Chocolate and Cocoa Products

SIC 2066

Companies in this industry

Industry report:

Included in this industry classification are establishments primarily engaged in shelling, roasting, and grinding cocoa beans for the purpose of making chocolate liquor from which cocoa powder and cocoa butter are derived and in the further manufacture of solid chocolate bars, chocolate coatings, and other chocolate and cocoa products. Also included is the manufacture of similar products, except candy, from purchased chocolate or cocoa. Establishments primarily engaged in manufacturing candy from purchased cocoa products are classified in SIC 2064: Candy and Other Confectionery Products.

Industry Snapshot

The chocolate and cocoa products industry has traditionally been subject to significant fluctuations in demand. Chocolate products tend to be seasonal in nature, with demand increasing sharply during the holidays. Typically, the third and fourth quarters reflect the highest sales. In addition, several consumer trends have had an impact on demand. These include rising sales of premium-priced chocolates and the growing interest in medical research news concerning either health risks associated with high-fat milk chocolates or, ironically, health benefits associated with dark chocolate and premium cocoa that contain antioxidant flavanols.

According to the U.S. Census Bureau, approximately 162 establishments operated in this category in 2007. Industry-wide employment totaled approximately 7,721 workers receiving a payroll of $370 million. Companies in this industry tended to be small, with 78 percent employing fewer than 20 workers and only 11 percent employing more than 100. Total value of shipments for the industry were about $4.4 billion in 2007, up slightly from $4.2 billion in 2005.

Organization and Structure

All cocoa beans processed by U.S. manufacturers must be imported by direct purchase or through the services of a broker, as cacao trees require a tropical climate to flourish. Growers are paid for the beans at market price, which is determined primarily by the quality and availability of the crop worldwide. A testament to cocoa's importance as a commodity is the existence of cocoa exchanges, similar to standard stock exchanges, in New York, London, Hamburg, and Amsterdam.

The beans are processed to make chocolate liquor, which is in turn used to manufacture such products as cocoa, chocolate syrup, and solid chocolate chips and baking bars. The chocolate liquor is often sold to other manufacturers who combine it with additional ingredients to produce confections, bakery items, and dairy products. Manufacturers roast, shell, and grind the beans to produce unsweetened chocolate, the chocolate liquor that is the basic ingredient of all chocolate products. Further processing of chocolate liquor falls into two categories: cocoa manufacture and chocolate manufacture.

In cocoa production, the fat is pressed from chocolate liquor, leaving a cocoa cake that is crushed to form cocoa powder. The powder may be sweetened and sold as a cocoa beverage or left unsweetened for use in bakery and dairy products and for home cooking use. Cocoa butter, which is the fat removed from the chocolate liquor, is used mainly in sweetened chocolate, but is also used as a moisturizer in soaps, creams, and medications.

The production of chocolate requires the addition of sugar or other sweeteners and cocoa butter to chocolate liquor. Milk solids are also added in the manufacture of milk chocolate. Bulk quantities of sweetened chocolate, in blocks of at least 4.5 kilograms, are considered chocolate coating and are used for candy coverings and baked goods. Chocolate coating is generally more expensive than the confectioners' coatings, which are made from cocoa powder.

Chocolate manufacturers sell these semiprocessed cocoa products to other firms that use the items in the production of confectionery, baked goods, and dairy products such as chocolate milk. In addition, some producers also manufacture their own confectionery. Exports of chocolate products consist mainly of confectionery items rather than semiprocessed chocolate.

Background and Development

The history of the chocolate and cocoa products industry in the United States began in 1765. In that year, supplied by cocoa beans from the West Indies, the first chocolate factory was established in New England. Physician James Baker funded the venture, and the Baker's brand continues to be produced today by Kraft Foods Inc.

During World War I, the U.S. government recognized chocolate's worth as both nourishment and a morale booster to those in the armed forces. Space was made on cargo planes coming into the country so a sufficient supply of cocoa beans would be available to manufacture chocolate products. The U.S. Army D-rations continue to include 4-ounce chocolate bars, and cocoa bean products are part of the rarified rations of NASA astronauts.

