THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE - IFRA
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™ THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
Amalia Sartori,
Member of the European Parliament
and Chair of the Committee on Industry, Research and Energy
The fragrance industry, as well as bringing a sense of joy and wellbeing to
people’s lives, also contributes an enormous amount to Europe’s international
competitiveness. The multitude of fragrances creates enormous value for European
manufacturers and retailers by meeting the needs of consumers every day. These
commercial benefits, and the manufacturing and retailing activity linked to them
result in significant numbers of jobs and contribute substantially to the wealth and
competitiveness of Europe. We need to create the right conditions for flagship
creative industries such as this to thrive and prosper.
Antonio Tajani,
Vice-President of the European Commission
Commissioner for Industry & Entrepreneurship
This study outlines the importance to the EU economy and society of innovative
industries which act as platform technologies for wider, global value chains. The
fragrance industry through their impact on productivity growth and on Europe’s
global competitiveness, provide an important basis for creating jobs and wealth
now and in the future. Ensuring that the right framework exists to ensure this industry
and others like it remain competitive is a priority.
Pierre Sivac,
IFRA President
The results of this in-depth study into our industry and its socio-economic impacts
have given us a much deeper sense of our responsibility as an industry. It clearly
shows that we have a duty of care to our employees, value chain partners, the
communities we all live in and ultimately the consumers who enjoy the fruits of our
creativity across a wide range of consumer products day in and day out.
This study clearly illustrates the complexity and interdependency of our industry
sector and shows that innovation and creation are delicate, especially in tough
economic circumstances. They need nurturing and investment. We can see from this
report the real value and impact of what we do and it can only reinforce our sense
of commitment to continued investment and dedication to this precious industry.
25THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
index
OVERVIEW 4
1 - INTRODUCTION 10
2 - METHODOLOGY 12
3 - F RAGRANCE TECHNOLOGIES
AND THE FRAGRANCE VALUE CHAIN 14
3.1 Fragrance Technologies 14
3.2 Uses of Fragrance Technologies 15
3.3 Value Chains and Economic Impacts 16
3.4 The Fragrance Value Chain in Europe 17
4 - THE FRAGRANCE INDUSTRY 20
4.1 The Global Fragrance Industry 20
4.2 The Fragrance Industry In Europe 21
4.3 Innovation and the Fragrance Industry 22
5 - ECONOMIC IMPACT OF THE FRAGRANCE VALUE CHAIN 24
5.1 Valuation Concept 24
5.2 The Narrow Value Chain 26
5.3 Wide Value Chain 33
6 - OTHER PUBLIC BENEFITS 38
6.1 Innovation and Productivity 38
6.2 Global Competitiveness, Innovation and Fragrance Technologies 44
7 - T HE SOCIO-ECONOMIC CONTRIBUTION OF FRAGRANCES
A GLOBAL PERSPECTIVE 48
7.1 Background 48
7.2 The Results – The Fragrance Industry 49
7.3 The Results – The Global Impacts (Narrow Value Chain) 49
7.4 The Results – The Global Impacts (Wide Value Chain) 51
8 - CONCLUSIONS 52
APPENDIX A
Importance of Fragrance Technologies – Valuation Methodology 53
APPENDIX B
Narrow Value Chain – Impacts 56
APPENDIX C
Wide Value Chain – Impacts 59
3OVERVIEW
Fragrances create important benefits that are ubiquitous, tangible, and valued.
They solve important functional problems and they satisfy valued emotional needs.
1 - Fragrance Technologies
In Europe1, fragrances are perceived as an essential Fragrances are “platform technologies”: they create
part of life. Fragrances are the product of a deep benefits for manufacturers of consumer products
partnership between the Fragrance industry and and luxury goods because their properties meet
owners of consumer brands. Every fragrance is a the highly-valued functional and emotional needs
unique combination of science and artistry. Through of end-consumers. Through an extended process
their complex properties, they form “platform of initial purchase and subsequent re-purchase, this
technologies”, facilitating innovation by brand creates added value for brand owners through the
owners throughout the Consumer Goods sector. creation of new product categories, new products,
In Fine Fragrance, Personal Care and Household greater differentiation between one brand and
Care markets, most products rely upon fragrances another, higher sales volumes, greater margins,
to deliver valued emotional or functional benefits, to more loyal customers, and improved brand equity.
communicate product performance, to differentiate
brands, or to create added value.
Fragrances create important benefits that are
ubiquitous, tangible, and valued. They solve
important functional problems and they satisfy
valued emotional needs. On a functional level, the
complex properties of fragrances allow individuals
to control or remove malodour: the bad smells that
afflict the everyday lives of millions. Control of these
smells, using fragrances embedded in household
and personal care products, improves the physical
quality of people’s lives. As well as combating
malodour, fragrances communicate complex ideas –
creating mood, signalling cleanliness, freshness, or
softness, alleviating stress, creating well-being, and
Throughout this report, the terms ‘Europe’ or ‘Europeans’
1
triggering allure and attraction. refers to EU-27 plus Switzerland and Norway.
4THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
2 - The Fragrance Value Chain
In modern economies, wealth and employment, products that contain fragrances are: Grocery
along with other public benefits, are often created Retailers, Supermarkets, Department Stores,
because ideas and technologies are embedded Pharmacies, Parapharmacies, and Drug Stores,
in other more complex products and services, Beauty and Well-Being Specialists, Beauty
adding value through progressive stages of the Salons, and, Direct Selling.
production process. This often culminates in the
final purchase of a product or service (which Economic activity of this type also sustains jobs
contains the embedded ideas or technologies) by and wealth indirectly through the operation of
consumers who satisfy multiple complex functional “multipliers”. Purchases of goods and services by
and emotional needs. This process of up-grading retailers and manufacturers throughout the value
generates successive increases in value added and chain, to support the sale and production of goods
employment, and is described as a “value chain”. that make use of fragrance technologies, creates
additional jobs and wealth in suppliers, many of
The creation, supply, and consumption of fragrance which are located in Europe. This process is often
technologies generate wealth, jobs, and other described as an “indirect multiplier” mechanism.
