Putting a brave face on cosmetics

01 February 1998 00:00  [Source: APC]

Asian growth has been driving the cosmetics and personal care sector for the past five years. Where will the growth come from now with so much of Asia in economic turmoil?

Chemical companies supplying the cosmetics and personal care sector have for years talked about how the rapidly emerging markets of Asia would guarantee sales growth into the next century and justify investment in new plant and equipment. Now it seems they may have overestimated the Asian market, and 1998 looks set to be a tough year.

The key customers for manufacturers of fragrance and soap ingredients include luxury perfume makers, the wider cosmetics industry, and international and large national manufacturers of consumer goods. Often these are among the first sectors to be hit when economies experience a downturn, like most nations in Asia in the latter part of 1997 and into 1998.

European and North American companies, including Roche and Firmenich of Switzerland and International Flavors and Fragrances (IFF) of the US, are fairly dominant in this market, and have been quick to establish production facilities across Asia.

A key player is IFF of New York which has fragrance ingredient sales of close on $1bn/year. The company has undergone an ambitious expansion plan, investing millions of dollars in new plant and equipment worldwide. On the fragrance side, IFF has undergone a streamlining of its production facilities. Production at its Union Beach, New Jersey, facility as well as at a couple of smaller units in Brazil and Mexico has been phased out. Most of that volume has been transferred to a new facility in Augusta, Georgia. Benicarlo, Spain, and Xianjiang, China, have also been the focus of new investment in fragrance production facilities for IFF in the past year. New fruit flavours plants have also been established in Indonesia and Thailand.

Last year Firmenich invested more than SF130m ($90m) in new plant and equipment worldwide. And the firm has also put a special emphasis on expanding its production activities in developing regions over the past few years. In India the company has a joint venture production facility in Daman, and a new facility has been inaugurated in Cileungsi, Java, Indonesia. In China the company has consolidated its industrial activities both in Suzhou, near Shanghai, and in Kunming, Yunnan province, where a new facility is under construction. Total investments in China alone amount to SF25m. In the Americas, the company has opened a technical centre in New Jersey, and in Anaheim, California, has expanded the production capacity of its plant to meet increasing demand. In Tampa, Florida, Firmenich is building a plant devoted to the production of biochemicals, and in Toluca, Mexico, a new manufacturing unit for the production of flavours and fragrances is due to be completed shortly.

In Europe, the company has invested well over SF65m in the past year. Geneva saw the opening of a fully automated compounding plant and in Landes, France, the construction of a new chemicals site continues. In Poland the company acquired Mrowna, a local flavours and fragrances manufacturer. Firmenich also developed facilities in South Africa and Egypt.

However, chief executive officer, Pierre-Yves Firmenich claims consumers are becoming more discriminating and distributors increasingly powerful leading to a tighter marketplace.

Roche's fragrances and flavours division, Givaudan-Roure, creates mixtures of natural and synthetic components for sale to manufacturers of consumer goods. Its fragrance products range from individual ingredients to complex fragrance compounds for use in luxury perfumes, cosmetics, toiletries, soaps and household and industrial detergents. Givaudan-Roure says the fragrance market has seen relatively weak growth over the past two years due to pricing pressures and intense competition. The firm says it has been hard work to maintain its strong position in this difficult environment. 'The fragrances business posted solid sales gains in the Americas and Asia, while demand for luxury perfumes continued to fall in the European market,' the company said. In the Asia-Pacific region the business recorded high growth rates in 1996 and 1997, compared with modest sales growth in Europe. This year the reverse pattern is expected. Sales in Japan were flat in 1996, and in North America business was hurt, among other things, by slackening demand. Now the fast-growing Asian market looks threatened, and Europe may not be able to take up the slack.

Over the past two years Givaudan-Roure has given high priority to the development of biodegradable fragrance chemicals and new ingredients and technologies that allow the controlled release of fragrances. Givaudan says the acquisition of the US-based flavours manufacturer Tastemaker will strengthen Roche's existing flavours business. The growth of the personal care market worldwide also encouraged further investment in more upstream areas, especially in the important area of biocides. Olin of the US announced a $42m global expansion plan last year to support projected double-digit sales growth in its worldwide biocides business.

The investment included the construction of a new biocides plant in China in an attempt to satisfy soaring demand in Asia for anti-dandruff shampoos and other personal care products that use biocides. The three-year expansion plan calls for the new Chinese plant to be onstream by 2000. It also calls for capacity increases for key intermediate materials within the next two years at Olin's existing biocides plants in Rochester, New York, US, and Swords, Ireland.

The new capacity expansions will contribute to Olin's efforts to grow its biocides sales by 40-50% by 2000. The expansion plan calls for a further capacity increase at Olin's Rochester plant for 2-chloropyridine, the raw material for the production of Olin's line of Omadine biocides. The plant has completed the first phase of a previously announced project to increase capacity for 2-chloropyridine.

Once the newly approved expansions are complete, Olin will have increased its total2-chloropyridine capacity by more than 200% over 1995 levels. The plan called for the increase in capacity of pyrithione - the key intermediate for the company's biocides - at Olin's Rochester and Swords plants. The Rochester expansion is now onstream, while the Swords expansion should be onstream by the end of 1998. Europe is still seen by many analysts as the world's most advanced market for cosmetics and toiletries. Premium brands perform particularly well in the fragrance market, while the increasingly sophisticated formulations used in skincare products, particularly those with anti-ageing properties, are expected to drive this market.

However, low growth is anticipated in the European markets for deodorants and bathroom products due to the mature nature of these sectors, high consumption levels, low marketing activity, and lack of potential for technological innovation.

The large French and German markets offer the best total value growth. The German market is experiencing a substantial increase in its overall size due to the reunification of West and East. Italy and the UK offer the next best growth prospects.

Weak demand for consumer products in important markets has intensified the process of concentration and consolidation in an increasingly global fragrances industry. As a result, the industry is faced with a contracting customer base dominated by high-volume purchasers which expect premium-quality products and services tailored to the needs of their markets.

Despite the considerable investments in new plant by the key cosmetics chemicals companies, analysts say that a combination of weak demand and continued pressure on prices will result in a drop in sales of fragrance chemicals worldwide this year.

This difficult economic climate is accelerating the pace of structural change in the industry. Given the ever-shorter life cycles of consumer goods, efforts aimed at continuously updating product ranges through market-orientated research and development will be stepped up. In the European cosmetics ingredients market, consultancy Frost & Sullivan says new entrants exist and the threat of additional entrants is increasing in markets where above-average industry returns have been achieved in the past few years. This involves suppliers extending existing market segments into these higher return categories or, in certain circumstances, will involve non-industry related manufacturers entering the market.

The other key world market is the US, where over the past few years new product introductions have been targeting emerging niches and increasing demand from an ageing population. The market for US personal care product sales will grow at about 6%/year, according to Frost & Sullivan.

Natural ingredients like aloe vera, almond oil, rose-hip oil, tomato extract and other ingredients derived from fruits, vegetables, flowers or herbs are becoming increasingly popular for their beneficial and 'natural' characteristics as manufacturers begin to respond to buyer resistance to synthetic materials. An increasingly middle-aged population wants to keep healthy and look younger with personal care products that minimise the outward effects of ageing. As changing demographics influence research and development, alpha-hydroxy-based products known for their anti-ageing properties have increased their market presence.

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With an already high penetration rate, successful manufacturers of soap and cleaning products must offer frequent new product introductions and relaunches. Companies need to stay ahead of the competition by shortening product cycles. Product improvements and extensions lengthen and revive product life.





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