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CONSUMER GOODS & RETAIL

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Flavors and Fragrance Industry Rivalry Intensifies as DSM and Firmenich Join Forces by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Commentary: Flavors and Fragrance Industry Rivalry Intensifies as DSM and Firmenich Join Forces

Over the years, DSM, a Dutch-based petrochemicals and commodity chemicals company, has strategically been shifting its focus to evolve into a fully integrated health, nutrition, and biosciences company. This transformation has been driven by several key factors, including increasing consumer demand for healthy and natural products, growing opportunities in the health and nutrition market, and DSM’s claimed commitment to sustainability.

Since 2003, DSM has actively pursued strategic acquisitions, consistently strengthening its product portfolio in human and animal health nutrition while divesting its chemical businesses. In 2022, the company sold the last of its traditional chemicals business to fully focus on its health and nutrition endeavor. In the same year, DSM made a notable move by announcing its plans to merge with Firmenich, a prominent player in the flavors and fragrances industry. The merger was completed in May 2023, and the combined entity is now renamed as DSM-Firmenich. While DSM has a history of acquiring businesses, the industry was taken aback by DSM’s recent acquisition of one of the world’s largest flavor and fragrance companies, leaving peers intrigued about the potential implications of this merger.

How does the deal impact the industry?

The flavors and fragrance industry is highly concentrated, with four major players – International Flavors & Fragrances (IFF) (22%), Givaudan (18%), Symrise (12%), and Firmenich (11%) – controlling more than 60% of the market in 2022. Changing consumer preferences for natural, exotic, and functional ingredients have prompted companies in this sector to explore growth opportunities beyond traditional flavor and fragrance products.

Over the last few years, these companies have been actively expanding their presence by acquiring or investing in businesses specializing in functional and natural ingredients. For instance, in 2021, IFF acquired DuPont Nutrition and Biosciences, a well-established player in value-added ingredients; in 2020, Givaudan acquired Ungerer, a leading US-based company specializing in flavor and fragrance specialty ingredients; and in 2021, Symrise acquired Canada-based company called Giraffe Foods, which develops custom flavors. The merger of DSM’s health and nutrition business with Firmenich’s Perfumery and Taste business has positioned the combined entity alongside these industry leaders.

Hence, in a broader context, all these major players look quite similar and are moving in a similar direction, except Symrise. Though Symrise has made some acquisitions, many of them are related to pet food, unlike the others who have been actively broadening their product portfolio in food, beverage, and nutrition.

Consequently, the DSM-Firmenich merger heightens competition, particularly among DSM-Firmenich, IFF, and Givaudan, as they strive to enhance their product offerings in flavors and nutrition and secure a larger market share. Furthermore, this recent merger consolidates the market, making it challenging for smaller players to compete in this highly competitive flavors and fragrances space. That being said, there are still numerous opportunities for innovation in flavors and functional ingredients among startups, mid-sized, and smaller companies.

How could DSM and Firmenich benefit from the deal?

The combined entity operates in four distinct business segments: Perfumery and Beauty (encompassing perfumery, fragrance, and personal care ingredients), Animal Nutrition and Health (offering products and solutions for animal nutrition), Health, Nutrition and Care (covering dietary supplements, early life nutrition, health and wellness products, etc.), and Taste, Texture, and Health (encompassing flavors, food, and beverage ingredients). Through the merger, the companies could capitalize on each other’s core strengths and benefit from synergies.

It is anticipated that 60% of the DSM-Firmenich revenue synergies will be derived from the Taste, Texture, and Health segment, signaling the likelihood of a substantial transformation in the combined entity’s food and beverage product portfolio. DSM is expected to capitalize on Firmenich’s expertise in enhancing taste using natural flavors, particularly in areas such as plant-based protein alternatives for meat and fish, and dairy alternatives. DSM is also expected to leverage Firmenich’s other strengths, such as salt and sugar reduction, bitterness locking, masking unpleasant taste, and texturizing, to further enhance its food and beverage offerings.

In the Health, Nutrition, and Care segment, DSM is likely to focus on developing next-generation supplements that promote health enriched with Firmenich’s taste offerings. Additionally, DSM may also expand its product portfolio in areas like gut health, brain health, women’s health, and postbiotics, incorporating Firmenich’s unique flavors to enhance product appeal.

In the Perfumery and Beauty segment, Firmenich might have some potential to expand its presence in the beauty and personal care market. Currently, specializing primarily in nutritional flavors and fragrances, Firmenich is likely to consider incorporating DSM’s aroma chemicals into its portfolio, enhancing its personal care capabilities. Furthermore, there’s the possibility of exploring the integration of DSM’s functional ingredients to cater to the growing demand for functional beauty products. However, relative to perfumery, DSM lacks the complementary or core strengths necessary to significantly enhance Firmenich’s already robust perfumery offerings. Hence, it is anticipated that the combined entity would have little to benefit from the merger on the perfumery side.

Additionally, the combination of DSM and Firmenich would provide opportunities to leverage each other’s proprietary technologies, especially in fermentation and extraction. DSM-Firmenich would benefit from extending its presence into local and regional markets worldwide.

How does the deal impact customers?

The extensive worldwide presence of both DSM and Firmenich would be advantageous for customers, enabling them to gain deeper insights into regional consumer preferences and tailor their products accordingly. Additionally, customers could take advantage of the expanded product range provided by both companies, which simplifies access to all necessary ingredients through a single source. The integrated solutions also enhance control and coordination throughout the product development process, ensuring a stable and secure supply chain.

EOS Perspective

The DSM-Firmenich merger is likely to result in higher innovation and growth opportunities in the flavors and ingredients space. However, both DSM and Firmenich are major players with diverse product portfolios, which could pose integration challenges. Speedy integration is crucial as CPG companies look to make products to meet the growing demand swiftly. Therefore, the success of the merger depends heavily on the speed of integration and how well the product offerings align with customer needs and target markets.

It is anticipated that the DSM-Firmenich merger will take some time to fully materialize and make a significant impact on the market. If the integration challenges are well-managed, DSM-Firmenich has the potential to capture a significant market share from its competitors. Ultimately, the success of this merger depends upon how effectively DSM incorporates Firmenich’s ingredients into its products and builds on new opportunities with these resources.

CVS Moves to Home-based Care with Acquisition of Signify Health by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Commentary: CVS Moves to Home-based Care with Acquisition of Signify Health

Retail health companies increasingly invest in primary care, particularly home-based care, with patients demanding low-cost and convenient care delivery. The recent acquisition of home healthcare company Signify Health by retail health giant CVS Health highlights the industry’s growing interest in home-based care.

There is an increased demand for at-home healthcare services and health assessments, especially after the COVID-19 pandemic changed customer preferences towards access to convenient at-home services.

At-home care can bring down expenses by reducing hospital visits and detecting health problems in advance. A study published by the US Agency for Healthcare Research and Quality in April 2021 indicated that at-home patient care could reduce hospital expenses by 32% and hospital readmission rate (within six months after discharge) by 52%. The study claimed that patients receiving at-home care were less exposed to other illnesses, and this kind of care provided consistent attention, which resulted in better management of chronic diseases and prevention of health problems, reducing hospital readmissions. Apart from lowering the overall cost of care, healthcare providers are also incentivized to lower readmission rates under Medicare incentive programs, and hence, many healthcare companies have realized the potential of investing in at-home services.

One example of this was CVS Health’s acquisition of home health company Signify Health, completed in March 2023, for a total value of US$8 billion. Signify’s network of 10,000 clinicians, nationwide healthcare providers, and proprietary analytics and technology platforms is expected to help CVS extend its at-home health business. Adding Signify’s capabilities, such as at-home healthcare services, health assessments, patient data analytics, Accountable Care Organization (ACO) management, and provider enablement solutions, is likely to strengthen CVS’s abilities to offer better accessibility to services, improved patient-provider connectivity, better coordination of services, and improved quality of services.

CVS increases focus on the Medicare population with at-home health offerings

Looking at the recent acquisitions in the healthcare industry, it can be seen that major players in the retail health space, such as CVS Health, Amazon, Walgreens, Walmart, Dollar General, and Best Buy, are acquiring companies to strengthen their capabilities in offering primary care. These retail health companies are trying to tap into the growing demand for consumer-centric care. In particular, there is an increased focus on senior citizens and patients with chronic diseases.

Almost 19% of the US population is covered under Medicare plans, making it one of the most lucrative segments. In 2022, McKinsey estimated that, by 2025, up to US$265 billion worth of healthcare services provided to traditional Medicare and Medicare Advantage beneficiaries by traditional primary care facilities could potentially navigate to at-home healthcare providers offering at-home health services and virtual primary care services. Retail health companies view primary care services offered at home, traditionally dominated by independent clinics, as an opportunity to enter the healthcare delivery segment. CVS is also heading in the same direction.

