The Cocoa Series: Adapting To A World Of Change Featured

The Cocoa Series: Adapting To A World Of Change Department of Foreign Affairs and Trade, Australian Government

Climate change, population growth, and the shift of power from developed nations to emerging markets are setting the stage for a brand new future. These are but some of the changes in the cocoa industry that are calling for immediate action. Who would have thought that in five years’ time, emerging markets will become the top consumers of cocoa? In the first of a six-part series, we explore the shifting food and beverage landscape and its effects on stakeholders along the value chain. By Sherlyne Yong

Ten years ago, it was hard to imagine smartphones permeating society like it does today. After all, mobile phones then were basic devices used primarily for its main purpose  making calls. Most phones did not even have colour capabilities, what more the functions that many of us have come to rely on today. 

However, following the steep curve of technological development, the average mobile phone today mirrors that of a mini computer. This phenomenon of rapid transformation is not partial to electronic devices; it is a trajectory that the world is embarking on, and is one that bears huge consequences for the cocoa industry.

Alongside technological advancements, climate change, population growth and increasing affluence are all drivers of change that are setting the pace for a fast moving future that requires action to be taken now.


The Seeds Of Change

In 2008, the world was thrown into a significant and painful financial crisis. Now in its sixth year of recovery, and for the first time since then, every single region in the world is growing again. 

“The world as a whole is out of recession, and it’s growing faster than it has since the beginning of the financial crisis,” said FX de Mallmann, global head of the Consumer Retail Group at Goldman Sachs, who expects global growth to be over three percent this year. 

Substantiating his forecast, he added: “We have seen significant recovery in capital markets activity and the access of capital to the provision as a whole. That access to capital is a source of significant investment activity and ultimately, greater activity and accelerated recovery from here.”

For instance, 2014 marks the year that has seen more equity being raised around the world since the financial crisis. Economic progress around the world, in tandem with urbanisation, has also boosted demographic changes, with an estimated one billion people coming out of poverty for the last 20 years.

Emerging markets that have previously taken a backseat are now coming to the fore to serve as the main drivers of economic growth. Countries like China, Brazil and India are filling the gaps with demand that have been fuelled by population growth and increasing affluence. So much so that according to Mr de Mallmann, “the consumption of cocoa in emerging markets will outpace the consumption of cocoa out of developed markets, in five years from now.” 

Department of Foreign Affairs and Trade, Australian Government

The BRIC nations have improving tremendously and “the centre of gravity for food and drink is undoubtedly shifting,” said James Walton, chief economist at IGD. For instance, the chinese market alone has grown US$330 billion in the last three years, and will do so again in the next three years. To put things into perspective, that amount is equivalent to the value of the India food and drink market. 

Likewise, KPMG has also predicted a six percent rise in revenue (worth approximately US$110 billion) for the cocoa industry this year, due to the growing appetite of chocolate in emerging markets. Eight markets alone  Brazil, China, Columbia, India, Russia, South Africa, Turkey and Vietnam  are driving 70 percent of confectionery growth in the world.  

In Brazil, South Africa and Turkey, the desire for chocolate mostly stems from a growing middle class, while in China, westernisation and the increasing presence of large foreign retail chains have helped to develop an untapped market. On the other hand, the driving force behind India’s chocolate consumption is finding the right price point, which when done correctly, avails itself to a market that houses one of the world’s largest populations. 

As varying as the drivers may be, one thing remains unanimous: the insatiable appetite for chocolate.


Challenge Of Demand

While the unabating demand for chocolate is good news to all in the cocoa industry, benefits can only be attained if the demand is actually met. Demand is growing at an exponential rate and that inevitably requires extra output. This places additional stress on the current supply, which is already dwindling due to climate change. 

Crunching some numbers for a conservative estimate, Mr Walton showed that the demand from China in 2015 alone would require an additional five percent of cocoa beans, translating into 638,210 more hectares of land. 

"Demand could outstrip supply by more than a million tonnes by 2020," said John Morris, partner and sector head of Consumer markets at KPMG UK. This is a huge issue for the industry, which is hard pressed to produce a constant stream of cocoa beans. As a result, sustainability has been propelled from being an optional focus to one that is of utmost priority. 

Companies in the industry are working with farmers to increase yield and productivity while maintaining quality. Besides exploring new sources of cocoa in new countries and investing in sustainable practices, businesses are also investing in new types of beans and exploring bean genome sequencing. 

Already, manufacturers are going to spend at least US$1 million in boosting productivity over the next few years. The amount of cocoa farmed in a sustainable way is also expected to increase from 20 percent to 50 percent in the next decade. Upping the stakes, global brands like Mars, Hershey and Ferrero have committed to sourcing 100 percent sustainable cocoa by 2020. 

The sequencing of cocoa bean genomes on the other hand, if successful, could increase yields twofold by developing new varieties of beans that may be hardier, leading to less losses, or possess a shorter breeding period. Nonetheless, it is still in its early stages and supply remains a challenge. 

Department of Foreign Affairs and Trade, Australian Government


Catering To The Consumer

One of the unintended consequences of having a tight supply is the higher risk of criminal activity. When supply is short, the price of materials increases and that presents a greater vulnerability to fraud and adulteration. Traceability is therefore an important component that helps to ensure, and assure consumers, that product quality is maintained. 

