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Premium brands gain, but overall U.S. chocolate consumption down

By Hugo Miller
Bloomberg News

	EMILE WAMSTEKER / BLOOMBERG NEWS Shoppers wait in line to pay for their purchases at a Lindt chocolate store in New York. More customers are seeking out chocolate with high cocoa content, fueling growth in the premium segment of the global $42.2 billion industry.
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"My chocolate-eating habits have definitely changed," Arbash said, as he browsed for gifts at the Lindt store on Fifth Avenue. "I target high-quality dark chocolate. I eat only a small amount every day, so I can afford it."

As obesity reaches record levels, chocolate consumption is declining in the U.S. Yet the premium segment of the global $42.2 billion industry is growing. In Europe, a similar shift is taking place after governments four years ago allowed vegetable fats to be used in chocolate, diluting its cocoa taste.

Profit at Kilchberg-based Lindt rose 20 percent last year as revenue gained 7.1 percent. Sales of organic chocolate at London rival Green & Black's surged 62 percent.

"The chocolate business is a very difficult one at the moment," said Edouard Dubuis, who manages a consumer-goods fund including Nestlé shares at Clariden Bank in Geneva. "With premium chocolate as its mainstay, a company like Lindt & Spruengli is much better positioned than larger competitors."

Premium chocolate is a product that uses cocoa butter as its main fat source and uses at least 70 percent cocoa.

Shares of Lindt & Spruengli, founded in 1845, have risen 68 percent in the past year, more than quadruple the gains of Vevey, Switzerland-based Nestlé, the world's largest chocolate maker, and twice the share-price increase of Hershey, Pa.-based Hershey, the U.S.' biggest maker of chocolate candy.

Cocoa beans were first used in South America to make a dark brew known as "chacahoua" and were brought back to Europe in the 16th century by Spanish conquistador Hernando Cortés, according to Nestlé's Web site. The beverage became a delicacy in Europe. In 1828, Dutch chocolate maker Conrad van Houten invented a method for pressing fat from cocoa beans, creating a cake that could be made into powder and paving the way for a solid form of chocolate.

Per capita consumption of chocolate candy in the U.S. fell to 10.9 pounds in 2001 from 12 pounds in 1997, according to U.S. Department of Commerce and Census Bureau data cited by research firm MarketResearch.com.

Falling demand hurt prices too: Raw cocoa prices have fallen almost 29 percent in New York in the past year and are trading at $1,402 a metric ton. Prices in London are down 39 percent in the same period.

"Awareness of sugar and its role in people's diets has come a long way," said Craig Sams, 59, a native Nebraskan who founded Green & Black's in 1991.

Still, U.S. sales of premium chocolate will rise 10 percent in 2005 from $1.1 billion this year, and reach $1.62 billion by 2008, predicts Packaged Facts, a unit of the U.S. market researcher.

Nestlé is feeling the pressure.

Sales at the company's chocolate unit, which makes KitKats, Smarties and Crunch bars, fell 4 percent last year to $6.4 billion. They dropped 2.9 percent in 2002.

The decline may force Nestlé, which also sells Perrier water and Dreyer's ice cream, to make acquisitions to stay on top in chocolate or bow out of the industry, said Alain-Sebastian Oberhuber, an analyst at Lombard Odier Darier Hentsch in Zurich.

Nestlé's profit rose 80 percent in the second half of last year as it benefited from more than $16 billion in acquisitions since 2000.

"There is still potential for further growth," Cesar De Los Rios, 52, Nestlé's senior vice president in charge of chocolate, confectionery and biscuit sales, said in an e-mailed statement.

Mars, the maker of M&M's, Mars and Snickers bars, says it's adapting its products to consumers' demand. It's test-marketing a snack called Cocoa Via, which will have boosted levels of phenols, a naturally occurring element in cocoa.

Hershey, whose candies include Milk Duds, Almond Joy and Hershey's Kisses, is driving growth by reducing sugar in products including Reese's peanut-butter cups, Chief Executive Richard Lenny, 52, told investors in February at a conference in Scottsdale, Arizona.

Fourth-quarter profit rose 11 percent to $144.9 million as sales gained 2 percent. Hershey doesn't break out figures for chocolate sales and executives weren't available to be interviewed on the subject, said Christine Dugan, a spokeswoman.

Cadbury Schweppes, whose candies include Twix, believes premium chocolate can become "an important niche in the overall confectionery market," said Dora McCabe, a spokeswoman. In 2002, London-based Cadbury bought 5 percent of Green & Black's parent, Whole Earth Foods.

The demand for chocolate with higher cocoa content comes after the European Union in 2000 allowed the use of cheaper vegetable fats in chocolate bars instead of cocoa butter.

The trend is in line with the rise in demand for gourmet coffees and olive oils, Lindt Chief Executive Ernst Tanner said.

"People have had enough of mass-produced foods," Tanner, 57, said in an interview at Lindt's headquarters on Lake Zurich. "They want to pamper themselves and enjoy what they eat."

Lindt & Spruengli's sales in the U.S., including its San Leandro-based Ghirardelli brand in California, rose 11 percent to $250.8 million last year as the company opened nine new shops.

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