CVS Health began expanding beyond its pharmacy services by acquiring health insurance company Aetna in 2018. Aetna is the fourth-largest Medicare Advantage plan, with 3.3 million enrollees in 2023.

In recent years, CVS Health has made significant efforts in building value-based care capabilities. Apart from acquiring Signify Health, which also includes Signify’s Caravan ACO business, the company acquired Medicare-focused primary care provider Oak Street Health in May 2023. These acquisitions indicate CVS’s increasing focus on enhancing healthcare services for the Medicare population.

Read our related Perspective:
Retail Health Clinics Eye a Larger Piece of the US Primary Care Market 

Signify’s acquisition brings CVS closer to its aim to become a full-service health provider

With the acquisition of Signify Health, CVS should be able to enter the at-home healthcare space in addition to its existing 9,900 retail drugstores and 1,100 MinuteClinics. CVS now has the capabilities to fulfill patient needs across the entire care spectrum, operating as a payer, a pharmacy benefit manager, an ACO manager, a chain of medical clinics, a network of primary care centers, and a home-based care provider, becoming a full-service healthcare provider.

This means CVS can make it simpler for patients and providers to navigate the complex healthcare system by centralizing services, as all these healthcare activities are performed under the same company. For instance, CVS can offer Medicare Advantage programs to patients, provide home visits, prescribe medicines, which can be delivered by CVS pharmacy, and track patients’ medication intake, which helps in making pharmacy reconciliations and offering follow-up care by primary care centers if needed. CVS can be able to access accurate and real-time data updates from all patient activities, which would improve care coordination and navigation of healthcare services for patients with real-time data sharing with providers.

CVS-Signify synergies can amplify companies’ growth and capabilities

CVS is enhancing digital capabilities to improve interoperability of electronic health records (EHRs) and enable remote patient monitoring. The company has already developed digital capabilities such as automated messaging on prescriptions, appointments, and vaccinations. CVS can integrate these digital capabilities into Signify’s systems to streamline communication between providers and patients.

CVS is expected to make use of Signify’s home care services to introduce at-home health assessments, which is a highly-demanded service by customers. Signify provided over 2.3 million unique at-home health assessments in 2022 and has witnessed a 16% year-on-year increase in the number of at-home assessments in Q2 2023. Using CVS’s nationwide primary care capabilities, Signify Health is likely to be able to expand its reach in the at-home health assessment space.

Signify’s technological capabilities are likely to strengthen CVS’s position in the market as customers appreciate increased convenience, such as remote patient monitoring, data-driven health predictions, and better navigation through the health systems. CVS can also benefit from Signify’s technological capabilities, such as provider enablement tools that would help manage population health, turnkey analytics, and practice improvement solutions to help providers transition to a value-based reimbursement model and improve the quality of care.

Furthermore, CVS also offers payer-agnostic solutions such as virtual primary care and pharmacy benefits management (CVS Caremark). CVS Caremark has the largest market share in the US pharmacy benefits manager market, with a 33% share in 2022. Signify’s client network of 50 health plan clients, including government, other payers, and private employers, can help CVS expand its payer-agnostic solutions to a diverse set of health plan and employer clients.

EOS Perspective

CVS outbid its rivals, such as Amazon, UnitedHealth Group, and Option Care Health to acquire Signify. Having acquired one of the most sought-after home healthcare companies, CVS has strengthened its position in terms of its expanded capabilities, such as primary care, home health, at-home health assessments, and provider enablement solutions. The company has the benefit of a large customer base, being the largest pharmacy chain in the US in 2022, which will help it expand its primary care and at-home services quickly. It will be interesting to see how CVS would be able to direct 8 million senior citizens who walk into CVS pharmacy stores annually to Oak Street clinics for a wellness visit or encourage them to schedule a home visit via Signify.

However, the competitors, especially the Medicare Advantage competitors, are not lagging behind. The largest Medicare Advantage Plan, UnitedHealth Group, boasting 8.9 million Medicare Advantage enrollees in 2023, announced the acquisition of two home health companies, LHC Group and Amedisys, this year. Humana, the second largest Medicare Advantage Plan with 5.5 million enrollees in 2023, acquired a stake in Kindred at Home in 2021.

Similar to CVS, UnitedHealth Group and Humana also own pharmacy and provider capabilities (including clinic-based, at-home, and telehealth). All three companies are on the task of deriving synergies among the different businesses they own with the aim to improve patient outcomes and reduce overall costs. To outperform the strong competition, the winning company needs to keep focusing on improving healthcare accessibility and patient experience, as well as catering to the evolving consumer needs.

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market

The utilization of retail health clinics (RHCs), also known as convenience care clinics, peaked during the coronavirus outbreak, with people rushing to get COVID-19 vaccinations or treatment for minor ailments when access to other care settings was restricted. FAIR Health (a non-profit organization managing a repository of 40 billion claim records) indicated that the utilization of RHCs increased by 51% from 2020 to 2021. Accordingly, the US retail health clinic market grew from US$1.78 billion in 2020 to US$3.49 billion in 2021 (as per estimates by Fortune Business Insights). With increasing familiarity and utilization, are RHCs set out to play a bigger role in the nation’s healthcare system?

RHCs move beyond low-acuity care

RHCs began with the concept of providing low-acuity care, spanning from minor illnesses and injuries to occasional visits for vaccinations or wellness screening. Increasingly, retailers are eyeing a larger share of the primary care market by making inroads into chronic disease management. Several are even expanding into mental and behavioral health.

  • Vaccinations

In 2022, nearly 40% of the patients at the RHCs came in for vaccinations. Much of this footfall can be attributed to the public health advisory recommending booster shots for COVID-19 vaccination. Even though the need for COVID-19 vaccinations is gradually expected to decline, the pandemic has established RHCs as a convenient venue for vaccinations. Before the coronavirus outbreak, about 50,000 adults died every year from ailments that could be prevented by vaccines, highlighting the value offered by RHCs in immunization delivery.

  • Diagnostics

During the pandemic, RHCs became a key provider of COVID-19 testing. Almost all the RHCs today have point-of-care testing capabilities. Flu and strep tests, lipid tests, pregnancy tests, glucose tests, etc., are among the diagnostics tests commonly offered at the RHCs. As RHCs aim to expand their services to penetrate deeper into the primary care market, the scope of diagnostic services is likely to widen. For instance, Walmart, which opened its first RHC in 2019, provides EKG tests and X-ray imagining services on-site as well.

  • Chronic disease management

In 2022, the Centers for Disease Control and Prevention (CDC) estimated that six in ten adults live with a chronic disease. This data indicates the vast opportunity this segment has to offer, and RHCs are vying for a piece of it. Analysis by Definitive Healthcare suggests that, in 2022, about one in ten diagnoses at the RHCs was related to a chronic condition. Nearly 6% of the claims were with the diagnosis of diabetes (Type 2 diabetes mellitus without complications and Type 2 diabetes mellitus with hyperglycemia).

As the opportunity for RHCs to contribute more to chronic disease management is vast, retailers are focusing on evolving the clinic offerings to provide treatment for chronic conditions such as diabetes, hypertension, chronic obstructive pulmonary disease, kidney disease, etc. For instance, in 2020, CVS launched HealthHubs, an enhanced RHC format, offering a larger suite of services including chronic disease management.

RHCs are able to provide chronic disease management at a lower cost. For instance, in 2022, the average charge per claim for Type 2 diabetes mellitus without complications was US$160 at an RHC compared with US$367 at a physician’s office, whereas for Type 2 diabetes mellitus with hyperglycemia, the average charge per claim was US$255 at RHC vs. US$639 at a physician’s office. Given that a chronic disease requires continuous long-term care, patients see RHC as a cost-effective and viable option for chronic disease management.

  • Mental and behavioral health

In early 2022, the Harris Poll data (based on a monthly survey among 3,400 people over the age of 18, physicians, and pharmacists) indicated that 41% of Gen Z and younger millennials were suffering from anxiety or depression conditions. However, the same study found that only 16% of those struggling with these mental conditions were comfortable seeking treatment from a therapist or mental health professional. A mystery shopper study (conducted in 2022) investigating 864 psychiatrists across five US states indicated that only 18.5% of psychiatrists were taking appointments for new patients with a significant wait time (median = 67 days). A person going through a breakdown or depression needs immediate attention. Thus, the low availability of psychiatry outpatient new appointments is concerning and one of the main reasons why mental health issues remain under-treated. With walk-in appointments and easy accessibility, RHCs are well-positioned to fill this gap.

Leading RHC chains have forayed into mental and behavioral health services. In 2020, MinuteClinic (an RHC chain owned by CVS) started offering mental and behavioral health counseling services. The company also added Licensed Mental Health Providers to its staff at select locations. In the same year, Walmart announced counseling services for US$1 a minute in partnership with Beacon Care Services, a subsidiary of Carelon Behavioral Health (formerly Beacon Health Options).

