Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle, and today we are covering the fragrance and flavor giant, Givaudan. My guest is Jeremie Fastnacht, Fund Manager at Banque de Luxembourg Investments. And we walk through this unseen empire in scent and flavor, and how the work that Givaudan does touches so much of our everyday life – how it acts as influential marketing, and some of the interesting dynamics that go into this work, how the industry structure has evolved over time, and how Givaudan has been able to capture 25% market share over a 100-plus year history. So this a fun one. Again, it's a large business that sits in an off-the-radar industry. Please enjoy this breakdown on Givaudan. Jeremie, I'm excited. We finally get to break down Givaudan together. Excuse my pronunciation in advance, but this is a business you presented in a very interesting way as a potential breakdown candidate. The more I researched it, the more interested I got. So maybe you can start with the simple introduction, how you would paint the picture of Givaudan to our listener base.
· Jeremie Fastnacht
[00:00:00] S1: Thanks for having me, Matt. First, I'd like to say that it's a special and quite secret fascinating business. They are based in a city called Vernier, by Lake Geneva. They currently have a market cap of 25 billion Swiss francs. A typical day for you or for lots of people, you wake up, you go to the bathroom, the floor is clean, smells of lavender. You take a shower, you grab your favorite shampoo and gel that you use every day for years, and you brush your teeth with your favorite refreshing toothpaste. You put your, organic deodorant, while your partner maybe is putting this terribly attractive perfume. Magic Skin Cream. You put on your shirt to go to work, smell the fresh scent of your laundry detergent. Then you grab this healthy beverage, you eat a plant-based yogurt that you take every morning on your way to work. Now you work a lot, so you're starving. You hesitate between this trendy veggie restaurant with delicious flavors, or your regular fast food. Finally, you fall for this yummy burger with irresistible sauce and your favorite soda. And now the day is almost finished. You visit the supermarket and at the checkout you can't resist the taste of this chocolate bar. All these products, tens of thousands of other products around the world, there is a high probability that Givaudan is involved. They are everywhere. They create the magic ingredients, the fragrances, the flavors that influence the sense of humans. These are the main reasons why people love certain products and keep repurchasing them for years.
· Matt Reustle
[00:00:00] S0: I am always amazed at the power of scent and taste. Anything around the 5 senses tends to be a good focus area.
· Jeremie Fastnacht
[00:00:00] S1: The studies show that this comes before advertising, usefulness of packaging, and price. It's really the main reason, the flavor and fragrance are why people are crazy about some products. Givaudan produces this and these fragrances and flavors. And what's important is that it's a tiny fraction of the client's cost. Their employees are artists, they are scientists, they are experts really, in nature, chemistry, human emotions. Humans had hundreds of receptors in the body dedicated to smell and taste, and these are linked to our memory, to the brain, and to our emotions. So Givaudan's products, they have the critical role of creating and reinforcing the emotional bond between the brands that people love and the consumers. They are really the real innovators behind the tons of decade-long success, world-famous branded products that are sold by the largest usual suspects, multinationals that everybody knows. In HPC, you have, for example, P&G or Unilever. Maybe Estée Lauder, L'Oréal, Colgate, Reckitt. In flavors, in food and beverage, you have PepsiCo, Coke, Nestlé, Starbucks, maybe Mondelez, Mars, Hershey, and lots of famous fast food chains. So secret industry, as I said. These companies don't really want us to know that the big innovation is coming from Givaudan. Givaudan does even more business with tons of local and regional leaders. And disruptive startups, small indie brands around the world who are growing actually much faster on average. In the end, hundreds of millions, if not billions of people are enjoying Givaudan's creations every single day, but they don't know that. They don't know this is coming from Givaudan. That's crazy. The business provides strong visibility and growth, strong cash flows and stable cash flow and nice return on capital because thanks to the structure, the value they provide in the end markets. The industry is like a Staples-like but better. Seems that most investors don't really know the name, but they are still a very nice business – defensive recurring growth, attractive cash flows. The industry is more diversified and you benefit from lots of trends. It just seems better by construction.
· Matt Reustle
[00:00:00] S0: I'd be curious to know, it's such a fascinating market and industry, and it makes sense to me. I just even think about me going onto a boardwalk, and the odor of the funnel cake is its own attraction and stronger than any marketing that you could ever come up with in terms of packaging or visual aesthetics. Can you get into both the history of Givaudan, their exposure to this particular industry and, how much they've pioneered it or disrupted it over time. I'd be curious to know how their story fits into that.
· Jeremie Fastnacht
[00:00:00] S1: So Givaudan was founded a long time ago, 1895 – in Zurich by two brothers, Léon and Xavier Givaudan. And at the beginning, it was a perfume factory. There is a small story. A few years later, the local bakery complained because the factory, the fumes made the bread smell like violet. So they were first to move and they went to Vernier, and they were really the pioneer to create synthetic perfume in large quantity because at the time it was only small boutiques and craftsmen. They really got into synthetic. So it's funny because now it's exactly the opposite. Everybody's going into naturals, but at the time it was revolutionary. At the beginning it was a perfume, then they moved with an acquisition, another Swiss company. In 1948, they bought Esrolko to get into flavor. And then in the '60s, the famous company Roche, the pharma company, they wanted to diversify, so they acquired Givaudan. But also another company, Roure, a French company that is legendary in luxury perfumes and naturals. It was based in Grasse, the cradle of perfumery in the Provence. Roche merged the two companies in the '90s, and then in 2000, Givaudan was spun off, listed on the Swiss exchange. They really became the dominant player by acquiring Nestlé Food Ingredients in the early 2000s, and then later Quest International. So big player in flavor and fragrances, which was part of Unilever. So these businesses were outsourcing this complex business. And now it's a bit funny, also the opposite, because some of the companies are now like Unilever or P&G, they are trying to get back by investing in fragrance capabilities. With all that and other bolt-on acquisitions, they are today the leader of this industry. Now they are equally split in revenue, between flavor and fragrances.