With Cocoa Prices Down, Candy Makers Face Tasty Choices
Candy manufacturers have come up against a sweet problem: what to do with increased profits resulting from lower cocoa prices?
Cocoa market analysts and commodity traders say more advertising and promotions are likely. But they disagree about the prospect for even bigger candy bars.
Cocoa prices have been sinking--falling 20% since July--and show no signs of recovery, particularly after the International Cocoa Organization failed during the weekend to adopt a new marketing pact that would support prices in an oversupplied market.
Candy bars account for more than half of the 2.3 billion pounds of chocolate manufactured annually by U.S. candy makers, according to the Chocolate Manufacturers Assn.
“If chocolate manufacturers decide to increase their bar weights or reduce their prices, it will increase consumption,” one trader said.
Consumption is affected by prices of the raw material, but analysts note that there is always a time lag of four to six months between the change in cocoa prices and the change in prices for the finished product.
Hershey Foods Corp. was the first to increase the size of its candy bars in July, 1986, and the company’s profit increased 20% in the first half of 1987. Other candy manufacturers followed Hershey’s lead to remain competitive.
Intense Competition Likely
An Argus Research report said Hershey’s performance should continue, partly due to aggressive marketing and lower costs.
“Manufacturers have reasonable profit margins and the industry, in general, is promoting a lot more, which is resulting in an expansion of the industry,” a cocoa buyer for a large U.S. chocolate manufacturer said.
“The more we spend in promoting products, the more products we sell,” he said.
Nomi Ghez, a stock analyst with Goldman Sachs, said intense competition for market share is likely to prevent manufacturers from simply keeping the increased profit margins. “They’re always fighting for market share and may increase the bar size or pass the benefits to the consumer through promotional coupons,” Ghez said.
“What you’ll probably see is the size of the bar increase,” said Tropical Trader analyst Eric Nadleberg.
However, others disagree. “The consumer perception has been improved since the larger sizes in 1986 and has held steady. If something has a positive impact, you tend to keep it,” said Richard O’Connell, president of the Chocolate Manufacturers Assn.
O’Connell said he expects manufacturers to pass the higher profit margins along in coupons and promotions.
“I think it’s ridiculous to expect 1manufacturers to increase the bar size,” said an executive from a large U.S. chocolate manufacturer. “There’s a lot to consider besides commodity prices, including changes in the tax law, the companies’ bottom lines and the prices of other ingredients,” he said.
Cocoa prices responded quickly Monday to the lack of a new marketing pact, falling to five-year lows on the London cocoa market, and to 18-month lows at the Coffee, Sugar & Cocoa Exchange in New York.
“The question . . . is whether prices will go down from here,” Prudential-Bache commodities analyst Debra Tropp said.
London trade house Gill & Duffus said in its latest market forecast released late last month that world demand for cocoa should increase by 3.7% in the next marketing year. Several analysts expect prices to stabilize because of a tightness of quality cocoa in the near term due to reluctance of producers to sell at these levels.
Creates Waiting Game
However, other analysts said that holding back by these producers will just create a waiting game and that the prospect of surpluses expected in 1987 and 1988 should limit rallies.
“Most manufacturers have enough cocoa to carry them through any burst in prices, if that should happen,” said Tropical Trader’s Nadleberg.
Major cocoa producers include the Ivory Coast and Brazil, Third World debtor nations whose finances are hurt by the decline in prices for the commodity.