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market by EOS Intelligence

Retail Health Clinics Eye a Larger Piece of the US Primary Care Market by EOS Intelligence

Patient-centric approach differentiates RHCs from traditional providers

Definitive Healthcare estimates that as of March 2023, there were 1,800+ RHCs, of which 90% were owned by retail and pharmacy giants CVS (63%), Kroger (12%), Walgreens (8%), and Walmart (2%). Noticeably, the consumer-centric concepts and learnings from the retail segment have helped RHCs improve patient experience and satisfaction. Implementation of proven retail strategies is, in turn, defining and shaping the convenient care model and setting apart the RHCs from traditional healthcare providers.

  • Omnichannel engagement

Omnichannel engagement is a key retail concept enabling companies to offer a seamless consumer experience across various touchpoints. Health Care Insights Study 2022, based on a survey of 1,000 US-based respondents, indicated that four in ten people had a virtual consultation in the past year. The same study suggested that ~70% of the respondents think that the virtual consultation is better or about the same as the in-person visit. RHCs, owned by big-box retailers and pharmacy giants, are seizing the omnichannel opportunity by complementing their in-person visits with virtual care services.

MinuteClinic (owned by CVS) started piloting telehealth services in 2015. In 2021, the company provided 19 million virtual consultations, of which ~10 million were for mental and behavioral health. The Little Clinic (owned by Kroger) stepped into telehealth services following the country-wide shutdown due to the coronavirus outbreak in March 2020. In 2021, with the aim to extend virtual care, Walmart Health acquired MeMD, a 24/7 telehealth company providing on-demand care for common illnesses, minor injuries, and mental health issues.

  • Walk-in appointments

The average wait time for a primary care physician appointment in the 15 largest cities of the US was 26 days, as per Merritt Hawkins survey data (2022). RHCs typically accept walk-in patients. Moreover, RHCs are open for extended evening hours and over weekends when primary care physicians are not available. This allows the patients to visit an RHC at their convenience.

  • Geographic proximity

RHCs benefit from the wide footprint across the country established by their owners, the big-box retailers. For instance, CVS, operating 1,100 retail clinics across 33 states, indicated that more than half of the US population lives within 10 miles of a MinuteClinic as of March 2022.

However, currently, there is a geographic disparity as the majority of the RHCs are located in urban areas, with only 2% serving the rural population. From the business perspective, it makes sense to concentrate on the metropolitan areas targeting high-income populations. Moreover, just like traditional healthcare providers, RHCs also find it challenging to hire qualified staff to work at remote locations. However, as the popularity and utilization of RHCs increase, expansion to rural areas may come as a natural progression. For instance, Walmart is uniquely positioned to capture the rural market opportunity by leveraging the presence of its 4,000 stores located in medically underserved areas as designated by the Health Resources and Service Administration.

Dollar General is the first retailer to step up and penetrate this unserved market. In January 2023, Dollar General, in partnership with DocGo (a telehealth and medical transportation company), piloted mobile clinics set up at the parking lots at three of its stores in Tennessee. This initiative is Dollar General’s first step into retail healthcare, and there is no clarity yet on whether the company is looking at the in-store clinics model.

  • Fixed and transparent pricing

RHCs have fixed pricing for different types of treatments offered, and the treatment costs are communicated up-front to the patient. The Annual Consumer Sentiment Benchmark report based on a survey conducted in January 2022 indicated that 44% of the 1,006 respondents avoided care because of unknown costs. It is evident that besides the concern over affordability, the anxiety and fear around uncertain costs are making patients avoid healthcare services. RHCs help patients to evade this anxiety through cost transparency.

  • Multiple payment options

At RHCs, patients receive a more retail-like experience at the time of the payment. Besides the common mode of payment such as cash and cards, the RHCs also allow for contactless payments, including digital wallets, tap-to-pay platforms, touchless terminals and, thus making the payment process faster, simpler, and more convenient. This aligns with the growing popularity of contactless transactions. 80% of US consumers used some form of contactless payment mode in 2021, as per a survey of 1,000 US consumers conducted by Raydiant (an in-location experience management platform).

  • Technology and automation

Technology and automation have been an integral part of modern retail. A reflection of this is seen in an RHC setup. For instance, at CVS MinuteClinic, the reception is a form of self-service kiosk. The patient is notified of the wait time (if any) and directed to fill out the electronic forms to share important personal and health-related data. The information submitted by the patient is directly shared with the healthcare professional on-site, who then confirms the details and proceeds with the diagnosis and course of treatment. Details of the diagnosis and treatment, along with the bill payment receipt, are automatically shared with the patient at the end of the visit. The communication for follow-up consultations or other reminders is automated. The process is highly streamlined and backed by automation.

Moreover, in the RHC model, the application of technology can be seen not only to improve patient experience but also to support clinical decision-making. For instance, in 2019, CarePortMD RHCs (owned by Albertsons grocery stores) started using the autonomous AI diagnostic system called LumineticsCore to detect a leading cause of blindness in diabetic patients. Such technological additions reduce the chances of human error, thus eliminating potential liability issues as well as increasing patient confidence. Walgreens, leveraging Inovalon’s Converged Patient Assessment decision support platform that provides insights into possible diagnoses using predictive analytics, is another case in point.

EOS Perspective

With all the growth and progress, RHCs are penetrating the underserved population and strengthening the current primary care delivery model. A report released by the National Association of Community Health Centers in February 2023 indicated that about a third of the US population does not have access to primary care. RHCs are well-positioned to fill this gap. Moreover, according to the data published by the Association of American Medical Colleges in 2021, the USA could struggle with a shortage of up to 124,000 physicians (across all specialties) by 2034. In the face of physician shortage, RHCs providing non-emergency care can help to alleviate the burden on the primary care providers.

To what extent the RHCs would be able to carve out a space for themselves in the primary care segment is still an ongoing debate. However, the owners of RHCs are determined to compete head-on with the traditional providers for the primary care market share and are rapidly foraying into alternative primary care models.

In May 2023, CVS completed the acquisition of Oak Street Health providing primary care to Medicare patients through its network of 169 medical centers across 21 states.

Walgreens holds a majority stake in VillageMD, offering value-based primary care to patients at 680 practice locations (including independent practices, Summit Health, CityMD, and Village Medical clinics at Walgreens, as well as at-home and virtual visits) across 26 states. In October 2021, Walgreens acquired a 55% stake in CareCentrix, an at-home care provider serving post-acute patients. The company has plans to acquire the remaining stake by the end of this year.

Amazon is another prominent retailer that made inroads in the primary care space this year with its acquisition of One Medical, a primary care provider with a network of 200+ medical offices in 27 markets across the USA.

It is foreseeable that at some point in time, the retailers will try to bring in the synergies between the RHC business and other alternative primary care service offerings with the aim to become a one-stop shop for all healthcare needs. As retailers take on a larger role in primary care delivery, the retailization of healthcare is certainly on the way.

Upcycling A New Trend in the Food Industry by EOS intelligence
by EOS Intelligence EOS Intelligence 10 Comments

Upcycling: a New Trend in the Food Industry

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Upcycling, a growing trend in the food industry, uses surplus food and food by-products to produce products such as dietary supplements, beauty products, nutraceuticals, or animal feed. Food businesses are looking at upcycling as one of the strategies to reduce the amount of food waste they generate. However, they face continued challenges around unmarketable ingredients, process costs, and consumer acceptance. To ensure success of this niche sector, fostering partnerships to collect food by-products, collaborating with government institutions for technical know-how along with initiatives that promote upcycled food waste products could go a long way.

Burgeoning need for upcycling food waste

UN estimates that nearly 33% of the food produced globally each year is either lost (in the form of any edible food that goes uneaten, crops left in the field, food that gets spoiled in transportation or does not make it to the stores) or wasted (food discarded by retailers due to color or appearance, food left on the plate at restaurants, and scraps from food preparation at home). This accounts for 1.3 billion tons of food worth approximately US$1 trillion, enough to feed 3.5 billion people.

Moreover, food wastage contributes to 10% of global greenhouse gas emissions and is a huge burden on the environment and natural resources. As more and more food waste ends up in landfills, it produces methane, considered to be eight times more harmful than carbon, thus contributing more to global warming than automobile emissions.

Upcycling is one way that can help mitigate the ill effects of food waste, to a certain extent. Upcycling uses food by-products, produce with visual imperfections (produce often unattractive to sell due to color or appearance), food scraps, and surplus food to make new products. It is forecast that, in 2022, the market size for products made from food waste will be approximately US$53 billion and is expected to reach US$83 billion by 2032, growing at a CAGR of 4.6%.

Upcycling – A New Trend in the Food Industry by EOS Intelligence

Repurposing food waste into value-added products

Driven by sustainability, repurposing food waste offers a plethora of opportunities for start-ups and other players to make value-added products such as beverages, food products, dietary supplements, nutraceuticals, animal feed, cosmetics, and personal care products. Companies are coming up with innovative solutions to convert food by-products and surplus produce into something reusable and resalable.

