We are in a phase of entrepreneurship where new brands are proliferating and even displacing older established brands. Media personalities like 21-year-old Kylie Jenner has become a billionaire with her own line of cosmetics.
Last week, Michelle Pfeiffer launched her own line of fragrances. It’s the first fragrance line to be verified as non-toxic by the Environmental Working Group (EWG), a nonprofit organization that rates the toxicity of personal care products. The brand also provides 100% transparency about product ingredients by listing all of them.
Let’s do a case study of innovation using the fragrance industry. To make this interesting, let’s imagine this post as a hackathon.
I will give a presentation about the subject of fragrances, and then we can think about ideas on how to disrupt or change the paradigm of the industry. The point of this exercise is to examine a concept in innovation that is applicable to many other industries.
Sources of innovation
I believe Peter Drucker describes innovation best. He articulates seven sources of innovation:
- Unexpected Occurrences
- Process Needs
- Industry and Market Changes
- Demographic Changes
- Changes in Perception
- New Knowledge
In fragrances and in many of the other new “millennial” brands today, changes in Demographics, Perception, or Industry & Market are most often the drivers for new innovations. These were not always the drivers of innovation in the fragrance industry’s past.
For the fragrance industry, these seven drivers of innovation can either affect Supply or Demand.
The entire history of fragrances, with the exception of a few marketing success stories, is about providing Supply: making a fragrance more available, making a fragrance cheaper, making a new fragrance. The last 150 years have fulfilled these Supply challenges extremely well, by innovations that were driven by New Knowledge, New Processes, and Industry Changes.
My perspective is that today, Supply is no longer a compelling problem. Innovation is needed on the Demand side: how do you create new Demand for fragrances? Michelle Pfeiffer and Kylie Jenner are just two manifestations of this new shift to demand-driven innovation.
My presentation of the fragrance industry starts with its modern beginnings.
The rise of organic chemistry as a craft: 1850-1860
All important components in natural extracts and all the important fragrances are organic compounds. These are compounds that, on a molecular scale, are built on a scaffold of carbon atoms.
Organic chemistry, the study of organic compounds, began in Europe in the early stages of the second industrial revolution, circa 1840-1860. By that time, the scientific foundations of organic chemistry were established, leading Kekulé and Couper to posit the tetravalence of carbon in 1857 (how carbon atoms connect to other atoms).
The study of organic chemistry was advancing in universities in England, France, Switzerland, and the German states. Discourses happened in scientific societies, such as the Royal College of Chemistry from 1845-1872.
This era created capabilities in
- chemical extraction, isolating extracts from plants and other natural materials,
- compound separation, separating extracts into their individual components,
- chemical analysis, identifying the structural composition of each compound, and
- chemical synthesis, the ability to manufacture these components at large scale and at low cost.
Commercial breakthroughs happened when the craft of organic chemistry achieved the ability to synthesize organic compounds using industrial methods.
Willow tree extracts have been used for treating fever, inflammation and pain since historic times. These new chemistry methods identified the active ingredient in these extracts as salicylic acid. In 1853, a more effective derivative was found and synthesized in large quantities: acetylsalicylic acid, also known as Aspirin. This was the start of the modern Pharmaceutical Industry.
In 1856, William Henry Perkin was experimenting with aniline chemistry and discovered a cost-effective way to make a purple dye. He also developed the Perkin reaction. These chemistries opened up a range of new dye colours. Up till then, purple was such a rare colour that it was restricted to emperors and royalty since Roman times. Perkin’s discovery, and his commercialization of the dyes that followed, propelled the ancient Pigments Industry into the modern day Pigments and Dyes Industry.
Flavours and Fragrances (F&F): 1868
Coumarin is a sweet, herbaceous smelling compound with a spicy top note. It was extracted from the Tonka bean found in Central America. Its synthesis was achieved in 1868 by Perkin using the Perkin reaction.
Vanilla, an extract of the exotic vanilla bean, has been prized for centuries. Its active ingredient, vanillin, was isolated in France in 1858. Its chemical structure was deduced in Germany in 1874. The first industrial synthesis of vanillin was produced in Germany in 1876.
Up to this time, the flavours and fragrance industry relied on extraction processes of natural materials. The craft of organic chemistry not only made extraction more efficient, it also introduced industrial scale synthesis, allowing formerly rare and expensive ingredients to be produced in large and affordable quantities.
