essential oil bdp report
DESCRIPTION
Nepal is known for its rich biodiversity, which makes it an interesting opportunity to set up herbal plant production in the country. Nepal has a diversified range of plants consisting of more than 7,000 species of flowering and non-flowering plants of which around 1,500 species are medicinal plants. Due to the natural topography of Nepal, it holds 2% of the world’s bio diversity within its landscape. Though Nepal possesses a huge potential within herbal products, only small portions of its species have been utilized for commercial purposes. Hence, the potential for commercial herbal production in the country is huge.TRANSCRIPT
Himalayan Essential Oil (P) Ltd. 1
Chapter 1 :
BUSINESS INTRODUCTION
1.1 Background and Business Concept
Nepal is known for its rich biodiversity, which makes it an interesting opportunity to set up
herbal plant production in the country. Nepal has a diversified range of plants consisting of
more than 7,000 species of flowering and non-flowering plants of which around 1,500
species are medicinal plants. Due to the natural topography of Nepal, it holds 2% of the
world’s bio diversity within its landscape. This makes Nepal an ideal place for the cultivation
and production of essential oils. Though Nepal possesses a huge potential within herbal
products, only small portions of its species have been utilized for commercial purposes.
Hence, the potential for commercial herbal production in the country is huge.
An essential oil is a concentrated hydrophobic liquid containing volatile aroma compounds
from plants. Essential oils are also known as volatile oils, ethereal oils or simply as the "oil
of" the plant from which they are extracted, such as oil of Lemon Grass. Oil is "essential" in
the sense that it carries a distinctive scent, or essence, of the plant. Essential oils are generally
extracted by distillation.
Essential oils are high value and low volume commodities. Essential oil is a global
phenomenon today. It is a $2 billion Dollar industry increasing day by day with more and
more people switching towards herbal and organic products. The recent popularity of
aromatherapy and the supposed benefit to health with negligible side effects make it an
attractive choice for many consumers of the 21st century. The use of essential oil has existed
through time in items such as perfume, soap etc but with the growing demand more and more
products now use organic herbal essential oil to give their products a more desirable edge.
In order to take advantage of the rich supply of herbs and plants in Nepal and a growing
domestic and International market for organic products, Himalayan Essential Oil (P) Ltd. was
visualized by a group of four professionals with direct and indirect past experience in bio-
trade industry of Nepal. The company is interested in setting up production of organic herbal
based products in Nepal. Organic herbal based products include a wide variety of products
from essential oils extracts to dried herbs. All the products are based on herbs and need to go
through the same processing process.
The overall ambition of the project is to have an innovative and competitive set-up offering
high quality herbal based products to the International market. The company will implement
the project gradually as there is the need to transform and professionalize the production and
operation system before being able to the meet requirements of International market. In the
first year the company will produce and supply the essential oil only to local and Indian
market. In the beginning of the second year the company will take all the required affiliations
and organic certification, so that it will be able to sell its products to the International market
(especially to USA and European countries).
Himalayan Essential Oil (P) Ltd. 2
1.2 Scope of Business Activities
Figure 1: Scope of business activities
The company will sell the products on the European and American markets from second year
of production. In order to be able to enter these markets, there is a need for obtaining an
organic certification to demonstrate high quality herbal production combined with
conservation of environment by sustainable harvesting. Furthermore, the company plans to
implement Good Agriculture Practice (GAP), Good Manufacturing practice (GMP) Good
Laboratory Practices (GLP) as well as ISO 9001 and ISO 14001 for environment protection
to give evidence of high quality of products to compete in International market.
In first two years, the company will work with four products namely Chamomile, Citronella,
Lemon grass and Palmarosa. These products have been identified by referring to the data
available at HPPL and interviews with the personnel working in this industry. The company
will lease 25 hectares of land at Bhardaghat, Nawalparsi in first two years. From third year
onwards, another 25 hectares of land will be leased in Nawalparasi. The company will also
expand the product range to include other types of products based on herbs or plants which
have been identified to have a potential in the International market.
1.3 Nature of the Business
Himalayan Essential Oil Pvt. Ltd. is planned to be registered under the Company Act of the
Nepalese Government. It will be a partnership company having shares owned by four
individuals having 25% share ownership each. The company has a total capital of Rs.
9,500,000.00 and a working capital of Rs. 3,700,000 (approx).
The nature of the business is to cultivate different types of herbs and plants and extract the oil
through distillation process in order to obtain high quality of essential oils. In initial years the
company will produce 1700 kg of Lemon grass, 2500 kg of Citronella, 1120 kg of Palmarosa
and 50 kg of chamomile from the 25 hectares of land it will lease from farmers and
Community Forest of Bharghat, Nawalparasi. From third year onwards the company will
acquire 25 hectares of land in addition and double its production capacity.
1.4 Vision of the Company
The vision of the company is "To position Nepal in its rightful place as a leading supplier of
premium organically grown, wild crafted and fairly traded herbal products for the global
market place"
Cultivation of
herbs/plants
Processing of
Herbs &
Plants
Marketing &
Sales
Distribution
to
Customers
Himalayan Essential Oil (P) Ltd. 3
1.5 Mission of the Company
The mission of the company is to be one of Nepal’s leading producers in organically grown
essential oil while maintaining the quality and uplifting the educational standard of the local
community.
1.6 Goals & Objectives of the Company
The main goals and objectives of the Company are:
a. To reach self sustaining profitability within the next five years.
To produce and sell 5 tons of essential oils in year 1 of the project increasing to
10 tons in year 3.
To generate a turnover on NPR 8 million in Year 1 and increase it to NPR 25
million in Year 5 of the project.
b. To be one of the leading companies for essential oil in Nepal
To develop and test 2-3 new products of the market per annum in its nursery
To enter the European market gradually starting with the three most attractive
countries in year 2 of the project
c. To create a brand image known to all for the quality of our product.
To implement an organic certification system as well as GAP, GMP, GLP, ISO
9001, ISO 14001 and SA 8000 and maintain the quality standard
To gain organic certification annually
d. To create better society and help local communities to improve their lifestyle
To fund the local community NPR 1 million per annum for improving the
infrastructure and education level of Bharghat community school for next 5 years
1.7 Project Area
1.7.1 Location and Accessibility
1.7.1.1 Factory Location
The company is planning to lease 25 hectares of land at Bhardaghat, Nawalparsi in first two
years. From third year onwards, another 25 hectares of land will be leased in Nawalparasi
district itself. It is done due to the fertility of the region, its easy accessibility from
Kathmandu, its proximity to India Boarder and the good security environment. Lease of the
land is reasonable (Rs. 850 per hectare) and water is in abundance. Labor is also plenty and
the villagers are willing to work on a day to day wage basis.
Nawalparasi, lies at 240 km from Kathmandu and takes around 4 hours drive from the capital
city. So, for site inspection by the senior office personnel it is can be reached within a day.
Even the transportation cost of ferrying the packaged oil is low due to its close proximity to
Capital city from which is the main point of dispatching the oil for export.
The area plan is given in annex 1
Himalayan Essential Oil (P) Ltd. 4
1.7.1.2 Head Office location
A flat of 800 sq. ft at Kumaripati, Patan has been finalized for locating the head office of the
company. Kumaripati is now fast becoming a major financial hub for Patan district and
provides easy accessibility to different financial institutions and is also easily recognizable to
potential clients. The rent at the interiors of Kumaripati is lower than similar city hub of
Kathmandu like New Road and Baneshwor area. With fewer problems of strikes and traffic
jams in the area compared to Kathmandu the location is better suited for the company.
1.7.2 Infrastructure and Facilities
1.7.2.1 Factory
The Factory at Nawalparasi is equipped with Distillation plant. The plant has a distillation
Unit of 2400 liter capacity made up of Stainless Steel. The plant covers an area of 15’x12’
and it is supplemented with two storage area, one for raw material storage and another for
essential oil storage. The factory distillation unit also has a small office room for the
distillation unit in-charge and junior agriculturist.
The farm land of 25 hectares is also facilitated with irrigation system. The water for irrigation
is boring water. The factory utilizes company owned tractor to transport raw material from
the farm to the distillation unit.
1.7.2.2 Head Office
The head office covers an area of 800 sq. feet and is equipped with all the necessary office
equipments and furniture and fixtures. The list of assets of the company is given at Table no.
4 of the report.
1.7.3 Support of Local Community
The local community of the area is highly receptive of the project as it will provide them with
additional job opportunity during non farming days. The cultivation of Chamomile is done in
November to January and during this time they will be able to earn additional money by
working in the company’s field.
In present context of bio-trade industry without co-operation of the local community, a
project will not be able to function. Good relationship with the community is a must. The
locals of Bhardaghat has co-operated with the company to establish the cultivation land and
land or distillation unit of the company.
Himalayan Essential Oil (P) Ltd. 5
Chapter 2 :
DESCRIPTION OF ESSENTIAL OIL
The company will offer the following product categories to the European market:
Dried herbs
Essential Oils
2.1 Dried herbs
The company will not actively build up this market, but will service customers if they
demand raw herbs. There is a niche market for this category as well and so it can increase the
market segment for the company. As per the market survey following herbs are expected to
be in demand from customers :
Anise Elder Oregano
Liquorice Fenugreek Parsley
Fennel Ginger Root Peppermint
Basil Angelica Rosemary
Thyme Juniper Sage
Dill
Nettle
The products will not be cultivated by the company but will be collected from Community
Forest Groups (CFGs) and other domestic suppliers as per the demand, sold either as herbs or
as finished products such as tea, herbs, aromatic plant and herbal salt mixed in accordance
with a given recipe. However this is not included while calculating the sales forecast of the
company in financial report as the actual demand for these dried herbs are yet to be
calculated and explored. The demand for these herbs will be taken as extra income for the
company. This segment will be carefully studied for its potential in later years.
2.2 Essential Oils
The company plans to sell essential oils of four herbs in its initial phase which will be
cultivated in the company’s land leased from farmers. However the company is open to ideas
to sell essential oil of other herbs which are found in the wild of Nepal in the Himalayan
region. Various co-operatives and CFGs collect these herbs and sell them to companies who
then export them to International market. But this is only identified as future possibility as the
company needs to install Distillation Unit in the Himalayan Region to explore this potential.
Other potential cultivated as well as wild harvested essential oil that the company can
cultivate in future is given in exhibit.
Essential oil Use
Palmarosa oil Scenting of soap, tobacco flavouring
Chamomile oil Cosmetic, perfumery as a flavouring agent
Citronella oil Perfumery
Lemongrass oil Cosmetic, perfumery
Himalayan Essential Oil (P) Ltd. 6
2.2.1 Lemon Grass Oil
Common Name: Lemongrass
Botanical Name: Cymbopogon flexuosus (D. C.) Stapf.
Source: Cultivated
Introduction / Varity of plant /
Method of extraction / Distilled
organ:
Lemongrass oil is obtained by steam distillation of
partially wilted leaves of Cymbopogon flexuosus (D.C.)
Stapf.
Lemon Grass is a type of grass that remains green throughout the year and grows up to a
meter in length. Once the saplings of lemon grass are cultivated, it can be harvested up to 5
years or more. Lemon grass contains 75% - 85% Citral that gives it the smell of lemon. These
grow in the tropical and sub tropical regions and are thus well suited for the Tarai region. The
origin of this grass is considered to be India.
Physico-chemical Properties
Specific gravity 0.8725 to 0.8965 at 25º C
Optical rotation [-] 1.25º to [-] 5º at 25º C.
Refractive index 1.4850 to 1.4936 at 25º C
Acid number 2 to 10
Ester number 15 to 40
Ester number after acetylation 220 to 260
Solubility Soluble in 0.5 to 1.5 vol. of 80% alcohol
Aldehyde content 70 to 85% (Hydroxylamine hydrochloride method)
For cultivation the seedlings the plant are sown in a row with a gap of 50cm – 60cm between
each seedling. Once the seedlings are sown it must be tended to on a regular basis to avoid
growth of other grass. Water log is the main threat for these plants and should not be allowed
for more than 24 hours or the plant may die. The cost of 1 seedling is around Rs.1 and it
around 40,000 seedlings is required in one hector.
During the first year the plant may be harvested after every 4 months but after the first year
they may be harvested every 3 months for the next 4 years. The first year may yield up to 15
tons per hectare where as the later years may yield up to 30 tons.
