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Flavour market is highly fragmented
The top five companies in the list above have had a substantial presence and business in India for many years now. Other international F&F houses in the last 10 years or so have also set up shop and are active in the Indian market. The Indian F&F market is estimated to be about 270 million US $. The organised fragrance market is about $137 million. Similar to the international market, the Indian F&F market is also almost equally divided between flavours and fragrances. It is estimated that International houses account for about 70% of the organised Indian market while homegrown Indian companies like M/s., S H Kelkar & Company Pvt. Ltd, Oriental Aromatics Ltd, Ultra International Ltd, Khattri Fragrances & Flavours Limited, Gupta & Company (P) Ltd, Sachee Aromatics Limited, etc. cater to the rest.
Almost all Indian companies are privately owned where typically sales volume figures are not openly disclosed. S H Kelkar & Company Pvt. Ltd., leads in the Indian F&F Industry followed by other houses as mentioned above. Some Indian FMCG companies who 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 may not be completely correct and may be 10% to 15% higher.
F&F industry segmentation is based on the application areas for flavours and fragrances and is as given below.
Fragrances / Functional Products
Fine Fragrances & Alcoholic Fragrances
F&F Market Scenario
The Flavour market is highly fragmented. Flavour purchasers may range from multinational companies to big Indian industrial houses to small-scale industrial units to local eateries to even individual homes. This is especially true in case of savoury, bakery and confectionary segments where manufacturing process is simple in comparison to other segments, which use more complex manufacturing technology. In the year 2005 the value-added food consumption market in India, is predicted at Rs. 2, 30,000 crores.
Fragrance market comparatively is more consolidated with majority players being either large or medium to small-scale enterprises. Although some segments do have very small players, the number is too miniscule in comparison. Indian FMCG is characterised by intense competition both by multinational companies, organised and unorganised Indian manufacturing setups. The National Sample Survey (NSS) data puts the Indian FMCG market size at Rs 89,000 crore of which more than Rs 53,000 crore was attributed to rural purchases. 41% of the middle class with 58% of the disposable income is in the rural areas. The consumption of non-food items year after year has only increased from 32.6% in 1987-88 to 46% in 2003.
Indian flavour and fragrance market looks promising
Associated Chamber of Commerce and Industry of India (ASSOCHAM) predicts that FMCG rural demand will rise by over 50% by 2012. Personal care, cosmetics and toiletries' market is itself about Rs 23,562 crore, sundry articles is about Rs 17,274 crore, and miscellaneous consumer goods Rs 48,325 crore. The sundry and miscellaneous consumer goods although not well defined certainly does not include food, clothing, pan, tobacco, intoxicants, medical or educational expenses, entertainment, consumer services, footwear or consumer durables. In light of the above, it is quite possible that the bulk of the expenditure was also on FMCG products! The modern cosmetics industry is still in the nascent stage and looks promising when you consider the vast population, the changing consumer attitudes towards health and hygiene, the proliferation of media & growing awareness of the rising educated class.
Factors Affecting The 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 flavours and fragrances are far from artistic creation but merely states that commercial rules have to be followed during creation while retaining the same quality followed in earlier times. Clients today believe flavours and fragrances to be simple mixtures of aromatic materials and not a harmonious accord achieved with difficulty. Flavours and Fragrances are graded 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 an 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 reluctant to spend similarly on a flavour 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 on the rise. FMCG manufacturers are unable to pass on the same to consumers by increasing product costs. In view of this, price increases requested by flavour and fragrances houses are strongly resisted by FMCG manufacturers 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.
Flavour and fragrance market 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 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 centres for essential oils, and for manufacturing quality aroma and flavour chemicals required by their creative setups around the world.
Fragrance and flavour manufacturing is not complex oil and involves simple mixing and making a blend of about 10 to 100 different chemical ingredients. 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 malodours, 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 corner their existing business making these exclusive only to the selected few.
Safety Rules and Regulations Another important factor in the F&F industry is the strict safety norms, restricting the use of many chemicals, either due to governmental regulations or due to self regulation by the industry itself. For example, some fragrance ingredients are not permitted for use on grounds of safety, while some others are restricted in their level of use in fragrances, depending on the intended end-use. Products intended to remain on skin viz., "leave-on" products, such as body lotions have stricter restrictions than those for products that are washed off the skin viz. Household products (e.g. Floor Cleaners) for which there are little or no intentional skin contact. The fragrance industry is guided by the IFRA (International Fragrance Research Association) guidelines for fragrance ingredients as defined and published in the IFRA safety standards.
The American Fragrance Manufacturing Association established the Research Institute for Fragrance Materials (RIFM), in 1966 in USA as a non-profit making, independent body whose task is to evaluate the safety of fragrance ingredients. The types of test carried out on behalf of RIFM include oral toxicity, irritation skin sensitisation and photo-toxicity (sensitisation induced by sunlight).
Intense competition in F&F industry
RIFM also gathers information from other independent research, published scientific literature and aroma chemical manufacturers. An independent panel of international experts in toxicology, pharmacology and dermatology reviews the test results. The results are published as RIFM monographs in the journal "Food & Chemical Toxicology". In case there is any cause for concern about the use of an ingredient, it is immediately indicated by the publication by RIFM through an Advisory Letter, which is acted on by IFRA. Environmental safety is another area of growing concern that RIFM has started to evaluate the environmental impact of many of the high volume ingredients.
