Cocoa prices are soaring. Candy makers will have to get creative

In recent years, the price of cocoa has hovered around $2,500 per tonne. But reports of a smaller-than-expected harvest have stoked concerns about supply, triggering a rise in the price of the commodity in recent months. Cocoa reached a record high of more than $11,000 per tonne in April. The price surge has since eased slightly, but the harvest remains well above what food companies are used to paying.

For now, many of the biggest candy companies – Hershey, Mars, maker of M&M’s, Ferrero, owner of Kinder and Mondelez, parent company of Cadbury – are likely insulated from higher cocoa costs, thanks to contracts at long term who set the prices they pay for the key products to be protected. them from events like this. This gives them some time to resolve the problem. But by 2025, they will likely end up paying a lot more for their cocoa.

“It has an absolute impact on how these companies run their businesses, just because the cost impact is incredibly significant,” said Steve Rosenstock, head of consumer products at Clarkston Consulting, which advises clients on how to deal with problems such as soaring cocoa prices.

Mars declined to participate in this story. Mondelez, Ferrero and Hershey did not respond to CNBC’s requests for comment.

West Africa, which produces the majority of the world’s cocoa production, has been hit by crop diseases and falling prices paid to farmers at the point of sale, called producer prices, which are pushing them to grow more lucrative crops such as rubber instead of cocoa. This season’s cocoa harvest is expected to see the largest deficit in at least six decades, according to a May Rabobank report.

Reuters reported on Wednesday that Ghana, the second-largest cocoa producer, was considering delaying the delivery of 350,000 tonnes of beans for next season, which would push up prices.

In recent earnings conference calls, executives from Mondelez and Hershey said they believed market speculation was behind at least part of cocoa’s rise. Prices may drop in September, once more information about the new crop becomes available, but that doesn’t mean they will return to normal.

The rising price of this product comes at a difficult time for many food companies. Over the past two years, many have raised prices to cope with inflation that has affected a wider range of products. As a result, shoppers have become more discerning about what they buy and more dissatisfied with the prices they see at grocery stores. Consumers’ focus on value leaves confectionery companies with little pricing flexibility to cope with the higher cost of cocoa.

And then there’s inflation contraction, a buzzword that has entered the layman’s lexicon over the past couple of years. Companies will reduce the quantity or weight of a product while the price remains the same. But consumers have understood the trick. A YouGov survey conducted in October found that 72% of U.S. respondents had noticed a shrinkage in food products.

As a result, many businesses will need to get more creative.

Daniel Fachner, CEO of J&J Snack Foods, monitors cocoa and chocolate prices. The company owns brands such as Dippin’ Dots, SuperPretzel and Hola Churros and makes products for other companies, such as Subway’s foot-long churro. Chocolate is a common flavor in its portfolio, which includes treats such as a chocolate-filled churro.

“It won’t stop us from using chocolate, but it will make us think and say, ‘Now, if we make this innovation with this new price, is it sellable?’ And then, when we sell it, “Is it priced low enough that the customer can sell it and still make a good margin,” Fachner told CNBC in May.

A hypothetical solution, proposed by Fachner, could be to reduce the number of chocolate chips from 12 to nine in a certain product. He also said J&J was researching every possible substitute that might work for some of its recipes.

Nik Modi, an analyst at RBC Capital Markets, cited Hershey’s new Jumbo Reese’s Cup as a creative workaround.

“This one has extra peanut butter in it, so it’s a good way to try to bring innovation to the market at a high price, to make the consumer feel like they’re getting value out of it, but you just need to change the product itself to reduce your dependence on chocolate,” he said.

Food companies that don’t primarily deal with chocolate might start to shy away from flavor, especially when it comes to new products.

“I think more or less people are going to try to stay away from chocolate at this point,” Modi said.

While this year’s surge in cocoa prices is historic, it likely won’t be the last time food companies are forced to pay more for the product. Analysts are already predicting another cocoa shortage next year, although it will probably be less dramatic than this season.

However, systemic issues, such as government-controlled producer prices, and climate change will likely continue to hurt the bean crop. Additionally, the use of child labor and slavery on West African cocoa plantations has led to lawsuits and scandals for confectionery companies.

In the long term, this means many businesses will need to look for more permanent solutions. In some cases, this may involve alternatives to cocoa.

“There are examples where companies are increasing the amount of non-cocoa additives, such as sugar, or more economical products like cocoa butter equivalents, shea butter, palm oil, oil coconut, that kind of thing,” Rosenstock said.

Recipe reformulation takes about nine months on average, according to a research note published Thursday by Bank of America Securities analyst Antoine Prevot. He said he believes fast-moving consumer goods companies have been considering changes to their formulas since the beginning of this year, meaning the new candies could start being distributed as early as August.

There are also more extreme substitutes. Startups such as Voyage Foods and Win-Win have made cocoa-free chocolate using alternatives such as grape seeds and legumes.

At least one candy company isn’t planning any major changes to its formulas.

“We’re going to do some cost tightening, but we’re not going to change revenue or do things that aren’t necessarily the right thing for the business in the long term,” Mondelez CFO Luca said. Zaramella, on June 4, during a Deutsche Bank conference.

There is also potential to diversify with other types of snacks. When Kraft created Mondelez more than a decade ago, its portfolio of snacks Triscuit, Sour Patch Kids and Wheat Thins was already there, in addition to chocolate products Milka, Oreo, Toblerone and Chips Ahoy.

Other confectionery companies have followed suit, adding more savory snacks to their ranges to drive further growth. For example, Hershey purchased Amplify Snack Brands in 2017, adding SkinnyPop to its portfolio, and Dot’s Homestyle Pretzels in 2021.

“I don’t think they did it to be less dependent on cocoa, they did it to respond more easily to the ups and downs of consumer trends and to be able to really diversify their portfolio,” Rosenstock said. “But the ability to rely on some non-chocolate categories, whether it’s savory snacks or candy or gummy products, I think that’s a good way to combat the cocoa crisis.”