FNB News - Fragrances and Flavours – Opportunities & Challenges

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F&B SPECIALS

Fragrances and Flavours – Opportunities & Challenges

Saturday, 16 May, 2015, 08 : 00 AM [IST]

Vaibhav Verma and Manish Malhotra

India has a population of 1.21 billion growing at 1.41% per annum; it is a young country with almost 65% population below the age of 30 years. It has been a traditional country so far but now things are just about to change in a hurry. By the CY 2020, the average age of an Indian is going to be 28 years when compared to 48 years in Japan.

The food processing industry in India is one of the largest in terms of production, consumption, import and is in the process of taking off as the average housewife is faced with less time to prepare home-made meals as has been traditionally managed. Buoyed by a favourable government policy for the food industry and a demand by a young consuming class with growing disposable incomes, India offers significant investment opportunities in the food, flavour and agro processing sector.

US$258 billion
By CY 2015, the Indian food industry is expected to reach US$258 billion from the current level of US$181 billion. This growth is expected to continue until FY 2020, where the industry size is expected to touch US$318 billion. India is making an important mark on the global food industry; both as a large producer and exporter of agriculture products as well as an importer of processed foods. The annual spending of US$181 billion on food accounts which attributes to31% of the per capita income is twice as high as any other category including housing.

The Indian food flavours market is set to grow; and offer innumerable opportunities for new entrants to grow in this market. Rampant urbanisation, growth of disposable income, availability of convenience goods coupled with growing health concerns are the major drivers for the industry’s growth. Additional factors such as awareness among governments and consumers to address specific health and nutritional needs are strongly fuelling the food and beverage markets, which, in turn are boosting the s market. There is demand for new variants especially in the health foods and beverage categories that keeps the market growing; a trend which is expected to continue for the next few years.

Novel foods, beverages
The future of the Indian flavours market rests on the launch of novel foods and beverages constituting health and functional ingredients. Innovation in flavour variants of key producers, enhancement of sales force capabilities and technological improvement are the critical factors for the success of a flavor industry

Market Scenario
The Indian F&F market is highly fragmented with both purchasers and suppliers ranging from multinational companies and large Indian industrial houses to small-scale industrial units, and local manufacturers.

This is particularly applicable to the flavour industry and more particularly to savoury, bakery and confectionery segments where the manufacturing process is relatively simple in comparison to others. In this case, even local eateries and individual homes contribute significantly to the increase in market. In comparison, there is better consolidation in the fragrance market, with larger players like Unilever, Godrej, Dabur, Reckitt Benckiser, Wipro, Henkel, and ITC, generating most of the sales.

The Indian F&F market as per estimates is about US$400 million. Similar to the international market, there is almost equal distribution of the total Indian F&F market between flavours and fragrances.

International houses account for about 70% of the organised Indian market while Indian companies like S H Kelkar & Company Pvt. Ltd, Oriental Aromatics Ltd, Ultra International Ltd, Khattri Fragrances & Flavours Ltd, Gupta & Company (P) Ltd, Sachee Aromatics Ltd, and Aarav Fragrances, cater to the rest of the market. Almost all Indian companies have private ownership; and they are not very open to disclosing actual / true sales volume figures. S H Kelkar & Company Pvt. Ltd leads the sales among Indian F&F companies followed by other houses as mentioned above.

Some Indian FMCG companies which use fragrances and flavours in their products also make their own fragrance blends, by purchasing individual aroma chemicals and mixing them. Mixing various fragrances purchased from different fragrance houses along with their in-house compounds is also a different way to make finished fragrance blends. Hence, the Indian F&F industry sales figures estimates given above could be 10% to 15% higher. In any case, competition is only likely to intensify with more and more international players expanding their footprint in the country.

The Indian fragrances and flavours industry has been growing rapidly following liberalisation. The global economic slowdown did not have any impact on the industry, instead, it clocked a growth rate of 12 -15 per cent. With globalisation, there have been improvements in technology, competition and brand images. The global industry is looking at India as a future hub for fragrances and flavours. The total size of the industry including menthol, sandalwood oil and other essential oils is around Rs 9,000 crore and the estimated growth rate is approximately 12 per cent. The key applications of flavours in the food processing sector include confectioneries, dairy, bakery and snacks among others.

