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120130904_Roland Berger_Flavor industry study.pptx

September 2013

Roland Berger study

Flavor industryKey trends and challenges


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Contents

A FLAVOR INDUSTRY CONTEXTA USD 9 Bn global market, dominated by few players 4

BTRENDS AND CHALLENGES

Four trends strongly reshaping the industry

12

DABOUT ROLAND BERGER

A worldwide leading strategy consulting firm26

2013 Roland Berger Strategy Consultants

C KEY QUESTIONSHow players will adapt along the value chain? 24

E CONTACTSContacts for further questions 30


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This study is a result of Roland Berger extensive experience in theflavor industry and was supported by over 50 expert interviews

Source: Roland Berger Strategy Consultants

PROJECT EXPERIENCEAND RESEARCH

EXPERT INTERVIEWS

> Multiple projects over the pastyears with players along thevalue chain (chemicalproducers, natural rawmaterial producers, F&Fplayers, F&B players,retailers)

> Quantitative research (marketestimates and forecasts)

Others

5F&F 12

F&B:

> R&D

> Sales

> Procurement

34

> Over 50 interviewsconducted with expertsalong the value chain


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A.FLAVOR INDUSTRY

CONTEXT

A USD 9 Bn globalmarket, dominated byfew players


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The flavor market represents almost half of the vast food ingredientsmarket

Global food ingredients market by product segments

Source: Leatherhead Food International, Roland Berger

7%

17%

5%

8%10%

EnzymesAntioxy-

dants

Preservatives

4%

Emulsifiers 3%3%

Hydro-

colloids

Colors

SweetenersAcidulants

Flavor

enhancers

14%

Flavors

29%

TASTE

COLORS

TEXTURE

PRESERVATION/ SAFENESS

PROCESSING AIDSGLOBAL FOODINGREDIENTSMARKETUSD 20 to 25 bn

Flavors


6/33620130904_Roland Berger_Flavor industry study.pptx

Flavor composition is actually part of a combination of closelyinterrelated sectors

Source: SRI, Roland Berger

> F&F compositions are the largestadded-value components in the F&Fvalue chain

> The synthesis of aroma compoundsis mainly based on synthetic rawmaterials, however natural extractsare increasingly being utilized

> Between 2,500 and 3,000 chemicalsfind use in F&F compounds but only a

few hundred are offered in the merchantmarket and find use in quantities largerthan 50 tons per year

COMMENTSNATURAL

Animals(secretions )

Plant

SYNTHETIC

ChemistrySource

Odoriferoussubstances

Fragrancescompositions

Flavorcompositions

End-userIndustries

Aroma chemicals

Soap &Detergents

Cosmetics &Toiletries

FoodBeveragesTobaccoPharma-ceuticals

Industrialuses

Benzenoids

MuskChemicals

Terpenoids

Others

Raw materials

Flavors as part of the F&F segment

Essential oils &natural extracts



The flavor market is estimated at USD 9 Bn and expected todynamically grow by ~6% per annum

Total flavor market value [USD Bn]

MARKET VALUE PER REGION AND SEGMENT [2012]GLOBAL MARKET VALUE PERSEGMENT OVER TIME

CAGR2012-2017

Source: IAL Consultants; Roland Berger analysis

11%

8%2%

8%2%

52%

LA

0.7

18%

10%

8%2%

M.E.&Africa

0.6

17%

10%2%

50%

EastEU

0.6

16%

11%

9%2%

7%2%

53%

WesternEurope

1.7

14%

13%

11%2%

5%2%

53%

NorthAmerica

2.5

15%

12%

11%2%

7%2%

52%

AsiaPacific

2.7

15%

10%

8%2%

7%2%

56%

+5.9%

11%

2017E

11.6

16%

9%2%

7%2%

53%

2012

8.7

15%11%

9%2% 7%

2%

53%

6.0%

6.0%

5.9%

7.1%

5.0%

5.0%

Soft drinksDairyBakeryChocolateConfectioneryIce CreamOther1)

5.8%

1) Includes animal feed, pet food, tobacco, snacks, savory convenience foods, oral hygiene & pharmaceuticals, meat and alcoholic drinks



Within the value chain, flavor creation is the most consolidated andprofitable step

Overall structure of the value chain [conceptual]

INDUSTRYCONCEN-TRATION

EBITDA

Flavor ingredientsFlavors

$9 Bn

Food and beverage$3500 Bn) and

other end-users

10-20 % 1520 % 210 %

HIGHTop-10 players possess

~70% of the market

LOW OVERALLBUT SEVERAL

SEGMENTS WITHSTRONG LEADERS

LOW(leaders in

certain end-usermarket, but ingeneral many

players)

