Food Ingredients and Flavors: Selling to Food Makers

Introduction

The suppliers behind a soft drink's taste or a snack's flavor often earn better margins than the brands that sell them. Givaudan, the Swiss flavor and fragrance group, reported 2025 sales of CHF 7.5 billion, up 5.1% on a like-for-like basis, with an EBITDA margin of 23.4%, a level few packaged food companies reach. Its Taste & Wellbeing division, which sells flavors and ingredients to food and beverage makers, grew 2.4% like-for-like at a 21.0% margin.

The reason is the role these companies play. Flavor houses and specialty ingredient suppliers sell components that account for a small share of a food maker's costs but decide whether a product tastes, looks and feels right. Their formulas are co-developed with customers and hard to replace, which gives them pricing power and sticky relationships. And every wave of reformulation, from cutting sugar to replacing artificial colors, creates new demand for their expertise. For consumer bankers, these companies sit at the intersection of food, chemicals and consumer health, and they are frequent subjects of M&A.

The industry spans several kinds of products, often sold by the same companies:

Many of the same companies also run fragrance businesses that supply perfumes and scents to beauty, personal care and household products, a side of the industry covered in the article on how the beauty industry works. The large commodity processors that turn crops into starches, oils and sweeteners in bulk sit at the agricultural end of the chain and behave more like commodity businesses.

Specialty Ingredient

An ingredient sold for a specific function in a customer's product, such as a flavor, color, texture or nutritional benefit, often co-developed for that customer and priced on its value to the recipe rather than on its raw material cost. Specialty ingredients carry higher margins and stickier customer relationships than bulk commodity ingredients.

The distinction between specialty and commodity matters as much here as in chemicals, where the Industrials guide explains the same logic in its article on specialty versus commodity chemicals.

Ingredient and flavor suppliers enjoy an unusual position, built on switching costs and technical know-how: their products are small in cost but large in consequence. A flavor might represent a fraction of a percent to a few percent of a drink's cost, yet changing it risks altering the taste that loyal shoppers expect. Food makers rarely switch suppliers for a small saving on something that could damage a brand.

Co-development and formula ownership

New flavors are usually developed in response to a brief from the customer, often in competition with two or three other houses. The winning supplier's formula then sits inside the customer's product for the life of that recipe, which can be many years. Because the supplier typically owns the formula, switching means recreating the taste from scratch and risking that shoppers notice. Large customers limit the number of suppliers they invite to compete through core lists of preferred houses, and being on those lists is a major competitive asset.

Core List

A short list of preferred suppliers that a large food, beverage or consumer products company invites to compete for new development projects, usually renewed every few years. Suppliers on the core list see most of the customer's new briefs, while those off it are largely excluded from new business with that customer.

What limits the advantage

The position has limits. Ingredient companies depend on their customers' volumes, so when food makers' volumes fall, as they have in many developed-market categories, ingredient volumes fall with them. Customer concentration is high, with large food and beverage groups accounting for a big share of each supplier's sales, and those customers push hard on prices during cost reviews. Smaller and fast-growing food brands, which buy more flavor development per unit of sales, have become an increasingly important source of growth for the mid-tier houses that serve them.

The concentrated structure of the top of the industry also draws antitrust scrutiny. In March 2023, competition authorities in the European Union, the United States, the United Kingdom and Switzerland opened investigations into possible collusion among the largest fragrance suppliers; some of the US inquiries were later closed, and civil lawsuits followed. For a buyer, that history is a reminder that pricing power concentrated in a few suppliers attracts regulators as well as investors.

Every major change in what consumers or regulators want from food creates work for ingredient suppliers, and regulatory change often moves faster than consumer taste. Sugar reduction needs sweeteners and taste modulators that mask the loss of sugar; cutting salt, fat or calories needs flavor and texture work; and the push for protein and better-for-you products needs functional ingredients. The most visible recent wave is the move away from synthetic dyes.

Sensient, a leading supplier of food colors, has described the US shift from synthetic to natural colors as a major opportunity. Its chief executive told investors that matching a shade with natural colors takes roughly 10 times the revenue of the synthetic color it replaces, compared with about $110 million of synthetic food and beverage color revenue in the US and parts of Latin America, and that capital spending would stay elevated for several years. Natural colors come from crops such as beets, carrots, paprika and spirulina, so supply takes time to scale.

The regulatory side of the shift, including the revocation of Red No. 3, is covered in the article on how packaged food companies make money.

Consumer trends add further demand. The rise of protein-rich and better-for-you products needs ingredients that improve texture and taste in high-protein recipes, and the spread of weight-loss drugs is pushing food makers toward smaller portions and more nutrient-dense products, each of which requires reformulation work. The demand shifts behind these changes are covered in the article on premiumization and trade-down.

The industry has consolidated through large mergers and steady bolt-ons, and portfolio reshaping is common. Firmenich and DSM combined in 2023 to form dsm-firmenich, and IFF, which had grown through acquisitions, has since sold businesses to reduce debt and sharpen its focus, including the sale of its Pharma Solutions unit to Roquette for about $2.85 billion, completed in 2025. Private equity firms buy carve-outs of ingredient businesses and roll up smaller specialty suppliers.

Buyers value the best ingredient and flavor companies at premiums to food manufacturers because of their margin stability, recurring formula-based revenue and exposure to reformulation trends. The questions in diligence follow from the business model: how much of revenue comes from formulas the company owns, how concentrated the customer base is, how often the company wins briefs, what share of sales comes from fast-growing small customers, and how exposed it is to falling volumes in mature food categories.

For consumer bankers, ingredient and flavor companies are a distinct client group with their own buyers, from strategic flavor houses and food conglomerates to chemical companies and sponsors. Understanding where a supplier sits between commodity and specialty, and how dependent it is on its customers' volumes, is the starting point for advising any of them.