Barry Callebaut, the business-to-business chocolate manufacturer, believes brand owners in the sector will continue to outsource production, a trend that has fuelled the company’s recent growth.
The Switzerland-based company is the world’s largest supplier of chocolate to confectioners and has supplies the likes of Kraft Foods, Mars Inc and Nestle.
Industry watchers estimate that the top four consumer chocolate companies, which also include Hershey, have outsourced around 15% of production and there have been questions about how far the trend will continue.
However, speaking at the Consumer Analyst Group of Europe investment conference in London, Barry Callebaut CFO Victor Balli insisted brand owners are continuing to look to companies like his to take on production.
“Is it the end of outsourcing? We hear this every few years,” Balli said. “We are not worried at all. If we are at 80%, you can ask the question of them going further. I think there is so much room with all these companies for further outsourcing. Yes, there will be companies who probably never or very long in the future outsource but let’s concentrate on the ones that are talking to us.”
Six million tonnes of chocolate were produced globally in Barry Callebaut’s last financial year, which ran until 31 August. The company told the CAGE conference that 51% of production remained “integrated” and made in-house by the major consumer chocolate companies.
The remaining 49% of production is in what Barry Callebaut CEO Juergen Steinemann called the “open market”. According to the company’s data, it accounts for 40% of the open market for chocolate, with, it claims, its nearest competitor, the US agribusiness giant Cargill, representing 14% of that market.
Steinemann echoed Balli’s belief that the trend for outsourcing would continue. “The integrated market is shrinking year-on-year. The open market is growing year-on-year. Five years from now, integrated will be clearly less than 50% and we will have more on the open market,” he said.
Barry Callebaut started to make concerted moves to focus more on outsourcing and less on consumer products in 2007, a year in which it secured deals with Nestle, the then Cadbury Schweppes, Hershey and Japanese confectioner Morinaga. In 2010, after Kraft acquired Cadbury, Barry Callebaut signed an agreement to supply the US food giant.
Balli admitted an average outsourcing deal tends to dilute margins but insisted Barry Callebaut works hard to boost profits in a number of ways.
“An average outsourcing deal is probably margin dilutive by 30%. They are dilutive. We are working hard to compensate for that by using these large deals as a platform for economies of scale and we are adding smaller clients, which tend to come at much better margins, we push speciality businesses which we can develop partly together with these large clients. We are heavily focusing on our gourmet foodservice segment,” Balli said. “It’s a combination of all these things. That’s why we say we will grow with the outsourcing deals but that comes at the cost that the leverage on EBIT is not so significant but we are growing faster. So far it works pretty well.”