Flavor Me This, Flavor Me That

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Just like most sectors in the tobacco industry, flavor suppliers also feel the pinch. While pressure for continuous competitiveness and cost-efficiency is mounting, turnovers, especially in western markets, are plummeting. Yet the number of ongoing projects is increasing. Three industry leaders have shared with Tobacco Asia where their beef lies.

By Thomas Schmid

Contracting markets, ever stricter regulations, dwindling smoking populations, incessant tobacco and excise tax hikes, and to top it all off, unreasonable hostility or even outright bans against e-devices and next-generation products in a multitude of countries around the globe. The picture surely doesn’t look too good for the tobacco industry; at least on the surface.

But, well-known supplier Hertz Flavors, its off-shoot FLAVORIQ, and equally renowned Borgwaldt Flavor GmbH, a member of the Hauni group, all seem to agree that this situation in fact presents more opportunities and welcome challenges than it does impede their activities or threaten their future. “Diversification” and “innovation” are the main magic mantras that keep all three outfits spinning and encourage them to expand beyond their original market scopes, seeking out new opportunities wherever they may present themselves.

Creating new trends

“The biggest trends in western markets are triggered by regulation and product innovation with the target of risk reduction,” said Dr. Philipp Hertz, vice president of Hertz Flavors. “As a strategic partner for multinational corporations but also for small start-ups in the different tobacco [industry] segments, we have spent a lot of effort to support the various product categories when it comes to taste performance and regulatory support. Additionally, there is still plenty of R&D activity for conventional products, mainly driven by opportunities in less regulated markets. Although certain segments are declining in the different markets, there is a clear trend towards product diversity and an increase in flavor variety overall, though new regulations tend to slow this trend down.”

Traditional flavors breaking borders

Hertz Flavors’ sales manager Ferdinand Baturusa added that “in the traditional [tobacco] segment, formerly quite localized products are now breaking through borders and create new global trends.” As an example, Baturusa mentioned shisha molasses, which some time ago started conquering the lounge scene in many European metropolises and enjoy an ever-increasing following. And snus, which is still banned in the EU, has found its way across the Atlantic to North America, but surprisingly also has made some inroads in Asian countries such as Japan or South Korea.

“So, people still do enjoy tobacco products and we believe in the future of each individual segment we serve,” said Barurusa.  “The ongoing growth of the combustible cigarette light segment in matured markets also will open yet more opportunities for the flavor industry to provide ingredient solutions for smoking pleasure at low tar-levels. Other tobacco products like cigarillos and pipe tobacco likewise will continue to offer more flavor diversity.”

Tougher regulations drive innovation

Meanwhile, Niels Danielsen, group manager sales management at Borgwaldt Flavors, shared insightful details about the ramifications toughened regulations, particularly in the EU, had for flavor companies: “In Europe, we have not only got the EUTPD2 but also many country-specific supplementary appendices [to that regulatory framework], such as Germany’s ‘Anlage 1’ and ‘Anlage 2’ or Hungary’s own appendix, only to name two examples,” Danielsen explained.

“For us, as a market-leading flavor house active in more than 60 countries, it meant that [with the promulgation of EUTPD2] we had to screen all our existing products in order to modify them when necessary in order to be in compliance. It also meant that we had to strengthen our consulting services for our valued clients on how to register their products in certain markets such as the US, where FDA is requiring complex information.” And when it comes to new and innovative developments such as the e-cigarette, or more recently, heat-not-burn tobacco products, market participants had to act even more flexible and agile to remain competitive, said Danielsen.

Vaping flavor industry: unique dynamics

In the vaping market, which also often relies on flavor suppliers, the situation has developed independently from traditional tobacco products and features its own unique dynamics.

UAE-based FLAVORIQ was established to particularly cater to that industry segment. Sales director Emilie Nault explains: “As vaporizers have become a lifestyle consumer product that is not constrained by traditional tobacco taste, the vaping industry is receptive for a lot of different taste profiles. While in the past the most popular e-liquid flavors in the market were indeed grouped around tobacco and fruity flavors, we have in the past few years seen the arrival of very different flavor trends. [So-called] fusion flavors, which are multi-dimensional flavor combinations with unique aroma and taste profiles, have become increasingly.”

