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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Shrunken chocolate eggs are hogging headlines this Easter. Their manufacturers, no strangers to shrinkage themselves, are seeing share price lifts as investors reckon on a revival of fortunes.
Sweeter times ahead are presaged by cocoa prices. The commodity has swung wildly in recent years, with Toblerone-style twin peaks breaching £8,000 a tonne. But prices have been in decline since the end of last year and now hover around £2,500 a tonne.
That’s because, despite inefficiencies in the way cocoa is farmed and priced, the market for buyers is improving. Cocoa is on track for its second year in surplus on the trot, says the International Cocoa Organization, and supply is diversifying. The dominance of Ivory Coast and Ghana, traditionally accounting for two-thirds of all production, has been reduced to under half as Ecuador and other areas increase output.
By rights, that should be a recipe for fatter margins at large chocolate manufacturers such as Hershey, the US maker of Reese’s; Swiss peer Lindt and Sprüngli; and industry supplier Barry Callebaut. They could use the break. Shrinking eggs or lowering cocoa content haven’t been enough to entirely offset the pain of high prices: Hershey’s gross margins, typically about 45 per cent, shrank to 37 per cent last year. Net profits slumped almost two-thirds.
The nub is that cocoa prices take time to feed through the chain; manufacturers largely buy cocoa through forward contracts. Barry Callebaut is basing its assumptions on a cocoa price of £5,000. It may also be that chocolatiers’ sensitivity to input prices has declined: they may be disinclined to revert once they have switched up recipes to lower cocoa content.
In the meantime, chocolatiers may not be able to sell quite as much of their highly priced products as they had hoped. Lindt, home of the eponymous gold bunny, has trimmed its expectations for this year’s organic sales growth to between 4 and 6 per cent. Barry Callebaut, noting a “still pressured” first half, expects a volume decrease of about 5 per cent this year. Hershey, meanwhile, is still guiding for net sales growth of 4 to 5 per cent, only partially boosted by its acquisition of LesserEvil snacks.
Conflict in the Middle East will take a toll, too. Elevated oil prices raise input costs and crimp consumers’ propensity to spend. That could reduce big brands’ pricing power, and melt the optimism around rising margins.
Chocolatiers command higher valuations than bread-and-butter food manufacturers. They can lay claim to some distinguishing attributes. Small treats typically do well in grim times, and Lindt even has data demonstrating — counter-intuitively — a bump in demand from consumers taking GLP-1 anti-obesity medicines. Regardless, there could be a longer wait before good times roll.
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