Upcycled food

In 2021, Nestle Australia launched a carbonated soft drink called “Nescafe Nativ Cascara”, which uses cascara, the husk of the coffee berry fruit which is discarded in coffee production. Another interesting upcycling initiative taken by Nestle Japan is “Cacao Fruit KitKat” which uses the white pulp surrounding the cacao beans (70% of the cacao fruit is wasted and only the beans are used to produce chocolate). Moreover, in June 2022, Barry Callebaut, a Belgian-Swiss chocolate manufacturer, also launched whole fruit chocolate made from 100% pure cacao fruit.

Taking a step ahead, companies are also investing to set up research centers and business verticals that focus entirely on food waste upcycling. Nestle invested approximately US$4 million and expanded its R&D center in Singapore to focus on upcycling food waste and plant-based innovation. Another American-Irish agricultural corporation, Dole, is partnering with the Singapore Economic Development Board and has formed “Dole Specialty Ingredients”, a new business arm that uses food waste to produce specialty ingredients such as enzymes, seed oils, fruit extracts, etc.

Bakery industry is another sector that holds significant potential for upcycled food waste products. For instance, ReGrained, a food technology company, based in the USA, is using leftover spent grain from brewing beer and turns it into nutritious flour called ReGrained Supergrain+, which is then used to produce snacks bars. The company also sells this flour to other food producers. Another US-based food company Renewal Mill, uses byproducts of plant-based milk to develop high fiber, gluten-free flours which are used in cookie mixes.

Food waste is also used in beverage processing. WTRMLN WTR, a food processing firm based in the USA, uses watermelons that are discarded due to aesthetic reasons and upcycle them to make flavored water. WTRMLN WTR is currently available at 35,000 retail stores across the USA. Another UK-based brewing company, Toast Ale, uses surplus bread from bakeries to brew beer. To date, the company has salvaged approximately 2.6 million surplus bread slices that would have otherwise gone to waste.

Several companies also upcycle the not-so-appealing fruit or vegetables to produce food products such as sweet and savory snacks, condiments, etc. For instance, Barnana, a US-based banana snack company, uses bruised bananas and produces snacks such as dehydrated banana bites, plantain chips, and crisps. The company has used roughly 50 million metric tons of not-so-good-looking bananas and plantains since its inception in 2013. Rubies in the Rubble, a UK-based company, produces condiments such as plant-based mayo, apple relish, and spicy tomato relish from imperfect produce rejected due to size and aesthetics.

While most of the applications for upcycled food waste ingredients have been in baking, beverages, and snacks, other interesting applications are also emerging. For instance, Scraps, a start-up based in New York, USA, uses excess or bruised basil leaves and odd-shaped peppers to make frozen pizzas. Unilever uses ice cream, not used in the primary production process, and mixes it with chocolate sauce and white chocolate chips to create a new flavor called “Cremissimo”. White Moustache, a US-based yogurt company, makes probiotic tonics from whey, a by-product of yogurt. Austria-based Kern Tec, a fruit seed producer and processor, uses the pits of cherry, apricot, and plum, and transforms them into protein powders and oils.

Beyond food

Food waste can also be used to make products beyond food. Wastelink, a food upcycling start-up based in India, collects food waste from 300+ distributors and factories across India and converts it into nutritional-rich feed for animals. Over the past two years, the company has upcycled over 5,000 metric tons of food waste. Wastelink raised over US$1.2 million in seed funding in June 2022.

Food by-products are also finding its acceptance in the textile industry. Orange Fibre, a sustainable textile company based in Italy, has partnered with Lenzing Group, a producer of wood-based specialty fibers, to produce Lyocell fiber made from orange juice and wood pulp.

Japan-based PEEL Lab started in 2021, is another innovative start-up that upcycles plant and fruit waste into plant-based leather. The company’s products include bags and wallets (made from apple and pineapple leather), yoga mats (made from bamboo leather), and apple leather coasters.

TripleW, a biotech company based in Israel, utilizes food waste for the production of polymer grade lactic acid, which is further used to make Polylactic acid (PLA) bioplastics used in food and beverage packaging, car parts, toys, textiles, and kitchenware, among others.

Upcycling food waste has also found applications in the beauty industry. Circumference, a New York-based skincare brand started in 2018, sources unused olive leaves from California-based olive oil company Brightland, to produce an antioxidant extract, which is used in the brand’s cleanser. The company previously launched a moisturizer using leftover grape leaves. Another US-based skincare company, Farmacy, uses left-over apple extract in its cleansing balm. Klur, a US-based beauty brand, utilizes avocado and tomato seed oils discarded by the food businesses to produce cuticle oil. Another interesting use of food waste in the beauty industry is adopted by France-based beauty brand Kadalys, wherein they extract bio-actives from bruised bananas to be used in their skincare products.

Challenges concurrent with upcycling food waste

Upcycling food waste poses many challenges. Most companies in this space are small and have limited product mix due to lack of consistent supply of upcycled ingredients. Another concern is maintaining the quality or freshness of the ingredients throughout the product lifecycle. Since these are mainly by-products or scraps, doubts on how these are stored (whether in a temperature-controlled environment or what sort of hygiene procedures are followed, if any), transported, and handled prevail.

Consumer acceptance is another challenge pertaining to upcycled foods. Consumers are often reluctant to buy upcycled food products owing to concerns about the quality of the ingredients used. Educating consumers that upcycled food is not just made from food scraps or leftovers but also from by-products which are nutritious and safe to consume is a daunting task. Moreover, the general perception that upcycled products are often priced higher further reduces consumers’ willingness to buy them.

EOS Perspective

Upcycling food waste is slowly but surely gaining acceptance, but still needs to go a long way to get established as a mainstream market. Owing to its environmental and economic benefits, the trend of upcycling is here to stay. ReFed, a non-profit organization in the USA, which strives to reduce the food loss and waste across the USA, claims that just by converting food by-products such as spent grains, fruit or vegetable pulps, and rinds into a new ingredient or an edible food product could save nearly 1.87 million tons of food waste diverted to the landfills resulting in financial benefits of US$ 2.69 billion each year.

Food waste industry offers multitude of opportunities for partnerships and cross-sector collaborations among start-ups, established food brands, food producers, philanthropic organizations, and technology and supply chain solution providers. For instance, ReGrained, in partnership with USDA (United States Department of Agriculture) developed a patented technology to convert spent grain into flour.

Several companies are also partnering with food producers for a consistent supply of raw materials. For instance, Barnana is partnering with farmers across Latin America to procure bananas and plantains on a large scale. Food producers are also working together in order to reduce food waste. An example of this is Kellogg’s UK’s partnership with Seven Bro7hers Brewing, a brewery company based in the UK, to turn its waste corn flakes into beer. Moreover, retail stores such as MOM’s Organic Market, an organic grocery chain in the USA, have also started dedicating shelf space for upcycled food products.

In addition to partnerships, philanthropic organizations such as Upcycled Food Association (UFA) also play an important role in reducing food waste by educating and connecting upcycled food companies globally to become a part of the growing upcycled food economy. Formed in 2020, UFA strives to improve the upcycled food supply chain. Currently, the association is a network of more than 180 businesses from over 20 countries. Credited with launching the world’s first third-party certification program for upcycled food ingredients and products, “The Upcycled Certified Standard” in 2021, UFA has received preliminary approval (in February 2022) from USDA FSIS (The Food Safety and Inspection Service), to include their certification mark in the FSIS-regulated ingredients and products. As of February 2022, nearly 400 products are waiting to be certified by the UFA. This initiative aims at educating consumers about the impact of upcycled food on environment and the economic potential it holds.

Furthermore, in 2021, UFA together with ReFed also launched the “Food Waste Funder Circle”, a network platform for private, public, and philanthropic funders for educating, collaborating, and investing to raise capital needed to reduce food waste by 50% by 2030 within the USA. Such initiatives highlight that the upcycling food waste industry has immense growth potential.

In the long run, it seems that upcycled products made from food waste could become a part of day-to-day life. Global appetite for sustainability is increasing and so is the upcycled food waste industry. Eventually, it is all about building an all-inclusive food system for a sustainable future.

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K-Beauty: A Trending Obsession Losing Its Novelty but Not without a Fight

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South Korea is the 9th largest cosmetic market globally with a market size of nearly US$ 12.6 billion. Innovative and affordable products made using exotic natural ingredients that focus on enhancing skin health and prevent skin concerns drive the success of K-beauty brands. Moreover, the launch of the first global customized cosmetics regulatory guidelines, along with support from the government to enhance R&D capabilities and to improve infrastructure, seem to reinforce further stability to the already growing sector. However, rising trends such as minimalism and concerns about sustainability might pose a challenge for the Korean beauty brands that thrive on the tenets of long product lines, multiple products pushed on a daily basis, and focus on packaging that tend to use plastic.

