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Flavor industry Key trends and challenges
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1 20130904_Roland Berger_Flavor industry study.pptx
September 2013
Roland Berger study
Flavor industry Key trends and challenges
2 20130904_Roland Berger_Flavor industry study.pptx
Contents
A FLAVOR INDUSTRY CONTEXT A USD 9 Bn global market, dominated by few players
4
B TRENDS AND CHALLENGES Four trends strongly reshaping the industry
12
D ABOUT ROLAND BERGER A worldwide leading strategy consulting firm
26
© 2013 Roland Berger Strategy Consultants
C KEY QUESTIONS How players will adapt along the value chain?
24
E CONTACTS Contacts for further questions
30
3 20130904_Roland Berger_Flavor industry study.pptx
This study is a result of Roland Berger extensive experience in the flavor industry and was supported by over 50 expert interviews
Source: Roland Berger Strategy Consultants
PROJECT EXPERIENCE AND RESEARCH
EXPERT INTERVIEWS
> Multiple projects over the past years with players along the value chain (chemical producers, natural raw material producers, F&F players, F&B players, retailers)
> Quantitative research (market estimates and forecasts)
Others
5 F&F 12
F&B:
> R&D
> Sales
> Procurement 34
> Over 50 interviews conducted with experts along the value chain
4 20130904_Roland Berger_Flavor industry study.pptx
A. FLAVOR INDUSTRY CONTEXT
A USD 9 Bn global market, dominated by few players
5 20130904_Roland Berger_Flavor industry study.pptx
The flavor market represents almost half of the vast food ingredients market
Global food ingredients market by product segments
Source: Leatherhead Food International, Roland Berger
7%
17%
5%
8%10%
Enzymes Antioxy-
dants
Preservatives
4%
Emulsifiers 3% 3%
Hydro-
colloids
Colors
Sweeteners Acidulants
Flavor
enhancers
14%
Flavors
29%
TASTE
COLORS
TEXTURE
PRESERVATION/ SAFENESS
PROCESSING AIDS GLOBAL FOOD
INGREDIENTS
MARKET
USD 20 to 25 bn
Flavors
6 20130904_Roland Berger_Flavor industry study.pptx
Flavor composition is actually part of a combination of closely interrelated sectors
Source: SRI, Roland Berger
> F&F compositions are the largest added-value components in the F&F value chain
> The synthesis of aroma compounds is mainly based on synthetic raw materials, however natural extracts are increasingly being utilized
> Between 2,500 and 3,000 chemicals find use in F&F compounds but only a few hundred are offered in the merchant market and find use in quantities larger than 50 tons per year
COMMENTS NATURAL
Animals (secretions )
Plant
SYNTHETIC
Chemistry Source
Odoriferous substances
Fragrances compositions
Flavor compositions
End-user Industries
Aroma chemicals
Soap & Detergents
Cosmetics & Toiletries
Food Beverages Tobacco Pharma-ceuticals
Industrial uses
Ben
zeno
ids
Mus
k C
hem
ical
s
Ter
peno
ids
Oth
ers
Raw materials
Flavors as part of the F&F segment
Essential oils & natural extracts
7 20130904_Roland Berger_Flavor industry study.pptx
The flavor market is estimated at USD 9 Bn and expected to dynamically grow by ~6% per annum
Total flavor market value [USD Bn]
MARKET VALUE PER REGION AND SEGMENT [2012] GLOBAL MARKET VALUE PER SEGMENT OVER TIME
CAGR 2012-2017
Source: IAL Consultants; Roland Berger analysis
11%
8% 2%
8% 2%
52%
LA
0.7
18%
10%
8% 2%
M.E.& Africa
0.6
17%
10% 2%
50%
East EU
0.6
16%
11%
9% 2%
7% 2%
53%
Western Europe
1.7
14%
13%
11% 2%
5% 2%
53%
North America
2.5
15%
12%
11% 2%
7% 2%
52%
Asia Pacific
2.7
15%
10%
8% 2%
7% 2%
56%
+5.9%
11%
2017E
11.6
16%
9% 2%
7% 2%
53%
2012
8.7
15%
11% 9%
2% 7%
2%
53%
6.0%
6.0%
5.9%
7.1%
5.0%
5.0%
Soft drinks Dairy Bakery Chocolate Confectionery Ice Cream Other1)
5.8%
1) Includes animal feed, pet food, tobacco, snacks, savory convenience foods, oral hygiene & pharmaceuticals, meat and alcoholic drinks
8 20130904_Roland Berger_Flavor industry study.pptx
Within the value chain, flavor creation is the most consolidated and profitable step
Overall structure of the value chain [conceptual]
INDUSTRY CONCEN-TRATION
EBITDA
Flavor ingredients Flavors
~ $9 Bn
Food and beverage
(~ $3500 Bn) and
other end-users
10-20 % 15 – 20 % 2 – 10 %
HIGH Top-10 players possess
~70% of the market
LOW OVERALL BUT SEVERAL