Source: Euromonitor, IAL, Roland Berger analysis

Retailers andconsumers areinfluencers of> market trends> private label

development



Flavor industry profitability

Source: Deutsche Bank, Leffingwell, Roland Berger estimates

1) IndicationIn some cases based on 2010 figures or corporate figures instead of flavor business only

Given the high investment required in technology and flavor platformupgrades, scale drives profitability

5%

10%

15%

20%

25%

40% 45% 50% 165%65%60%55% 160%35%30%25%20%15%10%5%0%

Relative marketshare [%]

EBITDA / sales 20121)[%]

Soda Aromatic

Robertet SA

Kerry Group

Mane Frutarom

T. HasegawaSensient

Takasago

Firmenich

Symrise

IFFGivaudan



The flavor creation industry is highly consolidated, with the top 10companies representing 3/4 of the market

Source: Interviews; Leffingwell; Roland Berger analysis

12% 12% 12% 13% 14%

32% 30% 28% 28% 26%

19%

13%

13%

9%

7%

2010

21%

14%

12%

10%

6%

2009

19%

14%

12%

10%

6%

2008

19%

12%

12%

9%

7%

Givaudan

Firmenich

IFF

Symrise

Takasago

Top 6-10

Others

2012

20%

13%

12%

10%

6%

2011

Consolidation of the F&F market

MARKET SHARE OF TOP 10 COMPANIES

REASONS FOR CONSOLIDATION

> Consolidation at F&B companies is

continuous, resulting in consolidation atF&F companies

> Substantial operational and commercialeconomies of scale are present whereasinnovation requirement increases costs

> Multinational F&B companies started

working with core supplier lists enablingmarket consolidation

> Regulatory pressure increased, resulting inhigher fixed costs

100%



Large players dominating the industry are present in both flavors andfragrances for historical reasonsthis structure can be questioned

Share of flavor and fragrances for leading F&F players [2012 ; share of revenues]

Source: Desk research; Roland Berger

74%

61%

58%

53%

50%

49%

49%

40%

26%

39%

43%

48%

50%

51%

51%

60%

FragrancesFlavors

Firmenich

IFF

Symrise

Mane

Givaudan

Sensient

Takasago

Frutarom

> The current situation is explained by several factors:

historical development path of F&F players. Having bothflavors and fragrances was logic, especially when thefeedstock was natural (e.g, in Grasse, France, playerswould be considered as natural extracts experts)

flavors and fragrances revenue cycles considered ascomplementary

> But there are little synergies between flavors andfragrances' business units:

different end-markets, with heterogeneous dynamicsand downstream clients

different creation capabilities and skills required

> A restructuring of the industry may occur, leading to furtherconsolidation

CURRENT MARKET STRUCTURE: major playershave both flavors and fragrances in portfolio COMMENTS



B.TRENDS AND

CHALLENGES

Four trends stronglyreshaping the industry



Four major trends are shaping the flavor industry, requiring playersto adapt

Overview of key trends shaping the flavor industry

Source: Roland Berger analysis

TASTE AND FLAVORalways moreimportant to consumerIn-depth consumer understanding

capabilities

CO-DEVELOPMENTrequestsfrom key customers New collaboration models and

Key-Account management

PRICE PRESSURE from clients toreduce COGS Critical size and potential

disintermediation

Increasing R&D REQUIREMENTSand shorter product life cycles

Important financial resources

1

34

2

KEY

TRENDS



Focus on consumer trends becomes critical For the next 3 to 5years, the flavor industry has 4 hot topics

OTHER TRENDS

> Non flavors / clean label

> Sustainability

> Convenience> Religious (halal, kosher)

> Demographics

Key consumer trends

Source: Roland Berger research and experience

CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVOR1

HOT TOPICSFOR THE

FLAVOR INDUSTRY

NATURAL HEALTH AND NUTRITION

WINNING TASTECONSUMER UNDERSTANDING

AND VALIDATION

Given the high R&D

investment required, the

capacity to identify hottopics is a must



For example, the market for natural flavors is growing fast and hasovertaken the non-natural market in 2012

Natural & non-natural global flavor market forecast[USD bn]

Natural: CAGR 9%

Non-Natural: CAGR -1%

2015 E

9,9

5,7

4,2

2014 E

9,4

5,2

4,2

2013 E

9,0

4,8

4,2

2012

8,7

4,4

4,3

2011

8,3

4,0

4,3

2010

8,0

3,7

4,3


46% 49% 51% 53% 55% 58%MARKET SHARENATURAL FLAVORS

CONSUMER EXPECTATIONS AND IMPORTANCE OF TASTE & FLAVORBACKUP1


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Product innovation is characterized by short life cycles a typicalhalf-life is 4 to 5 years

Y6Y5Y4Y3Y2Y1

Sales [EUR m] Sales [EUR m]

EXAMPLE CITRUS EXAMPLE RED FRUIT


Y5Y4Y3Y2Y1 Y6

50% after4 / 5 years

50% after4 / 5 years

Half-life of new product innovations

INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES2


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Flavor houses need to make increasingly large investments in technology& capabilities to follow the performance level of the industry

Competence development flavor industry


1800 1900 2000

Cost/ Performance

Next big

thing ?

