Chocolate: soaring commodity prices leave makers in a sticky spot

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Chocolate has unique mood-enhancing qualities. Hence consumers have traditionally tolerated price inflation to get their fix. This year is different. Chocolate lovers are tightening their belts rather than swallowing higher costs.

The impact of commodity prices on demand is illustrated by the chart showing the relationship between cocoa prices and the sales of Barry Callebaut, the world’s largest business-to-business chocolatier. The trendline used to be relatively flat. But if the last two quarters of data are included, it slopes sharply downwards. 

Overall, volumes at Barry Callebaut and fellow Swiss chocolate giant Lindt & Sprüngliare are expected to be flat or fall this year. British boutique maker Hotel Chocolat is in a worse position, in part due to a botched overseas expansion. Group sales were 10 per cent lower in the year to July. Profits from the previous year turned into losses.

The Aim-listed company’s shares had fallen 80 per cent since last year’s peak when bittersweet relief arrived with an attractive offer from Mars last week. The US confectionery group is paying a 160 per cent premium for Hotel Chocolat shares. Its backing will provide the recipe for international growth. The deal gives Mars an opportunity to move further into the high end chocolate category.

Premium products are less vulnerable to increases in raw ingredient costs. Cocoa and sugar prices are already near record highs but further increases are likely. El Niño weather conditions are hitting cocoa growers in west Africa. This agricultural year’s supply deficit will be a record 350,000 tonnes and the stocks-to-use ratio will be the lowest for 40 years, thinks Jonathan Parkman of broker Marex. New EU sustainability legislation is likely to restrict supplies into Europe further when it goes live in early 2025.

Expect prices for chocolate and shares in its manufacturers to continue along opposing directions of travel.