public benefits in Europe through three distinct and
sequential phases of economic activity: Further indirect impacts are likely to occur through
the operation of “induced multipliers”. Household
•“
The Fragrance Industry” – this is made up spending by people whose jobs are dependent on
of the global specialist fragrance companies, mid- the sale or manufacture of products that make use of
sized specialist fragrance companies, and specialist fragrance technologies, either directly or indirectly
suppliers of ingredients. This stage of the value through the supply chain, is also affected by the
chain makes major investments in science, creativity, scale of activity of the fragrance value chain. Such
and market knowledge, and then exploits these expenditures create additional economic benefits.
assets to create and supply proprietary fragrance
blends, based on a wide range of ingredients, to 3 - The Fragrance Industry
manufacturers of fine fragrances, beauty, personal Fragrance companies meet the needs of their direct
care and household care products for consumer customers (manufacturers of consumer products and
and business-to-business markets. luxury goods) by creating and supplying proprietary
blended fragrances. Each blend is unique and is
•“
Manufacturers” – companies in a range of only sold to one brand owner for use with
consumer and luxury goods sectors use investments a specified brand in a single application. Each
in creativity, science, and market knowledge by blend may contain up to 250 different ingredients,
the Fragrance industry to create new sectors, build a mixture of essential oils, natural aromatic
brands, and differentiate themselves in competitive molecules, and complex synthetic aroma chemicals.
markets. Economic benefits created here are of a A “palette” of more than 3,000
significant scale, and of considerable importance in ingredients is used by the fragrance
Europe. Direct economic benefits are created through industry to create, produce, and supply
production, sales, marketing, product development, the 60-80,000 unique proprietary
R&D, administration, and logistics activities. blends sold world-wide each year. Blends
are created through the exploitation of long-term
•“
Retailers” – In the final stage of the Fragrance investments by fragrance companies in science,
value chain, end consumers purchase the creativity, input materials, and market knowledge.
consumer products and luxury goods that contain
fragrance technologies. They do this through To develop large-numbers of new, unique fragrance
expenditure in a wide range of retail outlets. experiences, fragrance companies make
Spending by consumers in these stores creates very large scale investments, equal
jobs and wealth. In Europe, the main types to approximately 16-18% of annual
of store and non-store retail outlets distributing turnover, in product innovation.
5This encompasses all forms of expenditure, short substantial proportion of these investments support
and long-term, associated with the creation of new production and innovation activities needed to
or improved products. meet the needs of European customers, additional
investments in strategic management, innovation
Europe has the largest concentration of Fragrance and creativity have been made in Europe by major
activities in the world. The Fragrance industry has fragrance companies to support global activities.
made major investments in Europe in production,
innovation, creativity, and strategic management. In 2010, overall sales of unique fragrance
Production assets, innovation facilities, and creative blends by the fragrance industry in Europe
centres are concentrated in France, Germany, were estimated to be EUR 1.7 billion.
Switzerland and the Netherlands. Whilst a
4 - Economic Impact of the Fragrance Value Chain
4.1 - Valuation Concept 4.2 - The Narrow Value Chain
For all developed world markets and for many The “narrow value chain” highlights the distinctive
markets in developing countries, the largest economic contribution of fragrance technologies. It
contribution to jobs and wealth made by fragrance identifies “fragrance dependent” output, jobs, Gross
technologies occurs in the economic activity they Value Added, labour costs and labour taxes within
support within the Manufacturing and Retail stages of the three stages of the value chain: innovation and
the fragrance value chain, and, through the operation production by the Fragrance industry; manufacture of
of indirect multipliers, in their suppliers. But this process products by the Fine Fragrance and Beauty, Personal
begins with investments in science, creativity and Care, and Household Care industries (for end
market knowledge by the Fragrance industry itself. consumers and business-to-business customers); and the
sale of products that make use of fragrances through a
Fragrances are, however, not sold directly to wide range of store and non-store retail outlets.
end consumers. Rather they are purchased by
manufacturers of consumer products and luxury After examining all major product applications and
goods, embedded into articles (such as perfumes, applying an appropriate valuation, it is estimated
shower gels and laundry detergents) and then sold that the distinctive role of fragrance technologies is
to private individuals. Articles are normally sold equal to 45% of the retail sales value of consumer
through retail outlets, although some, such as hair products that make use of fragrances and 35%
care products, may be purchased by individuals of the manufacturers output for products sold to
as part of a wider service provided by hair salons. industrial and institutional customers. Specifically,
For manufacturers of luxury goods and fast-moving this delivers the following economic benefits for
consumer goods, fragrances are one of a number Europeans:
of enabling technologies used to meet the needs of
end consumers. • Fragrance innovation, where it creates strong,
valued benefits for end consumers, increases
It is important therefore to find an appropriate the value of sales to consumers or business-to-
method to “value” the distinctive contribution of business customers. In turn, this underpins part
fragrance technologies recognising that other of the value of manufacturing output. In 2010,
factors, such as brands, image, or functional EUR 34 billion of manufacturing output
performance may also influence initial purchase depended on the distinctive part
and subsequent re-purchase of products. In this played by fragrances in fine fragrance
study, two approaches have been used called the and beauty, personal care, household
“narrow” and “wide” value chain respectively. care, and I&I products.
6THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
• P art of the expenditure by end consumers on output within the value chain. Induced impacts,
fine fragrances, beauty products, personal based on a conservative and indicative multiplier,
care products, household care products and add a further 160,000 jobs elsewhere in
services sold by beauty salons, depends on the the European economy, reflecting additional
distinctive contribution of fragrance technologies. consumption spending by households where jobs
In 2010, it is estimated that, for these are supported directly or indirectly by “fragrance
goods and services, more than EUR 57 dependent” output.
billion of retail sales depended on the
distinctive part played by fragrance • F ragrance technologies also make a substantial
technologies2. contribution to Europe’s wealth. After taking
account of direct, indirect, and induced
n a conservative basis, over 940,000
•O impacts, it is estimated that “fragrance
jobs and an additional 330,000 small, dependent” output throughout the
informal businesses are sustained by fragrance value chain in Europe
the economic output at all stages of supported GVA of over EUR 51 billion.
the value chain that depends on the Direct economic impacts within the value chain
distinctive contribution of fragrance account for EUR 30 billion. The remainder are
technologies. This is the scale of “fragrance the result of indirect multiplier impacts through
dependent” employment, and reflects direct, purchases from European-based suppliers (EUR
indirect and induced impacts. Over 660,000 13 billion), and induced multipliers due to
of these are direct jobs in the fragrance industry, additional consumption spending (EUR 8 billion).
manufacturers, and retailers. A further 120,000
jobs are sustained indirectly in supplier industries These economic impacts are illustrated below
through the purchases of raw materials, goods, (Exhibit 1).
and services to support fragrance-dependent
Exhibit 1 - The European Fragrance Industry “Narrow” Value Chain
Total Gross Value Added and Jobs Dependent on Fragrance Technologies
60 1,000
Total 945,000
900
Total EUR 51 bn Induced Employment
50 160,000
Induced GVA 800
Gr o s s V a l u e A d d e d E U R b i l l i o n
EUR 8 bn Indirect Employment
700 125,000
40
Indirect GVA
EUR 13 bn 600
Jobs (’000s)
30 500
400 Direct Employment
20 660,000
Direct GVA 300
EUR 30 bn
200
10
100
0 0
Gross Value Added Jobs
Source: The Huggard Consulting Group (2012)
Retail sales are measured excluding all sales taxes.
2
74.3 - The Wide Value Chain
The wide value chain highlights the scale of economic an additional 860,000 small, informal
activity in Europe that involves products that use businesses. This is the employment impact on
fragrance technologies. It provides an insight into Europe of the wide fragrances value chain. It is
the scale and nature of the “economic footprint” made up of 1,500,000 direct jobs, 270,000
of a technology. For this group of products in the jobs in suppliers, and a further 350,000 jobs
Fine Fragrance and Beauty, Personal Care, and in other parts of the European economy due to
Household Care industries, the wide value chain consumption spending impacts.
encompasses output at each stage of activity including
innovation and production of fragrances, manufacture • Output generated at each stage of the fragrances
of articles, and sale to end consumer and business-to- value chain also creates wealth. On a conservative
business customers, with associated impacts on GVA, basis, the wide fragrances value chain
jobs, employment costs, and taxes (labour and added sustains nearly EUR 114 billion of GVA
value). These impacts are estimated to be: after including the impact of indirect
and induced multipliers. The largest part
•A
fter taking account of direct, indirect and comes from direct impacts (EUR 67 billion) but
induced impacts, the manufacture purchases from suppliers sustains a further EUR
and sale of products in Europe that 28 billion and consumption spending impacts,
make use of fragrance technologies estimated using a conservative induced multiplier,
supports nearly 2.1 million jobs and supports an additional EUR 19 billion of GVA.
5 - Other Public Benefits
5.1 - Innovation and Productivity 5.2 - Global Competitiveness, Innovation
In most mature economies, economic growth occurs not and Fragrance Technologies
because of increases in quantities of people or capital In industries that use fragrance technologies,
utilised but as a result of the successful application Europe is a global leader. Fragrance technologies
of ideas. New or improved products, services, and play a critical role in this. They are an “engine of
business methods enhance the efficiency with which innovation”, supporting brand owners in Europe
capital and labour are used, driving up productivity. and elsewhere, and providing brand owners
Indeed, in modern economies, productivity growth with a continuous stream of new ways of meeting
makes the greatest contribution to improvements in additional customer needs, of creating new
living conditions and to delivering more and better jobs. markets, and of increasing consumer value. For
Productivity grows because companies innovate, leading many long-standing consumer brands, moreover,
to greater efficiency or higher added value or both. fragrances developed and sustained in the highly
Economic gains are, moreover, maximised when the competitive and demanding European market
productive performance of large-scale sectors increases. provide the competitive edge and unique sources of
value. These drive market success, enabling brand
Innovation drives the fragrance value chain. Investments owners to compete effectively with local or domestic
in intangible assets by fragrance companies, utilised brands outside Europe. Lying behind this are major
in partnership with brand owners, provide one of the investments in intangible assets, including creativity,
principal means for achieving continuous innovation science, and product development capabilities,
in markets with more than EUR 140 billion of annual which have been made by the global fragrance
consumer spending3. Fragrance technologies enable industry in Europe, providing brand owners with
productivity growth in the value chains supporting these access to world-class innovation expertise.
markets by facilitating different types of innovation. This
includes creating new consumer markets for products or Leadership in the world’s fine fragrance, beauty,
services; refreshing existing, mature consumer markets; personal care and homecare markets creates
and, facilitating the development of new store and non- significant benefits for Europeans through a
store retail formats. range of different mechanisms: exports of finished
Expenditure by ordinary households includes gross output VAT charged on retail goods and services
3
8THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
goods to non-European markets; management in strategic assets also support Europe’s “science
and development of global brands; growth and base”, as well as underpinning manufacturing
development of a globally competitive marketing activities in many of Europe’s lagging regions.
and services sector; and, inward investment in
strategic activities by non-European multi-nationals. In order to place the European fragrance industry
value chain and the associated socio-economic
Taken together, these impacts generate significant impacts in context, an overview of the global
numbers of well-paid, high-skilled jobs for Europeans impacts are contained in Section 7 of this report
in business management, finance, marketing, (The Socio-Economic Contribution of Fragrances –
production, and R&D, as well as in supporting A Global Perspective).
creative industries. Investments by brand owners
In industries that use fragrance technologies, Europe is a global leader. Fragrance
technologies play a critical role in this. They are an “engine of innovation”,
supporting brand owners in Europe and elsewhere...
