The Market for Differentiated Cocoa 1

8/13/2019 The Market for Differentiated Cocoa 1

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The Market for Differentiated Cocoa:A Market Opportunity Assessment for Small

Cocoa Grower Organizations

Seth Petchers

DRAFT


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Table of Contents

GLOSSARY OF TERMS ............................................................................................................................ 3

EXECUTIVE SUMMARY.......................................................................................................................... 5

1. DIFFERENTIATION AND COMPETITIVE ADVANTAGE ............................................................ 8

DIFFERENTIATION AND VALUE ADDITION IN AGRICULTURAL MARKETS.................................................... 8DIFFERENTIATION AS AN OPPORTUNITY FOR COCOA PRODUCERS .............................................................. 9

2. OVERVIEW OF VALUE CHAIN FROM EXPORT TO CONSUMER PRODUCTS ................... 10

DEALERS ................................................................................................................................................... 10PROCESSORS ............................................................................................................................................. 11CHOCOLATE MANUFACTURERS................................................................................................................. 11CHOCOLATE MARKETERS ......................................................................................................................... 11COCOA INGREDIENTS DISTRIBUTORS ........................................................................................................ 12FOOD MANUFACTURERS ........................................................................................................................... 12IMPLICATIONS OF SUPPLY CHAIN STRUCTURE ON DIFFERENTIATION STRATEGIES AND OPPORTUNITIES.. 12

3. OPPORTUNITIES FOR DIFFERENTIATION................................................................................. 14

EXISTING OPPORTUNITIES......................................................................................................................... 14Fine Flavor and Quality....................................................................................................................... 14Organic Certification ........................................................................................................................... 16

Fair Trade ............................................................................................................................................ 17

EMERGING TRENDS ................................................................................................................................... 18Single Country of Origin ...................................................................................................................... 18

Single Estate......................................................................................................................................... 19FUTURE POSSIBILITIES .............................................................................................................................. 19

Appellation d'Origine Contrle for Cocoa..................................................................................... 19

Other Social and Environmental Certification..................................................................................... 20A WORD OF CAUTION: RETURN ON INVESTMENT IN AN ENVIRONMENT OF SMALL MARKETS ................. 24

4. MARKET SEGMENT PROFILES ...................................................................................................... 25

THE RETAIL MARKET FOR CHOCOLATE .................................................................................................... 25Market Definition ................................................................................................................................. 25

Mass Market vs. Gourmet..................................................................................................................... 26

Market Size and Growth....................................................................................................................... 26Product Trends..................................................................................................................................... 27

Industry Use of Cocoa Ingredients....................................................................................................... 29THE MARKET FOR SWEET BAKED GOODS ................................................................................................. 29

Market Definition ................................................................................................................................. 29

Mass Market vs. Gourmet..................................................................................................................... 29

Market Size and Growth....................................................................................................................... 30

Product Trends..................................................................................................................................... 30

Industry Use of Cocoa Ingredients....................................................................................................... 31THE MARKET FOR ICE CREAM AND OTHER FROZEN DESSERTS ................................................................ 31


Mass Market vs. Super-premium.......................................................................................................... 32


THE MARKET FOR DAIRY BASED AND ALTERNATIVE DAIRY BEVERAGES................................................ 33Market Size and Growth....................................................................................................................... 33Product Trends: Ready-to-Drink.......................................................................................................... 34

Product Trends: Flavorings ................................................................................................................. 34


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Product Trends: Alternative Dairy....................................................................................................... 35THE MARKET FOR BODY CARE PRODUCTS ............................................................................................... 35



Industry Use of Cocoa Ingredients....................................................................................................... 37CONCLUSIONS ........................................................................................................................................... 37

5. OTHER ISSUES AFFECTING THE MARKET ................................................................................ 39

INDUSTRY RESPONSE TO SLAVE LABOR ALLEGATIONS ............................................................................ 39Background .......................................................................................................................................... 39Implementation of the Protocol ............................................................................................................ 40

Industry Response to the Findings........................................................................................................ 40Criticism of the Industry Report and Response .................................................................................... 40

Implications for Marketing Cocoa........................................................................................................ 41THENATURAL AND ORGANIC PRODUCTS BOOM....................................................................................... 42



SMALL PROCESSORS AND CHOCOLATE MANUFACTURERS ON THE HORIZON? .......................................... 44

WORLD COCOA PRICE OUTLOOK.............................................................................................................. 45

6. RECOMMENDATIONS....................................................................................................................... 48

QUALITY ASSESSMENT.............................................................................................................................. 48ACCESSING THE MARKETS FOR CERTIFIED PRODUCTS.............................................................................. 49SINGLE ORIGIN AND ESTATE BRANDING................................................................................................... 50STRATEGIC CORPORATE PARTNERSHIPS ................................................................................................... 51A NOTE ON PERCEPTIONS OF LABOR CONDITIONS.................................................................................... 52NEXT STEPS: SELF ASSESSMENT FOR DIFFERENTIATION OPPORTUNITIES................................................. 52

APPENDIX 1 .............................................................................................................................................. 53

SELF ASSESSMENT FOR DIFFERENTIATION OPPORTUNITIES

APPENDIX 2 .............................................................................................................................................. 56PRODUCTION/ EXPORT OF FINE FLAVOR, ORGANIC, AND FAIR TRADE CERTIFIED COCOA BEANS BYCOUNTRY

APPENDIX 3 .............................................................................................................................................. 57

EXAMPLES OF TERROIR (SINGLE ORIGIN AND ESTATE) CHOCOLATES

APPENDIX 4 .............................................................................................................................................. 58

GUITTARD PROPOSAL LETTER

APPENDIX 5 .............................................................................................................................................. 62

NATURAL FOOD PRODUCTS CONTAINING COCOA INGREDIENTS

APPENDIX 6 .............................................................................................................................................. 63

BEN & JERRYSNEW SOCIALLY ALIGNED SUPPLIERS SCREEN

REFERENCES ........................................................................................................................................... 65


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Glossary of Terms

Cocoa Butter: The fat obtained by pressing cocoa liquor. Cocoa butter is used to makechocolate, as well as some cosmetic products and baked goods.

Cocoa Cake: The residual product left after cocoa butter has been pressed from cocoaliquor.

Cocoa Nibs: Roasted cocoa beans separated from their husks and broken into smallpieces.

Cocoa Liquor: The product obtained from cocoa beans after they are roasted, husked, andground. Cocoa liquor is the main cocoa ingredient in chocolate. It is sometimes referredto as cocoa mass or cocoa paste.

Cocoa Powder: Ground from cocoa cake, cocoa powder is used as an ingredient in foods.

It is often used as a beverage flavoring, and is a common ingredient in ice cream andbaked goods.

Commodity Cocoa: Undifferentiated cocoa priced on the basis of the New York orLondon exchanges, not on the basis of unique attributes or its value as a uniqueingredient to manufacturers, marketers, or consumers.

Compound Annual Growth Rate (CAGR): Compound annual growth rate is the rate atwhich a given value would grow each year to reach a given future value over a specifictime period.

Consumer Products: Products produced for purchase and consumption by individualconsumers, as opposed to products used by manufacturing or other types of firms.

Couverture: A glossy, professional-quality coating chocolate that typically contains atleast 32 percent cocoa butter. Couverture is typically sold in blocks or in drops (i.e.,chips) and then melted for use in molds or as a coating.

Fair Trade Certification: The most well known system for social auditing of the globalsupply chain. Fair trade standards guarantee a minimum FOB price, as well as specificlabor conditions and other terms of trade. In the US, TransFair USA, the US affiliate ofFairtrade Labelling Organizations, is the agency that provides fair trade certification.

Free on Board (FOB): A pricing term used in contractual transactions indicating that thequoted price includes the cost of loading the goods into transport vessels at a specifiedplace.

Genetically Modified Organism (GMO): plants and animals that have been geneticallyaltered by the addition of foreign genes to enhance a desired trait (e.g., increasedresistance to herbicides or improved nutritional content).


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Gourmet: The label "gourmet" is subjective, but in general, gourmet foods are perceivedto have higher quality, more limited production, and more limited distribution than mass-market foods. In different industries, the terms gourmet, specialty, and premium are usedinterchangeably.

Marketers: In the context of this report, marketers are companies that market and sellconsumer products.

