Chocolate Confectionery

Executive Summary UK April

Chocolate Confectionery Executive Summary UK April 2011

Ben Perkins
Head of UK Food & Drink Research

Sharing formats and seasonal chocolate are the main growth opportunities for chocolate confectionery. Consumers are treating themselves less often and to smaller quantities of chocolate, therefore limited editions are increasingly important to create excitement and drive sales. The simple concept of sharing helps offset any calorific guilt.

Chocolate Confectionery Executive Summary UK April 2011

The Market

Figure 1: UK retail sales of all chocolate, 2005-15

6,000 5,500 5,000 4,500 4,000 3,500
(m) 3,771

Best case (m) 5,572 Mintel forecast (m) 5,073 Worst case (m) 4,574

Market value (m)

Confidence intervals
3,000 2,500 0 2005

95% 90%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

70% 50%

Est. Actual Forecast

Source: Mintel

Overall, the chocolate market is worth around 3.8 billion, as of 2010; of which almost two-thirds is chocolate confectionery (2.4 billion), while the remainder is split between seasonal and boxed chocolates. Volume sales of chocolate confectionery fell by around 1-2% during 2009-10, while value sales appeared falsely robust due to price inflation, with growth of 5.5% during the same period. The impact of the increase in VAT and of rising raw material costs of cocoa, sugar, and glucose on pricing is currently the industrys biggest challenge. Chocolates penetration (excluding boxed chocolate) is stable at round 89% of adults but quantities consumed are declining due to smaller appetites for HFSS (high in fat, salt, sugar) products.

Despite showing resilience to the economic downturn as affordable treats, unit sales were down for many of the big-hitters (eg Cadbury Dairy Milk, Snickers, Mars Bars, Kit Kat) during 2010. Chocolate confectionery performed marginally better than boxed and seasonal lines in 2010 although countlines struggled due to health considerations and in some cases due to rising prices and shrinking pack sizes; both of which are more noticeable in the impulse and everyday sector. Sharing bags at round-pound price points have proved popular as they tick several boxes for consumers, such as portion control and less treat guilt, while price marked packs signal better value for money. The selfline segment of the market, under which they fall, now captures a 16% share of the market in value terms.

Chocolate Confectionery Executive Summary UK April 2011

Countlines may not be as en-vogue as other emerging segments, but they remain the popular choice, bought by 67% of adults and accounting for just over half (53%) of the market by value. Mars has reformulated its core countlines Mars Bar and Snickers in a bid to win back favour as chocolate consumers migrate to lighter, shared packs and premium positioned chocolate such as large moulded bars. Solid chocolate bars are the second most popular chocolate type according to Mintels survey; 59% of adults aged 16+ have bought these in the last 12 months. The momentum behind block sales has slowed slightly compared to previous years but growth remains strong, the blocks broadly maintaining their value share of the overall market, of 31%.

Rising numbers of 25-34-year-olds is good news for chocolate

Key demographics for the chocolate confectionery market are young working adults with families. Mintels expects the proportion of families in the population to remain stable between 2010 and 2015 (27%), growing in line with the overall population, and boding well for ongoing demand. Among young adults, a 4% decline forecast for the number of 15-24-year-olds should be offset by the 11% increase in 25-34s between 2010 and 2015 in terms of demand for chocolate. However, the latter is a much more health conscious group, eating chocolate and other sugary foods less often than their younger peers. This underlines the importance of developing healthier chocolate alternatives to retain chocolates high penetration and frequency of consumption.

Market Factors
Rising cocoa prices are a key concern for the market Cocoa prices reached their highest level in more than 30 years in January 2011 and commodity experts have warned of a global chocolate shortage by 2014. While the price volatility is partly due to unpredictable global harvests, rising demand from developing markets will contribute to future upward pressure on price. Pressure on the cocoa supply chain has reinforced the industrys longer-term focus on sustainability and fair trade initiatives; in the meantime, manufacturers have responded by increasing prices and/or reducing pack sizes of selected lines. Figure 2: Monthly averages of daily prices per tonne, cocoa, January 2005-January 2011
Daily prices of Cocoa Beans
4000 3500 3000 2500 US$ per tonne 2000 1500 1000 500 0

Health concerns affect the market

Children have cut back on eating chocolate every day, reacting to parental pressure to eat healthily, and enforced by restricted availability at school. Added to which almost half (45%) of adults are trying to lose weight (2010); this means that chocolate brands are under pressure to reduce saturated fats and calorie counts not least because of Government recommendations. Yet, some manufacturers are still sceptical about the role of health claims in chocolate confectionery, believing it might harm chocolates indulgence image. Chocolate relies on seasonal peaks such as Easter and Christmas even more now, given that everyday chocolate eating occasions are in decline. Falling volumes are a symptom of consumer health awareness and cost-cutting, both of which are less influential on special occasions such as Easter, and as a category it needs to defend its seasonal advantage.

