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Why chocolate has reached a melting point: confectionery category report 2023

Published in The Grocer

Erratic weather is putting ever more pressure on chocolate prices. But certain brands are keeping cool in the face of melting demand.

Gone are the days when a pound coin would buy you a big sharing bar of chocolate. In a year that has been dominated by inflation, chocolatiers have suffered more than their fair share of cost hikes.

The price of cocoa butter has been the major factor – surging 58% from €4,336 to €6,850 per tonne in the year to 26 July 2023 [Mintec]. When combined with other cost increases like energy, it’s left the category’s biggest players with no choice but to hike prices, reduce pack sizes or even do both.

The vast majority of chocolate lines – 78% – experienced an increase in shelf price in the year to 1 August across Asda, Morrisons, Sainsbury’s, Tesco and Waitrose [Assosia]. The average price hike was 16% – but in many cases, it was far heftier.

Take Cadbury’s Dairy Milk 110g, which jumped by 50% in Morrisons from £1 to £1.50. Quality Street, Galaxy and Lindt Lindor are among the other brands to have seen price increases upwards of 40% on certain SKUs.

At the same time, SKUs are getting smaller, Assosia data shows. The size of Cadbury Buttons, for example, shrunk 23% from 240g to 184.8g earlier this year.

So, how much longer will rising prices continue? What will be the impact of climate change? And how are shoppers responding?

Kantar data shows the extent to which demand is falling. Take-home volumes have dived 6.5% – and value has grown only on the back of a 12.6% rise in average pack price [52 w/e 9 July 2023].

“Cocoa beans are the single biggest raw material input for chocolate”

Nearly all the top 10 chocolate brands – bar M&M’s and Ferrero Rocher – have suffered volume declines [NIQ 52 w/e 5 August 2023].

Of course, prices won’t be the only reason behind this trend. The intensifying war on obesity led to the introduction of HFSS rules last October, which banned chocolate bars from prominent in-store display areas.

But in a cost of living crisis, higher prices will be noticed. And these cost pressures could persist for some time. Writing in The Grocer in July, Warren Ackerman, head of European consumer staples research at Barclays, noted how the price of cocoa beans, “the single biggest raw material input for chocolate”, had remained relatively stable.

But that was due to change, he warned. Cocoa prices have surged on a tightening supply outlook, exacerbated by heavy rain in key producing nation the Ivory Coast.

Suppliers are now bracing themselves for the El Niño weather phenomenon potentially restraining supplies further, by bringing drier weather to west Africa. That risk is reflected in futures prices for cocoa, which hit a 46-year high on the Intercontinental Exchange in London over the summer.

As climate change looks set to produce increasingly unpredictable weather in the years ahead, suppliers are now thinking hard about how to keep the supply of affordable cocoa flowing. “We’re working closely with our growing partners to ensure we can sustainably maintain our supply, not just in the short term but in the future as well,” says Andy Mutton, MD of Storck UK, which produces the Bendicks and Toffifee brands.

In the short term, hedging against rising cocoa prices looks like a sensible strategy. But not everyone can do that.

“A lot of the bigger companies will probably hedge for 12 to 24 months, but for a smaller challenger brand like ours, we just don’t have access to some of those financial derivatives that would help us mitigate some of these costs,” explains James Cadbury, founder & CEO of Love Cocoa and Hip Chocolate.

What’s more, cost pressures are not restricted to cocoa. “Aside from cocoa, we have seen rising costs across our whole supply chain, including other raw materials, packaging, and transport,” says Sophie Loveday-Davies, marketing director at Divine Chocolate. The increase in energy costs has been “a big contributing factor”, she adds.

Sugar is another such factor. Prices are “trading high”, says Carol Oldbury, MD at private label supplier Hames Chocolates.

Consumer response

As these pressures on suppliers push up the prices of their chocolates, you might expect shoppers to migrate to cheaper lines. Certainly, pricier brands are aware of the need for competitive pricing. In the UK, ethical brand Tony’s actually reduced the price of its 180g chocolate bars last year from £3.49 to £2.99, in a bid to grow more quickly.

