Food & Beverage

US chocolatiers looking for new sweet spot

Americans' sweet tooth for chocolate may never fully go away, but healthier eating and other snack choices, such as nutritional bars, nuts and chips, appear to be taking a bite out of chocolate sales.

"You're seeing a lot more snacking alternatives or substitutable occasions that is taking people away from traditional sugar confection and also that everyday kind of chocolate purchase," said UBS analyst Steven Strycula.

In a new research report, the analyst discussed how Americans are not eating as much chocolate as industry sales would imply, and how competition is heating up — "trends likely to limit" Hershey Company's sales in the near term. Also, he said we're seeing more "trading-up to premium chocolate offerings (dark, nut-based, lower sugar, etc.)."

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Last year, U.S. retail chocolate sales were approximately $18 billion, and over the last 10 to 15 years, they've been growing consistently at a roughly 3 percent rate, or slightly above conventional food sales, according to UBS.

A closer look at the data reveals that U.S. per capita volume consumption for chocolate peaked in 2005-2006 and has fallen at a 3 percent compound annual rate over the past decade, according to UBS. In other words, actual industry performance is slowing, not increasing, and pricing due to cocoa inflation is driving all of the chocolate category's growth.

Americans on average spent $56.80 on chocolate products during 2015, according to Euromonitor. And the amount of chocolate consumed per person last year was around 9.5 pounds — down from nearly 12.6 pounds in 2006.

To be clear, global chocolate consumption also is slowing. There's been a marked decline, especially in such markets as China, Brazil and Russia, which analysts attribute in part to economic challenges in those countries. Germany, too, has seen softening chocolate consumption in the past decade.

Yet, dark chocolate — considered a healthier indulgence snack — is holding up much better and actually beating some alternative snacks. While chocolate sales as a whole were up 2.5 percent in 2015, Nielsen data show dark chocolate saw healthier sales growth of 6.8 percent during the period.

Hershey and Mars are among the U.S.-based chocolate brands expanding their offerings in the dark chocolate category. Overall, dark chocolate accounted for 36 percent of all chocolate launched in the U.S. in 2014 and 37 percent in 2015, according to Mintel Group.

"What we find is whether times are good or times are bad, consumers still want to treat themselves," said Tracey Massey, president of Mars Chocolate North America. "Innovation is critical for this industry because consumers like to try new things. But they always go back to their old favorites, which is why Snickers and M&M's have done so well for so many years."

Mainstream chocolate still represents the majority of industry sales (88 percent) followed by the premium category, according to Nielsen. Seasonal chocolate is a big seller during holidays, although it usually is a lower-margin category due to promotional activity.

Last year, Mars — a closely held company — announced a $100 million factory expansion in Kansas. Massey said the investment is important as the Virginia-based company focuses on innovation in the U.S. chocolate market. One of the new product lines is Goodnessknows Snack Squares, featuring dark chocolate and fruit, and it follows the 2014 launch of Dove Fruit, another dark chocolate line.

Meanwhile, Hershey sells dark chocolate products from its KitKat, Reese's and Kisses lines, and the Pennsylvania-based company also has Cadbury-brand dark chocolate bars in the U.S. market through a partnership with the British confectionery company.

Within the U.S., Hershey's 32.2 percent market share makes it the largest chocolate company followed by Mars (26.4), according to Euromonitor. Worldwide, Mars is tops in share with a 14.5 percent followed close behind by Mondelez International (14.3 percent), Nestle (12.3 percent) and Hershey (7.3 percent).

"We are very happy with how the category is going and our performance," said Mars' Massey. "It's obviously a mature market but we do believe there's a lot of growth."

Weak domestic chocolate trends underscore the importance of Hershey's international growth and diversification plans. Hershey didn't respond to requests for comment.

A little over a year ago, Hershey also made a push to diversify beyond chocolate into other snacks by acquiring Krave, a jerky products business. It also has Brookside, a fruit and nut bar line launched nationally last summer.

Hershey gets about 85 percent of its sales from the U.S. market but it has stumbled in expanding abroad in China, where Mars has around 50 percent market share. Hershey China continues to lose money and "will be a drag on the total operating profit in 2016," the company said in January. At the same time, Mars appears to be doing well in China.

"Our China business is very robust, very strong — and we see good growth in it," said Massey. "That said, it's an emerging volatile market and things go up and down — and when you're operating in international markets you have to be able to manage those trends."

Meantime, some analysts are cautious about Hershey's near-term outlook and have lowered earnings estimates in recent weeks. Hershey is scheduled to report results April 26 and current consensus is for revenue and earnings per share to be below year-ago levels.

Last week, Credit Suisse analyst Robert Moskow lowered his EPS and top-line estimates for Hershey's first quarter and full year to below Street consensus; he cited weak sales trends in the U.S. and China. Then, RBC Capital analyst David Palmer on Wednesday reduced EPS estimates for Hershey's first quarter "to reflect currency, recent sales trend, and a shorter Easter selling period in the first quarter of 2015."