201309 roland berger flavor industry study (2)

1 20130904_Roland Berger_Flavor industry study.pptx

September 2013

Roland Berger study

Flavor industry Key trends and challenges


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


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


A. FLAVOR INDUSTRY CONTEXT

A USD 9 Bn global market, dominated by few players


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


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


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


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


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


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%


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


B. TRENDS AND CHALLENGES

Four trends strongly reshaping the industry


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


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


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


46% 49% 51% 53% 55% 58% MARKET SHARE

NATURAL FLAVORS

CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR – BACKUP 1


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


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


Flavor houses need to make increasingly large investments in technology & capabilities to follow the performance level of the industry

Competence development flavor industry


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


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)


CO-DEVELOPMENT – CHANGE IN COMMERCIAL MODEL 3


As a result, the prevailing commercial business model is shifting to stronger emphasis on partnership and strategic alliances


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



For instance, major F&B players are building strategic partnership with F&F suppliers to co-develop flavors


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


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


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


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



C. KEY QUESTIONS

How players will adapt along the value chain?


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?


Natural ingredients suppliers

for private label

http://www.iff.com/internet.nsf/HomePage!OpenForm

http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=cyOr-sHwbAZ0LM&tbnid=LkGgxRzRxlVVAM:&ved=0CAgQjRwwAA&url=http://brandingsource.blogspot.com/2013/01/new-logo-solvay.html&ei=PvR5UfXuOs7wtQbS4YGADQ&psig=AFQjCNH86FahaZ-R2i48CGKso87Ki7Zc4w&ust=1367033278994788


D. ABOUT ROLAND BERGER

A worldwide leading strategy consulting firm with more than 50 offices


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



Roland Berger provides significant experience in the flavor and food ingredient industries

Selected references in the food ingredient industry


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


Selected references in Consumer Goods

We have also worked for major food and non food manufacturers

FOOD AND BEVERAGE NON FOOD



E. CONTACTS

Contacts for further questions


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

http://muc-digitals-4.rolandberger.net:8080/Sites/contact.jspx


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


impact! that creates

It's character