Wholesale and Retail Year in Review: Chocolate
by Christina Lee on January 27th, 2009
Less than three weeks away is Valentine’s Day – and with this, the best-selling week for chocolate candy. But while the holiday morsels may taste as sweet as usual, the chocolate market had to pay a higher price, due to a number of reasons beyond the economic downturn that made 2008 a rather bittersweet year:
Mother Nature Punishes the Ivory Coast
The Ivory Coast produced more than 1.4 million tonnes of cocoa beans in the year ending Sept. 30, providing nearly 40 percent of the world’s supply, as Bloomberg reported on Jan. 7. But its dwindling supply is still not meeting consumer demand, and overall production may still fall short of 45,000 tons during the 2008-2009 season, according to Fortis Bank.
While still the world’s largest cocoa producer, the Ivory Coast has dealt recently with a number of nature-related troubles: dusty winds that shriveled buds and flowers, fungi that caused pods to turn black and rot, and potentially, a Liberia-based caterpillar infestation.
“If the price of cocoa is going up due to scarcity, this is because individual farmers are producing lower yields,” said Sophi Trancell, managing director of Divine Chocolate, to the Financial Times. “Chocolate prices are going up in store but the high cocoa price won’t necessarily benefit those individuals.”
As a result, cocoa deliveries sent for export declined by 36 percent from a year earlier in the week ending Dec. 21, an industry official said to Bloomberg. Wholesale prices soared to levels 40 percent higher than in 2007 by October, according to French news source Confectionarynews.com.
As part of Europe’s biggest chocolate market, London saw wholesale cocoa prices jump above the £2,000-a-tonne level for the first time in almost 24 years, after rising by 75 percent over the past year, The Financial Times reported Monday. The consequences may be eased however for consumers outside of the United Kingdom, because of the euro and dollar’s strengths against the pound.
As Commodity and Wholesale Prices Rose, Manufacturers’ Morale Fell
While dealing with the rising costs of milk as well as cocoa, chocolate manufacturers have especially struggled to make profit over the past year. Many had to raise prices, shrink bar sizes, or both – though the smaller bars resulted in lowered demand, as 21food.com, a B2B global food e-marketplace, reported in September.
Hershey’s, the largest chocolate manufacturer in North America, raised wholesale prices twice in 2008 of its standard-size bars, king-size bars, 6-packs and vending lines. The first time, on Jan. 28 by about 13 percent, the company claimed that it suffered more from such prices than its competitors because of its greater use of pure milk and solid chocolate, spokesman Kirk Saville told USA Today. The second time, on Aug. 15 by about 10 percent, Hershey’s predicted that the still-high prices of key ingredients – cocoa, sugar, peanuts and corn sweeteners – could later raise its wholesale price by more than double of the 2008 increases.
After Lindt observed the price of milk doubling in the second half of 2007, the company then had to deal with cocoa prices rising by more than 70 percent in the first half of 2008. The two price increases, impounded by declining consumer confidence and rising transportation costs, resulted in just 2 to 3 percent overall growth in its U.S. and European markets.
Demand Rises for Higher-End Chocolate – But At a Low Price
Meanwhile, while U.S. chocolate consumption has increased by just 4.1 percent from 2005 to 2007, the value of the chocolate gourmet products consumed increased by almost 28 percent, as reported by Daniel Workman in Suite101.
With the tremendous rise in demand for dark and premium chocolates, U.S. chocolate companies may still face a tough debate, on whether to satisfy customers foremost on price or quality.
After ten years of preparation, Art Pollard launched in 2006 his specialty dark chocolate retailer and wholesaler, Amano Artisan Chocolate. While his chocolate continues to garner national attention, Pollard faces great competition for precisely what he wants – high-quality cacao beans from Venezuela, Madagascar, Indonesia and Ecuador.
“The market becomes much more of an auction format,” he said in a phone interview, “not in a formal sense, but it still comes down to who’s willing to pay the most, and who has the best relationship with the farmer. The top shop makers in Europe, for example, are all competing for the same sets of beans – and we have to compete with them.”
At the same time though, Pollard realizes that even with his pursuit, retail prices of his chocolate must be kept as low as possible – even though this leads to smaller profits than desired. From 2007 to date, the recommended retail price of an individual bar has gone up from $6 to $6.95, even though retailers can charge up to $9, Pollard said.
“You can do that in California and the Northeast, but you might not be able to pull that off in the Northwest. We try to keep prices reasonable, and then what happens is that sometimes we see a smaller margin than we’d like.”
Today’s Market: Raising Hopes for 2009
A report by Credit Suisse gave an optimistic outlook for European confectioners in 2009, as most European food companies proved to be somewhat resilient to the economic downturn. But while the bank foresaw commodity costs finally lowering over the year, it has yet to predict what cocoa prices will be like.
Manufacturers also plan to spend their money differently in 2009, to make up for profits lost in the past. Rocky Mountain Chocolate Factory is working on a store model more appropriate for small markets, after it suffered profit decreases while mall traffic slowed, according to its third quarter report. Other manufacturers have taken slightly more controversial means of cutting costs, by substituting vegetable oils for cocoa butter.
After seeing slightly higher profits than expected in its fourth quarter, Hershey’s plans to spend $5 million more on advertising. The company also predicts that it will see an overall net sales growth of 2 to 3 percent in the coming year.
“The financial market and credit crisis has not had a material effect on our business operations of liquidity, to date,” its latest earning report states. “However, the increase in our cost structure and uncertainties in the financial markets and in the broader economy present challenges as we head into 2009.”
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February 4th, 2009
at 1:06 pm