Measure of success

BRICS chocolate sales are wobbling as emerging market economies weaken. Bill Corcoran, Mauricio Savarese, Lena Smirnova, Raghavendra Verma and Wang Fangqing report.

As far as emerging markets are concerned, chocolate sales are a good barometer of economic success. When growth is robust, consumers buy more chocolate; when it is weak and they are not yet rich enough to console themselves with a bar, it is still regarded as a luxury that can be cut from shopping lists.

This article will review the chocolate market and industry in the so-called ‘BRICS’ markets of Brazil, Russia, India, China and South Africa.

Brazil is a case in point. It has been in recession in the past year, its economy shrinking 2.6 per cent in August 2014 compared to August 2015. As a result, chocolate sales have suffered; Chocofest, a popular pre-Easter festival held in Gramado, Rio Grande do Sul, southern Brazil, was cancelled this year for the first time in two decades. Owners of 20 local chocolate producers blamed the cash strapped government, which is implementing austerity measures that are dampening  business. The picture is similar nationwide; 2015 Easter sales were the worst for the chocolate business since 2007, with zero per cent growth year on year, according to Brazilian credit research firm Serasa Experian SA. In Easter 2011, chocolate sales were up 9.1 per cent year on year.

With no end in sight for the recession, Brazil’s central bank, Banco Central do Brasil (BCB) expects the country’s gross domestic product (GDP) to drop by up to three per cent this year. Brazil’s chocolate production has been falling too; it dropped six per cent in the first half of 2015, year on year, according to the Brazilian Cocoa, Chocolate, Peanut and Candies Manufacturers Association (Abicab), which says production is unlikely to rebound until the end of the year. In the first six months of 2015, the Brazilian chocolate industry produced 231,000 tonnes, compared to almost 246,000 tonnes produced in the same period last year, says the association.

Abicab vice president Ubiracy Fonseca thinks the figures are “disappointing” and says he is not optimistic of a comeback yet.

“We are still facing consequences, such as the rise of inflation, faltering economic activity and more unemployment,” he says. There are also external reasons for the bad results, he adds. One of them was the outbreak of Ebola in Africa, which affected cocoa producing regions and as a result, made the commodity more expensive for Brazilians.

However, Fonseca believes the worst is over. In the first quarter of 2015, production fell almost 10 per cent, but later recovered a little. Brazilian per capita consumption averages 2.5 kilos per year, according to an Abicab spokesperson.

Surging costs

The other problem economy for BRICS, Russia, is also seeing its economic woes depress chocolate spending. Surging costs of raw materials and the devaluation of the rouble (by 50 per cent against the US dollar since early 2014) have boosted chocolate prices in Russia by almost 40 per cent over the past year and forced local consumers to turn to lower cost alternatives, according to the Moscow-based Confectionery Industry Research Center.

Meanwhile, with the prices of raw materials growing worldwide, especially for cocoa beans, which have seen a price increase of 13 per cent since the start of the year, nearing a four year maximum, inputs are being made especially expensive for Russian chocolate producers. Indeed, production costs for a milk chocolate bar, which contains at least 30 per cent cocoa, rose by more than 50 per cent from April 2014 to April 2015, according to the research centre.

“A low exchange rate and the increase in prices on the global market makes cocoa and related products extremely expensive for domestic producers,” says Elizaveta Nikitina, the centre’s executive director. “These factors, combined with high prices of other confectionery raw materials, take almost every fourth enterprise over the brink of profitability,” she adds.

Rising production costs have adversely impacted consumers. As of September 2015, the average price of chocolate in Russia was €7 per kilogram (kg), up 37 per cent year on year according to the Russian Federal State Statistics Service (Rosstat).

Nikitina expects consumers to be paying 40 per cent more for chocolate by the end of 2015 year on year as retail prices catch up with raw material price hikes, which already range from 30 to 60 per cent. This has depressed consumer demand; according to Rosstat data, the average Russian ate about 5.5kg of chocolate and chocolate products in 2014, but this has fallen to 4kg in 2015.

“The consumption of chocolate in Russia per person is falling rapidly,” says Nikitina, noting that Russians ate 4.5 per cent less chocolate in the first half of 2015 compared to this period last year.

“Due to the crisis in the industry, in the second half of 2015, this trend can accelerate and the decrease in consumption will be about 5.5 to six per cent.” Consumers are switching to lower price segments such as cookies in which the price per kilogram is four to five times lower than for chocolate, Nikitina adds.

Import duties

Meanwhile, Russia’s Association of Confectionery Manufacturers (Askond) has appealed to the government to decrease import duties on cocoa products to avoid potential staff layoffs.

