This article about indie perfumeries in the NYT fascinated me and I've been meaning to write about it for a couple of days now. It's interesting because it's such a completely pure example of a tectonic shift in consumer needs.
There's no fundamental difference in technology or technological advantage here - the big perfume houses could easily concentrate their resources and close the gap. Furthermore, note that perfume fits the traditional definition of a search good - you can test it out a million different ways before you buy, so there's no asymmetric information to cause any problems. In short, a really simple industry to think about.
The problem is that the big perfume houses are caught between two fundamentally different views of the world. The indies, who they can see are growing exponentially, are pursuing quality. But the Consultants tell them to market
, and do (idiotic) things like bundling, versioning (ie gift sets) and designing products that appeal to the middle 80% of the market at the lowest cost possible. Obviously, this is a stupid strategy for many reasons, not least of which is that economies of scale in a cosmetic business are a vital point opponents can strike if you don't innovate - because you can either command market share via innovation or quality, and you're now doing neither. The problem, at heart, is that thinking in terms of 'brand' and 'loyalty' confuses this fundamental economics, which is the dominant force in the industry.
So the tectonic shift is that consumers have gotten fed up of staleness in innovation and have defected to quality, because, at the relatively higher price they're willing to pay, they have no options
. This is what I mean by a 'shift in the value equation'.
Now the big perfume houses could respond - but then they'd have to change the beliefs which underlie their strategy, not just the strategy itself. So they simply won't innovate and play the game - they'll resort to greater and more violent competition inside a shrinking market segment.
Yeah, I know there are a few interesting exceptions to this dynamic, like Shiseido - but if you think about them carefully, they don't answer the new value equation consumers have thrown down either.