CBI Channels and Segments:

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1 CBI Channels and Segments: Cocoa in Europe CBI Market Intelligence Product Factsheet Cloves in Germany 1

2 Introduction Most bulk cocoa production takes place in Ivory Coast and Ghana. However, production in these countries is declining and new cocoa-producing countries such as Vietnam and Indonesia are emerging. Grinding and processing is being done more and more often in the country of origin. To secure their supplies, grinders increasingly try to gain more control over the supply chain by integrating their businesses both upstream and downstream, increasingly taking over the sourcing of cocoa beans and the production of liquid chocolate. Furthermore, demand for specialty and fine flavour cocoa is increasing. Direct trade is the most important and promising trade channel for this specialty market. Market channels Figure 1: Channels for export of cocoa to European markets Smallholde r (farmer) Producer cooperatio n/ association Local trader Grinder/ Process or Exporter Importer / trader Grinder/ Processo r Confectionery Food Pharma/Cosme tics Food service Retail sector There are several trade channels that can be used to export cocoa to the European market (see Figure 1). The selection of market entry channels depends largely on the type of company, the nature of the product, the target markets and the resources available to the company. All trade channels have their advantages and disadvantages. See Annex I for the main characteristics of each trade channel. Tip: Make an analysis of your company s capabilities, products, target markets and resources as a basis for choice of the most suitable combination of market entry channels. CBI Market Intelligence Channels and Segments Cocoa in Europe 2

3 Market channel trends and forecasts In producing countries (upstream) More production in new countries Both for bulk and specialty cocoa new countries of origin are emerging that can set up a strong supply chain towards Europe. Ivory Coast and Ghana account for more than 50% of global (bulk) cocoa production. However, cocoa production in these countries is declining due to aging plantations, diseases, inconsistent rains and natural disasters. As a result, (bulk) cocoa production is being expanded to include Asian countries such as Indonesia (where production is expected to continue to grow) and Vietnam. The Vietnamese government has stepped up technical assistance to cocoa farmers to improve productivity and post-harvest processing. Furthermore, Cargill (a large global processor) is investing in technology transfer centres in that country. At the same time, demand for cocoa from Southern and Central American countries such as Peru, Ecuador, Venezuela and Costa Rica is growing and is expected to increase even more due to the rising popularity of specialty and fine flavour cocoa. Tips: Look for opportunities in the specialty and fine flavour cocoa market. The International Cocoa Organisation (ICCO) recognised 17 countries as fine flavour cocoa producers including Bolivia, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, Grenada, Indonesia, Jamaica, Madagascar, Mexico, Papua New Guinea, Peru, Saint Lucia, Sao Tome and Principe, Trinidad and Tobago and Venezuela. Further information on fine flavour cocoa may be found on the website of the International Cocoa Organization and in the CBI Product Factsheet 'Fine flavour cocoa in Europe. Look for opportunities in direct trade with smaller partners, for example smaller specialised European traders or smaller makers of premium/specialty/fine flavour cocoa products including chocolate. "As a result of direct trade, cocoa price setting and relationships along the fine flavour cocoa value chain are no longer dictated by commodity market dynamics. Instead, they are based on mutual partnerships and ethical trading standards, which imply premium price, contract security, capacity building and business partnerships. This is a win-win situation for producers as well as chocolate makers! Maurits de Koning CBI expert More local grinding Grinding for both local and international markets increasingly takes place in the country of origin. Especially in Ivory Coast grinding capacity increased in recent years due to the development of new grinding plants. Ivory Coast is now the largest grinder and processer in the world, followed by the Netherlands. As a result of origin grinding, more opportunities are expected to arise for the export of cocoa paste, butter or powder. However, most of the new grinding plants are in the hands of large multinationals such as Barry Callebaut and Cargill. Tips: Discuss the opportunities for cocoa grinding and processing in your country and the relevant product specifications with buyers (including potential buyers) and other trading partners. The best opportunities for local grinders/processors can be found in niche markets such as premium/specialty/fine flavour cocoa and/or semi- finished cocoa and chocolate products. Read more about the challenges and opportunities of local cocoa processing and other forms of value addition in the report Cocoa Agri-Processing Opportunity in Africa. In European countries (downstream) Increased importance of sustainable cocoa sourcing Consumer pressure is making the big chocolate industry take the sustainable sourcing of cocoa very seriously. The five largest chocolate manufacturers (Mars, Mondelez, Ferrero, Nestlé and Hershey) are all committed to sustainable cocoa CBI Market Intelligence Channels and Segments Cocoa in Europe 3

