28 indias ff market sanganeria

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Paper presented at the IFEAT Int. Conference in Cape Town, South Africa, 27 Nov.- 1 Dec. 2006: The Industryin Sub-Saharan Africa and the Indian Ocean Islands. Pages 233-237 in the printed Conference Proceedings.

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INDIAS MARKET FOR F&F INGREDIENTS

Ravi Sanganeria

Ultra International Limited,AVG Bhawan, M-3 Connaught Circus, New Delhi 110 001, India

[ [email protected] ]

Since 1990, India has experienced a remarkably fast expansion in the domestic market for consumerproducts containing F&F ingredients. In the not too distant future, the size of the Indian market will begreater than that of the USA and the European Union. Essential oils, aroma and flavour chemicalshave traditionally been used in India and these have been sourced from domestic production and byimport from other countries. More recently, the robust economy, rising income levels and exposure toWestern influences have resulted in a substantial increase in imports.

This paper examines trends in Indias F&F market and considers the opportunities or constraints forsuppliers of essential oils, particularly those in the Sub-Saharan Africa region.

Indias Economy at a Glance

Indias economy has more than doubled in real terms since reform began in 1991, and shows no signsof cooling. The broad commitment to liberalization demonstrated by three successive governments hassparked unprecedented growth and opportunity, both for local companies and for the foreign onesthinking about entering the subcontinent for the first time.

Consumer demand in India, increasing three to five times faster than the economy, reveals the outlinesof an aspiring middle class that is vibrant, growing, and young. Indeed 70 percent of Indias citizensare less than 36 years old, and the country is home to 20 percent of the worlds population under theage of 24.

The Indias F&F Ingredient Market

Market size

The global flavours and fragrances ingredient market was worth $6.3 billion in 2006, of which Indiahas a market share of approximately 10%.

Indias expected significance in the global market for F&F Ingredients by 2011

(US$ Millions)

The global market

Products 2004 2005 2006 2011Indias share

in 2011

GlobalAAGR

2006-20011

Essential oils 3,583 3,734 3,926 5,047 20% 5.2 %Aroma chemicals 2,206 2,299 2,374 2,786 15% 3.3 %

Total 5,789 6,033 6,300 7,833 35% 4.5 %Source: BCC Research

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BCC Research has predicted an global average annual growth rate (AAGR) of 4.5% per year in theF&F ingredient market and that in 2011 the global value will grow to $7.8 billion, of which the Indianmarket has the potential to grow to the tune of US$ 3 billion.

Industry structure

The Indian F&F market is estimated at currently around $ 500 million and the top five internationalhouses account for 75% of the market.

Flavours comprise of 45% of the market while fragrances total 55%. However fragrances are also usedin the joss stick and pan masala / zarda (chewing tobacco) industries, where figures are typically notdisclosed. Hence, the F&F industry sales may not completely reflect these figures and estimates rangeto 10% and higher.

Source: Frost and Sullivan

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The flavour market in India is highly fragmented into the bakery, savoury and confectionery segmentswith buyers ranging from multinationals to individual Mom and Pop owned stores that manufacture ona small scale. In all other segments, it is relatively more consolidated, as manufacturing technologybecomes more complex, restricting the entry of smaller players.

Source: Frost and Sullivan

The fragrance market in India is highly consolidated and most of the sales are made by large or mid-sized personal and home care players such as Unilever, Godrej, Nirma, Dabur, Reckitt Benckiser,Henkel, Marico, Johnson & Johnson and P&G. The exceptions are the joss stick segment and to someextent the hair oils segment, which have a host of small players. The Indian fragrance market differsfundamentally in its segments from the global market. Globally fine fragrances are a major componentof sales, while in India the fine fragrance market is negligible and soap and detergent form the bulk ofunit sales.

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Trends in the industry

Traditionally while fragrances and flavours were viewed as the most customized of all raw materials,and therefore commanded higher prices, prices have been pushed down consistently by largemanufacturers in the last decade. This trend has gained momentum, as there is increasinglyconsolidation among customers through mergers and acquisitions, improving their bargaining power.