SEGMENTS WITH STRONG LEADERS
LOW (leaders in
certain end-user market, but in general many
players)
Source: Euromonitor, IAL, Roland Berger analysis
Retailers and consumers are influencers of > market trends > private label
development
9 20130904_Roland Berger_Flavor industry study.pptx
Flavor industry profitability
Source: Deutsche Bank, Leffingwell, Roland Berger estimates
1) Indication – In some cases based on 2010 figures or corporate figures instead of flavor business only
Given the high investment required in technology and flavor platform upgrades, scale drives profitability
5%
10%
15%
20%
25%
40% 45% 50% 165% 65% 60% 55% 160% 35% 30% 25% 20% 15% 10% 5% 0%
Relative market
share [%]
EBITDA / sales 20121) [%]
Soda Aromatic
Robertet SA
Kerry Group
Mane Frutarom
T. Hasegawa Sensient
Takasago
Firmenich
Symrise
IFF Givaudan
10 20130904_Roland Berger_Flavor industry study.pptx
The flavor creation industry is highly consolidated, with the top 10 companies representing 3/4 of the market
Source: Interviews; Leffingwell; Roland Berger analysis
12% 12% 12% 13% 14%
32% 30% 28% 28% 26%
19%
13%
13%
9%
7%
2010
21%
14%
12%
10%
6%
2009
19%
14%
12%
10%
6%
2008
19%
12%
12%
9%
7%
Givaudan
Firmenich
IFF
Symrise
Takasago
Top 6-10
Others
2012
20%
13%
12%
10%
6%
2011
Consolidation of the F&F market
MARKET SHARE OF TOP 10 COMPANIES
REASONS FOR CONSOLIDATION
> Consolidation at F&B companies is continuous, resulting in consolidation at F&F companies
> Substantial operational and commercial economies of scale are present whereas innovation requirement increases costs
> Multinational F&B companies started working with core supplier lists enabling market consolidation
> Regulatory pressure increased, resulting in higher fixed costs
Ʃ 100%
11 20130904_Roland Berger_Flavor industry study.pptx
Large players dominating the industry are present in both flavors and fragrances for historical reasons – this structure can be questioned
Share of flavor and fragrances for leading F&F players [2012 ; share of revenues]
Source: Desk research; Roland Berger
74%
61%
58%
53%
50%
49%
49%
40%
26%
39%
43%
48%
50%
51%
51%
60%
Fragrances Flavors
Firmenich
IFF
Symrise
Mane
Givaudan
Sensient
Takasago
Frutarom
> The current situation is explained by several factors: – historical development path of F&F players. Having both
flavors and fragrances was logic, especially when the feedstock was natural (e.g, in Grasse, France, players would be considered as natural extracts experts)
– flavors and fragrances revenue cycles considered as complementary
> But there are little synergies between flavors and fragrances' business units: – different end-markets, with heterogeneous dynamics
and downstream clients – different creation capabilities and skills required
> A restructuring of the industry may occur, leading to further consolidation
CURRENT MARKET STRUCTURE: major players
have both flavors and fragrances in portfolio COMMENTS
12 20130904_Roland Berger_Flavor industry study.pptx
B. TRENDS AND CHALLENGES
Four trends strongly reshaping the industry
13 20130904_Roland Berger_Flavor industry study.pptx
Four major trends are shaping the flavor industry, requiring players to adapt
Overview of key trends shaping the flavor industry
Source: Roland Berger analysis
TASTE AND FLAVOR always more important to consumer In-depth consumer understanding capabilities
CO-DEVELOPMENT requests from key customers New collaboration models and
Key-Account management
PRICE PRESSURE from clients to reduce COGS Critical size and potential
disintermediation
Increasing R&D REQUIREMENTS and shorter product life cycles Important financial resources
1
3 4
2
KEY
TRENDS
14 20130904_Roland Berger_Flavor industry study.pptx
Focus on consumer trends becomes critical – For the next 3 to 5 years, the flavor industry has 4 hot topics
OTHER TRENDS
> Non flavors / clean label
> Sustainability
> Convenience
> Religious (halal, kosher)
> Demographics
Key consumer trends
Source: Roland Berger research and experience
CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR 1
HOT TOPICS FOR THE
FLAVOR INDUSTRY
NATURAL HEALTH AND NUTRITION
WINNING TASTE
CONSUMER UNDERSTANDING
AND VALIDATION
Given the high R&D
investment required, the
