201309rolandbergerflavorindustrystudy2 140822032106 Phpapp01

Flavor industry
Key trends and challenges
Roland Berger study

September 2013
20130904_Roland Berger_Flavor industry study.pptx
Contents
A
B
C
D
E
FLAVOR INDUSTRY CONTEXT

A USD 9 Bn global market, dominated by few players
TRENDS AND CHALLENGES

Four trends strongly reshaping the industry
KEY QUESTIONS
How players will adapt along the value chain?
ABOUT ROLAND BERGER

A worldwide leading strategy consulting firm
CONTACTS
Contacts for further questions
2013 Roland Berger Strategy Consultants
12
24
26
30
This study is a result of Roland Berger extensive experience in the

flavor industry and was supported by over 50 expert interviews
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)
> Over 50 interviews

conducted with experts
along the value chain
> Quantitative research (market

estimates and forecasts)
Source: Roland Berger Strategy Consultants
Others
F&F 12
F&B:
> R&D
34 > Sales
> Procurement
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
GLOBAL FOOD
INGREDIENTS
MARKET
USD 20 to 25 bn
PROCESSING AIDS
PRESERVATION/ SAFENESS
Antioxydants
TEXTURE
Preservatives
Enzymes
3% 3%
Emulsifiers
Flavors
4%
7%
29%
Hydro17%
colloids
TASTE
14%
5%
Colors
COLORS
8%
Sweeteners
10%
Flavor
enhancers
Acidulants
Flavors
Source: Leatherhead Food International, Roland Berger
Flavor composition is actually part of a combination of closely

interrelated sectors
Flavors as part of the F&F segment
SYNTHETIC
Source
Animals
(secretions )
Raw materials
Essential oils &

natural extracts
Odoriferous
substances
End-user
Industries
Source: SRI, Roland Berger
Plant
Fragrances
compositions
Soap &
Detergents
Cosmetics &
Toiletries
COMMENTS
Chemistry
Aroma chemicals
Flavor
compositions
Food
Beverages
Tobacco
Pharmaceuticals
Benzenoids
Musk Chemicals
Terpenoids
Others
NATURAL
Industrial
uses
> 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
The flavor market is estimated at USD 9 Bn and expected to

dynamically grow by ~6% per annum
Total flavor market value [USD Bn]
GLOBAL MARKET VALUE PER
SEGMENT OVER TIME
MARKET VALUE PER REGION AND SEGMENT [2012]

2.7
2.5
1.7
0.6
0.7
0.6
56%
52%
53%
53% 50% 52%
+5.9%
11.6
8.7
53%
2%
2%
7%
8%
2%
2%
7%
11%
2%
2%
2%10%
2%
5%
8%
7%
2%
2% 2%
2%
11%
8%
9% 8%
11% 10% 11%
13%
10%
12%
15%
15%
14%
Asia
Pacific
North
America
Western
Europe
16% 18% 17%

East LA
EU
M.E.&
Africa
CAGR
2012-2017
5.8%
6.0%
5.0%
53%
2%
2%
7%
9%
11%
15%
2012
2%
7%
2%
9%
11%
5.9%
16%
7.1%
5.0%
6.0%
2017E
Other1)
Ice Cream
Confectionery
Chocolate
Bakery
Dairy
Soft drinks
1) Includes animal feed, pet food, tobacco, snacks, savory convenience foods, oral hygiene & pharmaceuticals, meat and alcoholic drinks
Source: IAL Consultants; Roland Berger analysis
Within the value chain, flavor creation is the most consolidated and
profitable step
Overall structure of the value chain [conceptual]
Flavor ingredients
Flavors
~ $9 Bn
Food and beverage