Many of these new flavor preferences have been driven by the burgeoning US vaping market, resulting in more and more cross-category and cross-industry trends. “For example,” said Nault, “taste profiles that originally were developed for e-liquids are now also in high demand in shisha tobacco production, while almost simultaneously popular shisha taste profiles have found their way into RYO tobacco.”

A rollercoaster ride of flavors

But while in the e-liquid and shisha segments certain flavors have always commanded the market, being sort of a traditional mainstay, there are others that suddenly emerge and become trendy for a short while before they eventually disappear again. “In general, the lifecycle of exotic and modern flavors especially in the shisha and e-liquids arena is short and the industry needs to be fast-responding and frequently adjust to changing consumer demands. On the other hand, continuously successful flavors are those that represent traditional taste profiles like mint or grape, or they have become a fixed part of a popular brand’s portfolio and have been available in the market for years,” said Philipp Hertz, also managing director of FLAVORIQ.

Combustibles flavor market still strong

But even though the market for e-liquid flavors is growing at a seemingly ever faster fast pace, flavor companies’ core businesses with the highest turnover quantities still lie with combustibles, according to Borgwaldt’s Niels Danielsen. “Well-established products such as Virginia casings and burley casings, as well as the traditional top flavors used in cigarette production are the backbone of the industry,” he said, adding that “the same is true for hookah flavors, where traditional taste directions still represent the majority of our client’s inquiries.” If flavor products are being phased out, the main reason would be emerging legislative restrictions “such as menthol bans in certain countries, for example.” (For more on this, see our side box.)

Globalization presents new opportunities

Yet globalization as well as accelerating product diversification present plenty of opportunities for flavor companies to stay afloat comfortably, and yes, even expand.

“Despite the well-known fact that cigarette sales mostly in western countries have been declining, we are witnessing a growth in all of our tobacco flavor segments on a worldwide basis,” attests Hertz Flavors’ Ferdinand Baturusa. Although he concedes that the European and North American markets are contracting, “Asia offers new potential for growth.” So much so that Hertz Flavors is currently building a facility in Indonesia (see side box).

And despite still being a very young company (having only been established in 2014), FLAVORIQ likewise has extended its reach from the US and Europe to many emerging vaping markets, for example China, India, South Korea, but also Russia and Eastern Europe. In fact, China and Southeast Asia are markets with huge potential, and of course South Korea is one of the regional leaders when it comes to vaping, according to Emilie Nault. “FLAVORIQ, with its international setup and local partnerships, is well prepared,” she insisted.

The Southeast Asian conundrum

Yet of course most Southeast Asian countries have either made vaping entirely illegal (Thailand, for example, imposes up to five years imprisonment even for merely possessing a vaporizer) or it is living a quasi-underground existence due to unclear and ambiguous legislation. Nault acknowledged that bans of e-cigarettes and vaping in those countries happened years ago when these devices were new and scientific evidence whether they would be harmful or not was lacking.

But, still she identified the region as one that would provide opportunities for further growth “when the governments start to acknowledge the potential of risk reduced products.” Until then, Southeast Asia in particular remains a black spot on FLAVORIQ’s marketing map, “as we operate under a strict code of conduct.”

North America and Europe Growing

But even where electronic devices are perfectly legal, one challenge is to identify upcoming players in the e-smoking and vaping theaters, as the market still is very dynamic and fast moving.

That at least is the opinion of Niels Danielsen, whose company is catering to these industry segments as well. “From our point of view it is too early to recognize any signs of market consolidation, so it is sometimes tough to predict what the market needs to distinguish one product from the rest. But we are in close and constant contact with our clients in order to support them by manufacturing unique taste solutions.”

And speaking about the flavor market in general, Danielsen added: “Even though the Middle East and Africa still make up around 85% of the global market, demand for tobacco flavors and aromas is growing continuously in the North American and European markets. We have noticed that both small manufacturers and major players are discovering this growth market.”