2025

Import

spices Extraction

Distillation

Chemical

synthesis

Taste

receptor

cloning

Olfactory

receptorcloning

Moleculardistillation &

advanced

extraction

Industrialscale bio

synthesis

Advanced

chromato-graphy &

membranes

Consumer

under-standing

Molecular

imprinting

Fully

computerized

function-structure

analysis

2050

INVESTMENTS

Jump to new platform

CommercializationFlavor platform

CommercializationFlavor platform

> 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

INCREASING R&D REQUIREMENTS AND SHORTER PRODUCT LIFE CYCLES2


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RELATIONSHIP REQUEST FORSAMPLE

GENERATION OFSAMPLE

Flavors house has arelationship with atechnical person

Sales person isincentivized togenerate a "requestfor sample" so thatthe flavors house willhave a "chanceto win"

Flavors house willgenerate thousandsof samples during ayear, often withoutspecific guidance orsuccess criteria

Very few of thesesamples will besuccessful (1-3% ofsamples will win), butthis is what flavorshouses relyon to win business

SAMPLE

We believe that the traditional "lottery model" for growth is no longerviable for large flavors houses as marketing/ acquisition costs rise

Traditional "lottery model"

A large flavor house will spend ~10% of its revenue on generating samples (e.g. a USD 100 mdivision will generate 10,000-12,000 samples at a loaded cost of ~ USD 1,000 each)


CO-DEVELOPMENTCHANGE IN COMMERCIAL MODEL3

3


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As a result, the prevailing commercial business model is shifting tostronger emphasis on partnership and strategic alliances


TRADITIONALB2B RELATIONS FUTUREB2B RELATIONS

> Long-termcontracts

> Productsstandardizedacross customers

> Few major partners> Substantial

coordinationrequirements

> Fragmentedsources

> Minimaldemandcoordination

> Few partners> Substantial coopera-

tive initiatives

> Capability driveninnovationpartnerships

> Low switching costs> Intensified price pressure; overcapacities

> Limited growth potential through newapplications/ products

> Increasing customer demands on productsupply quality; small drops, high frequency

> Perfect availability

> One-stop shop

NumberofSupp

liers

Nature of TransactionStrategic Commodity

Deep StrategicAlliances

Price based Procurement

Nature of Transaction

Qualified Suppliers UndevelopedSources

Key Alliances

NumberofSupp

liers

Strategic Commodity

Changing business models in F&F industry


CO DEVELOPMENT CHANGE IN COMMERCIAL MODEL3


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For instance, major F&B players are building strategic partnershipwith F&F suppliers to co-develop flavors


A new way of working - Collaboration between a major F&B and a leading F&F

ILLUSTRATION

OVERVIEW OF THE COLLABORATION

Source: Companies data, Roland Berger experience

Extensive consumerunderstanding

Productdevelopment and

market entry

Definition ofstrategic axes and

priorities

Competitorintelligence

Technical skills to

create a large array ofdifferentiable tastes

F&F

F&B

PRICE PRESSURE FROM CLIENTS TO REDUCE COGS4


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In the meantime, retailers and consumer good producers put agrowing pressure on F&F suppliers to discount prices

Source: Roland Berger experience

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

INCREASING RETAIL PRICE PRESSURE> Manufacturers pass on retail (in particular discount) price pressure to F&F suppliers

RISING COST OF COMPLIANCE> Build trusted manufacturer relationships and meet consumer trends

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

PRICE

COST

Increasing pressure on F&F suppliers from retailers / consumer good producers




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In the future, this pressure could lead to a reshaping of the value chainwith some disintermediation at the flavor creation level

Source: Interviews, Roland Berger analysis

Potential changes impacting the flavor supplymedium to long term

Some key issues at the F&B and F&F levelcould favor a disintermediation of the flavorcreation value chain

F&F have integrated capabilities on the different added valuelevels to develop a flavor...