Switzerland becomes a global hub of chemistry-driven innovation
Firmenich, one of the three leading F&F companies today, was founded in Geneva Switzerland in 1895 to synthesize ground-breaking fragrance compounds. This endeavor involved such advanced chemistry that one of the company’s scientists, Leopold Ruzicka, won the 1939 Nobel Prize in chemistry for his work on terpenes, a class of complex essential oils found in plants.
Givaudin, one of the other three leading F&F companies today, was founded in France, also in 1895. In 1898, it moved to Geneva Switzerland.
Switzerland at that time spawned two hubs of chemistry innovation (Geneva and Basel) that anchored the formation of pharmaceutical companies and F&F companies that endure to this day.
Such a hub is also known as a business cluster. When companies within the same industry are clustered together in a local region, it draws workers with the relevant specialized skills. There is better employment stability when they lose their job, because they are able to find work at other companies nearby. There are more opportunities for career growth. The specialized skills in the area also advance through the social and educational networks in the local area. Companies up and down the supply chain co-locate in the area to serve this specialized industry. This interconnected concentration of businesses, workers, suppliers, and knowledge institutions help to reinforce the economic strength of the area, providing those companies with a competitive advantage at a global level.
The neutrality of Switzerland during the political and military turmoil of this era on the European continent had a large influence on the development of these chemistry hubs in Switzerland vs. France and the German states. This is another example supporting a key theme of this blog, that geopolitics has a big influence on economic development and business competitiveness.
Chemistry enabled the first series of innovations in fragrances
The above events demonstrate many of Drucker’s sources of innovation at work since the middle of the 19th century.
1) New Knowledge generated by the craft of organic chemistry was sweeping multiple industries, enabling new products to be made. The growth of the F&F industry was one major result of this activity.
2) Process Needs existed because the old methods of extraction were costly and inefficient. They led to a limited number of fragrances that could not even be reproduced batch to batch. The science of extraction and synthesis brought radical improvements to F&F manufacturing, in quantity and quality.
3) Industry and Market Changes were occurring during the second industrial revolution. An industry hub emerged in Switzerland, dramatically increasing productivity and invention. These in turn fed market demand for fragrances that used to be rare and only accessible to the extremely wealthy.
4) Unexpected Occurrences: as the fragrance industry grew, it fed a cycle of interest in new and novel fragrances. Serendipitous discoveries of new scents from exotic plants and animals, enabled by improved methods of extraction and analysis, and eventually from chemical synthesis, fed into this expanding cycle. Here is just a short list of examples of newly discovered fragrance ingredients:
- heliotropin or piperonal from plants (1869)
- phenylacetic aldehyde from plants (1876)
- musks from animals (1888)
- citronellal from plants (1889)
- Rhodinol from plants (1891)
- gamma-undecalactone from synthesis (1900)
- methyl heptin carbonate from synthesis (1903)
- farnesol from plants (1913)
- nerolidol from plants (1923)
The list today stretches into hundreds of compounds.
All of these innovations had one common effect: they all provided increased Supply.
Up to that time, fragrance compounds were available in small quantities from plant and animal extracts. It was very hard to procure these ingredients. Access to their natural sources was limited by geographic distance and the cost of global trade. Extraction processes were inefficient and costly. Many fragrant compounds were not even known and were awaiting discovery.
These Supply constraints were reduced significantly with the above innovations. These have been the drivers of industry innovation until just recently.
The industry today
Today, three large companies dominate almost half of the total global market share: Givaudin, Firmenich and International Flavors & Fragrances (IFF). This industry had revenues estimated at US$ 26 billion in 2018.
I don’t have access to the latest market segment breakdowns. As I recall, the market is split 50:50 between flavours and fragrances.
On the fragrance side, the original market that consisted of fine fragrances (perfumes, colognes, etc.) has grown to include many other product segments:
- Fine fragrances (perfumes, colognes, etc.)
- Personal care (shampoo, hair conditioner, etc.)
- Soaps and fabric care (laundry detergents, fabric softeners, etc.)
- Cleaning products and air care (air fresheners, candles, etc.)
Let’s look at fine fragrances.