K-beauty brands are uniquely well-known due to the use of natural and unusual ingredients such as snail mucin, bee venom, ginseng, pearl, mushrooms, carrot seed oil, royal honey, and yuzu, among others, in their skincare and beauty products. Products incorporated with such ingredients may, at first, sound too out of the ordinary to be a part of one’s beauty regime but they are believed to be effective.

Korea’s beauty and cosmetic sector backed by strong government support

Korean domestic cosmetics industry, which offers growth prospect of more than 5% per year on average, draws huge support from the government. In November 2021, the South Korean Ministry of Health and Welfare declared plans for 2022 to support the cosmetics industry through technology development, preparation of legal system, overseas expansion, and professional manpower training.

On the technology side, the government is focusing on developing a ‘skin genome data platform’ that can collect and utilize skin characteristics and genomic information by country and race. The government will also continue to make mid-to-long term R&D investments towards development of local and sustainable innovative raw materials.

Additionally, plans are underway to complete the construction of the K-Beauty Comprehensive School and Academy in Osong, North Chungcheong Province, for providing professional and comprehensive training to beauty professionals by 2023; the school is to provide comprehensive consulting and train workforce for the industry’s needs.

Another way the government supports the domestic Korean beauty companies is by offering tax breaks if they have an all-export business model.

With an aim to promote the growth of small and medium-sized enterprises (SMEs) in cosmetics industry in Korea, the South Korean Ministry of Health and Welfare along with Foundation of Korea Cosmetic Industry Institute, launched a pilot concept of ‘K-Beauty Experience and Promotion Center’ in September 2021. The center is a comprehensive exhibition space for domestic SMEs in Seoul, allowing SMEs to promote their innovative cosmetic products that they would otherwise be unable to promote due to lack of funds. This is expected to not only enhance brand awareness among domestic consumers but also to strengthen export competitiveness among foreign tourists visiting Korea as potential customers. A monthly event is to display more than 100 products from 30 companies (selected through monthly application process).

In another initiative to promote the beauty sector, the Seoul Metropolitan Government conducted an online beauty industry branding conference in September 2021. Held under the theme ‘Branding Seoul’s K-beauty Industry’, the conference was attended by domestic and international experts and content creators active in the fields of beauty and tourism. Aiming at expanding the K-beauty industry through the Seoul city brand, which constitutes 45.7% of the country’s domestic cosmetics distributors, plans are underway to develop beauty specific tourism products and tourism courses by partnering with beauty creators and beauty flagship stores.

In September 2022, the government also plans to set up K-Beauty consumer hotspots or zones, a place with several K-beauty shops offering discounted deals on beauty and cosmetic products in areas frequented by tourists.

New initiatives: customized cosmetics regulations and product refills

The South Korean Ministry of Drug and Safety (MFDS), in March 2020, introduced the world’s first regulatory guidelines on custom cosmetics. This will allow manufacturers to provide consumers with cosmetics made on the spot by mixing ingredients based on personal preferences. The regulations came into effect in October 2020 and aim at ensuring that businesses (manufacturers or retailers) comply with safety management standards for the formulation of custom cosmetics.

The authorities also encourage cosmetic companies to offer cosmetic product refill services keeping in mind environmental benefits as well as cost effectiveness. People can purchase refill products at 30% to 50% lower prices when compared to a newly packaged product. As of June 2021, the country had 150 custom cosmetic stores, out of which 10 stores offered refill services where consumers could refill products such as shampoo, conditioner, body wash, and liquid soap. The program will allow consumers to refill products on their own without the need of a customized cosmetics dispensing manager. To make this initiative more effective, a pilot program, which will run for two years, is being conducted wherein existing store staff (who have been trained to work at refill stores) can replace the customized cosmetics dispensing managers.

A customized cosmetics system, wherein certified individuals can mix cosmetics according to a consumer’s individual skin condition and preference at stores, is a revolutionary change in the beauty industry where any concerns related to product usage or suitability can be minimized, if not eliminated completely.

International brands and PE firms investing in Korean beauty brands

Innovation is at the forefront of the Korean beauty industry. A number of consumer goods and international beauty players have invested in innovative Korean beauty brands.

Estée Lauder, a multinational beauty company, acquired Have & Be Co. Ltd., a Korean beauty company, for nearly US$ 1.1 billion in 2019. The deal was made with a key focus on acquiring Dr. Jart+ brand, an innovative high-performing skin care brand, and Do The Right Thing (DTRT) men’s grooming brand.

In October 2021, Glow Recipe, a Korean skincare brand whose products are made with fruit extracts, received an investment from the US-based private equity firm North Castle Partners (for an undisclosed amount). The brand aims at using the investment funds for marketing and global expansion.

Private equity firms are also investing in local brands based in Korea. Helios Investment Partners, a London-based emerging markets-focused private equity firm, signed a stock purchase agreement (SPA) in October 2021, to acquire management rights with a 67% stake in Soleo Cosmetics, a cosmetics and household goods development and production company. The value of the transaction is said to be around US$ 32.5 million. Additionally, in September 2021, JKL Partners, South Korean private equity firm, announced that they will acquire Perenne Bell, a domestic brand that offers organic and sensitive skin products to consumers, and will help the brand focus on entering new markets, including the USA, Japan, and the Middle East.

Not everything is as ideal as it seems

Despite beauty brands claiming their products to be well-researched, organic, and environment friendly, issues exist. In early 2021, sunscreens from Korean brands such as Purito, Dear Klairs, and Keep Cool were under scrutiny when, on the basis of independent lab tests, it was found out that their sunscreens have far lower SPF that what was indicated on the packaging. Following the controversy, the brands withdrew their sunscreen products from the international markets and issued refunds to the customers.

In another incident, Innisfree, a cosmetic brand owned by Korean firm AmorePacific, was called out for misrepresenting the product’s eco-friendly credentials – on the packaging, the product was wrongly labelled as “paper bottle” whereas it actually came in a plastic bottle wrapped in paper.

Loyalty and trust are important in the beauty business and while it might be incorrect to write-off all Korean beauty brands based on a few bad incidents, consumers would not shy away from exploring other brands that offer what they claim.

EOS Perspective

Over the years, South Korea’s cosmetics industry has built a stronger position on the global map especially with the use of innovative and natural ingredients, and a shorter product development cycle. The quality of Korean beauty products, sold with a promise of flawless and crystal-clear skin, is the biggest selling point in a hyper-competitive beauty market.

The popularity of Korean skincare brands is definitely growing but it is not just driven by innovation or quality but also propelled by the mounting fascination for everything Korean, be it culture, entertainment, food, or beauty. Right now, the charm of Korean wave is so prominent that anything Korean will sell and Korean beauty brands are leveraging this opportunity to make big bucks. However, they might not to be able to ride the tide forever.

Since COVID-19, beauty industry has undergone momentous changes. As lifestyles changed and staying indoors and wearing masks became the new normal, the demand for make-up products decreased and the need for skincare products increased. The trend is here to stay. People want healthier skin but prefer to achieve it through easier, minimal, and effective skincare routines and K-beauty brands might be popular for a lot of things but minimalism. By updating their product lines with the strangest of ingredients, discontinuing products, and asserting the use of multiple products on a daily basis, Korean beauty brands tend to over-tire the consumers. Rising trends such as skinalism that focuses on single multi-functional products and sustainable packaging that demote the use of plastic pose further challenge for Korean beauty brands.

In the ever-changing beauty industry, beauty regimes change rapidly and country-led beauty regimes are no exception. With new beauty trends and regimes such as J-beauty and C-beauty quickly catching up among consumers, the novelty of K-beauty products will definitely wear off sooner or later.

K-beauty can perhaps be considered just a fad that stayed and resonated with consumers for more than a decade. For now, the appeal of this trend is not expected to fade very soon. As for the time when the ‘all things Korea’ fascination is over, only players who have been able to build their brand awareness and gain consumers’ trust are likely to successfully continue when the Korean tag will no longer be a pass for high sales.

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Cloud Kitchens on the Surge as Consumers Choose to Order-in

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For food delivery, e-commerce was an option before COVID-19, but as the pandemic unfolded, it became the preferred way to take customers’ orders. Restaurants were shut down for indoor dining, so customers turned to cloud kitchens to order and enjoy restaurant-like food without having to step out. The ease of having high-quality food delivered right at the footstep has instigated people, now more than ever, to order in. The pandemic has accelerated the cloud kitchen business, causing a paradigm change. Customer- and technology-driven cloud kitchens reflect a business model that will be adopted, sooner than later, unanimously by players in the food and restaurant service space.

The global cloud kitchen market was valued at close to US$ 52 billion in 2020, with the APAC region accounting for more than 60% of the global market share. Rising disposable income and increased use of smartphones have been driving the increase in online food delivery services (on which cloud kitchens depend), but it was not until the pandemic entered the scene that cloud kitchens really gained traction as restaurants and other eateries closed down.

