Sector Insight: Luxury chocolate - Regular treat

Premium chocolates are on the rise as people reward themselves for coping with daily stresses.

THE BACKGROUND

Chocolate is very close to the hearts of a stressed-out society that feels it has earned a treat. Each UK consumer eats an average 8.5kg a year - ahead of the US, Japan and all of Europe. While this figure indicates a saturated market with few opportunities for manufacturers to make inroads, it is not such bad news for companies in the organic and luxury chocolate sectors. They can reap the benefits of consumers trading up to more indulgent products as their taste becomes more sophisticated.

Luxury chocolate accounts for about 18% of the total £631m chocolate market. While volume growth in the total chocolate market has stalled, the luxury category has increased 21% since 1999, according to Mintel.

This category covers a range of products and brands, from the more mainstream, such as Ferrero Rocher, All Gold and Guylian, to premium products often classed as 'Belgian' or 'Continental'. These include Elizabeth Shaw, Lindt, Bendicks and Thorntons.

At the top of the tree are the super-premium brands, which have limited distribution. These include Godiva and Green & Black's.

The luxury category includes boxed, block and countline chocolates, with organic and fair trade products often falling into the sector.

As with other FMCG luxury categories, erosion takes place over time, with lower-end products no longer being considered a luxury as they become routine purchases.

The super-premium sector accounts for almost 20% of the category by value, a rise of 85% since 2001. But value sales of mainstream luxury chocolates are down 12% in the same period, although they still account for 37% of the market.

Liqueur chocolates are enjoying renewed interest, with sales up 24% to more than £10m. However, block chocolate, worth £96m, and mints, at £64m, are bigger sellers.

This sector enjoys the advantage that it is less influenced by factors such as consumer affluence and the obesity debate as these chocolates are seen as treats, rather than a regular purchase.

TOP MANUFACTURERS

The leading manufacturers are Kraft Jacobs Suchard (KJS), Thorntons, Nestle and Lindt, although many new products are introduced by smaller, niche firms.

KJS is the top manufacturer, with sales of about £102m. Its brands include Terry's All Gold, Cote D'Or and its most premium, Suchard. In June 2004 it announced it was closing its Terry's of York facility, moving production to other parts of Europe. It had acquired the Terry's brand in 1993.

Thorntons has its own stores (380 high-street branches and 200 franchise outlets), but it has also gained listings in Tesco and Woolworths and extended into cakes and chilled desserts. Its strategy is to be a specialist chocolatier, and it is putting its staff through a brand-training programme.

Thorntons floated in 1988 but now looks likely to be sold.

Nestle has more than 10% of the luxury chocolate market and, while some of its products have suffered from erosion of brand perception, it has renewed its efforts in this sector in recent years.

In 2002 it launched the block Double Cream, which uses cocoa beans from Ecuador. It relaunched the product this year, with variants including fruit, white chocolate and roasted cocoa pieces.

Cadbury has all but withdrawn from the luxury market. Many of its brands, such as Roses and Milk Tray, are no longer classed in this category due to price and perception erosion, while products such as Wicked and Allure have failed altogether.

However, Mintel claims the company will refocus on this area and that it has been making inroads into the indulgent market again. In September it launched the Roses Luxury Collection (a single-layer 200g box priced £4.99), with larger chocolates and richer flavours.

Partly thanks to its infamous TV ads, Ferrero Rocher is one of the best-known luxury chocolate brands and has a market share of about 8% at £48m, up 51% since 2000. However, this familiarity has seen it has slip into the mainstream sector of the luxury market.

Fair trade and organic chocolate brands continue to perform well, although the extent to which this is down to their ethical positioning as opposed to their high cocoa solid content and resulting superior taste is hard to quantify.

ORGANIC INDULGENCE

Environmentalists Craig Sams (founder of Whole Earth foods) and Josephine Fairley (environment columnist for The Times and Sams' wife) founded Green & Black's in 1994, although Cadbury now has a 5% stake in the company.

Following its initial success with block chocolate and brand extensions including biscuits, beverages, gift products and ice cream, it is now expanding into the boxed chocolates market. In October the company launched The Dark Collection, a box of 28 individually wrapped chocolates with fudge and nut centres priced £12.99, sold exclusively through branches of Waitrose.

