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MARKET OVERVIEW

The chocolate market has experienced steady growth in recent years. North America and Western Europe still dominate, but growth has been very strong in the BRIC countries (Brazil, Russia, India, and China). Significant growth in the latter markets has the potential to cause supply shortages of cocoa and hence increasing prices. Brand loyalty, reinforced by advertising by major producers, is strong. Consumers often stick to their favorite brands, and chocolate has proven to be relatively recession proof.

In the traditional areas, where markets are saturated, emphasis has switched to differentiating products, with new flavor combinations and bolder health claims, as well as vegetarian, organic, and premium offerings. In the developing world, market growth is expected to mirror growth in personal disposable incomes.

There is a big seasonal boost in demand at Easter, in particular, and also at Christmas. Chocolate's popularity as a gift has increased. With more premium products available, it is a relatively cheap luxury item. This helps keep demand up in times of recession when people tend to forgo more expensive luxuries. As chocolate has a relatively long shelf life, online sales have been an avenue of growth. Unlike perishable food products, delivery times for online sales of chocolate are not a problem.

Major Competitive Factors

The market is dominated by a few large producers (e.g., Kraft, Hershey, Mars, and Nestle) with advertising being a major driver. Barriers to entry are quite high, as new operations require major capital investment. Competition is strong in the premium segment, with less domination by large producers and better opportunities to set premium prices with brand recognition. However, the large producers are increasingly entering the premium segment and are also expected to acquire many of the small producers.

Brand recognition and reputation are important at the premium end of the market where chocolate is increasingly seen as having health benefits, and many craft producers have sprung up in recent years. This portion of the market is relatively small but growing.

Conversely, nonpremium products and desserts with higher sugar content are under attack from health professionals and governments concerned about health and obesity. Quality control is important – a brand can be ruined if an inferior batch enters the supply chain and causes mass sickness. As a food producer, Blue Wood is regulated by the U.S. Food and Drug Administration (FDA).

A further factor that is increasing in importance is a greater focus on the plight of cocoa farmers who receive only a tiny fraction of the retail price, as well as on the use of child labor in developing countries. In fact, few cocoa farmers are thought to have ever actually tasted the end product of their labors. Fair trade products have sprung up in recent years to salve consumers' consciences in this regard.

Selling prices are a factor for mainstream products. Not only can people switch to other chocolate brands, but there are many other candy, dessert, and snack food products around that they can select. At the premium end of the market, price competition is less of a factor than perception of quality and luxury based on product branding.

Cocoa prices depend on demand and supply and can be heavily affected by factors such as weather and politics. U.S. sugar prices are inflated compared to world prices due to market manipulation through price support for U.S. producers, domestic market controls that limit production by individual producers, and tariff rate quotas applied to sugar imports.[1] This puts domestic chocolate manufacturers at a competitive disadvantage to foreign competitors. Prices have also been affected on occasion by speculators buying large positions of physical product or futures. Much of the world's supply comes from countries with a history of political instability, and this can cause (and has caused) supply disruptions.

  • [1] See: sugarcane.org/global-policies/policies-in-the-united-states/sugar-in-the-united-states. See also, for example, nytimes.com/2013/10/31/us/american- candy-makers-pinched-by-inflated-sugar-prices-look-abroad.html?_r=0 and commodities.about.com/od/researchcommodities/a/The-Two-Sugar-Markets-Us- Sugar-And-World-Sugar.htm.
 
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