Trade structure and channel for essential oils

A number of raw materials is not produced in the EU. They require considerable (expensive) labour input or require a tropical climate. The EU is highly dependent on supplies from developing countries for the majority of these raw materials. Taking the competition from EU production into account, developing country exporters may find the best opportunities in the supply of essential oils, or their semiprocessed materials, for which the production conditions are not favourable in the EU. For more information on opportunities for exporters in DCs, please refer to the Module Promising EU export markets.
Figure 1 Trade channels for essential oils and oleoresins

Source: Unido (2005)

Trade channel for existing essential oils

Exporters of essential oils in DCs can approach EU traders, intermediate processing companies (such as fragrance houses, refining companies and extractors), agents or

Trade structure and channel for essential oils

wholesalers (either with or without processing capacity, dependent on the product) if they wish 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 geographic areas; 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 essential oils, 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 oils

Exporters 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, research institutions, and other intermediaries. These intermediaries collect samples in a similar way as for the pharmaceutical industry, but with greater emphasis on traditional use, and an eye towards raw material sourcing strategies, which are of immediate concern to companies in the personal care and cosmetics industry. Specific research and training centres specialised in extraction and purification processes, 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 even retailers, to assess their interest. They could also supply ingredients or formulae which they have identified through literature as being of possible interest (because of certain interesting functionalities). Natural personal-care companies. Many of these companies have grown out of strong personal interest in natural ingredients on the part of the founder (such as Ales

Trade structure and channel for essential oils

Groupe, Aveda, The Body Shop, Yves Rocher and Rainforest Nutrition). This often translates 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 other forms of partnership are popular and increasingly necessary to be able to surmount issues, such as costly safety tests.

Price structure and margins

The 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 margins charged 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 risks As 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 customer base 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.