The Smell of Money

Making scents of the world's perfume industry.

One of P&G Prestige’s more recent licensing agreements has been with Gucci. The Florence-based fashion house and P&G have just launched their first fragrance, a trendy, cyprus scent called Gucci by Gucci. Nothing about this fragrance, launched in October, reveals its association with P&G, and the mass-market implications that would entail. Priced at €90 for 75ml, it’s sold in a slick package that houses a beautifully crafted flacon featuring a little Gucci belt dangling from its neck. It’s being sold at first in a limited number of shops before wider distribution in 2008. Adding to its cachet is the television advertising campaign with catwalk models shot by director David Lynch.

The concept of fewer launches, controlled distribution and lavish branding probably isn’t always easy to sell to the head office back in Ohio, but it must certainly help that the prestige fragrance division is growing faster than many other parts of P&G — “at double-digits for the past few years,” says Feola, who declined to provide precise numbers. Not bad for a company whose group goal is to deliver annual sales growth of between 5% and 7% through to 2010.

The way Feola sees it: “The essence of the prestige business is to learn how to play with the rules. We’ve been learning fast.”

Janet Kersnar is editor-in-chief at CFO Europe.

Sell the Smell

What’s the first thing that comes to mind when you think of your favourite perfume? Sexy? Exciting? Provocative? What about chemistry? Molecules? Scientists in lab coats? Welcome to the flavours and fragrances industry, or FnF for short. The hundreds of researchers employed in the $18 billion FnF industry concoct not only the majority of perfumes that we associate with fragrance houses such as Coty and LVMH’s Christian Dior, but also the vast range of smells and tastes in our food and household products.

As the fragrance houses feel the strain of trying to sell more perfumes to more people, so too are the FnF firms. Amid their own industry consolidation — today the top five FnF firms handle about 70% of all outsourced perfume-making globally — competition for the big multinational “briefs,” or perfume assignments, is growing more intense.

“We have very demanding multinational customers,” says Dominique Yates, CFO of Symrise, the world’s number-four FnF firm. “And if you’re not good at [capturing the largest customers], you won’t survive.” That’s not a problem at Symrise at the moment — sales grew 7% to €989m in the first nine months of 2007, a satisfying result as it completes its first full year as a Frankfurt-listed firm.

The way to continue growing at Symrise — as well as its competitors such as Givaudan of Switzerland and IFF of the US — is to land a place on as many multinational “core lists” as possible. Once on a list, an FnF firm will work closely with the multinational, with the ultimate aim to win briefs. While briefs once used to be as vague as, “We want something sexy, exciting and provocative,” they are now far more detailed, demanding intense market analysis and consumer research, and winning them “can be a big burden” for FnF firms, says Fabian Wenner, an analyst at UBS Investment Bank.

“The thing that makes you successful in our business is whether you really understand what the consumer is after,” says Yates. “We pride ourselves on that, despite the fact that we don’t sell products directly to consumers…and therefore when we interpret briefs, we’re always looking for that extra added bit of value.”

Paying greater attention to end consumers requires constant innovation and heavy investments in R&D — the top FnF players devote on average around 7% of their revenue on R&D and employ an army of scientists. In Symrise’s case, says Yates, the battle for briefs has also driven a wide range of recent initiatives — setting up a perfume academy, making small acquisitions, signing co-operation agreements with biotech companies and investing in new talent, hiring “three of the world’s top ten perfumers in fine fragrances.”

But a peculiarity of the FnF industry is that these firms get paid only when a manufacturer buys the finished product as an ingredient. “Briefs can take 18 months to two years to turn into a product from which we can then generate sales,” Yates explains. And while Symrise has secured a place on some core lists, “we haven’t seen the full benefit of that coming through in sales.” What’s more, even though “there are still three or four lists that we’re trying to gain,” there’s an element of risk every time a brief is won. “The last thing you want to do is gain core-list status and not live up to customer expectations.”


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