Voice Over Recording:
Welcome to Insight Exchange, presented by LEK Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Peter Walter:
Welcome to another episode of the podcast, focusing on some of the transformative trends impacting the specialty chemicals industry, with exclusive insights from LEK Consulting. My name is Peter Walter and I'm a partner in LEK's specialty chemicals and materials practice with more than 20 years of experience in the industry. In a few moments, we'll be diving into some of the key dynamics taking place in the chemical sector related to strategic investments, sustainability initiatives, and digital transformation efforts. To provide insights on these topics, you'll be hearing from LEK managing directors, Carol Wingard, Amanda Winters, and Morgan Callahan. Carol, Amanda, and Morgan, could you each please take a moment to briefly introduce yourselves?
Carol Wingard:
Thanks, Peter. Hi, my name is Carol Wingard. I've been a partner with LEK for about 25 years, and I lead our global chemicals and materials practice. Over to you, Amanda.
Amanda Davis Winters:
Hi, everyone. Amanda Winters. I'm a managing director and partner at LEK Consulting, a leader in our global chemicals and materials practice. I've been with LEK for over 15 years and I'm based in our New York office. Over to you, Morgan.
Morgan Callahan:
Hi, everyone. My name is Morgan Callahan. I'm a partner in our global chemicals and materials practice as well. I've been with LEK about 12 years now, and I'm also based in our New York office.
Peter Walter:
Thank you all very much for that. I'd like to get the conversation going with the following question. What are some of the recent investment trends and strategic priorities that you're all seeing in the specialty chemicals industry?
Carol Wingard:
Peter, as you know with the chemicals industry has seen very challenging few years, and so many of the investment priorities are in a response to some of these external forces. In the work that we do with both our corporate clients as well as investors, we do see a number of key themes playing out over the next few years.
The first that I would call out is a renewed emphasis on innovation, and in particular on technologies relying on alternative feedstocks driving towards other green molecules. Now, the petrochemical industry is certainly not going away, but we certainly see renewed attention in investment dollars behind alternative bio-based chemicals going forward.
The second key trend is on diversification. I think this comes in a number of areas. The first is on diversification of end markets, but also on supply. We've certainly seen a lot of supply constraints in recent years, so there's a lot of attention on making sure that we have diversity of supply close to our production sources wherever they are globally.
A third key trend is on consolidation. Now, this is something that we have seen going on in the industry for many years, but we still see opportunities for roll-ups in other areas of consolidation. Some areas that come to mind in this area are case lubricants and even chemical distribution. Other key themes that come up in our discussions with companies are how to use and profit from digital tools as well as overall sustainability initiatives.
Peter Walter:
On the topic of digital, how are digital strategies being implemented in the chemicals industry and what's been the impact of these initiatives so far?
Morgan Callahan:
Sure. There is an increasing number of chemical companies looking to develop digital strategies, and many are setting specific targets for these digital initiatives. Somewhere around 80% of chemicals leaders that we have surveyed in the last year believe that their digital investments are successful, especially when it comes to driving operational efficiency and improving digital ways of working. A lot of these executives are now looking in the future to use digital tools to drive business growth and value creation.
For example, we're seeing digital tools be used to support executives introducing new product lines, driving revenue streams, enhancing the customer experience, and again, improving operational efficiency as a key value creation lever.
When we think about what is underpinning a lot of these digital strategies, there's really a core set of principles guiding executives in setting their strategy. So they're thinking about gaining alignment across the organization and taking a really holistic enterprise approach to integrating digital tools. But that's not to say that there aren't still challenges. In particular, we do see that there is still a challenge in proving the ROI of a lot of these digital strategies, and so it's imperative to have robust monitoring and granular data tracking to make sure and ensure the success of these digital strategies.
But ultimately what we're seeing is a lot of top-level attention being paid to digital in those organizations that believe they've been successful with digital strategy. The C-suite, the board, are deeply invested in driving that strategy forward. There's organization-wide commitment and really alignment of the strategy to broader business goals.
Peter Walter:
Amanda, on the topic of sustainability, what are some of the ways that sustainability-related goals and strategies are shaping the specialty chemicals market?
Amanda Davis Winters:
Great. As we're seeing in many other industries, sustainability is a strategic imperative for many chemicals companies. Given where chemical manufacturers and distributors sit in the value chain, the sustainability-related goals and strategies of their customers also very much plays a role here. This is especially true for specialty chemicals companies serving consumer facing end markets such as food and beverage or beauty and personal care, as we're seeing significant consumer demand and pull through for sustainable products from these end markets in particular.
Earlier, Morgan mentioned the annual survey that we do, and our recent round of the survey wrapped up in the latter part of 2023 where we surveyed 250 specialty chemical manufacturers, and 84% of them who are supplying consumer facing end markets indicated a high degree of importance of sustainability in order to remain competitive in their respective market segments. Some of this is driven by the fact that consumers are reporting an increase willingness to pay a premium for sustainable versions of existing products.
While there have been significant transformational trends and investments in innovation, there are also some challenges that chemical companies are dealing with when it comes to sustainable product development. In particular, chemical manufacturers are often charged with making drop-in replacements for solutions that already exist, albeit with more sustainable alternatives. They also are requiring these drop-in replacements to have the same performance characteristics of their less sustainable counterparts, as well as some degree of price parity. This is presenting a huge challenge for chemical manufacturers and distributors. This is why we're continuing to see investment in sustainable product pipelines with chemical manufacturers.
Peter Walter:
Morgan, another question related to sustainability for you. Could you please talk about some of the actions chemicals companies are taking to become more sustainable and to offer more sustainably produced raw materials and inputs to their customers?
Morgan Callahan:
Absolutely. Building on what Amanda was saying about how companies are really investing in innovation, particularly to develop these drop-in replacement solutions where possible, there's also a lot of investment going on in and around biosimilar opportunities. That would include chemicals that perform the same functionality as the pre-existing petrochemical based alternatives that have been used for many years, but not necessarily as a drop-in replacement. There's also a fair amount of investment going on in recycling, which is a tangential area to actual bio-based chemistry specifically. We are seeing a lot of interest in utilization of waste streams as a feedstock for chemicals manufacturers and how those opportunities can present new innovative solutions to various end markets downstream.
Peter Walter:
Thanks, Morgan. Carol, maybe a question for you. In addition to the topics we've already covered, could you talk a bit more about the future direction you foresee for the chemicals industry going forward?
Carol Wingard:
A few other important things came out of the recent LEK survey that I think are really worth mentioning. The first is channel overstocking, which really played havoc with the industry's ability to read demand drivers. De-stocking is now playing out through the industry. This is something that we focus on in the survey. The second is supply chain optimization and a trend towards reshoring or making sure that we have suppliers close to the areas of production. The third area that I think is always very important for chemical companies is focusing on increased operational efficiency in many areas the key to profitability and success in the sector.
Peter Walter:
Thanks, Carol, for those great perspectives. To close out the conversation, I would like to extend a special thanks to our expert guests, Carol, Amanda, and Morgan, for their very interesting perspectives regarding LEK's specialty chemical study. We would be happy to provide more detailed perspectives on request, and we invite you to connect with us to learn more about LEK's extensive experience providing strategic support to businesses and investors in this industry. Thanks for listening.
Voice Over Recording:
Thank you, our listeners, for joining us today at the Insight Exchange, presented by LEK Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
