Businessweek Archives

Beef Fat Flavor May Not Sound Glamorous, But...


The Corporation

BEEF-FAT FLAVOR MAY NOT SOUND GLAMOROUS, BUT...

It's not exactly a household name. But International Flavors & Fragrances Inc., the rather secretive multinational headquartered in the middle of Manhattan's warehouse district, is renowned among cosmetic executives in New York and Paris. The late designer Halston publicly acknowledged that IFF was responsible for developing his best-selling namesake fragrance. IFF's perfumers also created some of the 1980s' trendiest scents, such as Calvin Klein Inc.'s Eternity and Giorgio Beverly Hills's Red.

Glamorous stuff. But these are leaner times, and IFF can no longer count on debt-strapped consumers to shell out $125 an ounce for designer perfume. They have to eat, though. So IFF Chairman Eugene P. Grisanti hopes his $378 million food-flavoring business will pick up the slack. He sees mouth-watering profits ahead in supplying flavoring systems to jazz up low-fat and sugar-free products. "The flavor side of our business is the most exciting, because there are so many opportunities," says Grisanti.

If he's right, flavors could be just the trick to keep IFF on the fast track. During the giddy 1980s, IFF's fragrance unit rode the boom in highly profitable, upscale perfumes. Big fees for concocting prestige scents helped boost IFF's pretax margins to an astonishing 26.2% in 1990, from 22.5% in 1986. Grisanti also expanded abroad, kept overhead low, and avoided debt.

Repeating that kind of success in flavors won't be a cinch. The unit accounts for 39% of IFF's total sales, but its operating margins are 28% less than those of the fragrance group. What's more, competitors such as Unilever's Quest International and Indianapolis-based Universal Flavor Corp. have also targeted the growing market for nutritious, convenient foods.

Even so, IFF has already won over such heavyweight clients as McDonald's, PepsiCo, and Kraft General Foods. It provides cappuccino, mocha, and cinnamon flavors for canned iced coffees and enzyme-modified cheese for flavored popcorn. IFF's chemicals also add pizzazz to low-fat cakes and cookies. "By removing fat, you take out one thing that makes food taste good," explains Bob McVicker, senior vice-president for technology at Kraft General Foods Inc. "Working with the IFFs of the world, we have developed new flavors."

Today's food processors need outside flavor wizards more than ever. Several are carrying heavy debt loads from large acquisitions and don't want to spend the money necessary to design flavoring systems, which can involve elaborate mixtures of up to 200 different ingredients. "With the advent of leveraged buyouts, food companies have chosen to reduce in-house staff in research and development," says Frank J. Listi, president of Universal Flavor. "The remaining companies are dependent on valuable suppliers."

To make sure IFF is one of them, Grisanti has boosted R&D. Spending jumped to $54 million last year, vs. $39 million in 1986. And that research is veiled in a shroud of secrecy. Asked about the beef-fat flavor that analysts say it developed for McDonald's low-cholesterol french fries, Hendrick C. van Baaren, president of IFF Flavors, shakes his head: "We never discuss the work we do for customers." McDonald's also declined comment. IFF prefers the role of "ghostwriter," says Andrew Shore, an analyst at Prudential-Bache Securities Inc.

LOOK MA, NO DEBT. One thing is clear: Flavors will play a more visible role in the company's earnings picture. Sales should grow 10% annually during the next five years, compared with 7% for fragrances, says Shore. That should ensure that IFF, whose balance sheet is virtually debt-free, will continue to show double-digit earnings growth. In 1990, net income climbed 13%, to $156.7 million, on a 10.7% sales increase, to $962.8 million. And earnings should increase 11% this year.

Another plus: The weak dollar has been a boost, since an astounding 70% of IFF's sales come from overseas. No wonder investors have bid IFF's stock up 12% since January, to a recent price of 82. However, analyst Diana Temple of Salomon Brothers Inc. thinks IFF's price-earnings multiple of 20 may be rich.

Grisanti isn't ignoring IFF's traditional fragrance business. The Harvard-trained lawyer wants to sell scents for moderately priced soaps, shampoos, and cleansers in emerging markets such as China and Eastern Europe. IFF will also supply the ingredients for Tresor, a new perfume from Lancome that is due out this spring.

Increasingly, though, IFF intends to spend more time on the less glamorous business of spicing up food. That's a long way from the rarefied world of designer perfumes, which often involves tracking down exotic stuff such as ylang-ylang oil or Iranian Galbanum resin. Still, IFF's Grisanti will gladly trade a little cachet for the sweet smell of success.Monica Roman in New York


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus