The beginning: Supply Chain.
Initially the concept of supply chain was limited to the logistic processes of a company and in some cases to stock management.
Over time it became a cross-functional process with an integrating function within the organization. Its main objective was: to deliver the right product in the right amount, place, time and cost.
It became necessary to use increasingly advanced information systems for communication, management and control and in order to have visibility over the entire chain, and finally to do so in real time.
Extended supply chain
An extended supply chain is one that is not limited to the value chain of a company, but also includes the rest of the sector, from the end users to the first suppliers of raw materials or services. It therefore includes all the parties involved in the flows and interactions of products, services, finances and information, from the first supplier to the last customer.
The extended supply chain shares the acquisitions, sales, manufacturing, transport and delivery processes and is interdependent, driven by the end user.
In order the extended chain being a practical reality, the use of technological tools is necessary, and the information systems include clients, clients of clients, suppliers, suppliers of suppliers etc. It is understood that the information generated in each level can help to optimize the functioning of companies in other parts of the chain, which at the end will result in a benefit for all.
Not only is necessary the use of technological tools but also changes in the business culture. The digital technological developments are oriented to allow management, and monitoring in real time the processes of each company in relation to the chain, and its interactions with customers and suppliers. These, in turn, integrate their systems to allow a complete vision throughout the value chain.
It is fundamental to generate trust relationships among all the members of the chain and to learn how to manage change which is implied in this new way of interacting.
There must be a collaboration between the parts involved in this objective. Suppliers, producers, distributors, selling points etc., all of them must establish an adequate communication system and make collaborative efforts to synchronize supply, demand, information and financial flows.
Innovation in supply chain.
With the technological advances and the advantages brought by this approach, innovations in the extended supply chains and in the information systems have been intensively developed in the last decades, related to their management, communications and control.
As an example we will see the cosmetics and perfumery sector.
In recent years, this sector has shown that the main innovations have occurred more in its extended supply chain than in the particular field of each company.
The decisions that are taken consider the position of the company in the total chain and the flow of value in it. And these considerations are especially useful in defining the potential benefits of innovation.
The value creation map in the extended chain is taken into account in order to take decisions about our own situation in the chain, and the relationships or changes that we can set as an objective.
Innovations usually occur in one or a few very specific areas of the extended chain, and usually coincide with those of maximum value creation.
Sustainability is a key element in the cosmetics and perfumery supply chain.
The total supply chain of this sector can incorporate innovations in a flexible way, and at the same time, face complex challenges such as fluctuations in the price of raw materials, new production processes, incorporation of technologies, more demanding customers, assimilating novelties , short-term fashion trends and quality and long-term sustainability.
The constant innovation and sometimes, short life cycles of the products make the demand extremely volatile. This has increased the need for planning and production processes in the supply chain to be more sustainable and to minimize waste.
Individualization takes over supply chains.
The trend towards individualized and personalized cosmetic products has highlighted the agility to respond to changes. A solid supplier relationship management system is needed to support the segmentation, identification, definition and automation of changes related to different segments.
Consumers have accepted new methods of purchase, but they want their orders delivered as soon as possible, sometimes the same day and perhaps instantly. This requires more flexible transport solutions, and integrated and decentralized logistics.
The cosmetics and perfumery market
Definition and characteristics of the sector.
The “Cosmetics and Perfumery” is a first level industrial and economic sector with a market of great relevance and complexity.
Worldwide, the cosmetics and perfumery industry generates a value exceeding € 300 billion, with a solid expected annual growth of 4-6 percent until 2021.
Europe is the largest cosmetics and perfumery market, valued at € 77,6 billion at consumer prices in 2017. Followed by the USA, China, Japan and Brazil.
According to the same source, it is a sector that employs more than 2 million workers in Europe throughout the supply chain, with more than 195,000 direct jobs. (2017)
The most important national markets in Europe are: Germany (€ 13,600 m), France (€ 11,300 m), UK (€ 11,100 m), Italy (€ 10,1000 m) and Spain (€ 6,800 m).
In terms of products, skin care is the first segment, with retail sales in Europe of € 20,070 million in 2017, followed by toilet products, € 19,640m, hair care, € 15,000m, products perfumery and fragrances with about € 12,000 million and finally decorative cosmetics, about € 11,170m.