To extract the essential oil from the plant the leaves of the plant have to put through a
distillation unit. The oil produced is around 0.3% - 0.5% of the total mass put through the
distillation plant. The general production of 1 hectare of land is around 85kg but this will
largely vary according to the fertility of the land.
The current market price for 1kg of Lemon Grass oil is Rs. 880 to Rs. 1600. For the financial
report we have considered the lower range of the price. Currently there is a large demand for
Lemon grass oil in the European and Indian market and a few in the local market.
Himalayan Essential Oil (P) Ltd. 7
2.2.2 Citronella Oil
Common Name: Citronella (Java Type)
Botanical Name: Cymbopogon winterianus Jowitt.
Source: Cultivated
Introduction / Varity of plant /
Method of extraction / Distilled
organ:
Citronella oil is obtained by steam distillation of
partially wilted leaves of Cymbopogon winterianus
Jowitt.
Citronella is also a type of grass that can grow up to 1.5m in length. It remains green
throughout the year and the leaves of this grass look like that of Sugarcane. These plants
grow in the Tropical and Sub-Tropical regions and are naturally found in the Tarai region of
Nepal.
Physico-chemical Properties
Specific gravity 0.8820 to 0.8875 at 23º C
Optical rotation [-] 2º to [-] 4º at 23º C
Refractive index 1.4750 to 1.4885 at 23º C
Acid number 0.5 to 3.5
Ester number 20 to 40
Ester number after acetylation 250 to 280
Solubility Soluble in 0.8 to 1.5 vol. of 80% alcohol
Total alcohol 80 to 90% (calculated as geraniol)
Aldehyde content 21.5 to 35% (Hydroxylamine hydrochloride
method)
When cultivating these plants seedlings or SLIPS are used for the initial plantation. The Slips
are sown in rows with a gap of 50cm-60cm in a 10cm deep hole. Each row should have a gap
of 50cm-60cm. Water log is the main threat to these plants and the field should be regularly
tended to remove any unwanted grass. Around 40,000 slips are needed for 1 hectare of land
and each slip will cost around Rs.1.
The first harvest may be collected after 4-5months and than at an interval of 2-3months for
the next 4 years. The first year may yield around 15-20 tons per hectare and from the second
year it will yield around 20-25 tons per hectare.
Once harvested the grass should be left in a shade for up to 24 hours before the distillation
process can begin. Production of essential oil can be 100-150 kg per hectare. The current
market price for Citronella oil is Rs. 440- Rs. 950.
Citronella oil is most commonly used in the making of perfumes, washing powders, mosquito
repellent incense, detergents etc. This is the most widely used oil and is in high demand in the
US, European and Indian market.
Himalayan Essential Oil (P) Ltd. 8
2.2.3 Palmarosa
Common Name: Palmarosa
Botanical Name: Cymbopogon martinii stapf var. Motia
Source: Cultivated
Introduction / Varity of plant /
Method of extraction / Distilled
organ:
Palmarosa oil is obtained from freshly cut whole
flowering plant of Cymbopogon martinii stapf var.
Motia.
This is type of grass that can grow up to 3m in height. It remains green throughout the year.
This plant has long spear like leaves and contains Geraniol which gives it a scent like that of
a rose. These plants grow naturally in the western regions of Nepal.
Physico-chemical Properties
Specific gravity 0.8805 to 0.9007 at 25º C
Optical rotation [-] 0.5º to [+] 0.75º at 25º C
Refractive index 1.4750 to 1.4798 at 25º C
Acid number 0.85 to 10.5
Ester number 15 to 48.5
Ester number after acetylation 240 to 305
Solubility Soluble in 1.2 to 3.5 vol. of 70% alcohol
Total alcohol 80 to 96%
Free alcohol 62 to 84% (calculated as geraniol)
The initial cultivation of these plants may be done either by sowing seed or SLIPS. It is better
recommended to use slips as it will save time and effort. Slips can be obtained from
nurseries. Slips need to be sown in rows with a 50cm difference between each slip and also a
50cm gap between rows. These can also however be planted in-between other crops like
Pease. Around 40,000 to 45,000 slips may be required for 1 hectare of land and each slip will
cost around Rs. 1. Irrigation is necessary but waterlog can kill them so it should happen for
more than 24 hours.
The first harvest may be collected after the plant bares flowers which may take around 4
months. For the first year it may be harvested up to 3 times and from the second year it can
be harvested up to 4 times a year. Though the plant may last up to 7 years for the optimum oil
production it is recommended to keep the plant up to 4 years. The plant should be cut around
6-7cm from the ground up.
The harvested leaves should be left in a cool shade for up to 24 hours before they can be put
through the distillation process. Around 50 kg of essential oil can be produces per hectare.
The current market price for Palmarosa oil is Rs. 3000 to Rs 5000.
Palmarosa oil is used in a variety of items such as soap, perfumes, lotions, sweets, biscuits
etc. The current demand for this oil comes mainly from France and other European Nations.
Himalayan Essential Oil (P) Ltd. 9
2.2.4 Chamomile
Common Name: Blue-German Chamomile
Botanical Name: Matricaria chamomilla L.
Source: Cultivated
Introduction / Varity of plant /
Method of extraction / Distilled
organ:
It is obtained from the flowers with stalks of Matricaria
chamomilla L. (syn. Chamomilia recutita Rauschert.)
through steam distillation
Chamomile is a herb and is also the National Flower of Russia. It is a seasonal plant and can
only be grown during the winter seasons and can be harvested only once a year. The initial
cultivation of this plant is done by directly spreading the seeds in the prepared land which are
readily available in the nurseries. It will take approximately 1.5kg of Chamomile seed to
cultivate 1 hectare of land. The seeds are sown during the months of January or December.
The duration for the plant to be ready for harvest is approximately 4 months.
To extract the essential oil the crop is harvested and then taken for the distillation process. 1
hectare of land will produce about 5 kg of Chamomile essential oil. Chamomile is mostly
used for lotions and other cosmetics products. It is mainly imported by the US and European
countries. The current market price of it is around Rs. 40,000 to Rs. 45000.
Himalayan Essential Oil (P) Ltd. 10
Chapter 3 :
MARKET RESEARCH AND ANALYSIS
Essential oils are basic raw materials used mainly for Flavor and Fragrance creation. The
market potential and demand for essential oil is therefore closely related to the Flavor and
Fragrance industry which in turn is largely dependent on the Food, Pharmaceutical and the
FMCG Industry. According to a report by the National Research Development Corporation
(NRDC), the total demand for essential oil is roughly split between the fragrance industry
(60%), flavour industry (20%), and pharmaceutical industry (20%).
World's total annual production of essential oils ranges from 100,000-110,000 tons. Major
producers of essential oils are Brazil, China, USA, Egypt, India, Mexico, Guatemala and
Indonesia. By comparison, Nepal produces only a negligible volume (Gurung, 2009). The
world market for plant based medicines is estimated at US $ 30 billion, of which world trade
of essential oils average over US $ 1.1 billion annually in which principal import markets are
USA (40%), EU (30%) and Japan (7%) occupying over 75% of the total import (CBI, 2007).
Nepal exports about 55 tons of essential oils representing 2% of global trade, positioning the
country 72 in the list of exporters’ category. Similarly, Nepal exports about 29 tons of
essential oils to India only (Gurung, 2009).
According to a study conducted by the global market research firm Frost and Sullivan in
2006, the rise in consumer demand for natural food products, coupled with the associated
need for flavouring compounds from natural sources, have provided a major boost to the
essential oils market. Frost and Sullivan estimated that the market size of Europe and the US
for essential oils would grow to 666 million by 2009, with the actual volume consumed by
the two in 2009 being 105,800 tons.
According to the United Nation’s COMTRADE database, global imports of essential oils
stood at $2 billion in 2005. As listed by them, the top ten import markets in 2005 were the
USA ($391 million), France ($199 million), the UK ($175 million), Japan ($152 million),
Germany ($117 million), Switzerland ($103 million), Ireland ($75 million), China ($65
million), Singapore ($61 million) and Spain ($61 million). The fastest-growing markets,
based on import spending between 2000 and 2005 include Vietnam (14% per annum),
Poland (35%), Nigeria (16%), Turkey (25%), South Africa (14%), Indonesia (14%), Saudi
Arabia (14%), India (19%), Spain (13%), Singapore (35%), Switzerland (14%), and Japan
(13%).
It is quite difficult to get an actual figure of demand of essential oil. However, all the
researches imply that there is high demand and low supply in this industry and the demand is
ever growing. In Nepal, the general trend has been to study and observe the Indian market to
get an idea on the world demand and supply of essential oil. If we look at the past amount of
essential oil exported from Nepal, there is a growth trend. In year 2067 in the first four
months the amount of oil exported from Tribhuvan International Airport at Kathmandu is
641,819 kg whereas in the first month of 2068 B.S. 1,148,115 kg of essential oil has already
Himalayan Essential Oil (P) Ltd. 11
been exported. The total amount of essential oil exported in year 2067 B.S. from Nepal is
27,281,446 kg. So this also shows the opportunity for more companies in Nepal as the supply
is low compared to the world demand which is ever increasing. (The full export detail of
essential oil in Nepal is given at Annex no. 2)
International market trends:
General growth has occurred in the essential oil markets over the past 7‐8 years. While
products for flavourings have been used in food products for many years, there is an
increasing use of essential oils globally with a greater diversity of usage (with an increasing
popularity in aromatherapy) and also a larger quantity used.
Growth in demand for essential oils is being led by the pharmaceutical, cosmetic and
nutrition segments. A trend that favours small producers is the growth in niche markets where
quality is more important than price. In addition, consumer preference has shown an
increasing interest in natural products over synthetic products, which will favour producers of
Nepal which not only promote natural essential oils, but offer Organic and FSC certification
which satisfies “traceability” requirements of buyers.
According to CBI (2007 and 2008), there is limited information on demand for essential oils,
but certain oils have seen an overall decline in demand while others remain high due to
chronically limited production or weather related limitations on crop production. One
important trend is that Organic essential oils continue to have high demand and as such can
result in high price premiums than conventional oils.
Europe:
Essential oils from Nepal are introduced in Europe since the late 1980s. The buyers of
essential oils are Primavera Life (Germany), Vossen (Belgium), S&D Aroma (UK). The
Nepalese essential oils have a niche market as organic certified specialty products until today.
New market entry is hindered because no company and product information is available of
producers and exporters of essential oils from Nepal. Europe’s cosmetic industry is interested
in many different, often very specific, essential oils. Many of the raw materials are not
produced in the EU as they require considerable (expensive) labour input or a tropical
climate. Therefore the EU is highly dependent on supplies from developing countries.
As the demand for organic essential oils is increasing, a potential opportunity for Nepalese
producers is supplying the EU market with organically certified essential oils. Opportunities
exist especially for ingredients with properties which allow cosmetic products to be made
fully organic. There is a high interest in having direct access to producers and exporters of
essential oils from Nepal in Europe.
The marketing partner companies in Europe have a long standing working experience with
their partners in Nepal. At present they report no obstacles of trade in Nepal. They consider
the technical information available to them as very solid.
Himalayan Essential Oil (P) Ltd. 12
India
India, a country which depends on the medicinal and aromatic products from Nepal as
strategic raw materials after own resources in the Himalayas had been depleted, is a
traditional market for Nepalese essential oils. Normally the production of essential oils was
done with companies in India. In India companies say there is high demand. However they
have large domestic supply. Essential oils are mainly used in cosmetics and Ayurveda.
Market is growing. Interesting oils: Rose, Palmarosa, Rosemary, Sandalwood.
Sri Lanka:
As per a research, the companies have a high demand for essential oils, preferably in organic
quality. Few companies are already trading essential oils from Nepal. Most of the products
are relatively easily available from other countries where business relations have already
been developed. However, specialty oils, organic certified oils etc. would doubtlessly have
the chance to enter the market. Potential buyers expect to get a complete offer in terms of
product documentation (MSDS, TDS, certificates, available quantities) followed by samples
and prices.
3.1 Market for Dried Herbs
The company will offer dried herbs to customers in Europe and America. However, this
market will not be actively build up, but will service customers if they have a specific
request. The overall objective is to move into production of oils and extracts in order to add
more value to the product. However, sales of dried herbs can be a door opener to sales of
essential oils.
