Cargill’s three pillars of success for the chocolate industry
October 01, 2015
World Chocolate Forum - London’s British Library
Inge Demeyere, Managing Director Chocolate, Cargill
The chocolate industry faces stiff challenges – increased volatility, changing consumer preferences and more pressure from social media and regulators. But companies can thrive by sticking to three fundamentals. That was the message from Cargill’s Inge Demeyere in a speech Oct. 1 at the World Chocolate Forum in London.
Demeyere, Cargill’s managing director of chocolate for EMEA and Asia, said companies can boost margins and grow long-term business if they adhere to these vital pillars:
- Manage price risk
- Re-engineer your products
- Adapt to what the consumer needs
Demeyere outlined five major challenges and how manufacturers can overcome them. These are her prepared remarks:
I am very pleased to stand for the second time in front of you, here in London, on the occasion of the World Chocolate Forum. Since last year when we met, a lot of things happened. We have taken on ADM’s global chocolate business and we expanded Cargill’s chocolate plant in Mouscron, Belgium. We will keep going ahead on growing our chocolate business globally.
As you may know, part of the acquisition was a chocolate and compound facility in Liverpool, here in the U.K. The site is nicely set and dedicated to mostly serving British customers from within the confectionery market. And that’s the market I want to discuss with you today. So, let’s have a look:
To put it simply: it’s tough!
The chocolate confectionery market overall is facing a challenging environment, with margins grinding down. In Europe, after years of growth, total demand is now stagnating in volume terms. And more recently, demand in European export markets has dried up as well, mainly due to the adverse macro-economic situation.
We had a close look into this situation and have identified the following five challenges that I would like to share with you today.
First, the market is facing a situation where large branded players are working hard to gain increasing visibility. This can happen either by growing and enlarging their product portfolio or by strategically increasing the shelf space dedicated to their products with retailers or by sometimes aggressive promotions.
Secondly, within the retailer environment, we see an increasing activity of new private label brands across all markets. And what makes those retailer- or supplier-owned brands even more outstanding is that their appeal goes beyond price. In 2014, a Nielsen report indicated that consumers are seeking quality and value – and private labels deliver on both of these attributes. Two-thirds (67 percent) of consumers believe private labels offer extremely good value, and 62 percent of them say buying private labels makes them feel like a smart shopper. In only five years, from 2010 to 2015, private labels have grown value by over 20 percent.
The third challenge, and you are very much aware, is the profound change in lifestyle, with consumers aiming for increased differentiation. Consumers are better informed nowadays, and they are concerned about what is in their food and about the future. Families and households want their food to taste good, be authentic and be of good quality.
Ultimately, consumers want to do well: They worry about the environmental and societal impact of the food they buy, so they want it to be grown sustainably and responsibly to ensure it can be enjoyed in the future. (And with regards to our concerns on sustainability, let me just refer back here to the work UTZ does and the industry initiative Cocoa Action, which we actively support with our Cargill Cocoa Promise.)
On top of the sustainable supply chain, consumers more often than before opt for a more-balanced, healthier food intake. They want their food to be good: healthy, without complex sugars, salt or fats. Therefore, an increasing number of snacks today are built around dried fruits, cereals or protein, allowing for consumers to manage their energy intake differently. While this is not a “new” trend, it now has become mainstream and applies as much to A brands as to private labels.
In addition, social media play an increasing role in the public debate. They amplify networks, messages and calls for transparency. Consumers today have a channel to raise their voices and they increasingly are using it. Regular citizens are highly receptive to messages from all kinds of experts or celebrities. Just look at the buzz somebody like Jamie Oliver and his “Healthier Happier You” campaign are able to generate.
And this brings me to the fourth challenge: increased pressure for the regulatory environment. The public debate around fat, salt and sugars leads legislators in many countries, including here in the U.K., to remove confectionary items from cash points in supermarkets, for example. We have also seen major changes in terms of communication on health claims and advertising of sugar or fat rich products to children.
So let me recap:
One, we have a more-competitive environment with A brands and secondly, private labels gaining traction. Three, we see a fundamentally changing consumer behavior and, we have an increasingly constringent legal environment.
So now is the time to look into our next challenge: We need to talk about raw material cost.
Prices for raw materials have skyrocketed in recent years, driven by uncertainties on the supply side with issues like Ebola, the Ghana crop failure and aging trees with decreasing productivity. Confectionary manufacturers are particularly exposed to the high cocoa bean prices, as chocolate could make up to 100 percent of your end product. And as it is rather difficult to pass on price increases to your customers or end consumers, your margins are under pressure.
I told you: It is tough.
So what is the best way forward?
It is by helping our customers' business thrive that we built our capabilities in cocoa and chocolate for the last 50 years, and for 150 years as a company overall. We can say we are both the solid partner our customers can count on and agile, constantly anticipating our customers’ needs and improving our products, services and application expertise.
Thanks to our in-depth knowledge of the food, cocoa and chocolate markets, I believe that we have a pretty good idea on the price drivers for chocolate in the confectionery market and how we use that knowledge to help our customers.
So let me explain three vital pillars which I believe have the potential to significantly impact margins and help you grow a long-term sustainable business.
- First it’s about managing the risk associated with the cost of your raw materials.
- Then, you will have to grow all opportunities you have to re-engineer your products.
- And finally, you must look into what we call the “consumer-needs-adaptation”, which you achieve by up-grading and innovating.
Let’s start with managing price risk.
