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Despite a dip in fourth-quarter fragrance sales, the 174-year-old International Flavors & Fragrances Inc. is poised for what executives hope will be a new takeoff.
At least that’s the view of Robert M. Amen, who took the reins as chairman and chief executive officer 19 months ago, succeeding Richard Goldstein. “It’s the first chapter of the new IFF,” he said, referring to the company’s recently reported year-end results.
In his tenure so far, Amen reorganized the top management of the fragrances and flavors divisions for greater transparency, continued to invest 8.5 to 9 percent in research and development and oversaw a further diversification of the business strategy. Referring to the plethora of ads on TV for scented household products and fragranced candles, Amen noted: “there is a shift going on.” While admitting that personal use of fine fragrance “hasn’t grown as much,” he added, “people still value good fragrance and I think it’s shifting from a personal choice to an environmental setting. The functional fragrance business is huge and very important to us, and I think it supports, in the long run, choices on personal fragrances.”
Amen estimated that the functional scent market is twice the size of the fine fragrance market and growing at a faster clip — 3 or 4 percent a year versus 1 or 2 percent for fine fragrance — because “dosing in functional is increasing.” Amen sees three broad avenues of opportunity. “The first is continuing to grow with our key customers in mature markets,” he said. “Europe and the United States represents nearly 70 percent of our sales.”
Nicolas Mirzayantz, who was named group president of the fragrance division in the reorganization, pointed out that the company hopes to leverage the consolidation mania; as IFF’s partners get bigger, so do the opportunities.
Amen identified the second step as taking advantage of a phenomenon that has long been pointed to by suppliers: trying to penetrate the emerging world. “Geographic and economic growth: We have tens of millions of consumers each year who are moving up the economic strata and becoming different consumers,” he said of people trading up from scented household products to shampoo to fragrance. “So we’ve got to find and create products that are going to meet their needs.” For quite some time, IFF has been investing in markets like China, India, Brazil and Eastern Europe.
The third area is innovation. An example is IFF’s encapsulation technology, in which beads of scent are imprisoned in fabric and released when pressure is put on the cloth. “In some products, they put in 50 million capsules,” said Mirzayantz. “Every time you move, you’re going to release additional capsules. So it’s fragrance on demand.”
“Right now, it’s being sold commercially in fabric care,” Amen added. “But it will be applicable in lotions, it will be applicable in home care products, that sort of thing.”
Like some other suppliers, IFF has for a long time been pioneering the use of scent in hotel rooms, retail spaces and other habitable areas. Last month, perfumer Christophe Laudamiel designed fragrances to scent different meeting rooms at the World Economic Forum in Davos, Switzerland, including the venue holding the subprime mortgage discussion. But the company also has been developing therapeutic and other olfactive uses for scent. Mirzayantz described a project with a hospital outside of Paris that specializes in treating victims of motorcycle and auto accidents. “Usually they’re in trauma, they’re paralyzed, they have lost their memory and…even their ability to speak,” he said, adding that, “the recovery process was much faster when we were introducing scent into their protocol. On many occasions, patients who had lost their ability to speak were able to recover that ability after being introduced to scents.” In one of the examples he cited, a young man, who had not spoken for a year, smelled a note of tar. He spoke his first words, saying: “Death, motorcycle and tar.”
IFF also did a project with the Italian automaker Fiat, in which cars were outfitted with a scent dispenser on the dashboard, offering a choice of three scents.
But IFF also seems determined to maintain what IFF sees as its leadership role in fine fragrance, despite the fragmentation of the market. Amen estimated that the industry sells fragrance to only about 10 percent of the roughly six billion people on the planet, leaving the door open to a great growth potential. “I do believe — and this is probably going to get me into trouble — but I do believe we have to continue to pursue new forms of application,” he said. “The traditional alcohol-dispersed fragrance is wonderful and it’s a foundation, but we’ve got to find other means of enabling women and others to apply fragrance.” Amen added that a substitute has to be found for the traditional alcohol delivery system, in which “we just spray around a lot of alcohol.”
The U.S. economy is “probably going to have a pretty tough 2008,” he speculated, while pointing out that only the domestic market accounts for about 26 percent of IFF’s total sales. “The growth in Asia and Latin America is very, very important to us.
“That’s why we feel very confident we can grow this company more than 4 percent in local (sales) terms each year for the next couple of years with earnings per share growing again something greater than 11,” Amen stated.
For 2007, Amen’s first full year at the helm, IFF’s total sales neared $2.28 billion, an 8.6 percent increase from $2.1 billion in 2006, on fragrance sales that grew 6 percent to $1.27 billion.
Amen noted that the flavor business was up 12 percent in dollar sales and 9 percent in local currencies, while fragrance swelled 2 percent in local currencies and 6 percent in dollars for 2007. “It’s a 9 percent combined growth rate over the last four years,” Mirzayantz said, reiterating the market probably is growing at 1 to 2 percent.
However, IFF “struggled in laundry care a little bit,” Amen said, and in the fourth quarter, fine fragrance dipped 1 percent in local currencies, which the ceo attributed to “a Christmas event and inventory adjustment.”
Meanwhile, on Wall Street, Erin Ashley Smith of Argus Research Co. wrote in a research note, “Our expectation [is] that the company will generate solid 2008 results. We expect the company to become more focused on opportunities in emerging markets and to implement cost-savings programs in the fragrance business.”
At J.P. Morgan Chase & Co., analyst Jeffrey Zekauskas said the firm trimmed its full-year 2008 earnings per share estimate for IFF to $2.95, from its previous estimate of $3.05, due to the bank’s forecast of higher interest expense this year.
Amen predicted, “I think the first quarter is going to be a good quarter, and we’ll grow consistent with our long-term goals.”