Dried herbs are demanded in the food, pharmaceutical and cosmetic industry. The market for
herbs is very big. Just within the pharmaceutical industry the import of medicinal and
aromatic plant from European countries amounted to €349 million in 2003.
The partners assess that the primary customers to dried herbs are companies producing
alternative medicine, health food products and delicatessens.
The main criteria influencing the purchasing process are:
Security for delivery
Quality
Adaptation of the product
Price
Competition is highly driven by price, where Chinese and Indian suppliers have a strong
position. The company should focus on other parameters to differentiate themselves from
competitors.
Himalayan Essential Oil (P) Ltd. 13
3.2 Market for Essential Oils
The market for essential oils can be divided into a number of activities as illustrated below.
Most actors within the industry do not engage in all levels of the chain, but specialize in few
activities.
Figure 2 : Structure of the Industry
The plants are cultivated or wild-collected by farmers. The farmers either sell the plants
directly to processing companies or to various intermediaries (exporters, importers,
wholesalers, brokers, traders), who act on behalf of the processing companies.
The processing companies transform the plant material into essential oils. Global production
of essential oils ranges from 100,000 to 110,000 tons and is estimated at US$ 30 billion.
Developing countries command a dominant position as they account for 85 percent of global
production. The main player is China, which alone accommodate for more 50% percent of
the global production. (Source: FAO (2004))
Essential oils are supplied to companies which manufacture various types of end-products
such as medicine and food additives. In the food industry essential oils are used for
flavouring substances. In the perfume industry, essential oils are mainly applied for
fragrances and in the pharmaceutical industry for adding taste or smell.
Many end-product manufacturers do not purchase essential oils directly from the processing
companies, but prefer to go through wholesalers or other intermediaries. The objective is to
avoid the risks of deliveries of low quality essential oils.
The majority of finished products is sold through retail outlets, either mass market (e.g. chain
pharmacies, supermarkets, grocery stores) or specialty (e.g. health food stores, pharmacies),
although direct sales command a significant proportion of the market.
3.2.1 Consumption and Prices
3.2.1.1 Consumption
No figures are available on consumption of essential oils in the EU market, which is mainly
because essential oils are used in various industries - cosmetic industry, food industry as well
as the pharmaceutical industry. However, the majority of essential oils are imported, which
give an indication of the total market size for essential oils.
Cultivation of
herbs/plants
Processing of
Herbs &
plants into essential oils
Retailers &
Consumers
Manufacturers of
end-products
Wholesalers Traders, brokers
Himalayan Essential Oil (P) Ltd. 14
In 2004, imports of essential oils by EU member states amounted to € 501 million, as
illustrated in the figure below. Two thirds of the total imported value of essential oils is
supplied by countries outside the EU, of which 60% is accounted for by developing
countries.
Importing EU
Country
Import
value
In
millions
Leading suppliers
France 123,759 USA (10%), Morocco (8%), Italy (8%), India (7%), China (7%)
UK 117,294 USA (10%), Argentina (18%), France (10%), China(7%), Brazil (5%)
Germany 70,717 France(21%), USA(10%),The Netherlands(9%), China(9%),India(6%)
The
Netherlands
51,827 Brazil (22%), USA (20%), France (7%), India (5%), Spain (4%)
Spain 34,047 France(16%), China(14%), Indonesia(10%), USA(7%), Germany (7%)
Italy 20,185 France (26%), UK(25%), The Netherlands (14%), Germany (7%)
Belgium 16,439 USA (64%), France (15%), Germany (5%), Italy (3%), UK (2%)
Total 501,235 USA (19%), France (10%), China (6%), Brazil (5%), UK (5%),
Argentina 5%), Italy (5%), India (5%)
Source: Eurostat 2004/05
The largest markets for essential oils are France, UK, Germany, The Netherlands, Spain, Italy
and Belgium. France is the leading EU importer of essential oils. France tends to import high-
value items, whereas the UK, Germany and the Netherlands are relatively more involved in
lower-value commodity trade.
From the research conducted by Eurostat it was found that France, UK, Germany, are the
most attractive market in terms of total import value although it has been declining from 2002
to 2004. There has been decline of 14%, 17% and 18% respectively in value of import of
these countries. However, same report shows that the volume of import has increased
indicating that demand is increasing, but prices are decreasing. It was also seen that the
Eastern European countries are also attractive as they have the highest growth both in terms
of import value and volume.
3.2.1.2 Price
The prices on essential oils can fluctuate widely depending on the raw material of the oil. The
price level is influenced by:
Quality factors: Determined by the country of origin, the climate, the crop, the
concentration of the ingredients and the extraction method
Economic factors: Based on supply and demand. The supply depends on the size of the
current crop, the carry-over from previous crops and the existence of synthetic
substitutes.
Himalayan Essential Oil (P) Ltd. 15
3.2.2 Trends & Conclusion
The European market for essential oils is expected to grow in the future, due to the following
trends:
The consumers prefer the use of "natural" ingredients in the composition of a product.
Fashion and the emphasis on maintaining a youthful appearance, bring about a higher
demand for essential oils used in the cosmetic industry.
Some essential oils are available at low prices, which makes it attractive to use these
instead of synthetic products
Over the past decade the use of essential oils in alternative medicines and therapies has
developed considerably, thereby contributing to increased demand for essential oils.
European consumers have an increased interest in a healthy lifestyle including healthy
food. It has a positive impact on the demand for essential oils as it can be used in food
containing less saturated fats, calories, sugars, or salt.
Having control over especially cultivation will become more important as regulations on
how to produce will become stricter. It must be expected that the manufacturers of
finished products will engage more actively in processing and cultivation to make sure
that requirements are met.
The market demand traceability of the raw material due to legislative requirements and
production needs.
Among the customers there is an increasing interest in branding the company as
environmentally and socially responsible. It provides a good opportunity for sales of
organic products.
The European market for essential oils is attractive as the total market size is at least € 501
million. However, market entry barriers are high as a producer of essential oils has to fulfill
strict requirements stipulated in EU law and have organic certification. Furthermore
competition is fierce and the company will only be a small player on the market, which can
result in a weak bargaining power. If the company succeeds in obtaining organic certification
they will gain a stronger position on the market and combined with the positive image of
Nepal and companies’ interest in branding themselves as environmentally and socially
responsible, the partners stand a good chance of entering the market successfully. However,
the entry strategy has to carefully consider as the company has limited resources.
Himalayan Essential Oil (P) Ltd. 16
3.3 EXTERNAL ANALYSIS
The following PESTEL Analysis has been carried out on external environment that may
influence the company.
3.3.1 Political Environment
Nepal has gone through a historic change in political system after the end of the decade long
armed conflict. The new constitution of the country is being drafted. However, the delay in
constitution drafting and the increment in lawlessness in the country have taken its toll in the
smooth functioning of industries. The impacts of strikes and bandhs called by various parties
and trade unions have affected the profitability of the companies in Nepal.
In Nepal the essential oil can be categorised as cultivated and wild harvested. In context of
cultivated oil, Tarai is considered to be best location due to its climatic condition,
accessibility and its fertile land. However, the security situation of the region is highly
volatile. Kidnapping and extortions in the region is quite rampant. Communal disharmony is
been created by politicians for their own personal gain.
In Sarlahi, there have been cases when the existing companies had to face loss as during the
time of harvest, some unknown group has burned the herbs. At present three of the major
essential oil companies are based in this region. Similarly, due to misunderstanding with local
communities, the companies might not be able to harvest the plants in right time which will
affect the quality of the oil.
So, until there is political stability in the country and the Government solves this lawlessness
problem the business environment does not seem favourable. So a company first has to
understand the law and order of the region before venturing out on their business. The choice
of site should be done by looking at the security situation and the company should have
amicable relationship with the local community.
3.3.2 Economic Environment
The economic environment of Nepal is not favourable for high investment industry. The
official inflation rate is just 10.51%. However, the price of local commodities has increased
by more than 35% while compared to prices of last year. The GDP for the fiscal year 2010
was recorded as 5.6% (Rs. 39.09 billion) compared to 3.7% in 2008/09. The unemployment
rate of the country in 2010 is also at high 46%. The trade deficit of the country is also
increasing and at present it is at 239.14 billion.
Moreover, this modest economic situation of the country is further made worse by the
liquidity crunch our financial institutions are facing. Since 2008, the country has been faced
with liquidity crisis and to open an industry or to expand an industry, companies are finding it
hard to gain loan from banks or other financial institutions. Even if they are able to get loan
amount, the rate of interest has increased from average of 10% in 2009 to 18% in 2011.
Himalayan Essential Oil (P) Ltd. 17
Furthermore, in recent years, the boom in realty sector has increased the land value across the
country. In some cases the land value has even increased by 300 times. Though the realty
business is now in downward trend, the price of the land has not shown decreasing trend.
This has further increased the capital requirement of the company as now the company has to
buy land at higher price.
However in the positive side, the country has formally adopted economic liberalisation and
open door policy under WTO accord. This has created space for the essential oil industry to
compete in International market. Data shows that earnings from export of essential oil is
showing growth pattern. Though the contribution of essential oil industry to our economy is
negligible, it has huge potential to generate foreign currency for Nepal which is currently
facing trade deficit of few billion Nepalese rupees.
3.3.3 Social Environment
Due to better job opportunities abroad, more and more people are opting for foreign
employment. The manpower drain of the country is at high rate. As per the official figure 50
people per day are leaving country to find jobs abroad. In reality the figure is much higher.
So, companies are finding it difficult to find skilled manpower.
In context of labour available for cultivation and farming in Tarai region, the labour is mostly
women as the men of the houses have gone to neighbouring country India or to Middle East
countries. In case of technical manpower as well, it is very difficult to find skilled person. So,
the company has to invest certain amount for the training and capacity building of its
employees. In present context various NGOs and INGOs like DANIDA, GTZ, ANSAB,
SNV, etc. are providing such trainings either free or at minimum cost.
The trend of creating obstructions in industries by local community is also rampant in Nepal.
So, a company should have good rapport with the local community. The use of CSR tools to
benefit the local community can solve this problem.
3.3.4 Technological Environment
The technology used in essential oil industry is still manually operated. The harvesting is
done manually, distillation process used is steam distillation and packaging is also done
manually.
The steam distillation uses distillation unit (DU) which is made either of stainless steel (S/S)
or mild steel (M/S). Use of S/S DU will generate higher quality essential oil whereas further
purification is required if distillation is done in M/S DU. The cost of S/S is higher than M/S
by approximately 90%. For example the cost of 2000 litre of DU made of S/S costs Rs. 7.5
million whereas that of M/S costs Rs. 4 million. The distillation units can be bought either
from local market or Indian market. The comparison between S/S DU and M/S DU is given
at annex 3.
In some part of the world solvent extraction method is used to extract essential oil. Using this
method the time of distillation can be reduced (distillation of Chamomile by using steam
Himalayan Essential Oil (P) Ltd. 18
distillation requires 7-8 hours whereas using solvent extraction requires 2 hours). However
the quality of the essential oil will be reduced as chemicals will be used in this process.
The tests required to be done to check the quality of the oil is done by various laboratories in
Nepal and not by the company itself. The list of tests and the laboratories are given in Annex
3.3.5 Environmental Analysis
In essential oil industry, organic certification is very essential to garner market. So a site
should be chosen such that pesticides are not used in the area. Even if the company is not
using pesticides if neighbouring land owner is using it then the pesticide will seep into the
company’s land as well. So, land near or inside community forest is considered to be
optimum.
Usually the cultivation of essential oil is done in Tarai region due to various benefits of the
site. However, many areas in Tarai region have been known to have high arsenic level. So
before plantation, arsenic level of the land has to be checked.
The main fuel used in the boiler of distillation unit is firewood. Initially 150kg of firewood is
required per vessel. For one hectare of land 20-30 vessels has to be distilled. So, if only
firewood is used for boiling water then for a land of 25 hectare it will consume approximately
93,750 kg of firewood is required. This will create great environmental hazard as it will
encourage deforestation. So, in order to avoid such situations, company will use the biomass
in combination with firewood. The herbs after extracting oil will be dried and will be reused
as fuel for the distillation plant. This will reduce the use of firewood to approximately
10000kg per year for 25 hectares of land.