6-C
onclusions
Fragrance technologies create substantial social technologies and in their use and dissemination
and economic benefits for Europeans. They improve by brand owners and retailers. Only by doing this
quality of life, and sustain significant economic will Europeans continue to be able to enjoy the
benefits today. Moreover, through their impact emotional, functional, and economic benefits that
on productivity growth and on Europe’s global fragrances deliver.
competitiveness, they provide an important basis for
creating jobs and wealth in the future. The Huggard Consulting Group
September 2012
European policy-makers recognise that, at a time of
constraints on public spending, major demographic
change, and increasing globalisation, the creation
of new jobs and the future of living standards
depends upon creating the “framework conditions”
within which innovation flourishes4.
Until now, however, the role that fragrance
technologies play in creating benefits for Europe
and its citizens has not been fully recognised by
policy-makers. In particular, the role that fragrances
play as a platform technology, triggering innovation
and economic gains in downstream user sectors,
has been overlooked by decision-makers and
opinion-formers.
For the future, the challenge facing policy-makers is
to sustain a business environment that encourages
further investment in innovation in fragrance
See for example CEC ‘Europe 2020 Flagship Initiative – Innovation Union’ (Communication from the European Commission, SEC (2010) 1161)
4
91 - INTRODUCTION
Yet the enjoyment of fragrances by Europeans goes beyond the satisfaction
of functional needs. Through their appeal to our fifth sense and its complex links
in our minds, memories, and psychologies, fragrances help meet an extensive
range of emotional needs for countless people.
In Europe5, fragrances are perceived as an For ordinary Europeans, fragrances solve important
essential part of life. They are the product of a deep functional problems and they satisfy valued
partnership between the Fragrance industry and emotional needs. On a functional level, the complex
owners of consumer brands. Every fragrance is a properties of fragrances allow individuals to control
unique combination of science and artistry. Through or remove malodour. Control of these smells, using
their complex properties, they form “platform fragrances embedded in household and personal
technologies”, facilitating innovation by brand care products, improves the physical quality of
owners throughout the Consumer Goods sector. people’s lives.
In Fine Fragrance, Personal Care and Household
Care markets, most products rely upon fragrances Yet the enjoyment of fragrances by Europeans
to deliver valued emotional or functional benefits, to goes beyond the satisfaction of functional needs.
communicate product performance, to differentiate Through their appeal to our fifth sense and its
brands, or to create added value. complex links in our minds, memories, and
psychologies, fragrances help meet an extensive
Development of new fragrances begins with major range of emotional needs for countless people.
investments by Fragrance companies in science, Fragrances play a valued emotional role in the
knowledge and creativity. These investments are then household as well. They create a sense of place
used to create unique proprietary ideas to meet the and of belonging, defining our homes to ourselves
defined requirements of consumer goods businesses. and others. They demonstrate to families, friends,
In turn, brand owners combine the insights and and peers that we care about home, hygiene,
creativity of these new fragrance ideas with their and family, building self-respect and pride. And
understanding of product performance, the values of fragrances help us with our feelings and sense of
their brands, and their deep insights into consumer well-being. They create different moods, triggering
needs, wants, and behaviours, triggering waves of emotional relief or stimulating new ideas, sensations
innovation across major consumer goods markets. and pleasures.
Throughout this report, the terms ‘Europe’ or ‘Europeans’
5
refers to EU-27 plus Switzerland and Norway.
10THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
Satisfaction of these needs generates enormous through the supply chain, is also affected by the
economic benefits for Europeans. Sales to Europeans, scale of activity of the fragrance value chain. Such
through retail outlets and non-store channels, of expenditures create additional economic benefits.
consumer products that make use of fragrance
technologies sustain jobs and contribute to economic The scale and nature of the economic impact in
wealth. Most of these products are manufactured Europe of fragrance technologies is, however, little
in Europe by brand owners in the Fine Fragrance, understood. This study rectifies that. It provides a
Personal Care and Household Care sector. Indeed, quantification and explanation of the scale and
Europe is the world’s largest net exporter of consumer nature of the contribution of fragrance technologies
products that rely upon fragrance technologies, to employment and wealth in Europe. It also
dominating global sales of products such as highlights additional public benefits created by
cosmetics, toiletries, and fine fragrances. This process fragrance technologies for Europeans, most notably
of manufacturing supports employment throughout their importance for the future global competitiveness
Europe and produces additional wealth. Jobs and of Europe and for economic growth in important
wealth are also produced by the economic activities parts of the private sector.
of the Fragrance industry, creating new fragrances to
help consumer goods companies meet the needs of Our methodology is described in the initial part of
Europeans ever more successfully. the report (Section 2). In the next part of the report,
the uses of fragrances are set out in more detail, and
Economic activity of this type also sustains jobs and a comprehensive description of the “fragrances value
wealth indirectly through the operation of “multipliers”. chain” is included (Section 3). After that a detailed
Purchases of goods and services by retailers and description of the Fragrance industry is included,
manufacturers from European-based businesses, to along with an explanation of its investments in
support the sale and production of goods that make innovation (Section 4). The next section provides
use of fragrance technologies, creates additional a detailed quantification of the contribution of the
jobs and wealth in suppliers. This process is often fragrances value chain to jobs and wealth in Europe
described as an “indirect multiplier” mechanism. (Section 5). Further public benefits are set out in the
next part of the report (Section 6). An overview of
Further indirect impacts are likely to occur through the global impacts of the fragrance industry value
the operation of “induced multipliers”. Household chain (Section 7) is provided to set the European
spending by people whose jobs are dependent on study in context. The final part of the report lays out
the sale or manufacture of products that make use of some conclusions, drawing together the main ideas
fragrance technologies, either directly or indirectly that emerge from the research.