Basically, this is when you manage to buy your raw materials like cocoa, milk or sugar at the right time and at the right price. The objective is to end up with a consumer price that ensures adequate margins for you. And getting this right is a challenge. Therefore, it is a risk.
We define “risk” as the exposure to uncertainty that may lead to significant losses or gains.
Price volatility – or variance in the price of your major raw materials: cocoa beans, milk, and sugar – can be a risk, as there may be major variances between the moment where you buy your raw materials and the moment you sell the end product.
In 10 years, since 2005, the price of the ingredients for dark chocolate increased more than 60 percent and there is a 40-point gap with milk chocolate.
Volatility in agricultural commodity markets exists because it is driven by supply and demand fundamentals. It has always been inherent in agriculture. Just think about the immediate impact of weather on the crops and structural changes in finance or politics.
Now at Cargill, we are tracking cocoa- and chocolate-related trade flows in over 80 countries! Our supply and demand team monitors the processing economics, storage and production capacity of the entire industry. Our systems continuously aggregate data on bean stocks, grind, press and industrial chocolate across our customers, competitors and partners. We track global consumption data for major food and beverage categories and analyze the earnings of major confectionary manufacturers and industry peers. And as other non-cocoa ingredients are also very volatile, we integrate dairy, sugar and refined oils into our research.
In other words, we do have a pretty profound knowledge of price risk, demand and supply, and we use exactly that information to help our customers in their buying strategy. I will be happy to give you more details about Cargill’s risk management capabilities, which also happens to be one of my personal passions. But what is really essential for you to remember is: To get things right, you need to buy at the best price and at the right time. And the appropriate risk management tools will improve predictability and the decision making process within your organization.
Let us now go to the second pillar, which, for you as the experts, will speak to your hearts. It is all about re-engineering the value of your products to help you address the market challenges. Let me explain:
Take any of your regular products, and have a look at it. Have a very close and detailed look at all the different facets of your product. Have a look at the ingredients, the features.
Then stand back, and take a holistic approach. Try to understand how the combination of all aspects plays together, benchmark it with competing products, look what you can optimize and then map your formulation again with your consumer needs.
“In nature, we never see anything isolated, but everything in connection with something else which is before it, beside it, under it and over it,” said Wolfgang von Goethe some 200 years ago. So looking at your product, you will understand the multiple interactions that exist between your different ingredients.
And there is a multitude of options to play with:
- You can add one or more ingredients to your original product and promote those as new, or enhanced. This way, you can focus on what consumers are looking for.
- Alternatively, you can remove ingredients, and primarily remove those that consumers do not care about, and thereby reduce cost.
What is essential in value engineering is to see the opportunities you may have by playing with the interaction of our senses and by working on smell, sound, color, taste and texture. You explore opportunities to reduce production costs, you work on the reformulation of your product ingredients and you rethink the impact of any claims you may have.
I said this before: at Cargill, we collect a world of data from around the industry. What we do with all of that data is we integrate this extensive food knowledge into a unique structure: the T-model. The “T” symbolizes the depth and breadth of all our capabilities that can help you grow your business by providing a steady flow of new ideas for food manufacturers – from product concepts and improved recipes to breakthrough innovations. And we also provide a broad range of insight from across the food ingredient sector, with a direct access to a large ingredient portfolio. This means that can we find solutions to complicated requests and deliver innovations for all kinds of chocolate applications.
With one of our customers, we achieved a track record of 30 percent cost reduction on the recipe of the end product! And with other customers, we strengthened claims like “origin cocoa beans,” “100 percent cocoa butter,” “Belgian chocolate” or “Alpine milk” and redesigned products that really catch consumer attention and generate financial returns.
So now that you have bought your raw materials at the right time and the right cost, and re-engineered the value proposition of your product, let’s have a look at the third pillar. It is what I referred to as “consumer-needs-adaptation.”
Basically, this comprises two steps:
- One is the “premiumization” or upgrade of your product positioning.
- The other is about innovation in product marketing.
In a recent report, I read the sentence “seasonal chocolate acts as guilt-free excuse for consumers who reward themselves.” I love this kind of description, as this means that our products are seducing and generally overcome criticism. And they associate chocolate with positivity, pleasure or delight.
The current economic environment is prone for consumers who are sensitive to greater indulgence, and that asks for greater exclusivity. By going premium, you will stimulate demand for dark chocolate, chocolate with origin labels or variety of beans with extended conching. Moreover, consumers will be prepared to pay a little extra for premium products, as it is their special treat. An opportunity to push on price increases in raw materials.
Let me just refer to the Lindt Excellence portfolio, which is a perfect illustration of a product range that consciously conveys this idea of “a little exclusive treat is OK.” I believe you are all aware of the extraordinary growth they have made in the last couple of years.
Alternatively to the “premiumization,” you can do innovation in product marketing and promote existing features of your product and promote health and wellness – working along the chocolate’s functionalities, like clean labels or more balanced ingredients, like stevia. Or you can use in-depth market insights to promote novelty, flavor or color to amplify consumer experience.
In summary, there are a great lot of things that can be done, that you as a manufacturer can act upon to improve your product, strengthen your market position and, foremost, address your customer loyalty.
Dear friends, let me remind you: despite the challenging environment, with ever-changing consumer trends and price volatility for your raw materials, always think about the three pillars:
- Manage price risk
- Re-engineer your products
- Adapt to what the consumer needs
I believe then you are on a good track to preserve your margins and ensure a sustainable long-term business.
Is this not a great market to be in?