Business Breakdowns
· Jeremie Fastnacht
[00:00:00] S1: The segments where Givaudan is active, so they are mostly in customized and tailored products, not basic commodities. So in flavor – if you take all the market, they are roughly 30 billion Swiss francs. In fragrance, the market fragrance and beauty, it's around 25 billion Swiss francs. Again, all the clients we mentioned plus local and regional and indie brands. The market share, it's a big difference between fragrance and flavors. In fragrance, there is the Big Four. So you have Givaudan, another Swiss company, which is called Firmenich. Which was acquired by DSM a few years ago. And then you have US-based IFF, then a bit smaller, you have the German Symrise. These are the big 4 players. And then it goes much lower in terms of sales. And you have, for example, 2 French companies. One is a private, it's called Mane. The 2 companies are based in Provence. You have another great listed business founded in 1850. It's called Robertet. They have a very nice niche in raw materials. So these two are much smaller. And then you have a lot of small players, but the big four players, they control something like two-thirds of the market in fragrance. And it's very stable. So it's very stable for decades. In flavors, it's more fragmented. Around the world, you have the bigger players, they have something like 10% market share. The players are almost the same for decades. And what is interesting is that the competition in general is more like a golf contest than a Krav Maga fight, for example. The players are rational. Sometimes they even sell some specific ingredients to each other. They are not competing like crazy on price. They are really competing on innovation. Sometimes it forces you not to become complacent. Sometimes in some kind of industries, a problem is when you have recurring growth, it's too easy and you stop innovating. So it's not the case in this industry. In terms of market growth, as you asked, the end markets are really mainly defensive, as we've seen. And it's high-frequency, repeatable, small-ticket transactions, so stable. From all the figures that we found, the industry is estimated to grow constantly at 4 to 5% by year. If you dig into the IPO prospectus of Givaudan in the year 2000, you check the figure that the market was at the time, you calculate that the CAGR is really 5% per year up to today.
· Jeremie Fastnacht, Matt Reustle
Typically the F&F companies, they have a revenue churn. So the business you lose because the consumer's tastes change, or there is no product, or there is competition. So it means you have 10% that disappear roughly. So if you want to achieve 5% growth, it means that you have to create 15% new products, new creations every year. So it means, for example, Givaudan is selling tens of thousands of products and you have to win briefs and create thousands of new products each year. So really an innovation machine The churn rate is much higher on trendy perfume or small startups where lots of them don't succeed. And the churn rate is higher than a billionaire ready-to-drink, for example, logically. If you look at the growth rate, this 4 or 5% below the surface, there are very different things. To know because you have EM countries that are growing on average 4 times faster than developed countries. So over the last decade it was around 2% for mature markets, roughly 8% for the high growth countries. The local and regional, they are growing on average 3 to 4 times faster. That's really driving the growth. [00:00:00] S0: Yes. I would imagine that population growth and general growth of consumption is a big piece of this, but what would you say are the underlying growth drivers of that broader number.
· Jeremie Fastnacht
[00:00:00] S1: You have tons of growth drivers in the industry in general. They benefit from population growth, more consumers. They benefit from urbanization, people who move in town and change the way they consume. You have the rising disposable income in EM. You have lots of trends like natural, sustainable, sourcing, better for you, the multiplication of indie brands. If you go in flavor, the people want less sugar, less fat, less salt, but don't want to sacrifice, of course, on the tastes they love. They want healthier food and beverage, protein and dairy alternatives. You have to improve the aspect, you have to improve the taste, you have to mask ingredients, you have to improve the texture. There is the trend of, in the US, natural colors to replace artificial dyes. The market is expected to grow 10% in the next 5 years. If you go on fragrance and beauty, it's a bit the same. People want less ingredients, better ingredients, but they want exactly the same effects and smell. You need to improve, for example, the scent to carbon ratio. You need to improve the scent to volume ratio. There is a trend with people who want more juice in the bottle, so more fragrance concentration. You have young generations, they are more interested in fragrance, they are trying lots of products. There is the impact of social network and TikTok influencers. That's driving growth. You have encapsulation technology, so it's the way that the fragrance is released, which must stay longer. It must be more biodegradable. You have premiumization. You have people that are more savvy. They want more active in their skin cream. You have population aging. They have more purchasing power. They consume more beauty maybe and health products. So you have tons of drivers. And I think it was Mark Twain during the gold rush – it's a good time to be in the pick and shovel business. The big and most diversified F&F companies, they can benefit from all these trends without being too exposed on one specific segment.
· Matt Reustle
[00:00:00] S0: Relative to the other 3 in the Big 4, what would you say is differentiated about Givaudan's approach, if anything?
· Jeremie Fastnacht
[00:00:00] S1: They are the leader with fragrances globally. They have around 25% global market share in fine fragrances. They are very strong in prestige and haute parfumerie. They have also increased their market share because over the last few years they have really strong growth organically. They have doubled their business in fine fragrances since 2019. So very strong. They are also a very strong global player in consumer fragrances. So shampoo, soap, floor cleaner, laundry detergent. They have roughly a 20% market share worldwide. They're really the leader in that part. They are smaller – they are also active in active beauty. They are smaller, they have low exposure to commoditized fragrance ingredients, it's a low single digit. They are the leader –the one which is closer with what we mentioned is Firmenich. And then you have IFF and Symrise. On the other division, the taste and wellbeing, so the flavor, they're also the top player, but it's more fragmented. They have maybe 10-15% market share in the flavor market, so the most customized, not in the very basic businesses, low margin business. They are really a leader of innovation. They own tons of IP and they spend 3 billion Swiss francs over the last few years in R&D. It's 8% of sales, more than the competition. They own 5,000 patents. They have 60 research and creation centers worldwide in Brazil, in Mexico, Eastern Europe, in South Africa. So they have local data on consumers, they have insight. They can anticipate where everything is going on in terms of consumer trends. They have a big team that is chasing and then screening hundreds of startups. They are the pioneer to open a perfumery school, in 1946. Most of the best perfumers went in the school. They have tons of PhD, they have 200 noses. They have some stars, for example, Calice Becker. She created the iconic J'adore Dior, and she's now head of the Perfumery School. They have also very nice, very interesting innovations. They have partnerships with academic partners. They make crazy stuff in encapsulation, the way to release fragrance. For example, it's different in Mexico if you're putting your laundry to dry in the sun. The fragrance must be released thanks to the impact of the sun. It's different if you are in UK, it's rainy, you put your laundry inside, the fragrance must be released differently.
· Jeremie Fastnacht, Matt Reustle
You have blue color, for example, which is very hard to find in nature, so they make it from spirulina. They are very strong in plant-based meat, in sausage and burgers. What's also important is that they have a very strong global footprint. They are in 80 production sites worldwide. They were a pioneer 100 years ago in France and the US. They went into LATAM 8 decades ago, India maybe 50 years, and China several decades. You need in the industry to have scale production. You need to be able to produce big quantities locally and reliably. A critical point is the raw material access to have nice creations of your flavorists and perfumers, you need to be able to have lots of molecules. They have a big library in their innovation center in Zurich. They have long-lasting relationships to have access to scarce raw materials. On the other hand, you need to manage tons of raw materials. They have 3,000 suppliers. You need a big know-how. They have a very dominant position. [00:00:00] S0: Is it right to think about fragrance and beauty and taste and wellbeing as having some overlap in terms of customer base. You mentioned that proposal before, which would've included both angles of fragrance and flavor. Is it right to think that with some of these, they might have some overlap in terms of customer base, and when they make proposals, they're winning the deal for both businesses?