Category Analysis: Chocolate: Quality Satisfies American Sweet Tooth

Gourmet chocolate is expected to experience delicious growth over the next four years. Indeed, it is expected to become a nearly $1.8 billion market. According to market analysts and manufacturers, consumers are seeking better-quality chocolate at a variety of market levels. Further evidence of this trend is the recent acquisitions of small artisan chocolatiers by large manufacturing powerhouses.

Big Boy Buyouts
According to Packaged Facts, gourmet chocolate accounts for roughly 10 percent of overall chocolate sales and is growing faster than the chocolate market. Based on available market information, Packaged Facts estimates that total gourmet chocolate sales reached $1.3 billion in 2005, and projects that they will reach $1.8 billion in 2010, illustrating growth of 6.4 percent between 2005 and 2010.

Information Resources Inc.-tracked retail sales of gourmet chocolate stood at $310.8 million in 2005, a strong 20.2-percent growth over 2004. During the period from 2001 to 2005, the market experienced a compound annual growth rate of 10.5 percent. In comparison, overall chocolate candy sales grew by a compound annual growth rate of 1.8 percent during the same period. The National Confectioners Association estimates total retail chocolate sales at $15.7 billion for 2005 — that's 3.5 billion pounds of chocolate, an increase of 2.6 percent over the previous year. Halloween and Christmas were the big holiday winners in 2005 for confectionery sales with increases of 2.3 and 2.4 percent, respectively. NCA estimates seasonal sales will increase 2.3 percent overall for 2006.

One of the major reasons contributing to the growth of gourmet chocolates is expansion of the distribution reach to mass-market channels. Gourmet chocolates once found only in specialty stores, boutiques and high-end department stores, are now widely sold in food, drug, and mass (FDM) channels.

Researchers consider gourmet chocolate, by definition, different from normal chocolate varieties mainly due to their ingredients and the production process. Normally, the chocolate categories are categorized based on the cocoa origin, level of cocoa content, the craftsmanship involved in chocolate making and the type of packaging.

The lure of higher margins provided by gourmet chocolate has attracted the interest of large chocolate manufacturers, many of whom have introduced their own successful premium brands and/or acquired smaller, well-known gourmet manufacturers in the past few years. While the majority of gourmet chocolatiers are still small businesses, many of them European, the influence of the corporate chocolate giants has been instrumental in introducing gourmet chocolates into mass market channels.

"Gourmet chocolates have come out of the closet and are showing some muscle in the mass market arena with exceptional branding that is making gourmet indulgence a household phenomenon," notes Don Montuori, the publisher of Packaged Facts. "Higher cocoa content, the health benefits associated with chocolate, and the introduction of organics, 'single origin chocolates' and exotic flavors such as grapefruit and habañeros are having a major impact on this industry, helping it grow more quickly than standard chocolate."

Many of the majors competing in the U.S. gourmet chocolates market are European chocolate manufacturers. Major marketers include See's Candies, MasterFoods USA (Dove, Dove Promises); Lindt & Sprungli A.G. (Lindt, Lindt Lindor, Ghirardelli); Ferrero USA Inc. (Confetteria Raffaello, Ferrero Rocher, Mon Cheri); Hersheys (Joseph Schmidt Confections, Scharffen Berger); Nestle USA Inc. (Nestle, After Eight, Perugina); Campbell Soup Co. (Godiva Chocolatier); Kraft Foods, Inc. (Terrys, Toblerone chocolate); Maxfield Candy Co. (Mrs. Field, Maxfield's, Hallmark); Alfred Ritter Gmbh & Co. (Ritter Sport) and Droste B V (Droste).

Top-of-the-range confectionery is becoming increasingly important as margins tighten elsewhere. For example, more than three quarters of respondents to a recent Mintel survey said they were given premium chocolate for the Christmas or Valentine's holidays last year and two thirds of products bought in the holiday seasons were from gourmet stores.

Consumer Trends
Trends in the confectionery field, predicted by NCA analysts, include limited editions, dark chocolate, high-end and gourmet selections, high cocoa content chocolates and single-origin chocolates.

Growth in the gourmet industry is attributed to antioxidant benefits of chocolate in the news and commitment at retail. NCA estimates sales of everyday gourmet chocolate candy grew 32 percent in 2005.

Sampling and chocolate-tasting programs are an important tool for creating product awareness and introducing consumers to new gourmet product. Brad Maslan, Guylian's VP of sales and marketing, stresses the importance of "guerilla-type sampling programs" in building brand identity. Chocolate-tasting sessions also serve as a tool to educate consumers on the fine properties of chocolate, as well as to introduce them to a company's gourmet brand.

La Maison du Chocolat conducts tasting classes at its New York store that highlight their products, as well as introduce consumers to different types of chocolate.

Since chocolate is often an impulse purchase, product placement and signage assume importance and retail initiatives, such as in-store promotional campaigns are the key to driving sales growth. Product differentiation at this level is particularly important for gourmet chocolate manufacturers to sustain their premium aspect.

Datamonitor's Industry Opinion Surveys (IOS) illustrate that consumers in both Europe and the U.S. are seeking more luxury from their consumption choices to satisfy their increasing lifestyle aspirations. Everyday occasions now have an added premium focus — in Datamonitor's study, 85 percent of respondents agreed with the statement that "high-quality products are increasingly being chosen for 'everyday occasions,'" while prior analysis has already shown that consumers are consuming higher-quality products more frequently (which is reflected by the increasing number of premium indulgence occasions).

The growth in snacking occasions is also reflected by value growth. The value of super-premium snacking occasions in Europe is forecast to rise from $12.3 billion in 2004 to $15 billion in 2009. In the U.S., the market is smaller but growing more rapidly (from $8 billion in 2004 to $10.7 billion in 2009). Of these super-premium snacking occasions, chocolate's share of the U.S. market is expected to increase by five percent, from $670 million in 2004 to $855 million in 2009.