Unlike other agricultural harvest the impact of hailstorm for essential oil herbs like lemon
grass, citronella and Palmarosa is negligible. In case of Chamomile, hailstorm affects the
crop. So, the harvest of this plant should be done before the month of Chaitra (or March) in
order to avoid this risk.
3.3.6 Legal Environment
Few of the Government policies in essential oil industry have been discussed below:
Forest Related Laws
Forest regulation (1995) rule-11 states that the collectors should acquire a license from
District Forest Office (DFO) to collect the forest products from government managed forests.
In the case of Community Forests (CF) or Leasehold Forests (LF) or Buffer Zone
Community Forests (BZCF), the concerned committees have the right to collect herbs by
themselves from their forests or provide the collection permit to any collectors within the
limit preset and approved by the operational plan but the consensus letter of the DFO is
necessary.
The Environment Protection Regulation (1997) is also an important law relating to the
collection of forest products. In accordance with schedule-1 of the Environment Protection
Himalayan Essential Oil (P) Ltd. 19
Regulation (1997), if any collector plans to collect 5-50 tons of forest products other than
timber per year and commercial collection of non-polluting medicinal and aromatic herbs, it
is necessary to prepare an Initial Environmental Examination (IEE) report. In accordance
with schedule-2, it is necessary to prepare an Environmental Impact Assessment (EIA) report
for the collection of over 50 tons of forest products other than timber per year.
The DFO staff or committee/group can issue only release order/permit for the transport of
herbs and are not authorized to issue permits for processed products from any industry. In
annex4, the list of permissions required are given.
Value added tax
According to annex-1 of Value Added Tax (VAT) Act (1996), VAT is not imperative in case
of trade of herbs and aromatic plants and its extracts.
Processing permit
Any individual, community, government or semi-government, non-governmental agency or
institution interested in establishing an enterprise, must undergo IEE or EIA. The Department
of Cottage and Small Industries Board (DCSIB) and the Department of Forest (DOF) reserve
the right to grant approval for the establishment of herbs processing industries. These
approvals apply to all operations that have an investment of total fixed capital exceeding
Rupees one million and process only non-polluting medicinal herbs and aromatic plants
based on the results of the IEE report.
The EIA of commercial and industrial processing of medicinal herbs and aromatic plants,
which emit garbage and pollution, must be approved by the Ministry of Environment,
Science and Technology (MOEST).
Thus, any industry can process medicinal herbs and aromatic plants for the production of
essential oils only after the approval of IEE or EIA on the basis of capital invested, quantity
of herbs and aromatic plants and nature of pollution they will create.
European Market Access Requirements
Legislative requirements
In order to be able to enter the European market for essential oils, the company has to comply
with many legislative requirements. Depending on whether the oils should be used in the
food, cosmetic or pharmaceutical industry different laws apply. Thus, the partners have to
study the following laws carefully.
- General Food Law
- Cosmetics Directive and INCI
- Medicinal Products Directive
- Detergents Regulation
- Biocidal Products Directive
- REACH
The oils have to fulfil strict requirements and the need for documentation is extensive. The
company has to demonstrate that the products meet requirements in EU law. Furthermore, the
Himalayan Essential Oil (P) Ltd. 20
company needs to be able to demonstrate traceability of the product from growing, harvesting
and processing.
To enter the European market, there is also a need for obtaining an organic certification to
demonstrate high quality herbal production combined with conservation of environment by
sustainable harvesting. Furthermore, it would be an advantage if the company implement
GAP, GMP, GLP as well as ISO 9001, ISO 14001 and AS 8000 for social accountability, as
it very often is required by the customers.
3.4 COMPETITOR ANALYSIS
3.4.1 Competitor Identification
Competitors in Nepal
There are nine companies in Nepal currently doing business in essential oil industry. Other
than these nine companies various community forest user groups and co-operatives are
collecting wild herbs and providing them to these companies. Of the nine companies one
company, Herbal Production and Processing Co. Ltd (HPPCL) is Government Corporation
whereas the rest of the eight companies are registered as private limited company. List of
these companies are given below:
- Aarya Aroma, Kamaladi, Kathmandu
- Chaudhary Biosys (Nepal) Pvt Ltd. (CBNL)
- Gorkha Exim Pvt. Ltd.
- Herbs Production and Processing Co. Ltd.
- Himalaya Bio Trade Pvt. Ltd.
- Khaptar Aroma Industries
- Natural Products Industries
- Natural Resource Industries Pvt. Ltd.
- Shambhala Herbal and Aromatic Industry Pvt. Ltd.
- Gyan Herbal Pvt. Ltd
The list of certification and affiliations obtained by the competitors are given in annex 6.
International Competitors
There are hundreds of essential oils producers active in the International market and
competition is expected to be fierce. The main suppliers to the European market for essential
oils are processing companies located in USA, France (export to other European countries),
China, Brazil and India.
Examples of European producers of essential oils are:
- L'Herbier du Diois, France
- Sanoflore, France
- Citroflor, Italy
- Vioryl, Greece
- Herbes del Moli, Spain
- Norfol Essential oils, UK
Himalayan Essential Oil (P) Ltd. 21
Some of the producers not only produce essential oils, but are also active as importers of
essential oils. It means that these companies are both competitors and potential customers.
3.4.2 Competitor Analysis
Most of the companies in Nepal are concentrating their business in wild harvested essential
oil. This limits the company to collect more herbs as they have to follow sustainable
harvesting amount. In case of HEOPL it will concentrate on high yielding cultivated herbs
like Chamomile, Lemon Grass, Palmarosa and Citronella. However some of the companies
like CBNL and Shambhala Herbal and Aromatic Industry are also extracting oil from same
herbs and plants.
Below a brief analysis of the competitors are given:
Table 3.1: Competitor Analysis
Competitors Strength Weakness
Government
owned
Subsidised by Government
Land acquisition more than other
companies as initial entrant in the industry
Own Laboratory available for various tests
Manufactures products from essential oil
itself eg. sancho
High demand for its products
High skilled manpower
Political appointments at
management level
Lack of career path for
employees
Personal interest dominant over
industry interest
Lack of strategic planning
Private owned
having
alliance
with NGOs
and INGOs
Receives trainings on capacity building
from organisations like GTZ, DANIDA,
SNV and ANSAB
Organic certification taken so easy
accessibility in international market
Funding provided by organisations to build
or improve infrastructure. So less operating
cost
Knowledge of new technology and
cultivation method
More interested in collecting
funds than actually performing
in the essential oil industry.
Most of the funds used by the
upper management for personal
benefit
High level of corruption
Private owned
companies
without
alliances
High work effort to recover self investment
Company run on pure business motive
Lack of skilled manpower
High investment required other
than other competitors
Quality check not performed as
per standard
Indian and
Chinese
companies
The companies are in the business for
many years
They have already established strong
customer links
The land available for harvesting is in
abundance and labour cost is lower
The products of these countries
are not trusted for being organic
in nature
The use of pesticides and
insecticides are rampant in the
countries making it difficult to
make it organically friendly
Himalayan Essential Oil (P) Ltd. 22
3.4.2 Michael Porter’s Five Forces Model
3.4.2.1 Threat of new entrant
This is a big potential threat for the industry. Government has prioritised this industry for
increasing export earnings. The companies are not required to pay VAT amount and the
investment for entry is also not huge.
However, due to non compliance of law and order in the country, people are not interested to
enter the business due to security risk. If the political situation improves more players in this
industry is will enter. On the other hand, since the demand of the essential oils worldwide is
increasing and the supply is lower than the present demand, the new entrant will not create
any threat to the company for many years.
3.4.2.2 Bargaining Power of Customer
The bargaining power of customer is not a threat to the company if it follows the quality
requirement of the customers. The customers in this industry do not bargain in price. Instead
the quality aspect is important to the clients (eg. Organic certification, FSC certification,
concentration of oil, etc).
3.4.2.3 Bargaining Power of Supplier
Since the company is cultivating its own herbs and plants, this aspect is not important for the
essential oil product of the company.
3.4.2.4 Threat of Substitutes
Essential oils can be substituted by synthetic substitutes, which are a serious competitor to
essential oils, as they often can be acquired at lower prices. There are also many competitors
within this field. However, with the demand for natural oil increasing as per the present
international trend, the threat of substitutes will not impact the industry.
3.4.2.5 Rivalry among competitors
Rivalry among the competitors is not intense and there is healthy environment for conducting
business. The nine companies are working in harmony and few are getting similar training
programmes from same organisations as well which has created an alliance among the
competitors.
Usually if a company is able to establish good working relation with foreign clients then there
will be high demand and the company alone might not be able to provide the required amount
of essential oil. In such scenario, the company will buy the oil from other competing
companies as well.
At present the world demand of essential oil is increasing and Nepal is slowly starting to
create a place for itself in the international market. Now Nepal is exporting 55 tons of
essential oil which is still less when compared to the demand. So since there is more demand
than supply, the rivalry among competitors is not strong.
Himalayan Essential Oil (P) Ltd. 23
3.5 SWOT ANALYSIS
3.5.1 SWOT Analysis of Nepal
Strengths Weaknesses
Its unique topography and high level of
biodiversity
High labour requirement, low financial
return
High degree of seasonality
It has established capacity and reputation
for producing essential oil
Initial capital requirement in infrastructure may
exceed producers’ expectations.
Unavailability of financing
Still at many places limited to raw material
collection whereas high return is only in
essential oil.
Remote production centers vulnerable to poor
transportation
Need for strict quality control
Close relationship with buyers often exceeds
the capacity of producers or exporters
Opportunities Threats
Essential oil is used in plethora of
products by variety of industries (eg. Food
cosmetics, perfumes) which diversifies
risk exposure
Buyers tend to prefer close and long-term
relationships with suppliers
Global trade is notoriously non-transparent
and heavily driven by reputations. Identifying
and cultivating new buyers can be difficult
Certain certifications (eg. Organic, FSC, fair
trade) may be prerequisite for accessing the
global market. Often the certifications add
little value and increase the cost substantially.
3.5.2 SWOT Analysis of HEOPL
Strengths Weaknesses
100% organic cultivation method
Close co-operation with community for
cultivation of essential oils
Under CSR, the funding for quality
education will increase its goodwill and
help in promotional activities
Low cost structure
Lack of necessary certifications
Limited experience with International
market
Limited resources
Affiliations with various organizations yet to
be established
Opportunities Threats
Nepal has one of the biggest available
sources of herbs in the world.
Focus on growth in niche markets, where
quality is more important than price
To develop new products based on
herbs/plants
Nepalese government is proactive in
promoting the industry
Competitions from low cost developing
countries like China and India
Availability of synthetic substitutes
High entry barriers on European market
The Nepalese industry is underdeveloped
Himalayan Essential Oil (P) Ltd. 24
There is a window of opportunity for production of herbal based products in Nepal, as the
country has a rich biodiversity. It implies that the company can get access to a wide variety of
herbs. However, one of challenges is that the industry is not very developed as the growing
and harvesting methods as well as processing methods are ineffective. Furthermore, the
company is yet to start production and will require minimum of one year to get organic
certification which is necessary to obtain access to International market.
The European market for essential oils is attractive as the market size is over € 501 million.
Furthermore there is an interest among customers and consumers in new products. One of the
strengths of the company is product development combined with low cost structure, which
will give them an advantage on the market. However, the company has limited experience in
marketing and sales in the European market and combined with strong competition from low
cost developing countries, it can be difficult for them to enter the European market. The
company has to develop a strategy and business concept which enables them to differentiate
themselves from competitors as competition is fierce.
Himalayan Essential Oil (P) Ltd. 25
Chapter 4 :
PRODUCTION AND OPERATIONAL PLAN
4.1 PRODUCTION PROCESS
The basic methods of extraction of essential oil are distillation, enfleurage, maceration,
solvent extraction, expression and supercritical fluid extraction. However, steam distillation
has always been the most widely practiced methods of essential oil extraction. Distillation
basically is the separation of components of a mixture of two or more liquids by virtue of
differences in their vapor pressure.
The company has chosen steam distillation technology for extracting essential oils by using
2400 liters capacity Stainless Steel Distillation unit extraction process involves steam
distillation technology.
In this process, the distillate separates out as a layer of oil, distinct from a layer of water. But,
if water and various components of essential oil mixture are miscible, it becomes necessary to
use rectification and fractionation techniques.
