World Reimagined: The Food Flavors Market Could Hit Nearly $20 Billion; Stocks to Watch

Whether the food we eat is spicy, sweet, savory, or even bland, there is little question that flavor matters. Flavorful food is rewarding, and even some flavors that might be stomach-churning for some can be quite appealing to others. That said, we think many question the vomit-flavored jelly bean even if it was created to bring a fictional world into our reality. The bottom line is that flavor sells, and as we know consumer tastes can be fickle. Different flavors come in and out of favor, but as we embrace plant-based alternatives, particularly for meat, consumer expectations call for something that tastes as good as the original, if not better. For investors, this flavor demand can be satisfied by a handful of global companies attacking the food flavors market, which Fortune Business Insights sees reaching $19.3 billion by 2027, up from $14.1 billion in 2019.

What is flavor?

On our path to discussing those companies, first let's understand what flavor is. Flavor is the sensory impression of a food or other substance, and is determined mainly by the chemical senses of taste and smell. While many of us would think taste is the key determinant of flavor, it’s really the smell that influences the flavor. The reason for this is rather simple - the taste of food is limited to sweet, sour, bitter, salty, and umami. Yes, while we fancy ourselves rather proficient in our respective kitchens, we too had to do some googling to figure out what umami is. The smells of a food are potentially limitless due in part to the fact the human nose can detect more than one trillion different scents.

This means that altering a food’s taste relies not so much on its actual taste, but rather its smell. Examples of this can be found across soft drinks and flavored jellies. The point being that when we think of companies that influence the flavor of food, we have to consider not only spice and ingredient companies, but scent and fragrance ones as well. Food (or flavor?) for thought.

Plant-based alternatives

The combination of taste and smell sensations are called flavorants, and we use them to alter or enhance the flavors of natural food product such as meats and vegetables. From the simple salt and pepper to the more complex spices you have in your pantry, their purpose is to enhance the natural flavor of the food so it is more appetizing. Flavorants also add flavor to those food products that may not have the desired flavors, such as different packaged foods that include candies, snacks, beverages, and yes, plant-based foods, particularly plant-based meat alternatives.

According to the Plant Based Foods Association, the number one driver of all food purchases is taste. As more food becomes plant-based, there will be more demand for the colors, flavors and scents that consumers have grown accustomed to and these products will become a larger part of the science of food. The plant-based meat market is expected to reach $13.8 billion by 2027, a dramatic increase compared to $3.3 billion in 2019, as folks look to adopt healthier lifestyles and become more socially responsible. Conventional animal agriculture contributes 18% of all global greenhouse gas emissions – that’s more than the entire transportation sector!

Cleaner preferences

Consumers are also increasingly seeking colors, flavors, fragrances and other ingredients that are organic, contain less sodium, are gluten-free, and are non-GMO (genetically modified organisms). Moreover, they are no longer willing to trade off taste for health and nutrition. In 2017, 57% of consumers agreed that nutrition is more important than taste, but only 48% of consumers in 2019 agreed. Furthermore, with consumers wanting less sugar and sodium in food and beverages or the addition of functional ingredients to boost nutritional benefits, the need to build back or balance taste expectations will continue to be key. The confluence of these factors is expected push the global natural and organic flavors market to $10.7 billion by 2027, which equates to a compound annual growth rate of 8.1% over the 2019-2027 period.

Adding some flavor to your portfolio

When it comes to the combination of flavor, taste and fragrance, investors have roughly a handful of public companies in which to invest. According to data published by Statista, the largest is Givaudan SA (GIVN:SW) with 16% of the global flavored and fragrance market followed by International Flavors & Fragrances (IFF) at 13%, rounded out by Symrise AG (SY1:GR) and privately held Firmenich at 10% each. Quickly tallying the market share percentages published by Statista suggests half of the flavor and fragrance market remains, but we’d quickly note that compilation doesn’t call out McCormick & Co. (MKC) or flavor and color company Sensient Technologies (SXT). Even after adjusting for those two additions, the flavor and fragrance market is a rather fragmented one, and if recent history holds, we could see the recent wave of acquisition activity continue as companies look to position themselves to meet evolving consumer preferences.

In recent years, McCormick & Co., the company behind Grill Mates Montreal Seasoning, Lawry’s Seasoned Salt, Old Bay, and Frank’s Red Hot Sauce, among others, has been on an acquisition spree. The company recently acquired clean and natural flavor company FONA International, which had sales near $114 million, for $710 million. That purchase closely followed McCormick’s buying hot sauce maker Cholula for $800 million. We’d point out that McCormick is a member of the Dividend Aristocrats, which means it’s not only a member of the S&P 500 but it has continued to increase its dividend for over 25 consecutive years. In our view, we see a company’s ability to deliver that track record while integrating acquisitions pointing to a disciplined and financially savvy management team.

International Flavors & Fragrances recently merged with the Nutrition & Biosciences business at DuPont (DD). This combination follows IFF’s 2018 acquisition of Frutarom that enhanced its position in natural taste, scent and nutrition. When IFF reports its quarterly results on May 11, investors should pay attention the expected synergies to be had that will likely range from flavors and fragrances and cross marketing opportunities but cost reductions as well. The degree to which IFF shares more granular thoughts on those matters, the more likely we could see meaningful changes to the current 2021 and 2022 consensus EPS forecasts of $5.91 and $6.59, respectively.

Individual companies continue to grow both organically and through acquisition as discussed here. There is no doubt to us that this segment of the food industry is one that is poised for growth, especially given the move away from animal-based protein (meat) and toward plant-based sources. As anyone who has cooked with soybean products can tell you, inasmuch as soybeans are a very versatile food, the one thing they lack above all is flavor.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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