112 - METHODOLOGY
Our study provides quantitative estimates of the impact (including studies by Euromonitor International,
of the fragrances value chain on employment, gross Kline and Freedonia), European Commission data
value added (GVA – a measure of contribution to (including Eurostat “Structural Business Statistics”
national output), labour income, labour taxes, and database), data from Cosmetics Europe, AISE,
taxes on value added in Europe. Using a conservative and the European Candles Association (the
approach, estimates are based on the direct value EU-level trade associations for the personal care,
chain activities (fragrance innovation and production, home care, and candle manufacturing industries
the manufacture and sale of consumer goods that make respectively) and expert interviews informed the
use of fragrances, the manufacture of products that development of the estimates.
use fragrances for institutional and industrial customers,
manufacture of products for export markets, store and • After identifying the scale of the final output value
non-store retailing of consumer goods that make use of for products that use fragrances, the next stage
fragrances, and the supply of services to end-consumers focused on estimating manufacturing output
that depend on fragrance-based products), along with values for the same group of products. This was
relevant indirect and induced multipliers. achieved using Eurostat data, UN COMTRADE
Import-Export data, published market research
A multi-stage approach was used: studies, and the company accounts of 15 major
manufacturers.
• In the first stage, the main end use applications
that make use of fragrances were identified • The next stage of research focused on developing
using a process of expert in-depth interviews estimates of direct economic impacts in the
with managers in the Fragrance industry. retail part of the fragrances value chain. Using
These applications are found predominantly in published market research, estimates were made
three consumer sectors: Fine Fragrances and of the scale of sales of products that make use
Beauty, Personal Care, and Household Care. of fragrances through each major type of store
Similar types of products are also produced for and non-store retail format in Europe. Sales of
business-to-business markets in the Industrial and services that are linked to products that make use
Institutional (I&I) sector. of fragrances were also identified, using data
from national accounts, Coiffure EU (the EU-level
• T he next stage focused on drawing up expert trade association for hair salons), and Seldia
estimates of the final “output” values for each of (the EU-level trade association for direct selling
the principal product categories that make use of businesses). This analysis provided an estimate
fragrance technologies. For consumer markets, of the scale of the relevant sales value for each
values were based on retail selling prices major retail format. The direct economic impacts
(excluding VAT and similar taxes). In business-to- of these sales were then estimated by drawing
business markets, manufacturers selling prices up an analysis of the cost structures for each retail
were used. Published market research studies format. Analyses identified retail gross margin,
12THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
bought-in goods and services (not for resale), fragrance value chain, an analysis was drawn
in-house labour costs, and operating surplus (prior up of the principal categories of bought-in goods
to taxes and payments to providers of capital). and services. The value of these purchases,
Cost and margin structures were based on EU- adjusted for estimated levels of import penetration,
level data from Eurostat combined with data from was then used to estimate indirect economic
Verdict, Mintel, Euromonitor, Coiffure EU, Seldia, impacts. Relevant industry-level data from Eurostat
Cosmetics Europe, AISE, national statistical informed these analyses. This was achieved using
offices, and from an analysis of the accounts Eurostat data, UN COMTRADE Import-Export
of more than 20 major European retailers. data, published market research studies, and the
company accounts of 15 major manufacturers.
•A
similar analysis was undertaken of the
manufacturing stage of the fragrance value chain. •A
fter estimating direct and indirect economic
This used Eurostat data (such as sector specific impacts, the likely scale of associated taxes on
data for appropriate NACE codes), company labour income and on value added was identified
annual accounts information, and a proprietary using data from the OECD Tax Database 2010.
database of cost structures, to develop estimates of
bought-in-goods and services, in-house labour, and • F or the initial part of the fragrance value chain,
operating surpluses for the principal manufacturing expert interviews with 38 senior managers and
sectors. Estimates of direct economic impacts were industry specialists, published studies by Freedonia,
based on a “whole company approach”, ensuring and analyses of company accounts were used to
that in-house sales, marketing, administration, R&D, develop estimates of the output and cost structure
distribution, and other head office activities were of the fragrance industry. This has been done on
included within the scope of the manufacturing an indicative and conservative basis. It takes into
stage of the fragrances value chain. account experience from other studies undertaken
by the project team, expert academic advice, and
• F or the initial part of the fragrance value chain, evidence from other, similar studies.
expert interviews with 38 senior managers and
industry specialists, published studies by Freedonia, Using this overall methodology, estimates of economic
and analyses of company accounts were used to impacts were identified that reflected the entire sales
develop estimates of the output and cost structure value of all of the major product categories that make
of the fragrance industry. These estimates allowed use of fragrances in Europe. It provided a baseline for
direct economic impacts to be identified. our final estimates of the two different types of value
chain: a “narrow” value chain, valuing the distinctive
• T he next stage of research involved the benefits that fragrance technologies create for end users;
identification and quantification of the indirect and a wide value chain, valuing the current scale of
impacts of the sale and manufacture of products economic activity that makes use of fragrances. (These
that use fragrances. For each stage of the concepts are explained in more detail in Section 5.)
133 - FRAGRANCE TECHNOLOGIES
AND THE FRAGRANCE VALUE CHAIN
3.1 - Fragrance Technologies
Fragrances are platform technologies. They provide • Deliver core functional benefits, principally the
brand owners and retailers with a basis for further control of malodours, creating distinctive product
innovation. Embedded in articles or retail formats, categories, such as air fresheners and scented
they are combined with other technologies and candles;
intangible assets to create new or improved ways
of meeting customer needs. • Create major markets by delivering the primary
emotional benefits. Without fragrance technology
Examples of innovation by brand owners triggered there would be no market for perfumes and fine
by new fragrance ideas include new product fragrances, substantially reducing the size of the
categories (such as scented candles or body-sprays luxury goods industry;
for young men); expanded emotional benefits of
existing products (such as shower gels or fabric • Articulate the complex functional benefits of
conditioners); confirmation of complex functional major consumer product markets, such as laundry
innovations (as is the case with the most leading detergents and surface cleaners. This increases
brands of laundry detergent); differentiation of consumer satisfaction, driving greater overall
existing products, raising competitive intensity and purchase, increasing added value, and creating the
value added in mature markets (such as the use of opportunity for premium segments to be developed;
fragrance to deliver brand extensions from soap
product categories into the shampoo market); and, • Satisfy additional emotional needs that emerge
through its role in masking the unpleasant smell of after the satisfaction of functional needs. In markets
many ingredients used in household and personal such as fabric softeners and shower gels, fragrance
care products, expanding the appeal of products in technologies deliver distinct emotional benefits, as
applications such as hair care. well as articulating to consumers that the functional
performance of the product has been achieved.
