These are dark days for the chocolate industry. Not in terms of sales and profit warnings, but because we’re beginning to spurn the Mars bars and Maltesers of this world in favour of more expensive, dark chocolate. And companies are beginning to reap the rewards. Sales of premium dark chocolate are soaring, with food companies clamouring to snap up a piece of the action.
This explains the rationale behind Cadbury’s purchase of Green & Blacks two years ago, and US giant Hershey’s plan to launch a high-end brand called ‘Bliss’ in March this year. The moves make sense. Premium chocolate accounts for about a quarter of the market in terms of value, says Breakingviews, but just 10% of the total volume. In other words: there’s money to be made from dark chocolate.
But before we take a look at who’s making it, why are consumers buying more dark chocolate? There are two reasons, both related to the ‘premiumisation’ trend across the food sector. The first factor is the growing body of medical evidence, which suggests that chocolate with a high cocoa content is actually good for you. This plays into consumers’ desire to buy healthy food.
Secondly, and more importantly, is the growing appetite for ‘affordable luxuries’. Premium dark chocolate sales are increasing at a rate of 20% in the UK and the US, against 1%-2% for the middle-of-the road chocolate market, says Landsbanki Kepler in Zurich. In continental Europe, where palates are arguably more sophisticated when it comes to sweets, 45% of the market is taken by dark chocolate compared with 25% in the US. “Growing up in the UK, for me a slice of Cadbury’s cream egg was a slice of heaven,” says Landsbanki Kepler analyst Jon Cox in Zurich. “But once you taste a Lindt ball you suddenly realise they’re a different class.”
It is this status as an ‘affordable luxury’ that premium chocolatiers hope will protect their sales from the effects of any recession in the US and UK. Chocolate will be one of the “small luxuries people will continue to enjoy”, Lindt & Spruengli chief executive and chairman Ernst Tanner told Agence France-Presse last month. And even if cocoa prices continue to rise, premium manufacturers are far better placed to pass price rises onto their customers. Cox, who seems to have missed the point of the feminist revolution, agrees. “I think [in a recession] you’re maybe not going to buy your wife a fridge freezer. But you will buy her a box of Lindt chocolates on her anniversary.”
And it’s not just about Europe and North America. An almost entirely new chocolate market is developing in the Far East. Asian consumers account for just 17% of cocoa consumption worldwide, says Global Business Insights. But that’s growing at a rate of 25% a year as Indians, and especially Chinese, switch from traditional dried fruits and rice-based confectionery to chocolate. In the past five years alone, chocolate sales in China have nearly doubled to $813.1m, while in India they’ve increased 64% to $393.8m, says researcher Euromonitor International.
Companies have seen which way the wind is blowing and are opening operations across the region. The rationale is straightforward. At present, the Swiss eat 11.9kg of chocolate per head a year, against 10.2kg here in the UK, says ChocoSuisse, the Swiss chocolate manufacturers’ industry body. India and China eat just 100g each, far below Japan on 2.5kg. If emerging-market consumers step up chocolate consumption simply to Japanese levels in the years ahead, sales will go through the roof. We look at who will benefit below.
Two confectionery firms to tuck into
Some firms operate exclusively in the premium arena, whereas others have only dipped in a toe or two. And they’re doing well. Sales at Hershey’s, the American candy behemoth, came in at $4.95bn in 2007, up just $2.5m on 2006, as Americans lost their appetite for the cheaper milk-chocolate based products churned out at its Pennsylvania plant. But over at Lindt & Spruengli (Zurich:LISN) in Zurich, which, among other niche products, makes the distinctive gold-wrapped Easter bunnies, sales rose 14% to 2.95bn Swiss francs ($2.68bn).
It’s a similarly buoyant story at Berne-based Barry Callebaut (Zurich:BARN), the world’s largest chocolate maker. The Swiss firms “are a country mile ahead of everyone else in terms of innovation, taste and quality”, says Cox. Of the two, Callebaut looks the most attractive – certainly for investors – given that it trades on 15 times expected 2009 earnings, a discount to Lindt & Spruengli on 22.6. Expansion into the Far East is progressing well. Just last month a e13.6m facility opened in the Chinese city of Suzhou, so “it’s certainly not a bad time to dip in”, says Cox.