Chocolate Pedigrees
The world of chocolate encompasses many ongoing trends. They range from extraordinary infused flavor profiles to dark chocolate madness to organics.

Dark chocolate has the added benefit of a healthy image. In response to increased consumer preferences for dark chocolate, marketers are introducing many products with higher cocoa content, which continues to be a key selling point.

Artisan chocolates, normally offered by small manufacturers in a handcrafted or handmade process, have become a niche in the gourmet chocolate market due to their exclusive offerings. Chocolate makers are continually experimenting with exotic flavors and ingredient mixes.

Introductions of organic, natural and varietel chocolates reflect a growing trend within the confectionery market. Consumers are becoming more ethically concerned. In the UK for example, a recent YouGov survey commissioned by Marks & Spencer found that 78 percent of consumers claimed they would like to know more about the way goods are made, including the conditions in the factories where they are produced.

Some 59 percent said they already purchase Fair Trade products and 18 percent said they would buy Fair Trade items if they were more widely available.

Fair Trade Certification ensures that the cacao farmers who provide the raw product necessary for manufacturing chocolate are being given "a better life through fair prices, direct trade, community development and environmental stewardship."
American consumers are now following in the footsteps of European consumers who are more likely to enjoy gourmet chocolate as part of their daily routine and not just during a special occasion. The same self-indulgence phenomenon that's causing people to spend three or four dollars on a cup of coffee is driving premium chocolate sales, particularly those of the small, portion-controlled packages.

Equal-Opportunity Chocolate
To a degree, consumer demographics for gourmet and premium chocolates overlap with demographics for the gourmet food market as a whole. Asians, for example, are not only prime consumers of gourmet/premium chocolates (at an index of 191), but are similarly overrepresented (an index of 187) among those who seek out gourmet foods.

Similarly, according to the Simmons survey, younger adults, those who are not married, college graduates or graduate degree holders, and renters or condo/co-op dwellers rank significantly above average as consumers of gourmet and premium chocolates in specific and of gourmet foods in general.

In Datamonitor's September 2005 IOS, 92 percent of respondents agreed with the statement that "premium consumers are no longer confined to the high income group,"" whereas our consumer survey indicates that indulgence is valued amongst low and high earners alike.

Consumers have become increasingly exposed to higher-quality products as they filter down from luxury segments to such an extent that they now expect mainstream products to be stylish and of higher quality. In Datamonitor's April 2005 IOS of respondents across all packaged good sectors, 84 percent agreed that "there is a rising set of expectations in the consumer marketplace, which means that what was once premium is now often mainstream."

McKinsey research in 2003 revealed that consumers have fundamentally changed their reference points for both price and quality and now view the value players as having caught up on "highest quality fresh foods" and "good store brands." With premium quality no longer reserved solely for the wealthiest consumers, the concept of premium (and its high-quality connotations) has become increasingly mainstream. University of Florida advertising professor James Twitchell dubs it the 'democratization of luxury.'

As Advertising Age (October 2004) states, "the debate is no longer about whether luxury and value can coexist in today's global marketplace; they can and they do." The Journal of Revenue and Pricing Management (2005) highlights how 'premiumness' takes on many different forms for different people and is "dependent on the mood and experience of the consumer."

Knowing your customers and the popularity of trends they'll be learning about through word-of-mouth and media influences is essential to the success of your chocolate sales. In addition, offering a broad selection of single-origin, Fair Trade and premium chocolates for customers to sample will help educate their palettes and help them discover their favorites. Plan on holding tasting seminars this fall to inspire gourmet holiday sales and everyday gifting occasions. In return for these simple sessions, your customers will repeatedly walk through your doors for their favorite chocolate selection and inadvertently shop the store for more.

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Chocolate Snapshot
Chocolate Moving Upscale: Chocolate is moving upscale, with varietals and chic pairings, along similar lines as wine and coffee.
Everyday Premium: The growth in gourmet chocolate can be attributed to what is called "Everyday Premium" and more mass-market channel sales in gourmet chocolate.
Single-Origin Chocolates: This trend, similar to that in the wine category, is gaining importance and serves as a differentiating factor at the market's premium end. The origin of ingredients and the chocolate-making process are important to a gourmet positioning.
Health Benefits: Dark chocolate is high in antioxidants, lowers blood pressure and LDL3 cholesterol and bestows cardio-protective benefits. A glut of publicity around recent studies on dark chocolate's health benefits is renewing consumer interest in these products.
Boomers: The younger population and women consumers are still the major demographic group driving growth in the premium chocolate segment in the U.S. However, though gourmet chocolate consumption remains low among Baby Boomers at present, aging Baby Boomers interested in healthier premium products and with ample disposable income to splurge on their indulgences are a key target consumer market.
Organic Chocolate: Driven by the health and wellness trend, organic and natural products are the growing categories in the confectionery segment, particularly organic chocolates that are growing by more than 50 percent.
Entry of Mainstream Marketers: The entry of major mainstream marketers, including Hershey's and Mars in the premium segment, is likely to drive additional growth. The gourmet chocolate market will see dynamic activity in the form of increased advertising and promotional initiatives and expanded retail reach.

Industry opinion concerning the 'most important' consumer group to target with higher-quality snacks and drinks products

Consumer group and % of respondents who felt the group was the 'most important'
Tweens and Teens (10-17 year olds) 10%
Young Adults (18-24 year olds) 36%
Early Mid-lifers (25-34 year olds) 18%
Late Mid-lifers (35-49 year olds) 50%
Seniors (aged 50+) 0%

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Source: Datamonitor Industry Opinion Survey, September 2005