How much does that fancy $100-a-bottle department store perfume you wear really cost to make? The answer is one of the retail industry's dirty little secrets -- with good reason. If shoppers got a whiff of the how little is spent on making "the juice," it would be like Toto pulling back the curtain in The Wizard of Oz.
Here's the lowdown: Despite all the flamboyant marketing-speak behind prestige fragrances -- all that talk of floral formulas and gourmand notes -- the value of the actual liquid is roughly equivalent to a large cup of regular coffee. Yep, not even a cappuccino.
And perfume is no outlier in the cosmetics department: When it comes to a host of beauty products, "There's an enormous disparity between the cost of the product and the cost to the consumer, more so than anything else," a former department store CEO told DailyFinance.
"If you bought a laptop that costs $1,000, the laptop might cost $600 to $700 to manufacture, but if you bought a lipstick for $25, it might cost 25 cents to manufacture," he said. "The same holds true for fragrances."
Fragrances are a big -- and growing -- business.
From January to March alone, department store fragrances generated $501.2 million in sales, up 7% from 2011, with nearly 8.0 million units sold, according to market research firm the NPD Group.
The ex-retail CEO offered DailyFinance a rare glimpse into the breakdown of the costs built into department store prestige fragrances, using an average $100, 3.5 ounce bottle of a "celebrity" perfume as an example. As the cost breakdown is a closely-guarded trade secret (rather like Colonel Sanders' fried chicken recipe), he would only speak on the condition of anonymity.
The perfume bottle itself is a meaningful contributor to the cost of the fragrance, especially as some bottles are veritable sculptures, expensively designed by commissioned artists, the CEO said. Indeed, perfume bottles have a noble history as objets d'art -- to the point that they have been the subject of museum exhibitions.
Typically, this includes the bottle's package, as well as collateral material for the department store counter, such as testers and displays "that are all part of an integrated presentation scheme," said the CEO.
All the legerdemain that goes into creating a perfume's mystique, particularly for a celebrity-backed fragrance, carries a heavy price tag. The marketing-magic machine includes everything from department store marketing at the point of sale to the media blitz: "scent strips in magazines, outdoor ads on billboards and bus shelters, and TV advertising," the CEO said.
While the retailer and supplier typically split the cost of TV spots, all the other marketing costs are usually paid by the manufacturer.
But when marketing a fragrance -- as opposed to fashion or accessories -- seeing isn't always believing, Karen Grant, vice president and senior global industry analyst for the NPD Group, tells DailyFinance.
A shopper might instantly respond to the aesthetics of a handbag she sees in the store or in an ad, for example, which can prompt a sale. But before they'll be convinced to make a perfume purchase, consumers must "encounter the scent" via promotional ploys like testers or scent strips in magazines. And all those things jack up marketing costs, she said.
Sales Commission: $6
The sales people at department store beauty counters work on commission, which also figures into the price of the fragrances they sell. Typically, they are paid by the beauty supplier, as opposed to the retailer.
Licensing Fee: $4
When a perfume is a celebrity label, and so many of them are these days, the star gets a royalty for the use of their name, likeness and participation in promoting the product.
Manufacturer's Overhead: $15
A big chunk of the perfume price goes toward the manufacturer's corporate overhead -- everything from the salary of the brand's CEO to corporate office expenses. And of course, paying for the chemists who produce the scent is factored in as well, the CEO said.
In the case of a celebrity fragrance, the star or product development gurus articulate their concept. Then companies like International Flavor and Fragrances and Givaudan, often working on contract for the fragrance manufacturer, produce scents based on that input, which then go through a selection process.
The journey from concept to final fragrance is not unlike how a food manufacturer settles on "a recipe for chicken soup," the CEO said.
Manufacturer Profit: $15
This figure is an estimate of what the retailer profits from the fragrance. (Not bad.)
Retailer's Corporate Overhead: $25
This is the same as the manufacturer's corporate overhead, excluding the cost of the chemist.
Retailer's Profit: $15
The is the profit the store generates from the perfume after corporate expenses. (Also not bad.)
And Finally ... The Juice: $2
The actual liquid concentrate, which includes a mixture of distilled water, alcohol and flavorants, is the least valuable part of that bottle of celebrity perfume.
And while the mixture of exotic flavorants can be expensive, "it's introduced in very small concentrations by the brewmeister who created the scent," the CEO said.