Natural Products/ Ingredients: Though not a regulated term, natural typically denotesgoods that are free of additives, contain no artificial ingredients or preservatives, and areminimally processed.

Organic Certification: Now regulated in the US by federal guidelines, organiccertification guarantees that no chemicals were used in the growing, processing, ormanufacturing of a product.

Pallet: The platform, typically constructed from wood, on which goods in a warehouseare often stacked to facilitate easy transport by forklifts or other machinery. In thecontext of this report, pallet quantity is used to distinguish purchases of smalleramounts of cocoa ingredients from larger quantities that would be shipped alone in ashipping container. The distinction is important because shipping smaller quantities istypically less cost efficient than shipping larger quantities.

Prestige Products: Much like the term gourmet in the food industry, the term prestigein the body care market refers to products that are higher-priced and sold mainly indepartment and specialty stores.

Single Estate Chocolate: Chocolate manufactured from cocoa that comes from a singleestate or cooperative.

Value Proposition: The unique added value a company offers customers through itsproducts, services, or operations.


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1) who is looking for those characteristics, 2) how to communicate with those buyers, and3) how to create (or work within) supply chains to get ones cocoa to those buyers.

Overview of Value Chain from Export to Consumer Products

One of the major challenges to adding value at the cooperative level is the number oflinkages in the value chain. From the time of export to distribution of consumerproducts, the chain includes some combination of dealers, processors, manufacturers,ingredients distributors, and marketers. The length of the supply chain has importantimplications on differentiation strategies for cocoa growers. Consumer productsmarketers, likely the most interested in differentiated cocoa, often have little control overwhere cocoa beans are sourced. This problem is exacerbated by the minimum productionruns often imposed by processors and manufacturers. Further, the lengthy supply chainalso makes communication between cocoa growers and marketers difficult. Thus, it isdifficult to make a differentiated value proposition to marketers. Nonetheless, examplesof marketers who have successfully worked with suppliers to source cocoa from

particular sources do exist.

Opportunities for Differentiation

In spite of the structural hurdles of the supply chain, industry experts and buyersinterviewed for this study generally saw opportunities for differentiation that couldbenefit cocoa growers, as well as product manufacturers and marketers. However,initiatives to create differentiation at the cooperative level as a means to add value tococoa must be devised such that they meet the demands of the market. Conversationswith key players in the chocolate and food industries suggest that the differentiationopportunities with the most market potential include high quality, single origin and singleestate branding, organic and fair trade certification. Over time, other opportunities

could include government sponsored systems to certify unique, regional cocoa origin ornew types of social or environmental certification systems.

When considering investment in any differentiation strategy, growers should understandthat implementation does not guarantee markets for cocoa sold at a premium. Thus,cooperatives must carefully analyze their ability to access differentiated markets andmake a realistic comparison of investment in differentiation and expected returns beforemoving forward.

Market Segment Profiles

Chocolate manufacturers provide the bulk of the market for processed cocoa. However, asubstantial market for cocoa products exists in consumer goods markets other thanchocolate, including baked goods, dairy products, and body care products. The health andtrends of each of these industries will likely influence their level of interest indifferentiated cocoa. While the mainstream segments of most cocoa using industrieshave matured to the level of price competition (i.e., products competing on price ratherthan uniqueness) certain segments of the markets, particularly the gourmet and naturalproducts segments, are still open to product differentiation. These are the segments that


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are looking for high quality, branded, and certified ingredients and could be willing topay a premium for unique cocoa and chocolate.

Other Issues Affecting the Market

While the key factors that should contribute to cooperatives differentiation strategies arethe industry and market trends, some additional factors are important to consider. Ofparticular interest are recent developments regarding concerns over the use of child laborin the production of cocoa in West Africa. While Central America was not singled out asan area of specific concern, media coverage and the potential for Congressional actionhas made the chocolate and cocoa industries particularly sensitive about the issue of laborconditions. Also important is the boom in the natural and organic product markets, whichhas resulted in mainstream consumer consciousness about natural and organic productsthat has translated into increased, mainstream supermarket shelf space. Specific to thechocolate market, there are rumblings of an up-and-coming presence of small processorsand manufacturers. This could create an import market opportunity for growercooperatives. Finally, the relatively flat world price for cocoa appears reasonablyconducive to differentiation strategies, although cooperatives should watch pricemovement and consider potential implications on customer willingness to pay pricepremiums for unique cocoa.

Recommendations

Every cocoa producer organization finds itself with a unique set of resources, challenges,and priorities. Add to that the specific characteristics associated with the cocoa theorganizations farmers produce and it is clear that there can be no single prescription for adifferentiation strategy. Nonetheless, current market conditions suggest several generalareas in which cocoa cooperatives can look for differentiation opportunities. In order to

take advantage of these opportunities, cooperatives can consider a number of initiatives,some of which include quality assessment and improvement, accessing certified markets,incorporating single origin and/or single estate concepts into a branding initiative,pursuing strategic corporate partnerships via NGOs or specialized dealers, andproactively preparing for questions concerning labor conditions of farmer members andcooperative employees.


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1. Differentiation and Competitive Advantage

For many of the worlds cocoa producers, the price received for each years crop isdetermined in large part by commodity pricing systems, specifically the New York Board

of Trade (NYBOT) and London International Financial Futures and Options Exchange(LIFFE) exchanges. By definition, commodity products are largely homogeneous. Assuch, commodity pricing revolves around worldwide cocoa supply and demand, largelyignoring differences attributable to where cocoa comes from, how it is grown, or whogrows it.

The notion of value addition through differentiation is a foundation of productdevelopment and marketing and is widely accepted both in business practice and theory.A differentiated product is one that has unique characteristics real or perceived thatcan be used to position it in such a way that it holds added value for a particular group ofbuyers. That added value translates into consumers willingness to pay a premium above

the commodity price for the product. In his pioneering work in the field of businessstrategy, Porter (1980) identifies product differentiation as an effective means for creatingcompetitive advantage (i.e., earning above average profits). He suggests that competitiveadvantage creates a defensible position for coping with five competitive market forces industry competition, supplier power, buyer power, potential market entrants, andsubstitute products. Building on the premise that competitive advantage yields sustainedprofits, Grant (1991) also asserts that differentiation is a key to creating sustainable,competitive advantage. Included in his discussion is the well-accepted theory that valueis added to products through the process of matching consumer needs and interests withproduct attributes and associations. Relevant to evaluating opportunities for cocoagrowers to add value through differentiation, Grant uses a value chain analysis to showhow drivers of uniqueness incorporated at the bottom of the value chain can add valueto consumer products.

Differentiation and Value Addition in Agricultural Markets

More recently, scholars and marketing experts have begun to incorporate the generalprinciples of differentiation and value addition into the fields of agricultural economicsand agricultural extension. Barone and DeCarlo (2003) liken the challenges ofdifferentiating agricultural commodities (i.e., products that lack physical productdistinction) to those facing producers and marketers of products in mature, non-agricultural industries. Hayes et al (2003) affirm the typical commodity farmers statusas a price taker and then proceed to describe how farmer owned branding, a form ofdifferentiation, transforms farmers into price makers.

Several authors expand on the notion of value addition as a way for farmers to capturelarger portions of retail prices. Ellerman (2003) shows that the portion of the consumersdollar that reaches the average US farmer decreased from 40 percent in 1910 to 10percent in 1990. He then suggests that while value addition will not likely raisecommodity prices, farmers can use value addition to increase their share of products


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retail prices. Focusing specifically on value addition through brand development,Giddens (2002) suggests that branded agricultural products command a price premiumfrom retailers because they stimulate increased consumer spending. Specifically pertinentto this paper, Barone and DeCarlo (2003) write that promotional focus on non-physicalattributes and association with some type of quality guarantee are particularly useful for

distinguishing agricultural commodities and thus adding value.

In an attempt to show why the market will support a price premium for branded and othertypes of value-added food products, Coltrain (2002) cites data that show relativelyconstant real-food prices from 1960 through the present and a 300 percent increase in theaverage US households expendable income over the same period. These trends, suggestthe author, have left consumers less sensitive to the price of food than in the past andmore willing to pay a premium for high quality, convenience and gourmet branding.

