Taste and health ahead of their time For a company that started in 1933 as an extractor and distiller of flavours, fragrances and essential oils from plants and flowers, Frutarom has remained remarkably close to its roots. The food industry has evolved in the last 75 years and trends have come and gone. But as multinational companies invest in functional foods and develop 'clean label' products, many believe healthy and natural ingredients are not just another trend, but a new direction set to endure for the long term. "Historically Frutarom has always been involved in taste and health," said Yehudai. "This is now at the front end of the food industry." Today the Israeli company has two divisions: Flavours and Fine Ingredients. Fine Ingredients has a strong focus on health, especially with the acquisitions of Emil Flachsmann in 2003 and Acatris Health last October, both of which came with a slate of ingredients and the expertise to develop more. In Flavours, the focus is on natural and organic systems. "We believe it is well-placed, with the right strategy and position in the market." Although the flavours and fragrances market has been the subject of consolidation recently (notably with Givaudan's acquisition of Quest and Firmenich's of Danisco Flavours) Yehudai is undaunted by the giants at the top. This is because the large flavour firms tend to concentrate on serving the multinationals. But a chunk of the food industry is made up of small and medium-size companies, who need medium-size suppliers. "We believe we are enhancing our position, doing the R&D and supporting our customers," said Yehudai. The Frutarom model involves working closely with selected customers to provide integrated solutions that also combine a health and taste element. It is this combination, Yehudai believes, that places the company in the fastest growing area of the food industry. Rapid growth - one step at a time Frutatrom's rapid growth strategy is predicated on growing at a faster rate than the industry in general - both internally with a strong pipeline of products and externally, through acquisitions and technology license agreements. Yehudai joined Frutarom in 1987, when the company was achieving annual sales of US$4m. By the early 1990s sales had grown to $10m, but he recalls a meeting in the early 1990s at which top executives said the company was still too small to remain the market for the long-haul. Only a company that could bring in over $300m would have a chance of survival, it was thought. Undaunted, Frutarom set a series of realistic targets. In 1997 sales had reached the $60m mark and it began eyeing a place in the top ten of global flavour companies. Almost a decade later, in 2006, Frutarom reported sales of $287m and is now said to hold the number seven spot in flavours. And from here? "The new target is to be a $600m company and number five in the flavour arena," said Yehudai. "We expect to achieve that by 2009." In the last twelve years Frutarom has successfully completed fifteen acquisitions, the most recent of which were UK flavour companies Belmay and Jupiter. And more are yet on the horizon. One or two companies are be expected to be brought into the Frutarom fold by next year, Yehudai teased, "one of which may be bigger than any seen so far…" A 'how to' of acquisitions When Frutarom goes shopping for potential acquisitions, it takes with it a checklist of criteria. First of all, Yehudai said, it looks at the target company's culture, and weighs up whether it will fit with its own easygoing atmosphere. However much growth the company sees, it is important to Yehudai that the employees are happy to be involved in Frutarom and feel connected to its goals. Moreover, in a larger company the decision-making process can be long and drawn out. At Frutarom decisions can be made relatively quickly, said Yehudai, with an eye to the long term. This he believes is appreciated by members of the management team, many of whom joined Frutarom from bigger players. "Frutarom believes that to continue growing, it must have strong and experienced management." To this end, a potential acquisition should have a strong management team at is helm, with which Frutarom works to develop the new strategy and vision. Rather than come in over their heads, Frutarom prefers to explore synergies and new strategies with the existing management and to draw up a detailed plan that is implemented from the very first day. It is also important to look at the technological and customer base, said Yehudai. "Through acquisitions we acquire customers and can offer more products to more customers. With every acquisition there is an 'old' and a 'new' Frutarom." Not all plain sailing Frutarom may be seeing sales that increase quarter-by-quarter, but it is not coasting along immune to challenges that are facing the food industry at large. This year raw material costs have been cited by numerous companies as a detrimental factor in their financial results - and Frutarom is no exception. This week it said it will be tweaking its prices to counter the effect of costs on its Q1 2007 margins. Energy costs play no small part, but Yehudai also said: "We are in a situation where there are still some increases in raw materials for natural products, especially commodities like corn, sugar and potatoes." But he does not expect that this will affect growth in the flavours industry, since in the context of the final product the cost of flavours is not that great - yet flavour is all important in the final product. What's more, Yehudai was upbeat that the high prices will not remain a fixture for long - perhaps just up until the end of this year. In the meantime, he counselled, look to the best source of raw materials, and seek out synergies so that operations can be as streamlined as possible. This latter measure is one that Frutarom has already been able to put in place with its UK flavour acquisitions, for instance, especially since Belmay is located close to its new parent's facility in Kettering. Another challenge faced by ingredients companies today is food manufacturers cutting back their own R&D expenses. Rather, they expect their suppliers to provide the R&D - on safety and efficacy, for instance, and use in formulations - as part of the package. This is a particularly tough issue for small-scale suppliers, and it could be a driver in more small and medium-sized companies coming up for acquisition. As for Frutarom, Yehudai said it is in a strong position since its model is based on collaboration anyway - and it channels a generous slice of revenue back into R&D. But the biggest challenge that Yehudai has faced so far is directly related to the impressive growth. Managing a company as it becomes larger and larger - expanding from 60 to 1,200 employees - is no mean feat but he has done it to date. With the target of $600m sales within his sights, Yehudai looks like he will be leaving the competition eating dust.