Integrated solutions – Driving the consolidations in flavor industry
Flavors are one of the largest and important categories of the food ingredients, globally. Almost every category of processed food is highly dependent on flavors for delivering their true product experience, which drives the core factors like consumer acceptability, memory, and positive product association leading to repeat purchases. The evolution of flavors began with exploring nature-derived molecules as early as 11th century and as the knowledge of organic chemistry and synthesis evolved, soon molecules mimicking the original flavor profile were derived with better properties like heat and oxidation stability and better production economics. By late 19th century, there were about 20 basic artificial flavors. Due to shortage and increasing prices of natural vanilla pods, McCormick started working on synthetic vanilla in 1976 and succeeded in producing imitation vanilla in 1982. More complex flavors like reaction flavors, processed top notes, complex profiles have become not so uncommon across the industry. In the 21st century, the trend of “natural” flavors gained prominence due to increasing scrutiny from regulators and consumers on artificial ingredients. With advancements in biotechnology, methods for deriving natural ingredients like vanillin from genetically modified yeast have been developed and commercialized, but with some resistance. Since the last decade, the flavor industry is being driven by trends like “clean label”.
Most well-known global flavor companies had European origins as trading companies for essential oils, spices, and other agro commodities. Swiss and German companies have been pioneers in supplying flavors to the food processing industry in the US. The flavor industry in the US has only developed largely during World War I, due to supply breakdown from the Europe. In other regions like Asia barring Japan and Africa, the flavor industry has developed mostly in the 20th century, in line with the late progression of the processed food industry. The global flavor industry has witnessed consolidations in a cyclical manner through mergers, acquisitions, and joint ventures throughout its history. These consolidations have happened for a variety of reasons like increasing the flavor portfolio, entry to new markets, increasing customer base, acquiring patents and technology, sourcing raw materials etc.
Flavor business has become a red ocean, with many companies facing cut-throat competition for a share in the bulk with margins and demand stagnant. Though some companies hold recognition in specific food categories or flavor types, the competition within these clusters has been very high. This situation has forced companies to look beyond flavors for synergistic growth options. With improved research and development on food properties and ingredient interactions, the role of flavors extended beyond just adding aroma and taste to foods. As the food and ingredient categories, and consumer choices evolved, the need for delivering a better product experience has created new opportunities or laid more weight on flavor to bridge the sensory gap. For example, in categories like low fat/ low sugar foods, in order to deliver a superior product experience novel ingredients like taste enhancers, texturizers, etc have to be used to along with flavors. Usually, these were offered by other ingredient companies, but the interdependency with flavors has come out as a new growth opportunity for flavor companies. Evolution of new categories of food products and ingredients also gave new challenges and opportunities to these companies.
Over the last five years, the consolidations happening in the flavors industry present an interesting trend. IFF, one of the leading flavors firm has announced a merger with DuPont Biosciences and Nutrition recently in 2019. This signifies a trend of companies looking to offer holistic solutions, particularly in the novel categories like plant proteins/ alternate proteins where a significant work is yet to be accomplished in terms of improving the sensory properties, in order to promote the consumer acceptability. While IFF brings together a sound experience of taste and flavor science, DuPont has a strong repository of health, nutritional and functional ingredients. This merger also brings together the synergies between the companies in other categories like pharma, fragrance, health and biosciences. Together, the companies now boast of 9000 patents and a research budget of 550 million USD. The acquisition of France based Naturex, a plant extracts, natural flavors and functional ingredients company by Swiss based flavor company Givaudan in 2018, signifies the interest in the natural offerings and clean label trends in the food and cosmetics industry. Givaudan also acquired a US based speciality flavors and fragrances company in 2019, and plans to acquire Alderys, a French biotechnology company with bio-engineering capabilities to produce valuable compounds form renewable feed stock, with applications in nutrition, pharma and cosmetics. These acquisitions are in line with Givaudan’s strategy to offer integrated solutions in future. Firmenich, a Swiss based flavor company has planned to acquire majority stake in the Indian seasonings and flavor company VKL, with a view to combine the taste and nutrition expertise of Firmenich with the ingredient sourcing, and client base of VKL and to cater to the evolving needs of the industry. These are only few examples among a large number of consolidations taking place in the flavors and ingredient companies.
These changes signify changing outlook of the food processing companies in sourcing ingredients while also showcasing the emerging needs of the start-up companies. IFF in its disclosure, stated how the increasing share of the smaller clients in the novel categories in the recent years has shaped the company’s outlook for the proposed merger with Dupont. These consolidations also seem to have the potential to improve the profitability for the flavor company, while improving the efficiency of the food processing companies. Also the conventional expertise of flavor companies in screening & synthesizing molecules, blending etc. now needs complementation with modern technologies like bio-engineering, biotechnology, and intimate understanding of food ingredient interactions. As large flavor companies are now becoming gigantic, the mid-tier companies may need to jump a few steps and start scouting for next generation technologies to stay relevant in the market.