Industry segmentation F&F industry segmentation is based on the application areas for flavours and fragrances and is as given below.

Flavours Food industry

Confectionery (Sweets, chocolates, candies, jam, jellies, chewing gums, Indian sweets)
Dairy Products (Milk, yoghurt, frozen food, ice creams, cheese)
Bakery and Processed Foods (Cakes, flavoured breads, biscuits, meat, soups, noodles)
Savoury (chips, namkeen, snacks)
Feed Industry
Pet Food
Farm Animal Feed
Pharma Industry
Medicines
Health Food Supplements, etc.,
Mouthcare
Toothpaste, Tooth Powder
Mouth Rinse
Mouth Fresheners
Lipgel
Lipsticks
Fragrances / Functional Products
Personal Care
Toilet Soaps
Shampoos
Hand Wash
Shower Gel
Cosmetics
Hair Oils
Hair Styling products
Body Talcum Powder
Shaving Creams, Shaving Foams
Deodorants
Household Care
Household Cleaners (Glass cleaner, surface cleaner, dish wash, toilet cleaner, etc.)
Air Fresheners
Candles
Incense Sticks
Insect Repellents, Mosquito Repellents.

Willingness of consumers to try out new flavours coupled with the ability of flavour companies to provide more authentic and natural flavour profiles has helped.

$250 m market
Industry sources estimate the flavours market in India at around $250 million, or approximately Rs 1,350 crore. It has been growing in double digit in the last couple of years; and going ahead, the growth rate is only expected to accelerate.

PepsiCo's salty snack brand Kurkure was recently extended to variants blended with international tastes including Punjabi Pizza, Andhra Bangkok Curry and Rajasthani Manchurian.

Chinese food ingredients brand Ching's Secret has had tremendous success with its Schezwan Chutney, a Chinese sauce with Indian flavour. "Consumers want more Indian touch even in Chinese as it is no longer international for them,

Indian consumers could soon munch on masala tea flavoured biscuits, or sip on guava juice spiced with red chillies straight out of tetra pack.

These are among a dozen flavours the world's largest flavour company Givaudan has developed specially for the Indian market as flavours emerge a high-potential business segment in the country with packaged food companies increasingly adding new flavours to push their brands.

Swiss firm Givaudan recently opened an innovation centre in Mumbai while US firm International Flavours & Fragrances (IFF) last year opened a facility in Gurgaon to primarily develop flavours for food, sweets, beverages and dairy products.

Current strategies in India by intl F&F cos
Companies today are currently strategising ways to strengthen their presence and are focussing their sales expansion plans to cater to increasing demand from tier II and tier III cities that eventually drive growth. To quote, as an example in the fragrance market, companies are launching a range of affordable deodorants, perfumes, and colognes for consumers willing to spending on fragrances to stay well groomed. In short, companies are taking all efforts to fulfill consumer demand.

Newer variants
Companies are exploring newer variants, thereby creating product differentiation to spur consumption. People today are willing to experiment with new, more exotic flavors rather than opting for basic flavors such as vanilla and chocolate. Examples include flavours that combine Tahitian vanilla with honey or white chocolate with cranberries. Consumers nowadays are becoming progressively health conscious, providing ample opportunity for “health and wellness” food flavours like Blueberry, Grape, Aloe Vera, Pine Bark, and Soy. They are also exploring the natural and functional flavors segment for more variety and marketers are tapping this high potential segment.

The concept of natural and traditional Indian herb extracts is also gaining significance in fragrance markets.

Symrise has set up its first perfumery school outside Germany. The Chennai, school intends to train Indian students to create exotic fragrances and flavors for the industry, strengthening its presence in India, as well as establish a talent pool for the Indian and the global market. International Flavour and Fragrance (IFF) India Ltd., recently announced the opening of a new facility for creating new flavors and fragrances for its business unit in Gurgaon. Major FMCG players like, Hindustan Unilever plans to capitalise on the fragrance segment through its deodorant range. ITC is looking to launch into the aromatherapy market by introducing customised agarbattis.

