Food & Beverage

China's sweet tooth for chocolate melts with economic slowdown

Jeff Daniels | CNBC

Chocolate demand is souring amid China's economic slowdown as consumers lose their appetite for paying high prices for the treats, according to a recent Euromonitor report.

It's a double whammy for Western chocolatiers exposed to China's market because they are already dealing with lackluster growth closer to home and consumers' sugar concerns.

"There are a number of pressures affecting the market, and perhaps the biggest is while consumers are snacking frequently, they are more often looking for healthier snacks than in the past," said George Puro, a New York-based analyst who covers the chocolate industry for market researcher Packaged Facts.

In China, Euromonitor estimates there was a 2.4 percent decline in sales for chocolate confectionery in 2015 compared with the prior year and it sees more deceleration this year. That compares with double-digit growth just a few years ago.

At the same time, there are signs Chinese consumers are opting for healthier and natural snack choices more regularly in their diets rather than indulging in chocolate treats, which they view as a special occasion or luxury item.

"The Chinese who are eating chocolate are eating less of it," said Marcia Mogelonsky, director of Insight for Mintel Food and Drink in Chicago. She said health or weight concerns maybe playing a role in the decline as well as economic reasons because chocolate tends to be pricey in China and the premium chocolate category in particular is "very expensive."

Hershey's big China bet

Hershey, known for its Hershey's Kisses and Reese's Peanut Butter Cups, has had a rough time with its China expansion. Last year, the company took a nearly $250 million impairment charge on Shanghai Golden Monkey, its Chinese chocolate business.

"From Hershey's point of view they have to be there [in China] to broaden themselves internationally," said Morningstar analyst Wesley Moultrie, noting the U.S. accounts for just over 80 percent of Hershey's chocolate sales. "Since China is one of the emerging markets it is really where you want to be at."

Among the other leading companies competing in the $2.8 billion Chinese chocolate market are Nestle, Ferrero, Cadbury and Mars. Last month, Mondelez International invested about $100 million in China as part of the rollout of its European chocolate brand Milka. Mondelez, which makes Cadbury chocolate bars, made a nearly $23 billion takeover offer for Hershey in June but the deal was rejected by Hershey.

Italy's Ferrero, famous for its chocolates wrapped in gold foil, invested about $300 million last year to build its first chocolate factory in China. Ferrero holds nearly a quarter of the Chinese chocolate market, according to Nielsen. That compares with Mars, which has just over a 40 percent share.

"This is an exciting time for the chocolate confectionery market, but only as a result of the difficulties it faces — the perpetual slowdown in the West is now being imitated in some markets such as China," said Euromonitor. "Companies are slowly dealing with the challenges they face, but can expect a low growth environment for some time to come."

US consumers trading up

The U.S. remains the world's largest single chocolate market but is considered mature, with annual sale growth slowing from 5 percent in 2013 to nearly 1 percent over the last year, according to Nielsen. The U.K.'s chocolate growth is essentially flat and comes as per capita consumption of the treat is already among the highest in the world.

Nielsen figures show everyday chocolate candy sales, a category which includes popular milk chocolate bars sold at U.S. convenience stores and grocers, have produced negative compound annual growth rates over the last four years. Dark chocolate, however, is enjoying double-digit sales growth in the U.S. as it benefits from a perception as healthier because of its antioxidant content.

"Growth is mostly occurring at the higher end of the market, particularly with pricier premium products, most of which are made of dark chocolate," said Puro.

India slump may be 'temporary'

Overall, three of the so-called BRIC countries – Brazil, Russia and China – have seen slowing chocolate consumption trends. Researchers say most of the chocolate slowdown has occurred in the last two years due to macro-economic headwinds.

Euromonitor's forecast was revised recently for Brazil and Russia's chocolate volume sales. For Brazil, the researcher expects volume sales to be between 3 percent and 12 percent lower by 2020 than its earlier forecasts, reflecting household consumption levels falling while the local economy slows.

As for Russia, it sees the outlook as "uncertain." The outlook will depend on how it recovers from its economic slowdown, with volume sales possibly 13 percent lower in 2020 in a pessimistic scenario, or 5 percent higher given an optimistic one.

Even India, the second-most populous country, has seen weakness in the chocolate category. Major Western food brands have invested heavily in India's market, including Nestle and Cadbury, among others.

Experts suggest the success of India's chocolate market will ultimately depend on affordability. Chocolate that might be affordable to urban consumers may be out of reach to the population in rural areas, where incomes tend to be lower.

In part, India's recent softness can be traced to headwinds the local market faced last year when a national food regulator made changes on labeling, quality and the way products are imported into the Asian nation.

"A lot of companies had to stop selling products in India for a couple of months last year," said Jack Skelly, an analyst for Euromonitor in London. "That had to do with a change in regulation. That is a temporary blip."

India's actions covered such things as organics and genetically modified ingredients. The end result was some food companies were ordered to withdraw products and others made recipe changes or shelved new launches.

To be clear, not all emerging markets are struggling as growth is considered attractive in Mexico and Indonesia, according to Euromonitor. Some confectionery companies such as Mondelez have moved production from the U.S. to Mexico, where labor is cheaper.

"These remain nascent markets for chocolate, where distribution is increasing and the product grows more affordable," Euromonitor said.