What manufacturers can do about the rumored cocoa shortage
With Valentine's Day, one of the biggest chocolate-consuming holidays of the year coming up, manufacturers had to be sure they could deliver chocolate and chocolate-covered products without interruption or significant price hikes.
Global cocoa demand hit a record 7.1 million tons in 2015, a 0.6% increase year over year, Euromonitor International reported, but cocoa production fell 3.9% to 4.2 million tons, according to the International Cocoa Organization. The discrepancy in numbers stems from the chocolate — including ingredients like sugar and often milk — but the trend the numbers suggest is the same.
Ghana's cocoa production has been hit hard by disease, dry weather, and government policy changes, declining 18% year over year in the growing season that ended Sept 30. The cocoa harvest from Ivory Coast saw an uptick of 2.8%, but that wasn't enough to offset Ghana's production dive. The two countries produce about 60% of the global cocoa crop, so any shift in their production reverberates throughout the industry.
The question is whether manufacturers' actual supplies are legitimizing concerns of a cocoa shortage, which has been referred to as the "chocopalypse." Many companies have been tightlipped about any effects the cocoa shortage and commodity price hikes have had on their business, but Sean Duclaux, director of industry and solution marketing at PROS, told Food Dive, "I'm not certain of business implications or if they'd say they've been impacted, but anyone that creates or manufactures a chocolate product is going to be impacted."
How manufacturers meet demand while maintaining their margins will demonstrate how companies can weather shortages of any commodity.
How manufacturers contend with cocoa pricing
Manufacturers have seen margins thrive amid drops in commodity prices across the board recently, but not so with cocoa, prices for which rose 10% last year. Since 2012, that number jumps to a 40% increase. As a result, companies like Hershey, Nestle, and Lindt & Sprüngli have all raised prices since early 2014. Fierce competition in the chocolate and confections space has kept price hikes modest, Duclaux said.
"There's a slight pass on (of costs) to the retail consumer, but because of the competitive nature, it's certainly held in check," said Duclaux. "And the implication of that is slowing the revenue growth and increased margin pressure."
Manufacturers have two basic strategies when trying to sustain margins during a commodity shortage like this one: eat the costs — pun intended — or "become smarter," Duclaux said. The increased availability of data means manufacturers have better means to determine how to more effectively manage costs and be proactive about pricing changes and initiatives to drive efficiency. These are things companies can control, so this is where the strategy for dealing with a cocoa shortage has to start.
"Competition, commodity prices, weather, energy costs — those are factors that you really can't control," Duclaux said. "So it's about recognizing those and saying, 'I need to manage my business better,' and being able to harness that data science to balance prices and demand and operational constraints."
Getting to the root of the issue
Besides internal changes, manufacturers have looked further down the supply chain for opportunities to improve cocoa output to meet increasing chocolate demand. Those solutions have come from improved interactions with farmers. Mondelez has committed $400 million to its cocoa-sustainability program through 2022. Industrywide, the total for cocoa sustainability spending comes to about $1 billion, as 10 major chocolate producers and cocoa processors have disclosed.
These chocolate makers agree that foundational improvements in farming methods can begin to remedy production issues to keep up with the pace of demand. Mondelez president and CEO Irene Rosenfeld told The Wall Street Journal in April 2014 that the company has worked to help farmers boost their yields up to 20% by introducing them to different farming techniques, increase their salaries, and set up better community infrastructure. In another past effort from 2011 to 2013, Hershey and the World Cocoa Foundation sent Ghanaian farmers texts and voicemails containing weather and marketing information, and participating farmers saw their yields soar by 46%.
If contract farmers can increase their yields, this enables manufacturers to relieve pressure off their bottom line starting further down the supply chain. Companies can fix potential commodity pricing issues at the source by increasing the supply needed to keep up with heightened demand. Effecting change doesn't just come from within a manufacturer's direct operations — supporting partners along the entire supply chain can also make a significant difference.
Is there any truth to the "chocopalypse?"
Across the board, large and small companies are reporting little to no significant effects from the cocoa shortage. Major chocolate player Nestle USA told Food Dive, " ... We have not experienced a shortage of cocoa for Valentine’s Day."
A spokesperson for Lindt & Sprüngli, the third-largest chocolate seller in the U.S., told Food Dive that the company "is one of the few chocolate producers that have full control of their production chain … from bean to bar," which means handling everything from cocoa bean selection to packaging. "Up to this point, the rumored cocoa bean shortage has not affected our operations," Lindt’s spokesperson said.
However, CEO Ernst Tanner did tell Reuters last month that 2015 "was the most challenging year I have experienced," referring to challenges including high raw cocoa prices and adverse weather conditions. At the same time, he confirmed prospects for growth in 2016, despite any cocoa-related issues.
Startups and smaller companies haven't been hit as hard either. Because of their smaller production capacities, their raw cocoa can come from farms around the world rather than just larger cocoa-producing farming communities in Africa. Chocolove, a smaller company that is growing in popularity at retailers like Whole Foods, told Food Dive that its chocolate comes from Belgium, so the cocoa shortage hasn't affected this company either.
Mars and Hershey did not respond to requests for comment.
Manufacturers can't always outrun rising commodity costs. This will force a closer look at the supply chain to identify ways to keep margins strong without inflating prices too high to drive away consumers.
Duclaux said mitigating the sustained pressure on the cocoa supply and commodity costs could come down to better data analysis followed with better management of the company.