Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: It makes sense to me. Obviously fragrance has an impact on taste. Anytime you restrict your ability to smell and you taste something, there's overlap. But in terms of how these teams operate, you mentioned they moved into flavor with an acquisition. Do those teams and divisions operate very separately?
· Jeremie Fastnacht
[00:00:00] S1: They operate separately, but on the other hand, you have lots of things that are common. If you want to succeed in the industry, you have to get big. You need scale, you need global and local operations, you need tons of R&D and IP. You need trade secrets, deep pockets. You need lots of relationship and trust from the clients. You have to navigate a complex regulatory environment, different in each country and region. You have to manage a vast portfolio of thousands of raw materials and sophisticated global supply chains. This is the same for both businesses. The client issues what they call a brief to explain the product they want to create – describe the brand, the identity, the positioning, the image, the colors. Maybe feelings they want to associate with the products. And they give a given price. So this is the same for both businesses. For example, "Hello, Givaudan, this is L'Oréal. We want to create a new luxury Creed perfume for women. We need a fragrance, something smooth and complex with pineapple, jasmine, and bergamot, and we need it for $150 USD per kilo." Or, "Hello, I'm the founder of a startup, Melvita. I want to create the best premium organic tea. I need a delicious hibiscus flavor, which tastes fresh, natural, healthy. I want it for $5 USD per kilo." So it's a bit the same in, in both cases. What is special is that what you have is the core list. Most of the large meat, food, and beverage and household personal care companies work with the core list systems. It's the list of their very few selected suppliers for several years. Where you usually find the biggest F&F players like Givaudan, and they are guaranteed to be included in all the briefs. But then they are also in competition. So you have 3 or 4 companies maybe in the list. It's a very selective club. You have to pay thousands of dollars just to play. Barriers entry in the industry, of course, are very high. Now, if you go back to the examples, the 2 creation examples, you have the perfumer, the 'nez'. So it means nose in French. Or the flavorists from the F&F company who are the artists, but also scientists because it's very complex. The companies, they have thousands of employees, but the big companies have only a few thousand of these star flavorists and perfumers. They are generously paid. And you have evaluators that help them.
· Jeremie Fastnacht, Matt Reustle
You have chemists, you have food technologists that create a complete product so the clients can really imagine what it would be. And it's very complex because even for a simple flavor – for example, apple – it must fit with the products, the, the specificities of the brief in terms of flavor. Which variety of apple is it? Is it flavor of a fresh, ripe apple? What format is it? What do you need? Liquid, powder? You have to be careful with chemical stability. It must fit with the brand, with the regulation, tons of unique variation. Sometimes it must mask other ingredients. And you have to be careful, because even if you change 1% of a formula, it can change a lot of stuff, not only scent, but the texture or the stability. [00:00:00] S0: Certainly sounds like the chemistry is incredibly important on both sides of the business.