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August 5, 2012

R&D Key to Success for the Ingredients Industry

IntroArticleImageForTheBlogBy Lauren Bandy, Analyst – Ingredients at Euromonitor International 

The ongoing economic uncertainty is probably the single greatest challenge for food ingredients companies today. They have to ensure short-term financial growth while finding the funds to invest in research and development (R&D) and sustainability to ensure longer-term progress. Many ingredients players are investing heavily in R&D to deliver a wider range of ingredient options for their customers, who themselves are looking to reduce costs at the same time as meeting consumer demand for healthier and more convenient packaged food.

Levels of R&D expenditure vary greatly between companies, with the highest spending coming from those focussed on speciality and technical ingredients: of the largest ingredients companies, DSM spends the most on R&D, at €350 million annually. In contrast ADM, a company focussed on commodities and bulk ingredients, has a much lower R&D spend at under €50 million.

While commodities and bulk ingredients are the largest categories in volume terms, growth rates will be much higher for smaller speciality ingredients such as botanicals, cultures and proteins. The health and wellness market offers opportunities and challenges, with a contrasting and simultaneous demand for natural and scientifically proven ingredients. Changes to the European Food Safety Authority’s (EFSA) approved health claims may prove a test for ingredients companies in Western Europe over the next 12 months. For example, soy proteins and probiotics grew by 25% and 50% respectively in volume terms over 2006-2011, but with their health claims rejected by EFSA, these ingredients will struggle to repeat that performance over the next five years.

As elsewhere, higher energy and raw material prices are negatively impacting production costs in the ingredients industry. Nevertheless there are also new opportunities in some categories, as suppliers look to develop cheaper alternatives to costly ingredients. For example, as cocoa prices continue to fluctuate, cheaper alternatives such as cocoa butter equivalents are becoming a popular alternative. At the other end of the spectrum, value-added ingredients and complete solutions and blends which allow a manufacturer to tackle more than one ingredient requirement in a single purchase are also attracting a growing interest. Botanicals for example, which come at a premium price, fit well with a healthy and natural product image whilst serving multiple purposes as a colour, flavour and antioxidant. Volume consumption of botanical ingredients is expected to rise by 30% over 2011-2016.

R&D is one area of business which should not be squeezed during these fragile times. By focussing on key packaged food trends – health, convenience, indulgence, natural and ethical – and ensuring a strong global presence with specialised local knowledge, ingredient companies should be able to create new and organic growth in the medium term.



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