Differentiation as an Opportunity for Cocoa Producers

The evolution of the chocolate and cocoa-based ingredients markets in the US has begunto open up new opportunities for cocoa producers to differentiate their cocoa. Withgrowing markets for gourmet, natural, and environmentally and socially responsibleconsumer goods, marketers are open to new ideas for differentiating their products,including the use of unique chocolate and cocoa as an ingredient. On the producer end ofthe value chain, successful differentiation requires a balance between production of cocoawith truly unique characteristics and enough of an understanding of the market to know1) who is looking for those characteristics, 2) how to communicate with those buyers, and3) how to create (or work within) supply chains to get ones cocoa to those buyers.


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2. Overview of Value Chain from Export to Consumer Products

One of the major challenges to adding value at the cooperative level is the number oflinkages in the value chain. In order to begin to think about alternatives to the status quocommodity sourcing model it is important to understand to whom differentiation

matters. As subsequent sections will illustrate, the most fruitful opportunities to marketdifferentiated, value added cocoa will likely involve an active effort to coordinate with anumber of companies at different levels of the chain. As such, an understanding of thedifferent roles of companies in the chain is crucial. Box 2.1 puts the followingdescriptions into the context of the entire supply chain.

Dealers

In the most typical types of transactions,cocoa dealers are the first intermediariesto take possession of cocoa from the

exporting agent. Few dealers areinvolved with the processing of cocoabeans or the manufacture of chocolatecouverture, cocoa based ingredients, orfinished consumer products. The vastmajority of cocoa beans purchased bydealers are for use in mass marketingredients and consumer products.1Suchtransactions most often involvecommodity cocoa and thus anydifferentiation of cocoa beans will be oflittle importance. Yet even in the case ofcocoa purchases for use in fine flavor anddifferentiated ingredients and consumerproducts, the fact that the dealers are sofar removed from the manufacture andsale of consumer products has importantimplications for the cocoa exporter andproducer looking to differentiate. Asboth a dealer specializing in fine flavorcocoa and US manufacturer of gourmetchocolate describe, most dealers are notconcerned with differentiation based onquality or other factors above and beyondtheir customers requirements.2 This does

1According to the International Cocoa Organization and the US Department of Agriculture, only 3.2% ofthe worlds cocoa production in 1998/1999 was considered fine-flavor cocoa, the category typically (butnot exclusively) associated with gourmet chocolate and cocoa ingredients (International Trade andDevelopment Centre UNCTAD/WTO, 2001).2Discussions with these industry sources and others cited in this paper were conducted by phone during thewinter and spring of 2004.

Box 2.1

The Typical Roles Played in the Supply Chain

Cocoa

Exporter

Dealers

Cocoa

Ingredients

Distributors

Retail

Outlet

Food

Manufacturers

Consumers

Processors

Chocolate

Manufacturers

ChocolateMarketers

Food

Distributors


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not suggest that dealers do not contract and sample for quality or require proof of originor certification. However, it is the manufacturers and marketers who are the drivers ofthe market for differentiated cocoa and who should be the target audiences ofdifferentiation strategies.

Processors

Cocoa processors, sometimes referred to as grinders, roast beans and convert them intonibs, liquor, butter, cake and powder. The cocoa and chocolate industries differentiatebetween processing and chocolate manufacturing. While some of the major cocoaprocessors also manufacture chocolate, the majority of companies that manufacturechocolate do not have the capacity to process beans.3 Of the companies that serve bothfunctions, very few manufacture consumer products in the US. Processors domanufacture cocoa powder in finished form, yet as is the case with chocolate, fewprocessors market consumer cocoa powder products.4

Chocolate Manufacturers

With the exception of the small number of companies that process andmanufacturechocolate, chocolate manufacturers purchase cocoa liquor and butter from cocoaprocessors. It is as this stage in the value chain that significant choices about quality andorigin are made. Manufacturers develop recipes that include various combinations ofcocoa liquors and butters to create specific flavor profiles. Typically, manufacturers willcreate recipes that incorporate multiple origins. However, gourmet manufacturers areresponding to a new and growing trend for single country of origin and even single estatechocolate.

Chocolate Marketers

Much of the chocolate sold in the US is marketed by companies that either purchasefinished products (e.g., chocolate bars or chocolate drops) from manufacturers orpurchase bulk chocolate in solid or liquid form and then mold and package it themselves.In either case, marketers often choose the chocolate for their products from a selection ofstandard chocolate recipes regularly produced by chocolate manufacturers. Becausethese chocolates are produced in large quantities, marketers benefit from scale pricingand are not faced with large minimum run requirements. Should a marketer choose tohave chocolate manufactured to unique specifications, they must meet minimum runrequirements and pay for the costs associated with cleaning equipment. Because of thisdynamic, small chocolate marketers often have little control over the specific origin and

quality of the cocoa used in their products. They do, however, control their own brands

3Notable exceptions of processors who also manufacture chocolate in the US are ADM, Cargill, Nestle,Hersheys Chocolate, Worlds Finest Chocolate, Blommer, Guittard, and Scharffen Berger. Of thesecompanies, only Nestle, Hersheys Chocolate, Worlds Finest Chocolate, Guittard and Scharffen Bergermarket consumer chocolate products.4Hersheys, Nestle, and Scharffen Berger are the only US processors who market cocoa powder toconsumers.


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and positioning strategies and can thus incorporate the attributes of the cocoa intopackaging and advertising to the extent that they are aware of its origin.

Cocoa Ingredients Distributors

Many small and medium sized consumer products food manufacturers purchase smallquantities of cocoa ingredients from wholesale ingredients distributors. This isparticularly true of small bakeries, which purchase from large, national distributors,specialty distributors that deal with niche markets like organic, and small, localdistributors. Larger distributors typically buy ingredients from processors and chocolatemanufacturers in container loads and often break up or repack them for resale. Dealingwith these quantities, large distributors may have some amount of control over the originsof the cocoa used in their ingredients products. Smaller distributors buy in palletquantities and break them up to sell to small customers interested in a single 55 lb. bag ofcocoa powder or box of chocolate chips. These companies have much less market powerthan their larger competition and thus, like food manufacturers and small chocolate

marketers, have little influence on the source of the cocoa used in their products.

Food Manufacturers

Like chocolate marketers, manufacturers of food products like ice cream, cookies, andchocolate milk are dependent on other companies for the chocolate and cocoa ingredientsthey use in their products. To minimize costs, it is typical for food manufacturers tochoose chocolate and cocoa ingredients manufactured to a standard set of specificationsrather than to have ingredients manufactured to unique specifications. According to theCEO of one high profile organic food marketer, buying chocolate ingredients made tostandard specifications makes it nearly impossible to choose the source of the cocoabeans used in the manufacturing. That said, as questions about forced child labor in cocoaproduction have recently been raised, many companies express interest in sourcing fairtrade certified ingredients if the quality is comparable to other products and theingredients are available through typical suppliers. This example suggests that whilethere are supply chain hurdles to navigate, interest in differentiated products made fromdifferentiated cocoa does exist.

Implications of Supply Chain Structure on Differentiation Strategies and

Opportunities

The number of stages in the cocoa and chocolate supply chain alone makes the process ofcocoa differentiation difficult. Unlike the supply chain in the specialty coffee market, in

which a producer cooperative could, in theory, put ten sacks of green coffee on anairplane bound for a small roasters home town, the process required to transform cocoabeans into consumer products almost always involves several companies. Ironically, thecompanies most likely to be interested in using differentiated cocoa are small companieslooking to differentiate their own products in a market dominated by larger players. Bynature of their limited buying power, these small companies find it difficult to play asignificant role in choosing the source of the cocoa used in their products.


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One of the biggest factors contributing to this dynamic is the minimum run requirementsof processors and manufacturers. In order to specify a unique cocoa source, processorsgenerally require minimum runs of at least one container (i.e., 12.5 metric tons orapproximately 27,500 pounds). For a chocolate manufacturer or marketer, this representsroughly 17,500 kilograms (38,500 pounds) of dark chocolate or 27,000 kilograms

(60,000 pounds) of milk chocolate.

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While these quantities may be insignificant for a large chocolate marketer, a smallcompany wishing to maintain a diverse product range would have difficulty meetingthese minimum requirements. Even if the differentiated cocoa beans were already in thesupply chain, marketers face minimum run requirements from manufacturers. Onegourmet manufacturer said that his companys minimum run to produce chocolate from aunique source would be approximately 6,000 pounds. In terms of quantity this would befar more manageable for a small marketer than the chocolate produced from a fullcontainer of beans. However, the manufacturers costs for cleaning machinery andswitching to a unique cocoa source could make such small production runs infeasible.