capacity to identify hot
topics is a must
15 20130904_Roland Berger_Flavor industry study.pptx
For example, the market for natural flavors is growing fast and has overtaken the non-natural market in 2012
Natural & non-natural global flavor market forecast [USD bn]
Natural: CAGR 9%
Non-Natural: CAGR -1%
2015 E
9,9
5,7
4,2
2014 E
9,4
5,2
4,2
2013 E
9,0
4,8
4,2
2012
8,7
4,4
4,3
2011
8,3
4,0
4,3
2010
8,0
3,7
4,3
Source: Roland Berger analysis
46% 49% 51% 53% 55% 58% MARKET SHARE
NATURAL FLAVORS
CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR – BACKUP 1
16 20130904_Roland Berger_Flavor industry study.pptx
Product innovation is characterized by short life cycles – a typical half-life is 4 to 5 years
Y6 Y5 Y4 Y3 Y2 Y1
Sales [EUR m] Sales [EUR m]
EXAMPLE CITRUS EXAMPLE RED FRUIT
Source: Roland Berger analysis
Y5 Y4 Y3 Y2 Y1 Y6
50% after
4 / 5 years 50% after
4 / 5 years
Half-life of new product innovations
INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES 2
17 20130904_Roland Berger_Flavor industry study.pptx
Flavor houses need to make increasingly large investments in technology & capabilities to follow the performance level of the industry
Competence development flavor industry
Source: Roland Berger analysis
1800 1900 2000
Cost/ Performance
Next big
thing ?
2025
Import
spices Extraction
Distillation
Chemical
synthesis
Taste
receptor
cloning
Olfactory
receptor
cloning
Molecular
distillation &
advanced
extraction
Industrial
scale bio
synthesis
Advanced
chromato-
graphy &
membranes Consumer
under-
standing
Molecular
imprinting
Fully
computerized
function-
structure
analysis
2050
INVESTMENTS
Jump to new platform
Commercialization Flavor platform
Commercialization Flavor platform
> Range for flavor platform upgrade (EUR 10 to 15 M) making a full portfolio
upgrade difficult
> Large R&D budget enables to start upgrade programs of 3 flavors each year
> Structured, planned approach to flavor development and roll-out ensure
success
INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES 2
18 20130904_Roland Berger_Flavor industry study.pptx
RELATIONSHIP REQUEST FOR SAMPLE
GENERATION OF SAMPLE
Flavors house has a relationship with a technical person
Sales person is incentivized to generate a "request for sample" so that the flavors house will have a "chance to win"
Flavors house will generate thousands of samples during a year, often without specific guidance or success criteria
Very few of these samples will be successful (1-3% of samples will win), but this is what flavors houses rely on to win business
SAMPLE
We believe that the traditional "lottery model" for growth is no longer viable for large flavors houses as marketing/ acquisition costs rise
Traditional "lottery model"
A large flavor house will spend ~10% of its revenue on generating samples (e.g. a USD 100 m
division will generate 10,000-12,000 samples at a loaded cost of ~ USD 1,000 each)
Source: Roland Berger Strategy Consultants
CO-DEVELOPMENT – CHANGE IN COMMERCIAL MODEL 3
19 20130904_Roland Berger_Flavor industry study.pptx
As a result, the prevailing commercial business model is shifting to stronger emphasis on partnership and strategic alliances
Source: Roland Berger analysis
TRADITIONAL B2B RELATIONS FUTURE B2B RELATIONS
> Long-term contracts
> Products standardized across customers
> Few major partners > Substantial
coordination requirements
> Fragmented sources
> Minimal demand coordination
> Few partners > Substantial coopera-
tive initiatives > Capability driven
innovation partnerships
> Low switching costs > Intensified price pressure; overcapacities > Limited growth potential through new
applications/ products
> Increasing customer demands on product supply quality; small drops, high frequency
> Perfect availability > One-stop shop
Nu
mb
er o
f S
up
plie
rs
Nature of Transaction Strategic Commodity
Deep Strategic Alliances
Price based Procurement
Nature of Transaction
Qualified Suppliers Undeveloped Sources
Key Alliances
Nu
mb
er o
f S
up
plie
rs
Strategic Commodity
Changing business models in F&F industry
CO-DEVELOPMENT – CHANGE IN COMMERCIAL MODEL 3
20 20130904_Roland Berger_Flavor industry study.pptx
