Divine says seasonal trading can be "race to bottom" on price

Divine says seasonal trading can be "race to bottom" on price

UK-based Divine Chocolate was one of the first Fairtrade-only FMCG brands when it launched in 1998. However, the entry of larger, mainstream companies into the category, while increasing awareness of Fairtrade and boosting sales, has had an impact on the specialists. Divine commercial director David Francis spoke to Dean Best about competition, retail support for Fairtrade and the promotional battle in the UK.

In October, it will be 15 years since Divine Chocolate, the first farmer-owned Fairtrade chocolate, was launched in the UK.

Divine was one of the pioneer Fairtrade FMCG brands and its early success encouraged the likes of Tate & Lyle, Cadbury, Nestle and Mars Inc that the ethical mark could be good business as well as boost their sustainability credentials.

Despite the downturn, demand for Fairtrade products in the UK is robust. Sales increased 19% in 2012 to GBP1.32bn, the latest year of good growth. The numbers were boosted by initiatives including Mars' move to sell Maltesers as a Fairtrade-only product, Morrisons converting all own-label sugar to Tate & Lyle Fairtrade sugar and The Co-operative Group now selling only Fairtrade bananas. However, underlying demand remains strong. Surely, then, fertile conditions for a Fairtrade-only business like Divine?

It perhaps is not as simple as that. A look at Divine's financial results seems to underline that, while these may have been bumper years for Fairtrade, there are pressures on the specialists. Divine's latest publicly available figures show turnover of GBP8.2m for the year to 30 September 2011. Operating profit was GBP158,000 and net profit GBP59,000. Rewind three fiscal years and sales and earnings were significantly higher. Revenue reached GBP12.4m in the 12 months to 30 September 2008. Operating profit was almost GBP458,000, while net profit was close to GBP253,000.

Divine's profitability in 2010/11 did improve year-on-year. 12 months earlier, Divine fell into the red amid costs from a product recall and the loss of a "major" own-label contract. However, its sales in 2010/11 were down, dropping over 21%.

Speaking to just-food at the IFE trade exhibition in London last week, Divine commercial director David Francis, who joined the company in July 2011, said the lower sales in 2010/11 were due to a fall in own-level revenues. Divine has yet to publish its numbers for the year to the end of September 2012 but there is little doubt the company is operating in a tough environment, despite the increase in interest in Fairtrade products.

Francis says Divine is a different business from the larger entrants into Fairtrade chocolate in the UK. He points to the fact African farmer co-operative Kuapa Kokoo owns a 45% stake in Divine, which pays the co-op a dividend. He also says Divine has a "completely traceable supply chain" through which it uses 100% Fairtrade cocoa for its chocolate. The likes of Cadbury use a system of "mass balance" where Fairtrade cocoa is mixed with conventional cocoa, although farmers are paid a premium for the total amount used.

However, he admits Divine is "without a doubt" feeling an impact from the entrance of Cadbury, Nestle and Mars into Fairtrade chocolate. Perhaps more pertinently for Divine as a more upmarket brand, however, is its rivalry with fellow premium producers like Green & Black's and Lindt & Sprungli. In the last 12 months, Green & Black's has switched all of its range to Fairtrade and, all the while, promotions are a key weapon even in the premium segment.

"The Fairtrade Foundation will tell you numbers and awareness are growing but I think when money is tight, people revert to type a little bit. And there are so many deals on chocolate, even in premium chocolate where we sit," Francis says.

"Green & Black's were on multi-buy, I think in Waitrose, for two-for-GBP3 during Fairtrade Fortnight and then they moved straight into a 3-for-GBP5. There was no gap. That's quite tough and it's definitely hitting us. We've had to get involved in that promotional programme, which is good and bad. It highlights the brand in-store a bit more but you get into that cycle of it and it's hard to break."

Faced with such discounts, Divine, Francis admits, has had to be "more involved" in "promoting our brand" through price, marketing or in-store activity. "You can no longer just sit there and not promote. You have to get involved in that party whether you like it or not," he says. "There's a great old saying of 'if you don't you'll die in good health'. Your margins look great but you've got no sales."

He adds: "It is potentially margin-eroding. Hopefully you'll get enough upside of volume over a period that you don't in the actual promotion. You very rarely get promotions that pay for themselves. You hopefully get an upside that kicks through over the six, 12 months."

While Divine is involved in the cut and thrust of promotions, there remains a weapon in its armoury it appears reluctant to use. Not only is the brand part-owned by the farmers who produce the cocoa but its traceability means it can claim every bean that goes into a bar of Divine is Fairtrade. Using the mass balance system, its mainstream competitors cannot make such a claim.

However, one can see why Divine would have qualms about making mass balance a point of difference. The system has been devised to allow mainstream companies to move into Fairtrade in a cost-effective and logistically practical way and is sanctioned by the Fairtrade Foundation. While possibly advantageous from a brand perspective, trading on the mass balance issue - and effectively denigrating that system - might be detrimental to the overall progress of Fairtrade. Francis favours Divine sticking to stressing its own merits. 

"We shout about our own credentials. Our ethics and farmer ownership that makes us different and we make lovely chocolate; you have to have that to start with," he says. "The people who know us know about that and that's why they buy us and they don't buy Green & Black's or Lindt in premium chocolate."

Francis meets just-food in the middle of what could be two of Divine's biggest selling periods - Fairtrade Fortnight, when The Fairtrade Foundation looks to promote the category - and, of course, Easter. The Divine commercial director had some interesting observations on both trading periods.

"The biggest disappointment I've had this year has been Fairtrade Fortnight [and] the level of engagement within the major multiples," Francis says. He points to Sainsbury's - "the biggest retailer of Fairtrade products in the world" - and says there was "very little signage" to promote the fortnight. "Their main thrust, if anything was Red Nose Day because they're the corporate partner of Comic Relief," he says. With interest in Fairtrade increasing in the UK, Francis wonders if The Fairtrade Foundation could do more to build on that in partnership with retailers.

"It's trying to find that balance between [the retailers] saying they want to do this versus how much leverage the Foundation has with them in order to encourage more smaller producers as well," he says. "How can the Foundation can leverage that slightly more into the retailers."

And, a week before Easter, Francis highlights the promotional battle during the period. Francis characterises seasonal battles like Easter as "a race to the bottom", citing a promotion at Sainsbury's where GBP6 eggs were on sales for GBP2 for five days. "The Green & Black's 180g egg was GBP2; our 260g egg was £10," he says. Seasonal periods like Easter, he says, is a matter of "who can sell the most volume at the lowest price".

The Divine executive also has some thought-provoking comments on retailers' commitment to ethical brands. "One of the things we'd like to see is buyers having targets based on ethical credentials. Generally, they're all targeting sales, volume, value, profit, availability. None of them really have targets about ethical products or anything else. You'll meet buyers who are very much into it without a doubt, who really support the brands, and then you get the buyers who are not interested in the slightest whether you are Soil Association or Fairtrade."

Does he think such considerations could one day be included in buyers' targets? "I think you can get there but you almost need people at some of the bigger companies to drive that," he says. "If a P&G or a Unilever is doing buy-one-get-two-free, what chance have we as a small company got? Those companies curtail to the 50%-off launch programme. Consumers in the UK now are coached by the retailers to buy on deal," he says. "And I'm a classic example of that."

For all that, Francis remains positive. The entrance of Cadbury, Mars and Nestle into the Fairtrade category is, Francis argues, "testament to us that we have taken the journey to those guys". "It is", he says, "the thing to do. It has its challenges but I still think there is a lot of mileage in it."