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The chocolateof tomorrow

What today’s market cantell us about the future

June 2012

kpmg.com

CONSUMER MARKETS

www.kpmg.com

Revenues from the chocolate industry continue toprove rewarding, with 2011 figures from IBISWorldpredicting annualized growth of around 2% overthe next five years, after dampened expectations

during the dark days of 2007-09.But behind the encouraging headlines, many

companies are battling to stay on top of a rapidlyshifting marketplace. Taste is diverging, as fast-growingeconomies and empowered consumers demand morefrom their products. For industry stalwarts, the requirementto offer local, highly tailored and increasingly diverseproducts represents a serious threat to market share.

Spotting the markets that are likely to grow quickly will make the differencebetween the winners and losers of tomorrow’s chocolate landscape. Accordingto official government figures, current hot spots include India (annual growth rate15%), China (9%), Russia (6%) and Mexico (3.8%). They all exhibit a numberof key factors that help them stand out from the pack, including a youthfulpopulation, rapid capital inflows and retail consolidation.

In this report, we’ll take a tour of the factors shaping the chocolate market oftomorrow – from geography and demographics, to consumer needs and preferences,and other market drivers. And we’ll attempt to offer a glimpse into the future by definingwhat might be the chocolate bar of 2030.

JohnA MorrisEuropean Head of Consumer MarketsKPMG LLP

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

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Contents4 The global picture

What they’re eating and why:a world tour of consumer tastein the chocolate market

6 Shoppers’ preferencesThe three types of consumershaping the way people buychocolate across the world

8 Trends to considerFour factors that are increasinglydefining the chocolate market

10 The bar of 2030A glimpse of the future – and whatit might mean for the industry

12Contacts

Where nextfor chocolate?The industry has weathered a global recessionand is still seeking growth. But with somemarkets saturated, where does its future lie?

The global chocolate industry is many things, but as abellwether for the wider economy its use is limited. Revenueshave remained resilient despite a recessive global picture,falling disposable incomes, volatile commodity prices andincreasing competition.

Chocolate is often described as recession-proof. Someeconomists call it the ‘lipstick effect’: when facing aneconomic crisis, consumers are more willing to buy lesscostly luxury goods, such as cosmetics and chocolate, evenas they cut back on other luxuries. Revenues over the pastfew years would seem to back this hypothesis, althoughyear-on-year growth remains relatively sluggish and thespectre of volatile input prices continues to cast a shadowover future projections.

Although the global market is still dominated by WesternEurope and North America, emerging markets clearlyrepresent the future.The BRIC countries (Brazil, Russia, Indiaand China) accounted for 55% of global confectionery retailgrowth in 2011. Other emerging economies with youthfulpopulations and an acquisitive middle class are likely todevelop a taste for chocolate and, as their disposable incomesgrow, they will represent important target markets.

With the traditional markets ofWestern Europe and NorthAmerica seemingly saturated, manufacturers are being forcedto pull even more innovative tricks out of the bag to attractconsumers, from enigmatic flavor combinations to bolderhealth claims, portion control and personalized bars.

Like a large sharing tablet, the market is breaking up. Taste isdiverging as the BRICs and empowered Western consumersdemand more from their products. Where will the market takeus next?

The chocolate of tomorrow

State of the market

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Theworldof chocolateGeography is still key to understandingthe specifics of consumer taste.What arecustomers across the world demanding?

Western Europe is still thelargest chocolate market inthe world, but slow growth

suggests saturation. Health isbecoming a major driver innew product launches: in

2011, 10% of products weremarketed as vegetarian, 7%as free from additives and

7% as organic.

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The global picture

The US eats more chocolateby volume than any country,says the International CocoaOrganization. Consumers aredemanding value – and wildflavors, such as bacon and

wasabi. Health matters but isnot yet a major driver.The

large Hispanic market is key.