'The bulk of our business is in high-quality block chocolate, but we should be able to transfer successfully into gift chocolate,' says Green & Black's marketing director Mark Palmer. 'The Dark Collection is our first move into the area and it will be a much bigger part of our business in future.'

The increased use of internet shopping has led to several chocolate companies distributing their products direct to consumers. Hotel Chocolat, which originally traded as Choc Express, is one of the best-known, and runs a members chocolate club as well as its traditional gift products.

Mintel predicts that over the next five years the luxury chocolate market will grow 4% in real terms to £712m. If consumers are encouraged to trade up in the category, value growth will be achieved.

A rise in sophisticated taste preferences among consumers could benefit this sector in a similar way to wine and coffee. Some manufacturers are making more of the provenance of their cocoa beans - a trend that Mintel expects to continue.

While chocolate has found itself in the spotlight of the obesity debate, scientific research is now showing some benefits to the ingredients of dark chocolate in particular - that the antioxidant properties in chocolate, phenols, help to protect against heart disease, for example.

Masterfoods is one manufacturer investing in this research and a wellness sector may well emerge in chocolate in the not-too distant future.

UK LUXURY CHOCOLATES MARKET BY MANUFACTURER VALUE SHARE

Brand 2003 2000 2000-03

pounds m % pounds m % % chng

1 Kraft Jacobs Suchard 102.4 17.1 111.0 21.0 -8

2 Thorntons 86.3 14.4 64.0 12.1 35

3 Nestle 65.3 10.9 100.0 19.0 -35

4 Lindt 64.1 10.7 n/a n/a n/a

5 Bendicks 51.5 8.6 n/a n/a n/a

6 Ferrero Rocher 48.5 8.1 32.0 6.1 51

7 Green & Black's 23.4 3.9 n/a n/a n/a

8 Elizabeth Shaw 15.5 2.6 n/a n/a n/a

9 Masterfoods 7.8 1.3 n/a n/a n/a

10 Guylian 7.2 1.2 n/a n/a n/a

11 Cadbury Trebor Bassett 0.5 0.1 93.0 17.6 -100

Own-label 60.5 10.1 42.0 8.0 44

Others 76.0 12.7 85.0 16.1 -11

Total 599.0 100 527.0 100 14

Source: Mintel

DISTRIBUTION OF LUXURY CHOCOLATE BY RETAIL CHANNEL

2003 2000 2000-03

pounds m % pounds m % % chng

1 Multiple grocers 247 41.2 213 40.4 16

2 Impulse 128 21.4 120 22.8 7

Convenience 43 7.2 30 5.7 43

Independents 85 14.2 90 17.1 -6

3 Confectionery stores 127 21.2 115 21.8 10

4 Specialist retailers 74 12.4 68 12.9 9

5 Internet 23 3.8 11 2.1 109

Total 599 100 527 100 14

Source: Mintel

ANALYST COMMENT - LAWRENCE GOULD, Consumer markets analyst, Datamonitor

British consumers spent £920m on premium treats and comfort foods in 2003. As the pace of life increases, treats become more important to consumers. Expenditure on premium chocolate alone will rise by 3.8% to £832m in 2008.

For manufacturers, the treating occasion represents an opportunity to capitalise on consumers' desire for quality by focusing new product development and marketing efforts on indulgent products. Chocolate accounts for 43% of total spend on premium indulgence.

This trend is not limited to the UK. The boxed chocolates segment has benefited from consumers increasingly seeking solace in premium snacks in the US, where premium chocolates used to be a rare product that people brought back from Europe. Godiva (owned by Campbell Soup) is a pioneer of mass-market luxury in the US, and has so many outlets that it has been compared to Starbucks.

There is also a trend for chocolate from a single source, rather than blends. Terroir - the flavour and quality of a product that derives from its place of origin - matters less for chocolate than for wine, but the emphasis on first-class cocoa beans means many consumers will now pay much more for a bar of premium chocolate.

This trend is made possible by consumers' need to unwind, more sophisticated tastes and willingness to experiment with different types of indulgent food, as well as a growing feeling that they deserve to reward themselves.

As this attitude becomes more widespread, these desires for indulgence are becoming more akin to needs for many people, ensuring repeat purchases and future growth in this area.

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