Chocolate prices expected to climb as industry relays cocoa burden

Cocoa prices have steadily increased over the past year, but having spiked in recent months, they’re now truly vertical.

Compounding factors are at play. To begin with, weather and disease have disrupted crop supply in the main cocoa producing countries Ghana and Cote d’Ivoire. Add to this very late, very big cocoa purchases from FMCG majors, and the sector finds itself in a perfect storm.

Caught out manufacturers are hurriedly racing to secure cocoa supply. Those with sufficient funds will likely secure it, but it’s expected they’ll be working hard to recuperate costs down the line. If neither supplier, manufacturer nor retailer is willing to foot the bill, there’s only one party left: the consumer.

Barry Callebaut protects profits by passing on cocoa costs

Barry Callebaut is one such supplier unwilling to shoulder rising cocoa costs.

For the most part, the world’s leading maker of cocoa and chocolate related products operates on a ‘cost-plus’ model. That means that price fluctuations of raw materials (such as cocoa), as well as other production cost components including energy, freight and transportation costs, are passed on its customers.

Barry Callebaut has long been operating this way. Since the supplier sources beans up to 18 months prior to selling them on, it wants to avoid being caught out if prices surge – as they have been. “It’s part of the business model, and how we made the agreements with customers,” explained Barry Callebaut’s CFO Peter Vanneste while reporting the company’s 2023-24 half-year results this week.

Ensuring these costs are passed onto customers is the ‘job we need to do every day’, added CEO Peter Feld.

How did Barry Callebaut fare in its 2023-24 half-year results?

The cocoa and chocolate supplier is reporting a sales increase of 11%, but an operating profit decrease of -40%. More details found here​.

Of course, not all cocoa suppliers may act in this way. But with a market share of close to 40%, processing 14% of total global cocoa bean production, Barry Callebaut is serving enough manufacturers for its model to make a difference.

During such a turbulent time in the cocoa sector, the company credits its cost-plus model for protecting its profitability. Over the half-year period, Barry Callebaut secured net profit recurring up 0.8% in local currencies, which CFO Vanneste explained aligns with its ‘volume evolution’.

The company has informed its customer base​ of plans to increase prices for ingredients from 1 May 2024.

Will manufacturers shoulder the cost burden?

If the cocoa supplier is passing on cocoa price hikes to manufacturers, will they be the ones to shoulder the burden?

That’s unlikely, according to Barry Callebaut. The supplier expects its packaged goods customers will increase pricing accordingly between 3-8%. “That’s the guesstimate we have right now,” explained CEO Feld, adding that the price increase will depend on the percentage of cocoa in the product.

The price impact on a plain chocolate bar, for example, will be great. For others, the impact will more forgiving.

“If it’s just chocolate crumbles in a cookie, it’s much less. If it’s in ice cream, again, that’s a very different percentage of the total end product that will be sold to a consumer…It depends on which category we’re talking about,” Feld told journalists and analysts.

Cocoa crops have been plagued by unusual weather and disease in west Africa. GettyImages/Eliot76

Whether private label or branded chocolate products, the same outcome is expected. Serving both segments, Barry Callebaut has observed a ‘clear’ trend of consumers trading down to private label and value brands in recent times.

This puts boutique confectionery brands with higher cocoa content at serious risk. Some in the sector say up to half of smaller chocolate brands could fold by the year’s end​.

Chocolate price hikes incoming!

As to when consumers will notice heftier price tags on chocolate confectionery, well, some already have. The price of Mondelēz International-owned Cadbury Freddo is reportedly up 150% this year​. Shrinkflation – or ‘chocflation’ – whereby manufacturers reduce the size of their chocolate offerings without lowering the price, is also at play​.

On the whole, chocolate price increases are expected to be felt sooner in the US than in Europe. State-side, a two-to-three-month lag can fall between the time manufacturers realise bean prices are rising and set up negotiations with retailers. In Europe, this lag is likely to take longer, between six months and one year, explained Feld. “It depends…how fast this will be materialised in the different markets.”

chocolate Cultura RM ExclusiveDiana Miller

Barry Callebaut estimates chocolate confectionery products will increase anywhere between 3-8%. GettyImages/Cultura RM ExclusiveDiana Miller

Although a 3-8% price increase on chocolate confectionery is nothing to sneeze at, consumers have experienced worse in recent times. Food inflation between 2022 and 2023 far exceeded these potential price hikes, stressed the CEO. Of course, in between these periods prices were ‘trailing back’, but now consumers will once again observe the trend reverse.

“But it is far less excessive, as we assume, versus [the trend] has been in the past.”

‘What goes up, must come down’

Barry Callebaut does not expect cocoa prices to continue to rise to the same extent. It certainly will not double from today’s level, Feld assured journalists and analysts. “We believe what goes up fast, comes down fast at one point in time, and we’re preparing for that.”

Cautious to not over-speculate, the CEO expects the price to stabilise somewhere lower than it is today, but higher than it was six months ago.

“We’re being cautious on all steps we’re taking going forward. It is a very unprecedented situation. When you track back on cocoa prices, we’ve never seen something like this before.”