8/12/2019 Trade Structure and Channel for Essential Oils

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8/12/2019 Trade Structure and Channel for Essential Oils

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Trade structure and channel for essential oils

wholesalers (either with or without processing capacity, dependent on the product) if theywish to penetrate the EU market. Traders and brokers are well informed on the EU market,

therefore, they can fulfil important functions:

Purchase of natural ingredients throughout the world or from specific geographicareas;

Analysis and quality control; Rectification of the ingredients to fit the commercial standards; Blending; Sale to users.Processing companies add value to essential oils before selling them to the end-product

manufacturers. This process, which takes place in the EU, can include breaking down into

smaller units, re-packaging and labelling etc. Current tendency shows that EU buyers,

particularly perfumery manufacturer, are also increasingly looking for fractions of essentialoils, in which the required properties are isolated.

Exporters in DCs wishing to penetrate the EU market can contact importers or processors in

order to have their sample evaluated, and to obtain advice on the possibilities for entering

a given market. It should be noted that many EU buyers prefer to stick with their existing

suppliers, instead of investing in all the arrangements which are necessary to go into

business with a new supplier. Therefore, DC exporters will have to compete with existing

suppliers. It is important that products are offered at a competitive price and of consistently

high quality. Products with distinguishing properties can secure a place in the EU market,

meaning that product must have no adulteration, preferably fulfilling standards

(IFRA/ISO/Fair Trade/organic), wild-collected, ethical sourced and with a background story.

Please refer to the module Trends and segments for essential oils for more detailed

information.

Trade channels for new essential oilsExporters in DCs, who are interested in launching new essential oil in the market, are

recommended primarily to trade in existing oils in order to build up a reliable relationship

with the EU importer and to gain experience of the industry. The importer may be able to

guide the exporter in introducing a new oil to the market, which is a challenging process,

due to complications concerning strict EU regulations. It is estimated that the whole

process can take about 1 to 2 years before a new essential oil can be traded in the market.

Exporters need to pay attention to the sustainability of the plant species when developing

new essential oils as well as ensuring that sufficient quantities are available for a viable

business.

The following channels are especially relevant for producers of new essential oils:

Large companies with screening programmes sub-contract brokers, researchinstitutions, and other intermediaries. These intermediaries collect samples in asimilar way as for the pharmaceutical industry, but with greater emphasis ontraditional use, and an eye towards raw material sourcing strategies, which are ofimmediate concern to companies in the personal care and cosmetics industry.

Specific research and training centres specialised in extraction and purificationprocesses, offering services to companies involved in the food industry,pharmaceuticals and cosmetics (e.g. Archimex in France).

To promote a new oil to EU processors, finished product manufacturers or evenretailers, to assess their interest. They could also supply ingredients or formulae whichthey have identified through literature as being of possible interest (because of certaininteresting functionalities).

Natural personal-care companies. Many of these companies have grown out of strongpersonal interest in natural ingredients on the part of the founder (such as Ales

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Trade structure and channel for essential oils

Groupe, Aveda, The Body Shop, Yves Rocher and Rainforest Nutrition). This oftentranslates into continued interest and involvement in new product development,including field trips to collect samples for further study in the companys laboratory.

Since quality demands for cosmetic ingredients are very high, joint ventures or otherforms of partnership are popular and increasingly necessary to be able to surmountissues, such as costly safety tests.

Price structure and marginsThe value chain of essential oils covers the full range of activities required to transform it

from a plant to an oil and further to a cosmetic ingredient, including research and

development, raw material supply, and all activities of production, marketing and sales to

international buyers.

Different prices and margins apply throughout the various trade channels. The marginscharged by the different intermediaries in the essential oils trade are influenced by many

different factors like:

Different prices and margins apply throughout the various trade channels, but can also be

seen within the different essential oils. Explanations for this can be found in:

Type of oils (species (new/existing), quality, organic/ Fair Trade or not); Cost of extraction and losses from extraction; Exchange rates Volumes Costs incurred for production/processing/trade at that level Level of investment needed Other risksAs the essential oils market is not transparent, it is virtually impossible to determine prices

and margins. However, the information provided by the Australian Rural Industries

Research and Development can be used as an indication for a price structure. The price of

the final cosmetic ingredient can be up to five times as much as the raw materials. Around

75% of the value added during the processing, from raw material to cosmetic ingredient, is

accounted for by extraction. This is also due to the very large amount of raw materials

needed for the production of essential oils. Between export and use in manufacture of the

final cosmetic product, the difference in value added may not be so great.

It should also be mentioned that price pressure is reducing margins for fragrance suppliers,

because their clients (large cosmetics companies) are consolidating. These pressures are

also driving consolidation among fragrance houses. This will probably reduce the customerbase for ingredient suppliers to the fragrance industry. Furthermore, producers of natural

essential oils have to compete with generally lower priced and more consistent (no natural

variation) chemical substitutes, which take a much larger share of the market. However,

please note that in some cases, chemical substitutes are not considered as opponents of

essential oils as sometimes it is not possible to replicate the same aroma by distillation of

an essential oil. In general, a potential risk of essential oils is that they could be replaced by

chemicals, especially the ones that are used as a fragrance. In the aromatherapy, essential

oils do not compete with synthetics as only pure essential oils are used.

Price margins could be very useful information for exporters in developing countries in

determining the sales price of your product. However, more important is to know the cost

price of your product and from there on determine the sales price. Unfortunately, data for

calculation of the raw material cost is often difficult to obtain.