Developing a new fragrance product
When a designer or a brand – Chanel, Taylor Swift, Nautica, and even Michelle Pfeiffer and Kylie Jenner, etc. — wants to produce a fragrance, they create a “fragrance brief” to describe the imagery, emotions and themes the scent is to evoke. The top notes, middle notes and base notes are also described as well as technical and business specifications.
From there, the brand hires a fragrance company or opens the fragrance brief to competition. The fragrance brief is used by a perfumer to design the fragrance.
Perfumers are usually employed by the fragrance companies. They are the critical stars of the industry. Apprenticeships last years. Training continues into decades as they memorize hundreds of smells and learn how different chemical compositions work together. Perfumers can identify ingredients by smell alone, and they possess that rare gift of knowing how different scents work together.
The perfumer’s work involves formulating combinations of fragrance compounds to meet the customer’s fragrance brief. This work is supported by the chemistry department of the fragrance company. The final recipe contains 20 to 50 different compounds and is a fiercely guarded trade secret, unknown even to the customer.
These are the most expensive mass consumer products in the world on a per liquid volume basis. The only other product at this price point are ink jet printer inks. We have to look outside of the mass consumer segment to find anything comparable in price, and that would be products like patented prescription pharmaceuticals and rare collector wines.
The value chain
In the fine fragrance value chain, most of the margin (profit) is captured by the brand and by the fragrance companies.
The fragrance company’s contribution to the value comes from the skill set of the perfumer, and from their in-house chemistry capabilities that support the perfumer in designing and developing fragrances.
The value chain extends to the fragrance company’s portfolio of proprietary in-house synthesized compounds. The size and diversity of this library gives perfumers an advantage over the competition in their ability to achieve just the right scents and notes.
Just as book libraries can skew towards strengths and weaknesses in certain subject areas, the compound collection in fragrance libraries can also skew towards strengths and weaknesses in certain scents.
When it comes to compound libraries, the largest, most established companies hold a competitive advantage, from the length of time they have had to build their library and their chemistry capabilities.
The supply chain
Despite the hundreds of fragrance compounds that modern chemistry has brought to F&F companies, there are many critical fragrance ingredients that are still sourced from natural sources.
Hence, all F&F companies also have a supply chain to access natural products from around the world.
An example is vetiver oil, a dry or musty woody scent with chocolate and smoke facets. Vetiver grass is harvested from India, Southeast Asia, and Reunion Island. The oil is obtained by steam distillation of the grass roots. The oil has over 100 compounds, all of which contribute to the oil’s scent profile, and this is why there is no synthetic substitute. The composition depends on the growing region. Vetiver from the small island of Reunion is considered to provide the highest quality oil.
There are many other extracts like this example. The farms and the field workers are the starting point of the supply chain, yet they obtain the least amount of the value. As demand increases, these sources are also stressed.
The supply chain mostly source plants, but other natural materials are also sourced.
For example, ambergris is an oily secretion from sperm wales, found within their carcasses or wash up onto beaches. A 1.5 kg sample can fetch $71,000 on the perfumery market because it is prized for its ability to fix scent to human skin. Because of the sperm whale’s vulnerable status, use of ambergris is illegal in USA and Australia, but its use is still legal in England, France and elsewhere.
The present day market and state of technology
We all have our own perspective of the current day fragrance market and industry. I will share mine.
The demographics of consumers are changing to a generation that grew up digital.
Emerging markets with huge populations can afford more consumer goods. Cultural differences across these markets are manifested in different scent preferences.
Fragrances can be invasive in close or crowded spaces. Interest in clean air is growing.
Fine fragrance has been losing market share to other market applications such as personal care, fabric care, and air care.
The easily accessible fragrance ingredients have been identified. “Scent Treks” where teams go to more distant, more exotic, and more inaccessible locales may still lead to new ingredient discoveries, but discovery efforts are getting less productive.
There is more laboratory attention on trace compounds from natural products.
Synthetic chemistry still continues to discover new synthetic compounds. However, synthetic compounds are becoming harder to sell. Market interest is increasing in natural compounds.
There is a growing segment of the market that is interested in fair trade sourcing.
Climate change is disrupting the supply chains of many sources of natural products.
Can you propose any more that are important drivers?
The scope of this hackathon is to propose a way to change the paradigm for how fragrances are developed, used or sold.
After hearing about the issues and challenges, hackathon participants present ideas to each other and then form teams based on each participants’ interests and skills. The teams go off to work of the idea. They present their demo product or results at the end of the event.