In particular, technology has been a game changer in the way that consumers retrieve and process information. “Technology gives every community a voice. It makes the supply chain transparent, whether you want it to be or not,” explained Mr Walton. 

Suppliers and manufacturers must be able to substantiate the claims they make (eg: origin of beans, cocoa content, method of production), as contraptions such as spectrometers made for consumers have made it much easier to debunk fraudulent claims. 

Meanwhile, there is another type of claims that consumers are looking at. Buoyed by increasing health consciousness and growing obesity rates, consumers are watching their weight as well as the nutritional content of the food they eat. Chocolate, long associated as a sweet treat, is in the position of being scrutinised for its healthfulness. 

While this may seem like a threat to the category at first glance, manufacturers can spin this into an opportunity by including it as part of their social responsibility. For instance, Ferrero tackles the obesity problem by rolling out initiatives that advocate a balanced lifestyle, a moderate consumption of sweet treats and higher sports engagement.

Manufacturers can also cater to the health trend by monitoring the calorific contents of their portfolio, or reinventing products by using a new ingredient mix to reduce fat, sugar and sodium. Cocoa butter can be replaced with natural derivatives or coconut oil while natural sweeteners like stevia can be used instead. Alternatively, manufacturers can turn their focus to something that they already have on hand  dark chocolate. 

Dark chocolate is a special segment that has been recognised among consumers, governments, academia, and most importantly, regulators, for its health benefits. According to Mr Morris, this particular category has been growing twice as fast than the rest in the US market, while in china, retail share of dark chocolate has more than quadrupled in five years to 34 percent in 2013. 

Adding on to the segment’s potential is the fact that regulators are starting to rethink their policies, such that the European Food Safety Authority (EFSA) has allowed Barry Callebaut to use the claim of ‘maintaining the elasticity of blood vessels’ for its dark chocolate produced using a flavanol-retaining method. 

In time to come, dark chocolate may eventually become a vehicle for public health. But until that happens, manufacturers have to continue to innovate in order attract both new and mature markets.

Everjean, Antwerp, Belgium


Innovation Is Crucial

Despite the emphasis being on emerging markets, mature markets such as the the US, Europe and Japan cannot be neglected as they make up a sizeable portion of consumers. In these places, the challenge faced by manufacturers lies in differentiating oneself from a sea of brands. 

In saturated environments where competition is rife, price and promotion becomes less of a differentiating factor. Technology has enabled the rise of price comparison programs, especially in the UK, which effectively negate the effects of promotional activities and brand loyalty.

Certification programs like Fair Trade, while helping with brand value, are becoming the norm, such that businesses have to look for new ways of being distinctive. Innovation is the key that opens the door to the future. 

The retail landscape is slowly but surely changing with the addition of technological advancements, the most prominent of which is 3D printing. Touted as the next industrial revolution, 3D printing not only allows manufacturers to test prototypes immediately, but also blurs the lines between suppliers and manufacturers to create a level playing field.

More importantly, it is the pathway to the promising world of customisation. In an era where people are constantly bombarded with information, personalisation is perhaps the brand’s best shot at reaching the consumer. 

3D printing can be used to develop the chocolate industry’s seasonal markets, such as Easter, Halloween, Christmas, Valentine’s day, and even occasions like Mid-Autumn festival and Diwali (Deepavali) that are celebrated in Asia. This holds particular relevance for Asian markets, where according to Mr Morris, gifting makes up 30 percent of China’s confectionery market while India has seen a 40 percent growth in chocolate sales during Diwali. 

However, innovation is not limited only to product development, but applies to distribution channels as well. In mature markets where choice can be overwhelming, personalisation can be applied to point-of-sales for a more effective reach. 

Everjean, Antwerp, Belgium

Mike Mozart, US

Jared Frazer

Case in point: confectionery giant Mondelez is planning to roll out its smart shelf technology in 2015, an in-store display unit that monitors shoppers and displays information based on their demographics. This is a step towards Internet of Things (IoT), a concept that hinges on communication between objects for a seamless experience. 

Smooth transactions are arguably the holy grail in retail, and as IoT substantially reduces hiccups or disruptions, it is likely to take greater prominence in the future. For instance, IoT can be used to link multiple routes to market, effectively helping retailers and manufacturers shift to multichannels. 

A full multichannel will see hypermarkets, superstores, supermarkets, convenience stores and online shops being connected through digital communication, replete with links to other business, and completed in an immersive multimedia environment. 

In a survey conducted by IGD, it was found that migration to multichannels would be the retailers’ biggest priority in three years time. This is unsurprising keeping in mind that the first to achieve this would reap the benefits of a completely new retail (and digital) frontier. However, for that to happen, there must first be logistical support from suppliers and a deeper understanding of consumer insights. 

Similar to the developments seen in mobile technology, speed and innovation will be the difference between success and failure in the cocoa industry. Instead of waiting for things to happen, the real question is — who dares to make the change?

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  • Last modified on Friday, 12 September 2014 18:51
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Asia Pacific Food Industry (APFI) is Asia’s leading trade magazine for the food and beverage industry. Established in 1985, APFI is the first BPA-audited magazine and the publication of choice for professionals throughout the industry with its editorial coverage on the latest research, innovative technologies, health and nutrition trends, and market reports.

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