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Vanilla market volatility: fluctuating prices demand new CPG sourcing strategies
Vanilla is one of the world’s most popular spices, but extreme price increases in recent years mean CPG companies must weigh up many factors to determine a sustainable sourcing strategy.
It’s something we take for granted as consumers: vanilla is our default, go-to flavour for a wide range of food products including ice creams, cakes and biscuits.
But its ubiquity is under threat as extreme market volatility has pushed up prices – to the point where, in 2018, the price for natural vanilla surpassed silver.
With the price of vanilla set to remain volatile in 2019, consumer packaged goods (CPG) firms using vanilla flavour, powder or extract must adapt to market dynamics to determine a sustainable sourcing strategy.
This blog outlines why the vanilla market is so volatile, and explores three cost optimisation options open to CPG companies.
Vanilla volatility: a market driven by environmental, cultural and socioeconomic pressures
Many factors combine to make vanilla a highly volatile commodity in terms of quality, availability and price. Eurovanille’s Vanilla Market Report for 2018 revealed that around 87% of the world’s vanilla is grown in Madagascar and the crop is typically at risk from extreme weather events, theft (especially when prices are high) and premature harvesting (to prevent theft).
Recent attempts to offset these risks have increased both the quantity and quality of Madagascan vanilla. New plantation initiatives are increasing crop yields, and anti-theft measures like stamping vanilla beans are reducing premature harvesting – which is expected to drive an increase in quality in 2019. That’s good news for companies prepared to pay a premium for high-quality vanilla.
With consumers indicating a clear preference for natural ingredients, Nestlé, Kellogg’s and Hershey’s are among the CPG giants who have abandoned artificial substitutes and are instead using all-natural flavourings – including vanilla – as a key selling point. As more companies seek out high-quality natural vanilla to meet consumer demand, prices are likely to be pushed higher, to the point where most buyers will need to adapt their sourcing strategy to accommodate the continuing volatility.
There are three main options to consider when formulating a sustainable strategy:
Option #1: Diversify supply sources to include other vanilla-producing countries
While Madagascar produces the bulk of the world’s natural vanilla (exporting around 1,600 tons per year), other countries are also investing in vanilla production. Indonesia, Papua New Guinea, India, Uganda, Mexico, Réunion and Comoros are all vanilla producers, with Papua New Guinea increasing production in 2018 to 250 tons, and Uganda increasing export volumes from 75 tons in 2017 to 100 tons in 2018.
However, close attention should be paid to farming, harvesting and storage methods before deciding on a supply source. Premature harvesting and vacuum-packing of unripe beans frequently results in low-quality beans with inferior flavour. Alternatives should therefore be thoroughly researched and the risks fully understood before switching sourcing location.
Option #2: Find an acceptable balance between natural vanilla and vanilla substitutes
For products where cost control is a higher priority than the use of natural vanilla, another strategy might be to reconsider the use of vanilla substitutes and alternative flavourings.
With consumers wary of artificial flavourings, flavour companies are working hard to research natural alternatives to vanilla. Some have started to develop and implement reformulations that involve combining vanilla with another flavour.
Others are synthesising vanilla substitutes from natural sources like guaiacol and lignin. Producers of synthetic vanilla flavourings, like Symrise, Solvay and Borregaard, report growing demand for vanilla substitutes from food and beverage producers, and are launching new products accordingly.
Vanilla substitutes can be a far more sustainable and cost-effective alternative to vanilla, and the latest formulations are certified for labelling as ‘natural vanillin’ or ‘natural flavouring’, addressing consumer demand for natural ingredients.
Option #3: Work more closely with supply chain partners
Supply chain dynamics are another area to consider when developing a sustainable sourcing strategy for vanilla. The supply chain tends to be complex, with several layers of middlemen between vanilla growers and CPG companies selling the final product to consumers. A typical vanilla supply chain includes:
- Growers: producing uncured green beans in Madagascar and other vanilla-producing countries
- Collectors: working for exporters to collect the harvested beans, and negotiating prices with growers
- Processors and conditioners: curing the beans into their dried state, ready for use as flavouring
- Exporters: storing – and sometimes also conditioning – the beans, and handling their export
- Brokers and traders: including importers, agents and distributors in the destination country
- Final processors: including grinders, packers, re-exporters, and flavour and fragrance companies
- Final sellers: Spice firms, food and beverage producers, pharmaceutical companies
With so many links in the chain, the ability of final sellers to influence the price, quality and availability of natural vanilla is very low. This is leading some CPG firms to seek ways to work more closely with growers, or with suppliers who have a direct link to growers.
Flavour companies like Symrise, for example, are working directly with growers and governments of growing countries to implement programs of education, financing and theft prevention. These programs are designed to increase yields and offset the risk of farmers harvesting their crop too early, which damages quality and further contributes to the cycle of boom and bust.
Closer working also gives CPG companies more leverage in determining prices, while also ensuring a fairer price for growers – an approach which in turn appeals to ethically-minded consumers.
Market intelligence can help CPG buyers find the right sourcing strategy
The vanilla market is complex and volatile, with many factors conspiring to create risk and uncertainty for buyers. Determining the right sourcing strategy is far from straightforward, and CPG companies need to stay abreast of fluctuating market conditions in order to maintain the right balance.
Market intelligence is key to informed decision-making. But not all market intelligence is created equal. Procurement managers should seek objective, customised research to drive a sustainable vanilla sourcing strategy that works for their organisation.
If you’d like to learn more about how The Smart Cube can help you better understand the dynamics of the vanilla market – or any other category or commodity – please get in touch.
In her eleven years with The Smart Cube, Rashi has risen through the ranks from a research analyst to Senior Manager. Leading a team of 30 people, she is responsible for the end-to-end delivery of projects for clients in the CPG sector. An economics graduate, Rashi is an in-house expert in the F&B and FMCG space, especially on the procurement, supply chain and strategy side. When Rashi is not providing market intelligence to clients, she loves to spend her time doing kathak, a form of Indian classical dance.