Let’s pitch some ideas.
Supply side ideas
1) Process changes such as environmentally friendly production routes, lower cost production routes, and production routes leading to higher quality products.
For example, aldehydes are one of the key aroma groups. They are not easy to make. An aldehyde can be obtained by oxidizing the corresponding alcohol, but oxidation often over-shoots to produce the carboxylic acid. Alternatively, an aldehyde can be produced by reducing the corresponding carboxylic acid. The best route in either case is costly and yields can be low. I saw a start-up company with a new engineering process that was environmentally friendlier than current routes and also cheaper. One challenge with this business model is that this is a technology platform to make just one class of compounds. A previous post explained why these types of platforms usually do not scale. Such a business becomes a niche contract manufacturer.
2) New knowledge: molecular biology has advanced to the point where yeast and bacteria can be engineered to produce complex fragrance ingredients. This lowers the production cost and provides an environmentally friendlier route over chemical synthesis. Most importantly, products made in this way can be labeled natural ingredients.
Companies such as Amyris, Allylix, Evolva, and Ginkgo Bioworks are attempting this. This is enormously capital intensive and time consuming. Such companies need to offer compelling visions to raise sufficient financing. Again, these platforms do not scale, because each compound is a new endeavor. So far, Evolva and Ginkgo Bioworks have fared well through creative and flexible business development strategies.
3) Industry changes through artificial intelligence (AI): the operational process of discovering new fragrance molecules in the synthesis lab is very similar to the operational process of small molecule drug discovery in the pharmaceutical industry. It is also very similar to the process of electronic chemicals discovery in the LCD and OLED industries.
I was very much involved in small molecule drug discovery. I never thought that AI could be applied to small molecule drug discovery, but a number of high profile and well-funded start-up companies are attempting this. They have yet to prove this can be done in drug discovery. Recently, I am seeing a few companies attempting to use AI to discover new electronic chemicals. So why not attempt to use AI to discover new fragrance compounds?
Demand side ideas
4) Demographic changes: reaching new customers through social media and new distribution channels are text book cases. An example are the many monthly fragrance subscription startup companies. Reaching these new customers is always a need.
5) Changes in perception: Michelle Pfeiffer’s new brand of non-toxic fragrances is the example that inspired this post. A fair-trade theme or ethical fragrances could be other approaches.
6) Market changes: customer personalization has led to the creation of shops that create customized fragrances. Le Labo, founded in New York City, was one of the first that took this concept and scaled it globally. It has since been acquired by Estée Lauder. Today, there are no less than eleven such companies in the New York City area. They are here, because this is the fragrance industry’s U.S. hub. These companies are the first generation of this concept. We await the next generation entrepreneur to develop a distinct concept of personalized fragrances and to scale it.
7) Industry changes: other segments are already growing in market share, such as fabric care and air care. Are there new segments that have yet to be developed?
All of the above can lead to viable start-up companies with the right business concept and team. However, few of them will probably make any long term impact. If any can contribute a new direction to the industry for the next 150 years, I would say it is (2), or maybe the final hack idea below.
Take home message
I encountered the fragrance industry while looking at early stage companies and their technologies for making complex compounds such as (1) and (2) above. It has been instructive for me to study these companies and to watch them over the years.
Their science and technologies always sound exciting, like magic. Yet they remain technologies in search of a market need. When they find a market need, the technology platform turns out to not scale so well.
In fragrances, there were no shortage of interesting technologies, yet I found that example after example consistently did not offer any industry shattering solution to a compelling problem.
That was how I came to my personal conclusion that in the fragrance industry, problems of Supply to serve the current market have mostly been solved.
The innovation challenge is to find new Demand.
I suspect that there are a lot of industries today that face these same conditions. The new geopolitics we see today featuring economic nationalism and accessing better trade is a symptom of this condition. These industries are struggling to find Demand.
Finding new Demand, that is sustainable and ethical, is one of the biggest economic innovation challenges for humanity now.
I conclude with my idea for this Hackathon. It is early in concept, so it is not ready for a company start-up, but suitable for the applied research stage.
The biological origin of fragrances is attraction. In some few cases, it is also repulsion. Why think about humans? What about other animals? What if we discovered the critical scents that attract (and/or repel) certain important species? We can then use them in productive – ethical – ways. I’ll elaborate more on my next post for Earth Day.