Even at this lower price, though, Tony’s is still above the market average – which Kantar puts at £1.18 for block chocolate. But that hasn’t stopped the brand growing. “We have seen total chocolate volumes fall across most subcategories, but Tony’s appears to be bucking the trend,” says Ben Greensmith, UK & Ireland country manager. “Total bars units are down 3%, but Tony’s is up 80%.”

“Middle market brands may be struggling a little bit. People want to treat themselves”

Hip and Love Cocoa founder Cadbury believes this is a sign of the market trending towards premiumisation. “It’s those middle (market) brands which may be struggling a little bit,” he says. “I think when people are treating themselves, they want something which is really special.”

This premiumisation trend could explain why Cadbury Dairy Milk is down 6.8% in volumes and fellow mid-market brand Galaxy is down 3.7% [NIQ].

But that’s not to say consumers have an unlimited amount to spend on premium chocolate. An increasing number are looking to cut costs by going for smaller sizes. “We have seen growth in smaller, impulse size bars – allowing consumers to treat themselves, not compromise on indulgence but at a lower per unit price point,” says Divine’s Loveday-Davies.

This trend has been noticed at CBD chocolate brand Cheerful Buddha. Founder James Wright says the rising cost of chocolate, coupled with the cost of living crisis, were factors in its decision to add smaller 30g bars, which will be available by the end of 2023.

“This helps to keep price points affordable at a time when people are counting every penny,” he says.

White chocolate

Another way to keep prices down is to switch up your range. A number of brands have launched white chocolate lines, which will be relatively insulated from rising cocoa prices due to their low cocoa content.

This year, Mondelez introduced Cadbury White Creme Egg, which “really got shoppers excited”, says Susan Nash, trade communications manager at Mondelez.

Mars, meanwhile, has developed a white chocolate variant to sit alongside a milk chocolate SKU for its Snickers Hi Protein Low Sugar bar, set to roll out from November.

These lines will also benefit from dairy prices falling from their previous highs. According to Mintec Benchmark Prices, anhydrous milk fat in the EU fell by 39% from a high of €9,000/Mt (£7,776) in November 2022 to €5,475/Mt (£4,731) at the end of July, while whole milk powder was down over 20% to €3,275/Mt (£2,830) during the same period.

“White chocolate has returned with innovations and proved a hit with the public”

 

Aside from the price benefit, Mutton at Storck UK says white chocolate NPD also caters to the growth of at-home snacking and dessert occasions, which has resulted in shoppers looking for new options.

“We’ve seen this with the increase of blonde chocolate products on the market, but also in the comeback of white chocolate, which has returned with innovations and proved a hit with the public – with sales up 14% year on year.” This surge in interest was one of the reasons Storck introduced Toffifee White Chocolate as a festive limited edition last year, which will be brought back for Christmas 2023, Mutton adds.

For Oldbury at Hames, “the real growth area in chocolate is blonde chocolate”. One in three consumers choose caramel tastes – a notable feature of blonde chocolate – when they seek comfort, she says. As such, Hames will incorporate blonde lines into its Easter range for 2024.

Arguably the biggest driver of this blonde trend has been Mondelez. Following the successful launch of Cadbury Caramilk in the UK in 2021, it’s been busy building brand extensions. The latest is Cadbury Caramilk Crispy, “a golden blend of white chocolate with a light crisped rice inclusion” available in an 85g tablet format, launched in August.

Ethical supply chain

Behind this playful NPD, though, there are more serious issues at play – and particularly for giants such as Mondelez.

At a time of rising inflation, the category’s biggest suppliers are having to dedicate ever greater resource to their supply chains amid evidence of environmental and social harms such as deforestation and child labour.

This much was highlighted by the 2023 Chocolate Scorecard, a collaboration between 37 NGOs and universities that rates the world’s largest cocoa buyers on six key issues: deforestation and climate; traceability; living income; child labour; pesticide use; and agroforestry.

Its fourth annual scorecard, released in March, recognised the improvements made by certain large players, including Ferrero, Mars and Nestlé. But it also handed out a number of “rotten egg” awards to companies including Mondelez, General Mills and Unilever. They were accused of failing to be fully transparent about their cocoa sourcing.

