Overview Of The Ecosystem And Value Chain Of The Perfume Industry

Introduction

In any industry, a business strategy relies in two major components: a clear value proposition and a value chain that goes with it. The value proposition gives an external focus based on the customer (needs, market segment and pricing) whilst the value chain focus on the internal, its operations. This is why these two must be linked; a value proposition that differentiates the business from other competitors its effective only if there is a correspondent value chain tailored with activities specifically adapted to deliver in the best way said value. This is how a competitive advantage is achieved

The fragrance industry is no different. The value proposition is embedded in each phase of the value chain: creation, supply and consumption. It’s important to delve in this industry and understand how can value be created through the supply chain as its one of the most valued sectors. According to Euromonitor International, the world market for perfumes and fragrances generated a value of about € 43,5 billion and it is estimated to reach a worldwide turnover € 58 billion with annual growth of 5% by 2023.

This industry which involves many product categories such as Fine Fragrance and Beauty, Personal Care, and Household Care industries create value through at least three different major parts of economic activity: The fragrance industry specialists and ingredients suppliers, the manufacturers and the retailers.

Within the fragrance industry, we have the perfume industry which will be explained in more detail its ecosystem and value chain in the next pages.

Value Creation Process in the Perfume Sector

First of all let’s give an overview of the fragrance industry ecosystem. Through our visit to the Pays de Grasse, we learned that there exists a big know-how I this area full of expertise and skills related to perfume. From the cultivation of perfume flowers and plants, the knowledge and processing of natural raw materials and the art of perfume composition by reknown Masters perfumers or “Noses” of major luxury houses.

The ecosystem of fragrance is divided as such:

• Production of Flowers: Grasse is the world capital of perfumes because this region has been blessed with its soils and its microclimate which are ideal for fragrance flowers and plants. Among the emblematic flowers from this area we have the Rose Centifolia, Jasmine, Tuberose, Violet and Orange Blossom.
• Transformation of Essential Oil: In this part, the raw ingredients are processed to extract the concentrate and obtain what is called the absolute.
• There are three types of process to obtain the absolute: Steam Distillation, Solvent Extraction and CO2 Extraction.
• Formulation of fragrances: this is where specialists take the absolutes and mix them to create different flavors or fragrances. This is the step where the “Noses” comes in.
• Industrial Production: in this part they take the fragrance formulas and replicate them in bigger quantities through industrialized processes in big scales.
• Distribution: The step where the final product “the juice” is delivered to the perfume brands so they can later distribute as well to retailers and wholesalers and finally to the consumer.

After seeing the general view, we can get deeper in the Perfumery value chain.

• The Perfumery Value Chain
• Synthetic Molecules
• Flowers, Gums, Woods, Herbs, Fruits
• Perfumes and Cosmetics
• Aromatherapy
• Extracts, Essential Oils, Absolutes.

The farmers and growers add value with the quality of their crops. From the care of the soils, to the care and expertise in harvesting which is mostly done by hand.

Ingredient Producers and F&F creators are specialist fragrance companies (global and mid-sized) and suppliers of base ingredients for perfumes like extracts, essential oils and absolutes. They are mostly European-based in which suppliers provide fragrance companies with specialist ingredients that can be either natural or synthetic. Then the ingredients are used to create a flavor or a fragrance and then supply fragrance blends to perfumery manufacturers brands. Fragrance companies meet the needs of their direct customers (manufacturers of consumer products and luxury goods) by creating and supplying proprietary blended fragrances. Each blend is unique and is only sold to one brand owner Each blend may contain up to 250 different ingredients, a mixture of essential oils, natural aromatic molecules, and complex synthetic aroma chemicals. A “palette” of more than 3,000 ingredients is used by the fragrance industry to create, produce, and supply the 60- 80,000 unique proprietary blends sold each year. In this stage of the value chain big investments are made in innovation science, creativity, and market knowledge. This part of the value chain is formed by the F&F market players which are a small group of companies specialized in this business: Givaudan, IFF, Firmenich, Symrise, Mane Fils and Robertet (he last two based in Grasse).

It’s is important to mention that in the perfumery value chain there are companies that are present in many phases. Some companies even have a vertical integration such as Robertet which is traceable from the field to the bottle, “from seed to scent”. They have expertise in all the aspects of perfume creation.