Leading global F&F players, already having presence in India, are all now envisioning India as an important manufacturing destination. The country has a strong potential to become a manufacturing hub, given the abundant availability of raw materials essential for the industry.

Factors affecting the India F&F industry
Traditionally flavours and fragrances commanded a high price due to the flavourist or perfumer?s artistic ability and difficulty in creation. Flavours and fragrances now have very similar requirements as consumer goods. It too requires investments in marketing and presentation, for commercial success. This does not mean that flavors and fragrances are far from artistic creation but merely states that we need to follow all commercial rules during creation while retaining the same quality followed in earlier times.

Clients today believe flavors and fragrances to be simple mixtures of aromatic materials and not a harmonious accord achieved with difficulty. We grade flavors and fragrances according to the price of the raw material used to create them, as it is easy to decipher the composition with modern analytical methods. The cost of creation, technical application and research, evaluation and panel testing largely ignored in the calculations.

Ironically, without hesitation one purchases a marble carving or a canvas painting at exorbitant price, much more than the cost of the marble stone or the cost of canvas and paint, but is very much reluctant to spend similarly on a flavor and fragrance purchase.

In the last decade, prices offered to fragrance and flavour houses by FMCG manufacturers to supply flavour and fragrances have consistently gone down. Raw materials costs for manufacturing FMCG are rising. FMCG manufacturers are unable to pass on the same to consumers by increasing product costs. FMCG manufacturer strongly resist, price increases requested by flavour and fragrances houses ignoring the genuine concern of the F&F industry affected by the overall increase in the prices of aroma and flavour chemicals that are the building blocks of their products. Price increases and fluctuations in petrochemical industry that are precursors in the manufacturing of aroma chemicals have also squeezed profit margins substantially for the F&F industry. Domestic players also face increased competition from MNCs aroma chemical manufacturers with advanced R&D facilities. This exerts added pressure on these players to accelerate the improvement of their research and technological facilities, as they are still in the upgrading process.

Flavour and fragrance markets in the developed nations have fully matured with sales almost stagnant. Global F&F industries in order to grow are increasingly looking at developing nations, especially India, China, and countries of the erstwhile USSR. The Indian market is still in its nascent stage and there is a long way to traverse before it fully matures. The lowering of margins have forced many global F&F manufacturers to look at India and China as sourcing centers for essential oils, and for manufacturing quality aroma and flavor chemicals required by their creative setups around the world.

Fragrance and flavor manufacturing is not complex. It involves simple mixing and making a blend of about 10-100 different chemical ingredients in the right proportions. On these, some may be natural and some synthetic. Improving fragrance delivery systems using techniques like encapsulation, sustained release, or using newer methods in counteracting specific malodors, etc., are some areas where F&F houses are concentrating to maintain their existing business and to increase profit margins.

The development of captive aroma chemicals is another way larger F&F houses use to maintain leadership position and prevent cheaper imitation of their fragrance creations. One major method global FMCG manufacturers and F&F houses use is to make a long term purchase arrangement among themselves which permit large discounts for FMCG manufacturer and in lieu an assured amount of global business for the F&F houses. This core listing process procedures adopted by most international FMCG manufacturers and F&F houses, effectively thwarts attempts by Indian F&F manufacturer?s acquire or corner their existing business making these exclusive only to the selected few.

Competition is intense in the F&F industry in terms of quality, price and services rendered to the end user. The competitive edge can only be achieved by use of captive and exclusive ingredient technology that will make ones flavour and fragrance unique and difficult to copy. Cost control will continue to play a very important role if one has to maintain a leading position. In recent times, we have seen economic crisis, conflicts and confrontation, among nations. As the outcome of all these upheavals, independent nations have become interdependent. Energy conservation, environmental concerns, communications and the will to survive have made commercial coexistence on one another crucial. The ability to function on a truly integrated world scale and service globally will be a key in gaining core listing and long-term contracts mutually beneficial to the F&F houses and the FMCG players.

(The authors are asst professors at Banarsidas Chandiwala Institute Of Hotel Management & Catering Technology)