The British government ispressurizing manufacturersto tackle obesity, although

only 12% of consumers seefat content in chocolate as an

important factor. Portioncontrol is imperative, with

smaller bars and larger‘sharing packs’ introduced

to curb overeating.

In Mexico, 52% of thepopulation are under 20: ahuge market for candy and

chocolate. Around 80-90% ofchocolate products are aimed

at children.This offersopportunity for tie-ins with

well-known children’s brands,but rising obesity levels may

prompt regulation.

Easter is big business inBrazil, with 100 million Eastereggs eaten every year – andthis is likely to increase. Butchildhood obesity presents

a curb on growth. With morethan 35% of children

overweight, child-focusedproduct launches have been

driven down by 62%.


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Russia is one of the mostpromising emerging

economies for chocolatiers.The market is worth more

than US$8bn and isexpected to grow 45% by2016. As consumers moveup the value chain, artisanmanufacturers begin to

stake their claim.

Widespread lactoseintolerance has made fora slow start in China, butchocolate sales have risen

40% since 2009. Lindt claimsin its annual report that themarket is growing 30% a

year. Premium products arepopular, with over half of all

sales bought as gifts.

India has always had a sweettooth, and chocolate is fastbecoming its favorite treat,ahead of sugar candy, withan annual market growthrate of 15%. Cadbury’s nowowns 70% of the market,introducing innovative

products that can survive inthe extreme heat.

The Middle East/North Africamarket is expected to reachUS$5.8bn by 2016, up 61%on today. Almost every partof Africa is growing: SouthAfrica is the biggest market,but sugar confectionery isstill 22%more popular there

than chocolate, saysLeatherhead Food Research.

At US$11.4bn, Japan is thelargest Asian market.

Domestic artisan companiesare flourishing but foreigners

can find it hard to gain afoothold. Nestlé’s Kit-Katbrand is the exception,

appealing to consumers with200 unusual flavors and

special editions.

Globalmarket share by region, 2011Western Europe 32%

North America 20%

Asia 17%

Latin America 13%

Eastern Europe 12%

Middle East and Africa 4%

Australasia 2%

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1.5%

10%

27.5%

45.3%

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What consumers wantThe psychology behind chocolate suggests consumers see it asa ‘naughty but nice’ impulse treat. But a closer look reveals threedistinct types of buyer, each with different behaviors and demands

THE CONVENIENCEBUYERChocolate may be seen asan impulse purchase, butit’s becoming increasinglyeveryday among consumers.Convenience is a major driverfor chocolate lovers, who wantto grab a bar from a local store

or throw a multi-pack into the trolleyduring a weekly shop.

As convenience becomes moreimportant to time-poor shoppers, salesof tablet bars are growing (up 37% inthe UK last year) as consumers grab

and go. Premium chocolate-makerssuch as Godiva are rethinking theirstrategies to get a bite of this lucrativemarket, introducing smaller bar formats.

A desire for convenience is alsoincreasing the popularity of sharingbags, particularly in Western markets,as consumers buy to share or finisheating later. Manufacturers havereacted with packaging innovations,such as the ‘memory wrapper’ fromMars that allows bars to be twisted,closed and saved. Mars says theinnovation “empowers the consumer”.It also drives brand loyalty.

THE VALUE BUYERIn many markets, value is ahot topic. In the US, 79% ofconsumers look for good valuewhen choosing chocolate,although 70% also want aname brand, according toMintel Oxygen – meaningeven value shoppers are

making demands of manufacturers.

Value is particularly important ineconomies where the middle classis still being defined – and may existfar belowWestern levels. Accordingto research from financial servicesprovider Rabobank, a 45g chocolatebar accounted for less than 1% ofthe weekly shopping budget in theUS and UK in 2010, but in India thesame bar made up 18% of the weeklyfood allowance: which means a snackcomes at the expense of a full meal.

One-size-fits-all global pricing solutionsare difficult when the income levelsand aspirations of the fast-growingmiddle class differ so widely. Althoughdisposable income is rising in emergingmarkets, we could assume that a largeproportion of consumers will continueto look for the cheapest option.

