Photo”Cocoa labor: Women & children hand sorting beans in Ghana’s Western region”; photo by Kristy Leissle
By Dr. Kristy Leissle
June 6, 2018
A few weeks ago, as I was preparing to talk to Joe Weisenthal on Bloomberg’s “What’d You Miss?” about cocoa’s price rise earlier this year, my partner, as he often does, asked questions to help me gather my speaking thoughts. My partner said, “You always talk about who loses when the price of cocoa goes down. Who wins when it goes up?”
From years of studying this industry, I can usually start talking right away when someone asks me a question. But this one brought me up short. I had never thought about who wins.
After the Bloomberg segment, I talked to Lauren about this question. She was interested, too, and invited me to write a post to think it through. I have not met too many people working in cocoa who describe themselves as “winning.” Given that, it felt important to devote a post to who does lose out when cocoa’s price rises. In next week’s post, I’ll tackle the winners.
First, large chocolate manufacturers and cocoa processors lose out when cocoa’s price rises. No company wants the price of their primary input to go up. As I read recently in The Cocoa Coast by Shashidhara Kolavalli and Marcella Vigneri, on average across all types of products, cocoa accounts for about half the raw material costs of making chocolate. When cocoa’s price surges, as it did recently, these companies face having to pay more for the ingredient they need the most.
But … as I discuss in my book, Cocoa, big chocolate companies have sophisticated strategies for dealing with this. They buy futures contracts to hedge against price rises in the short to medium term. In the long term, they change their products. Sometimes they make them smaller, but keep the suggested retail price constant, as Mondelez routinely does with its iconic Cadbury Dairy Milk the world over (and Mondelez is not alone). If you make a bar smaller, you need less cocoa, and voilà—you’ve helped to offset a cocoa price rise.
Another option is to replace expensive cocoa butter with cheaper fats. When a manufacturer does this, it can no longer legally call the product “chocolate” (in the US, that is; in the EU, chocolate’s fat content can legally be up to 5% cocoa butter substitute). But as Hershey has shown, consumers don’t always notice that their favorite bar has become “chocolate-flavored” or “chocolate candy” instead of “chocolate,” so long as other aspects of branding remain the same.
There are other replacement strategies. Have you noticed that many classic chocolate candies now come in different flavors and with novel inclusions, like M&Ms and KitKat? Every time you add an ingredient, you reduce the amount of cocoa you need to make that product. Of course, this strategy works best if the new ingredients cost less than cocoa, but if you diversify enough, something is bound to be cheaper.
Small chocolate companies—such as bean to bar craft makers—can also lose out when cocoa’s price rises, for the same reason: the cost of their most important input has gone up. But they do not usually have the same wherewithal to protect themselves. For example, no craft chocolate maker that I know hedges on the futures market to keep its cocoa costs predictable in the short term (if you are interested to know how this works, I explain it in Cocoa). But there is evidence that some craft makers—such as Taza and Dandelion—already pay more than world market price. While a rising cocoa price would put upward pressure on their costs over the long term, in the short term, a price hike might not have a noticeable impact on their margins.
Chocolate consumers lose too. Eventually, companies always pass rising production costs onto consumers. When cocoa’s price rises, chocolate shoppers end up paying more. I personally believe that we do not pay enough for our food, so, for me, paying more for chocolate is not by itself a negative. However, raising the retail price of foods is no guarantee that the worst compensated people along the value chain will be better paid. Moreover, that is a pretty classed position for me to take. I recognize that while I may be able to pay more for groceries, many others cannot. So, overall, consumers do lose on a cocoa price rise.
Distributors, wholesalers, and retailers may lose or win when cocoa’s price rises. These usually work with a fixed amount of capital to buy stock, so they need to make judicious choices. Over the long term, people have kept buying chocolate, even as cocoa’s real price (that is, adjusted for inflation or deflation) has risen: chocolate is a luxury good with no substitute. But in the short term, shoppers might choose to buy less of any particular chocolate if its price rises. If you’re a retailer, you need to guess correctly: will people buy it, or won’t they? If people do keep buying at the higher price, then cocoa’s price rise becomes a win for this category. Distributors, wholesalers, and retailers typically make small margins on consumer products like chocolate bars. If the price of a bar goes up and they can still move that stock, then their margin rises.
Next up: the winners. In my analysis, there are no unqualified wins when cocoa’s price goes up. No person or company is invulnerable: anyone who benefits from cocoa’s price rising also stands to lose when it falls. Tune in next week to find out who these “winners” are …
Dr. Kristy Leissle is a scholar of cocoa and chocolate. Since 2004, her work has investigated the politics, economics, and cultures of these industries, focusing on West African political economy and trade, the US craft market, and the complex meanings produced and consumed through chocolate marketing and advertising. Her recent book, Cocoa (Cambridge: Polity, 2018) explores cocoa geopolitics and personal politics. Dr. Leissle is Affiliate Faculty in African Studies at the University of Washington; Research Associate for the development through trade organization Twin & Twin Trading; and Cultural Specialist for National Geographic-Lindblad Expeditions. Among other previous roles, she served as the Director of Education for the Northwest Chocolate Festival from 2010-2013. She lives in Accra, Ghana.