4 sourcing. Mars, Ferrero and Hershey have committed themselves to using 100% sustainable and/or certified cocoa by Some manufacturers get their products certified by standard bodies such as UTZ, the Rainforest Alliance and Fairtrade, while others have set up their own certification projects or are combining both approaches. This has given a boost to the production of certified cocoa beans and is expected to further increase demand for sustainable cocoa. Tips: Focus on offering sustainable cocoa as this is becoming very important in the European market. Whether or not you should get your products certified as sustainable depends on your target market, your buyer and your resources. Certification is generally more important for large international buyers in Western Europe. Smaller buyers are usually more interested in direct trade than in certification. If you offer fine flavour cocoa, consider applying for organic certification. Demand for fine flavour cocoa with organic certification is rapidly growing, making this an interesting niche market. The CBI factsheet Buyer requirements for Cocoa also gives further information on certification. Growing power of grinders due to vertical integration The global demand for chocolate continues to grow with expanding markets for cocoa in upcoming economies such as India and China. To secure their supplies, grinders increasingly try to get more control over the supply chain by integrating their businesses both upstream and downstream: they increasingly take over the sourcing of cocoa beans and the production of liquid chocolate. This might threaten the role of exporters in the near future. Tip: Multinationals (including grinders) increasingly source their cocoa beans directly from cocoa farmers. Exporters should demonstrate their added value, for example by guaranteeing high quality beans in micro lots and continuous and in-time supply, in order to safeguard their role. Pressure on margins for bulk cocoa products Margins and profits for retailers who offer bulk cocoa products are under pressure due to various reasons, such as price wars and the economic recession of the last years. This results in an increasing market concentration in the retail segment. The margins and profits of manufacturers are also under pressure, since retailers pass the pressure back into the supply chain. As a result, many manufacturers are obliged to lower their wholesale price for cocoa products as for other commodities. See Figure 2 for an overview of value distribution in the cocoa sector. Figure 2: Value distribution in the cocoa segment, % of the final sales price Farmer Transport & trade Processor/ grinder Manufacturer Retail 6.6% 6.3% 7.6% 35.2% 44.2% Source: Cocoa Barometer 2015 At the same time, the price of cocoa beans is rising. Cocoa prices can be exceedingly volatile, as cocoa is largely grown in developing nations where the political situation is often unstable. Recent turmoil in the Ivory Coast, for example, has caused cocoa bean prices to skyrocket. Lack of access to modern insecticides and fertilisers also makes production less predictable. Large producers of cocoa manage and absorb much of this risk, but will begin to pass on higher prices beyond a certain point. Willingness to pay a higher price for specialty products Consumers are increasingly willing to pay extra for good quality products with a high cocoa content, especially in combination with organic and other certification and with a good story behind the bar. Consumers expect nowadays to be given assurances about how the cocoa is produced and where it comes from. This trend is expected to become even more important in future, as consumer demand for transparency and traceability grows. CBI Market Intelligence Channels and Segments Cocoa in Europe 4

5 Tip: Make sure you know the background story about your cocoa products, and tell it to your trading partners and consumers. For example, you can explain how your farmers live and how they produce their beans. Use visuals such as photos and videos to enhance your story. Confectionery industry The industrial cocoa sector is divided into three segments: the confectionery industry, the food industry and the pharmaceutical/cosmetics industry. Most cocoa is destined for the confectionery industry, to make chocolate. Segment characteristics Figure 3: Industrial market segments for cocoa Source: Industry experts, 2014 Most cocoa is destined for the confectionery industry About two thirds of global cocoa production is used to produce chocolate and confectionery (see Figure 3). The confectionery industry uses mainly cocoa liquor and butter to produce chocolate bars, candy bars, and small chocolates such as bonbons, dragées and bite sizes. The food industry uses cocoa powder as an ingredient in drinks, desserts, ice creams, spreads, sauces, cakes and biscuits. The cosmetics industry processes cocoa butter in products such as creams and soaps. Strong market concentration Forty per cent of the entire global confectionery market is in the hands of only six companies according to the Cocoa Barometer 2015: Mars, Mondelez, Ferrero, Nestlé, Hershey and Lindt. Half of these companies are based in Europe, with Ferrero based in Italy and Nestlé and Lindt based in Switzerland. Mars has some production locations in Europe as well. Most cocoa consumption is bulk chocolate More than 90% of European cocoa consumption consists of bulk chocolate. Mainstream European brands for chocolate (candy) bars, such as Kit-Kat (Nestlé), Milky Way, M&M s and Twix (Mars), Cadbury (Mondelez) and Toblerone (Mondelez) use bulk cocoa mainly from Ghana and Ivory Coast. The other 10% consists of specialty cocoa. This entails high quality, specialty products such as fine flavour, single origin, cocoa with a special story, or products with a niche sustainability label (Organic or Fairtrade). Specialty cocoa is often the subject of long-term contracts with European buyers. It is generally purchased by smaller brands, for example Valrhona (France), Rausch and Vivani (Germany), Seed and Bean, Duffy's and Divine Chocolate (United Kingdom), Bernrain and Idilio (Switzerland), Amadei (Italy), and Original Beans (the Netherlands). Sustainability is often linked to this segment. CBI Market Intelligence Channels and Segments Cocoa in Europe 5