The chocolate industry did not escape the effects of the recession of the early 1990s. Most cocoa-based companies in North America experienced layoffs, mergers and consolidations, plant closings, shift cutbacks, advertising budget slashes, and operational streamlining, as reflected in poor sales figures and fiscal restraint. Between 1989 and 1991, the industry experienced 50 acquisitions, mergers, licensing agreements, or joint ventures, and companies were intent on expanding and diversifying their product base.

The decline in world output of cocoa and the increase in demand for chocolates in new markets, such as China, Russia, and other emerging economies, indicated the arrival of a long-awaited bull market in cocoa. Another area in which the demand for cocoa increased was the beverage industry. Of the nearly 3,000 new product introductions in the mid-1990s, approximately half the beverage products consisted of cocoa, coffee, or tea.

In the 1990s, producers also began catering to health-conscious consumers. The popularity of "lite" (low-fat) candy and desserts increased dramatically. Bakers, as well as other name-brand companies, began to offer reduced-fat and fat-free chocolate items.

In the 2004-2005 season, the United States accounted for 12.5 percent of worldwide grindings of cocoa beans, or 419,000 tons, and while in 2005-2006 the amount increased to 432,000 tons, the global share was stable at 12.4 percent. North America and Europe consumed nearly two-thirds of all cocoa product imports.

In the mid-2000s, Americans spent about $13 billion annually on all end-product chocolate. The Chocolate Manufacturers Association (CMA) indicated that U.S. exports of chocolate products totaled more than $711 million in 2005, whereas imports of cocoa for processing purposes reached $870 million. The industry itself, consisting of the manufacturing of chocolate from cacao beans, had shipments worth about $4.2 billion in 2004, according to the U.S. Census Bureau.

Current Conditions

The news in the mid-2000s that pure cocoa and high-end dark chocolates were actually healthy and nutritious brought new and prodigal consumers back to chocolate indulgence. Several published reports indicated that cocoa plant extracts had been proven to reduce cholesterol. Moreover, they contained high amounts of natural antioxidants in the form of flavanols--even higher levels than that found in most fruits and vegetables. Antioxidants, according to medical research, fight disease-causing "free radicals." The news could not have been better for the cocoa industry.

Additional research revealed positive results for the cocoa-based chocolate industry in the late 2000s. For example, a study by Northumbria University (Newcastle, UK) found that the flavanols in dark chocolate can fight the fatigue that comes from intense mental concentration and hone mental sharpness. According to researchers, flavanols have the ability to dilate blood vessels, which allows more blood to reach important areas of the brain and thus boost brain power, in addition to lowering blood pressure. In 2009, Newsmax reported that consuming dark chocolate, over time, can provide protection against neurodegenerative disease and decline in cognitive function.

Findings such as these helped provide a positive outlook for cocoa-based products, especially dark chocolate. Premium chocolate, which, according to a January 2009 Wall Street Journal article, "is typically characterized by an emphasis on sourcing and the production process, much like wine," was also growing. According to market research firm Mintel, sales of premium chocolate increased 129 percent between 2001 and 2006, reaching $2.05 billion in 2006. Mintel forecasted continued growth and predicted sales of premium chocolate in the United States would top $3.5 million by 2011. As a result of its higher price, growth slowed somewhat during the sluggish economic conditions of the late 2000s.

Although unit sales of chocolate decreased about 3.8 percent in 2008, value of sales continued to increase. For example, total chocolate candy sales in supermarkets, drugstores, and discount stores (excluding Wal-Mart) reached almost $5 billion in 2008, a 2.2 percent increase from the year before, according to Information Resources Inc.

According to Gourmet Retailer, important trends occuring in the industry as the first decade of the twenty-first century neared a close included organic premium chocolate, "single-origin" chocolate (or that made with cacao exclusively from one region), sugar-free and nutraceutical chocolate products, and premium chocoloate infused with exotic flavors. Manufacturers wasted no time in capitalizing on these trends. In 2008, Mars launched deluxe Dove bars and premium M&Ms in flavors like raspberry almond, and Hershey's bought up organic chocolatier Dagoba and premium chocolate makers Scharffen Berger and Joseph Schmidt. Cocoa content began to appear on the labels. Hershey's Cacao Reserve, for instance, contained 35 percent cocoa, while its Scharffen Berger Extra Dark boasted 82 percent.