Exports from Europe are also the largest, totaling € 20.2 billion, at transfer price, in 2017. France and Germany are the largest exporters, with more than € 10,0 b between the two, representing just over 50% of world exports from Europe. It is a sector that also generates a significant proportion of intangible assets, such as brands and patents. It is estimated that the total value of European brands in cosmetics exceeds € 59 billion. Of the 50 leading brands in this market, 22 are from companies domiciled in Europe. (BrandFinance, 2017).
There are more than 5,000 companies manufacturing cosmetics in Europe.
In terms of inputs for production, there are more than 100 companies manufacturing cosmetic ingredients (EFfCI, 2015) and it is likely that a large number of companies are also involved in the manufacture of packaging components and packaging for cosmetics .
Perfumes and fragrances
According to Euromonitor International, the world market for perfumes and fragrances generated a value of about € 43,5 billion. According to MarketWatch, it is estimated that by 2023, worldwide turnover can reach € 58 billion (US $ 64,6 billion) with annual growth of 5% based on new Asian and other markets.
La perfumeria de luxe Luxury perfumery represents just over half of the total market value at consumer prices. (RSP, Retail Sales Price)
Alcoholic perfumery is a mature market in Europe and the United States but growing in the Far East and Middle East countries and Latin America.
Europe as a whole leads the world market with a consumer value (RSP) of around € 12,440 million, followed by the United States, Brazil, China, Arab countries, Russia, and Mexico.
Together they account for almost 75% of world consumption. (74.3%) (Data: Statista 2018)
According to ‘Cosmetics Europe’, the RSP (Retail Sales Price) values indicate the market at retail distribution prices to the public, and the MSP (Manufacturing Sales Price) values ‘ex-works’.
The consumption in Western Europe by countries, at RSP prices, is led by France and the United Kingdom, followed by Germany, Spain and Italy, with Poland, the Netherlands, Belgium, Switzerland and Romania at some distance. These ten countries represent 86.4% of European consumption.
According to a trend analysis of Euromonitor International, for 2021, with a world market of 52,600 million US $, (47,650 million €), the Latin American area can reach Europe in market volume.
Production in Europe.
We will see that production is concentrated in the countries with the highest consumption, although with exceptions.
We will also see that Ex Works MSP (Manufacturing Sales Price) prices, is very diverse among producing countries. There is some specialization in “low cost” products, and in other cases in the “Prestige” market.
The European statistics (Eurostat, Prodcom) refer to “Perfumes and Fragrances”, and regarding production are included in two sections:
- Prodcode 20421150 – Perfums
- Prodcode 20421170 – Toilet waters
The annual European production in the two previous groups was about 125.4 million lt. in 2017.
France, Spain and the United Kingdom concentrate 78.9% of European production and are clearly exporters to other world areas. If we add Poland, Italy and Germany, the 6 concentrate almost 96%.
Value and prices.
According to Eurostat, Statistics Prodcom, the value of the European production ExWorks MSP (Manufacturing Sales Price) represents a total of 4,151 mio €.
In this case, only France reaches 68.2% of the total value of production, followed by Spain with 13.1%, UK 4.8%, Poland 4.5% and Italy 3.8%. The sum of the 5 countries represents 94.1% of the total value.
Recall that market value in Europe is 12,440 m. € RSP, and that is set against 4,151 m ExW MSP, with a difference of 8,289 m. €. This difference may represent added value mainly by brands, packaging, presentation, design and distribution channel.
At the price level, there are large differences, due to the different composition of market segments in each country and the sale of bulk products and toll manufacturing for third parties.
The European average price is € 33.1 / lt. while France reaches 64.4 and Spain remains at € 12.9 / lt.
The diversity of products of the sector implies a high degree of specialization and a great variety of distribution forms. That is, perfumery products reach the final consumer through a wide range of channels that vary depending on the type of product and the target audience. Mainly specialized stores, perfumeries, supermarkets, department stores, pharmacies, professional hairdressers and beauty salons, internet and direct sales.