Value-conscious shoppers favor anew generation of outlets. Discountstores are flourishing, which is forcingsupermarkets to think more likediscounters to attract fickle customers,including increasing their private labelranges. Small grocery stores may lackthe economies of scale to competeon price, while ‘specialist’ formatsare being crowded out. In emergingmarkets, ‘one-stop’ retail locations arebecoming popular due to low pricesand greater choice.

Non-storeSpecialist storesSmall grocery storesSupermarkets and discount storesOthers

Where they’re buying

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Shoppers’ preferences


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Luxury sales on the up

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THE LUXURY BUYERThe luxury chocolate marketcontinues to embrace themainstream – and not justin developed economies.“The psychology is thateven expensive chocolate isan affordable luxury,” saysMarcia Mogelonsky, Global

Food Analyst at researcher Mintel.

Chocolate is becoming increasinglypremiumized, and brands such asGodiva and Lindt have become almostmass market as consumers developa taste for everyday glamour. Godiva,which has increased its sales fromUS$400m to almost US$700m in 10years and is now owned by Turkey’sYildiz Holdings, plans to become astaple for the health-conscious, sweet-toothed consumer. “Our revenues haveincreased in all our markets, especiallyin China and Japan, which are the

most important markets right now,”Godiva CEO Jim Goldman has said.“[Marketing our product] is a balancingact. And it’s different in every country.We do retain our prestige… but wehave to be relevant.”

In Russia, the chocolate market isexpected to grow 45% over the nextfive years, to reach US$11.6bn, saysEuromonitor. Belgian artisan chocolatierJean-Philippe Darcis has his eye onthe country, predicting: “The marketwill evolve and people will have morebuying power.” Lindt is enjoyingdouble-digit sales growth in the MiddleEast. In China, rich dark chocolateis thriving, with Ferrero Rocher andartisan chocolate maker Senz launchingexclusive premium dark brands in thelast two years. Unsurprisingly, largermanufacturers are keen to get a biteof this burgeoning sector but, withoutthe personal story required to sell

such products, they can struggle. Thesolution: purchase artisan brands andmarket them as separate entities – largeproducers’ economies of scale meanthis phenomenon makes life hard forsurviving artisan brands. Mars has EthelM, Nestlé bought Maison Cailler andHershey owns Dagoba and ScharffenBerger. “It may sound counterintuitive,but what’s happening in the [globalfinancial] crisis is a quest by consumersfor value, for more affordable products,but also for products that overtake theirexpectations,” says Laurent Freixe,head of Nestlé’s European business.

However, large manufacturers withdesigns on artisan businesses mustbe careful. “Consumers like artisancompanies because they are highquality and unique,” warns MaryNanfelt, Food Analyst at IBISWorld.“That uniqueness and independencemust remain.”

“What’s happening inthe financial crisis isa quest by consumersfor products that aremore affordable butthat also overtaketheir expectations”

GodivaLindt

0 0.5 1 1.5 2 2.5 3

US$bn sales


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Driving growthFrom sustainability to eventing, four factors that are increasinglyimportant in understanding the global chocolate market – andthe opportunities they could create both now and in the future

SUSTAINABILITYFood origin is an increasingly importantdriver for consumer purchasingdecisions in more developed markets,particularly at high-end retailers. MaryNanfelt, Analyst at IBISWorld, says:“Americans in particular are becomingmore socially conscious in their choices,buying chocolate from sustainableand organic sources.” Globally, use ofFairtrade cocoa has risen dramaticallyover the last few years, and smartphone users can even downloadethical shopping apps.

All the major manufacturers haveembraced Fairtrade to some degree.Kraft’s Cadbury brand has tripled theamount of Fairtrade cocoa it uses,and Cadbury’s Dairy Milk, the UK’sbest-selling bar, is certified Fairtrade.Hershey announced this year that itwould begin to source the cocoa forits Bliss brand through Fairtrade farms,while Mars and Nestlé already havebest-selling Fairtrade lines.