(~ $3500 Bn) and
other end-users
INDUSTRY
CONCENTRATION
LOW OVERALL
BUT SEVERAL
SEGMENTS WITH
STRONG LEADERS
EBITDA
10-20 %
Source: Euromonitor, IAL, Roland Berger analysis
HIGH
Top-10 players possess
~70% of the market
15 20 %
LOW
(leaders in
certain end-user
market, but in
general many
players)
Retailers and
consumers are
influencers of
> market trends
> private label
development
2 10 %
Given the high investment required in technology and flavor platform

upgrades, scale drives profitability
Flavor industry profitability
EBITDA / sales 20121) [%]
25%
Symrise
20%
IFF
Firmenich
Givaudan
Sensient
T. Hasegawa
Mane Frutarom
15%
Kerry Group
Takasago
Robertet SA
10%
Soda Aromatic
5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
160% 165%
Relative market
share [%]
1) Indication In some cases based on 2010 figures or corporate figures instead of flavor business only
Source: Deutsche Bank, Leffingwell, Roland Berger estimates
The flavor creation industry is highly consolidated, with the top 10

companies representing 3/4 of the market
Consolidation of the F&F market
MARKET SHARE OF TOP 10 COMPANIES
REASONS FOR CONSOLIDATION

100%
Others
32%
30%
28%
28%
26%
Top 6-10
12%
12%
12%
13%
14%
Takasago
Symrise
7%
9%
6%
10%
6%
10%
7%
9%
6%
10%
IFF
12%
12%
12%
13%
12%
Firmenich
12%
14%
14%
13%
13%
Givaudan
19%
19%
21%
19%
20%
2008
2009
2010
2011
2012
Source: Interviews; Leffingwell; Roland Berger analysis
> 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
10
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]
CURRENT MARKET STRUCTURE: major players
have both flavors and fragrances in portfolio
Flavors
Fragrances
74%
26%
Frutarom
Takasago
61%
39%
Sensient
58%
43%
Givaudan
53%
48%
Mane
50%
50%
Symrise
49%
51%
IFF
49%
51%
Firmenich
40%
Source: Desk research; Roland Berger
60%
COMMENTS
> 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
11
B.
TRENDS AND
CHALLENGES
Four trends strongly
reshaping the industry
12
Four major trends are shaping the flavor industry, requiring players
to adapt
Overview of key trends shaping the flavor industry
TASTE AND FLAVOR always more

important to consumer
In-depth consumer understanding
capabilities
Increasing R&D REQUIREMENTS

and shorter product life cycles
Important financial resources
CO-DEVELOPMENT requests
from key customers
New collaboration models and
Key-Account management
KEY
TRENDS
PRICE PRESSURE from clients to
reduce COGS
Critical size and potential
disintermediation
Source: Roland Berger analysis
13
CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR
Focus on consumer trends becomes critical For the next 3 to 5

years, the flavor industry has 4 hot topics
Key consumer trends
NATURAL
HEALTH AND NUTRITION
OTHER TRENDS
>
>
>
>
>
HOT TOPICS
FOR THE
FLAVOR INDUSTRY
WINNING TASTE
Source: Roland Berger research and experience
Non flavors / clean label

Sustainability
Convenience
Religious (halal, kosher)
Demographics
Given the high R&D

investment required, the
capacity to identify hot
topics is a must
CONSUMER UNDERSTANDING
AND VALIDATION
14
CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR BACKUP
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]
MARKET SHARE
NATURAL FLAVORS
46%
8,0
Non-Natural: CAGR -1%
Natural: CAGR 9%
4,3
49%
8,3
4,3
51%
8,7
4,3
3,7
4,0
4,4
2010
2011
2012
53%
9,0
4,2
55%
9,4
4,2
58%
9,9
4,2
4,8
5,2
5,7
2013 E
2014 E
2015 E
15
INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES
Product innovation is characterized by short life cycles a typical

half-life is 4 to 5 years
Half-life of new product innovations
EXAMPLE CITRUS
EXAMPLE RED FRUIT
Sales [EUR m]
Sales [EUR m]
50% after
4 / 5 years
Y1
Y2
Y3
Y4
Y5
Y6
50% after
4 / 5 years
Y1
Y2
Y3
Y4
Y5
Y6
16
INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES
Flavor houses need to make increasingly large investments in technology

