On your marks, get set, merge.
At least that has been the anticipated battling cry among flavors-and-fragrance suppliers ever since the Nov. 22, 2006, announcement of Givaudan’s $2.3 billion (e1.8 billion/£1.2 billion) acquisition of Quest International.
“I expect more consolidation, as there are a lot of tiny players around,” said Daniel Buerki, an equity analyst at Zurich-based Zuercher Kantonalbank.
“Mid-sized companies could be targets,” continued Luc Malfait, president of Takasago Europe’s fragrance division, in Paris.
Once the Quest deal is finalized as expected in the first quarter of 2007, Givaudan would become the world’s leading flavors-and-fragrance supplier, generating an estimated CHF 4 billion (e2.5 billion/£1.6 billion/$3.2 billion), of which 44% would be derived from its fragrance business and 56% from flavors.
“In fragrances, Givaudan will become the global market leader in fine fragrances and [fragrances for] consumer products,” the company said at the time of the deal’s announcement.
To put that in context, according to a recent ranking commissioned by WWD Beauty Report International late last year, Firmenich topped the list of the 10 largest fragrance suppliers in 2005, with sales of CHF 1.53 billion, according to industry sources followed by IFF with $1.44 billion. Givaudan took third spot with CHF 1.13 billion; Symrise was fourth with e609 million (£402 million/$787 million), according to industry sources, and Quest was fifth with £301 million (e475 million/$590 million).
“IFF and Firmenich will be under pressure to do something,” said Buerki. “They have to show a reaction.”
“No one knows what will happen,” added Francis Thibaudeau, director of Grasse, France-based flavors-and-fragrance supplier Robertet’s perfumery business.
However, according to numerous industry sources, Symrise, which was formed in 2002 following the merger of Haarmann & Reimer and Dragoco, would make an attractive target for IFF, for instance. That being said, Symrise just successfully held its initial public offering in December 2006, which could make a direct acquisition complicated.
Some growth is also expected to result organically, as is the case at Firmenich, according to Armand de Villoutreys, managing director of Firmenich France and vice president of its fine fragrances worldwide. He said although the company is to be ousted from its top fragrance position, it would look to take back the title through internal growth.
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“It was never our objective to be number one, but I think that’s a consequence of being the best, and we aim to be the best,” he said. “We love being the challenger again.
“In the new landscape we have fewer competitors but more intense competition,” added de Villoutreys.
Indeed, once Givaudan takes over pole position, the fragrance sales differential between the top players will be almost negligible, according to some executives.
“It is very close among the top three, since they are more or less the same size,” said de Villoutreys. “[The leadership position] is not out of reach, nor is it a competitive advantage in fine fragrance.”
“At the end of the day, it is a perfumer’s business, it is a people business,” reasoned Patrick Lambert, an analyst at Paris-based Cheuvreux, the equity brokerage arm of Crédit Agricole bank. “It’s not because there are more noses that there will be more clients.”
“I don’t see consolidation as creating different company dynamics,” added Robert Amen, IFF’s chairman and chief executive officer.
While the larger players downplay the impact the Givaudan-Quest deal will have on their businesses, executives suggest it is the mid-sized firms that will feel the long-term pinch most.
After Givaudan, Firmenich and IFF move into the top-three fragrance-supplier slots, Symrise would retain its fourth place, with estimated 2005 fragrance sales of e609 million. From there, it would be a significant leap to fifth spot, where Tokyo-based Takasago International would fall. (Its 2005 fragrance sales came in at ¥30.8 billion, or e197 million/£130 million/$255 million.)
There would be another sizeable difference between Takasago and Mane, the Le Bar Sur Loup, France-based fragrance supplier, whose fragrance sales reached e104 million in 2005. Seventh place would go to Robertet, whose business hit e103 million. On its heels would be Baierbrunn, Germany-based Drom Fragrances, whose sales reached e94 million, and Le Tour-de-Peilz, Switzerland-based Fragrance Resources, with estimated sales of CHF 115 million in 2005.
Such a widened sales gap would surely present intensifying difficulties for mid-size players, not to mention the smallest ones.
As de Villoutreys explained, the largest fragrance suppliers work on a global basis, whereas the smaller firms generally tend to handle accounts of like-sized manufacturers.
“The mid-sized companies have to be different in order to be on [manufacturers’] core lists,” he said, referring to fragrance manufacturers who are more aggressively restricting the number of their suppliers with “core lists.”
Further, the smaller suppliers are obliged to meet the swiftly rising expense of doing business.
“The cost of introducing new molecules is getting higher,” said Cheuvreux’s Lambert, who explained the additional testing procedures required under the REACH regulations governing chemical ingredients adopted by the European Union in December 2006 further amplifies the expense. “It adds another CHF 1 million cost to research and development per molecule.”
“The regulatory environment is more and more complex, and the management of that and meeting norms is going to be more challenging,” agreed Michael Carlos, president of Givaudan’s fragrance division. “It requires a strong [administrative] system and analytical competencies.”
“For smaller companies, it’s a nightmare,” said de Villoutreys, explaining big firms are more easily able to amortize costs.
Additionally, fragrance suppliers are often expected to have a wide-reaching geographic presence these days, which is among the reasons cited by Givaudan for its purchase of Quest.
“Emerging countries are starting to represent major opportunities for growth,” said de Villoutreys, referring to beauty products’ sales growth in such markets. “We’re seeing it impact business.”
“We’re looking at the emerging world with a different set of eyes —what is required in China, India, Russia and Brazil and how to respond to a different situation there,” said IFF’s Amen.
Even mature markets are offering fragrance suppliers—both great and small—fresh challenges, including manufacturers’ increased focus on natural and ethical raw materials.
Take the example of Australian sandalwood, which has largely been replaced by sandalwood coming from India in fragrances in the recent past.
“There were problems with Indian sandalwood, as it was destroying forests, and the [business] was managed by crooks,” said Thibaudeau, who added in Australia, the ingredient is produced by the country’s indigenous people, who replace a tree once another is felled. “The product is very close to the original, and the production is very nice for the environment and very nice for the people who produce it. So, it’s very good for the industry.”
“In the long run, we want sustainable development,” continued Givaudan’s Carlos.
There has also been a heightened focus on natural fragrance ingredients, including organics.
“There’s a challenge with organic ingredients, since there is less available supply [versus ingredients produced using chemicals] and there is a cost issue there,” said Amen.
Yet, despite the numerous factors, such as rising production costs, pressure to have a wider geographic reach and an emphasis on pricier ingredients, industry executives agree there is a place for all types of fragrance suppliers these days.
“In our business, there’s room for huge companies, but there are also a lot of business opportunities for smaller companies like us,” said Robertet’s Thibaudeau.
“I think there’s always going to be a place [for smaller companies],” agreed Givaudan’s Carlos. “There are always going to be people who look to work with smaller companies [as long as] they can bring something different.”