Despite these structural challenges, there are marketers who have managed to findsolutions that enable them to specify the source of the cocoa used in their products. TheDay Chocolate Company, Dagoba Organic Chocolate, and Newmans Own Organics(none of which process or manufacture beans or chocolate) all specify the source of thecocoa for their chocolate from small farmer cooperatives of their choosing.

Above and beyond the challenges inherent in production, the length of the supply chainhas historically prevented communication between marketers and producers. From theperspective of the marketer, this makes it difficult to identify producers who can providedifferentiated cocoa that meets specified criteria. From the perspective of the producers,this makes it difficult to understand what types of differentiation the market is looking forand to know which companies to approach with unique value propositions.

5Rough approximation based on a discussion with a representative from the Barry Callebaut chocolatecompany.


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3. Opportunities for Differentiation

In spite of the structural hurdles of the supply chain, industry experts and buyersinterviewed for this study generally saw opportunities for differentiation that couldbenefit cocoa growers, as well as product manufacturers and marketers. However,

initiatives to create differentiation at the cooperative level as a means to add value tococoa must be devised such that they meet the demands of the market. A key question isthe degree to which markets are looking for and are open to specific differentiators.Conversations with key players in the chocolate and food industries suggest that thedifferentiation opportunities with the most market potential include high quality, singleorigin and single estate branding, organic and fair trade certification. As newinitiatives are launched, other opportunities for differentiation may become viable.

Existing Opportunities

While many unique opportunities to add value to cocoa beans may exist, those with themost proven track records in the US market are high quality/fine flavor, organic certified,

and fair trade certified. Appendix 2 shows production (or export in the case of fair trade)of fine flavor, organic, and fair trade beans by country.

Fine Flavor and Quality

When asked for their opinions about the most important value added trends, nearly all ofthe industry sources from the gourmet segment of the chocolate market spoke first aboutfine flavor cocoa and quality. The chocolate and cocoa industries characterize criollo,trinitario, and the Ecuadorian grown nacionalsub-species offorasterobeans as fineflavor. Ordinaryforasterobeans are not considered fine flavor (chocophile.com, 2004).

From the perspective of the grower, the ability to tap into the fine flavor marketsrepresents an opportunity for significant premiums above commodity pricing. Whilepremiums for fine flavor cocoa vary widely, the FOB price for some beans can reach upto $800 per metric ton more than the New York or London exchange prices in the mostextreme cases.6 The premiums paid for fine flavor beans are supported through pricepremiums paid for gourmet chocolate and cocoa in the consumer goods market. AsTable 3.1 illustrates, gourmet chocolate bars (typically made with fine flavor beans) retailat prices significantly higher than mass market bars (made from ordinary beans).

6In an interview with one US bean dealer, Ocumare cocoa from Ecuador was given as an example ofpremiums that can be put on the most sought after beans. In a $1400 per metric ton market, these beanswere selling for approximately $2200 per metric ton.


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Table 3.1

Gourmet Chocolate Bar Pricing as Compared to

Hersheys Milk Chocolate (Mass Market)

Brand Equivalent per/

pound Price

Hershey's Milk Chocolate $ 3.69Terra Nostra Chocolate $ 7.73

Valrhona Chocolate $11.84

Newman's Own Organic $13.20

Scharffen Berger $15.95

Michel Cluizel DarkChocolate

$20.80

While fine flavor beans are typically perceived to have a more intense flavor and aromathan ordinaryforasterobeans, the value placed on fine flavor depends as much on thequality of the individual beans as on their species. While marketers are able to use fineflavor, not to mention organic, fair trade, single origin, and other differentiators, in their

branding strategies, companies selling gourmet products stress the need for high qualitybeans and report quality as one of the key factors in choosing a bean source.

From the perspective of some of the individuals in the gourmet chocolate industry whoare purchasing beans, quality is the biggest limitation for farmer cooperatives looking toenter the fine flavor market. Specifically, buyers point to poor post harvest processing asan area that they perceive to be responsible for reducing the quality of beans. As oneindustry expert suggests, it is difficult to evaluate the inherent quality of beans until theprocessing is done correctly. In addition to mold problems caused by inadequate drying,fine flavor buyers cite inadequate fermentation as a typical problem. Compounding theissue of improper fermentation, suggests one buyer, is misinformation about fermentation

that some farmers receive from technical advisors. To maximize the value of the beans tobuyers, the specific length of fermentation must be matched to the bean characteristicsand climatic conditions. Buyers suggest that technicians often prescribe fermentationtimes by rote rather than in response to specific conditions and market needs.

In the best of scenarios, the buyers themselves can work with technicians to determinethe optimal length of the fermentation process. One high end processor recounts hisinteraction with a Costa Rican estate owner to perfect the fermentation process. At thestart of the harvest, the manufacturer requested cocoa samples from the estate that werefermented for different numbers of days. Through a process of back and forthcommunication, the processor was able to instruct the estate on the ideal fermentation

process that was then incorporated into post harvest processing for the remainder of theseason. Clearly this process was simplified by the fact that the processors instructionsdid not need to be disseminated to hundreds of farmers. Nonetheless, it points to thevalue of tailoring the fermentation process to the specific processing conditions and tolooking for ways to establish lines of communication between processors and growers.Further, opportunities for farmer cooperatives to solicit feedback from buyers on postharvesting do exist, sometimes free of charge (see Appendix 4 for one example).


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Organic Certification

While still only a small percentage of the total market, organic chocolate and cocoa aregrowing in importance. Curtis Vreeland, a chocolate industry analyst who writes anannual summary of the organic confectionery market for Candy Industrymagazine, cited

a 30 percent growth rate for organic chocolate in 2003 (Vreeland, October 2003). Thisfigure rose from 11 percent the previous year, and Vreeland expects growth to remain inthe 20-30 percent range in the year to come. Vreeland attributes the surge to a number offactors, including the publicity generated by the new United States Department ofAgriculture (USDA) organic standards, introduction of gourmet organic chocolateproducts, and the increased availability of organic chocolates as they make their way intonational distribution channels (Vreeland, October 2003). The growth of organicchocolate is a part of a wider US trend in organic foods. By the year 2007, the USmarket for organic products is expected to reach $30.7 billion. This represents acompound annual growth rate (CAGR) of 21.4 percent, up slightly from the 21.2 percentgrowth rate between 1997 and 2002 (Organic Trade Association, 2004). Outside of

chocolate, organic cocoa is used in a wide range of organic baked goods and dairy andsoy products. Interestingly, some products marketed as containing organic ingredientsinclude a small enough quantity of cocoa to use conventional rather than organic powderor chocolate ingredients, as per the USDA standards. This suggests that organiccertification may not always be necessary to take advantage of the growing organic foodsmarket.

Over 60 percent of the organic cocoa beans being produced come from Central Americaand the Caribbean. The Dominican Republic alone produces more than half of theworlds organic bean supply (UNCTAD/WTO, 2001). While organic certification hasadded significant value for many farmers, many in the chocolate industry reportdisappointment in the quality of organic beans. One well respected industry sourceexpressed concern that the majority of organic beans are being produced in countries thathave lost their reputations for high quality production, in particular the DominicanRepublic. On the consumer side, a 2002 study by the market research firm The HartmanGroup indicated that consumers felt organic chocolates tasted flat and were not qualityproducts (Vreeland, 2003). Given the disappointment in the quality of organic cocoaand the growth of the organic market, Curtis Vreeland suggests that there will always bea market for high quality, organic cocoa beans. That said, another industry expertbelieves that Central American and Caribbean organic growers could face seriouscompetition if West African countries develop organic production of high quality beansthat would have an inherently less acidic flavor profile because of where they are grown.There has been some discussion that organic conversion is under way in Brazil,Cameroon, Cte dIvoire, Cuba, Ecuador, Ghana, Guyana, Haiti, Honduras, Indonesia,Panama, Peru, the Philippines, Sao Tom and Togo (Sippo, 2004). However, it is unclearif and when these countries will be viable sources of organic cocoa.


