The Indian market for processed foods is growing at over 12 per cent a year, propelling demand for flavours in savoury foods and beverages as the large food makers make inroads into the region, reveals a new report from Frost & Sullivan.
Globally, the flavours and fragrances industry is estimated at about €14.8 billion, of which the top five players account for 40 per cent of the market.
The five largest companies in the industry are Switzerland's Givaudan, the US firm International Flavors & Fragrances (IFF), Firmenich, Symrise and Quest International.
Japanese firm, Takasago, the sixth largest player, has revenues close to that of Quest International, says the report.
These top five companies have a substantial presence in the €187 million Indian flavours and fragrance market - flavours make up 45 per cent of the market, and fragrances 55 per cent - along with competition from Indian businesses such as SH Kelkar, Sachee Aromatics and Oriental Flavors & Fragrances.
And according to the report, the leading international flavour houses account for 75 per cent of the market.
Trends Traditionally, while flavours and fragrances were viewed as the most customised of all raw materials, commanding higher prices, in the last decade prices have been pushed down consistently by large manufacturers, writes the report's author Aparna Vedapuri.
This trend has gained momentum due to consolidation among food makers that neatly serves to improve their bargaining power.
Flavour customers are already grappling with rising costs due to the upswing in oil prices. In most cases, manufacturing companies are unable to pass on these costs to consumers through price increases.
Any price increases by flavour and fragrance houses are therefore strongly resisted, writes the report's author.
Margins in the industry have also been impacted by the overall increase in the prices of aroma and flavour chemicals, the building blocks for the industry.
These have seen price increases due to the dramatic fluctuations in the petrochemicals industry in recent months.
Globally, major flavour houses are trying to counteract this trend by increasingly use of their Indian and Chinese hubs as sourcing centres for raw materials required by creative centres all over the world.
The F&F industry itself has seen some consolidation in the last five years - IFF acquired Bush Boake Allen (BBA) in 2000, while Germany's Haarmann & Reimer (owned by Bayer Corporation) and Dragoco (privately held) were taken over by private equity investor EQT, merging to form Symrise in 2002-03.
"These moves are expected to confer better purchasing ability on flavour and fragrance houses," claims the industry analyst.
Fragrance and flavour manufacturing is not complex, involving mainly the blending of aroma chemicals.
As a result, flavour houses have been focusing on different areas in flavour synthesis technology, such as the encapsulation of flavours for timed release, to maintain customer loyalty and gain higher prices for their products.
The flavour makers are also focusing on developing captive materials that can give them the edge in synthesis, as well as discourage imitation.
The move into long-term arrangements with manufacturers whereby each fragrance or flavour brief is only opened to two or three houses is a developing trend, say the researchers.
They add that in the fight for business, in exchange for "an assured chance to gain a certain amount of global business", the flavour houses provide manufacturers with large discounts and first look rights at "exclusive cutting-edge fragrance and flavour styles."
Apparently this core-listing process is gradually being adopted across brands by most international manufacturers, such as Unilever, Frito-Lays, and Proctor & Gamble (P&G), making it very difficult for a newer supplier to break into such customers.
Regulations The presence of stringent safety norms often restricts the use of many chemicals. Apart from Indian government regulations, the flavour industry is self-regulated by the Flavor and Extract Manufacturer's Associations' (FEMA) GRAS regulations.
Besides these regulations, many large customers also have their own regulatory departments, which prohibit the use of certain chemicals and often require the substitution of more expensive materials.
Stocks "Inventory management represents a challenge that flavour houses are trying to address with more streamlined systems," claims the report.
While the total number of flavour and fragrance raw materials available may be more than 3000, most large houses typically have about 1000 materials on their standard palette for perfumers and flavorists to use.
Maintaining sufficient quantities of all these materials at all times without accurate forecasting is impossible, asserts the report.
This, coupled with a high dependence on imports, accounts for the often long lead times (sometimes six to eight weeks) of fragrance and flavour supply, which can be critical for end users.
"As F&F houses move into closer relationships with end users, these issues are being addressed partially through more accurate estimates of materials required," writes the report's author.
Many of the large flavour makers also work closely with Indian suppliers to upgrade the quality of their raw materials to international standards, trying to bring down costs as well as lead times, adds the report.
The competitive edge for the international flavour players will come through captive ingredients and technologies that make one flavour or fragrance relatively exclusive and difficult to copy, thereby extending its shelf life.
And cost control will continue to be a critical factor in the next three to five years. Firms, recommends the report, need to bring about a marked reduction in the import content, achieving consistent supply quality from cost-effective Indian or Chinese sources.
This is critical to securing the region as a profitable sourcing base.
In short, Frost & Sullivan claims "critical success factors that will lead to the winners" in the industry will be those firms able to foresee new segments, early movers into new segments - instant foods, branded snacks and newer fruit-based/energy drinks - and those with the speed to build up a sizeable presence in the Asia Pacific region.
"Despite the presence of the top five international houses, we may still witness more competition as players on the next ten rungs globally attempt to penetrate the Indian market more effectively," concludes the study.