For manufacturers of luxury goods and fast-moving This enables brand owners to meet wider consumer
consumer goods, fragrance ideas help brand needs, providing opportunities to increase value
owners to: added through differentiation, segmentation, and
premium offerings.
•B
uild the scale and value of product categories
such as cosmetics, skin creams, and polishes by In overall terms, fragrance technologies help
removing obstacles to consumption by masking the manufacturers of consumer and luxury goods, as
unpleasant smell produced by many ingredients well as retailers, to build strong brands (“brand
used in Household and Personal Care products; equity”), by creating product categories, meeting
14THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
consumer needs, stimulating innovation, and is then purchased from the successful fragrance
delivering added value for end consumers. company on a regular basis and embedded into the
final consumer or luxury goods product. In turn, this
Retailers have also used fragrance ideas to fragrance enables a brand owner to make a unique
innovate. New retail formats have been created offer to end consumers, creating a period of relative
most notably differentiated, specialist perfumeries competitive advantage in a market and generating
throughout Europe, as well as the direct selling of superior added value.
fine fragrances and beauty products, most notably
in Eastern Europe. Existing store formats have used Fragrance companies invest in the development
fragrance innovations as well. Hair salons, for of long-term assets and in funding project-specific
instance, increasingly offer own brand or specialist activity in advance of receiving payment from
brand hair care products adding value to the brand owners. The costs of investments and product
consumer experience or authenticating their service development can only be recovered through regular
offer and creating consumer confidence. purchases of the blend of materials, if the fragrance
wins the competition to be used in the new product
New fragrance ideas are created through a unique and if this product is then successful in the market.
process of partnership involving complementary sets To ensure that the fragrance company benefits fully
of intangible assets. Owners of consumer goods, from this, and hence is able to recover the costs
luxury, and retail brands work closely with specialist of investment in innovation, the unique fragrance
fragrance companies, combining the deep market is protected by intellectual property which is, in
knowledge, brand reputation, and functional turn, owned by the fragrance company. Only this
performance expertise of the brand owner with the fragrance may then be used in the final article.
creative and scientific capacity of the fragrance
specialist. 3.2 - Uses of Fragrance Technologies
Fragrance technologies are widely used in three
Within this context and in response to specific principal user sectors: Fine Fragrances and Beauty;
requests from brand owners, fragrance companies Personal Care; and Household Care. Specific
compete to develop complex mixtures of natural and products include:
synthetic materials designed to produce a fragrance
experience that is unique to a particular application • F ine Fragrance and Beauty – in this market sector,
of a single brand in a specific geographic market. product categories that depend on fragrances
A brand owner then selects one of the fragrances include all types of perfumes (prestige, mid-
offered by the competing fragrance businesses. market and, economy products), skin care, colour
This fragrance, in the form of a blend of materials, cosmetics, and beauty gift sets. In 2010, the total
15European consumers are the largest group of buyers of products that depend on
fragrances. In 2010, their overall expenditure on these products (measured at retail
selling prices, excluding taxes) was over EUR 85 billion.
value of retail sales of these product categories in of these are similar to consumer products in the
Europe was more than EUR 35 billion (excluding household care and personal care sectors. Key
VAT and equivalent taxes); applications include surface cleaning, malodour
control, textile care, and dishwashing. Overall
• P ersonal Care – a wide range of personal care European sales of these products are estimated to
product categories make use of fragrances, have been approximately EUR 6-7 billion in 2010.
including hair care (shampoos, conditioners,
colorants, hair control), personal hygiene (shower 3.3 - Value Chains and Economic Impacts
gels, body washes, toilet soaps, deodorants, In modern economies, wealth and employment,
antiperspirants, body-sprays), male toiletries, along with other public benefits, are often created
feminine care, and baby care. Overall retail sales because ideas and technologies are embedded
value of these products in 2010 in Europe was in other more complex products and services,
almost EUR 28 billion (excluding taxes); adding value through progressive stages of the
production process. This often culminates in the
•H
ousehold Care – many product categories in final purchase of a product or service (which
this sector make use of fragrances. They include contains the embedded ideas or technologies) by
textile washing (laundry detergents, fabric care consumers who satisfy multiple complex functional
conditioners, stain removers), dishwashing and emotional needs. This process of up-grading
(automatic dishwashing, hand-washing, rinse generates successive increases in value added and
aids), surface cleaners (for kitchens, baths, employment, and is described as a “value chain”.
windows, floors, and carpets), air fresheners,
scented candles, and polishes and waxes. Taken Fragrances are “platform technologies”: they create
together, these product categories generated retail benefits for manufacturers of consumer products
sales of nearly EUR 24 billion (excluding taxes) in and luxury goods because their properties meet
Europe in 2010. the highly-valued functional and emotional needs
of end-consumers. Through an extended process
European consumers are the largest group of of initial purchase and subsequent re-purchase, this
buyers of products that depend on fragrances. In creates added value for brand owners through the
2010, their overall expenditure on these products creation of new product categories, new products,
(measured at retail selling prices, excluding taxes) greater differentiation between one brand and
was over EUR 85 billion. Almost every European another, higher sales volumes, greater margins,
household buys some or all of these products on more loyal customers, and improved brand equity.
at least a monthly basis, purchasing the functional
and emotional benefits delivered by fragrance For fragrance technologies, this process begins
technologies. with major investments by the Fragrance Industry in
science, creativity, and market knowledge. These
Alongside this, products that make use of fragrances investments are then used to create unique proprietary
are sold to business-to-business customers in the blends to meet the defined requirements of brand
industrial and institutional sectors (including schools, owners. In turn, these are embedded, alongside
hospitals, offices, hotels, and restaurants). Most other technologies, in a wide range of consumer
16THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
products. To promote these products to retailers and (Zurich, Switzerland), and GPC Parfum (Milan,
end consumers, brand owners invest in marketing, Italy). Economic activity is concentrated in France,
including advertising and sales promotion. This Germany, the Netherlands, and Switzerland.