For instance, major F&B players are building strategic partnership with F&F suppliers to co-develop flavors
CO-DEVELOPMENT – CHANGE IN COMMERCIAL MODEL 3
A new way of working - Collaboration between a major F&B and a leading F&F
ILLUSTRATION
OVERVIEW OF THE COLLABORATION
Source: Companies data, Roland Berger experience
Extensive consumer understanding
Product development and
market entry
Definition of strategic axes and
priorities
Competitor intelligence
Technical skills to create a large array of differentiable tastes
F&F
F&B
21 20130904_Roland Berger_Flavor industry study.pptx
In the meantime, retailers and consumer good producers put a growing pressure on F&F suppliers to discount prices
Source: Roland Berger experience
RISING INNOVATION / MARKETING COST > Higher demands by customer in terms of pre-decision research & development > Need for brand manufacturers to re-invent flavor, in order to compete with private labels > But selected customers negotiated to no longer carry development / sales costs
INCREASING RETAIL PRICE PRESSURE > Manufacturers pass on retail (in particular discount) price pressure to F&F suppliers
RISING COST OF COMPLIANCE > Build trusted manufacturer relationships and meet consumer trends
MORE PROFESSIONALIZED PURCHASING BEHAVIOR > Groupwide purchasing organizations, processes and intra-group knowledge transfer > Unbundling of modules: Standardization and more low cost country sourcing of standard
modules vs. custom modules
DRIVE FOR TRANSPARENCY BY MANUFACTURERS > Insourcing of standard competencies
PR
ICE
C
OS
T
Increasing pressure on F&F suppliers from retailers / consumer good producers
PRICE PRESSURE FROM CLIENTS TO REDUCE COGS 4
22 20130904_Roland Berger_Flavor industry study.pptx
In the future, this pressure could lead to a reshaping of the value chain with some disintermediation at the flavor creation level
Source: Interviews, Roland Berger analysis
Potential changes impacting the flavor supply – medium to long term
…Some key issues at the F&B and F&F level
could favor a disintermediation of the flavor
creation value chain
F&F have integrated capabilities on the different added value
levels to develop a flavor...
> F&B :
– Cost control objectives
- especially in more mature countries (pressure from retailers, economic context, etc.)
– Trend for food traceability / safety
- especially as food scandals occur (e.g. melamine)
> F&F :
– Need to reduce complexity and improve competitiveness
- especially for mid-sized F&F to remain competitive vs. leading F&F
> Complexity increases exponentially downstream
> Intermediate flavor modules ("building blocks") are used to reduce complexity of the flavor creation
Top notes Flavors
compounds
Food &
beverage
Sold as "flavors"
Building blocks Sold as "flavors"
Flavor
ingredients
Other ingredients
General F&B
Aroma chemical co's
Natural extract companies F&F
Flavor value chain creation – illustration
PRICE PRESSURE FROM CLIENTS TO REDUCE COGS 4
23 20130904_Roland Berger_Flavor industry study.pptx
Therefore, to succeed in the F&F industry, four dimensions need to be addressed
TECHNOLOGY
POSITIONING
Must-have competences: "killer line-up"
> Meat
> Vegetable
> Vanilla
> Mint
> Citrus
> Red fruits
> Taste modification
> Regional taste competencies
> Overall sophistication level
(building block to top notes)
> Flavoring substances
> Flavoring complexes
> Reaction technology products
> Precursors
> Formulation technology products
> Separation and concentration
technology products
> Advanced analytics
> Encapsulation
Technology Competences Taste Competences
FLAVOR POSITIONING END USE POSITIONING
> Culinary
> Snacks
> Sweet
> Dairy
> Non-alc. beverages
> Alcoholic beverages
> Powdered beverages
> Consumer health
> Regional categories
Application knowledge
CUSTOMER POSITIONING
> Key Accounts, such as
– Unilever
– PepsiCo
– Coca-Cola
> A-B customers
> Regional heroes
Account management
"Killer Line Up" > Maximize the competitiveness of the "business" output or "chain" output of sets of competences and capabilities
regardless of whether they reside within own company boundaries
Source: Roland Berger analysis
24 20130904_Roland Berger_Flavor industry study.pptx
C. KEY QUESTIONS
How players will adapt along the value chain?
