Frutarom keeps growing (naturally)

With a dozen acquisitions in the past year alone, Israel’s food flavor and ingredient company is making a dent in global market share.

By NIV ELIS
Updated: FEBRUARY 1, 2016 09:56
Murals illustrating how Frutarom adds flavor to life adorn the company’s halls in Herzliya (photo credit: NIV ELIS)
Murals illustrating how Frutarom adds flavor to life adorn the company’s halls in Herzliya
(photo credit: NIV ELIS)
You may have never heard of Frutarom, but in all likelihood you have tasted it.
The Herzliya-based company produces flavors that zest up, spice or sweeten about half the products you can buy on Israeli supermarket shelves.
Whether it’s the tropical tang of passion fruit in your yogurt, the smoky barbecue on a crunchy snack or even the spicy kick in a condiment, many of the Israeli foods people know and love are created in Frutarom’s R&D labs and manufactured in its factories.
“What is a flavor? It’s a combination compounding of dozens of ingredients – in our case, mostly natural – out of at least 5,000 different raw materials, that when you combine them creates the taste of banana or vanilla, apple or salami or Bisli Grill taste,” says Frutarom president and CEO Ori Yehudai.
While the public has been busy eating Frutarom flavors, Frutarom, already among the top 10 flavor companies in the world, has been gobbling up companies around the world. In 2015 alone, Frutarom acquired 12 companies from around the world, and says there are only more in its pipeline.
With Frutarom growing at such a dizzying pace, it has its eyes set on becoming Israel’s next Teva. But will it be able to adapt to a world increasingly conscious about processed foods? That’s its strategy.
FRUTAROM HAS been around longer than the State of Israel itself. But though it was founded in 1933, it didn’t start expanding until the 1990s.
“When I joined the company, it was very small. It had little confidence in itself and its ability to become a real flavor company. Since then, we did mainly two things. We grew the company quite nicely, and we became truly global,” says Yehudai.
According to Yehudai, the company’s sales grew from around $3 million a year in 1990 to $80m. in 2000, $450m. in 2010 and $820m. in 2014. This year, it expects its sales to reach $1 billion, and UBS analysts project that figure to double by the end of the decade.
“Assuming execution and deal multiples remain intact, we expect this strategy to continue to unlock value through cost and top-line synergies,” UBS wrote in an analysis of the company in November.
A huge part of the company’s strategy has been to buy up other companies, a strategy that it’s speeded up of late. In its history, Frutarom has acquired 50 companies. Twenty-six of those acquisitions have been in the last four years alone, and 12 of them were in 2015.
According to its website, Frutarom sells over 31,000 products to more than 15,500 customers in 145 countries. It has 41 R&D labs where it develops its flavors, and employs 3,500 people.
Though it’s near the bottom of the top 10 in global flavor and fragrance companies, Yehudai notes that Frutarom doesn’t compete in the fragrance side of the business. When looking at flavors alone, he says, the company is sixth.
But despite its growth, Yehudai doesn’t see the company soon overtaking the top players.
“I don’t see the goal of being No. 1 to be the most important target. What I see as important is bringing value to our shareholders, growing carefully, not overpaying for acquisitions. We are very conscious and disciplined,” he says.
The biggest companies in the flavor field, he notes, are three times bigger than Frutarom, which still has only a 3 percent market share when fragrances are included.
Still, its mega-load of acquisitions is making the company increasingly important.
“Frutarom sees itself as one of the main consolidators in the global market,” Yehudai says.
Even if Frutarom will not be the biggest in the coming years, its strategy is very much inspired by the late Eli Hurvitz, the chairman and CEO of Teva, who helped grow the company into the largest generic pharmaceuticals manufacturer in the world, in part through a shrewd M&A strategy.
And getting the acquisitions right is what keeps Yehudai up at night. Making sure that the management and corporate cultures align, that the companies are headed in the same direction, and that the companies in question are the ones representing the future of the industry is no easy task.
And growing a company, of course, is about more than simply consolidating the market.
In an age marked by growing awareness of food-related health implications, an obsession with organics and concern over “unnatural” food products, companies like Frutarom have to adapt.
“TO TALK about processed versus not-processed food is in a way a useless debate for me,” Yehudai remarks, when asked about the increasingly contentious debate around processed food.
The proportion of people living in cities, he notes, has in recent years surpassed 50 percent, and the number of urbanites is expected to double in the coming decades. With more and more people living in cities, he says, the trend of food needs will be more toward processed food as opposed to away from it.
“There is not enough food in the world for people to decide that we just won’t have processed food,” he says.
Consumers, he avers, have busy lives and would rather spend free time with their children than spend hours preparing meals based on rice and potatoes and chicken.
“People want more ‘homey’ food, a homier perception to their food, but fewer and fewer people know how to cook,” he explains. “If you agree that processing is here to stay, then the question is how do you support healthier processed food. That’s our business: making natural solutions to replacing synthetic ingredients in a cost-effective way.”
In its various R&D labs around the world, Frutarom is trying to find more ways to extract flavor molecules from natural sources. One of its recent investments, in a company called Algalo, focused on the “efficient cultivation, harvesting and processing of a wide variety of algae that yield active ingredients for use in the food, dietary and clinical nutrition supplements and cosmetics industries, including strong antioxidants, lipids and unique proteins and carotenoids, which help in maintaining cardiovascular health, a strong immune system and healthy skeletal and bone structure.”
In a way, Yehudai says, the efforts to label something “natural” amount to marketing. Some of the world’s most potent poisons, he notes, are natural, while many harmless ingredients do not come from plants or minerals.
Some forms of processing, he argues, can maintain food’s nutritional value for longer.
Still, he says, the company is trying to follow the trend of finding natural sources for its products, and putting the health factor at a premium. That way, people will still be able to buy food in packages while taking comfort in the “all natural” labels printed on them.
“Is it fresh? No. But it can’t all be fresh. I think it’s a question about balance between cost and affordability and availability.”
While the debate rages, Frutarom shows no signs of slowing.
The final deal it announced in December, a $172m. deal for Austrian savory flavor producer Wiberg, was its largest ever. Its next acquisition, for US-based Grow, came just 12 days into 2016.