In order to isolate essential oil, steam is subjected into aromatic materials. Under the
influence of steam, essential oil is freed from the glands of plant tissue. Both water and
essential oil vaporized, condensed by an adjacent condenser and drained into a receptacle,
where oil separates automatically above and below water, depending upon its density. Steam
is continuously charged until all the essential oil is vaporized and the distillate formed in the
condenser is essentially pure water.
In the second process, involving rectification and fractionation, the mixture of essential oil
produced by the foregoing method is isolated and purified. The process involves a gradual
increase in the temperature of the mixture, where more volatile compounds in the oil distil
first and less volatile compounds later.
4.2.1 REQUIREMENT FOR PRODUCTION
4.2.1.1 Equipments and Accessories
The details of the Distillation unit and other accessories are given below:
S.N. ITEMS NO. DESCRIPTION
1. Steam distillation Unit
S/S
1 Made of Stainless Steel. Capacity 2400 litres
a Vessel 1 Made of 4 mm thick insulated by glass wool
b Condenser 1 Shell and tube type
c Receiver 1 Made of 2mm thick
d Steam Pipe Line 1 With valves, fittings and vapour line
e Boiler 1 Husk/Wood fired, Capacity 600 kg/hour
2 Weighing balance 2 One small for weighing the oils and another big one
3 Containers 263 HDPE with 20 kg capacity
Himalayan Essential Oil (P) Ltd. 26
4.2.1.2 Building and store
Three separate shed are built in the distillation plant. Shed 1 for raw material storage has area
of 600 sq. ft. It will be simple wood and hay structure. Shed 2 for Distillation unit covers 180
sq. ft and shed 3 having storage room for essential oil and a small office unit covers 120 sq. ft
area. These sheds will be made out of timber, stone, mud and roofing with stainless steel.
4.2.1.3 Other Infrastructure
Regular supply of water is essential for the distillation unit. The water supply system will be
managed along with drainage facilities. The company is not using any chemicals during the
extraction process, so there is less likely to be harmful effect to the environment.
4.2.1.4 Raw Materials
The raw material for the essential oil is cultivated in the company’s 25 hectares of land. As
per the season of the herbs, harvesting will be done. The initial cleaning of the raw materials
will be done by the collectors at the site itself.
4.2.1.5 Transportation, Storage and Packaging
The collectors will load the raw materials in tractor of the company and transport them to the
distillation unit plant. Then the raw material will be stored at the plant and the extraction of
oil is done from the next day.
Most essential oil deteriorates through oxidation and polymerization upon prolonged exposure
to air and light. Therefore, producers should store essential oil in closed, completely filled
containers and perfumers. In particular, essential oil should be stored in sealed bottles in dark
and cool cellars. Without such precaution essences become less intense, grow darker and more
viscous, and develop a bleaching effect and eventually changes into a brown, odorless resin.
Packaging and labeling materials are the other needed materials which are essential for the
process. HDPE food grade container will be used as packaging materials. The packaging will
be done in 20 kg capacity container or as per the demand of the buyers. Since the market of
the packaging materials is far from the production area or/ only available in India, they has to
be procured initially. Each container with essential oil will be labeled. The label will include
the information about the company, name of items, net content, weight of the container, raw
materials information etc. A labeling sticker will be prepared for each container.
4.2.1.7 Fuel/ Energy
Firewood is the main source of fuel for steaming the raw materials. Firewood will be
managed in community forest areas and will be harvested according to the operational plan of
the forests by community forest users. Dried firewood is brought at the factory site. A fuel
efficient stove will be used to reduce the quantity of firewood consumption. The cooperative
will consume roughly 10,000 kg of firewood a year. While the firewood can be purchased
from nearby communities, the inventory of the firewood will be kept optimum leaping
attention to the harvesting season of it and operation of the unit. A minimum of one month's
inventory will be kept as a security stock. In the season of peak agricultural activities, the
cooperative will maintain enough inventories to ensure smooth operations during and post
season.
Himalayan Essential Oil (P) Ltd. 27
4.2.1 PRODUCTION PROCESS
The overall distillation process of the selected essential oils is described as below:
1. Harvesting raw materials: The Collectors use sickle or knife to cut the leaves and
flower of Lemon grass, Citronella, Palmarosa and Chamomile.
2. Transportation of the raw materials : The collectors do the preliminary cleaning
activities in the raw materials collection areas. Then the collected raw materials are placed in
tractor and transported to the distillation unit sites.
3. Storage of raw materials: The collected raw materials are stored in storage room next
to distillation unit.
4. Cleaning and grading the raw materials : The distillation unit most often has to
clean the raw materials again. Cleaned raw materials are graded to produce high quality
essential oils.
5. Weighing and putting into vessel: The raw materials are weighed and put into the
distillation apparatus evenly with several layers to avoid channelization of steam.
6. Steam distillation: Water is filled into the bottom chamber of the distillation unit. Cold
water circulation is maintained around the condenser of the unit. Firewood is burnt to heat the
water in the chamber (boiler in the distillation unit with separate boiler). The steam of the water
takes up the essential oil of raw materials into the condenser pipe. In condenser, the steam turns
into the liquid form. The raw materials are distilled with low pressure and relatively dry steam
for few hours. For Lemon grass, Citronella and Palmarosa it requires 3 hours for distillation and
hence two vessels n a day can be achieved. For Chamomile it requires 7-8 hours of distillation.
7. Collection in a filter jar: The condenser pipe takes the water and essential oils into the
separating jar (oil separator) where the mixture of oil and water are collected.
8. Separation of essential oil: If the specific gravity of the essential oil is lower than
water, the oil stays up. While if the specific gravity of oil is higher than that of water, the oils
stays below water. With the help of separating jar, the oil is obtained.
9. Filtration of essential oils: The essential oil has some water and particles with it. The
water and unwanted particles are removed with the help of the filter paper.
10. Quality control, packaging, and storage: The quality of essential oil is checked,
verified and packaged in aluminum/epoxy-coated metal/HDPE containers. The containers are
stored in a safe place.
11. Distribution and preparation of the required export permit : The oil is distributed to
Domestic and international market. The Indian and domestic consumers will collect the oil
directly from our storage area. Whereas for International buyers, the company will do the
packaging and handover the oil to DHL courier service. The cost of courier will be borne by
the buyers. The company has to prepare a list of documents to export the oil as well.
Himalayan Essential Oil (P) Ltd. 28
Figure : Flow chart of the essential oil production process
Cultivation of Lemon grass, Citronella,
Palmarosa and Chamomile as per the season
Harvesting of the
raw materials
Transportation of the
raw materials
Storage of
raw materials
Cleaning and grading of
raw materials
Weighing and putting
into vessel
Steam distillation
Collection in a
filter jar
Separation of oil
from water
Quality control
and packaging
Transportation
and marketing
Himalayan Essential Oil (P) Ltd. 29
4.2 LOCATION
4.2.1 Factory Location
The company is planning to lease 25 hectares of land at Bhardaghat, Nawalparsi in first two
years. From third year onwards, another 25 hectares of land will be leased in Nawalparasi
district itself. It is done due to the fertility of the region, easy accessibility from Kathmandu,
its proximity to India Boarder and the good security environment. Lease of the land is
reasonable (Rs. 850 per hectare) and water is in abundance. Labor is also plenty and the
villagers are willing to work on a day to day wage basis.
Nawalparasi, lies at 240 km from Kathmandu and takes around 4 -6 hours drive from the
capital city. So, for site inspection by the senior office personnel it is can be reached within a
day. Even the transportation cost of ferrying the packaged oil is low due to its close proximity
to Capital city from which is the main point of dispatching the oil for export.
The area plan is given in annex 1
4.2.2 Head Office location
A flat of 800 sq. ft at Kumaripati, Patan has been finalized for locating the head office of the
company. Kumaripati is now fast becoming a major financial hub for Patan district and
provides easy accessibility to different financial institutions and is also easily recognizable to
potential clients. The rent at the interiors of Kumaripati is lower than similar city hub of
Kathmandu like New Road and Baneshwor area. With fewer problems of strikes and traffic
jams in the area compared to Kathmandu the location is better suited for the company.
4.3 LAYOUT DESIGN
4.3.1 Office Layout
Himalayan Essential Oil (P) Ltd. 30
The head office of the company has been designed keeping in mind the efficiency and
functionality. The office opens up to reception area which combines as the waiting area as
well. The location of the Managing director’s office is placed such that the MD can see the
overall activity of the office from his room. The other employees have been given cubicles of
their own. The office also has a meeting room which can be used if a employee has to give
presentations regarding their department to other colleagues.
4.3.2 Plant Layout
The distillation plant will be strategically placed by keeping in mind its accessibility to the
motor-able road. The raw materials will be transported to the plant in tractor and the finished
goods will be transported to Kathmandu by pick-up van.
Second, if any area of the land is found to have lower yield by the agriculturists, then the
plant will be located in that area.
Figure: Roof Plan of the Plant
The above figure shows the basic layout of the plant setup. The first shed is 40’x 15’ and is
divided into two area; one for firewood storage and another for raw materials storage. The
second shed houses distillation unit. Its dimension is 12’ x 15’. And the third shed (15’x10’)
is again divided into two spaces; the first area is the office area for distillation unit supervisor,
the junior agriculturist, and two helpers. The room opens into a storage area where the
finished essential oil is stored. This room has only ventilation and no large windows so that
threat of theft is avoided as well as acts as a protection from direct sunlight.
4.4 CAPACITY DESIGN
The capacity of the company and its plant is selected based on various factors:
Capital requirement
Availability of land
Availability of Skilled manpower
Market opportunity
Himalayan Essential Oil (P) Ltd. 31
The capacity of the distillation plant is based on the requirement of the process. A distillation
unit of 2400 liters capacity is optimal for extracting oil of 25 hectares of land, so one
distillation unit is enough for the company. In the third year the company will again purchase
another distillation unit and additional 25 hectares of land will be leased.
The table below gives the capacity of the Distillation plant :
Item Unit Quantity/year
(Year 1 & 2)
Quantity/year
(Year 3,4 &5)
Lemon Grass Oil kg 1700 3400
Citronella Oil kg 2500 5000
Palmarosa Oil kg 1120 2240
Chamomile Oil kg 50 100
Total essential oil Kg 5370 10740
Total land used Hectare 25 50
4.5 INVENTORY MANAGEMENT
Initially the inventory management for the company will be manual as there is not much
inventory.
For raw material:
The moment raw material is brought to the distillation plant, distillation process will start.
Raw materials will be stored for maximum of 5 days. For Lemon Grass it is better to store the
raw material for a day before extraction process.
Firewood
Since firewood is the major source of fuel for distillation unit its inventory has to be kept for
a month. Though wood is available from nearby community forest, it is better to have stock
of a month. During distillation time stock of approx. 3000kg of wood has to be stored.
Storage containers
The storage containers are not locally available and have to be imported from Indian Market.
A year’s stock will be kept in advance. The empty storage containers will be stored and
manual inventory will be kept. For present capacity, approx 260 containers of 20kg capacity
are required.
Essential Oil
Essential oil is packaged and labeled in 20kg HDPE containers and stored in a cool area
where there is no direct sunlight. The essential oil extracted will be stored in the distillation
Unit for 15 days and then will collectively be transported to Kathmandu Head office where
after carrying out all the required documents and test, it will be either sold to the domestic
buyers, Indian buyers or exported to International market.
Himalayan Essential Oil (P) Ltd. 32
4.6 SCHEDULING PLAN
The schedule of cultivation, harvest and distillation is given as below:
Item Lemon Grass Citronella Palmarosa Chamomile
Initial cultivation
time
June - August June - August June - August November to
January
Weeding and
maintaining
4 months 4 months 4 months 6 months
Time of harvest October –
December
October –
December
October –
December
May - July
Distillation hour 3 hours 3 hours 3 hours 7-8 hours
No. of distillation
days for one lot of
harvest
11 days 16 days 7 days N/A
Employee at head office will work for 8 hours day from 9:30am to 5:30 pm. There is no need
to prepare shifts. At site, the labours will work from 7am to 11 am and again from 1 pm to 5
pm.