In general, channels are usually classified as:
- Selective. Large groups of licensees, fashion and luxury brands. Connection with fashion.
- Middle market. It includes some specialized stores, monobrands stores and a large part of online sales. It is a relatively new segment between luxury and the mass market. It is based on concept / product.
- Mass market. Products in consumer stores, supermarkets, some single-brand stores and in general defined by the “low cost”.
According to a report by DBK in 2015 the “mass market” represents 43% of the total in the turnover of perfumes, while the selective channel, specialist trade, chains and independent represent 35,2%, although in another study of Euromonitor Inernacional , we have already seen that luxury perfumery (selective brands of the “Prestige” segment), represent more than half of the total market value at consumer prices. (RSP, Retail Sales Price).
FMCGs include medium and selective market fragrances, some at lower prices, while mono brand cosmetic chains such as The Body Shop, Yves Rocher etc. are marketing their own fragrances and toilette waters.
Online sales of fragrances and perfumes have increased in recent years at rates of 15 to 20%. Amazon is a growing seller of cosmetics, including perfumes and fragrances.
Product lines, types of fragrance: (Depending on the content of essential oil)
- Concentrated perfume or originally: “Perfume”. The most concentrated and expensive version of all fragrance options. Slightly more fatty, it is composed in 20% – 30% essence. A single perfume application can last up to 24 hours. Normally in 7.5-10 ml presentations.
- Perfume or Eau de Parfum: Historically fragrance versions are made for women and men, and more recently for both genders. It contains 15% – 20% essence and usually has durations of 5 to 10 hours. Presentations from 35 to 100 ml.
- Eau de toilette: A lighter composition, usually in spray with 5% – 15% essence. In general, it lasts approximately 3 to 5 hours. Size: 50 – 100 ml.
- Eau de Cologne or colony. It is a term that has been known for a long time, with light and fresh compositions. Typically with 2 – 5% essence. As a solvent, it can carry water in addition to ethyl alcohol. In general, it lasts approximately 2 hours. Size: 100 or more ml.
- Eau Fraiche: The most diluted version of fragrance, usually with 1% – 3% of essential oil in alcohol and water. In general, it lasts less than 1-2 hours.
The extended supply chain
The value chain of perfumery can be divided into five levels:
- The inputs to production. The companies that provide the raw materials necessary for manufacturing. There are more than 200 companies dedicated to providing ingredients. From the cultivation of aromatic plants and extraction of essential oils, synthetic aromatic chemicals and other materials, alcohol, auxiliaries, etc.
- Manufacturing The manufacturers of products and suppliers of support for perfumery activities, such as glass, packaging, plastics, plugs, design. Marketing, etc. There are more than 4,600 manufacturing companies in Europe, the vast majority of which are small and medium-sized.
- Large distribution and wholesalers. There are approximately 20,100 companies involved in the wholesale distribution of perfumes and cosmetics in Europe, most of which are in France, Italy, Spain, Germany and the UK.
- Sales services and specialized stores. Vendors such as salons, department stores, online stores and pharmacies. There are also approximately 45,700 specialty stores and 55,000 points of sale in Europe.
- Consumers. It is the final market with its different segments. People who buy perfumes and fragrances represent the last link in the value chain.
Mature market, Innovation
The perfumery market is a mature market with moderate growth globally, but which continuously generates changes and opportunities in new segments and in the same supply chain analyzed and with different ways of reaching the final consumer.
As a mature market, it can only be successfully addressed and maintained through innovation.
Most of the innovations are focused on:
- Launching of new products. It is done continuously. In this case it can be both technological innovation, basically in raw materials and processes, as well as design in perfumes and fragrances, brand or perfume creation suitable for a subsegment or consumer typology. On the other hand, there are perfumes with a long tradition in the market, some nearly 100 years since its launch, and some brands of toilet water over 100 years.
- Innovation in the chain. A new positioning in the market, segment or situation in the extended CS. Innovations in the extended supply chain occur from raw materials to distribution channels and relation with the public
- Innovations in the value proposition to customers. It can be a new change or launch with a new value proposition from the brand to consolidated customers, to future customers or to new segments.
We will also see some of the future trends in the perfume industry.