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The Price Paradox

Beauty sales may be on the rise, but the cost of raw materials continues to soar.

Appeared In
Special Issue
Beauty Inc issue 09/09/2011

Remember the cliché about the worthlessness of a hill of beans? Well, nobody is laughing now, particularly the keepers of corporate P&Ls.

Much has been written about cost increases, primarily in the consumer products industry, but beauty has also suffered strains from topsy-turvy price increases for key ingredients grown by farmers on the other side of the world, and even outbreaks of scarcity. Beauty is learning a few lessons in the true meaning of sustainability.

Fragrance suppliers are nurturing direct relationships with farmers by guaranteeing them a market, a practice they adopted some years ago; product designers are pioneering use of cheaper, more sustainable packaging materials, manufacturers are rethinking how they deal with the supply chain and “transparency” is the big word as fragrance houses talk to their customers about necessary price increases.

Some suppliers say the industry can no longer take for granted that the key components of top-selling products will always be available at tolerable prices. Within the past month, Givaudan, International Flavors & Fragrances Inc. and Symrise all noted significant increases in their overall raw materials costs. Givaudan reported a higher than expected 15 percent jump on a full-year basis. Other suppliers have cited sporadic price spikes, like double-digit increases in the cost of orange blossom flowers.

“Clearly we have to manage more closely the security of the supply of our ingredients,” says Felix Mayr-Harting, executive vice president of fine fragrances at Givaudan, which expects to recoup half of this year’s raw material cost increases through renegotiated price increases. Like other fragrance suppliers, Givaudan has conducted a number of sustainability projects with ingredient producers, most recently the vanilla growers in Madagascar.

“Fundamentally, the world economy in raw materials has changed,” says Jerry Vittoria, president of fine fragrances, North America, at Firmenich. “We’re talking a dramatic shift in the marketplace,” he adds, noting that the growing affluence of emerging markets has encouraged better eating habits in what used to be called the Third World and driven up the demand for food. Coupled with the growing demand for biofuels, there is now intense competition for farmland. “Farmers now make a choice: ‘Do I want to grow patchouli or sugar cane?’ Other agricultural products are more lucrative,” Vittoria says. “Extreme weather conditions—droughts and floods—also impact prices, as does the weakness of the dollar in buying imports.” Firmenich has partnered with farmers as far flung as Uganda, Madagascar, Brazil and Haiti on sustainability projects.

The problem is not restricted to agriculture. Non-organic materials, driven by the rising price of oil, can play havoc with packaging costs. These fluctuations in the supply chain could end up forcing a change in consumer aesthetics.

Packaging designer Marc Rosen notes that the consumer has come to expect mass market packaging to be just as attractive as the pricier department store variety. One solution is to do new tricks with cheaper materials, such as inexpensive and sustainable aluminum, which can be anodized to look like gold. “Designers should redefine what a luxury product looks like,” Rosen says, noting that the consumer instinctively equates heaviness with quality. Rosen hopes to help change attitudes to the point where people appreciate the inherent beauty of lighter-weight, more sustainable and inexpensive materials. One such example is Eastar CN, a plastic resin made to look as luxurious as glass, with thick walls, sharp edges and bright clarity to show off the color of the product.

Nicolas Mirzayantz, group president of fragrances at IFF, notes avant- garde thinking already is evident in packaging design. “Luxury has a different meaning and there are different expectations,” he says. “It’s all about service and experience.” He adds that in going back to the fundamental building blocks of perfumery, “we are connecting back to the world.”

Maintaining that sales were up last year in local currencies, Gladys Gabriel, IFF’s vice president of sales and marketing for fragrance ingredients, asserts, “When you have increases in demand, you have to have a good program to ensure supply.” IFF made one of the most high profile sustainability moves in 2000, when it acquired Laboratoire Monique Remy in Grasse, France, an organization that for 30 years has been encouraging cultivation of natural ingredients to guarantee future supplies, putting IFF first in line to get the pick of the crop. “We invested in naturals to ensure long-term sustainability,” he says. “If we are not providing revenue, [the farmers] will disappear.” As a result, Mirzayantz maintains that market pressures forced IFF to take an action that ended up giving the company a competitive edge.

Foresight also is being prized at the manufacturing level. The Estée Lauder Cos. has been sharpening its forecasting by reaching back into the supply chain. By talking to the producers of plastic resins, for instance, Lauder can make key decisions early in the product design game, according to Len DeCandia, senior vice president and chief procurement officer. “We can define what is important to the consumer while defining the cost implications,” he says. Then the product teams can decide on the best execution.

At Elizabeth Arden, Pierre Pirard, executive vice president of product development, says the best way to fight price increases is to outsource the manufacturing role to a much larger company and then leverage its enormous size. “We were doing the management of the supply chain and we were not getting the benefits,” he recalls. Now that Arden is two-thirds of the way into the transition, efficiencies have improved. “It lets us do what we do best,” he says, “understand the consumer.” Drop me a line at peter_born@condenast.com and let me know what you think.