Here too there is no need to schedule the operation of staffs. However during harvest season,
at the site staff scheduling plan is required for the distillation unit staffs. During that time the
distillation plant will start at 4 am till 12 noon and again from 1pm to 9 pm. Two shifts of
staff will be present. Each shift will have:
Distillation in-charge/assistant : 1
Helpers : 2
4.7 QUALITY CONTROL
The entire production process from seeding, cultivation, harvesting and processing will in the
long run be performed in accordance with standards and requirements of organic production.
It is pivotal for the company to obtain organic certification if it is going to enter the European
market successfully. There will not be any chemical used in the processing procedure. The
essential oils thus produced are non-toxic, non-irritant and non-sensitizing to skin. However,
care should be taken to ensure that these oils would not contact with eyes, mouth and groin
areas.
Quality control of essential is very crucial. To ensure it, the company will make a system of
quality checks at various stages of oil extraction. Some of them are:
Raw materials will be well stored.
Foreign materials will be removed from the raw materials both at the site as well as at
the distillation unit. For this required training for the staffs will be given.
The temperature will be maintained constant throughout the extraction process.
Himalayan Essential Oil (P) Ltd. 33
The amount of water present in the essential oils will be separated up to its purity.
The oils will be filtered thoroughly ensuring no foreign particles other than oils
remain in it.
Each item of the oils will be packaged in separate container to be sure that they would
not intermix with each other.
Essential oils will be stored in sealed containers in dark and cool warehouse. Most
essential oil deteriorates through oxidation and polymerization upon prolonged
exposure to air and light. Without such precaution essences become less intense, grow
darker and more viscous, develop a bleaching effect and eventually changes into a
brown, odorless resin.
The manager of the processing unit will supervise all these handling procedures. Prior to
marketing, the essential oils items will be laboratory analyzed for its specification. They will
be sent to the authorized laboratory as Natural Products Research Laboratory under
Department of Plant Resources or/ laboratory of Herbs Production and Processing Company
Limited. Organo-leptic properties, physico chemical properties and gas liquid
chromatography (GLC) analysis will be performed by this laboratory.
There is a risk of lack of quality control. The raw materials quality can degrade with the over
harvesting activities which in turn, decreases the quality level of its products. The quality
control of the finished products also depends on the operation activities the unit. The skill of
the unit workforce can influence the quality level of essential oils. There is a high risk of
inconsistency in supply of quality raw materials and production of high quality products.
Once the products lose quality consistency, the market will hardly offer the good price.
Moreover, any improvement in quality of products, service can take long tile to improve its
image in the market.
So, the company will try to control its quality of products and service. It will differentiate the
price rate for different qualities of raw materials and offer good prices and other services for
high quality materials. The production process will be regulated and systematized to produce
consistency in essential oil production. The final products will be checked and proper
measures will be devised. It will also improve its service quality to raw material suppliers and
target customers, or its stakeholders.
In order to give assurance to its potential customers, the company will obtain organic and
FSC certification as well as affiliation of GAP, GMP, GLP, ISO 9001, ISO 14001 and SA
8000 and maintain the quality standard
4.8 DISTRIBUTION PLAN
The final essential oil is first packaged at site storage area and later transported to Kathmandu
head office. After taking all the required tests to verify its concentration and quality, the
essential oil is ready to be distributed. The list of tests and the laboratories to be referred are
given in Annex 4.
Himalayan Essential Oil (P) Ltd. 34
The distribution of the essential oil is done to four different customer base viz. domestic
wholesalers, Indian Wholesalers, Foreign Agents, and Direct Customers.
Packaged and labeled essential oil after conducting
all the
required tests & documents prepared
Domestic
Wholesalers
Indian
Wholesalers
Foreign
Agents
Direct Customer
If the customers are from abroad then various documents for export has to be prepared. Some
of the documents required are given in Annex : 5, Table No. A5.2
4.9 MAINTENANCE PLAN
No maintenance plan is required to be prepared for this industry. Just the regular maintenance
of office and plant is required. The thatched room shed for raw materials storage has to be
changed in yearly basis so that there is no leakage of water. The distillation unit and
especially its boiler have to be regularly cleaned using water.
Himalayan Essential Oil (P) Ltd. 35
Chapter 5 :
MARKETING PLAN AND STRATEGIES
5.1 MARKETING SEGMENTS
5.1.1 Overall market
5.1.1.1 Concerned Industries
According to a report by the National Research Development Corporation (NRDC), the
worldwide total demand for essential oil is roughly split between the fragrance industry
(60%), flavour industry (20%), and pharmaceutical industry (20%).
The market of essential oil as per different industries is given below:
Sector Segment
Cosmetic industry Soap and detergent
Perfume
Cosmetics
Food and flavor industry Tobacco
Pharmaceutical industry Aromatherapy
Homeopathy
The market within cosmetics is growing because consumers are calling for healthier and
more natural products. The trend is that consumers prefer 'therapeutic' products. This has led
to increased use of new, active ingredients, including natural products with defined
constituents and specific biological effect. The oils are used in perfumery, soaps etc.
The food industry has increased its usage of essential oils over the past few years and this
appears to be the most promising sector for demand growth. The main essential oils used are
citrus fruit, mint and clove. New food and beverage products generate strong flavour demand.
This segment has to be looked into future as only Tobacco industry can be catered with
present list of essential oil produced by the company.
Within the pharmaceutical industry there is a growing interest in a multiple of different
essential oils and extracts from plants and seed, most of them of tropical origin. Western
consumers seek an alternative or complement to pharmaceutical drugs and modern healthcare
resulting in a growing demand for "natural" medicine and herbal remedies.
Today, 70% of the world's population relies on some form of alternative medicine, a global
industry that generates over $100 billion annually. Bio-business based on plant-derived
products is speculated to grow to five trillion dollars by the year 2050 (source WHO). Most
of this demand will be driven by alternative medicine and personal care products, which
consumers increasingly demand by naturally derived, as well as organically grown and
processed, socially responsible, and fairly traded.
Himalayan Essential Oil (P) Ltd. 36
5.1.1.2 Geographical Region
The market segment of essential oil is as per Geographical region is given below:
Domestic Market
This includes wholesalers of Nepal as well as other competing companies. Usually
established companies get higher demand of essential oil which they are unable to meet. So to
meet their demand, they collect essential oil from other producers.
Other domestic wholesalers are also present who directly collect the essential oil and export
them either India or international market.
Indian Market
Indian market for essential market is huge. It is mainly due to demand for these oils in
aromatherapy as well as in Ayurveda. Nepal exports about 55 tons of essential oils annually
of which it exports about 29 tons of essential oils to India only.
Europe
Europe is one of the main exporters of essential oil. It imports 30% of the Total World
imports. Some of the major players in essential oil import in Europe are given below :
Importing EU
Country
Import
value
Leading suppliers
France 123,759 USA (10%), Morocco (8%), Italy (8%), India (7%), China (7%)
UK 117,294 USA (10%), Argentina (18%), France (10%), China(7%), Brazil (5%)
Germany 70,717 France(21%), USA(10%),The Netherlands(9%), China(9%),India(6%)
The
Netherlands
51,827 Brazil (22%), USA (20%), France (7%), India (5%), Spain (4%)
Spain 34,047 France(16%), China(14%), Indonesia(10%), USA(7%), Germany (7%)
Italy 20,185 France (26%), UK(25%), The Netherlands (14%), Germany (7%)
Belgium 16,439 USA (64%), France (15%), Germany (5%), Italy (3%), UK (2%)
Total 501,235 USA (19%), France (10%), China (6%), Brazil (5%), UK (5%),
Argentina 5%), Italy (5%), India (5%)
Source: Euro Stat; The import value is Euro million
United States of America
USA imports 40% of the world essential oil. The essential oil in USA is mostly used in Food
and Flavour industry and Fragrance industry. Since most of the companies in Nepal are
affiliated to Europe based organizations, the market potential of USA is not advantageously
explored.
Japan
Japan is the third largest importer in essential oil after USA and Europe. It imports about 7%
of the world’s import of essential oil.
Himalayan Essential Oil (P) Ltd. 37
5.1.2 Target Market (Market Strategy)
Geographical Region
In year 1 of the project, the company will concentrate on Indian and Domestic market to sell
its products. It is easier to gather information and demand in domestic market for the
company. Also, it will be easier to garner partnership with Indian agents in short duration
than foreign agents. The base of relationship between foreign agents and direct customers are
usually decided in various trade fairs. This is both time consuming and requires at least a year
planning. So, the company needs time to develop International market.
From second year onwards, the company will focus on entering French, British and
German market. These countries are the highest importer among European countries and
HEOPL will work on creating strategic partnership with local foreign agents who will
function as a distributor and be responsible for sales to relevant customers.
When the partners have gained a solid foothold on the above markets, the idea is to approach
other European countries and USA. The idea is to identify relevant agents, who will be
responsible for sales and marketing activities on these markets.
The main criteria influencing the purchasing process of the customers in international
markets are:
Effect of the product and the fact that the product that is grown and processed in social
responsible and environmental friendly way
Traceability and organic certification
Security for delivery
Quality & price
Industry
The company will focus on targeting the pharmaceutical industry for Palmarosa and cosmetic
industry for all four herbs viz. Lemon Grass, Citronella, Palmarosa and Chamomile oil
extracts.
For the initial year, the company will focus on cosmetic industry of Nepal. From interviews it
has been found that cosmetic industry of Nepal (herbal soap, body oil, etc.) is using all of the
concerned essential oils. However, they are importing the oil from India due to smooth
supply and availability of variety of materials, as per their requirement.
5.2 MARKETING MIX
As per the marketing strategy of the company, marketing mix has been developed as
discussed below:
5.1.1 Product
The intent of the company is to cater to the increasing demand of essential oil in the world
market. The company will cultivate four different plants i.e. Lemon Grass 2.Chamomile
Himalayan Essential Oil (P) Ltd. 38
3.Citronella 4.Palmarosa, and extract its oil in the distillation plant located in its farm area.
The particular plants have been chosen for cultivation primarily due some basic facts:
They have all been successfully cultivated in Nepal.
Recent demand of these oils are relatively high than other crops in cultivated
essential oil herbs category
The profit margins are reasonable.
They are easy to cultivate.
Less susceptible to diseases.
Less susceptible to natural hazards
Local populations are aware of the plants and know the cultivation process.
Chamomile would be cultivated in higher quantity. While all the three herbs will be planted
in 5 hectares of land each, Chamomile will be planted in 10 hectares of land. This is because,
Chamomile is high revenue earning crop. The market price of Chamomile at present is
between Rs 40000 to Rs 45000 while for other crops the prices are between Rs. 800 to 3000.
Similarly, large quantity of Chamomile herbs gives small amount of essential oil. For
instance, same amount of raw material in one vessel yield only 500 g of Chamomile Oil
whereas the yield can be extracted and the time required to extract one vessel of Distillation
unit is 7-8 hours. However in the case of other three herbs, in one day 7-8 kg of essential oil
can be extracted and time required for distillation of one vessel is just 3 hours. So, if the
company wants to build good relationship with the customers, it should be able to generate at
least 50 kg of Chamomile in a year and for that 10 hectares of land is required.
The product or essential oil will be extracted by following all the standard quality check
requirements as mentioned in previously in operation process. The target of the company will
be to extract high quality oil so that the company is able to charge premium amount.
5.1.2 Pricing:
If one company sets the price significantly below the price of the other companies,
theoretically all the buyers will buy from that company. The advantage in this case is the
greater demand. However, in essential oil industry the disadvantage in this strategy is that the
company might not be able to satisfy such a great demand. On the other hand the other
companies will underbid with even lower prices and so on.
In contrast, a high price can be an indicator for high quality. If the price for the organic
certified essential oils is too low, the buyers won’t trust the producer. Similar prices make it
easier to satisfy a large demand. If one buyer wants to buy a large quantity which cannot be
satisfied by only one company, similar prices make the coordination between the companies
easier.
Hence the company will stick to the current market price of the essential oil and will not
lower the price to attract customers. Instead it will concentrate on increasing the quality of the
product and gaining higher market rate.
Himalayan Essential Oil (P) Ltd. 39
5.1.3 Promotion:
Promotion is the communication link between sellers and buyers. It purposes to influence,
inform or convince a potential buyer’s purchasing decision. Various promotional tools are
identified by the company. Some of them are discussed below:
5.1.3.1 Promotional materials / Brochures:
Brochures create credibility, because consumers expect a “real” company to have printed
sales literature. Especially at a trade fair, where many customers have only limited time,
brochures are a good way for them to save their time. They can take the material home and
read at their leisure.