“After multiple pledges by chocolate companies on sourcing cocoa free of child exploitation and deforestation, these problems persist throughout the industry,” says Julian Oram, senior director (Africa) at Mighty Earth, one of the NGOs that co-ordinated the scorecard. “By 2025, we need the big chocolate brands to achieve 100% farm-level cocoa traceability, deliver an effective joint deforestation monitoring system, and move in tandem towards fairer cocoa purchasing practices.”

Mondelez says all the cocoa used in UK Cadbury chocolate is sustainably sourced through its Cocoa Life programme. The aim is “to create a strong cocoa supply chain while transforming the lives and livelihoods of farmers and their communities, touching many aspects of life – from farming techniques to looking after the environment and supporting the local economy”, says Nash.

Mars, which was recognised for its improvements in the scorecard, admits addressing issues like child labour and forced labour “is an ongoing struggle”. However, Victoria Gell, brand director at Mars Wrigley, says its Cocoa for Generations’ initiative “demonstrates a commitment to confronting these challenges head-on”. In particular, Gell highlights Galaxy’s pledge to help one million people, especially women, thrive by 2030 by empowering them socially and economically within cocoa-growing communities.

Nestlé says it has used 100% certified sustainable cocoa in all of its confectionery products in the UK and Ireland since 2015 and remains committed to doing so. It also points to the launch of its Income Accelerator Programme in 2022.

“This includes everything from implementing good agricultural processes and building climate resilience, to encouraging schooling for children and helping farmers establish additional sources of income – such as growing other crops or keeping livestock,” says Cheryl Allen, head of sustainability at Nestlé Confectionery.

There’s no doubt the big chocolate brands are looking to address these issues. But the companies considered to be doing most to ensure transparency and sustainability are challenger brands. And none more so than Tony’s Chocolonely, which was awarded “good egg” status for bringing structural change to the cocoa sector.

“We are happy to see that cocoa prices are rising – they are consistently too low for African farmers”

Tony’s has been actively encouraging chocolate companies to copy its five sourcing principles – referred to as Tony’s Open Chain – based around fair pricing, traceability and equality for farmers. Having attracted the likes of Huel, Ben & Jerry’s and Albert Heijn in the Netherlands, it is now “in conversations with more potential mission allies in the UK” and promises “big news” soon.

In terms of its own brand, Tony’s is putting its money where its mouth is. Even in the face of inflationary pressures, this cocoa season it will pay 70%-80% more than the farmgate price “and therefore more than other chocolate companies”, Greensmith says.

“We are happy to see that cocoa prices are rising – they are consistently too low for west African cocoa farmers to earn a living income,” he adds. “It is up to companies to take responsibility and pay a higher price.”

Prices to farmers are only one aspect, though. Another key issue highlighted by Tony’s is traceability. And this is often lacking in cocoa. “The grim reality is that 30%-40% of cocoa is still untraceable,” said Sam Mawutor, senior advisor, Ghana at Mighty Earth on launching a new cocoa accountability map for Ghana in December last year.

As such, B2B supplier Luker Chocolate has made end-to-end traceability a key priority. In 2022, its team of analysts documented 2,503 farms, gathering demographic and environmental data to ensure traceability of its cocoa and zero deforestation in its value chain. It aims to have full traceability of its cocoa to the farm by 2027.

One of the brands supplied by Luker is Hip, which uses single-origin cocoa sourced from Colombia in its oat milk products. The farmers supplying Hip are encouraged to make their farms resilient in the face of climate change by planting banana trees for extra shade and increasing biodiversity.

This work is part of Cadbury’s vision for his Hip and Love Cocoa brands, which recently achieved B Corp status. He believes ethics and sustainability are an increasing point of difference in a crowded market. “If you can tick all of those sustainability boxes – from sourcing to packaging – that’s what consumers are looking for these days.”

And if these brands can keep price rises down to the minimum, all the better.

Published in The Grocer, 19th September 2023

https://www.thegrocer.co.uk/category-reports/why-chocolate-has-reached-a-melting-point/683350.article