“Noses,” those elite folks who create alluring scents for perfumers large and small, are up in arms to varying degrees over new regulations from the European Union about which ingredients may be used in the formulation of such iconic, romantic names as Chanel No. 5, Shalimar and Anaïs Anaïs. At issue are a number of substances, ironically many of them natural, that the EU says will result in allergic reactions for 1–3% of the population and thus must be eliminated.
In question are such molecules as atranol and chloroatranol, found in oak moss—a natural ingredient contributing a woodsy element that also adds to a scent’s longevity. They are found in traditional fragrances, like Chanel No. 5, and in a wide range of other scents as well. Also endangered is the synthetic HICC, known as lyral, which conjures up the scent of lily of the valley. All three are on the proscribed list because they can cause dermatitis in that tiny percentage of the population.
Other ingredients are also under debate, including linalool, which is found in lavender and is also a popular element of numerous high-end fragrances; the Givaudan synthetic lilial, which contributes a “green” scent; citral, which comes from lemons and tangerines; eugenol, from rose and clove oils; and coumarin, sourced from bergamot and related species of plants. While no ban has been issued—yet—for these, it was recommended, although the issue is still under study.
In a report published by the Scientific Committee on Consumer Safety (SCCS) in 2012, those recommendations were made public and the perfume industry reacted with horror. The first regulations take effect early in 2015, with discussion and testing continuing to determine the fate of those other proposed bans. In the meantime, perfumers have been scrambling to find ways to reformulate their scents in ways that will neither alienate customers nor drag down the bottom line. And the task is not an easy one.
While perfume formulas are notoriously secret—they’re not protected as intellectual property, but instead regarded as, unromantic as it may sound, industrial formulas that can be duplicated —customers always seem to know when a perfume has been altered, whether or not such an alteration has been disclosed by the parfumier. And that can result in a search for a new scent by the finicky consumer. People can be more sensitive to the minuscule differences present in natural scent oils that gas chromatographs cannot distinguish, and for many, if an ingredient changes, the scent is no longer alluring.
That’s no small thing in an industry that’s worth $25 billion globally for high-end products alone. And in 2013, a report by Global Industry Analysts projected its worth in 2018 to nearly double to $45.6 billion, thanks to increasing popularity in emerging markets—in particular the Asia-Pacific and Latin American regions, expected to contribute particularly to growth—and in the men’s market, to ever-younger customers and in the celebrity fragrance sector.
This is by no means the first time that certain ingredients have been banned from perfume. The International Fragrance Association (IFRA), the perfumers’ self-regulatory body formed in 1973, has already restricted a number of ingredients over health concerns, and of course the perfume companies themselves have taken action from time to time to accommodate shortages of some ingredients and increasing costs for others.
Still, Guerlain’s Shalimar once contained birch tar oil, which was eliminated when it was thought to pose a risk for cancer. The use of linalool is already limited because of allergy concerns, while eugenol, also limited, can cause allergic reactions as well. And the organic compounds of furocoumarins have been removed because exposure to the sun can cause them to produce dark spots on the wearer’s skin.
Still, the industry is not happy, as might be expected, concerning the EU’s new regulations. It points to, among other things, the popularity of essential oils for massage and other purposes, and the fact that other substances—such as tobacco and alcoholic products—present far more identifiable risks than perfumes. It also cites the expense of reformulation, which can run to the hundreds of thousands of euros per perfume, not to mention the danger that, after months of work, the finished product will not smell quite the same.
Regions that produce the ingredients for perfumes will have to be wary of bans and restrictions as well. The south of France is home to Grasse, which grows not only roses and jasmine but many other varieties of flowers used in perfumes; it bills itself as “the birthplace of the world’s perfume industry.” Provence contributes lavender fields; Bulgaria, Germany and Iran grow more of the heavily scented roses the industry needs; and other regions as far-flung as Madagascar, Indonesia and Haiti all produce plants likely to be affected by the EU regulations.
So how might this play out for the perfume industry as a whole? Should investors be alarmed? Perhaps not so much, unless they’re themselves perfume aficionados who will soon be in search of a new signature scent themselves. According to Erin Lash, senior equity analyst, consumer packaged goods at Morningstar, “Some companies have already been proactive for adjusting formulation, so it’s not such a big impact near term, given that some companies have [already] taken it into consideration.”
Lash said, “Companies don’t always develop fragrances in house; sometimes they’re outsourced. IFF and Givaudan, among others, find it helpful to outsource. They develop different fragrances that would maybe be comparable, without those potentially harmful side effects.” That said, she added that not just the perfume industry itself, but other sectors could be affected by the EU’s anti-allergy regulations: such categories as “detergents, any kinds of soaps, a lot in personal care and potentially the home care sector.”
Still, Lash doesn’t see the new rules as a major headache—at least for the major companies rather than small specialty perfume houses. “The odds are that for a lot of these companies, those specific products [that would be hard hit don’t make up the majority of their business.] A lot of global beauty care companies operate with diverse portfolios, not only in their fragrance business, but in personal care as well: skin care, makeup, etc. The impact of changing a specific product because of regulation likely won’t have a material impact on [those companies’] consolidated financials. That’s assuming a company operates with a diversified portfolio. Some beauty care companies are obviously more focused [than others, and will be more affected by the changes.]”
But she held up iconic Chanel as “an example of a company already planning in advance” to comply with the new regulations, since it “stopped using lyral in 2010 in anticipation of the new rules.”
So unless an investor is devoted to a particular scent and personally affected if that perfume changes, she—or he—can likely relax and look forward to continued growth.