COVID-19 accelerated the ascent of cloud kitchens as people used food delivery services much more frequently than before the pandemic. The growth was further favored by the trivial need for dine-in space due to social restrictions.

Everyone wants a piece of cloud kitchen on their menu

While China, India, and Japan are the key markets driving the growth of the cloud kitchen market in the region, the market in other countries is also witnessing significant growth rates. For instance, JustKitchen, a Taiwan-based cloud kitchen operator established in March 2020, has 14 “Spokes” (smaller kitchens for final meal preparation and packaging) and one “Hub” (larger commercial kitchen where earlier stage food preparation takes place) across the country. The company further plans to expand both domestically (by having 35 Spokes and two Hubs in Taiwan by the end of 2021) and internationally – it opened its first overseas kitchen in Hong Kong in June 2021 and plans to expand further in Singapore, the Philippines, and the USA. Another player, GrabKitchen, owned by Singapore-based online-to-offline (O2O) mobile platform Grab, which opened its first cloud kitchen in Indonesia (in 2018), now has operations in Thailand, Vietnam, Singapore, Myanmar, and the Philippines.

Restaurant chains are the primary adopters of the cloud kitchen concept. The pandemic has made India-based QSR chain Bercos realize that it is important to include deliveries as part of the business plan, because of which it is planning to launch three new cloud kitchen brands in the western and southern parts of India. Another Indian multi-brand cloud kitchen player, TTSF Cloud One, looks at opening 150 cloud kitchens by 2022. They aim to invest between US$ 3.3 million to US$ 4 million in the project through a combination of owned cloud kitchens, retail stores as well as franchised stores, and franchised cloud kitchens.

Owing to corporate strategy and global restructuring, the Philippines-based fast-food restaurant chain Jollibee Foods announced (in May 2020) that it would spend US$ 139.4 million on building its cloud kitchen network.

Global food chains are also partnering with local players to increase their outreach in the cloud kitchen ecosystem – in 2020, Wendy’s, a US-based fast food restaurant chain, entered into a joint venture with Rebel Foods, an Indian online restaurant company, to open up 250 cloud kitchens across India. This is a strategic move for Wendy’s as the company will get immediate access to scale rapidly across the country because of Rebel Foods’ existing network of cloud kitchens. Furthermore, Rebel Foods recently announced that the company plans to add another 250-300 locations to its repertoire across Southeast Asia, West Asia, and the UK via partnerships.

With the cloud kitchen concept growing at an astronomical rate, players, especially in nascent markets, are also looking to scale up rapidly. CloudEats, a Philippine-based cloud kitchen, plans to expand its reach further within the country (it currently has five cloud kitchens domestically) and other countries with the highest online food delivery penetration across Southeast Asia. Bangladesh-based cloud kitchen and digital food court player Kludio launched Kitchen-as-a-service to help restaurateurs, home cooks, and virtual brands expand with no upfront investment, and FoodPanda Bangladesh, in July 2020, announced that it would be launching 30 new cloud kitchens (in a period of 6 months) across the country.

Cloud Kitchens on the Surge as Consumers Choose to Order-in by EOS Intelligence

Cherry-picked business model served on a silver platter (well, almost)

Cloud kitchens present a sea of prospects for both food and restaurant industry players as well as other adjoining sectors. They represent the potential of a tech-enabled business model for the restaurant and food delivery industry, where operational jobs in the kitchen will be handled by robots and deliveries made by drones. Another opportunity is for restaurants that would like to expand their geographical reach but are incapable of opening another dine-in place. With a cloud kitchen in place, they can access new markets via delivery only. Restauranteurs can further use it to their advantage by experimenting with new food items with relatively no investment and low risk. Last but not least, the mid and large-sized restaurant chains, which thrived on the dine-in concept (before the pandemic), will be quick to jump and adapt (some players have already ventured into this space) the cloud kitchen model to capitalize on the growing food delivery business. Furthermore, new players entering the restaurant and food business can take this as an opportunity to pan the layout of their premises in a way that space is efficiently optimized to adjust both the restaurant layout as well as the delivery service.

But it is not all smooth sailing. With a large number of cloud kitchens sprouting, the competition will be fierce in the coming years. Furthermore, with only so many food delivery platforms to support the already crowded cloud kitchen market, they are easily exploited by food aggregators. Not only do aggregators charge a high commission (ranging between 25% and 40%), the ratings for cloud kitchens on these portals (for a cloud kitchen) play a massive role in influencing other customers and affect the brand value.

EOS Perspective

Unlike restaurants, a cloud kitchen offers no dine-in facility and relies solely on online orders. The delivery-only model has its limitations, especially when it comes to customer experience. And a slowdown in dine-in style is indicative that restaurants are moving forward and looking to enter this space. Therefore, a hybrid model where cloud kitchen and dine-in concepts integrate is most likely to rise in the future.

The restaurant industry is recovering from the coronavirus crisis and adjusting to the fact that a pandemic could shake the entire foundation of the sector which was once based on dining in. But now, with more and more people ordering in, the burgeoning cloud kitchen space represents a sprouting new business model. In the near future, smaller brands are most likely to embrace a cloud kitchen network model, whereas the hybrid business model (combining physical stores and cloud kitchens) will work best for the larger and established brands. For instance, in July 2020, Thailand’s fast-food restaurant chain, Central Restaurants Group (CRG), which currently operates 1,100 fast-food outlets nationally, announced that it would open 100 cloud kitchens across the country in the next five years to strengthen its food delivery business. Moreover, as social distancing becomes the norm (wherein restaurants are forced to maintain sizable distances between tables) and preference for eating out reduces, the dine-in spaces across restaurants are also likely to shrink.

In the long term, the concept of cloud kitchen seems practical and a plausible winner, however, its success hinges entirely on the growth of the food delivery market. Before the pandemic, in 2017, APAC led the global online food delivery market with a share of 52.1% and market revenue of US$ 34.31 (the region was anticipated to contribute a revenue of US$ 91.0 billion and a share of 56.2% by 2023). Post-pandemic, these figures have multiplied and present a space that exudes growth potential. For instance, in Southeast Asia, the food delivery market grew 183% from 2019 to 2020 (in terms of gross merchandise value) owing to changing consumer behavior (towards how they consume food) and the ease of ordering due to digitalization. Moreover, the growth in the food delivery sector is expected to continue.

Food aggregators have been active in the cloud kitchen space even before the pandemic hit. Their value proposition of acting both as a supplier (wherein it allows independent cloud kitchen players to use its platform while charging them on a revenue-sharing model) and operator of the platform puts them in an interesting position, where they have control, to a certain extent, of business functions of other players. Food aggregators may likely dominate this space in the long run.

The metrics of the food and restaurant service industry have changed as businesses evolve continuously. With concepts such as cloud kitchen, the sector has become consolidated, wherein multiple establishments work under a single roof.  In a nutshell, cloud kitchens are here to stay as they display substantial growth potential, provided players revisit their business strategies and rethink the right hybrid business model (such as merging with a large brand to expand into cloud kitchen space, among others) in order to thrive.

Clean Beauty Next Stop China by EOS Intelligence
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Clean Beauty: Next Stop – China

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China is one of the most promising markets for cosmetics and skin care companies globally, only being second to the USA in size. Despite its size and potential, the Chinese beauty market has remained relatively closed to several international players that make cruelty-free and vegan products. This is because of Chinese regulations that required compulsory animal testing pre- and post-market entry for international brands. However, in 2021, the Chinese government squashed the mandated animal testing requirement and introduced other certification methods. While this opens the market for a plethora of players who have till now shied away from entering the Chinese market, steering through the Chinese turf may still not be very simple.

China’s new cosmetic regulations easing entry for imported products

China is currently the second-largest cosmetics market globally, and has an immense potential to grow further. As per China’s Ministry of Commerce, the value of imported cosmetics grew by 30% in 2020, underlining the strong potential for international brands in the Chinese market. At the same time, several international companies have kept their distance from this US$57 billion beauty and personal care market, owing to stringent regulations.

However, in 2021, the government introduced new rulings for cosmetics and beauty products, which have altered the regulatory landscape in China. As per Chinese regulations, cosmetics are divided into two categories, special and general cosmetics, and the two are subject to different pre-market registration requirements.

As per the new regulations, while the former will continue to be subject to pre-registration with National Medical Products Administration (NMPA) before being allowed to be manufactured or imported, general cosmetics now only require filing documentation of the product with the authority. Earlier, the general category also required prior approval before import.

In addition to streamlining the process for the general category, the government has reduced the number of special product categories from nine to six. As of 2021, the only product categories under the special category encompass hair dye products, hair perm products, spots removal and skin whitening products, sunscreen products, and hair loss prevention products. The streamlining of the registration process for general category is expected to have a direct impact on the cost of warehousing and logistics for global brands as it is likely to quicken the import cycle.

