The UK boutique chain’s founding directors received a sweet £280mn payout from Mars’ acquisition of Hotel Chocolat last week. The acquisition also filled in a gap in the brand mix of the US-owned confectionery giant.
As governments crackdown on unhealthy foods and consumers demand healthier, more sustainable options, big chocolate companies are reorganizing their portfolios.
Some companies have created lower-sugar versions, but they haven’t been a big hit with chocolate fans. This has led snack makers such as Mars, Hershey, and Nestle, to concentrate on purchasing higher-quality brands or healthier ones.
Andrew Clarke said Hotel Chocolat, “fills a hole in our portfolio”, and that the group already pursued premiumisation strategies with its petcare division and its healthier snack line “better-for-you”.
Mark Lynch, partner of corporate finance boutique Oghma Partners believes that confectioners will have to upgrade their products to higher-end ones.
He said that as healthier snacks gain market share, sugary sweets will be pushed out of the way. . . “You can’t stay still on any of these markets. You have to create more growth engines.”
Mars Snacking’s portfolio is dominated by mass market brands like M&Ms and Snickers. It has no presence in the premium segment, which is occupied by Godiva and Lindt. This is in stark contrast to rivals like Nestle who bought Brazilian premium chocolate maker Grupo CMR this year, and Mondelez which acquired vegan and Paleo-friendly chocolate brand Hu in 2021.
Purchasing cocoa is a complicated business. Farmers in Ivory Coast, Ghana and other African countries grow more than 70% of the world’s cocoa. They receive less than 5% of the retail price of chocolate bars. Child labour and deforestation is rampant in areas of poverty. According to a recent analysis, since 2000, cocoa production is responsible for 37 percent of Ivory Coast forest loss and 13 percent of Ghana’s. With new legislation, the EU is attempting to combat this. In January, a landmark legislation that forces companies to report environmental and human right abuses within their supply chains will come into effect. This is in conjunction with new regulations that ban products associated with deforestation.
Businesses that have a marketing strategy that focuses on sustainable sourcing are growing rapidly. Tony’s Chocolonely whose brightly-packaged bars are a staple in stores in the UK, US, and Germany reported a 21 percent jump in sales in its latest financial year.
Clarke stated that Mars saw “a great deal of opportunity” in the sustainable sector, and Hotel Chocolat’s sustainability credentials was part of the reason the acquisition was so attractive. Hotel Chocolat said it invested 10 percent of its profits in its sustainable farming initiatives. It also paid farmers $250 per metric ton above the market price for cacao beans by 2022.
Jack Steijn is the founder of Equipoise in The Netherlands, a cacao consultancy that focuses on improving sustainability. He said that premium producers tend to be more sustainable than mainstream brands, whose supply chain was largely driven based on price.
He said that there was more room for sustainability costs. “Many of these chocolate makers will include the sustainability story on the packaging of the bar,” so that their ethically-minded customers can read it as they snack.
He said that because cocoa used in premium chocolates is usually sourced from one origin, it was easier for high-end manufacturers to maintain sustainability within their supply chains.
Despite record-breaking price increases, consumers continue to buy as much chocolate as they did before. Sales of confectionery and fizzy beverages have been very strong due to their status as affordable luxury items.
But if chocolate manufacturers raise prices even further, the demand for cocoa could be affected. This year, the price of cocoa reached its highest level in 12 years as disease and drought caused by El Nino weather patterns hit cacao crops from Ghana and Ivory Coast.
Paul Joules is a cocoa analyst with Rabobank. He said, “We are at record highs right now on the London contract. New York prices have also gone crazy.” Cocoa futures in London traded at $4,069 per tonne last Friday, an increase of about 70% from the previous year.
Joules said that while high cocoa prices have not yet translated to higher consumer prices in Europe, they did so in North America, where the contracts between retailers and producers were more flexible. In the third quarter, cocoa grindings in the region were down 18% year-on-year.
Rabobank predicts that the first and second quarter results of big European chocolate companies will show a decline in sales. This could result in a slight easing in cocoa prices, according to Joules.
Lynch, of Oghma Partners, said: “We could be entering a period of recession. Consumers are tightening the belts.” “But, the trend towards premiumisation on a longer term will rebound.”
Mars, in addition to its investment into the high-end chocolate market, has also invested in the healthier snack end of the market.
Clarke stated that Kind, a high-protein gluten-free snack product the group purchased in 2020 for $5bn was now sold in more than 30 countries, bringing in sales of over $1bn annually.
Granola bars are now being sold by other chocolate giants. Ferrero will buy Eat Natural by 2020 while Mondelez acquired Clif Bar last year. Hershey’s mergers and purchases have focused on salty snacks, such as Dot’s Pretzels, Pirate’s Booty and Dot’s Pretzels, to make healthier snacks for kids.
According to Clarke, Mars believes that “permissible snacking” has a huge potential. Its goal is to have 30 percent of its snacking products be healthy by 2030.
Clarke stated that “the big picture is snacking has been a very appealing category for us. The growth rate changed a little during Covid but accelerated nicely.”