May 6, 2002
Volume 80, Number 18
CENEAR 80 18 pp. 32-37
ISSN 0009-2347


Latest consolidation bout leaves giants and many niche players, but few in the middle




This month, Bayer expects to begin receiving binding bids for its flavors and fragrances subsidiary Haarmann & Reimer. Bayer put H&R on the block at the end of November 2001 and has said it hopes to raise roughly $1.3 billion from the sale.

The sale in a sense marks the end of an era: Bayer follows Roche, which spun off its Givaudan division in 2000, in ending a decades-long involvement with the flavors and fragrances, or F&F, industry. The industry itself has global sales that will probably top $16 billion this year.



The only remaining major F&F business held by a chemical company is Quest International, owned by ICI. Quest--cobbled together from a number of smaller suppliers--became part of ICI when ICI purchased Unilever's specialty chemicals business in the mid-1990s; unlike its peers, ICI considers the sector one of its core interests.

So now, industry gossip is turning on who is to buy H&R. Bayer invited some seven or eight companies to bid for the unit. Degussa--currently in the business only in a minor way--is one; other F&F suppliers are logical candidates as well. And at least some industry observers are hoping for "fresh blood" from private financial investment companies, for example.

Of today's top tier of F&F companies--those with sales of $800 million and up--International Flavors & Fragrances (IFF) of New York City, Japan's Takasago International Corp., and Givaudan are the only ones with publicly traded stock. Firmenich, based in Geneva, is privately held. Quest is part of ICI, and H&R--for now--is part of Bayer.

Milwaukee-based Sensient Technologies is aiming to join the big leagues through an ambitious program of acquisitions. It has edged its way into the top 10, according to rankings by industry consultants at Canton, Ga.-based Leffingwell & Associates, followed by Japan's T. Hasegawa, Germany's Dragoco, and France's Mane S.A. Bush Boake Allen had been in the top 10 before it was acquired by IFF in 2000. All have sales in the F&F field in the range of $200 million to just over $500 million.

From there, the industry fragments into a host of much smaller players. In fact, as consultants at SRI International pointed out in a study published at the end of 2001, a characteristic of the F&F industry "is the virtual absence of medium-sized participants," with sales of $75 million to $100 million.

That opens a potential for smallish, select acquisitions, of course. For example, Sensient earlier this spring acquired the German firm C. Melchers, which has sales of about $14 million per year and supplies flavors for coffees and teas as well as essential oils and aroma chemicals.

BUT OPENINGS for larger acquisitions still remain. Witness Givaudan's buy in January of Nestlé's flavors business, Food Ingredients Specialties (FIS), in a transaction valued at roughly $450 million. Jürg Witmer, Givaudan's chief executive officer, calls the acquisition "an important step forward in attaining undisputed industry leadership."

And in 2000, IFF paid $970 million for Bush Boake Allen, whose sales in 2000 were just over $470 million. Subsequently, in December 2001, IFF sold to financial company Close Brothers Private Equity the former Bush Boake Allen aroma chemicals business in Widnes, near Liverpool, England. CBPE will operate the unit as a newly independent company to be known as Aroma & Fine Chemicals Ltd., and it is expected to have sales of about $30 million per year.

Key to making the big acquisitions, Givaudan's Witmer believes, is speed and flexibility. He says, "It took us no longer than three months from the beginning of negotiations with Nestlé to the conclusion. We had small teams, and everything was done in-house, except for attorneys, so we were able to keep this deal under wraps. It came as a surprise even to most people in this company. When the opportunity arises, we can move very quickly."

And there is still little danger of the industry's top tier becoming so consolidated that alarm bells will ring in the offices of antitrust authorities, Widmer points out. "If you look at the market shares of even the number one and number two, if we were to merge with IFF, we would still be under the theoretical threshold of acceptance," he says.

More resistance would come from customers, adds Peter Wullschleger, director of investor relations at Givaudan. "Antitrust authorities would closely follow any major mergers or acquisitions," he says. "But a more important factor is the customers--they would not allow too much consolidation, leaving them with little or no choice."

However, Wullschleger predicts that the F&F industry will continue to see more consolidation. "The industry as a whole is reacting to the concentration of its customer base," he points out. For example, there are more and more mergers and streamlining of portfolios in customer industries such as personal products, household products, and foods. Customer companies draw up a call list of suppliers, who are then sent bidding document briefs, explaining the flavor, fragrance, or ingredient wanted. With the number of customers going down through consolidation, buyer pressure on suppliers is increasing, Wullschleger says.