Restrictions reshape markets

But e-smoking and vaping aside, there is no question that continuing innovation in the traditional tobacco sector will offer plenty of additional opportunities for flavor suppliers. Take the ongoing trend for filter capsules or sophisticated new types of filters, for instance, which started out in East Asia and has since spread around the world.

“There is more and more demand for flavors for filter capsules but also filters, and Hertz Flavors is actively supporting its customers with bespoke flavor developments for these applications,” said Philipp Hertz. Additionally, he said flavor bans and potential future flavor restrictions only would serve to further motivate customers to strengthen their drive for inventing new products that would allow consumers to add distinctive flavors to different tobacco products.

Reduced risk products yet another avenue

The advent of reduced risk products such as heat-not-burn devices (see our related story in this issue) is another avenue that flavor companies are successfully exploring in their tireless quest to keep their businesses viable.

 “An actual trend that we observe is accelerating activity in the heat-not-burn segment as people who enjoy tobacco are looking for more authentic alternatives to vaping,” Hertz explained. Borgwaldt also is “of course participating in the market for heat-not-burn tobacco products in close collaboration with our affiliated companies,” according to Niels Danielsen, and his company was “proud of the product portfolio that we can offer to our global clients [in that segment].”

Flavors are here to stay

Frequent doomsday predictions perpetuated and repeated ad nauseam by certain anti-smoking and anti-tobacco lobbies notwithstanding, it surely appears that flavor suppliers do not need to worry too much and are going to have their hands full for years to come. Or as Baturusa put it eloquently: “Because people will always consume tobacco and nicotine products, we think it is safe to say that there also always are going to be flavor demands for these products that will constantly reshape the market over time.” 

Hertz Flavors Builds Kretek Flavor Factory in Indonesia

As the Indonesian market is growing, supply chain management, intensive communication and cooperation for rapid design and development capabilities are gaining in importance. Because of this great potential, Hertz Flavors is in the process of building a state-of-the-art kretek flavor research, development and production facility near Surabaya, East Java. The new facility will be equipped to produce tailor-made flavors and also conduct R&D tasks for the company’s customers in the kretek tobacco industry.

According to Hertz Flavors vice president Philipp Hertz, the outlet will create many opportunities in many different aspects for Hertz Flavors in the near future. “We will be able to respond more efficiently to our [local] customers’ needs and thrive as a strategic partner for many kretek cigarette companies in Indonesia,” he said. The facility is expected to be operational by 2019.

Menthol Issues

Menthol flavoring in cigarettes has been or is going to be outlawed (or its use severely restricted) in a number of countries.

The first nation to ban menthol-flavored cigarettes (together with all flavored cigarettes) was Brazil, in March 2012. In June 2013, EU health ministers agreed on a directive to ban menthol cigarettes, and in October of the same year, the European Parliament voted to make menthol and other flavored cigarettes illegal by the year 2022. Brexit or not, the UK likewise resolved that menthol and flavored cigarettes be phased out “within weeks” just ahead of a complete ban to be enforced as of May 2020. And despite protests from various groups, including retailer organizations, a menthol ban also appears well within the reach of the US Food and Drug Administration rather sooner than later.

As usual, it must be expected that a domino effect might ensue, encompassing other countries as well. But so far, the flavoring industry doesn’t appear to be overly concerned about the development.

“The menthol markets outside of Europe, especially in Asian countries like the Philippines, for example, is strong,” said Hertz Flavors’ Ferdinand Baturusa. “Our growth in these markets has off-set any decline in western and especially European markets.”

The restrictions do so far not apply for the e-smoking and vaping industry, which is perhaps why FLAVORIQ’s Philipp Hertz even welcomes the situation. “We see the upcoming regulations as an opportunity… as the regulatory path of the e-cigarette inside the tobacco category will professionalize the whole industry and improve the quality and safety of the whole category by integrating flavor and tobacco expertise. After all, our strategy of providing high-quality products and specialized flavor designs for vaping devices have established FLAVORIQ as a leading industrial brand of premium quality e-flavors,” he asserted.