment because it's sweet, but not too sweet. And it's also this beautiful purple color. It's interesting that that flavor has had this recent run also at Starbucks. but in other places as well.

20:22So I think you can introduce things like that that are trend-driven, but it's also important that you still have a consistent base of core products that customers love.

20:36Melissa Daniels:Yeah, things like your vanilla, your clean sheets, the ones that you know people will want time and time again that really are classics and, like you said, induce that nostalgia factor. You know what I think about looking back on 2026 so far, I feel like tomato really had a moment. Tomato is having a moment. It's not. Yeah, I like that. I like that. I like the tomato, tomato trend. It was first introduced to me by a friend. He is trying to develop a sort of Americana farm brand. And his first hero product is a tomato scented hand cream. Beautiful. Yeah, there's something about it that's like earthy and grounding, but also really fresh and familiar.

21:28Melissa Daniels:I really like that. What else, you know, when you're talking to these companies, what else makes you go like, oh, I like that? Or, oh, I'm excited by that. Any other anecdotes or memories that you have of certain fragrances or types of products with fragrance that have stood out to you? Yeah, I think it's like where their ideas come from. Often for consumer founders, it's a pain point that they're feeling in their own life. But beyond that hero product, how else are they coming up with inspiration and products to come up with new ones to launch? So that's something that I think I spend a lot of time on because I think it's best practice to launch a new product one to two times a year.

22:23Again, to create that halo effect for the brand and give consumers a reason to come back beyond the core SKUs that they love. I think it's also like how they name their products is also something that's really interesting. Yeah.

23:10their brand. So if, you know, they're, they're heavily associate themselves with an area like the South of France. Um, I can think of a couple like, like Italy, there's actually this Southern brand, I think either out of Charleston or, or, or Nashville. So a lot of their naming, um, criteria sort of revolves around maintaining that sort of like origin, that origin story. Victoria Beckham's perfume line is based on special memories she had with David Beckham. So that's interesting. Like their house in Los Angeles was on San Ysidro. And so she has an LA-inspired perfume called San Ysidro Drive. So things like that.

24:00I think it's really interesting and also mirrors the brand story.

24:04Melissa Daniels:Yeah, yeah. I think about the Jenny Kane candles, which I love in our big hit. She's got the, you know, it's Montecito, it's Hamptons, it's, you know, just these certain places that evoke a certain scent. That's really fun. I love this idea of, you know, looking at where the founder gets their inspo from because they feel like fragrance is a bit of like, it's an art and a science. You know, there's sort of a mad scientist lurking beneath everyone who's making a fragrance. Yes. I would say in a, I think in a positive way that the fragrance founders I encounter are very eccentric, um, might be the right word.

24:55They have a very clear perspective on why they have to, it's like very specific why they, they exist in the market. And, um, it makes it really interesting as an investor.

25:05Melissa Daniels:Oh yeah. And it's, it's, it's storytelling, you know, I just go back to what you said even earlier about that scent of fabulosa making you think of your grandmother's house. There's a story there. And there's a story that you were there every Sunday while she was cleaning before dinner and before everybody came over or what have you. And I think for me, when I talk to folks in this space, when they have that scent, it triggers a memory. And then there's a story behind that memory, right? Like, you know, you can sort of trace your way through it. And I think that probably also speaks to why consumers are looking for it right now.