Focus: European cosmetics makers face supply crisis amid scarcity of Ukraine resources (updated)
12/04/2022 12:22
* Struggle to find key ingredients, packaging materials
* Glass and paper makers wrestling with soaring gas prices
* Mass producers face challenges as production costs rise
* Luxury beauty products seen becoming more expensive
(Updates penultimate paragraph with Intercos-D&G deal)
By Mimosa Spencer, Valentina Za and Francesco Zecchini
PARIS/MILAN, April 12 (Reuters) - European perfume- and
cosmetics-makers face shortages of paper, glass, and some key
oils and alcohols, as Russia's invasion of Ukraine adds further
disruptions to the supply chains for beauty products, driving
prices higher amid robust demand.
Like the food industry, the $500 billion global cosmetics
sector is grappling with fallout from the war because producers
use alcohol derived from grains and organic beets to make
perfumes, and sunflower-seed oils to make cosmetics - all key
crops from Ukraine.
At the same time, the energy crisis sparked by the war has
pushed glass and paper prices through the roof, while China's
COVID-19 lockdowns have thwarted companies' ability to obtain
packaging components for $100-a-bottle scents and $30
lipsticks.
"We're in crisis management mode when it comes to these
subjects of sourcing," Emmanuel Guichard, secretary general of
French cosmetics association FEBEA, told Reuters in an
interview.
Consultancy firm Bain & Company calculates higher prices for
packaging, energy and raw materials have driven up production
costs in the cosmetics industry on average by 25%-30%, posing a
challenge to mass cosmetics producers, though demand for
personal care products remains strong, according to partner and
EMEA luxury practice leader Federica Levato.
Italian fragrance manufacturer ICR expects sales this year
to surpass pre-COVID levels, but the family-owned maker of
Bulgari and Salvatore Ferragamo SFER.MI perfumes is wrestling
with a yearly 30% spike in the cost of alcohol, on top of a 10%
rise in the cost of glass and paper, Vice President Ambra
Martone said.
Sales of beauty products globally are seen topping the 2019
level of $538 billion this year, up from $518 billion in 2021
and $458 billion in 2020, a McKinsey report showed.
That is still a fraction of other industries that have been
disrupted by the war, including the global packaged food
industry, which is forecast to be worth over $2 trillion this
year, according to the latest estimates from Euromonitor.
Russia's invasion of Ukraine has caused turmoil in markets for
staple grains and edible oils, pushing world food prices to new
highs.
While larger companies with higher profit margins have more
financial firepower and flexibility to cope - L'Oreal's
OREP.PA luxury division, which sells Giorgio Armani and
Valentino branded makeup and perfume, for example, has an
operating margin of 22.8% - the challenge is particularly acute
for small- and medium-sized companies in Europe.
"We face scarcity and price increases every step of the way:
from essences and alcohol to glass and paper - even for spray
dispenser pumps and Surlyn plastic used for caps," said Marco
Vidal, managing director of Venetian fragrance manufacturer
Mavive, owner of the Merchant of Venice brand.
The challenges are flaring up as consumers continue snapping
up higher-priced beauty products, including perfumes made with a
stronger concentration of oils and more unusual raw ingredients.
Sales of fragrances have been rising steadily over the past
three years, and were up by 15% in 2021 in the United States,
with perfumes priced at more than $175 a bottle more than
doubling in unit sales, according to the latest data from NPD
Group.
"It's a disaster, and you just can't find glass," said Alba
Chiara De Vitis, founder of Florence-based Alchemia Essenze
whose fragrances sell for up to 180 euros ($196) a bottle.
European cosmetic makers, which exported 22.6 billion euros
($24.6 billion) of goods in 2020 according to industry
association Cosmetics Europe, found competing demand for
packaging materials after the coronavirus pandemic which has
boosted e-commerce, driving paper consumption amid efforts to
reduce use of plastic.
Glass makers, on their part, have struggled to cope with
demand for vaccine vials after scaling down production in the
early stages of the pandemic, turning off furnaces in Italy for
the first time in decades.
Now gas prices are exacerbating problems for both
industries, forcing paper mills in Italy to temporarily halt
production to renegotiate selling prices.
A doubling in the cost of paper it uses to make rigid luxury
boxes for clients including Dolce & Gabbana, Ferragamo and
Givenchy has led Italy's Isem Group to hike the price of its
products of between 10% and 40%, CEO Francesco Pintucci told
Reuters.
Italian glass-maker Bormioli Luigi, which makes bottles for
spirits, perfumes and cosmetics with yearly revenue of 480
million euros, expects 80 million euros in extra energy costs
this year, half of which borne by its beauty division whose
clients include French brands Chanel and Dior, head of
fragrances Simone Baratta told Reuters.
"Before the war the cost of a flacon from distributors was
0.75-1.40 euros, now it's 1.00-1.50 euros," De Vitis said.
Glass makers in France, where larger cosmetics companies
began placing orders months earlier than they had in the past,
have struck a more reassuring note, said Guichard, who predicts
they, too, will likely soon feel the pinch of the energy crisis.
"I think we'll have a hard time obtaining gas to make
perfume bottles," he said, noting there wouldn't be enough time
to convert gas-powered ovens to electric systems.
Meanwhile, executives at Intercos ICOS.MI , an Italian
cosmetics supplier for brand names, which on Tuesday signed a
five-year commercial deal with Dolce & Gabbana, said it had
raised prices by around 5% in late 2021 and was considering a
further hike in the summer.
"In the luxury beauty sector, we expect that the consumers
will carry the burden of these higher costs after a transition
period that could last a few months," Levato said.
($1 = 0.9189 euros)
(Reporting by Valentina Za and Francesco Zecchini in Milan;
Mimosa Spencer in Paris; Additional reporting by Silvia Ognibene
in Florence; Editing by Diane Craft and David Goodman
)
((Mimosa.Spencer@thomsonreuters.com;))