Product and Service
Companies included in flavors &fragrances ingredient sector are usually manufacturers of flavors compounds used in savory, beverages, sweet and dairy and of fragrance compounds used in perfumes and consumer products.
Demand for Product and Service
The demands for Flavors & Fragrances ingredient form a huge market globally. It has been growing slowly in US market (1% or less) but growing much faster in developing market (4-5%).
Sector’s current, trend, causes behind trend, and future
Current and Trend
- Demands in this sector mainly come from developing market at a typical growth rate at 4%.
- Domestic demands, in terms of volume, seem to be picking up following gradually declining for a few of years mainly due to the products’ shifting to higher margin/price products.
- Increasingly intensive competition in food industry, especially presented by increasing number of mid and small size companies, may mean more opportunities for providers of flavor &fragrance ingredient and compound to earn higher margins by more frequently innovating their products.
- It seems that there is upward trend in selling price of products driven by increasing raw materials costs.
Causes behind the trend
- Global economy’s growth and increased accumulation of wealth in developing market, which are rooted from increasing productivity and global trading’s expansion, should be considered as the radical reasons behind this sector’s current.
- 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
Our data indicates that the companies in this sector have presented as high as 5% organic annual growth in sales in the past four years and, among those increases, 80% has come from developing market/business. The demands from existing business, mainly developed market, as indicated in the data of sales volumes seem to have been declining between 2015 and 2017 but may be gaining support from increasing demand across all regions.
The deep reasons behind sales’ growth in developing market and sales’ declining in developed market between 2015 and 2017 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 in developed market have had increasing consumption volumes in developing market. At the same time, increased disposal incomes, working with increased health and wellness awareness, also enable 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 will not bring increased consumption volumes for developed market. However, it can bring improved 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, it also explains why sales growth did not bring improvement in margins for those companies when sales growth comes primarily from developing market where the existing products have low margins and as well are costly during the process of developing new market. We think some of them will be seeing increased margins as existing product’s sales and new products catch up developed market.
The typical gross margin in this sector is 43% and operating margin is 19%.According our analysis, a typical ratio of enterprise price/adjusted EBI is 44 with interest/EBI of 23%.