6 Market segment trends and forecasts Rising demand for premium/specialty/fine flavour cocoa with higher cocoa content European consumers are increasingly aware what constitutes a healthy diet. Furthermore, there has been a strong increase in sales of sugar-free and reduced-calorie offerings. Dark chocolate is known for its high level of antioxidants which are associated with health benefits such as lower blood pressure, improved blood vessel health and improvement in cholesterol levels. Due to these claimed health benefits, the manufacture of premium chocolate with higher cocoa content is on the rise, especially in Northern and Western European countries such as the United Kingdom, the Netherlands, Germany and Switzerland. Demand for premium chocolate with higher cocoa content is expected to increase even more because of the growing health awareness of European consumers. Tip: Focus on developing cocoa products with healthier components such as dark chocolate, chocolate with added fruit, vegetables or nuts or chocolate with sugar substitutes such as stevia, agave or coconut sugar. Increased importance of direct trade European cocoa grinders/processors, chocolate manufacturers and chocolatiers are increasingly sourcing their cocoa beans directly from countries of origin to ensure stable supplies. This trend makes direct trade relationships more important. The role of direct trade is expected to become even more important in coming years, due to growing consumer demand for transparency and traceability and the increasing popularity of bean-to-bar concepts. Tip: Look for opportunities in direct trade with smaller partners, for example smaller specialised European traders or smaller makers of premium/specialty/fine flavour cocoa products including chocolate. Double certification Cocoa with double certification, for example both Organic and Fairtrade, represents a growing segment within the global chocolate market. Other combinations with UTZ or the Rainforest Alliance also exist. The three standard bodies UTZ, the Rainforest Alliance and Fairtrade certified nearly 1.4 million tonnes of cocoa in 2013 according to the Cocoa Barometer This is roughly 30% of the world market. It is unknown how much of the cocoa that originates from farmer groups they certify is double or even triple certified. Tips: Before investing in certification, consult your buyers to see whether they really want certified beans and what price they are prepared to pay for them. Make a cost and profit comparison. Especially organic growing may translate into lower yields in the first few years but may result in more profit in the longer run. CBI Market Intelligence Channels and Segments Cocoa in Europe 6

7 Price ranges Figure 4: Product segments including prices (2015) 5 Upper-end Middle range High quality, specialty products such as premium chocolate with high cocoa content, fine flavour cocoa, single origin cocoa, cocoa with a story or cocoa products with a sustainability label (Organic, Fairtrade) generally sold in specialty stores. Exclusive brands such as Amadei, Åkesson s, Domori, Duffy s, Guittard, Valrhona, Venchi and Willie s World Class Cocoa. Prices for chocolate bars/tablets range from 2.73 (Vivani, 71%, Organic) to 9.84 (Valrhona 70%, Organic and Fairtrade) and (Duffy s, 72%, single origin) per 100 gram. Accounts for around 5% of the market according to industry experts. 95% Lower-end Middle range Good quality chocolate (also private labels) sold in supermarkets, including chocolates with a sustainability logo. Mainstream brands such as Milka, Lindt, Cote D Or, Cadbury, Ritter, Toblerone, Verkade. Prices for chocolate bars/tablets range from 0.93 (Toblerone) to 0.99 (Milka and Albert Heijn Private Label, 85%, UTZ), 1.09 (Lidl FairGlobe, 70%, Fairtrade), 1.09 (Ritter, 73%), 1.45 (Verkade, 75%, UTZ) 1.67 (Swiss Finest, 78%, Organic and Fairtrade), 1,85 (Cote D Or, 86%, Rainforest Alliance) and 1,99 (Lindt, 85%) per 100 gr. Accounts for around 25% of the market according to industry experts. Cheap chocolate with lower cocoa contents sold in discount stores. Candy bars, such as such as Kit-Kat, Mars-bar, Milky Way, etc. Prices for chocolate bars/tablets range from 0.45 (Lidl) to 0.80 (Aldi) per 100 gr. Accounts for around 70% of the market according to industry experts. The CBI Market Intelligence Platform for Cocoa provides access to all CBI market intelligence documents relating to cocoa. CBI Market Intelligence Channels and Segments Cocoa in Europe 7