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Fair Trade

Alongside the growth in concern for how companies source the ingredients for theirproducts, consumers have become increasingly interested in rewarding companies thatactively support good causes. Cone, Inc. and Roper Starch Worldwide, Inc., both market

research firms, began tracking public attitudes about cause related marketing in 1993.Their second study, tracking consumers between 1993 and 1998, suggests that consumerinterest in cause related products has remained strong.

In the midst of this general trend, the market for fair trade certified products has seentremendous growth since mainstream introduction in the US in 1999. Fair trade certifiedcoffee, the fair trade certified product with the largest sales in the US, has seen anincrease of sales from 1.9 million pounds in 1999 to 18.7 million pounds in 2003. In2000, the first certified tea products were introduced in the US market, and in 2002, thefirst certified chocolate and cocoa products. In 2003, TransFair USA, the US fair tradecertification agency, certified 258,000 pounds of cocoa in the form of chocolate and other

products.

While fair trade in the US is still inits infancy as compared to Europe,a recent article in The NaturalFoods Merchandiser suggestssignificant potential for growth.Citing a 2003 survey by TheNatural Marketing Institute, thearticle reports that 51 percent of the2,000 general populationrespondents said that fair tradecertified ingredients were very orsomewhat important in theirpurchase of a particular product. Ofrespondents considered to beLifestyles of Health andSustainability consumers, fairtrade importance jumped to 76percent (Nachman-Hunt, 2003).

The world market for fair trade cocoa beans has grown at an average annual rate of 19.2percent between 1997 and 2003. Nonetheless, fair trade certified producer organizationsare selling only a portion of their cocoa eligible for fair trade certification at a fair tradeprice. Interestingly, about 50 percent of the beans exported on fair trade terms are alsoorganic certified, which suggests that the quality issues facing organic production alsoaffect at least some of the fair trade producers. Discussions with bean buyers,manufacturers, and marketers lend support to this concern. Recently, Fairtrade LabellingOrganizations (FLO), the international fair trade certification agency, instituted a fee forcertification at the level of the producer organizations. This change not only has financial

Box 3.1

Fair Trade Pricing Standards

The fair trade minimum price for all standard grades ofcocoa is $1,750 FOB per metric ton.

This fair trade minimum price includes a fair tradepremium of $150 FOB per metric ton.

If the world market (i.e., exchange price) rises above the$1,600, the fair trade minimum price is fixed as follows:

world market price + fair trade premium of $150 permetric ton.

For example: when the world price is $1,650 per metricton, the fair trade price is $1,800 per metric ton.

When the world price is $1,300 per metric ton, the fairtrade price is $1,750 per metric ton.

When the world price is $1,200 per metric ton, the fairtrade price is $1,750 per metric ton.

Source: Fairtrade Labelling Organizations


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implications but may also increase the number of organizations competing for fair tradesales, as certification will be open to all organizations that can pay the associated fees andmeet the certification criteria. Farmer cooperatives that have faced quality issues in thepast may find themselves at a particular disadvantage if new organizations with higherquality beans become certified.

Emerging Trends

Among the emerging trends in the chocolate industry, the two that hold the mostopportunity for growers to add value are single country of origin and single estatechocolates.

7 Because both models incorporate cocoa origin into the brand identity of the

chocolate, chocolate manufacturers and marketers become dependent on their beansources. While this dynamic has discouraged many companies from launching singleorigin or single estate products, increasingly sophisticated and adventurous consumersare putting pressure on marketers to introduce more single origin and single estateproducts. To the extent that countries, regions, and cooperatives can deliver a consistentvolume of high quality cocoa with a unique flavor profile, there appear to be increasingopportunities to develop long term relationships with manufacturers and marketers whoare willing to pay a premium for their cocoa.

Single Country of Origin

Over the past two to three years, an increasing number of chocolate marketers havelaunched chocolate products with cocoa from single countries of origin. Appendix 3 listssome of the single origin products that can be found in the US market today.

Experts from the chocolate industry express different opinions about the continuedgrowth of single origin chocolate. While Barry Callebaut, a multinational chocolate

manufacturer that supplies the US market, has a line of single origin chocolatecouverture, a representative from the company reports that the market for these productsis small and sees limited growth over the next few years. Meanwhile, other industryanalysts and chocolate marketers see the trend continuing, particularly among a growingnumber of small marketers who are looking for ways to differentiate their products fromthose of larger, more well known companies. Support for these opinions can be found onthe shelves of many upscale retail outlets where a number of single origin chocolateshave begun to appear.

If single origin chocolate does continue to grow in popularity, manufacturers will facecertain sourcing challenges that will influence their decisions about which origins to

choose for their products, as well as which growers to choose to provide the beans. Thefirst consideration is choosing origins that produce cocoa with a flavor profile that is notonly unique but is also able to a stand alone (i.e., not blended with other origins) inchocolate with 70 percent cocoa content. In a typical gourmet chocolate bar, beans from

7Single country of origin or single estate chocolates are sometimes referred to as terroir, single origin, pureorigin, or grand cru chocolates. The term varietal refers to chocolate made from cocoa from a singlespecies of bean.


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two or more origins are mixed to create a complex flavor. Asked about single originchocolates, representatives from two well-known manufacturers expressed their opinionthat the complexity of single origin chocolates could not match those of blends. On theopposite extreme, some in the chocolate industry regard the flavor profiles of someorigins, including many Central American countries, as too harsh. Where a mild bean

from Sao Tome can work well in a 70 percent cocoa chocolate, a more acidic bean fromcountries like Costa Rica could be too bitter for most palates.

A second major consideration in choosing single origin sources is the quality andconsistency of supply. Manufacturers and marketers who incorporate single originchocolates into their product range risk the inability to deliver product should the supplyof quality beans from a single origin run short. For that reason, any sensiblemanufacturer or marketer will carefully evaluate the supply and quality consistency ofbeans from a particular origin before launching a product made with beans solely fromthat origin. From the producers side, this means a burden of proof to show the ability todeliver high quality cocoa in sizeable and consistent quantities over multiple seasons.

Single Estate

While only starting to emerge, there has been recent interest in chocolate made withcocoa that comes not just from a single country of origin but from a single estate orcooperative. In terms of this differentiation strategy, there is no difference betweencocoa from a single estate or single grower cooperative. However, for the moment, thechocolate industry typically uses the terminology single estate to refer to actual estatesas well as cooperatives. Notable single estate products are marketed by CluizelChocolate of France, which offers single estate chocolate with cocoa from Los Anconesestate in San Domingo, Dominican Republic and Hacienda Concepcion estate inVenezuela, and Dagoba Organic Chocolate, which recently launched a fair trade andorganic certified single estate bar with cocoa from the CONACADO cooperative in theDominican Republic. Though single estate chocolate compounds the issue of supply andquality consistency, one small marketer hopes to move increasingly in the direction ofoffering single estate chocolates as a way to differentiate in the crowded market. Inpreparation, this marketer (who hopes to begin processing and manufacturing in the nexttwo to five years) is already looking for sources of unique, high quality, single origin andsingle estate cocoa. While the market for single estate beans is likely to remain small, itseems as though opportunities to market branded, single estate cocoa may begin to appearfor at least a limited number of fine flavor bean producers.

Future Possibilities

Appellation d'Origine Contrle for Cocoa

The Appellation d'Origine Contrle (AOC) system grants certain French wines, cheeses,butters, and other agricultural products certification of regional origin by thegovernments Institut National des Appellation d'Origine (INAO). French law makes it


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illegal to manufacture and sell a product under one of the AOC-controlled names if itdoes not comply with the criteria of the AOC. These criteria specify:

The product will be produced consistently in the traditional manner. It will be produced with ingredients from a designated geographical area, and will be

made and at least partially aged in this area. The characteristics of the product will be consistent and in line with clearly defined

standards.

The production is strictly regulated by a control commission following AOC-definedstandards (Wikipedia, 2004).

Similar certification of regional origin exists in Italy (Denominazione di OrigineControllata), Spain (Denominacin de Origen), Portugal (Denominao de OrigemControlada), Austria (Districtus Austria Controllatus), and South Africa (Wine ofOrigin).

