Spiralling cocoa prices are forcing chocolate manufacturers to take action. Some like Cadbury have announced retail price hikes, some have reduced product sizes, while others are tweaking recipes to reduce cocoa content. All are forced to gamble with consumer loyalty to protect profits, reports Patrick McGuigan.

Cadbury’s warning last month that it plans to raise chocolate prices because of spiralling cocoa costs follows similar announcements from manufacturers across Europe. Political instability in the Ivory Coast, combined with investors hedging their positions in the commodity markets, means that since 2000 the price of cocoa has more than doubled to around US$2,000 per tonne.

Cadbury remains cagey as to when and by how much it will raise prices, but it is by no means the only company struggling with the unwelcome proposition of passing costs onto customers. Several tactics are available to companies, besides simply raising prices, and some of them may have some interesting implications for new product development in chocolate for the future.

Shift to premium product – with premium prices

David Jago, editorial director of Mintel’s Global New Products Database, believes manufacturers will try to justify price rises by launching more premium, value-added products. “Nestlé’s Double bar, which launched last year, is a good example of what we are likely to see more of,” he says. “It makes a lot of the fact that it uses flavour beans from Ecuador, which allows it to retail at a higher price point than everyday countlines.”

“Cadbury remains cagey as to when and by how much it will raise prices “

Jago adds that we may also see products containing less chocolate. “The crossover between biscuits and confectionery is already happening and I believe there is a lot of room for further growth. Mars’s Bisc& range has been really successful since it launched in Germany and we’re going to see a lot of ‘me too’ products on the back of it – especially since this type of product doesn’t use as much chocolate.”

Cutting costs by trimming product size

High cocoa prices might also prompt manufacturers to consider lowering weights slightly when launching new products. “Companies are very wary about dropping the weight of established products because of bad press. But with new products it’s unlikely that consumers are going to compare weights with other brands,” says Jago. “You will also see fewer price promotions on chocolate products.”

Michael Hjertebjerg, marketing and sales director at Toms confectionery in Denmark, says lowering the weight of products, even if they are new to the market, is a risky strategy. “Maybe you can do it once, but it’s a very dangerous tool to use regularly because you get a bad reputation among consumers.”

He adds that if chocolate prices continue to rise, consumers could be tempted to substitute the chocolate bar in their shopping basket for other, cheaper sweet treats. “Companies might start developing new products which use less chocolate if this trend continues, but it really depends on the market you are targeting. Some manufacturers may also be tempted to use cheaper cocoa, but at Toms quality is paramount so we would never consider this option.”

The risky business of price hikes – with Nestlé leading the charge

Hjertebjerg acknowledges that rocketing cocoa prices have made life tough. “It has affected us quite dramatically and like everyone else we are suffering. We have had to swallow most of the increases ourselves, although we have passed some costs on to our customers,” he says. “The extent of price rises were decided by the different business units within Toms and depended on factors such as the customer, product and market in question. But in general no retailer or wholesaler is going to accept more than 5%.”

“Companies might start developing new products which use less chocolate if this trend continues “

Toms carefully timed the introduction of price rises to coincide with the beginning of the year, as Hjertebjerg explains: “We waited until January because by then we had calculated our budgets for 2003. This meant that we could work out exactly how much we had to raise prices and there was no suggestion that we were adding more than we needed to. Also, when making presentations to major chains in the autumn of last year, we got the impression that our competition had not put their prices up at that point.”

Toms may have delayed price hikes until this year, but in August 2002 Nestlé announced a 4.6% rise across all its chocolate products in Switzerland. Rather than drawing out the process through gradual increases, the company decided a short sharp shock was less painful in the long run. “But most of our competition in Switzerland had already raised prices by a similar amount earlier in the year,” says Nestlé spokesman Marcel Rubin. “Obviously we monitored what our competitors were doing because we couldn’t be the only ones putting up prices, but we also have to maintain margins.”

The decision to pass on costs very much depends on individual markets and products, says Rubin. “A product with, say, 85% cocoa-content is really going to feel cocoa price rises, but it’s less important for a low value-added line with 20% content.

Exchange rates are also important. The Swiss franc is in a relatively strong position compared to the dollar, but in Russia, where the rouble is much weaker, price increases in cocoa are passed on to consumers far quicker.”

In terms of product launches, Rubin believes that cocoa costs have little bearing. “New products are developed for the long term and nobody can tell what is going to happen with cocoa prices in the future, so it shouldn’t make any difference,” he says.

“Fooling around with your product strategy would be counter productive “

At Kim’s Chocolates in Belgium, which makes premium bars and assortments, CEO Fons Maex says there is no need to panic over high cocoa prices. “Fooling around with your product strategy would be counter productive,” he says. “We cater for chocolate lovers by delivering the best quality possible and we are not going to stop that. If you’re buying a nice present or giving yourself a treat, an extra 50 cents doesn’t make that much difference.”

“Retailers follow commodity prices too”

Kim’s products have been affected in different ways by rocketing prices. “For our luxury assortments, where packaging and handling are big parts of the product, cocoa price rises have had less of an influence. But you can appreciate the impact has been much greater on our 77% cocoa tablets,” he says. These differences mean that, unlike Nestlé, Kim’s has upped prices at different rates for different products. “They have risen by between 5% and 11%, with an average of about 7%,” says Maex. “Our customers expected the rises and, so far, have accepted them. In fact, many of them were asking us before we raised prices exactly when and how much extra they would have to pay. Retailers follow commodity prices like everyone else.” 

Although nobody knows for sure what the coming years hold for cocoa prices, the current situation in the Ivory Coast suggests that they may be far from rosy. According to Jean Michel Boehm, commodity relationship manager at ABN AMRO, the 2003/2004 harvest may well be affected by political unrest. He says: “The country is currently in a war situation and farmers are more likely to be planting crops to feed themselves and their families, rather than planting cocoa trees or spending money on fertiliser.”