Another factor affecting the margins in the industry has been the overall increase in the prices ofaroma and flavour chemicals. These have seen price increases due to the fluctuation in thepetrochemicals industry. Further, until now, the Indian F&F industry has largely been focused on thelarge soap and detergent segments. As these segments mature, the fragrance industry faces stagnantsales and prices. In the case of flavours, since processed and instant food itself is a nascent industry inIndia, there is a long way to go before the market matures. Globally, major F&F houses are trying tocounteract this trend by increasingly using their India and China hubs as sourcing centers for rawmaterials required by creative centers all over the world.

While the F&F industry in India is facing tougher times on account of rising input costs and droppingprices, there is still absolute growth to come as far as numbers are concerned. As consumers graduate

from using basic soaps and detergents to higher end products such as skin creams, lotions, hair gelsand other high-end cosmetics products the demand for the same will increase with time. Air careapplications are also seeing increased growth as consumers switch to more expensive insecticides suchas liquidators, and also start fragrancing home and office areas with fresheners.

In the flavour market too, as processed foods grow at over 12% on an average, the demand forflavours in the savoury and beverage application area is growing. This is fuelled by rising disposableincomes in the urban areas and an increased willingness to consume store-bought foods.

The competitive edge will come through captive ingredients and technologies that make one flavour orfragrance relatively exclusive and difficult to copy, thereby extending its shelf life. Cost control willcontinue to be a critical factor for the F&F houses in the next 3 to 5 years, until they manage to bring

around a marked reduction in the import content and are able to achieve consistent supply quality fromcost-effective Indian or Chinese sources.

The critical success factors that will lead to the winners in this industry will therefore be:

The ability to foresee new segments that have the potential to grow and enter these at an earlystage in the lifecycle. As buyers consolidate and rely more on long-term agreements, the earlymovers into segments such as skin care, styling products, hair conditioners, shower gels,instant foods, branded snacks and newer fruit-based energy drinks are likely to dominate thesemarkets.

Speed in building up a sizeable presence in the Asia Pacific (APAC) region. Currently APACis the fastest growing region for fragrances and flavours as consumers in these countries(especially China and India) can now afford to use more FMCG than they did before.

Despite the presence of the top five international houses, we may still witness morecompetition as players on the next ten rungs globally attempt to penetrate the Indian marketmore effectively. As the American and European markets saturate, increasingly, India alongwith China is being seen as the road to growth for most F&F houses and the action is going tobe here.

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Indias Sourcing of F&F Ingredients and the Potential for African Suppliers

As was revealed by the lectures presented at the IFEAT 2005 Conference in Cochin, India is asignificant scale producer of both aroma chemicals and of a wide range of essential oils, which aredestined for consumption on the domestic market and/or for export.

The domestic production of some essential oils is presently sufficient for the Indian market demand.However, India has had to import many other essential oils that are either not produced domesticallyor for which domestic production levels are inadequate. With the predicted growth in the Indian F&Fmarket, this could present an opportunity for greater exports to India of certain essential oils.

The flavour oil sector offers good opportunities, particularly for citrus oils since there is very limiteddomestic production. Within the fragrance sector, the opportunities are mixed: the rapidly growingsoaps and detergents sector predominantly consumes aroma chemicals but there remains a significantconsumption and import of essential oils by the compounders of traditional fragrances, which aremainly the smaller players in the industry.

With regard to the potential for exports from the Sub-Saharan Africa region to India, opportunities are

perceived for producers of: Orange, lemon, lime and perhaps some other citrus oils.

Ylang-ylang, clove, ginger, eucalyptus and rosemary oils.

However, current or planned developments aimed at production self-sufficiency in India mightconstrain the export potential to India for some fragrance oils that have been reported at thisconference as currently being developed in Sub-Saharan Africa; specifically, geranium, patchouli andvetiver oils.

Ravi Sanganeria has worked since 1997 at Ultra International Ltd, a leadingmanufacturer of creative fragrances and flavours in India. He has held various

positions in the company and was appointed Director of International Business

Development in 2005.

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28 indias ff market sanganeria

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