Another regulation that was a deterrent to entering the Chinese market was that international beauty companies were expected to perform animal testing for their products both pre-and post-market entry. This created an issue for the growing number of global clean beauty brands who position themselves as vegan or cruelty-free. These brands could either choose to dilute their brand positioning by undertaking animal testing for the Chinese region or had to keep away from this goldmine market.

However, these companies did have one channel to enter this market, and that was through cross-border e-commerce sites, such as Alibaba’s Tmall. Although this resulted in a limited presence as the cross-border market size has government restrictions and is about one-tenth the size of the domestic market. Moreover, physical retail still continues to dominate the Chinese market with regards to cosmetics sale, with growing popularity of multi-brand stores.

As per the new regulations, global companies do not require animal testing anymore before entering the Chinese market. This will level the playing field between international imports and domestic brands, as domestic brands have been exempt from animal testing since 2014.

However, there are a few conditions to be met by companies looking to bypass animal testing. The brand must provide relevant quality certifications from their country of origin, the product should not be aimed at children or babies, the product should not contain any raw material that is not included in China’s approved list of raw materials, and the applicant brand and its Chinese representative should not have been flagged as requiring further supervision by the authorities.

Clean Beauty Next Stop China by EOS Intelligence

Companies responding to the new regulations

This opens the door for several international players who position themselves as cruelty-free. In May 2021, Australian clean beauty brand, Frank Body, welcomed a closed investment from Chinese private equity firm, EverYi Capital, which put the value of the brand at about US$74 million (AUD 100 million). The investment, which includes the creation of a Shanghai team for the brand, will help the company find a strong footing in the Chinese market in the light of the latest animal testing relaxation. The brand is expected to enter the market over the next 12 to 18 months, with prospects of opening a physical store.

In a similar move, Brazilian beauty conglomerate, Natura & Co., mentioned during its 2020 fiscal year results that it is looking to expand into China with its brands, Aesop and The Body Shop. The two brands were expected to complete their registration in China by first half of 2021, with Aesop expected to open its first store in Shanghai by the end of 2021, while The Body Shop is scheduled to open its first store in 2022 (however, there is no information regarding the completion of the registration process yet). While these brands have been available in China through cross-border e-commerce, they expect that physical retail presence will help establish a strong foothold in this growing market.

Nerissa Low, founder of Singapore-based organic and cruelty-free cosmetic company, Liht Organics, has also welcomed the decision and expressed interest in entering the offline Chinese market. Liht Organics, which entered China in 2020 through cross-border e-commerce, gained significant traction in the Chinese market. However, the brand refused to enter the offline market when approached by several Chinese distributors, as the company did not want to compromise on its cruelty-free ethos. Given the change in regulations, the founder has expressed interest in expanding beyond cross-border e-commerce considering the potential in the offline market and is looking for the right partner and opportunity.

Moreover, popular international brands such as Drunk Elephant, Fenty Beauty, and The Ordinary, which are currently limited to be selling through Alibaba Tmall, are expected to enter the Chinese market and establish a physical presence there. While a lot of these brands might wait to establish physical stores and may penetrate the market through mainland e-commerce websites such as Tmall (instead of Tmall Global) to reach a larger audience, presence in multi-brand retail stores or opening pop-up stores will be the natural next step.

Despite new regulations, challenges remain

However, entering the Chinese market (despite the abolishment of the animal testing rules) will be no easy feat. Owing to the recent changes in regulations, the companies need to keep up higher standards in terms of product quality, marketing, and operations. Moreover, some of these regulations have made it harder for foreign players to comply as they require a complete overhaul of their local marketing strategies and operational functions.

Firstly, as per the new regulations, the NMPA of China has made it mandatory for international companies to have a domestic agent who must be based in China. This agent will be responsible for the registration process, which includes massive paperwork and approval procedures. Moreover, these agents will be held completely accountable for the company’s products and operations in China and will be answerable and responsible for any safety concerns arising in the product. In addition, they will be responsible for ensuring that the product, its ingredients, and its marketing are compliant with the Chinese regulations. Thus it will be a challenge for foreign players to find a Chinese agent to fill this capacity as in reality, such a person/company may have no impact on how the ingredients or final product are made. This is also definitely expected to increase costs for the company.

The government has also imposed harsher penalties for non-compliance and various violations such as misleading advertising, non-compliance of new cosmetic naming guidelines, non-submission of approved hygiene license and certificates, etc. This makes it critical for companies that the Chinese agent is well aware of all regulations and is thorough with all registration requirements as violations can also result in cancellation of license.

Secondly, while the removal of animal testing for imported cosmetics is a welcome news for a great number of global cosmetic brands, the policies put in place of this pose to be equally challenging and complex to steer through. Under the new regulations, cosmetics falling under the general category require a Good Manufacturing Practice (GMP) certificate to avoid animal testing. These GMP certificates need to be issued from the brand’s local government regulatory department. Considering that different countries will have different authorities and templates for issuing these certificates, there is a lot of ambiguity regarding what is acceptable and what is not.

Moreover, cosmetic companies need to provide a manufacturing quality management system (QMS) for each individual ingredient used in the cosmetic formulations. This requires companies to collect information on each and every ingredient manufacturer and supplier, including their quality specification documents and certificates. This is a tedious process since a company may use ingredients from several manufacturers for a single product. In addition, in case a company plans to change a supplier, it will have to undergo this process and update the information with the Chinese authorities for the new supplier, which is both money and time consuming.

On the one hand, it is true that the exemption from animal testing has given an opportunity of many cruelty-free brands to enter the Chinese market. However, on the other hand, the lengthy procedure and strict scrutiny over the process is undermining the overall market entry process for mid to small size companies. Non-compliance with these certifications will reverse the relaxation on animal testing for the companies that don’t meet the new procedural requirements and then their products will need to undergo animal testing for selling in China.

Furthermore, despite getting the green light to enter the Chinese market, the cruelty-free cosmetic companies would still need to deal with another challenge arising from the consumer side. While the clean beauty segment is definitely growing, it is currently not a major factor in purchasing decisions by consumers, unlike in the USA. Chinese consumers seek products that are functional and have healthier, milder, and more reliable formulas. Hence, to ensure a right placement of their cruelty-free products, companies would need to undergo distinctive marketing strategies to grab a good consumer base. Education and awareness regarding cruelty-free products and creating a substantial market for such products may require significant marketing funds.

In addition to the changes in regulations with regards to animal testing, the Chinese government added new regulations regarding product labelling. As per the new regulations, the labels must have corresponding Chinese explanation to everything mentioned and they must a have larger font size than the explanation in foreign language. Also, the label should contain the Chinese name and special cosmetics registration certificate numbers, product implementation number, name and address of the person responsible in China and of the manufacturer along with the production license number.

Adding to these is a ban on use of any kind of medical term, names/pictures/endorsement of celebrities in the medical field, and implication of medical effects to avoid any misleading of information. Although all these changes are implemented in order to curb the market of counterfeit products, they are expected to make the product approval process lengthier, as now companies would be required to undergo a comprehensive regulatory review of the guidelines to ensure hassle-free entry into the Chinese market.

EOS Perspective

While the new regulations provided a pathway for several foreign clean beauty players to enter the Chinese market, the process still requires a lot of navigation, especially since a lot of rulings regarding safety requirements, GMP authorities, and template remain ambiguous.

Moreover, since these certificates need to be derived from the country of origin, the country’s overall political and business equation with China might also play a subtle role in their acceptance by the Chinese authorities. For instance, China has not yet declared the jurisdictions that will be recognized for the QMS certificate. Given the current political friction with Australia and the USA, the Chinese authorities may not accept QMS certificates from these countries at the moment. Thus brands from these countries may have to look to find suppliers or shift part production to other countries to be able to enter the Chinese market.

While currently there is no clarity regarding what terms and jurisdictions will initially be accepted for the GMP and QMS certificates, it is expected that clarity on the matter will be provided by the government shortly. In the long run, these regulations are a move in the right direction. As the government has overall simplified the filing process and focused on quality and safety measures, the new regulations are a positive development for international cosmetic companies, especially clean beauty brands that have been unable to enter the second largest beauty market in the world.

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Beauty Tech Giving Beauty Industry a Facelift

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In recent years, artificial intelligence and virtual reality have been adding an additional dimension to the beauty industry, quite literally. With consumers increasingly embracing and demanding personalized offerings and precise results, leading brands, such as L’Oréal and Shiseido are investing heavily in the space. Just as in many other industries, AI is revolutionizing beauty products and how they are conceptualized, created, and sold. However, it is a long road from being perceived as gimmicky promotions to improving customer engagement to becoming commercial go-to solutions.

Artificial intelligence (AI) has been greatly integrated in our lives through different sectors and now the beauty industry is no exception. The use of AI, augmented reality (AR), virtual reality (VR) as well as complex beauty devices has revolutionized the way consumers perceive, apply, and select beauty products. Moreover, in the age of online retail, it enables companies to maintain a similar personalized level of service that would otherwise require a physical interaction with a beauty consultant. Technology is creating new experiences for the consumer, both in terms of beauty products’ features as well as purchasing process.