8 CBI Market Intelligence P.O. Box AC The Hague The Netherlands This survey was compiled for CBI by Globally Cool in collaboration with CBI sector expert Maurits de Koning Disclaimer CBI market information tools: January 2016

9 Annex 1 Main characteristics of the trade channels Producers Cocoa farmers can be found in tropical environments within degrees latitude north and south of the equator. The primary cocoa growing regions are Africa, Asia, and Latin America. Unlike large, industrialized crops, around 90% of global cocoa production comes from small, family-run farms, with approximately five to six million cocoa farmers worldwide. Individual cocoa producers usually sell their beans to local traders who come and collect the beans from their farms. The local trader then sells the beans to an exporter. Cocoa producers that are organised in producer cooperatives mostly sell their beans directly to exporters. Local traders/exporters Exporters mostly buy cocoa beans from a producer-cooperative or from local traders and sell them to international traders/importers or European grinders/processors. Translating the existing regulations, quality and sustainability requirements to the farmer s level can increase the added value and margins of exporters. Some (multinational) traders represent both the function of exporter and importer: it is integrated in one actor. Examples are OLAM, Transmar, Mondelez and Barry Callebaut. As around 90% of cocoa beans is produced by small farmers, most traders are specialised in dealing with smaller quantities. With regard to specialty cocoa and certified cocoa (Organic/Fairtrade), producer cooperatives mostly sell their beans directly to specialty cocoa importers or directly to a European grinder or chocolatier, hereby skipping the traders. In this case, the exporter is a producer-cooperative organising the actual export activities. An exporter could also be a local grinder/processor selling cocoa mass or cocoa butter. Locally ground beans often need to be processed again before they meet the European quality and food safety standards. If the locally ground beans are processed by a large multinational grinder, the semi-processed cocoa products may also be directly sold to the European (confectionery) industry. Importers/international traders The entry of cocoa into the European market is usually organised by large traders who buy the beans directly from producers (groups/cooperatives) or exporters. Most traders, especially the large multinationals, also perform grinding activities. Traders either sell the cocoa to domestic buyers or re-export them to other European countries. In most cases, traders have long-standing relationships with their suppliers. Integrated importers/traders are interesting partners for cocoa exporters. The focus lies on selling the cocoa beans but this can be extended with additional services. Grinders/Processors European buyers can be trading companies, but are mostly processors (grinders) of raw cocoa beans. Grinders purchase raw cocoa beans either locally or from traders and process them into cocoa mass, cocoa butter and/or cocoa powder. They distribute the processed products to the industrial sector, mainly the confectionery (chocolate) industry. Some grinders also manufacture end products to supply directly to the retail or food service sector. As grinders, especially the large multinationals, tend to integrate more and more steps of the supply chain (both upstream and downstream), exporters in developing countries are likely to become direct trading partners. Industries/chocolate manufacturers Many of the larger chocolate manufacturers have their own buyers based in the major cocoa-producing countries or they employ trading companies to make purchases on their behalf. These trading companies have instructions regarding quality, quantity and delivery requirements and are given maximum prices that they are authorised to pay for particular grades of cocoa. The typical cocoa supply chain is consumer and industry driven. This means that the farmers produce commodities that are pushed into the marketplace. In the case of cocoa beans, they have to be processed and eventually serve as an ingredient in either the confectionery, food or pharmaceutical/cosmetics industry. As a result, cocoa bean producers are often isolated from the end-consumer and have no/little control over the final products and the funds CBI Market Intelligence Channels and Segments Cocoa in Europe 9

10 received for their goods. However, bean-to-bar chocolate makers are increasingly using the producers stories in their marketing. Direct contact with the industry and manufacturers enable exporters to prepare for the European market properly. Specific industry requirements on sustainability, quality and marketing (telling the right story about your cocoa) can be addressed efficiently. In short, beans need processing before they serve as an ingredient in final products, creating a long distance between producers and consumers. As a result, the potential trading partners of cocoa exporters are limited: If you are an exporter and buy bulk beans from a producer-cooperative, your direct trading partner is usually a European grinder. If you are a local grinder and your cocoa mass and cocoa butter meet high quality standards (which means they do not need to be processed again), your direct trading partner is mostly the industry. In case of lower quality semi-processed cocoa products, your direct trading partner is a European grinder. If you are a producer-cooperative selling specialty or certified cocoa and you have the right financial means and technical knowhow to organise export activities, you may also sell your beans directly to European specialised cocoa importers, grinders or (increasingly) bean-to-bar chocolatiers. You should also consider setting up local processing facilities to add more value to your cocoa beans. CBI Market Intelligence Channels and Segments Cocoa in Europe 10