Another headache for chocolate manufacturers is having to switch their standard ingredients because of Moscow’s ban on importing some food commodities, such as nuts, from the US and the European Union, in response to their sanctions on Russia over the Ukraine crisis. However, the government currently allows the import of US and EU confectionery goods, although some Russian manufacturers have requested a ban. If this happened, sales of imported premium class chocolate brands, which make up about 15 per cent of the Russian chocolate market by value, would suffer the most.

The economies in other BRICS countries are doing better and so are their chocolate markets. Despite some concerns, China’s economy is still growing and Chinese consumers are still spending more on chocolate, with the market size expected to grow 28.3 per cent from its 2014 level to €11bn in 2018, according to Euromonitor.

Big market players continue to invest; Italian chocolate maker Ferrero has built its first manufacturing plant in China in Hangzhou, Zhejiang province, starting operations in September to produce Kinder Surprise chocolate eggs for the Chinese market. Ferrero expects to add at least 500 staff at the facility in the fiscal year 2016 to the current 300.

More varieties are being launched in the high end, imported chocolate sector. In September, Swiss Chocolatier Lindt & Sprüngli brought Lindt Excellence 85% Dark and Excellent 99% Dark Absolute into China, priced at €5.50 for 100g and €7 for 50g each. By comparison, the average price of dark chocolate bars from Chinese brands for the mass market is no more than €4.

Nestlé will launch its premier chocolate brand Cailler into China in November. “Chocolates have long been considered as high end snacks in China. Just like wine, they are expected to be expensive and imported. People who buy them are not very price conscious,” says Zhu Danpeng, a Guangzhou based independent food consultant who has worked for Danone and United Biscuits.

Sales up in India

In India, where growth is ticking over at seven per cent this year, chocolate sales are also up, according to Nikhil Chand, general manager of chocolate and confectionery at Nestlé India. “The market is growing at the premium end as well as in the innovation of tastes, textures and flavours,” he tells Confectionery Production.

In India, sales of chocolate in the year ending March 2015 reached €1.07bn, with 80 per cent consumed in cities, according to Gurgaon-based Technopak Advisors Pvt. “Milk chocolate is the leading category with 75 per cent market share (value terms), followed by white chocolate and dark chocolate,” it said in a note.

Meanwhile, mass milk chocolate brands, such as Cadbury 5 Star and Munch from Nestlé, have registered annual growth of 20 per cent over the past year (some small packs have prices as low as 0.07 cents), whereas premium and luxury brands have been growing at 33 per cent. This trend is expected to continue for the next two to three years, according to Technopak.

Increasing disposable incomes, a younger population, changing lifestyles and hedonism are driving this growth, according to Technopak. Purchasing decisions are influenced by taste, availability, price and packaging, while the most common consumption occasions for chocolates are still celebrations, but relaxation, sharing and indulgence are growing motivations.

Furthermore, according to Technopak, chocolates are emerging as an alternative to gifting traditional Indian sweets. In the past five years, gourmet and handmade chocolate have also become popular, with 20 brands – including Choko la, Leonidas, Patchi and Theobroma Chocolat – operating more than 200 stores in the country.

Premium and luxury chocolate is mostly consumed by adults, with Cadbury, Nestlé, Mars, Hershey and Lindt & Sprüngli dominating sales, according to Technopak. According to Mr Chand, import of mass market chocolate is limited with many majors manufacturing in India. He says the top selling brands are KitKat, Munch, Milkybar, Dairy Milk, Dairy Milk Silk, Perk and 5 Star.

Other markets

Meanwhile, South Africa’s sluggish economy (2.1 per cent growth projected for 2015) has been reflected in stagnating chocolate sales. The total market value for chocolate in South Africa for 2014 was €417m – projected to grow seven per cent in value in 2015, according to market research company Euromonitor.

Of this 2014 figure, 50 per cent of the market share is attributable to countlines and 36 per cent to tablets, with the other chocolate categories making up the rest. That said, Euromonitor senior research analyst Shereen Tuff believes overall sales of chocolate by volume could fall 0.5 per cent in 2015.

“This is essentially due to the ‘de-gramming’ of chocolate tablets,” she explains. “Rising commodity costs are pushing up unit prices, so in order to soften the impact on the consumer, manufacturers are implementing price increases as well as reducing the volume size of the tablet somewhat.”

So, South Africa’s chocolate market value growth is attributable to higher prices and regarding it “as a luxury category,” warns Tuff, consumers will drop out “if prices increase too significantly.”

Majors seem to have noticed – for the lower end of the market. South Africa-based Beacon and Switzerland’s Nestlé have been offering two bars of chocolate for the price of one in a fight for the countlines market. Tuff believes mass market promotional pricing may continue, depressing future value by unit sales, but maybe prompting additional purchases by volume.

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