Essential Oil BDP Report

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).

http://en.wikipedia.org/wiki/Hydrophobic

http://en.wikipedia.org/wiki/Aroma_compound

http://en.wikipedia.org/wiki/Oil

http://en.wikipedia.org/wiki/Distillation


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


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


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.


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


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.


2.2.2 Citronella Oil

Common Name: Citronella (Java Type)

Botanical Name: Cymbopogon winterianus Jowitt.

Source: Cultivated



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.



Optical rotation [-] 2º to [-] 4º at 23º C


Acid number 0.5 to 3.5

Ester number 20 to 40



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.


2.2.3 Palmarosa

Common Name: Palmarosa

Botanical Name: Cymbopogon martinii stapf var. Motia

Source: Cultivated



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.



Optical rotation [-] 0.5º to [+] 0.75º at 25º C


Acid number 0.85 to 10.5

Ester number 15 to 48.5



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.


2.2.4 Chamomile

Common Name: Blue-German Chamomile

Botanical Name: Matricaria chamomilla L.

Source: Cultivated



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.


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


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.


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.


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


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.


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.


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.


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


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


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


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


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


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.


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


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.


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


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.


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.


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


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


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


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.


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.


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.


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.


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.


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.


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


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.


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.


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.


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.


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.


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


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


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.


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


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.


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%


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.


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.


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


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


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

Documents

Essential Oil BDP Report