> F&B : Cost control objectives

- especially in more mature countries (pressurefrom 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 remaincompetitive vs. leading F&F

> Complexity increases exponentially downstream> Intermediate flavor modules ("building blocks") are used to

reduce complexity of the flavor creation

Top notesFlavorscompounds

Food &beverage

Sold as "flavors"

Building blocksSold as "flavors"

Flavoringredients

Other ingredients

General F&B

Aroma chemical co's

Natural extractcompanies F&F

Flavor value chain creationillustration



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Therefore, to succeed in the F&F industry, four dimensions need tobe addressed

TECHNOLOGYPOSITIONING

Must-have competences: "killer line-up"

> Meat

> Vegetable

> Vanilla> Mint

> Citrus

> Red frui ts

> Taste modification

> Regional taste competencies

> 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

Technology Competences Taste Competences

FLAVOR POSITIONING END USE POSITIONING

> Culinary

> Snacks

> Sweet> Dairy

> Non-alc. beverages

> Alcoholic beverages

> Powdered beverages

> Consumer health

> Regional categories

Application knowledge

CUSTOMER POSITIONING

> Key Accounts, such as

Unilever

PepsiCo

Coca-Cola

> A-B customers

> Regional heroes

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


C


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C.KEY QUESTIONS

How players will adaptalong the value chain?


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In this changing context, every player will have to address keyquestions

KEYQUESTIONS

SELECTIONOF PLAYERS

FLAVOR INGREDIENTPRODUCERS

FLAVOR

PRODUCERSFOOD AND BEVERAGEPRODUCERS

Key questions by player type with regards to flavors

> How to secure raw material accessat required price?

> Is downstream integration the rightstrategic move?

> How to improve operationalefficiency and return on investmentto maintain competitive position?

> Could the fragrances business unitbe carved-out ?

> What is the most relevanttechnology positioning?

> How to manage the innovationcycle?

> What flavor product depth (flavortype, product complexity level)?

> What end-market to serve?

> What commercial approach?

> How to secure the winning tastefor the consumer and constantlyinnovate?

> Should flavor be made or bought? Could building blocks and topnotes be bought from differentsuppliers?

> What is the best flavor supplierbase?

> How to optimally work withsuppliers?


Naturalingredientssuppliers

for private label

D
http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=cyOr-sHwbAZ0LM&tbnid=LkGgxRzRxlVVAM:&ved=0CAgQjRwwAA&url=http://brandingsource.blogspot.com/2013/01/new-logo-solvay.html&ei=PvR5UfXuOs7wtQbS4YGADQ&psig=AFQjCNH86FahaZ-R2i48CGKso87Ki7Zc4w&ust=1367033278994788http://www.iff.com/internet.nsf/HomePage!OpenForm


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D.ABOUT

ROLAND BERGER

A worldwide leadingstrategy consulting firmwith more than 50 offices


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Roland Berger is a worldwide leading consulting firm advising globalindustrials and presence in all key vanillin consumption areas

0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1

AMERICAS

Boston I Chicago IDetroit IMontrealI New York ISo Paulo

EUROPE & MIDDLE EAST

Amsterdam I Barcelona I Beirut I Berlin I Brussels Bucarest I

Budapest I Casablanca I Doha I Dubai Dsseldorf I Frankfurt IGteborg I HambourgI Istanbul I Kiev I Lagos I Lisbon ILondon I Madrid Manama I Milan I Moscow I Munich I Paris IPrague Riga I Rome I Stockholm I Stuttgart I ViennaWarsaw | Zagreb I Zurich

ASIA

Beijing I Guangzhou I Hong KongJakarta I Kuala Lumpur I MumbaiSeoul Shanghai I Singapore I Taipei

Tokyo

0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1

Founded in 1967in Germany byRoland Berger

51offices

36countries

2 700 employees

220RB Partners

1,000international clients



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Roland Berger provides significant experience in the flavor and foodingredient 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 footprintstrategy andproduction sites location for a leading F&F player

> Development of pricing strategy for a leadingF&F player

> Strategy development and growth strategies forselected business units of F&F players


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Selected references in Consumer Goods

We have also worked for major food and non food manufacturers

FOOD AND BEVERAGE NON FOOD


E


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E.CONTACTS

Contacts for furtherquestions
http://muc-digitals-4.rolandberger.net:8080/Sites/contact.jspx


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For further questions, please do not hesitate to contact us

Thank you

Alexander Belderok,PartnerAmsterdam

[email protected]

+31 (6) 4382 4920

Sebastien Adam,Project managerMontreal

[email protected]

+1 (514) 875 2000


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Acronyms and sources

ACRONYMS

Bn Billion

E Estimates

F&B Food and Beverage

F&F Flavors and Fragrances

M Million

SOURCES

Euromonitor

Expert interviews

IAL Consultants

Leatherhead foodLeffingwell and associates

Roland Berger experience and desk research

SRI


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impact!thatcreates

It'scharacter

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