5.1.3.2 Trade fairs:
The company will be participating in mainly two trade fairs in a year. The most important
trade fair is considered to be BioFach. It is yearly conducted at Germany. In this trade fair
most of the importers and exporters of the world are gathered and provides best platform for
the company to develop new clientele.
Another trade fair conducted by ifeat (International Federation of Essential Oil Association)
is also important. This trade fair is conducted in rotation basis in different countries. For
example, Boston, Shanghai and India has hosted this exhibition in the last three years.
Though the cost of exhibitions is high it is a good investment for the company. The benefits
of participating in these trade fairs
5.1.3.3 Direct mail / Personal visits:
Direct mail (or advertising mail) will be used by the company to delivery advertising material
via postal mail. This will address the consumer directly. A targeted direct mail campaign has
been termed very effective in this industry.
Invitations will also be forwarded to potential clients before dates of trade fairs which will
invite them to visit the booth of the company. In trade fairs thousands of buyers and sellers
will be present and it will be difficult to stand out in such a huge crowd. So by inviting
potential clients will help the company to attract them to its booth.
Other than postal mails, company will build a database of potential customers of its targeted
market segment and send them advertisement materials, greeting cards as per occasions to
promote the company.
5.1.3.4 Internet:
Internet has become a power tool for advertising about company’s products. Company web
site has become a must at present days. The website will allow the company to have
worldwide presence and access to buyers. A well designed web site can help the companies’
export venture in many ways, from promotion to customer service. The company will commit
time and money to keep the site up‐to‐date as an outdated site can do more harm than good.
To maintain this, the marketing and sales officer of the company will be given the
responsibility.
Himalayan Essential Oil (P) Ltd. 40
Furthermore the company’s website will be comprehensive, informative, professionally
designed, visually pleasing, email enabled, and capable of allowing online purchasing.
5.1.4 Place
The location of the site as well as head office has been placed keeping in mind various
factors. Locating the site at Nawlparasi will be beneficial to the company due to the fertility
of the region, easy accessibility from Kathmandu, its proximity to India Boarder and the good
security environment, lower land cost than neighboring region, availability of water and
labor. The transportation cost of finished goods from site to Kathmandu is also low.
5.3 Growth Strategy
The company will follow below given strategies as per Ansoff’s Growth Strategy :
5.3.1 Market Development Strategy:
The company will develop its market base as per the geographical market segments.
The company in the beginning will look into Indian and Domestic Market.
After first year it will develop its market in three European Countries namely
Germany, France and UK.
After first five years the company will further increase its base in other European
countries like The Netherlands, and Eastern European Country and USA.
5.3.2 Product Development
The company is at present concentrating on four herbs and plants for cultivation and
extraction of essential oil. After five years the company will broaden its product base as per
the market demand of other essential oils. The future product considering present scenario
have been identified. They are Anthopogon oil, Jatamansi and Juniper. All of these are wild
harvested herbs. This product line may be modified as suitable to the company.
5.4 Differentiation Strategy
There are many buyers and sellers in essential oil industry worldwide. It is very important to
differentiate the company if it wants to make a mark of itself. Currently, Nepal has been
known for its essential oil especially in wild harvested category. Due to unavailability of the
land for cultivation unlike its neighboring countries India and China, the company will not be
able rule the market by its production volume. So, the company will differentiate in following
manner:
CSR will be given preference by the company. The company will hire a CSR officer
who will be responsible to developing the community of Bhardaghat, Nawalparasi. A
fund of 1 million rupees will be allocated to improve the education and hygiene level
of the community.
Himalayan Essential Oil (P) Ltd. 41
Emphasis will be given to quality production by following various steps identified at
the beginning of this report
Since the availability of skilled manpower is low in Nepal, the company will train its
employee to make them proficient in their respective job. Trainings will be performed
in co-ordination of various organizations.
The product will be differentiated as purely organic essential oil which is
Environment friendly as well. In Nepal only the wild harvested essential oil are fully
organic whereas in case of cultivated herbs in some cases use pesticides have been
used. The company will make sure that no pesticide is used in the field and near its
area.
5.5 POSITIONING OF THE COMPANY
Following factors have been considered while considering the positioning of the product
The key selling points will be:
Organic production carried out in a social responsible and environmental friendly way
High quality products
So the strategic position of the company will be Product Focused.
The name of the company has been chosen as Himalayan Essential Oil (P) ltd. as it will make
it clear to buyers that the company is from Nepal. Nepal is known for its organic essential oil
and this will further enhance the brand value of the company.
5.6 Business Strategy in Sales & Marketing
Strategic alliance with foreign partners
HEOPL will build strategic alliance with foreign partners in future to benefit the company in
its distribution of its products. The alliance with foreign partners will give the company local
representative in International market. It is will be easier for the company to trace the new
international trends and new technology.
This alliance will help the company to differentiate itself from competitors by offering local
presence in Europe combined with a low cost production base in Nepal. The customers will
be able to deal directly with the partners by approaching the strategic partner. which will
make the customers fell more secure about delivery times, traceability of the raw material,
quality and more importantly that requirements to organic production are met.
Himalayan Essential Oil (P) Ltd. 42
Chapter 6 :
ORGANISATION AND HUMAN RESOURCE MANAGEMENT
6.1 LEGAL INCORPORATION OF THE BUSINESS
The company will be established in accordance of Company Act of Government of Nepal. It
will be registered in the Company Registrar’s Office, Ministry of Industry. It will be duly
registered in VAT and PAN in tax office. If the company finds suitable land in community
forest, it will get the required permission from the concerned Forest User Groups (FUGs) of
the community.
6.2 OWNERSHIP INFORMAITON
Following table presents the ownership information of the company:
S.N NAME Shareholding Form of ownership
1 Ms. Archana Basnyat 25% Limited Partner
2 Mr. Amit Pun 25% Limited Partner
3 Mr. Jason Baidya 25% Limited Partner
4 Ms. Yubika Bhandari. 25% Limited Partner
6.3 HR PLANNING AND FUNCTION
6.3.1 Organisation Structure
The Managing Director will be chosen from one of the shareholders of the company and will
function as the head of the company. MD will be supported by team consisting of Senior
Agriculturist, Logistic officer, CSR officer, Marketing & Sales officer and office assistant
and field staffs. The MD will function from head office and will supervise the field work
during site visits as per the need. It is a small company employing 13 permanent staffs and two
part-time staffs during harvest season. However, when plants and herbs are sowed and
harvested, a large number of labours are hired.
The organisation structure will be hierarchical. All the office staff will come directly under
the Managing Director and the field staff will be supervised by Senior Agriculturist who in
turn will come under the supervision of Managing Director. The organization chart is
provided in next page.
Himalayan Essential Oil (P) Ltd. 43
Figure: Organisation chart
6.3.2 Human Resource Policy
Human Resource Policy will be prepared with clear directives on recruiting, employee
selection, training and development, motivation and compensation and benefits and
disciplinary code of conduct. Organization strategies will be linked with HR Planning. Proper
Job Analysis with Job description, Job Specification and Job evaluation system will be
prepared.
6.3.2.1 Human Resource Requirement and Job Description
The minimum qualification an job experience requirement for the employees are as follows:
Particulars Years Qualification
Head Office
1. Managing Director MBA
2. Accountant 3-5 MBA/Mcom
3. Chief Agriculturist 10 Masters in Agriculture
4. CSR Officer 3-5 MBA, Masters in Sociology
5. Protocol officer 3-5 MCom
6. Logistic officer 3-5 MCom
7. Receptionist 1 +2 graduate or similar
Managing Director
Head Office Field Office
Accountant
CSR Officer
Marketing &
Sales Officer
Logistic Officer
Receptionist
Peon
Senior Agriculturist
Distillation Officer
Labours Helper 1/2 Helper 1/2
Junior Agriculturist
Himalayan Essential Oil (P) Ltd. 44
8. Driver 1 1 year experience
9. Peon 1 SLC graduate
Site Office
1. Distillation Officer 3 3 years experience
2. Junior Agriculturist 3-5 Bachelor in Agriculture
3. Helper 1 1 Basic education
4. Helper 2 1
Part-timers
1. Distillation helper 1 SLC graduate
2. Distillation helper 1 SLC graduate
3. Labour Local people
6.3.2.2 Job Description
Job Description of the employees are given below:
Title Functions/Responsibilities
Managing Director Strategic development of the company
Legal Aspects
Contact to Government authorities on highest level
Strategic development
Maintaining the office correspondence
Supervision of Office employees
Accountant Maintaining the finance of the company
Coordinating with banking and tax authorities
Coordinating with CEO for procurement of herbs and oils
Day to day accounting
Submitting sales return on monthly basis
Preparing the P/L, A/C, B/S on quarterly basis
Maintaining the petty cash accounting
Marketing and Sales
officer
Marketing of essential oils and herbs
Correspondence with foreign potential customers as well as
domestic clients
Building new clientele in online /direct marketing
Updating the company’s website
Designing and preparation of brochure and other
advertisement materials
Logistic officer Maintaining the inventory of herbs and oils
Preparation of required documents and certification for export
of essential oil
Correspondence with Government departments
Himalayan Essential Oil (P) Ltd. 45
Preparation for trade fairs
CSR officer Preparation of feasibility planning of new CSR projects and
its impact on community and company
Supervision and implementation of company approved CSR
projects
Senior Agriculturist Maintaining standard requirements of organic certification,
ISO 9001, ISO 14001 and other certifications
Collecting samples of herbs and oils
Testing samples and giving quality clearance
Field controls of the organic certification
Receptionist Daily Assistance in the office
Junior agriculturist Maintaining the farms
Growing the new herbs selectively on organic certification
basis
Assisting Senior Supervisor
Distillation Officer Performing distillation of essential oil following all the
quality procedures
Inventory preparation of raw material, fuel and essential oil at
the site office
6.3.2.2 Compensation and Remuneration
The top management will be given salaries higher than the industry average keeping in mind
the meaning of a popular proverb in management: “If you pay peanuts, you will get
monkeys”. At present our country faces skilled manpower drainage due to trend in pursuing
job abroad and unstable political situation. So, the company from its initially stage plans to
acquire skilled manpower so that the efficiency of the company will be greater as well as the
required quality standards can be maintained.
The staff salary increment as per the current plan will increase by 10% in yearly basis.
However, if employee gives praiseworthy performance and the management feels that the
person is an asset to the company, the uncertainty fund can be utilized to increase the salary
further.
At present the company does not have retirement plan and provident fund for the employees.
This will be incorporated after 5 years in company’s HR Policy.
Himalayan Essential Oil (P) Ltd. 46
6.3.3 Training need assessment and implementation process
Training plans will be developed for increasing the efficiency and productivity as well as
producing high quality essential oil. The training programmes will be conducted with the co-
ordination of various organizations like GTZ, SNV and ANSAB. The overall training
objectives can be defined as:
To set-up organic production meeting requirements within organic certification, ISO
9001, ISO 14001 etc.
To introduce and improve organic growing and harvesting methods
To upgrade processing process of essential oils by using a mobile distillation plant
To approach the European customers in a professional manner
To upgrade cultivation and harvesting methods among farmers by educating an “expert-
team” among the employees.
The training needs identification by analyzing the present available employees in the market
is as follow:
Title Training Needs
Managing Director Input to certification systems
Requirements to organic growing and production
Accountant No need for training
Marketing and Sales officer Contact approach for direct sales to customers
Research plans and customer database preparation to
understand customer demands trends and identify
potential customers
MIS system
Logistic officer No need for training
CSR officer CSR trainings and seminars
Senior Agriculturist Certification systems (organic certification, ISO
9001, ISO 14001)
Receptionist No need for training
Junior Agriculturist Organic growing and cultivation
Harvesting
Organic production and requirements
Organic spraying
Distillation officer Quality check of the product
Removing foreign material from raw material
Labour Drying and extraction of herbs
How to make finished product
Implementation of quality procedures to meet
requirements to organic production
Himalayan Essential Oil (P) Ltd. 47
CHAPTER 7:
FINANCIAL ANALYSIS
7.1 METHODOLOGY OF FINANCIAL ANALYSIS
Conventional method of financial analysis has been adopted. Sales and expenses have been
estimated on the basis of current market price. For sales projection conservative prices have
been taken. Total fixed assets and 6 monthly administrative, promotional and marketing
expenses, selling and distribution expenses and production expenses were calculated to
identify the working capital requirement. From these calculations the initial investment has
been worked out.
