Consolidation in food industry to impact flavour market

The United States and western Europe combined account for 58 per cent of the global market of the flavour and fragrance industry, highlights a recent article from Frost and Sullivan analyst Vivek Tapuria. But with growth slackening, the industry must look towards new markets and product innovations.

The flavours market - with the US holding a 33 per cent share and western Europe 25 per cent - can be segmented into three areas - natural and synthetic flavours, herbs and spices, and flavour enhancers. Flavours add taste and can also provide texture to food and beverages.

The flavour industry, which is not capital intensive, includes two types of companies: global flavour suppliers and local flavour suppliers. The trend toward consolidation continues with the top five global suppliers accounting for approximately 50 per cent of total flavour sales.

However, according to the article, the localised nature of preferences for many flavour products can be seen in the more than 500 local suppliers, rendering flavours competition typically a much more local affair than in fragrances.

The article continues that the fragrance or flavour creation is the value that the flavour and fragrance company offers to its customers. Pricing or low-cost manufacturing does not essentially create value. The business of producing flavours and fragrances is generally distinct.

Flavour and fragrance operations - produced in small volume batches - are often divisions of a single company due to some taste and smell linkages in the food flavour markets. There is overlap between taste and smell in the marketing, research, and commercialisation of food flavours - in addition the businesses have been combined for historical reasons. Aspects of both smell and taste are involved in the development of successful food flavour products.

Barriers to enter the industry are high, reports the author, as the development of unique flavours and fragrances involve difficult-to duplicate research and technical capabilities. The production of high-quality flavours can involve the extraction of natural ingredients in bulk from all over the globe, the selection from thousands of natural and synthetic ingredients, the appropriate blending and mixing these ingredients, and the "mouth" or "nose" for testing the desirability of the resulting product. Formulas can involve more than 500 ingredients - natural or synthetic - and subtle changes to single ingredients can dramatically alter the final product.

For the author, the principal question surrounding the flavour and fragrance companies is the question of growth. Is the current lack of growth to be understood in terms of products, population growth, brands or some other category?

The article proposes that the trend in the late 1990s towards consolidation among food product companies is a harbinger of bad news for the flavour and fragrance companies.

One consequence of consolidation is that the food companies are wielding greater power and are attempting to use their formidable size to increase purchasing power. Pricing inefficiencies among larger and smaller customers are being scaled back. Moreover, it could be argued that food retailers - also undergoing consolidation - have taken pricing power from the food companies. For Frost & Sullivan​ these trends are far from favorable for the flavour and fragrance companies.

The packaged food companies in turn have lost brand-pricing power. Both the number of private label brands of the major food retailers has increased and the quality of the offerings has also risen. As a result, Frost & Sullivan believes that price pressure is likely to be a normal state of affairs in the United States and in Europe and that market share gains will depend largely on product innovation.

So where are the growth opportunities ? The article predicts that this will primarily occur in the Asia-Pacific region and South America. Asia-Pacific shows particularly positive signs, writes the author, from a qualitative standpoint. The region represents more than one-half of the world's population but spending power has reached Western levels in only 20 per cent of the 3.2 billion population. Spending is on the cusp, with consumers only now starting to purchase convenience foods. In addition, food production remains basic, with companies lacking the funds to move towards more modern food production technology. As such, Frost & Sullivan predicts that this leaves room for the introduction of higher value flavour compositions on to the market.