Chocolatiers: licking their lips

Need to focus on faster-growing markets while managing developed ones

---------------------------------------
Lambs are gambolling, flowers budding and supermarket shelves heaving with Easter eggs. Very rough estimates suggest that the world will devour a quarter of a million tonnes of chocolate in its biggest annual sweet-tooth splurge. It’s enough to make chocolatiers lick their lips.

Not that they – or their investors – have had much to complain about recently. Consumer spending on chocolate mirrors economic growth. There was a drop in 2009, but a 3 per cent recovery in the following year. That left consumption in the main developed markets at more than 5.5m tonnes, up a tenth over the decade. By late-2013, market researchers were estimating that volume growth in the chocolate sector (for the top 25 nations) was running at over 3 per cent. Gains were coming fastest in less developed markets – South America and Asia – and more slowly in Europe or the US. Annual growth of at least 2 per cent is now expected for the next few years.

A much bigger headache is rising raw material prices. Cocoa is up by a third since early 2013, to more than £1,800 a tonne. Milk production has tightened, putting pressure on prices there. A poor Turkish harvest means hazelnuts, too, have become dearer.

So the task for the big chocolate makers is to focus on faster-growing markets, while using new products and brand-management to push share gains in the developed ones. Swiss-based Lindt & Sprungli, which last month posted an 8 per cent sales rise in 2013 and 22 per cent jump in operating profits, is a case in point. It has earmarked Brazil, the world’s fifth largest chocolate market, on the first score, taking a majority stake in a new venture with a local specialist retailer. At the same time, it has launched the Hello range in Europe, chocolate cafés in Australia and Japan, and recruited tennis legend Roger Federer to front its products.

For investors, all this comes at a price. Pure chocolate plays are rare: Mars and Ferrero are private while chocolate is only a part of brand portfolios at Mondelez or Nestlé, say. Lindt shares trade on a 29 times forward multiple; Hershey, 24 times. These shares, though, have returned more than 500 and 200 per cent each over 10 years: the S&P 500, 100 per cent. Affordable luxury, perhaps?

Email the Lex team in confidence at lex@ft.com