25 20130904_Roland Berger_Flavor industry study.pptx
In this changing context, every player will have to address key questions
KEY QUESTIONS
SELECTION OF PLAYERS
FLAVOR INGREDIENT PRODUCERS
FLAVOR
PRODUCERS
FOOD AND BEVERAGE PRODUCERS
Key questions by player type with regards to flavors
> How to secure raw material access at required price?
> Is downstream integration the right strategic move?
> How to improve operational efficiency and return on investment to maintain competitive position?
> Could the fragrances business unit be carved-out ?
> What is the most relevant technology positioning?
> How to manage the innovation cycle?
> What flavor product depth (flavor type, product complexity level)?
> What end-market to serve?
> What commercial approach?
> How to secure the winning taste for the consumer and constantly innovate?
> Should flavor be made or bought ? Could building blocks and top notes be bought from different suppliers?
> What is the best flavor supplier base?
> How to optimally work with suppliers?
Source: Roland Berger analysis
Natural ingredients suppliers
for private label
26 20130904_Roland Berger_Flavor industry study.pptx
D. ABOUT ROLAND BERGER
A worldwide leading strategy consulting firm with more than 50 offices
27 20130904_Roland Berger_Flavor industry study.pptx
Roland Berger is a worldwide leading consulting firm advising global industrials and presence in all key vanillin consumption areas
0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1
AMERICAS
Boston I Chicago I Detroit I Montreal I New York I São Paulo
EUROPE & MIDDLE EAST
Amsterdam I Barcelona I Beirut I Berlin I Brussels Bucarest I Budapest I Casablanca I Doha I Dubai Düsseldorf I Frankfurt I Göteborg I Hambourg I Istanbul I Kiev I Lagos I Lisbon I London I Madrid Manama I Milan I Moscow I Munich I Paris I Prague Riga I Rome I Stockholm I Stuttgart I Vienna Warsaw | Zagreb I Zurich
ASIA
Beijing I Guangzhou I Hong Kong Jakarta I Kuala Lumpur I Mumbai Seoul Shanghai I Singapore I Taipei Tokyo
0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1
Founded in 1967 in Germany by
Roland Berger
51 offices
36 countries
2 700 employees
220 RB Partners
1,000 international clients
Source: Roland Berger Strategy Consultants
28 20130904_Roland Berger_Flavor industry study.pptx
Roland Berger provides significant experience in the flavor and food ingredient industries
Selected references in the food ingredient industry
Source: Roland Berger Strategy Consultants
SELECTION OF CLIENTS IN THE FOOD INGREDIENT INDUSTRY
SELECTION OF ROLAND BERGER PROJECTS
> Development of global R&D strategy for the fragrance division of a leading F&F player
> Definition of manufacturing footprint strategy and production sites location for a leading F&F player
> Development of pricing strategy for a leading F&F player
> Strategy development and growth strategies for selected business units of F&F players
29 20130904_Roland Berger_Flavor industry study.pptx
Selected references in Consumer Goods
We have also worked for major food and non food manufacturers
FOOD AND BEVERAGE NON FOOD
Source: Roland Berger Strategy Consultants
30 20130904_Roland Berger_Flavor industry study.pptx
E. CONTACTS
Contacts for further questions
31 20130904_Roland Berger_Flavor industry study.pptx
For further questions, please do not hesitate to contact us
Thank you
Alexander Belderok, Partner Amsterdam
Alexander.Belderok@ rolandberger.com +31 (6) 4382 4920
Sebastien Adam, Project manager Montreal
Sebastien.Adam@ rolandberger.com +1 (514) 875 2000
32 20130904_Roland Berger_Flavor industry study.pptx
Acronyms and sources
ACRONYMS
Bn Billion
E Estimates
F&B Food and Beverage
F&F Flavors and Fragrances
M Million
SOURCES
Euromonitor
Expert interviews
IAL Consultants
Leatherhead food
Leffingwell and associates
Roland Berger experience and desk research
SRI
33 20130904_Roland Berger_Flavor industry study.pptx
impact! that creates
It's character