Perfumery manufactors and brands: These are the perfume brands. They create new sectors, build brand equity and differentiate themselves in competitive markets. The economic value is generated through production, sales, marketing, product development, R&D, administration, and logistics activities. An important feature of this part of the value chain is the creation of the clusters of specialist support industries sustained by brand owners because of their investments in branding and communication, to exploit the creative ideas developed by the Fragrance industry. ideas developed by the Fragrance industry. These support industries include advertising, market research, sales promotion, media, and packaging. As an example, the value created for the support industry is that brands that make extensive use of fragrances has helped to develop European expertise in fashion and beauty magazines for instance.

Retailers: These are the ones in charge to make possible that end consumers purchase the consumer goods and luxury goods that contain fragrances through a wide range of retail channels such as department stores, parapharmacies, Beauty and Wellbeing specialists, and non-store formats as direct shopping and e-retailers. These store and non-store retail formats are found in every single country of the world and as a result, sales of fragrances products that create significant economic benefits throughout the globe. The value of retail output contributes to generate tax revenues from value added. The greatest concentration of Greater Value Added and employment is supported by retail sales that depend on the distinctive contribution of fragrances.

Consumers: Spending by end consumer creates jobs and wealth.

Finally, throughout the whole perfumery value chain, the multitude of existing fragrances creates great value for manufacturers and retailers by meeting the needs of consumers each day. The fragrance value chain triggers purchases of raw materials, goods and services. These commercial benefits, and the linked manufacturing and retail activities creates value for the society and economy resulting in significant numbers of jobs and contributing substantially to the wealth and competitiveness of the regions where these companies operate. For instance, in 2017, the perfumery sector employed more than 2 million workers in Europe with more than 195,000 direct jobs.

Impact of Technology in the Different Phases of the Value Chain in the Fragrance Sector

There are some macro trends impacting the value chain of the perfume sector and one of them are the digitalization and disruptive technologies.

Fragrance technologies create added value for brand owners and retailers by meeting a wider range of customer needs, explaining functional performance, segmenting markets, and creating new markets and premium products.

Innovative development and widespread use of fragrance technologies creates substantial impact on productivity. Advances in technology can be mostly seen in the machinery used in the fragrance extraction and the industrialization process of perfume. The key of success is having right mix between technology and the traditional know-how and expertise of the operators in the factories. In vertically integrated companies such as Robertet technology is of outmost important where nearly 80% of process is automated.

Artificial intelligence is taken over the supply chain where more and more companies in these fields benefit from robot and AI machines to accelerate and make more efficient process. From extraction to manufacturing to testing to distribution. Biotechnolgy is growing and thus has an important impact in the perfume sector.

Innovations in technology deliver value to end consumers as well by enhancing benefits perfume longevity, bloom and malodor counteraction.

Technology is an absolute need and the future of fragrances can proceed without them.

References

1. Magretta, Joan. Harvard Business review Press 2012. Creating Value – Staking Out Your Company’s Unique Competitive Position Using Michael Porter’s Elements of Strategy.
2. Bo Nielsen, Torben Pedersen, Jacob Pyndt, Ivey Publishing 2017. Global Value Chain Management.
3. Lecture on 'Grasse and the perfume sector : leveraging the territory' by Prof. Cervellon &; Mars.
4. The value chain in the Fragrance Industry' Talk by Sonia Botta ( Senior Sales Director, Firmenich).
5. Talk by G. Nejman on 'The supply chain in the Fragrance Industry'.
6. Conference on 'Coopetition to cope with international competition? 'The strategy of the fragrance industry in Grasse county, Talk by Grasse Expertise founding members.
7. Talk on 'The Perfume Brief' by A.Megier, Head of Communication, Robertet Group.
8. Güell, F. (2019, February 12). Innovation and extended supply chain: Perfumery and cosmetics. Retrieved from https://www.fguell.com/en/innovation-and-extended-supply-chain-perfumery-and-cosmetics/
9. International Fragrance Association (2012). The socio-economic impact of fragrance technologies in Europe. Retrieved from www.ifraorg.org/view_document.aspx?docId=23341