THAT IS WHAT is giving the boost to big companies, he argues. The smaller companies, on the other hand, are the ones being squeezed. "They will have trouble," Wullschleger says. "If an F&F company is not strong in all markets, it will not be able to serve the large customers like Unilever or Procter & Gamble."

No matter what their size, however, companies in the business are cheered by the relatively healthy growth of the industry.

A recent study by the market research firm Freedonia Group forecast growth in global demand for flavors and fragrances of 5.4% per year, with the industry reaching $18.4 billion in 2004. The growth will be driven by strong gains in the developing regions of Latin America and Asia, outside of Japan.

Particularly strong growth is forecast for China, Brazil, India, and Mexico, as well as smaller markets such as Vietnam and Chile. "These countries are experiencing robust growth in their food-processing and consumer-product manufacturing industries, bolstered by strong international investment activity," the study says.

In contrast, growth in the world's developed markets "will continue to be sluggish. Growth will be held down by market maturity, trends favoring less flavor- and fragrance-intensive consumer goods, consolidation in end-user industries, and strong downward pressure on prices."

The industry's supply and demand have historically been dominated by Western Europe, the U.S., and Japan, the consultants say. These regions will account for 68% of total demand this year.

However, over the past decade, the study notes, there has been a definite globalization of the industry. The reason is simple: Leading F&F manufacturers are following key end users such as food processors and detergent producers to these regions. Expansion activity in China and Brazil has been especially strong, the study points out, with production showing particular growth in countries such as Spain, Ireland, and Mexico.

According to the Freedonia study, growth in demand for essential oils and natural extracts will outpace that for synthetic aroma chemicals over the next several years.

Flavor blends will continue to be the largest product segment. Blends should show strong gains in developing countries, which are increasing their consumption of products such as fast foods, soft drinks, and snacks. However, in developed markets, growth is being hindered by a variety of factors: consolidation in the food-processing industry, strong downward price pressure from end users, and strong growth in products such as "near waters"--flavored mineral waters that use less flavor than the traditional carbonated drinks they replace.

Demand for fragrance blends will benefit from healthy increases in the production of cosmetics and toiletries worldwide and from growing interest in aromatherapy, the study adds. It notes two particular influences: In the developed world, aging and affluent consumers are increasing their use of skin-care products and cosmetics; while in the developing world, increasing per capita incomes are allowing purchase of greater amounts of better quality consumer products.

All of that demand requires a wide variety of essential oils and extracts and synthetic flavors and fragrances. According to SRI consultants, some 2,800 individual aroma chemicals--benzenoids, terpenes, and heterocyclic chemicals, primarily--are used in F&F compositions. However, SRI points out, only a few hundred are offered on the merchant market and used in quantities larger than 50 metric tons per year.

Although essential oils and natural extracts that are needed for compounding are closely identified with the F&F product business, major F&F houses are only selectively involved in producing them.

International marketing and global presence are becoming increasingly important in this sector, and SRI predicts that the role of essential oil dealers will change from one of trader to that of a critical link between suppliers and users of raw materials of natural origin.

These days, China is the biggest natural products source for the F&F industry. However, points out one supplier, China is also importing a lot from India. The two countries, with their cheaper raw material costs, have kept prices down.

This is also true in aroma chemicals. For example, Jean-Pierre Tirouflet, CEO of Rhodia, a major producer of vanillin, says that Chinese suppliers of vanillin have sold at extremely low prices, hurting the overall market. But now, he says, the situation seems to be improving, and Chinese manufacturers are becoming more realistic about their pricing.

Other areas, too, have their natural-oil specialties. For example, until the 1990s, Bulgaria was the prime supplier of rose oil, distilled from Rosa damascena, the damask rose. The blooms are picked by hand early in the morning, when the aroma is strongest, and transported to distilleries.

Seven companies garner almost half of the global sales of flavor and fragrance chemicals

2001 SALES
International Flavors & Fragrances (U.S.) $1.84
Givaudan (Switzerland) 1.42
Firmenich (Switzerland) 1.12
Quest International (U.K./ Netherlands) 1.05
Takasago (Japan) 0.82
Haarmann & Reimer (Germany) 0.78
Sensient Technologies (U.S.) 0.53
All othersa 8.09
TOTALa $15.7
a C&EN estimate. SOURCE: Leffingwell & Associates
ROSE GROWING in Bulgaria suffered in the 1990s as subsidies from the post-communist government dried up and land reforms began. Farmers who got only one crop a year from a rose harvest ripped out bushes to plant grain and other seemingly more lucrative crops. At one point, Bulgaria had about 50% of the world rose-oil market, but the country saw its share fall to about 35% when growers elsewhere in the world, including Turkey, Morocco, and India, gained market share.

