GrowthSpotting: The Art of Global Investing
This series cuts through market noise to explore a handful of what we believe are the most relevant and inevitable global trends for investors seeking growth.
These powerful subthemes take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).
Today’s post focuses on The Finer Things: Sweet Luxury in Bitter Times.
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Have you noticed a change in the number of chocolate bars you can select at checkout counters over the past few years? Until relatively recently, one found only Hershey’s®, Nestle’s® and, for the particularly adventurous, the occasional Toblerone®. Now, however, there’s an array of expensive alternatives with names that often sound more like prep schools than candy bars, Green & Black’s®, Valhrona®, or the truly over-the-top Scharffen Berger®. And, the change is apparent not just at the checkout counter. According to an online reviewer at Chowhound, it’s “Like nothing I’d ever had before—intense, floral, winey, really sophisticated tasting.” 1
Was the reviewer describing the new season’s Bordeaux? No…it was a review of a high-end brand chocolate bar! People are paying even higher prices for artisanal chocolate in destination shops such as La Maison du Chocolat, whose packaging is easy to mistake for that of Hermès, or Christopher Elbow in San Francisco, “where the art of chocolate is expressed in a single, beautiful, decadent piece that’s hand-crafted one at a time.”2 Demand for premium chocolate is at a point where prestigious brands, such as Godiva, are now bordering on mass market.
While we have struggled with a financial crisis, a recession and high unemployment, the U.S. chocolate market has been growing around 6% a year, with the premium segment growing about twice as fast.3 Call it “affordable luxury”. The growth in premium chocolate mirrors that of lipstick sales during the recession in 2000, or higher nail polish sales more recently. As belt-tightening consumers cut spending on big ticket items, they tend to splurge on small luxuries, and one of those luxuries has become chocolate. One of the main beneficiaries of this trend is Barry Callebaut (BARN SW), the Swiss chocolate sourcing and supply company.
Barry Callebaut is the world’s leading supplier of chocolate to the food industry, with a 45% share of the global market.4 During the past four years, as the developed world economies have suffered, Barry Callebaut has produced moderate, but steady earnings growth, raised operating margins and improved its return on invested capital. Current consensus forecasts project 20% annual earnings growth over the next three years.5
With its commanding market share, Barry Callebaut is well-positioned to potentially benefit from the secular drivers of growth in the chocolate market. One is the fast-growing demand for premium chocolate in the developed world. Another is the accelerating trend for major food companies to purchase ready-to-use chocolate ingredients, rather than find, purchase, transport and process their own cocoa. Then, there are the emerging markets. Despite widespread lactose intolerance, chocolate sales have increased 40% in China since 2009, while demand in the Middle East and North Africa is expected to grow more than 60% by 2016.6
As Americans trade up from Hershey’s to brands with barely pronounceable names, many a consumer in the emerging markets is buying a chocolate bar for the first time, which proves that luxury, like beauty, is in the eye of the beholder.
- Chowhound.com. (http://chowhound.chow.com/topics/301766)
- Christopher Elbow. (http://www.elbowchocolates.com/about/about )
- The Daily, “Choco-Love”, 6/4/12. (http://www.thedaily.com/page/2012/06/04/060412-biz-chocolate-rosenbush-1-4/)
- Deutsche Bank, “Barry Callebaut” 3/16/12.
- Bloomberg, 7/20/12.
- KPMG, “The Chocolate of Tomorrow: What Today’s Market Can Tell Us About the Future”, 6/7/12.
Read more from the series GrowthSpotting: The Art of Global Investing at http://blog.oppenheimerfunds.com/tag/growthspotting/
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The mention of specific companies does not constitute a recommendation by any Oppenheimer fund or by OppenheimerFunds, Inc. Certain Oppenheimer funds may hold the securities of those companies mentioned.
BARN SW is not recognized by Yahoo as a listed stock????
Surprised that you don’t mention the growing influence of climate change on chocolate-producing regions. Over the short term, these regions are already seeing isolated shocks affecting yields due to extreme weather events. Like coffee, the long-term impacts are even more troubling.