builds “image”: the emotional identity of a brand. In these countries, companies have made
In the final phase of economic activity, brands are major investments in management, innovation
distributed to end consumers through a wide range of and production assets. Whilst many of these
different types of retail outlet. investments support activity in the European
market, other investments underpin markets around
Indeed, fragrance technologies trigger waves the world. Indeed, Europe, along with the USA,
of economic activity at different stages of the is the one of world’s two leading centres for
production and consumption process. fragrance innovation. Alongside this, Europe
also hosts the global head office and strategic
3.4 - The Fragrance Value Chain in Europe management activities for Givuadan, Firmenich,
The creation, supply, and consumption of fragrance Symrise, Mane Fils, and Robertet: five of the
technologies generate wealth, jobs, and other world’s largest fragrance companies.
public benefits in Europe through three distinct and
sequential phases of economic activity: A further characteristic of this part of the value
chain is the presence of European-based
•“
The Fragrance Industry” – this is made suppliers that provide fragrance companies with
up of the global specialist fragrance companies, specialist raw materials. Examples include BASF
mid-sized specialist fragrance companies, and (Ludwigshafen, Germany), Kao (Barcelona,
specialist suppliers of ingredients. This stage Spain), Sensient Technologies (Granada, Spain),
of the value chain makes major investments in and Treatt (Bury St Edmunds, UK).
science, creativity, and market knowledge, and
then exploits these assets to create and supply •“
Manufacturers” – companies in a range
proprietary fragrance blends, based on a wide of consumer and luxury goods sectors use
range of ingredients, to manufacturers of fine investments in creativity, science, and market
fragrances, beauty, personal care and household knowledge by the Fragrance industry to create
care products for consumer and business-to- new sectors, build brands, and differentiate
business markets. This part of the value chain themselves in competitive markets. Economic
is dominated by a small number of global benefits created here are of a significant
specialist companies, most notably Givaudan scale, and of considerable importance in
(Geneva, Switzerland), Firmenich (Geneva, Europe. Direct economic benefits are created
Switzerland), IFF (Hilversum, Netherlands), through production, sales, marketing, product
Symrise (Holzminden, Germany), Takasago development, R&D, administration, and logistics
(Paris, France), Mane Fils (Grasse, France), activities.
and Robertet (Grasse, France). There are also Another distinctive feature of this stage of the
a number of smaller specialist companies in Fragrance value chain are the clusters of specialist
Europe, such as Belmay (Northampton, UK), CPL support industries sustained by brand owners
Aromas (Bishops Stortford, UK), Luzi Technologies because of their investments in branding and
17European markets for consumer products that make use of fragrances are
dominated by 8-10 global multinationals (many based in Europe but others with
global operations controlled from the USA or Japan) and retail brands.
communication, in part to exploit the creative • Household Care – Procter & Gamble Europe
ideas developed by the Fragrance industry. (UK, Germany, Belgium), Henkel (Germany),
These support industries include advertising, Reckitt Benckiser (UK, Netherlands), Unilever (UK,
market research, sales promotion, media, and Netherlands), SC Johnson Europe (Netherlands,
packaging, with major clusters in London (UK), Switzerland, UK), Colgate-Palmolive Europe
Paris (France), and Milan (Italy). It is estimated, (France, Netherlands), Werner & Mertz
for example, that brand owners spend annually (Germany), Luhns (Germany) and, McBride (UK).
EUR 8-10 billion to advertise products that make
use of fragrances. A significant proportion is spent The largest manufacturers of household and personal
on print advertising (predominantly magazines) care products for business-to-business markets are
with the remainder funding TV adverts. Indeed, Ecolab Europe (Switzerland), Johnson Diversey
expenditure on print advertising by owners of Europe (Netherlands), Procter & Gamble Professional
brands that make extensive use of fragrances has Europe (Belgium), and McBride (UK). Other, smaller
helped to develop European expertise in fashion companies include Aseptix (Netherlands), France
and beauty magazines, many of which have Industrie (France), Greyland (UK), Julius Holluschek
become globally successful titles. (Austria), Kleen Purgatis International (Switzerland),
and Spectro (Netherlands).
European markets for consumer products that
make use of fragrances are dominated by 8-10 Economic activity undertaken by manufacturers
global multinationals (many based in Europe but of these products is widely distributed throughout
others with global operations controlled from the Europe, and includes manufacturing sites, distribution
USA or Japan) and retail brands. Private label centres, sales offices, call centres, service centres,
brands are of particular importance in the UK, marketing and innovation centres, R&D facilities,
Germany, France, Sweden, and Spain. Major regional administration facilities, and head offices.
European manufacturers of products that make use
of fragrances for consumer markets include6: • “Retailers” – in the final stage of the Fragrance
value chain, end consumers purchase the consumer
• F ine Fragrance and Beauty – L’Oreal (France), products and luxury goods that contain fragrance
Chanel (France), LVMH (France), Ferragamo technologies. They do this through expenditure
(Italy), Euroitalia (Italy), Procter & Gamble Europe in a wide range of retail outlets. Spending by
(UK, Germany, Belgium), Coty (Switzerland), consumers in these stores creates jobs and wealth.
Puig (Spain), Clarins (France), Shiseido Europe The main types of store and non-store retail outlets
(France), Intercos (Italy), Oriflame (Sweden); distributing products that contain fragrances are:
• P ersonal Care – Henkel (Germany), Beiersdorf • Grocery Retailers – these outlets are the most
(Germany), Unilever (UK, Netherlands), L’Oreal important sales channels for personal care and
(France), Johnson & Johnson Europe (UK), Colgate- household care products in Europe. Major
Palmolive Europe (France, Netherlands), Alliance companies with outlets in more than one
Boots (UK), McBride (UK); European country include Carrefour (France),
Examples of major manufacturers include US-based companies that
6
have major strategic and manufacturing activities in Europe.