Bulgaria's rose acreage is going up again, however, because growers see the crop as a high-value product. Rose-oil distillers are modernizing, and producers are emphasizing quality rather than quantity. Last year, according to one source, international buyers paid anywhere from $3,500 to $3,600 per kg for Bulgarian rose oil, up about 5% from previous years, for the 1,200 kg of rose oil produced in Bulgaria. Some 60% of that went to the European Union and 35%, to the U.S.

Meanwhile, even for suppliers in an industry as traditional as essential oils and flavors, technology is not sitting still.

A case in point is U.K.-based Ineos Fluor, which this month is completing expansion of its capacity for toll manufacture of flavor and fragrance extracts, featuring its proprietary Xentia process. The expansion will introduce "new opportunities for the toll manufacture of high-quality, natural extracts," the company says.

The company has been working for the past two or three years to commercialize the Xentia process, "as we have worked in conjunction with worldwide flavor and fragrance houses to provide products and services that are unique in this market," says Dave Morrison, new ventures development manager for Ineos Fluor.

The process, based on fluorine chemistry, features hydrofluorocarbon 134-a, which Richard Longden, communications manager, terms "an effective extraction agent, good for essential extracts without damaging them." It works at about room temperature and at pressures of about 300 psi, retaining the volatile components of natural extracts. Longden claims that the quality of the extracts "is right up there with those produced by supercritical CO2."

He points out that because Ineos Fluor--formerly part of ICI and recently acquired by Ineos--produces propellants for asthma inhalers, "we understand regulations such as current Good Manufacturing Practices."

Other potential customers are final producers of F&F products--companies working with essential oils, but also the end-product manufacturers, on a global basis. The new capacity is primarily in the U.K., but Ineos Fluor is "doing a lot of development work in our labs in Japan as well," Longden says.

As Meredith Willson pointed out in "The Music Man," a good marketer "has gotta know the territory." For marketers in this very specialized sector of the chemical industry, it's a question of knowing how to juggle the science with the magic--and how to exploit products sourced from faraway places with strange-sounding names.


In The Flavor And Fragrance Industry, Small Is A Good Thing

Treatt plc, based in southeast England, is typical of the specialist firms that, despite consolidation, continue to populate the flavor and fragrance (F&F) industry. It succeeds by concentrating on niche businesses and offering services and products that the industry giants don't offer.

Treatt was founded in 1886 as a London trader in essential oils, soon becoming an agent for the Zanzibar government trading company, dealing with commodities such as clove and other East African essential oils.

The company began adding value to its commodities by distillation and similar processing. According to Hugo Bovill, managing director of Treatt, at one point, "we looked at making fragrances and flavors but decided strategically that was not for us."

The company also became a distributor of aroma chemicals, and since the mid-1980s this business "has grown faster than anything else," he notes. "Often, the needs of the entire F&F industry are less than one chemical company wants to make."

Additionally, the company offers related specialties such as diacetyl--a by-product of the South African sugar industry that is used to make margarine flavors--and various high-impact sulfa chemicals often used at dosage levels of less than 1 part per million.

"Any chemical company making something with an aroma might look to us to see if there is a market for it," Bovill explains. "They might need to determine whether or not the chemical is kosher, for example. Determination of whether a chemical is halal [the Moslem equivalent of kosher] will be next."

Moreover, increasingly sophisticated analytical tools are helping the industry determine the impurities in a sample. However, unlike most of the chemical industry, which wants impurities out, in the F&F industry, "impurities are what frequently matter--they carry and contribute to the odor profile," Bovill points out. "It's the mix of the impurities that may give the desired properties, not the overall purity of the product."

And the company is beginning to see marketing opportunities in the field of chirality. "We've been doing chiral chemistry for years," Bovill says. "For example, l-carvone is a spearmint flavor, and d-carvone is dill/caraway. This field is becoming more important, and we'd like to get more involved. If you can make a chemical with one isomer stronger than the other, you might get better value."

Inventory, Bovill notes, "for us is a key word. To have $12 million in inventory and $40 million in sales is a lot, but it's part of the business. You can wait for years and then something may happen very quickly."

Treatt, he says, can act as a one-stop supermarket for the flavor and fragrance industry in Europe, but not in the U.S. The company set up a presence in the U.S. in the early 1990s in Florida to process orange-peel oil. It now has a small team, selling to more than 300 customers, including all major F&F companies in the U.S., and this autumn it is scheduled to move to a new site in Lakeland, Fla.

"Long term," Bovill says, "we want to develop and do what we do in Europe in the U.S. We'll do it through organic growth and selective, very small acquisitions. We're not in a tearing hurry--we are patient."


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