Cracks are developing in the global chocolate market. Typically seen as one of the most stable of staples categories, chocolate is now being impacted by a confluence of both supply and demand factors. This has resulted in the weakest global volumes in decades, tracking down 2% to 3%.
Part of the issue is the hangover from strong growth during the pandemic. But persistent pricing and shrinkflation is also leading to consumer fatigue. People are eating less chocolate but better quality, which means mix is still positive for the manufacturers, but even premium players like Lindt are not immune – volumes were down 1.5% in H1-23. If consumers consider trading down and mix gains start to slow, it puts volumes even more in the spotlight.
Mondelez recently said consumers are shopping around to find attractive deals and trading up and down in pack sizes based on their specific needs and occasions.
The upstream cocoa players such as Barry Callebaut – the world’s largest business-to-business chocolate supplier – are much more reliant on volume than mix and typically see any slowdown first. It recently said shrinkflation is particularly evident in Asia, calling out Indonesia, India and Japan.
As well as demand pressures, a possible supply shock is developing. The inflation seen so far in the confectionery industry has largely been driven by cost increases not related to cocoa beans, which is the single biggest raw material input for chocolate. In the last few years, during which the majority of other soft commodities have risen sharply, cocoa has been one of the few exceptions.
This situation has changed materially in 2023. Cocoa prices are up 34% YTD on tightening supply outlook, after two years of supply-demand deficits that have reduced global inventories to the lowest levels in almost three decades. This has forced cocoa players to be aggressive on inventory to ensure they have enough supply.
Recent heavy rain in the Ivory Coast, which accounts for more than 40% of global cocoa supply, has exacerbated the situation. The country has halted sales of contracts for cocoa exports for the 2023-2024 season. El Niño could further pressure the supply outlook, which has reduced visibility further.
The raw material costs to produce a bar of chocolate could step up by a further circa 15% in 2024, which might require 7% pricing next year on top of steep pricing already this year. Manufacturers will be forced to look at more list pricing. But if this is increasingly unpalatable to retailers, manufacturers may also look at their promotional mix again. We certainly wouldn’t rule out another round of shrinkflation.
Indications from cocoa grind volumes in North America, Europe and Asia are down 12% in the second quarter and processing in Europe and Asia has fallen to the lowest levels since the pandemic. Factories typically process cocoa months before the commodity is used to produce chocolate. So the slowdown in bean processing could be a sign the industry expects weak volume demand to continue.
As well as these more challenging supply and demand dynamics, the industry is also battling with the ongoing challenge of child labour in the West African supply chain, regulatory threats such as high fat, sugar and salt (HFSS) restrictions in the UK, as well as a compliance with the upcoming EU deforestation regulation.
Long term there still remain plenty of opportunities for growth. Brazil, for example, is a top five global chocolate market. The premium part of the market is small but the situation is beginning to change as consumers are looking to trade up. This in turn starts to look more interesting for players looking to diversify their growth from relatively mature developed markets.
However short term, the situation is looking tricky. It will require agility and some course correcting for both processors and manufacturers to come out the other side of these near-term headwinds unscathed.
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