18THE SOCIO-ECONOMIC IMPACT OF FRAGRANCE TECHNOLOGIES IN EUROPE
Tesco (UK), Schwarz Group (Germany), Metro sector, whilst a smaller number target the wider
Group (Germany), Rewe Group (Germany), well-being and beauty market. Across Europe, the
Auchan (France), Aldi (Germany), Edeka sector is characterised by large numbers of small
(Germany), E Leclerc (France), Intermarche independent retailers, along with important national
(France), and Ahold (Netherlands). Alongside chains and a small number of multi-country retailers.
these multi-country retailers are small independent The largest multi-national businesses include Douglas
outlets and powerful national chains such as (Germany), Sephora (France), Body Shop (UK),
Coop Italia (Italy), Sonae (Portugal), Mercadona L’Occitane en Provence (France), Marionnaud
(Spain), Louis Delhaize (Belgium), Sainsburys (France), and ICI Paris XL (France). Large-scale
(UK), and KF Gruppen (Sweden). national chains include Nocibe (France), Yves
Rocher (France), La Gardenia (Italy), Limoni (Italy),
•D
epartment Stores – in a number of European Bottega Verde (Italy), The Perfume Shop (UK), Beauty
countries, most notably Belgium, Finland, Success (France), and Perfumeries Druni (Spain).
Germany, Netherlands, Spain, Sweden
Switzerland, and UK this is an important sales •B
eauty Salons – this sector contains predominantly
channel for fine fragrance and beauty products small local businesses, most notably hair salons.
despite strong competition from specialist beauty These sell hair care products directly to customers
and well-being stores. Leading store chains as well as using them in the provision of services.
include: Brueninger (Germany) El Corte Ingles
(Spain), Stockmann (Finland), Marks & Spencer •D
irect Selling – this is a non-store format and it
(UK), Galleries Lafayette (France), Ahlens includes person-to-person shopping, as well as
(Sweden), Inno (Belgium), and La Rinascente party planning. Whilst of limited importance
(Italy). in Western Europe, it is important distribution
channel for sales of fine fragrance, personal care
• P harmacies, Parapharmacies and Drug Stores – and beauty products throughout most of Eastern
this is one of the most important formats, alongside Europe. Leading direct selling companies include
grocery outlets, for personal care products. Avon Europe, Amway Europe, Faberlic Europe,
Major multi-country chains include Alliance Boots Oriflame (Sweden), and Yves Rocher (France).
(UK), Rossmann (Germany), dm-Drogeriemart
(Germany), and Muller (Germany). Important Other, less important formats include mass
national multiple retailers in this sector include merchandisers, electronic shopping and mail order.
Acqua & Sapone (Italy), Parashop (France),
Celesio (Italy), Apoteket (Sweden), Drogas (Latvia), These store and non-store retail formats are found
Trekpleister (Netherlands), and Superdrug (UK). in every country. As a result, sales of products that
contain fragrances to Europeans create significant
•B
eauty and Well-Being Specialists – this is the most economic benefits throughout Europe.
important sector for fine fragrance and beauty
products that make use of fragrance products.
Most stores focus on the specialist perfumery
194 - THE FRAGRANCE INDUSTRY
4.1 - The Global Fragrance Industry
Annual world-wide sales of the fragrance industry Blends are created through the exploitation of long-
are estimated to be approximately EUR 7.5 billion. term investments by fragrance companies in science,
Of this, around two-thirds (EUR 4.9 billion) represents creativity, input materials, and market knowledge.
the revenues from sales of approximately 60-80,000
proprietary fragrance blends to downstream Three distinct types of company participate in
users. Proprietary blends are complete fragrances that the fragrance industry. Competition for customers
are unique to individual brands and applications. The takes place, in general, between similar types of
remaining output of the industry (EUR 2.6 billion) is company. Each type of company tends to focus on
accounted for by sales of raw materials used different “served” markets: combinations of customer
in fragrance blends (such as essential oils and groups, customer needs, and technologies or
aroma chemicals) by fragrance companies and by materials. Specifically:
specialist suppliers of ingredients. Some of these
revenues represent sales of raw materials to a small • Global Specialists – this group is made up of
number of downstream users who continue to invest 6-7 global businesses and accounts for 80-85%
in in-house fragrance creation; others are the result of sales of proprietary blends. In general, they
of the trading of raw materials between fragrance form part of larger corporate entities that combine
companies to acquire speciality inputs. flavours and fragrances. They focus on creating
and supplying fragrances to global manufacturers
On a geographic basis, nearly 75% of revenues of consumer products and luxury goods, as well
from the supply of proprietary blends are obtained as large-scale national or regional brand owners.
from sales in markets in the EU, USA, and Japan, They invest heavily in technology, creativity, raw
with most of the remainder coming from developing materials sourcing, and market knowledge, and
markets. have sufficient scale to provide global reach in
product development, raw materials sourcing,
Fragrance companies meet the needs of their direct manufacturing, product supply, and product
customers (manufacturers of consumer products and safety. Their networks of manufacturing facilities,
luxury goods) by creating and supplying proprietary moreover, offer quality, consistency, speed, and
blended fragrances. Each blend is unique and is only competitive costs to global customers.
sold to one brand owner for use with a specified
brand in a single application. Each blend may • Mid-sized Specialists – this group of
contain up to 250 different ingredients, a mixture companies, smaller in average size and more
of essential oils, natural aromatic molecules, and numerous than the global specialists, is responsible
complex synthetic aroma chemicals. A “palette” of for about 15-20% of sales of proprietary blends.
more than 3,000 ingredients is used by the fragrance These companies focus on meeting the fragrance
industry to create, produce, and supply the 60- needs of regional or national brand owners,
80,000 unique proprietary blends sold each year. Institutional & Industrial (I&I) customers, as well
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