& capabilities to follow the performance level of the industry
Competence development flavor industry
Cost/ Performance
Jump to new platform
Flavor platform
Flavor platform
Commercialization
Commercialization
> 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
Distillation
Import
spices Extraction
1800
Next big
thing ?
Chemical
synthesis
1900
Molecular
distillation &
advanced
extraction
Consumer
Industrial underscale bio standing
synthesis
Advanced Molecular
chromato- imprinting
graphy &
membranes
2000
Taste
receptor
cloning
Fully
computerized
functionstructure
analysis
Olfactory
receptor
cloning
INVESTMENTS
2025
2050
17
CO-DEVELOPMENT CHANGE IN COMMERCIAL MODEL
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"
RELATIONSHIP
REQUEST FOR
SAMPLE
GENERATION OF
SAMPLE
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
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)
18
As a result, the prevailing commercial business model is shifting to

stronger emphasis on partnership and strategic alliances
Changing business models in F&F industry
Qualified Suppliers
Number of Suppliers
Key Alliances
Strategic
> Few major partners
> Substantial
coordination
requirements
Nature of Transaction
> Long-term
contracts
> Products
standardized
across customers
FUTURE B2B RELATIONS

Undeveloped
Sources
Commodity
> Fragmented
sources
> Minimal
demand
coordination
Number of Suppliers
TRADITIONAL B2B RELATIONS
Deep Strategic
Alliances
Strategic
Price based Procurement
Nature of Transaction
> Few partners

> Substantial cooperative initiatives
> Capability driven
innovation
partnerships
Commodity
> 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
19
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
OVERVIEW OF THE COLLABORATION
ILLUSTRATION
F&B
Extensive consumer
understanding
Competitor
intelligence
Definition of
strategic axes and
priorities
Product
development and
market entry
Technical skills to
create a large array of
differentiable tastes
F&F
Source: Companies data, Roland Berger experience
20
PRICE PRESSURE FROM CLIENTS TO REDUCE COGS
In the meantime, retailers and consumer good producers put a

growing pressure on F&F suppliers to discount prices
PRICE
Increasing pressure on F&F suppliers from retailers / consumer good producers

INCREASING RETAIL PRICE PRESSURE
> Manufacturers pass on retail (in particular discount) price pressure to F&F suppliers
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
COST
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
RISING COST OF COMPLIANCE
> Build trusted manufacturer relationships and meet consumer trends
Source: Roland Berger experience
21
PRICE PRESSURE FROM CLIENTS TO REDUCE COGS
In the future, this pressure could lead to a reshaping of the value chain
with some disintermediation at the flavor creation level
Potential changes impacting the flavor supply medium to long term
F&F have integrated capabilities on the different added value
levels to develop a flavor...
> Complexity increases exponentially downstream
> Intermediate flavor modules ("building blocks") are used to
reduce complexity of the flavor creation
Flavor value chain creation illustration
Aroma chemical co's
Natural extract
companies
Flavor
ingredients
F&F
Building blocks
Top notes
Other ingredients
Source: Interviews, Roland Berger analysis
General F&B
Sold as "flavors"
Flavors
compounds
Sold as "flavors"
Food &
beverage
Some key issues at the F&B and F&F level

could favor a disintermediation of the flavor
creation value chain
> 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
22
Therefore, to succeed in the F&F industry, four dimensions need to

be addressed
Must-have competences: "killer line-up"
TECHNOLOGY
POSITIONING
FLAVOR POSITIONING
END USE POSITIONING
CUSTOMER POSITIONING
> 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
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
> Key Accounts, such as

Unilever
PepsiCo
Coca-Cola
> A-B customers
> Regional heroes
Technology Competences
Taste Competences
Meat
Vegetable
Vanilla
Mint
Citrus
Red fruits
Taste modification
Regional taste competencies
Culinary
Snacks
Sweet
Dairy
Non-alc. beverages
Alcoholic beverages
Powdered beverages
Consumer health
Regional categories
Application knowledge
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
23
C.
KEY QUESTIONS
How players will adapt
along the value chain?
24
In this changing context, every player will have to address key

questions
Key questions by player type with regards to flavors
FLAVOR INGREDIENT
PRODUCERS
SELECTION
OF PLAYERS
FLAVOR
PRODUCERS
FOOD AND BEVERAGE

PRODUCERS
Natural
ingredients
suppliers
for private label
KEY
QUESTIONS
> How to secure raw material access

at required price?
> Could the fragrances business unit

be carved-out ?
> Is downstream integration the right

strategic move?
> What is the most relevant

technology positioning?
> How to improve operational

efficiency and return on investment
to maintain competitive position?
> 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?
25
D.
ABOUT
ROLAND BERGER
A worldwide leading
strategy consulting firm
with more than 50 offices
26
Roland Berger is a worldwide leading consulting firm advising global

industrials and presence in all key vanillin consumption areas
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AMERICAS
ASIA
Boston I Chicago I Detroit I