Gourmet chocolate manufacturers and industry analysts, including Clay Gordon of theconsulting firmpureorigin, suggest that there are opportunities for creating systems ofcertifying regional origin of cocoa beans. Where the commodity market values all cocoaequally, gourmet and fine flavor buyers could begin to value unique cocoa from specificregions at a premium. From the perspective of growers, such systems could add value byadding a level of legitimacy to the process of creating a differentiated identity. While anappealing concept, industry experts caution that in order to create effective regionalorigin certification there must be capacity to specify and enforce minimum qualityrequirements and the infrastructure and discipline to separate out beans that do not meetthose requirements. One bean buyer uses the example of Ecuadors Arriba SummerSeason grading standard as an example of a system that has lost its value because its

integrity has not been maintained. Designed to indicate a growing season and region thatyields unique bean characteristics, failure to enforce grading criteria has left theappellation significantly less meaningful to buyers.

Other Social and Environmental Certification

Forest Stewardship Council Non Timber Forest Product Certification: While most of theproducts certified by the Forest Stewardship Council (FSC) are timber and manufacturedwood products, FSC has somewhat recently initiated a program to certify the sustainableproduction of non timber forest products (NTFPs) grown in FSC-certified forests. FSCdefines NTFPs as all forest products except timber, including other materials obtainedfrom trees such as resins and leaves, as well as any other plant and animal products(Brown, Robinson, and Karmann, 2002).

One of the challenges of NTFP certification is that at present, certification criteria forindividual products grown in individual forest ecosystems must be developed separately.This makes certification of new products time consuming and often prohibitivelyexpensive. Additionally, it makes it difficult to understand exactly which NTFPs areeligible for certification. To date, cocoa is not among the NTFPs certified by FSC (see


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Table 3.2 for a list of NTFPs currently certified by FSC). While a representative fromFSCs US partner SmartWood indicated that cocoa wouldbe eligible for NTFPcertification, a researcher on forest certification systems from the US NGO Forest Trendssuggested that as an agricultural product, cocoa would notqualify for certification.

Table 3.2

Non Timber Forest Products Certified by

The Forest Stewardship Council as of October 2002

Product Description Country

Chicle (latex) Ingredient in chewing gum Mexico

Maple syrup Food product-sweet syrup USA

Acai juice Beverage Brazil

Palm hearts Food product Brazil

30 species of plants Ingredients in cosmetics Brazil

Brazil nuts Food product Peru

Oak tree bark Incense Denmark

Venison Food Product Scotland

Source: Forest Stewardship Council

Another important caveat of NFTP is that products must be grown in forests that are fullyFSC certified. In other words, NTFP certification is a supplement to certification ofsustainable forest management that includes timber. For communities that have marketsfor FSC certified timber, investment in NTFP certification of cocoa may be a way to addvalue. For those communities that do not anticipate selling wood into the FSC market,full forest certification, a prerequisite for NTFP certification, will not likely make sense.Thus, a cooperatives economic decision to pursue FSC certification should be primarilybased on the return on investment of timber certification, not on NTFP certification ofcocoa.

Finally, it is important to understand that at present, the FSC label does not have asignificant presence on consumer goods. While some manufacturers and retailersmention FSC timber certification in their company literature, few actually place the logoon consumer products. Although certified timber suppliers are receiving a premium fortheir wood, a representative from Forest Trends suggests that this premium is associatedwith the current scarcity of certified timber rather than value placed on the certificationitself. On the NTFP side, there are currently no certified products that display the FSClogo in the US market. Thus, for the moment, it is unlikely that cocoa growers would beadding significant value to their crops by obtaining the two FSC certifications necessaryto sell cocoa as FSC-certified.

MesoAmerican Biological Corridor Certification: The MesoAmerican BiologicalCorridor (MBC) is a conservation initiative aimed at preserving biodiversity throughmuch of the Central American region. The MBC runs through eight countries fromSouthern Mexico to Panama, comprising 30% of Central America. Participants invarious projects to protect the MBC have included partner governments, as well asinternational institutions such as the World Bank, GEF, GTZ, USAID, UNDP and UNEP(Comisin Centroamericana de Ambiente y Desarrollo, 2004).


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Along with efforts focused on the physical environment, the consortium of groupsworking on the MBC initiative has incorporated a component focused on creation ofeconomic incentives to encourage and facilitate environmentally sustainable livelihoodsof the communities that live within the MBC. Among the products produced bycommunities in the region, cocoa, wood, coffee, bananas, wicker, and cashews have been

identified as those that could lend themselves to incentivized sustainable production(M.Castro-Salazar, personal interview, February 27, 2004).8

The business plan for development of the MBC produced by Comisin Centroamericanade Ambiente y Desarrollo (CCAD) includes two potential opportunities for cocoaproducers in the region. The first opportunity is technical assistance, which the businessplan suggests will focus on improving flows of information to small/ medium enterprisesand civil society organizations, as well as export marketing and promotion (ComisinCentroamericana de Ambiente y Desarrollo, 2002). While the business plan outlinessizeable budgets, it is unclear to what extent the programs outlined in the business planhave been implemented. Nonetheless, to the extent that support of quality improvement,

certification, marketing and promotion falls under the guidelines of CCAD programs,there may be interesting opportunities for funding.

The second opportunity mentioned in the MBC business plan is development of MBC-specific certification. Like other certification systems, an MBC certification wouldattempt to add market value to products that bear an MBC label or other type ofaccreditation. In evaluating potential participation in an MBC certification program,grower organizations should understand that to date MBC certification has no presence inthe US market. Further, while the CCAD business plan includes over $15 million forcommunications programs, there is presently little if any recognition among most USconsumers of the MesoAmerican Biological Corridor project. Thus, in the short term it issomewhat unlikely that MBC certification will add significant value. Nonetheless, theMBC story would probably resonate with some consumer segments and could thus beincorporated as one component of a consumer products branding. With reference toproducts like Ben & Jerrys Rainforest Crunch ice cream or the Endangered SpeciesChocolate Companys products, grower cooperatives may be able to distinguish theircocoa in the market through MBC branding regardless of the certification initiative.

Rainforest Alliance Certification: While the focus of the Rainforest Alliance (RA)certification program has been coffee, RA has worked with cocoa growers since the mid1990s. To date, there are no RA certified chocolate or cocoa products in the US market,but a representative from RA suggests that introduction of the first certified products islikely by summer 2004.

Currently, RA certified cocoa comes from a single source a cooperative of smallgrowers in Ecuador. In partnership with the local NGO Conservacin y Desarrollo, RAworked to organize and build the grower cooperatives it now certifies. Much of thesupport provided by Conservacin y Desarrollo consisted of capacity building in the

8Mauricio Castro-Salazar is the ex-Secretary General of the Comisin Centroamericana de Ambiente yDesarrollo.


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areas of business infrastructure, cocoa processing, and technology transfer. With thecapacity in place for commercial operations, RA is now working to help connect thegrowers cooperative with potential buyers.

While the model of infrastructure development, certification, and marketing support will

appeal to many cocoa cooperatives, a representative from RA clarified that initiativesundertaken with individual producers and within individual countries are nothomogeneous. Because RA typically works by supporting its network of local NGOs,the specific nature of a given project is shaped by the unique competencies of eachpartner. In the case of the Ecuador project, the cocoa project was shaped byConservacin y Desarrollos core competency in cooperative organization andinfrastructure development. However, future work with other cocoa producerorganizations may be quite different from the RAs work in Ecuador and, depending onthe circumstances, may only involve certification.

The RA certification aims to help farmers add value to their products. However, unlike

the fair trade certification model, RA certification does not mandate that a minimum priceis paid to cooperatives. Instead, grower cooperatives are at liberty to negotiate pricepremiums for certified product with buyers. Although there is not yet a track record toevaluate premiums received for RA certified cocoa, RA reports that premiums forcertified coffee has ranged from $0.05-$0.55 above the typical market value (typically$0.10-$0.40 per pound above the exchange price for conventional specialty or organiccoffee, respectively). As a point of comparison, fair trade certified coffee sells for aminimum of $1.26 per pound for conventional coffee and $1.41 per pound for organiccoffee (approximately $0.45 on average above the typical market value in todaysmarket).9

Because RA certification does not yet have a presence in the chocolate or cocoaingredients markets, any opportunities to add value to cocoa that the initiative may createwill not be short-term opportunities. Further, because the RA cocoa program is in itsinfancy, it is unlikely that many cooperatives will be able to become part of the systemimmediately. Nonetheless, where there are opportunities to work with RA and itsnetwork of NGO partners to develop infrastructure and markets, there may be verytangible benefits that could come from the relationship. Further, while the RA label doesnot have a presence on chocolate or cocoa products, RA approximates that 100companies are using the label on coffee products in the US market (Rainforest Alliancerepresentative, personal interview, April 30, 2003). Thus, unlike certification programsthat have yet to register any consumer recognition, the RA label on chocolate and cocoaproducts will likely resonate with some consumers as soon as it reaches the shelves.