INNOVATIONAs consumers become ever moredemanding, innovation is crucial tomarket share. And personalization islikely to be the next consumer-drivenrevolution in the industry.

Nestlé is leading the pack in this area.Maison Cailler allows customers inSwitzerland, the world’s largest percapita chocolate market, to createpersonalized taster packs based on theirpreferences. Its Spanish brand Diselocon Chocolate recently launched ane-commerce platform where customerscan create their own assortments. Gumand candy businesses such as Wrigley’shave already introduced personalizedpackaging (particularly aimed at gifters)and chocolate could soon follow suit.

The next logical step is for consumersto design chocolate bars that caterto their unique palate – but whichmanufacturer will take on theproduction challenge involved?

HEALTHAlthough many consumers viewchocolate as an occasional treat anddon’t obsess over its effect on health,fat is becoming a major issue formanufacturers. So-called ‘fat taxes’are threatened in a number of majoreconomies, including the US and theUK, while European countries such asDenmark and Hungary have alreadyintroduced surplus taxes on unhealthyfood. In Japan, the government hasgone one step further and is taxingcompanies and local authorities witha high proportion of overweightemployees or residents.

An increased emphasis on healthylifestyles is an imperative forgovernments facing rising healthcarecosts, particularly in developedeconomies that are battling childhoodobesity. This has impacted child-focused product launches, which fell62% last year in the US and Brazil,both countries that are struggling tokeep their weight down (more than35% of Brazilian children under six areoverweight or obese). Globally, 21% ofparents reported switching productsto give their children healthier snacks,potentially reducing brand recognitionamong the next generation.

To combat this, the industry shoulddebate the potential health benefitsand enable chocolate to be among thenext generation of functional foods,pushing the antioxidant effects of darkchocolate or investigating the energy-boosting properties of bars with oats,nuts or ‘super fruits’. Latvian brand Laciis using ‘super berry’ sea buckthorn inits products. Smaller bars (Mars hascapped its bars at 250 calories in the UKand Australia, and will follow suit in theUS in 2013) can encourage awarenessof portion sizes.

Fairtrade takes off

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Trends to consider


Personalization is likely to be the next revolutionin chocolate… the logical step is for consumersto design bars that cater to their unique palate

EVENTINGIn many countries, chocolate is anessential component of religiousevents, special occasions and festivals.The seasonal chocolate market is worthUS$4.9bn in the US, an increase of6.4% since 2010, says Mintel.

Easter is the biggest chocolate eventglobally and, although the shelves canappear full of competing products,the market is in fact far from saturated.Easter products launched worldwiderose 45% during 2011. Canadahas proved particularly fruitful formanufacturers, with seasonal activityincreasing 89% in 2011. In gift-hungryWestern Europe, growth in seasonalproduct launches is particularlynotable in the UK and France, whereseasonal activity increased 53% and41% respectively.

In more mature markets like the US andAustralia, there is evidence to suggestconsumers are choosing to buy asmaller number of high-margin, luxuryitems rather than focusing on valueproducts. In Australia, where Easter

chocolate spending is expected togrow 3% in 2012 to over US$178m,specialty retailers stocking luxuryEaster eggs from the likes of Lindthave been reporting robust growth.

China has seen a seasonal boom.Theexpanding middle class is spendingmore on premium chocolate, whichmakes the perfect gift. More thanhalf the chocolate bought in China ispurchased as a gift, with Christmasand the Lunar New Year peakbuying times. According to ShaunRein, author of The End of CheapChina: Economic and Cultural Trendsthat will Disrupt the World, costlyconfectionery fills a gap in traditionalpresent-buying. “Chocolate hits a goodmarket position. There just aren’t thatmany other prestige gift items in the$50-$200 range.”

Q&A

QHow has Hershey maintained growthin a time of financial uncertainty?

