In July last year, Ferrero - which uses hazelnuts in Nutella, Kinder Bueno and Ferrero Rocher - acquired Turkey’s leading supplier Oltan soon before prices for the commodity hit record-highs.
Taking supply chain control
“I think we’re going to see a lot more acquisitions of companies securing their supply chains,” Jack Skelly, food analyst at Euromonitor, told ConfectioneryNews.
He said chocolate companies face pressure from practically all of their major commodities including cocoa, sugar, milk, palm oil and hazelnuts.
Sugar prices are rising, but shouldn’t pose a problem as the commodity is still so cheap, he said. “Cocoa prices are the main one – they’ve doubled in the past 10 years,” said Skelly. “Palm oil prices have also doubled in the past 10 years.”
However, the analyst said many chocolate companies such as Mars, Ferrero and Hershey were moving away from palm in favor of other vegetable oils to earn a “CSR badge”.
Palm oil cultivation has long been tied to deforestation in the developing world and destruction of animal habitats.
Skelly said Ferrero was disproportionately affected by palm oil prices as it was heavily used in spreads such as its Nutella brand.
Wholesale price hikes must be justified
Euromonitor says product downsizing, increasing wholesale prices and reformulation could also help chocolate confectioners overcome future commodity price hikes.
“The best strategy is to up unit prices, but justify it,” said Skelly.
Major producers such as Hershey, Nestlé, Mondelēz and Mars Chocolate North America raised wholesale prices last year, which led in most cases to retailers passing the cost on to consumers.
Analysts said consumers had responded negatively in markets such as the UK, where retail value sales for chocolate confectionery fell in the period after the price hikes.
Skelly said consumers would only accept higher prices if a manufacturer upped the value proposition by for example offering bite-sized options as Mondelēz International successfully did with Wispa Bitsa in the UK, a brand which significantly outgrew the overall market.
“You can put unit prices up but you get to a point when the price is too expensive and it puts people off,” said Skelly.
He added consumers would be frustrated if a product was downsized but the price remained the same.
Cocoa and palm oil price forecasts
The International Cocoa Organization (ICCO) has forecast a 38,000 metric ton (MT) supply/demand deficit for the current crop year 2014/15 due in part to unfavorable weather in number two producing nation Ghana.
The ICCO daily cocoa price (which combines NYSE Liffe Futures and Options and ICE Futures US averages) currently stands at $3,159 per MT, around the same level as the average for June 2014, but 38% higher than the June 2013 average.
Rabobank predicts palm oil prices will remain at around MYR 2,100-2,200 per MT for the next five quarters.