Industry Leaders

One of the leading companies in the industry was Wayzata, Minnesota-based Cargill Inc., the United States' second largest corporation (after Koch Industries), with $120.4 billion in 2008 sales and 160,000 employees. Decatur, Illinois-based Archer Daniels Midland Corp. (ADM) was another industry leader, with $69.8 billion in sales and 27,600 employees. In terms of companies focused on the chocolate market, the top three industry leaders in 2008 were Mars Inc. of McLean, Virginia, with about $30 billion in sales and 70,000 employees; Nestle USA Inc. of Glendale, California, with $10 billion in sales and 22,000 employees; and the Hershey Company, with sales of $5.1 billion and 14,000 employees.

Mars, makers of such well-known brands as M&Ms, Snickers, the Mars bar, Three Musketeers, Milky Way, and Dove chocolate, greatly increased its size when it purchased gum giant Wrigley in 2008. As of the late 2000s, the founding Mars family continued ownership of the firm.

Nestle USA, a subsidiary of the largest food company in the world, Nestle SA in Switzerland, offered hundreds of chocolate products, including Baby Ruth and Goobers, as well as an array of other food items.

The Hershey Company, maker of the well-known Reese's Peanut Butter Cups, Hershey's Kisses, and Kit Kat, among a host of other confections, was founded by Milton S. Hershey in 1894. Hershey stopped processing its own cocoa in 1999 but remained a leader in chocolate sales. In 2004, Nestle sold off its cocoa bean processing plants in the United Kingdom and Germany to Cargill Inc., which remained a major cocoa supplier with other facilities in the Netherlands, France, the Ivory Coast, and Ghana.

America and the World

The depletion of the tropical rainforest in the primary cacao-producing countries of Brazil, Costa Rica, Ghana, Trinidad, Malaysia, the Cote d'Ivoire (the Ivory Coast), and Indonesia was of great concern to the American Cocoa Research Institute (ACRI). In the mid-2000s, the Cote d'Ivoire was the largest exporter of cocoa beans, representing 38 percent of the world's supply and 58 percent of U.S. imports. According to ACRI, the cacao tree's natural habitat is in the shade of the rainforest where pollination and pest control occur naturally. The transfer of trees to open areas results in increased use of fertilizers and pesticides.

In response to this concern, the ACRI established the Sustainable Cocoa Program to assist farmers in increasing or maintaining productivity at levels that were "economically viable, ecologically sound, and culturally acceptable." The program's goal was to establish a sustainable and geographically diverse supply of cocoa by 2010. In addition, in 2000, the World Cocoa Foundation (WCF) was formed to promote similar goals within the industry. The endeavors of the WCF were financially supported by more than 50 member companies.

Another industry issue that cropped up in the early 2000s was the use of child labor and child slaves in the Cote d'Ivoire. The U.S. State Department estimated that approximately 15,000 children were working on cocoa, coffee, and cotton farms in the Cote d'Ivoire at that time. In late 2001, the U.S. chocolate industry, as represented by the CMA, proposed what was known as the Harkin-Engel Protocol, calling for the development of industry-wide labor standards and a uniform system for monitoring, reporting, and certifying the industry. However, in June 2004, the International Labor Rights Forum (ILRF, "Fund" until 2007) reported that little had changed since 2001 and called for more aggressive measures to ensure that, at a minimum, existing legislation would be enforced to control this problem. When the protocol expired in July 2005, it was considered a failure by the ILRF and Global Exchange, a San Francisco-based international human rights group that continued to lobby for changes in the industry's practices. Section 307 of the Tariff Act of 1930, 19 U.S.C. 1307 (1997) prohibits the importation of products made with "forced or indentured child labor." The protocol led to the 2002 formation of the International Cocoa Initiative (ICI), which has made some progress in Cote d'Ivoire as well as Ghana.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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