All flavouring substances are regulated by legislation, issued by FDA. Government departments that control the safety of foods is also responsible to control the safety of flavours used in the food products. The flavour industry too over the years have accumulated a lot of information and data regarding use, occurrence, biological properties and all the information have been used to carry out independent safety evaluation by various experts. The flavour industry is also regulated by GRAS regulations of the Flavour and Extract Manufacturer's association (FEMA).
The manufacturers of flavour ingredients around the world have set up the "International Organisation of the flavour Industry" (IOFI) based in Geneva, Switzerland. IOFI issues guidelines to the members, makes recommendations, draw up rules and make available their expertise, to harmonise the diverse rules in various countries for the betterment of the industry and for the benefit of the consumer. Intergovernmental organisations like European Flavour & Fragrance Association, European Council, The scientific committee for food of European commission SCF, The food and agriculture organisation FAO, and the World health organisation WHO of the United Nations also conduct independent study group to evaluate the safety of the flavouring substances. Fragrances and Flavour Association of India (FAFAI), and Essential Oil Association of India (EOAI) are similar bodies set up by the Indian Industry.
The flavour and fragrance industry operations are minuscule when compared to the bulk chemical industry. The flavour and fragrance industry still uses the batch process unlike the continuous processing methods prevalent in the chemical industry. The flavour and fragrance industry requires a lot more number of ingredients albeit in smaller quantities in order to create a single flavour or fragrance. This explains why every F&F companies manufacture their products only on receipt of confirmed purchase orders, so that their needs to keep low inventories of raw materials are met. Inventory management thus is a very important function and streamlining systems and their operations necessary. Maintaining sufficient quantities of aroma materials at all times is difficult without accurate forecasting of the fragrance or flavour need by the purchasing companies. This leads to long lead times, sometimes almost six to eight weeks for fragrance or flavour supply, which can be critical to end-user FMCG manufacturers. Environmental conditions, political upheavals, dependence on imports, are other reasons responsible in affecting availability and cost of aroma ingredients and impacting supply and demand. This has led the global F&F houses to source the raw materials from Indian suppliers, which help in bringing down the cost for procurement and reducing lead times.
The F&F industry today is at the crossroads finding it tough with rising input costs and dropping prices of the compounded products. However, still there is growth in absolute terms. Rising incomes, better education and more awareness will mean a higher inclination to spend on 'Quality Lifestyle' products for home and health, personal grooming and social symbols. The demand for flavours will also continue to rise as the processed food market continues to grow. Regular use of flavours and fragrances in a product is no longer a luxury but a necessity for consumer acceptance. Flavours and fragrances that are novel will continue to be popular and gain better and faster acceptance. India traditionally used more of natural flavours as Indians preferred freshly prepared foodstuff unlike in Europe and America where artificial or synthetic flavour were in demand due to the use of canned frozen food and beverage. This is likely to continue. However, due to fundamental changes in lifestyles certain food items, beverages, confectionaries, bakery, and snacks that generally use artificial additives will increase giving a fillip to the flavour industry in times to come.
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.
Today commercial economic power is valued more than brute military strength. Economic construction is being witnessed in India, China, and countries of the erstwhile Soviet Union. The large population in these nations are fast emerging into major marketing opportunities for all marketers. Speed in building up sizeable presence and market strength in these regions of Asia is critical for survival in view of the dwindling or near stagnant markets of the west.
Despite the presence of many international and Indian F&F houses, it is expected that more F&F houses will attempt to penetrate the Indian market and get their share of the pie. Locally grown private Indian F&F houses too are consolidating and regrouping themselves professionally to measure up to the international houses. With the Indian FMCG market, hotting up it is highly unlikely that local Indian F&F companies will lag behind in giving a fair competition to the global giants. It will be very interesting to watch the trajectory of this fragrant industry and savour its flavour in times to come.
The top five companies like Givaudan, Firmenich, IFF, Symrise, Takasago have had a substantial presence and business in India for many years now. Other international F&F houses in the last ten years or so have also setup shop and are active in the Indian market. The Indian F&F market is estimated to be about 270 million US . The organised fragrance market is about 137 million US . Similar to the international market, the Indian F&F market is also almost equally divided between flavours and fragrances. It is estimated that International houses account for about 70% of the organised Indian market while home grown Indian companies like M/s., S. H. Kelkar & Company Pvt. Ltd., Oriental Aromatics Ltd., Ultra International Ltd., Khattri Fragrances & Flavours Limited, Gupta & Company (P) Ltd., Sachee Aromatics Limited, etc cater to the rest.
Almost all Indian companies are privately owned where typically sales volume figures are not openly disclosed. S.H. Kelkar & Company Pvt. Ltd., leads in the Indian F&F Industry followed by other houses as mentioned above. Some Indian FMCG companies who 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 may not be completely correct and may be 10% to 15% higher.
[Author: Mr. Sitaram Dixit, Former President (Flavor and Fragrance Division) of Oriental Aromatics and current Chairman of the "Consumer Guidance Society of India"]