Montreal I New York I
So Paulo
Beijing I Guangzhou I Hong Kong

Jakarta I Kuala Lumpur I Mumbai
Seoul Shanghai I Singapore I Taipei
Tokyo
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Founded in 1967 in Germany by

Roland Berger
51 offices
36 countries
2 700 employees
EUROPE & MIDDLE EAST

Amsterdam I Barcelona I Beirut I Berlin I Brussels Bucarest I
Budapest I Casablanca I Doha I Dubai Dsseldorf I Frankfurt I
Gteborg 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
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220 RB Partners
1,000 international clients
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27
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
28
We have also worked for major food and non food manufacturers
Selected references in Consumer Goods
FOOD AND BEVERAGE
NON FOOD
29
E.
CONTACTS
Contacts for further

questions
30
For further questions, please do not hesitate to contact us
Alexander Belderok,
Partner
Amsterdam
Sebastien Adam,
Project manager
Montreal
Alexander.Belderok@
rolandberger.com
Sebastien.Adam@
rolandberger.com
+31 (6) 4382 4920
+1 (514) 875 2000
Thank you
31
Acronyms and sources
ACRONYMS
Bn
E
F&B
F&F
M
Billion
Estimates
Food and Beverage
Flavors and Fragrances
Million
SOURCES
Euromonitor
Expert interviews
IAL Consultants
Leatherhead food
Leffingwell and associates
Roland Berger experience and desk research
SRI
32
It's character
that creates
impact!
33

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Flavor industry

Key trends and challenges

Roland Berger study

FLAVOR INDUSTRY CONTEXT

TRENDS AND CHALLENGES

ABOUT ROLAND BERGER

2013 Roland Berger Strategy Consultants

20130904_Roland Berger_Flavor industry study.pptx

This study is a result of Roland Berger extensive experience in the

> Multiple projects over the past

> Over 50 interviews

> Quantitative research (market

Source: Roland Berger Strategy Consultants

20130904_Roland Berger_Flavor industry study.pptx

20130904_Roland Berger_Flavor industry study.pptx

20130904_Roland Berger_Flavor industry study.pptx

Flavor composition is actually part of a combination of closely

Essential oils &

Source: SRI, Roland Berger

> F&F compositions are the largest

20130904_Roland Berger_Flavor industry study.pptx

The flavor market is estimated at USD 9 Bn and expected to

MARKET VALUE PER REGION AND SEGMENT [2012]

53% 50% 52%

16% 18% 17%

20130904_Roland Berger_Flavor industry study.pptx

Food and beverage

Source: Euromonitor, IAL, Roland Berger analysis

Given the high investment required in technology and flavor platform

20130904_Roland Berger_Flavor industry study.pptx

The flavor creation industry is highly consolidated, with the top 10

REASONS FOR CONSOLIDATION

Source: Interviews; Leffingwell; Roland Berger analysis

> Consolidation at F&B companies is

> Multinational F&B companies started

20130904_Roland Berger_Flavor industry study.pptx

Source: Desk research; Roland Berger

20130904_Roland Berger_Flavor industry study.pptx

TASTE AND FLAVOR always more

Increasing R&D REQUIREMENTS

Source: Roland Berger analysis

20130904_Roland Berger_Flavor industry study.pptx

CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR

Focus on consumer trends becomes critical For the next 3 to 5

HEALTH AND NUTRITION

Non flavors / clean label

Given the high R&D

CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR BACKUP

Non-Natural: CAGR -1%

Source: Roland Berger analysis

20130904_Roland Berger_Flavor industry study.pptx

INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES

Product innovation is characterized by short life cycles a typical

EXAMPLE RED FRUIT

Source: Roland Berger analysis

20130904_Roland Berger_Flavor industry study.pptx

INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES

Flavor houses need to make increasingly large investments in technology

20130904_Roland Berger_Flavor industry study.pptx

CO-DEVELOPMENT CHANGE IN COMMERCIAL MODEL

We believe that the traditional "lottery model" for growth is no longer

Flavors house has a

Flavors house will