Globally, the regulations related to nutraceutical ingredients vary in terms of classification and specific requirements. This lack of harmonized rules in the nutraceutical space in different countries is a challenge for companies as they need to adapt their marketing strategies to the regulations of each country.
USA is a large export market for Indian aroma chemical manufacturers. In the US, aroma chemicals are regulated by the Food and Drug Administration (FDA), Environmental Protection Agency (EPA) and Occupational Safety and Health Administration (OSHA). They are further regulated by organizations such as International Fragrance Association (IFRA) and its research center Research Institute for Fragrance Materials (RIFM), Fair Packaging and Labeling Act (FPLA) and Consumer Product Safety Commission.
The European Union’s REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals), which came into force on 1st June 2007 (and will take full effect only this year in 2018), monitors the production and use of chemicals and their potential impact on human health and the environment.
While these stringent regulations act as barriers to entry, greatly benefitting the players who already have a presence in the market with the required regulations, it can significantly increase operating costs for smaller players and also delays product innovation.
With the growth of the industry, M&A activity has also significantly increased in the flavours, fragrances (F&F) and nutraceutical ingredients sectors. Smaller players with strong competence in a single product and limited geographic presence are getting acquired by larger players giving access to a broader market and stronger distribution capabilities. Considering the overlap between the value chains of F&F and nutraceutical ingredients, some of these acquisitions have allowed companies to gain access to specific customers and complementary products.
The bigger Indian companies are resorting to M&A led growth to quickly ramp up scale and gain access to new products and new customers. For example, S H Kelkar was traditionally weaker in the flavours segment, but has made two acquisitions recently which has helped it to nearly double its market share.
There has been some inbound interest for transactions in the F&F space in India from major global players. This is attributed to the fact that India ranks high on most of the parameters that are considered by a global company before making an acquisition in a particular geography. As Indian companies become bigger in size, they are expected to attract strategic interest from global players to strengthen presence in the low-cost manufacturing Indian landscape.
The F&F industry is likely to pose scale-up challenges to the Indian players, given the entry barriers, and dominance of the MNCs but the nutraceutical ingredients segment presents an extremely promising opportunity. It is a large global market, and Indian players have made strong inroads in this space. We expect the nutraceutical industry to grow at the fastest rate, with high-quality Indian companies combining their process efficiencies with an increasing level of R&D, to create globally accepted products. They are poised to scale up rapidly.