9Estimation based on an assumption of market value of $0.05 over an exchange price of $0.75 per poundfor conventional specialty coffee and $0.20 over an exchange price of $0.75 per pound for organic coffee.


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A Word of Caution: Return on Investment in an Environment of Small Markets

While these opportunities for differentiation are promising, it is important for growercooperatives to understand that the market for differentiated cocoa is limited. While themarkets for fine flavor, organic, fair trade, and single origin consumer products aregrowing, opportunities for cooperatives to sell into these markets are limited by 1)demand and 2) access. Every differentiation opportunity described above would requiresome type of investment by cooperatives, whether to pay for certification fees, developbranding strategies, or simply make the necessary connections to open up market access.Like any business decision, it is crucial that investment in differentiation strategies beweighed against expected returns. A premium price for just one or two containers ofdifferentiated cocoa could cover the investment associated with a differentiation strategy.However, the real question a cooperative must ask before making investments indifferentiation is whether or not it will actually be able to find buyers for those one or twocontainers after the investment has been made. As one fine flavor dealer remarked,cooperatives with limited resources may get a better return on investment inorganizational strengthening, basic post-harvest process improvements, anddiversification options than from investments in the marketing infrastructure needed tolaunch a differentiation strategy. Box 3.2 illustrates one way in which cooperatives canbegin to evaluate the benefits and costs of investing in certification.

Box 3.2

Sample Evaluation of Certification Benefits and Costs

Using the Fair Trade System as an Example

Year 1 Year 2 Year 5

Estimated Sales of Certified Cocoa (Containers) 2 3 6

Price Premium Above Market Value $ 7,000 $ 10,500 $ 21,000

Initial Certification Fees $ 4,300 - -

Annual Certification Fees - $ 600 $ 600

Volume Based Certification Fee $ 238 $ 357 $ 714

Setup and Maintenance of Control Process $ 3,000 $ 1,000 $ 1,000

Value of Human Resources Allocated to Certification $ 600 $ 600 $ 600

Net Revenue from Certification $ (1,138) $ 7,943 $ 18,086

*Assumes constant exchange price of $1,400/ MT. Certification fees estimated based oninformation from Fairtrade Labelling Organizations (Fairtrade Labelling Organizations, 2004)

While this model may not reflect exact costs or incorporate all costs associated with fair tradecertification, it illustrates a simple way for cooperative management to assess the merits of investing in

various types of certification. A more sophisticated analysis would include the opportunity costs ofinvesting in certification instead of other initiatives. For example, what if the $8138 invested incertification in year 1 was spent on a quality improvement initiative that could raise the value of all of thecooperatives cocoa by $400 per metric ton? If this cost is incorporated into the analysis, net revenueassociated with certification will decline. Additionally, there may be some benefits that are difficult toquantify but worthy of consideration. For example, a buyer attracted to the cooperative because of fairtrade certification may also become a new customer for conventional beans. Further, fair trade may openup opportunities for pre-harvest financing or provide other benefits, economic or otherwise.


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4. Market Segment Profiles

The value of differentiation, whether by product profile, quality, branding, orcertification, will ultimately be judged at the consumer products level. Very fewcompanies will invest in value added differentiation (even fair trade or other social or

environmental certification) unless that differentiation is somehow meaningful on thesupermarket shelves. For that reason, it is product marketers (responding to consumers)who drive the demand for differentiation.

Chocolate manufacturers provide the bulk of the market for processed cocoa. However, asubstantial market for cocoa products exists in consumer goods markets other thanchocolate, including baked goods (e.g., chocolate chip cookies), dairy products (e.g.,chocolate milk), and body care products (e.g., cocoa butter soaps and moisturizers). Thehealth and trends of each of these industries will likely influence their level of interest indifferentiated cocoa. While the mainstream segments of most cocoa-using industrieshave matured to the level of price competition (i.e., products competing on price rather

than uniqueness), certain segments of the markets, particularly the gourmet and naturalproducts segments, are still open to product differentiation. In order for cocoacooperatives to best position their products to capture added value, it is important tounderstand which segments of cocoa using industries will be looking for ways todifferentiate their products in the market. These are the segments that are looking forhigh quality, branded, and authenticated or certified ingredients and could be willing topay a premium for unique cocoa and chocolate.

The Retail Market for Chocolate

Market Definition

The retail market for chocolate includes not only chocolate bars but also boxed/ baggedcandy, snack-sized candy, and gift box chocolate, as well as chocolate chips, bakingchocolate, and dessert toppings sold to retail consumers. The chocolate candy segmentmakes up approximately 90 percent of the total chocolate market. It is noteworthy thatwithin this 90 percent, chocolate candy bars make up just one quarter of chocolate candysold. This suggests the importance of other products in the market (see Table 4.1 forcomplete market breakdown by product).10

10For purposes of this sections discussion, market refers to retail sales only, not sales or consumption bymanufacturers of other products like cookies or ice cream.


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Table 4.1

Share of Non-Seasonal Chocolate Candy Sales Through

Information Resources, Inc. Tracked Outlets

by Product Segment, 1998 vs. 2002

1998 2002(estimate)

Box/Bag/Bar Chocolate Candy of 3.5 oz. or More 39.50% 42.60%Chocolate Candy Bar of Under 3.5 oz. 29 26.3

Snack-Size Chocolate Candy 20.8 21.6

Gift-Box Chocolates 10.1 9.3

Novelty 0.6 0.3

Total 100.00% 100.00%

Source: The US Market for Chocolate, Candy, Gum, and Mints 2003, p. 24

Mass Market vs. Gourmet

Another important aspect in defining the market is the distinction between mass marketand gourmet (or specialty) chocolate. From the manufacturing standpoint, gourmet

products are typically distinguished by higher percentages of cocoa, premium/highquality natural ingredients, unique formulas, and distinctive packaging. Since manyaficionados would argue whether or not some products that position themselves asgourmet really fit these criteria, it may be more useful to think of gourmet as apositioning strategy rather than as a product trait. According to estimates, the gourmetsegment of the chocolate candy market comprised approximately 7.5 percent of the totalmarket (The Chocolate Market, 2001).

Market Size and Growth

The overall market for chocolate reached $13.7 billion in 2000, growing at a CAGR of

4.5 percent from 1996. During this period, the growth rate of different segments of themarket varied (see Table 4.2).

Table 4.2

US Retail Sales of Chocolate,

1996-2002 (in millions)

1996 2000 CAGR

All Chocolate Candy $10,500 $12,500 4.5%

Chocolate Chips/Baking Chocolate (supermarkets, massmerchandisers, and drugstores sales only)

$399 $444 2.7%

Chocolate Syrup/Dessert Toppings (supermarkets, massmerchandisers, and drugstores sales only)

$227 $262 3.7%

All Chocolate (chocolate candy, chocolate chips/baking

chocolate, powdered cocoa mixes, and chocolatesyrup/dessert toppings)

$11,500 $13,700 4.5%

Source: The Chocolate Market, 2001, p. 51; Gourmet/Specialty Foods, 2001, p. 271


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The market for gourmet chocolate was valued at $1 billion for 2002 (Gourmet/SpecialtyFoods, 2001). Unfortunately, the data that track total retail sales of gourmet chocolatecandy over time are not available. However, the data that are available, along withanecdotal evidence, suggest that gourmet chocolate candy is the market segment with themost significant growth. Specifically:

AC Nielsen data for the year ending April 13, 2002 show mainstream-market sales ofpremium chocolates up almost 28 percent, and sales for market leader Lindt up 42percent, against flat growth for chocolate candy overall (Gourmet/Specialty Foods,2001).

The Seattle Chocolate company reported a 17 percent growth rate in a Seattle Timesfeature in September, 2001 (Seattle Times, 2001).

Market leader Godiva reported that sales of its chocolate bars were up almost 30percent in 2001 and 20 percent in 2002 (Candy Industry, 2002).

The Day Chocolate Company reports sales of its premium, fair tradeDivinechocolatebars have tripled since their US introduction in 2001 (Day Chocolate CompanyRepresentative, personal interview, April 29, 2004).

