Sales of premium chocolate surge at expense of regular
By Hugo Miller
Bloomberg News Service
NEW YORK — Azy Arbash used to like Mars bars and chocolate made by Nestle SA and Hershey Foods Corp. Now when the 45-year-old New Yorker wants a treat, he turns to products with higher cocoa content from companies such as Switzerland's Lindt & Spruengli AG.
"My chocolate eating habits have definitely changed," Arbash said, as he browsed for Easter gifts at the Lindt store on Fifth Avenue. "I target high-quality dark chocolate. I eat only a small amount every day, so I can afford it."
As obesity reaches record levels, chocolate consumption is declining in the United States. Yet the premium segment of the global $42.2 billion industry is growing. In Europe, a similar shift is taking place after governments four years ago allowed vegetable fats to be used in chocolate, diluting its cocoa taste.
Profit at Lindt rose 20 percent last year as revenue gained 7.1 percent. Sales of organic chocolate at London rival Green & Black's surged 62 percent.
"The chocolate business is a very difficult one at the moment," said Edouard Dubuis, who manages a $25 million consumer goods fund including Nestle shares at Clariden Bank in Geneva. "With premium chocolate as its mainstay, a company like Lindt & Spruengli is much better positioned than larger competitors."
Premium chocolate uses cocoa butter as its main fat source and uses at least 70 percent cocoa.
Shares of Lindt & Spruengli, founded in 1845, have risen 68 percent in the past year, more than quadruple the gains of Nestle, the world's largest chocolate maker, and twice the share-price increase of Hershey, the United States' biggest maker of chocolate candy.
Inside the numbers
Cocoa beans were first used in South America to make a dark brew known as "chacahoua" and were brought to Europe in the 16th century by Spanish conquistador Hernando Cortes, according to Nestle's Web site. The beverage became a delicacy in Europe. In 1828, Dutch chocolate maker Conrad van Houten invented a method for pressing fat from cocoa beans, creating a cake that could be made into powder and paving the way for a solid form of chocolate.
About 90 million chocolate bunnies are made for Easter in the United States each year, according to the Web site of the National Confectioners' Association, which is based in Vienna, Va.
Per capita consumption of chocolate candy in the United States fell to 10.9 pounds in 2001 from 12 pounds in 1997, according to data from the U.S. Department of Commerce and Census Bureau cited by research firm MarketResearch.com.
Falling demand has also hurt prices: Raw cocoa prices have declined almost 29 percent in New York in the past year and are trading at $1,402 a metric ton. Prices in London are down 39 percent in the same period.
The pressure's on
"Awareness of sugar and its role in people's diets has come a long way," said Craig Sams, 59, a native Nebraskan who founded Green & Black's in 1991.
Still, U.S. sales of premium chocolate will rise 10 percent in 2005 from $1.1 billion this year, and reach $1.62 billion by 2008, predicts Packaged Facts, a unit of the U.S. market researcher.
Nestle is feeling the pressure.
Sales at the company's chocolate unit, which makes Kit Kats, Smarties and Crunch bars, fell 4 percent last year to $6.4 billion. They dropped 2.9 percent in 2002.
The decline may force Nestle, which also sells Perrier water and Dreyer's ice cream, to make acquisitions to stay on top in chocolate or bow out of the industry, said Alain-Sebastian Oberhuber, an analyst at Lombard Odier Darier Hentsch in Zurich.
Nestle's profit rose 80 percent in the second half of last year as it benefited from more than $16 billion in acquisitions since 2000. Chocolate products, which include some dark chocolate brands, accounted for 9.3 percent of revenue last year.
"There is still potential for further growth," Cesar De Los Rios, Nestle's senior vice president in charge of chocolate, confectionery and biscuit sales, said in a statement.
Lindt & Spruengli's sales in the United States, including its Ghirardelli brand in California, rose 11 percent to $250.8 million last year as the company opened nine new shops.
At the flagship store on New York's Fifth Avenue, shelves were laden with rows of purple, green and yellow boxes, some shaped like Easter eggs, and legions of gold foil-wrapped bunnies. The foot-tall chocolate bunny that greets visitors weighs 2.2 pounds and was selling for $39.99. The smallest rabbits went for $1.99 apiece.
