Moscow, 26 September 2012 KPMG, a global network of professional firms providing Audit, Tax, and Advisory services, presents the Russian version of a report entitled: "The chocolate of tomorrow: What today’s market can tell us about the future", which looks at the trends and future of the chocolate and cocoa industry.
The report states that despite economic headwinds that are battering consumer confidence, the global chocolate market remains robustly defiant, and is predicted to grow by an average of 2 per cent a year for the next five years. However, manufacturers are at the same time challenged by a rising proliferation of consumer tastes as well as volatility in cocoa markets.
The psychology behind chocolate suggests consumers see it as a ‘naughty but nice’ impulse treat. But a closer look reveals three distinct types of buyer, each with different behaviors and demands.
Chocolate may be seen as an impulse purchase, but it’s becoming increasingly everyday among consumers. Convenience is a major driver for chocolate lovers, who want to grab a bar from a local store or throw a multi-pack into the trolley during a weekly shop. As convenience becomes more important to time-poor shoppers, sales of tablet bars are growing (up 37% in the UK last year) as consumers grab and go. Premium chocolate-makers such as Godiva are rethinking their strategies to get a bite of this lucrative market, introducing smaller bar formats. A desire for convenience is also increasing the popularity of sharing bags, particularly in Western markets, as consumers buy to share or finish eating later. Manufacturers have reacted with packaging innovations, such as the ‘memory wrapper’ from Mars that allows bars to be twisted, closed and saved. Mars says the innovation “empowers the consumer”. It also drives brand loyalty.
In many markets, value is a hot topic. In the US, 79% of consumers look for good value when choosing chocolate, although 70% also want a name brand, according to Mintel Oxygen–meaning even value shoppers are making demands of manufacturers. Value is particularly important in economies where the middle class is still being defined–and may exist far below Western levels. According to research from financial services provider Rabobank, a 45g chocolate bar accounted for less than 1% of the weekly shopping budget in the US and UK in 2010, but in India the same bar made up 18% of the weekly food allowance: which means a snack comes at the expense of a full meal. One-size-fits-all global pricing solutions are difficult when the income levels and aspirations of the fast-growing middleclass differ so widely. Although disposable income is rising in emerging markets, we could assume that a large proportion of consumers will continue to look for the cheapest option. Value-conscious shoppers favor a new generation of outlets. Discount stores are flourishing, which is forcing supermarkets to think more like discounters to attract fickle customers, including increasing their private label ranges. Small grocery stores may lack the economies of scale to compete on price, while ‘specialist’ formats are being crowded out. In emerging markets, ‘one stop’ retail locations are becoming popular due to low prices and greater choice.
The luxury chocolate market continues to embrace the mainstream–and not just in developed economies. “The psychology is that even expensive chocolate is an affordable luxury,” says Marcia Mogelonsky, Global Food Analyst at researcher Mintel. Chocolate is becoming increasingly premiumized, and brands such as Godiva and Lindt have become almost mass market as consumers develop a taste for everyday glamour. Godiva, which has increased its sales from US$ 400 m to almost US$ 700m in 10 years and is now owned by Turkey’s Yildiz Holdings, plans to become a staple for the health-conscious, sweet toothed consumer. “Our revenues have increased in all our markets, especially in China and Japan, which are the most important markets right now,” Godiva CEO Jim Goldman has said. “[Marketing our product] is a balancing act. And it’s different in every country. We do retain our prestige…but we have to be relevant.” In Russia, the chocolate market is expected to grow. Belgian artisan chocolatier Jean-Philippe Darcis has his eye on the country, predicting: “The market will evolve and people will have more buying power.” Lindt is enjoying double-digit sales growth in the Middle East. In China, rich dark chocolate is thriving, with Ferrero Rocher and artisan chocolate maker Senz launching exclusive premium dark brands in the last two years. Unsurprisingly, larger manufacturers are keen to get a bite of this burgeoning sector but, without the personal story required to sell such products, they can struggle. The solution: purchase artisan brands and market them as separate entities–large producers’ economies of scale mean this phenomenon makes life hard for surviving artisan brands.
The rapid change of the past few years gives us some vital clues to the industry’s direction.
Luxury vs commodity
A growing middle class will continue to propel the luxury market, and will increasingly drive it into mainstream retailers. But this will pose a challenge: although middle class consumers in emerging markets may develop expensive tastes, their disposable income will still be relatively limited. Manufacturers may need to choose between margins and volume, positioning themselves carefully as either a luxury or commodity player.
The personal touch
Bespoke bars may be commonplace. One artisan chocolate maker says he envisages smaller shops offering people the chance to create their own bar. As consumer palates grow more sophisticated, unusual flavors will become the norm, with chocolate-lovers choosing their own combinations. Consumers may also be able to design their own packaging.
New distribution channels
Chocolate will be available from a wider variety of outlets, from coffee shops to health food stores, to cater for convenience buyers. Supermarkets and discount stores will continue to dominate sales, particularly among value customers. Premium chocolate could become available in mainstream stores as luxury buyers proliferate. Brands might seek to move up the value chain by creating their own flagship stores, something Hershey and Mars (through its M&M’s brand) have already done successfully.
Middle class rule
Manufacturers are likely to offer more chocolate from ethical sources to meet aspirational buyers’ needs. Middle class consumers will also be keen on premium chocolate for gifting purposes, and seasonal launches, which increased 6% during 2011, will continue to grow.
A new recipe
Milk chocolate will have a lower cocoa content due to rising prices, and manufacturers will be forced to use cocoa more sparingly. Demand for cocoa could spiral out of control: one Latin American manufacturer predicts that China and India increasing average per capita consumption by just 1kg could make most manufacturers’ current models unsustainable. In that scenario, artificial cocoa could become a viable alternative.
In developed markets, flavors may become increasingly unusual as palates grow more sophisticated and brands seek a marketing boost. Combinations of sweet and savoury (such as bacon and chocolate) will increase, and salt, olive oil, herbs and flowers will all be used as flavorings.
Rising obesity levels and government regulation will lead to manufacturers limiting portion sizes. Sharing bags of smaller bars will become more popular as people seek to limit the amount eaten in one sitting. Average per capita consumption (currently 8kg in Europe) may drop, although overall consumption is likely to rise as the global middle class mushrooms.
Price vs size
In emerging markets, chocolate takes a hefty bite from the household budget. As input price volatility continues, manufacturers may have to keep value in mind or risk losing consumers. Price per gram is rising fast in developed markets, but research shows consumers feel cheated if bars get smaller but price is static. Mainstream manufacturers could be forced to choose between containing cost, at the expense of size, and moving further up the value chain.
© 2017 KPMG Audit LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.