Consumer Discretionary Author: Enoch Gao, Shuyi Pan, Xiangru Chen Editor: Luke Sheehan Jan 04, 2022 10:55 AM (GMT+8)

Though it is estimated that less than 7% of Chinese people use scented products, the world's sixth-largest fragrance market grew by 10.48% during the pandemic – and is now set to explode in the following years.

Fragrance

Xavier Renard, a global head of Givaudan, pictured how promising the Chinese fragrance market during an interview

"The sky is the limit of what can be done in this market."

Along with the Swiss executive, senior managers from other famous brands have expressed their optimism. 

"Suddenly, it becomes one of the growth drivers in China's consumer sector," said Laurence Ma, general manager of L'Oréal.

Paul Andersson, Firmenich China president, confirmed the rapid growth: "Fine fragrance in China, the category itself, is growing at double-digit rates." 

"This is what we're focusing on today," said Agnès Lagrange, a senior commercial director of IFF.

To discover what's behind these opinions regarding the Chinese markets for fragrance products, we shall utilize qualitative and quantitative evidence presented in the industry. This article offers a framework to comprehensively investigate the fragrance sector in China.

This report…

  • elaborates on the business results of top fragrance companies globally, presenting the recent superior growth and resilience in Asia;

  • analyzes statistics of the Chinese fragrance sector, providing a quantitative overview of the booming market;

  • introduces key suppliers and sellers in China, gathering knowledge about the entire supply chain.


The global fragrance market in the past five years

Based on annual reports by the industry's six major international companies and other types of public information, we make an attempt to comprehend the global market's growth and resilience.

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Following the same method, we extracted data for other major markets: Europe, North America and Latin America.

Compared to the colossal cosmetics and skincare sector in Asia, the size of the Asian fragrance market isn't that impressive. However, from 2016 to 2020, the sector scored the largest percentage increment and highest compound annual growth rates (CAGR) across continents. 

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In 2020, the revenue of the global fragrance sector's leaders sharply decreased. Amid the global market slump, gains in Asia nevertheless increased by 1.14%.

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Thanks to the 10.48% increment in the Chinese fragrance market, Asia became the only significant commercial region to yield positive growth.

Since the pandemic has damaged global markets, China's focus has moved to domestic consumption. During the 3rd China International Import Expo (CIIE) in November 2020, President Xi Jinping emphasized the importance of stimulating demand within the country. Presented with geopolitical uncertainty and sporadic COVID-19 outbreaks, China's foreseeable growth is expected to be largely self-fueled.


China's story

The fragrance sector in China emerged long before 2020.

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Following Scent Library's phenomenal performance in 2017 (link in Chinese), the entire sector in China began accelerating. Although the COVID-19-caused healthcare crisis has slowed the progress, the market has proved its resilience and high potential.

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Despite the growing number of new entrants, the average gross margin in China's fragrance market has been consistently increasing in the past five years, indicating that the domain is still in its embryonic stage. 

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Across civilizations, fragrance serves as a medium to carry memories, which, much like cultural archetypes, tend to vary in different societies. For one, garden sage is a commonly used ingredient of the modern western perfume – but its smell could hardly echo any reminiscence in the Chinese culture.


The supply chain of the Chinese fragrance sector

Based on the materials used in perfume and other scent products, the modern aroma products can be separated into 10 categories In China, three commonly used ingredients to produce scented products are eastern flowers, Chinese herbal medicine and chemical composites.

I.              The floriculture sector

Among these three categories, flowers are the most expensive. Some exotic ingredients like ambergris have extremely high prices. However, due to their richness in smell, modern manufacturers need only fragments of these ingredients to make a tincture (usually provides an extra layer of the richness, evaporates fast) or base notes. Floral aromas nonetheless contribute a significant share of a product (usually top or middle notes). 1 ml (about 20 drops) of jasmine absolute would require 15 kg of jasmine. In 2021, the national average price for jasmine was CNY 40 per kilogram. Therefore, the approximate cost of materials needed to produce 1 ml of pure jasmine absolute is CNY 600 (USD 94.41).  

Fragrance manufacturers account for less than 2% of the floriculture sales in China. 

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Naturally sourced products are not prevalent in the Chinese market. In addition, the fragrance sector in China is small, compared to its upstream domains. Hence, at this point, demand from the fragrance sector is unlikely to affect the nationwide floral price.

Right now, the Chinese floriculture market is utterly competitive: its CR10 is less than 10%. Besides that, per official statistics (link in Chinese), the majority of players in the market are small private business owners. Therefore, fragrance producers' price negotiation power is excessive.

