Business Breakdowns
· Jeremie Fastnacht
[00:00:00] S1: You have deep integration, you have symbiotic relationship with the F&F companies and the clients. It's often a partnership. It's a co-creation process. So you have the product manager, the marketing guys of the client. and you have tons of iterations between both. Sometimes for a simple, small client, it can last a few weeks or a few months, but for a high-end perfume, it can last 2 to 3 years. The big players have trusted relationships often built over decades. It's really secret. So they don't tell that a lot of innovation comes from this company. They provide the creation as we've seen, but they also advise and support, in pre-creation. They can do internal testing for the clients. They can do market and trend analysis. They have tons of data. They can do consumer panel testing. They can help on regulatory or marketing stuff. The company then will create a unique compound with a unique reference number for you, for a unique client. It won't be used again with other clients. The IP on these products stays within the F&F company. You see that is very far from commoditized. We heard from an industry expert that sometimes an F&F company cannot replicate the flavor or fragrance of a peer despite having the formula. So it's really complex. That's why you see that these F&F companies, they spend 7 or 8% of sales in R&D. I mean, invest. If you look at the HPC and the food and beverage, it's only 2 to 3%. But it's also different by clients. For example, you have – most of the clients don't have very big capabilities, but you have, for example, as I said, a P&G, they have some internal fragrance capabilities. Or maybe you have a Chanel, they have their own perfumer, so they will only buy the raw materials. The F&F companies, for all the creation, they are working for free. So that's why they keep their IP. They submit their creation, all the specificities, and then the client, in the end, they will do testing with many end consumers. Then they will choose one of the submissions from the F&F and they will award the business to one of them, which will start the production and start making money. It's a bit like a royalty business where you have an upfront cost, but then you have optionality on the successful products, which might become a cash cow for many years.
· Matt Reustle
[00:00:00] S0: My assumption would be that once they win a proposal, so long as that product stays in service – let's assume they win an applesauce proposal for F&F. As long as that product stays on shelves and is selling, I assume that they continue to reap the benefits. You don't see any changes to the formula after that.
· Jeremie Fastnacht
[00:00:00] S1: That's another very critical point. A nice point of the industry is that once you have, for example, a client like a very famous red soda or blue soda selling for decades with the same taste everywhere for decades in the world, selling billions. You have a special coffee from a Swiss company. You have a wonderful ice cream that you get in your sofa every night. Once you have a cash cow, a billionaire product like this, the switching costs are enormous because if you change one percent, you have no reward, no incentive to save a tiny fraction of your costs, to change a formula. That's why you have a cash cow business. And even if you look at, small clients, Olipop or some smaller business with high growth, if you are relying on one or few products that are small but high growth, but for you that's very important. Also, you have no incentive. You don't take the risk to change because it's too risky. Even before you talk about brand perception, you have safety, health failure. Why would you go to an untrusted supplier? That's why it's a very sticky business. And something which is also important is that in the flavor business, you have the cost of the flavor that the F&F company provides is just maybe 1% of the client's cost. Even on the fragrance business, it's just 5% of the client's cost. So you have no incentive to change. But on the other hand, you have the procurement team of the clients which, from what we heard from experts, is they are constantly trying to get rebates on this. Sometimes you have contracts to maintain the price, sometimes you don't have contracts. But when you are in times of big raw materials inflation, the F&F company has to negotiate to try to pass it to the clients. That's another negotiation between them.
· Matt Reustle
[00:00:00] S0: Can you just give me a sense of the size of the F&F market? You mentioned they're the market leader. How big is this? I can probably back out math based on what percentage of F&B versus fragrance it is. But just some context – I'd be curious to know the general size of the market, how much it's either growing over time, any type of trends to the market size would be interesting as well.
· 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.