Beauty industry is also one of the most competitive sectors, with consumers always being on the lookout for new products and having low brand loyalty. Beauty tech seems to address this issue as well, as it elevates consumer engagement through enhanced personalized offerings, which in turn is a trend that has been driving the beauty industry for several years now.

The three main aspects of beauty tech encompass personalization through AI, virtual makeup using AR and VR, and smart skincare tools/beauty gadgets.

Personalization through AI

Across the retail sector, the key to consumer’s heart and pockets for a long time has been personalization of products and sales experience. Beauty industry is no exception. Consumers have been looking for the perfect skincare product that work best for them or the lipstick shade that goes perfectly with their skin tone. Moreover, consumers want this all from the comfort of their home. This is where AI comes in.

Through retail kiosks and mobile apps, AI enables companies to offer personalized shade offerings that are especially curated for the individual user. A number of companies is investing and capitalizing on this technology to differentiate themselves in the eyes of the consumer. One of the leading market players in the beauty industry, L’Oréal, has been one of the first companies to invest in AI- and VR-based beauty tech and acquired Toronto-based, ModiFace, in 2018. There are several different ways companies, such as L’Oréal, have incorporated AI into their product offerings.

Beauty Tech Giving Beauty Industry a Facelift by EOS Intelligence

Beauty Tech Giving Beauty Industry a Facelift by EOS Intelligence

Lancôme (a subsidiary of L’Oréal) has placed an AI-powered machine, called Le Teint Particulier, at Harrods and Selfridges in the UK, which creates custom-made foundation for the customer. The machine first identifies ones facial color using a handheld scanner, post which it uses a proprietary algorithm to select a foundation shade from 20,000 combinations. Following this, the machine creates the personalized shade for the user, which can then be bottled and purchased.

In addition to physical store solutions, AI-powered apps and websites also offer consumers personalized recommendations. In 2019, L’Oréal applied ModiFace’s AI technology to introduce a new digital skin diagnostic tool, called SkinConsult, for its brand, Vichy. The AI-powered tool uses more than 6,000 clinical images in order to deliver accurate skin assessment for all skin types. It analyzes selfies uploaded by users to identify fine lines, dark spots, wrinkles, and other issues, and then provides tailored product and routine recommendations to the user to address the skin concerns.

My Beauty Matches, a UK-based company, offers AI-based personalized and impartial beauty product recommendations and price comparisons. The website asks consumers diagnostic-style questions about their skin and hair type, concerns, and preferences, and uses AI to analyze the data and recommend products from 400,000 products (from about 3,500 brands) listed on its website. Alongside, the company runs Beauty Matches Engine (BME), which is a solution for beauty retailers using consumer data and AI algorithms to identify consumer purchasing and browsing patterns as well as their preferred products by age and skin or hair concerns. This helps retailers predict and stock, which product the consumer is likely to purchase, improving sales, increasing upsells, and providing a personalized solution to customers.

On similar lines, another app, Reflexion, uses AI to measure the shininess of skin through pictures and offers personalized product recommendations. The app claims to provide much deeper analysis than regular image analysis apps and provides additional features such as testing if products such as foundation are evenly applied. The app works by measuring a face surface’s Bidirectional Scatter Distribution Function (BSDF), which is a measure of light reflected on the user’s face.

Nudemeter is another such product, which uses AI to personalize makeup choices and foundation shades for a full spectrum of skin tones, including darker skins. The app uses color analysis and digital image processing along with its AI algorithms that ensure accurate color measurement irrespective of background lighting, pixels, etc. The app is currently being used by Spktrm Beauty, a US-based niche beauty company targeting shoppers with dark skin.

Virtual makeup through AR and VR

In today’s world where consumers prefer to shop from the comfort of their homes, AR and VR are enabling beauty companies to provide experience similar to that of physical retail to their consumers. AR and VR technologies-based apps let users experiment virtually with a range of cosmetics by allowing them to try several different shades, all within minutes and through their smartphone. This elevates the users shopping experience and improves sales conversion.

Sephora’s Virtual Makeup Artist enables customers to try on thousands of shades of lipsticks and eyeshadows through their smartphones or at kiosks at Sephora stores. While many such apps and filters have been in use for some time now, they are increasingly becoming more sophisticated, providing accurate color match to the skin and ensuring the virtual makeup does not move when the user shakes their face, changes to a side angle, etc. In addition, such apps also provide digital makeup tutorials to engage customers.

On similar lines, L’Oréal uses ModiFace’s AR and AI technology to provide virtual makeup try-on on Amazon and Facebook. The technology enables customers using these two platforms to try on different shades of lipsticks and other make-up products through a live video or a selfie from an array of L’Oréal brands such as Maybelline, L’Oréal Paris, NYX Professional Makeup, Lancôme, Giorgio Armani, Yves Saint Laurent, Urban Decay, and Shu Uemura.

Moreover, AR-based try-on apps helped brands connect with their customers during the previous year when most customers were stuck home and could not physically try on make-up. LVMH-owned Benefit Cosmetics has been investing in AR tech, and launched Benefit’s Brow Try-On Experience program (along with Taiwanese beauty-tech company, Perfect Corporation), which helps online shoppers identify the right eyebrow shape and style for them and then choose products accordingly. The company uses facial point detector technology for the program. The app witnessed a 43% surge in its daily users during April and May of 2020 (as compared with January and March 2020), when people were confined to their homes owing to the COVID outbreak. This helped connect with consumers in a fresh manner and increased brand loyalty. Moreover, Benefit claims that brows products have been their strongest category post-COVID outbreak.

One of China’s leading e-commerce players, Alibaba, also partnered with Perfect Corporation to integrate the latter’s ‘YouCam Makeup’ (an AR-based virtual makeup try-on technology) into Alibaba’s Taobao and Tmall online shopping experience.

Smart devices

In addition to AI and AR based apps and solutions, smart devices is another category in the beauty tech space that is gaining momentum. A certain section of premium consumers are increasingly open to invest heavily into smart beauty gadgets that not only improve skin and hair quality but also help them quantitatively measure the results from using a certain product. While these products are currently expensive and for a niche audience, they have been gaining popularity, especially across the USA and China.

One such smart skincare device is L’Oréal’s Perso, which is based on ModiFace’s AI-powered skin diagnostics and analysis technology. Perso uses AI, location data, and consumer preferences to formulate personalized moisturizer for the consumer. The product is further expected to extend into foundations and lip shades. Perso is expected to be launched in 2021.

On similar lines, in July 2019, Japan-based Shiseido, launched its smart skincare device called Optune, which measures a user’s location-based weather and air pollution data, sleep data, stress levels, and menstrual cycles to create a custom moisturizer. Optune is available on a subscription basis and costs about US$92 per month.

In 2020, P&G also launched a premium skincare system, called Opte Precision. The skincare device uses blue LED light to scan one’s skin and applies a patented precision algorithm to detect problem areas and analyze complexion. Post this, the device releases an optimizing serum that is applied to spots to instantly cover age spots, pigmentation, etc., and to fade their appearance over time. The device has 120 nozzles and works on a technology similar to that of a thermal inkjet printer. The device targets a premium niche audience and costs US$599 with refill cartridge costing US$100.

In 2018, Johnson & Johnson’s drugstore skincare brand, Neutrogena, also launched a smart skincare device – a skin scanner, called Skin360 and SkinScanner, which uses technology from FitSkin (a US-based technology company). The scanner comes in the form of a magnifying camera that gets attached to a smartphone. The camera, which has a 30-time magnifying power helps scan the size and appearance of one’s pores, size and depth of fine lines and wrinkles, the skin’s moisture level, and also provides a score to the skin’s hydration level. The data is processed in a mobile app, which in turn provides a complete skin analysis and offers expert advice and product recommendations. While most smart skin devices are relatively expensive, this one retails at around US$50.

EOS Perspective

While AI and AR have been embraced by a lot of industries in the past, beauty tech is still in its infancy. That being said, there is a lot of potential in the space, especially with the consumer becoming increasingly comfortable with technology. While till recently, most technology-based products in the beauty sector were gimmicky and more for fun and consumer engagement, brands have started taking this space seriously, and started launching products that offer real sales growth opportunity.

Moreover, while AI and AR-based technologies have been accepted fairly easily by the consumers and industry players alike, smart devices is still a very niche category, with most products focused on a niche affluent clientele, who are willing to spend more than US$100 on products that may help improve their skin. There is a lot of potential for this segment to innovate, collaborate, and launch products at a more affordable price point in order to reach the masses.

Over the next couple of years, we can expect new niche players, exploring the benefits of beauty tech to enter the market in addition to greater number of partnerships between traditional beauty giants and technology companies. As personalization continues to be the mantra for consumers, beauty companies cannot look to ignore the space in the coming future.

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