Based on the Revenue and Expenses calculation, income statement and cash flow projections
were done. The actual investment requirement were calculated. The company will not hold
much cash and in case of excess cash during a fiscal year it will be invested in fixed bank
accounts such that the fund can be utilized for future expansion. Balance sheet is also
projected based on these figures.
All the investment in this project has been done through equity. The ratios are also calculated
to check the return on investment, return on fixed assets, return on equity. Payback period
and Internal Rate of Return is also calculated. However, due to the nature of the business, as
the variable cost of the project cannot be differentiated from the overall expenses, Break
Even Point is not calculated.
7.2 KEY ASSUMPTIONS FOR FINANCIAL ANALYSIS
Following key assumptions have been made while carrying out the financial analysis
The capital investment in the project will by 100% equity divided equally among 4
shareholders
The lease agreement of the land, registration process and establishment of the company is
expected to be completed in two months period
The preparation of land will require a month time and cultivation can be started and the
first harvesting will be done in next 4 months
The sales and expenses are expected to increase by 10% per annum.
7.3 INVESTMENT IN FIXED ASSETS AND WORKING CAPITAL
The total Fixed Asset Expenses for the company in initial year is Rs. 4,806,800 and in third
year it will further increase by Rs. 3,150,730 after purchase of another distillation unit.
The working capital of Rs. 3647300 has been identified through calculation. And thus the
initial investment in the first year is calculated as Rs. 8,500,000 and later after increment in
fixed asset in the third year another Rs. 1,000,000 is added in as investment, making the total
investment by equity at Rs. 9,500,000.
The detailed tabulation of the financial documents are given in Annex : Financial Reports.
Himalayan Essential Oil (P) Ltd. 48
7.4 SALES REVENUE
The sales revenue of the company in Year 1: Rs. 8,731,000
Year 2 :Rs. 9,604,100
Year 3: Rs 21,129,020
Year 4: Rs. 23,241,922
Year 5: Rs. 25,566,114.
The sales revenue is calculated by taking lower side rates of the essential oil.
7.5 TOTAL EXPENSES
The total expenses in Year 1: Rs. 11,7,7,291
Year 2: Rs. 12,904,137
Year 3 : Rs. 16,260,304
Year 4: Rs. 17,699,760
Year 5 : Rs. 19,283,161
The total expense includes Cost of production, Administrative expenses, Depreciation
expenses, Selling & Distribution Expenses and Marketing & Promotional expenses
7.6 TOTAL PROFIT (LOSS)
The total profit in Year 1: Rs. (2,976,291)
Year 2: Rs. (3,300,037)
Year 3 : Rs. 3,651,537
Year 4: Rs. 4,531,622
Year 5 : Rs. 5,462,215
7.7 DIVIDEND AMOUNT
The total dividend in Year 1: Rs. 0
Year 2: Rs. 0
Year 3 : Rs. 0
Year 4: Rs. 1,000,000
Year 5 : Rs. 5,000,000
Only from fourth year onwards the company will be able to provide dividend to the equity
holders.
7.8 KEY FINANCIAL RATIOS
Ratios Year 1 Year 2 Year 3 Year 4 Year 5
Return on Equity 0 0 0.38 0.48 0.57
Return on Assets 0 0 0.36 0.30 0.32
Net Profit Margin 0 0 0.17 0.19 0.21
Payback period 4.28 years
Internal Rate of Return 9.87%
Himalayan Essential Oil (P) Ltd. 49
CHAPTER 8:
CRITICAL RISK AND CONTIGENCIES
7.1 Critical Risk
1. Market barrier analysis
The major barriers for the smooth supply of essential oils to domestic and international
markets are described under the following headings:
a. Distribution of raw materials in remote areas
In future when the company expands to essential oil of wild harvested herbs like
Anthopogon, Juniper and Jatamansi, it is difficult to collect, transport and process these
herbs. These herbs are naturally distributed in remote mountainous and even alpine regions of
Nepal where in most of the cases road accessibility is low.
b. Climactic calamities
In case of Chamomile cultivation at Nawalparasi chances of hail storm destroying the plants
is present. Usually the harvest time of Chamomile is before Chaitra and the risk of hailstorm
is less. However, in the changing global climatic condition, the company has to be prepared
for this risk as well.
c. Lack of trained manpower
The trained manpower for the collection and processing of aromatic herbs are lacking in
Nepal. Trained and semi-trained youths are temporarily migrated for the foreign jobs mostly
in Gulf countries. Trainings have to be given to the technical as well as labours to teach them
to work efficiently. This in turn increase the yield and quality of production.
d. Lack of market price data
There is a general lack of information on essential oil prices and as such it is difficult for
producers to know if they are getting a fair market price.
e. Health risks
Essential oils may be hazardous to human health if the safety measures are not followed.
Therefore, the distillation unit managers and workers should be trained regarding the personal
safety measures that they need to adopt right from cleaning equipments, loading raw
materials to the entire distillation process and transportation up to the Kathmandu based
buyers.
The distillation unit managers and workers should be knowledgeable on the Good
Manufacturing Practices (GMP), so that they can adopt the GMP procedures during handling,
processing, storing and transportation of essential oils. Therefore, the aforementioned
comprehensive trainings should be conducted to the distillation unit managers and workers.
In Nawalparasi, health risk due to snake and scorpion bites is present. Though health posts in
the area are equipped for such accidents, the manpower should be trained regarding the first
aid to be provided during such incidents.
Himalayan Essential Oil (P) Ltd. 50
CHAPTER 9:
SUMMARY AND CONCLUSIONS
Nepal being rich in biodiversity has ample scope for essential oil industry. At present the
essential oil industry worldwide is estimated at US$ 2 billion and the industry is still growing.
Nepal exports around 55 tons of essential oil per annum which is 2% of the world demand.
Various foreign organizations in Nepal have been actively involved in training and providing
funds to Nepalese essential oil companies. However concentration on wild harvested is more
in this sector which might affect the sustainable harvest of the raw material.
In contrast, the scope of cultivated essential oil like Chamomile, Lemon Grass, Citronella and
Palmarosa is high and yet to be fully explored. The favorable climatic zones for these oils are
Tarai region in Nepal and HEOPL plans to establish factory in Tarai and explore this
opportunity.
The development in essential oil sector will not only benefit the company but also will
increase the export earnings of Government of Nepal which is currently facing huge trade
deficit. The step taken by the Government to categories I high priority and exempting the
VAT amount has motivated companies to invest in this sector.
In Nepal there are around 10 major players in this industry but, there is no fierce competition
and each company has no difficulty to find buyers for its oil.
Though the initial cost of the business is reasonably high (around Rs 10 million has been
estimated for HEOPL), the payback period is quite fast (4.28 years). And after that without
any additional investment the company can earn huge profits.
Since organic essential oil are in demand and fetches higher value, the company will extract
only organic oil and steps will be taken to ensure that no pesticides are used in its land as well
as in the neighboring areas.
Furthermore, the company will ensure that its extracted oils are of high quality by following
the check list. This checking will be done from the cultivation process till the extraction and
packaging of essential oils.
Himalayan Essential Oil (P) Ltd. 51
Table of Contents
Executive Summary
Project Highlights
Chapter 1 : BUSINESS INTRODUCTION ............................................................................... 1
1.1 Background and Business Concept ................................................................................... 1
1.2 Scope of Business Activities......................................................................................... 2
1.3 Nature of the Business ...................................................................................................... 2
1.4 Vision of the Company ..................................................................................................... 2
1.5 Mission of the Company ................................................................................................... 3
1.6 Goals & Objectives of the Company ................................................................................ 3
1.7 Project Area ...................................................................................................................... 3
1.7.1 Location and Accessibility ................................................................................. 3
1.7.2 Infrastructure and Facilities ................................................................................ 4
1.7.3 Support of Local Community ............................................................................. 4
Chapter 2 : DESCRIPTION OF ESSENTIAL OIL ................................................................... 5
2.1 Dried herbs ......................................................................................................................... 5
2.2 Essential Oils ..................................................................................................................... 5
2.2.1 Lemon Grass Oil ................................................................................................ 6
2.2.2 Citronella Oil .................................................................................................... 7
2.2.3 Palmarosa ........................................................................................................... 8
2.2.4 Chamomile ......................................................................................................... 9
Chapter 3: MARKET RESEARCH AND ANALYSIS........................................................... 10
3.1 Market for Dried Herbs ................................................................................................... 12
3.2 Market for Essential Oils ................................................................................................ 13
3.2.1 Consumption and Prices ................................................................................... 13
3.2.2 Trends & Conclusion ....................................................................................... 15
3.3 EXTERNAL ANALYSIS .............................................................................................. 16
3.3.1 Political Environment .......................................................................................... 16
3.3.2 Economic Environment ...................................................................................... 16
Himalayan Essential Oil (P) Ltd. 52
3.3.3 Social Environment .......................................................................................... 17
3.3.4 Technological Environment ................................................................................ 17
3.4 COMPETITOR ANALYSIS ............................................................................................. 20
3.5 SWOT ANALYSIS ........................................................................................................ 23
Chapter 4 : PRODUCTION AND OPERATIONAL PLAN ................................................... 25
4.1 PRODUCTION PROCESS ............................................................................................ 25
4.2 LOCATION .................................................................................................................... 29
4.3 LAYOUT DESIGN ........................................................................................................ 29
4.4 CAPACITY DESIGN ..................................................................................................... 30
4.5 INVENTORY MANAGEMENT ................................................................................... 31
4.6 SCHEDULING PLAN ................................................................................................... 32
4.7 QUALITY CONTROL ................................................................................................... 32
4.8 DISTRIBUTION PLAN ................................................................................................. 33
4.9 MAINTENANCE PLAN ................................................................................................ 34
Chapter 5 : MARKETING PLAN AND STRATEGIES ......................................................... 35
5.1 MARKETING SEGMENTS .......................................................................................... 35
5.1.1 Overall market ...................................................................................................... 35
5.1.2 Target Market (Market Strategy) .......................................................................... 37
5.2 MARKETING MIX ........................................................................................................ 37
5.1.1 Product .................................................................................................................. 37
5.1.2 Pricing: ................................................................................................................. 38
5.1.3 Promotion: ............................................................................................................ 39
5.1.4 Place ...................................................................................................................... 40
5.3 Growth Strategy .............................................................................................................. 40
5.4 Differentiation Strategy .................................................................................................. 40
5.5 POSITIONING OF THE COMPANY ........................................................................... 41
5.6 Business Strategy in Sales & Marketing ......................................................................... 41
Chapter 6: ORGANISATION AND HUMAN RESOURCE MANAGEMENT .................... 42
Himalayan Essential Oil (P) Ltd. 53
6.1 LEGAL INCORPORATION OF THE BUSINESS..................................................... 42
6.2 OWNERSHIP INFORMAITON .................................................................................. 42
6.3 HR PLANNING AND FUNCTION ............................................................................ 42
6.3.1 Organisation Structure ...................................................................................... 42
6.3.2 Human Resource Policy ................................................................................... 43
6.3.3 Training need assessment and implementation process ................................... 46
Chapter 7 : FINANCIAL ANALYSIS .................................................................................... 47
7.1 METHODOLOGY OF FINANCIAL ANALYSIS...................................................... 47
7.2 KKEY ASSUMPTIONS FOR FINANCIAL ANALYSIS .......................................... 47
7.3 INVESTMENT IN FIXED ASSETS AND WORKING CAPITAL ........................... 47
7.4 SALES REVENUE ...................................................................................................... 48
7.5 TOTAL EXPENSES .................................................................................................... 48
7.6 TOTAL PROFIT (LOSS) ............................................................................................. 48
7.7 DIVIDEND AMOUNT ................................................................................................ 48
7.8 KEY FINANCIAL RATIOS ........................................................................................ 48
Chapter 8: CRITICAL RISK AND CONTIGENCIES ........................................................... 49
Chapter 9 : SUMMARY AND CONCLUSIONS ................................................................... 50
Annexes