A: We have focused on productivity gains,which have been reinvested in the productsconsumers are looking for, and increasedmarketing activity. Gross margins haveincreased over the last few years as a result ofseveral actions, including raising prices in theUS market to offset rising commodity costs.We believe we’re in the middle of a secular bullmarket for commodities, driven by the growthof emerging economies.What steps have you been taking tomitigate rising raw material costs?Aside from pricing, we use hedging programsin everything but dairy. Certain costs arepredictable but when it comes to commodities,we follow the fundamental as well as technicalmarket indicators for materials such as cocoaand sugar. Longer-term, there’s an opportunityto improve cocoa yield in regions such asWest Africa. The methods being used at themoment aren’t that sophisticated, which iswhy we are involved in farming training toenhance cocoa-growing productivity. Overall,cocoa farming is still profitable at currentmarket prices – and some markets are actuallyincreasing production.Howmuch of your future revenue wouldyou like to see coming from overseas?We have targeted US$1bn revenue from ouroverseas operations by 2015 – we’ve actuallybeen pacing ahead of that. Mexico, Brazil, Indiaand China are the most important markets forus, and we nowmanufacture in all of them. Wehave been manufacturing in China for severalyears, rather than just exporting there, becauseUS chocolate simply isn’t formulated for thelocal taste profile.How do you see the luxury marketdeveloping in future?I believe that smaller artisan companies willfind it harder to stay in the market in the longterm. Luxury is growing again as a segment andcompetition is intensifying. It could eventuallyaccount for 20% of the market over time.What type of chocolate will we be eatingin 2030?A lot of the products currently available in theUS market still have longevity. There will bemore personalized products as the marketseeks to deliver on unique taste profiles. Also,consumers are looking for more permissive,better-for-you alternatives.The digital aspectof personalization is still at an early stageand we will see further investment frommanufacturers. The mass market won’t goaway, but it will evolve.

Bert AlfonsoCFO, Hershey

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2030 bar


The bar of 2030

Looking tothe futureWhat kind of chocolate will we be eating in 2030?The rapid change of the past few years gives ussome vital clues to the industry’s direction

Health benefitsChocolate could ride the trend for nutraceuticals.Nestlé has already announced plans to invest

US$510m in “pioneering a new industry betweenfood and pharma”. Medicinal herbs could be usedas an ingredient, or even aspirin. Additional better-for-you ingredients such as super-fruits, nuts andoats may become more common. Additive-freechocolate will become the norm in developedeconomies. Dark chocolate could increase inpopularity as consumers become more aware

of its health benefits.

Innovative packagingTo stand out on the shelves and reduce

costs, packaging could undergo arevolution. Manufacturers will devise

new ways to ensure chocolatedoesn’t melt in the extreme heat ofmany emerging markets, as well as

introducing new bar sizes.

Attracting youthMarketing to the youthfulpopulations of emergingmarkets (especially Indiaand Latin America) willbe vital. Use of popularculture, including bands

and TV shows, in marketingcampaigns may increase,as will viral marketing andsocial media interaction, asyoung people broaden theirchannels. While childrenprefer sweeter chocolate,concerned parents will lookfor chocolate with added

health value.

The outsourcing solutionThe most successful chocolate companies

could be purely marketing and R&Doperations after outsourcing their productionto industrial suppliers. The public won’t evenhave heard of the world’s largest chocolateproducers, who will work behind the scenes

to supply well-known brands.

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Luxury vs commodityA growing middle class willcontinue to propel the luxurymarket, and will increasinglydrive it into mainstream

retailers. But this will posea challenge: although

middle class consumersin emerging markets maydevelop expensive tastes,their disposable income willstill be relatively limited.

Manufacturers may need tochoose between marginsand volume, positioning

themselves carefully as eithera luxury or commodity player.


2030 bar

The personal touchBespoke bars may be commonplace. Oneartisan chocolate maker says he envisages

smaller shops offering people the chance tocreate their own bar. As consumer palates growmore sophisticated, unusual flavors will becomethe norm, with chocolate-lovers choosing their

own combinations. Consumers may also be ableto design their own packaging.