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Key chapter takeaways

  • It's rather expensive to produce scent products with fresh flowers.

  • Demand changes in China's fragrance sector do not significantly impact the floral sector's market pricing.

  • Manufacturers interested in natural products could have great negotiation power, as the upstream in China is filled with small suppliers.


II.          The Chinese herbal medicine market

People have been debating about the clinical effectiveness of Chinese herbal medicine for decades. However, few doubt its strong, mystical and clam fragrance.

Among 12,807 herbal medicine raw material types in China, less than 30 have ever been used in commercialized scent products. Due to their rich earthy scent, these raw materials serve well in base notes and tincture. Culture-wise, some of these herbal materials carry out the reminiscent aroma and inherit as an auspicious symbol.

Fragrance manufacturers are not primary customers for the herbal medicine sector either. Pharmaceutical companies and hospitals purchase most of the raw materials directly from herbal farmers with good discounts. As a result, retail market prices of raw materials (from the distributors) are often much higher than prices for the organizations in the space. Since those organizations have primarily made herbal materials into patent medicines, we could use the market size of the patent medicines as a proxy to estimate the 2B part of the herbal market in China. Here we assume that it would be comparable for the fragrance sector.

Patent medicine takes up a significant share in healthcare expenses in China, with its market size slowly and steadily increasing. Based on our assumption, there is a similar growth pattern in the 2B herbal market.

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The market prices of the key materials here tend to be stable in the long run, but might fluctuate within a year. Regardless of the costs, pharmaceutical companies and hospitals have to purchase raw materials, and often sign long-term contracts with their suppliers. Unlike them, fragrance manufacturers can source raw herbal materials at lower prices.

Key chapter takeaways 

  • The herbal medicine industry is not a primary upstream area for fragrance producers.

  • The scents of particular herbal medicines have a symbolic cultural meaning in China.

  • Fragrance producers willing to source herbal medicine can wait for the price to drop and buy at the best moment. 


III.              The aroma chemical market

Synthesized fragrant ingredients abound in supply with cheaper costs. In addition, natural sourcing takes a much longer time in fostering raw materials. As a result, 70%-90% of the scent ingredients are chemically synthesized. According to Grand View Research, synthetic aroma chemicals accounted for a revenue share of 73.9% in the global scent market in 2019.

It is expensive and inefficient for smaller fragrance producers to extract the essence from raw materials. Since local manufacturers are usually small and private-owned, most of them cannot afford to source 'from scratch.'

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The total production of synthesized ingredients in China grew rapidly in 2016 and 2017, losing -1% in 2018. After that, it kept steadily increasing.

In 2020, the total sale of synthetic aroma chemicals was approximately CNY 33 billion, with 41% of this figure coming from 'household chemicals,' among which fragrant products accounted for 20%.

The CR5  of the Chinese aroma chemical market is 21.2% (excluding the market share of global industry giants). It is still distinctively low, compared with the most developed markets, where big companies like Givaudan and IFF hold most of the shares (the global CR10 is 77%). Because of its monopolistic nature, the market's major players have maintained high gross margins. As a result, their downstream buyers in the fragrance industry representing developed markets could hardly achieve the same gross margin levels as those in some emerging economies.

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Most Chinese fragrance manufacturers have a substantial price negotiation power due to the low market concentration. It is one of the critical factors pushing the country's fragrance sector's already-high gross margin further up.

On the other hand, the aroma chemical market is less standardized in China. As a result, the quality of products often cannot be guaranteed. It will be expensive for small fragrance producers to inspect the quality of ingredients.

Key chapter takeaways

  • Producers in the fragrance sector gather most of their ingredients from the aroma chemical industry. 

  • The low market concentration in the aroma chemical sector provides fragrance manufacturers with superior price negotiation power. It is one of the critical reasons for the high gross margins in the Chinese fragrance sector. 

  • The quality of aroma chemical products is crucial to inspect. The composites are highly standardized and often couldn't meet pickier needs.  


At a glance

China's fragrance industry has been rapidly expanding in the past years, unlocking a number of commercial opportunities. As the majority of the products are not naturally sourced (coming from synthesized chemicals), there is a lot of room for growth in the premium segment. Thanks to the low market concentration in both the floriculture and aroma chemical sectors, the entire fragrance industry is highly likely to keep gross margins at high levels. A slew of opportunities exists in the sector for both large MNCs and local startups.

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