Appetite for indulgence will sweeten bitter pill
Rising commodity prices, greater competition and lower levels of consumer spending are combining to pile pressure on chocolate producers competing in the £3.6bn a year UK market.
With a weekend of chocolate indulgence approaching, the nation’s favourite treat is front of mind for many consumers. But a chocolate war on a number of fronts is afoot. It is a year since Kraft launched Milka in the UK, which competes directly with its sister brand Cadbury’s Dairy Milk, and last month Asda started selling US brand Hershey, and is claiming that sales have exceeded all expectations.
Ferrero also wants a greater share of the £3.6bn a year UK chocolate market and wants to double its share of the children’s market in the UK. Meanwhile, Mars restructured its UK team last October to help it compete with rivals.
The size of the seasonal chocolate market in the UK is forecast to increase from £672m to £817m by 2015, according to Euromonitor, and this is part of a broader trend.
But for some, Kraft launching Milka in direct competition to Dairy Milk is an odd move. Sophi Tranchell, managing director at Fairtrade brand Divine Chocolate, says: “Having spent so much money on Cadbury’s Dairy Milk, it is an incredibly strange strategy of Kraft to launch Milka.”
However, Kraft is clearly confident that there is a place for both brands. Luca Miggiano, category vice-president for chocolate in the UK, Ireland and Nordics, says: “Both brands have seen strong growth and we believe there are plenty of future opportunities for both Milka and Dairy Milk. The marketing strategy for our chocolate category will be one of balance and proportion.”
In the UK, Dairy Milk grew 11.7% from £374m to £418m last year and Milka’s sales went up from £8.7m to £21.3m according to Miggiano.
Tranchell says that she can see the logic behind launching brands such as Milka and Hershey in London, where there is an ex-pat population that might long for them, but is unsure about the long-term success of Hershey’s. She is a fan of the US chocolate for its strong branding, but not for the taste of its products. “Hershey coming into Europe is an interesting and brave move. In Europe we are used to creamy chocolate that melts at body temperature, but you won’t get that with Hershey,” she says.
But Asda wants to increase its Hershey range. A spokesman says: “As part of the range there is an Extra Creamy flavour which has been created by Hershey’s to be more to European tastes. Although actually, lots of customers love the original flavour.”
These new entrants, combined with rising cocoa, sugar and dairy prices, are helping to shake up the market. The price of white sugar is up 51% compared with a year ago, dairy is up 20% and cocoa prices will hit a 38-year high at the beginning of May when the cost is hiked again.
Larger producers can buy commodities ahead, which protects them to a certain extent against rising commodity costs. However, Anthony Ward, a cocoa trader at hedge fund manager Armajaro, shocked the industry last summer by buying 7% of the world’s cocoa stocks, speculating that the market price would increase and force up prices for the likes of NestlŽ and Mars.
Added to that, supermarkets are heavily discounting branded Easter products to compete with each other, according to Richard Dodd, head of media at the British Retail Consortium. “They have to do it as customers are reluctant to spend when they don’t have to. Pressure on household budgets is increasing and people are worried about their jobs,” he says.
He claims that retailers and chocolate companies are splitting the bill for promotions “because it is in their interest to stimulate demand for their product just as the retailers want to maintain demand in their stores for goods generally”.
This means that smaller companies like Divine, which is sold by Sainsbury’s, say supermarkets are making it hard for them to raise their prices.
“An enormous amount of the way supermarkets market themselves is that they are cheaper than everybody else,” says Tranchell, who adds that because Divine is a smaller brand, major retailers have the option not to stock its products. “You can’t run a supermarket that doesn’t stock Heinz baked beans whereas you can have a supermarket that doesn’t stock our brand,” she says.
Being Fairtrade helps the brand hold its price. “Our consumers are concerned about where things come from and who gets the benefit. That anxiety doesn’t change because financial times are difficult,” she adds.
Even smaller producers are finding conditions hard. Chocolatier Paul Young, who runs two shops in London, says he is having to pass on price rises to consumers. “It is harder now than ever before because we are taking into consideration the differences in how people are now spending their money compared with five years ago when we started,” he says.
Londoners who have a love of good food are happy to pay more for his chocolate, Young claims. “We put a small rise over a number of products, but we don’t want to out-price ourselves, we have to look at whether something is marketable or commercial,” he says.
Food lovers are also the target for Green & Black’s current press campaign by agency Brave, which has seen the Kraft-owned brand double its ad spend for the year to £1.3m. It also claims to be the world’s largest organic and Fairtrade chocolate brand.
Young relies on social media, word of mouth and corporate events to market his products. But even for brands such as Divine, which is sold by supermarkets and independent retailers alike, partnerships are the best way to promote the brand. “O2 recently gave away samples of Divine chocolate to nearly 500,000 customers and we have also ran a promotion with [book publisher] Penguin to promote our Easter range, which gave us access to its database of people who read Penguin Classics,” Tranchell says.
She adds: “We develop long-term relationships with iconic British brands. These companies want to work with us and they understand that we are a different sort of brand. We are a social enterprise.”
It looks like the chocolate wars are hotting up, which is food for thought when you bite into your favourite Easter eggs on Sunday.
chocolate facts & figures
£3.6bn The total value of the chocolate market in the UK in 2010
£14m The sum Ferrero invested in its brands in February this year
15% The amounf by which Mars will reduce the levels of saturated fat in some of its products
1in3…adults are eating less chocolate than a year ago because of health concerns
Sources: YouGov, Ferrero and Mars