New distribution channelsChocolate will be available from a widervariety of outlets, from coffee shops to

health food stores, to cater for conveniencebuyers. Supermarkets and discount storeswill continue to dominate sales, particularly

among value customers. Premium chocolatecould become available in mainstream stores

as luxury buyers proliferate. Brands mightseek to move up the value chain by creating

their own flagship stores, somethingHershey and Mars (through its M&M’sbrand) have already done successfully.

Middle class ruleManufacturers are likely to offer more

chocolate from ethical sources to meetaspirational buyers’ needs. Middle class

consumers will also be keen on premiumchocolate for gifting purposes, and seasonallaunches, which increased 6% during 2011,

will continue to grow.

A new recipeMilk chocolate will have a lower cocoa content due to risingprices, and manufacturers will be forced to use cocoa moresparingly. Demand for cocoa could spiral out of control: oneLatin American manufacturer predicts that China and India

increasing average per capita consumption by just 1kg couldmake most manufacturers’ current models unsustainable. In

that scenario, artifical cocoa could become a viable alternative.

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Fresh flavorsIn developed markets, flavors may becomeincreasingly unusual as palates grow moresophisticated and brands seek a marketingboost. Combinations of sweet and savoury(such as bacon and chocolate) will increase,and salt, olive oil, herbs and flowers will all

be used as flavorings.

Think smallRising obesity levels and government regulationwill lead to manufacturers limiting portion sizes.Sharing bags of smaller bars will become more

popular as people seek to limit the amount eatenin one sitting. Average per capita consumption

(currently 8kg in Europe) may drop, althoughoverall consumption is likely to rise as the global

middle class mushrooms.

Price vs sizeIn emerging markets, chocolate takes ahefty bite from the household budget.

As input price volatility continues,manufacturers may have to keep valuein mind or risk losing consumers. Price

per gram is rising fast in developedmarkets, but research shows consumersfeel cheated if bars get smaller but price

is static. Mainstream manufacturerscould be forced to choose between

containing cost, at the expense of size,and moving further up the value chain.

AboutKPMGKPMG is a global network of professional firms providing Audit, Tax and Advisory services.We have 145,000 outstanding professionals working together to deliver value in 152countries worldwide.

KPMG is organized by industry sectors across our member firms. The Consumer Marketspractice, which encompasses the Food, Drink and Consumer Goods and Retail sectors,comprises an international network of professionals with deep industry experience.

This industry-focused network enables KPMG member firm professionals to provide consistentservices and thought leadership to our clients globally, while maintaining a strong knowledgeof local issues and markets.

It’s clear the chocolate market is shifting rapidly, and presents a range of challenges andopportunities. To discuss any of the issues raised in this report, please get in touch.

ContactsWilly KruhGlobal Chair, Consumer Markets andFood, Drink and Consumer Goods+1 416 777 [email protected]

Nick DebnamASPAC Regional Head of ConsumerMarkets and Food, Drink andConsumer GoodsKPMG in Hong Kong+852 2978 [email protected]

Stephane GardHead of Consumer MarketsKPMG in Switzerland+41 21 345 [email protected]

JohnA MorrisEMA Region Head ofConsumer MarketsKPMG in the UK+44 20 7311 [email protected]

PatrickW DolanAmericas Region and US Headof Consumer MarketsKPMG in the US+1 312 665 [email protected]

Publication name The Chocolate of TomorrowPublished by Haymarket Network LtdPublication no 120788Publication date June 2012Pre-press by Haymarket Pre-press

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor toprovide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in thefuture. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMGInternational. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-visthird parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.The KPMG name, logo and “cutting throughcomplexity” are registered trademarks or trademarks of KPMG International.

Photography and illustration: Creativ Studio Heinemann/Westend61/Corbis; Peter Dazeley/Getty Images; AP/Press Association Images; Shutterstock

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