The demands for Flavors products come either directly from customers or from food companies. It has been growing strong from emerging market, especially in the industry segment (food company’s demands). New innovated products seem to be helping bring more profit for companies in this sector.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Demands in this sector have been kept strong especially from developing market’s industry demands.
• Domestic demands, in terms of volume, seem to still growing but much slower than that from Eastern Europe and Asian market. However, increases in margins have been staying positive mainly due to the products’ shifting to higher margin products.
• Increasing demands for healthier and more natural food from this sector’s direct consumers or its industry customers’ consumers may mean more opportunities for providers of flavor to earn higher margins by more frequently innovating their products.

 

Causes behind the trend

• Global economy’s growth and increased accumulation of wealth in developed market, which are rooted from increasing productivity and global trading’s expansion, should be considered as the radical reasons behind this sector’s current.

 

Industry Future

• We will be able to see the expansion of developing market for consuming more products that are favorites of consumers in developed market. The existing companies in this sector need to use new market to consume their capacities for current products lines and put more money in innovation to meet the demands from consumers in developed market for more natural foods. 

   

General Financial Performance of Companies In the Sector

Relatively strong demands have stayed behind global increases in both sales volumes and selling price/product mix of flavor food products in the past four years. Our companies’ dada indicates that for both flavor foods for consumers and for industry the demands increased faster from emerging market such as Eastern Europe and Asian market than US market, especially the demands from industry in emerging market.

We think the fact that the fastest growth came from food companies of emerging market is consistent with our analysis on flavor& fragrance ingredient industry in another report. We think the deep reasons behind sales’ growth in developing market and slowing down sales volume growth in developed market are actually the ones that we have been seeing across the whole food industry, which are increased disposal incomes, resulted from global economy growth and increasingly accumulated wealth, and increased health and wellness awareness. They help bring a larger range of choices for consumers of developing market in terms of food and beverage’s quantities and qualities, which in fact explains why the existing products of developed market have been seen increasing consumption volumes in developing market. At the same time, increased disposal incomes, working with increased health and wellness awareness, also is driving consumers in developed market to pursue healthier lifestyle including foods with more natural and organic ingredients. Limited by demographic structure and high consumption level of consumers in developed market, the new lifestyle of consumers are not bring increased consumption volumes for developed market. However, it can help improve margins and profits for those companies who are more competitive in products innovation since the consumer would like to pay more for their new healthier life. 

In fact, the margins of companies (a typical gross margin at 44% and operating margin at 17%) in this sector have been largely improved (if exclude impacts of currency) even though the costs of materials increased in this flavor sector in the past several years. It is partially because the companies have been able to pass those increased costs on the selling price. But the more important reason is that, as we analyzed above, the sales is shifting to more value-added products (healthy/organic with higher margin). 

According our analysis, a typical ratio of enterprise price/adjusted EBI is 36 with interest/EBI of 25%.

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