Once viewed as just another part of their business, disruption is bringing food manufacturers and ingredient suppliers closer together as they grapple with changing consumer tastes and demand to get products to market faster, the head of Ingredion said in an interview.
CEO Jim Zallie said in the past, CPGs often took several months to enter into contracts with his business that today are regularly completed in a matter of days or weeks. Food companies also used to be hesitant to source more than one ingredient from a single supplier because they didn't want to become too dependent on one provider, and in many cases they were reluctant to share how much they spent on a particular additive.
The rapid shift in the marketplace has quickly made these once-standard practices obsolete.
Zallie said many companies have reduced their R&D budgets, making them more eager to partner with Ingredion and others to source ingredients and discover the right formulations — a dependence that is further compounded by trends like gluten free, plant based and clean label. Labor shortages, supply chain disruptions and a growing urgency to get products to market faster have only served to create "more intimate relationships" between CPGs and ingredient providers, he said.
"It's a win for them, a win for us," Zallie said. "We become a reliable supplier, a more intimate supplier. They take steps out of their manufacturing process."
The changing marketplace has created robust demand for Ingredion's more than 1,000 ingredients sold to most large CPG companies as well as smaller, local businesses around the globe. Ingredion's net sales rose $900 million in its 2021 fiscal year to $6.9 billion, with two-thirds of the jump coming from an increase in pricing for ingredients. Sales have jumped 19% from $5.8 billion in 2017. The company estimates net sales growth of 2% to 4% annually during the next four years.
Ingredion has spent more than $700 million on organic growth and M&A during the past five years in an effort to expand its toolbox of offerings in fast-growing categories. These include texturizers for applications such as providing crunchiness or emulsification, clean-label ingredients, products for sugar reduction and specialty sweeteners, and plant-based proteins.
Among its deals, Ingredion increased its presence in food texturizers through the purchase of TIC Gums for $400 million and KaTech for an undislosed amount. It acquired stevia pioneer PureCircle, though it did not disclose the price, and it entered into a partnership with Amyris for its fermented Reb M sweetener. Ingredion is now the largest provider of both stevia and Reb M, Zallie said, giving it a prominent position in the sugar reduction market which is set to increase from $5 billion today to $7 billion by 2026.
Together, these and other transactions have enabled Ingredion's customizable Food Systems platform to fashion itself into a one-stop shop for customers looking to address multiple needs in creating or reformulating products. The segment also is a lucrative one for Ingredion, with higher gross margin opportunities and growth expected in the mid-teens, according to the company.
Zallie noted one customer who wanted to create gluten-free cakes and muffins. Ingredion offered potato, rice and tapioca as options to replace the wheat, and then xanthan gum as a substitute for the lost gluten needed to retain moisture and provide texture for the crumb structure.
Ingredion also can play in multiple parts of the same category. In ice cream, for instance, it has plant-based protein to replace dairy protein, high-intensity sweeteners to provide taste while replacing sugar and calories, and hydrocolloids to control ice crystal formation and impart a rich, creamy and indulgent mouthfeel.
"We literally could not play in any of those categories before," Zallie said. "And today, we're just seen differently and we're engaging with customers in new and different ways."
The ingredient space has been a hotbed of M&A activity as companies look to combine their research and development capabilities and areas of expertise to churn out new offerings faster and with higher quality than they likely would have on their own. In addition, businesses are moving quickly to become more complete, integrated suppliers. Flavor companies, for example, are expanding into areas like texture.
Few deals have underscored the acquisition frenzy as much as the $26.2 billion merger between DuPont's nutrition business and International Flavors & Fragrances that closed last February. The combination created a mega company with dominant positions in taste, texture, nutrition, enzymes, cultures, soy proteins and probiotics.
Zallie said acquisitions will "continue to play an important role for us to grow" and that Ingredion has "a lot of firepower" to enter into both small and large deals.
He said the Illinois-based company is targeting transactions that expand its geographical reach or help it scale up its portfolio in categories it has identified as growth categories. In plant-based proteins, it's looking for ingredients that provide taste, texture and nutrition. For sugar reduction, Ingredion is eyeing natural offerings not mired in a long regulatory review process as well as ingredients that solve some of the challenges that can occur when sugar is removed or reduced, such as improving the mouthfeel or providing bulk.
The robust dealmaking throughout the ingredients space has created high valuations in some cases. Zallie said Ingredion maintained financial discipline in 2021 and passed on two deals in 2021 because the asking price was too expensive.
"We've been very disciplined in our M&A activity and we've done well with all the acquisitions we made," Zallie said, noting he doesn't regret missing out of some of the other deals. "We were totally comfortable at the end of the day with what those businesses sold for. Because the number was just too high. We were not willing to pay."