With the cost of raw materials up sharply since the start of 2007, one chocolate maker expects a price shock by Christmas
Germans have been worried recently about rising milk prices. But now chocolate too is set to get more expensive as raw materials go up in price. The crunch will be felt before Christmas, says one leading manufacturer.
Say the name "Barry Callebaut" to most people and they are more likely to imagine a 1970s easy-listening singer than a chocolate manufacturer.
But Swiss-based Barry Callebaut is the secret giant of the chocolate industry: One out of every four chocolate bars, pralines or chocolate cakes sold worldwide comes wholly or in part from its factories.
Barry Callebaut, which was formed in 1996 through the merger of the chocolate companies Callebaut and Cacao Barry, is the company behind the chocolate bars in German discount supermarket chains like Aldi and Lidl. It also produces the pralines sold by upscale Belgian confectioner Neuhaus. But consumers don't know that -- and are not supposed to know it either. The company's major customers prefer to keep the mystique of the master chocolatier for themselves.
About 60 percent of Barry Callebaut is owned by 43-year-old Andreas Jacobs and his family. Up until now, Jacobs, who is the son of famous German industrialist Klaus J. Jacobs, was more than satisfied with his company's balance sheet: sales, profits and share price had all been climbing consistently. But now the figures are leaving something of a bitter taste in Jacobs' mouth.
The numbers may be continuing to climb steeply, but they're now doing so on the wrong side of the balance sheet. Whether it's cocoa, glucose or wheat for crispy wafers: Prices of raw materials for chocolate have seen two-digit increases since the beginning of the year.
The final blow came with the recent price shock on the milk market, where costs have doubled in one year (more...). That represents "a real challenge," Jacobs says with a groan.
Globalization has now hit the chocolate sector with full force. Just like Barry Callebaut, other chocolate producers are also suffering from the poor hazelnut harvest in Turkey, the growing demand for milk in China and the wheat shortage in the United States -- this last caused by more and more of the grain being used to produce biofuel. Meanwhile packaging and transport costs have increased at the same time.
Torben Erbrath from the Association of the German Confectionery Industry (BDSI) speaks of an "unprecedented situation." And what is presently a problem for the chocolate magnates will soon also be one for consumers: Price negotiations between producers and retailers for the first six months of 2008 are scheduled to begin within a few days.
"There will be marked price increases," warns Jacobs, who wants to turn his company into a well-known brand in the future. "It's a long road for us," he says.
Barry Callebaut is not allowed to reveal the names of its customers, and chocolate producers as a whole are very reticent about revealing which mass-market products they are responsible for. Hence Barry Callebaut is considerably less well known in Germany than, say, its Cologne-based subsidiary Stollwerck -- purchased in 2002 -- whose "Sarotti" brand is a familiar sight on German supermarket shelves.
End-consumer sales make up less than 10 percent of Callebaut's €2.7 billion ($3.7 billion) annual sales at present. But retail sales are important because they allow the company to test new chocolate recipes before offering them to industry customers.
The chocolate giant is now looking to expand, mainly in the countries that represent globalization's winners: Jacobs is setting up new factories in China and Russia, as well as a Chocolate Academy in India. And indeed, chocolate education does seem to be necessary, since there is little tradition of eating chocolate in these countries. But with more and more people aspiring to a Western lifestyle, the potential is huge. "Chocolate consumption is partly a question of affluence," says Jacobs.
His father, Klaus J. Jacobs -- who is famous in Germany for being the founder of the coffee brand Jacobs Krönung -- built up the company during the mid-1990s, creating a market leader through a mixture of luck, skill and major purchases. Today the company produces the chocolate coating on Magnum ice cream bars for Unilever and the filling of the chocolate croissants sold at McDonalds.
Andreas Jacobs took over in 2005 and turned the company -- which employs 8,000 people -- into a subcontractor which other confectionery companies can outsource their production to. Jacobs produces the Lion chocolate bar for its rival Nestlé, for example, and an agreement has just been reached with Hershey to deliver 80,000 tons of chocolate products to the US chocolate giant annually -- a volume that corresponds to 800 million chocolate bars.
Jacobs can pass the increased cost of raw materials on to these multinational customers, since in their case prices are freshly calculated every day. The price increases will then in turn be passed on -- some time later -- to German retailers.
But in the end, it is the normal consumers who will have to foot the bill. "With our narrow profit margins, we can't absorb these price hikes," says Stefan Genth, head of the German Retail Federation (HDE).
Which means it is only a matter of time before chocolate products become noticeably more expensive. Jacobs expects the crunch to be felt in the run-up to Christmas. "Chocolate Santa Clauses will be first hit," he says.