A mix of factors, including access to new distribution channels, demographic shifts,home baking habits, and the proliferation of gift-giving occasions will net a very slightincrease in the overall markets rate of growth through 2005 to an estimated CAGR of 5percent. Forecasting out another two years, estimates show overall chocolate candy salesnetting a CAGR of 4 percent. Though specific predictions for growth in the gourmetcandy market are not available, qualitative assessment suggests continued strong growth(The Chocolate Market, 2001). Table 4.3 shows all growth estimates from 2000-2005.

Table 4.3

Estimated US Retail Sales of Chocolate,

2000-2005 (in millions)

Chocolate 2000 2005 CAGR All Chocolate Candy $12,500 $15,954 5.0%

Chocolate Chips/Baking Chocolate (supermarkets, massmerchandisers, and drugstore sales only)

$444 $515 3.0%

Chocolate Syrup/Dessert Toppings (supermarkets, massmerchandisers, and drugstore sales only)

$262 $289 2.0%

All Chocolate (chocolate candy, chocolate chips/bakingchocolate, powdered cocoa mixes, and chocolate

syrup/dessert toppings)

$13,700 $17,485 5.0%

Source: The Chocolate Market, 2002, p. 89 The US Market for Chocolate, Candy, Gum, and Mints, p. 24.

Product Trends

In 2001, the chocolate industry introduced 1,216 candy products (measured in stockkeeping units, or SKUs), up from 1,177 in the previous year (The US Market for


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Chocolate Candy, 2002). These products and those introduced subsequently reflected anumber of trends in the industry.

Dark Chocolate: Unlike the rest of the world, America has not always shown a greatinterest in dark chocolate. However, with the growth of the gourmet market, Americans

have shown new enthusiasm. Many marketers now include the percentage content ofcocoa on the packaging as an indication of just how dark the chocolate is. As thepercentage of cocoa increases, the specific taste profiles of the cocoa beans (bothdesirable characteristics and defects) become more a prominent component of the overallflavor of the chocolate.

Single Origin: Industry consultant Curtis Vreeland cites three reasons for the single origintrend: the quest for unique flavors, for marketing differentiation, and for meeting theincreasingly sophisticated tastes of die-hard chocolate lovers (Vreeland, May 2003).Still an emerging trend, companies that offer country of origin chocolate either oneorigin or a line of several - are distinguishing their products whether consumers can

actually taste the difference or not. International Chocolate Company offers single originchocolates with cocoa from Mexico, Ecuador, and Cote dIvoire. The OmanheneChocolate Company offers only single origin chocolate made with Ghanaian cocoabeans. In the wake of slave labor allegations, single origin has also become a way forcompanies to show they are not sourcing from areas specifically mentioned in theallegations typically Cote dIvoire or West Africa in general.

Flavors: Many marketers, particularly of gourmet chocolate bars, have introducedflavored chocolate products. Flavors like hazelnut and orange zest are among the morecommon added to lines of dark and milk chocolate. Dagoba and Endangered Species,which offer 12 and 16 different bar products, respectively, offer flavors including lime,cherry, and chocolatt.

Organic, Natural, and Fair Trade: The natural and organic food markets have grownhugely in recent years, creating opportunities for chocolate companies marketing naturaland organic products. Cloud Nine, Newman's Own Organics, and Rapunzel are allcompanies that have found a place in this niche and have availed themselves of themainstreaming of natural and organic foods in supermarkets like Whole Foods. Thissuccess is not limited to marketers of chocolate bars. Increasingly, companies like TinyTrapeze have introduced other types of natural and organic candies. While relatively newto the US chocolate market, fair trade is also growing. As of April 2004, nine fair tradecertified chocolate bars are currently being marketed in the US (Divine, Marche duMonde, Cocoa Camino, Dagoba, Equal Exchange, Shaman Chocolates, OmanheneChocolate, Art Bars, and Green & Blacks).

Chocolate Covered Salted Snacks: While these products have been in the mass market forsome time, gourmet versions have been among recent product introductions. MichaelSeason's Gourmet Chocolate Covered Potato Chips were introduced in 1999. In 2000,David & Sons launched Davids Sunflower Kernels in Rich Nestl Chocolate.


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Industry Use of Cocoa Ingredients

The 1997 US Economic Census reports that manufacturers making confectionery frompurchased chocolate (as opposed to beans) consumed cocoa ingredients as shown inTable 4.4.

Table 4.4

Cocoa Ingredients Consumed by the Manufacturers

Making Confectionery from Purchased Chocolate (1000s Tons)

1000s Tons

Chocolate coatings (including couverture) 277.6

Unsweetened chocolate (chocolate liquor) 88.6

Cocoa, pressed cake and powder 20

Cocoa butter n/a

Source: US Economic Census, 1997

Chocolate used in confectionery (either as a coating or for solid bars) typically contains

approximately 30-70 percent cocoa content.

The Market for Sweet Baked Goods

Market Definition

The sweet baked goods market includes cookies, pastries, snack cakes, doughnuts, cakes,pies, and muffins. Many of these products feature chocolate ingredients and are includedin this report for that reason. Two major segments make up the sweet baked goodsmarket: packaged sweet baked goods and fresh sweet baked goods. Packaged sweetbaked goods are often shelf stable (i.e., they do not spoil or become stale quickly) and are

nearly always branded products (e.g., Barbaras Bakery). Fresh sweet baked goods areproduced for immediate or near immediate consumption. While products do not typicallydisplay a unique brand themselves, the bakeries that produce them are branded (e.g., AuBon Pain). The distinction has important implications for chocolate and cocoa suppliers.Packaged sweet goods manufacturers can use packaging to identify unique chocolate andcocoa thus associating it with individual products. Fresh sweet baked goodsmanufacturers may be less likely to identify unique ingredients unless they fit into abroader message associated with the companys brand.

Mass Market vs. Gourmet

Like the chocolate market, the sweet baked goods market (both the packaged and freshsegments) are comprised of both mass market and gourmet products. The gourmet sub-segment makes up just a small portion of the total segments (e.g., 7 percent of packagedsweet baked goods in 1999). Nonetheless, it is the gourmet sub-segment that is mostlikely to look for chocolate and cocoa with unique characteristics as opposed to the leastexpensive chocolate or cocoa available. One gourmet cake manufacturer interviewed forthis report described a six-month process to identify a high quality cocoa powder with the


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perfect flavor profile. Such interest in the differentiating qualities of chocolate or cocoawould be unlikely in the mass market sub-segment.

Market Size and Growth

Sales of packaged sweet baked goods reached nearly $12.4 billion in 2002. This reflectsa mere 1 percent of annual growth, which followed a year of negative growth in 2001.Experts suggest that this poor performance is due at least in part to the economicdownturn. Because many sweet baked goods are used in offices (e.g., donuts, coffeecake) or when individuals are entertaining at home, the economic downturn has likelycaused consumers to cut back on purchases.

As the US economy regains momentum, slow growth in the packaged sweet baked goodsmarket is expected to follow. Experts predict a CAGR of 2.8 percent between 2002 and2007 (see Table 4.5).

Table 4.5

Estimated Growth of US Retail Dollar Sales ofPackagedSweet Goodsby Category, 1998-2007 (in millions)

1998 2002 CAGR

1998-2002

2007

(estimated)

CAGR

2002-2007

$ 1,120 $ 1,235 2.5% $ 1,419 2.8%

Source: The US Market for Sweet Baked Goods, 2003, p.3, 9

Sales data for fresh sweet baked goods are not available. However, while slightly dated,data reflecting the number of retail bakery outlets give some sense of the scale of themarket if not total sales. By the end of 1998, there were an estimated 26,000 stand-aloneretail bakeries operating in the US. At 1997s end, 22,407 bakeries were operating in USsupermarkets. Because of the huge boom of the US specialty coffee industry, theincrease in the number of retail cafs also has implications for the fresh sweet bakedgoods market. The Specialty Coffee Association of America estimates that the number ofcafs in the US reached 14,000 in 2003. These outlets typically serve muffins, cookies,biscotti, and other baked goods purchased from local bakeries or wholesalers. Accordingto one study, 23 percent of customer orders at cafs include a baked product of some kind(Bakery Pro

The Market for Differentiated Cocoa 1

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