Same Price for Less Chocolate 🍫 in Easter & Winter as Cocoa Prices Reach $10,000?

As Easter and winter approach, cocoa products are among the consumer trends making headlines, with popular chocolate products such as chocolate Easter bunnies and eggs enjoyed during the Easter celebration, while others opt for a cup of hot chocolate or other treats during the cold winter months.

In the past year, the cocoa industry has faced a significant challenge, with soaring cocoa prices reaching up to $10,000 per ton this month, from the $2,000 range prior to mid-2023. Cocoa is one of the main ingredients in chocolate. It's essential for giving chocolate its distinctive flavour and characteristics; the cocoa content in a chocolate product can significantly affect its taste, texture, and nutritional profile.

Factors including poor harvests in key producing countries such as Ivory Coast and Ghana have introduced supply shortages, leading to this surge in cocoa prices. While this may spell trouble for chocolate companies and producers of cocoa products in the short term, there's an interesting economic concept at play here: "High prices are the cure for high prices."

This essentially brings us back to the dynamics of supply and demand; when prices rise due to supply shortages, it could impact demand as costs are passed on to consumers. This can also impact a company's profit margin. Think of it this way: higher cocoa prices could mean the company has to spend more to acquire cocoa for the production of its products, and the profit margin may be less.

Companies with pricing power can pass on high cocoa costs to consumers, maintaining profit margins. Strong brands and unique products let them charge more without losing demand.

The Chocolate Giant

Mondelez International, a global chocolate giant with popular brands like Oreo and Cadbury, has strong pricing power due to its well-recognized and loyal brand following, leadership in product categories, and investment in innovation and marketing. This allows it to adjust prices without the potential of losing demand. Its global operations offer economies of scale and diversify risks like currency fluctuations, supporting its pricing strategy and product demand.

For the fourth quarter of 2023, the chocolate giant experienced a 7.1% increase in net revenues, driven by a 9.8% surge in organic net revenue, boosted by acquisitions and distributor agreements. Despite currency challenges and divestiture impacts, gross profit climbed $395 million, with a margin increase to 37.3%. Operating income surged by $359 million, reaching a margin of 12.8%, mainly due to reduced legal impact and divestiture gains. Diluted EPS rose to $0.70, up 66.7%, while Adjusted EPS reached $0.84, up 23.5% on a constant currency basis. Additionally, the company returned $1.5 billion to shareholders through dividends and share repurchases.

Here’s the full results.

The Same for Less

Shrinkflation, on the other hand, is another technique where the size is reduced while the price remains the same. An article from BusinessDay revealed that Mondelez's spokesperson said the company plans to keep prices the same amid rising costs but change the unit weights.

So, while high cocoa prices may pose challenges for chocolate companies and cocoa product producers in the short term, they also present an opportunity for savvy investors. Here's how: 

• Entry Opportunity: When cocoa prices are high, chocolate companies may experience margin pressure as the cost of raw materials increases, contributing towards lower earnings per share expectations. In the case of the chocolate giant, according to Nasdaq,  markets expect its EPS to rise in the first quarter of 2024 before declining in Q2, regaining momentum in the quarters to follow for the year.

As prices stabilise and supply improves, chocolate companies could benefit from lower input costs, leading to improved profitability. Hedging via stockpiling essentials at a specific price may also help against future price uncertainties arising as a result of supply disruptions and geopolitical events.

Conclusion

It’s also important to note that prices don’t rise forever, and changes in pricing don’t happen overnight. That said, it may be worth taking into account how long the prices remain high and developments taking place that could potentially stabilise the prices.

People and Profits (PP) is the theme that has emerged in the global economy, and companies contributing towards local communities while harvesting the wealth of the land and surrounding communities may stand to capitalise on being able to increase their production capacity. Rising incomes, urbanisation, and changing consumer preferences in emerging markets are driving demand for chocolate and cocoa products.

While cocoa prices may fluctuate, the demand for chocolate and cocoa-based products remains relatively stable over the long term. Investing in companies with a diversified product portfolio and geographic presence could mitigate the risks associated with fluctuations in cocoa prices. Evaluate the financial performance and competitive positioning of chocolate companies and cocoa product producers before making investment decisions.