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Apr-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Oct-10

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Source: ICCO/Mintel

Jan-05

Jan-11

Chocolate Confectionery Executive Summary UK April 2011

Companies, Brands and Innovation

The chocolate confectionery market is hugely competitive, particularly among the top three players; Cadbury, Mars and Nestl, intensified by a slightly shrinking marketplace. Following Krafts takeover of Cadbury in 2010, its market share has risen to 35%, making its combined chocolate portfolio a formidable force in the UK market. Cadbury and the other Kraft operations also enjoyed the fastest sales growth in the market over 2008-10. Above-the-line marketing spend rose in 2010, following a relative lull in 2008-09. This was mainly down to Mars, one of the few companies to increase spend during the year. However, building on 2010 campaigns, 2011 promises to be full of activity with several companies investing record amounts. With such extensive portfolios and a high level of penetration in this market, innovation from chocolate brands can increasingly overlap, with similar launches recently including Bubbles (Aero and now Galaxy), Malteser and now Aero Peppermint boxes, Cadbury Crme egg impulse now contested by Malteaster and Thorntons, while Giant Cadbury Buttons is joined by Milkybar Giant Buttons. Meanwhile, the more successful chocolate brands such as Cadbury Dairy Milk, Mars Galaxy, and Nestl Kit Kat have tapped in to consumer demand for more sustainably-sourced ingredients and better quality product. Cadbury comes across as particularly active in new product innovation, partly because it repackaged its countlines with the 2012 Olympic and Paralympic Games logo. Cadbury also launched its first limited edition countline in connection to its sponsorship campaign (50mn over two years); Spots V Stripes Milk Chocolate Bar followed by the Challenge Bar.

Figure 3: Manufacturers value shares in the UK chocolate market (retail sales), 2010
Ownlabel 6% Ferrero 4% KraftFoods 35% Others 7%

Nestl 20%

Mars 28%

Source: /Mintel

The Consumer
Reaction to price increases The major chocolate manufacturers have come a long way in terms of transparency in the supply chain; however pricing confusion threatens to force them to retrace their steps. Consumers expect to be kept informed of any changes to their favourite chocolate bar which might affect their expectation of price, quality, or size. Two in three chocolate buyers (64%) believe that brands should make it clear when they have reduced the product size or weight. One third of consumers would rather pay more than see their favourite chocolate bar reduced in size, and around 29% would keep buying their favourite chocolate bar even if the price went up. The majority (53%) however are likely to buy it less often if the price rises, and one in ten will switch to a different brand.

Chocolate Confectionery Executive Summary UK April 2011

Figure 4: Consumer reaction to the prospect of rising chocolate prices in response to higher cocoa costs, February 2011
Base: 1,390 internet users aged 16+ who have bought chocolate in the last 12 months
If the price of my favourite chocolate bar increased ...

Figure 5: Types of chocolate confectionery purchased for oneself or someone else, in the last 12 months, February 2011, February 2011
Base: 1,500 internet users aged 16+
42 67 41 59 26 30 30 28 25 27 21 26 23 24 52 24 23 18 14 11 0 10 20 30 19 38 40 % Forsomeoneelse Formyself 50 60 70 80 31 46

Standardsizeindividualbars(egMars,Snickers) Individualsolidchocolatebars(egDairyMilk,Galaxy,Green&Blacks) Singleservebag/tubeofchocolates Familysize/sharingsizebagofchocolates Multipacksofstandardsizebars

Id still keep buying it 29%

Id stop buying it and switch to another product 11%

Kingsizeindividualbars(egMarsKingSize) Otherchocolateconfectionery Boxofchocolates

Id buy it less of ten 53%

I would stop buying it 7%

Multipacksoffunsizebars ChocolateEastereggs Havenotboughtinthelast12months Otherseasonalboxedchocolates(egforHalloween,Valentines,Mothers Dayetc)

Source: Toluna/Mintel Chocolate preferences The most popular types of chocolate confectionery by some distance are the individual countlines such as Kit Kat, Mars followed by chocolate blocks such as Cadbury Dairy Milk or Galaxy. These are also popular when buying chocolate for someone else as well, however a box of chocolates or Easter Egg is considered most appropriate. Some chocolates are perceived as a self indulgent treat while others are more commonly bought for sharing or gifting to others. For example consumers are more likely to buy themselves a box of chocolates rather an Easter Egg. Multipacks and family sized/sharing bags are enjoyed by both adults and children. Whereas most fun-sized chocolate bars are targeted at children, adults may appreciate the smaller portion size as well as the variety provided and are not put off by childish imagery. Source: Toluna/Mintel

Dark chocolate has a strong minority following among UK consumers. Almost one in five (18%) prefer the taste of dark over milk chocolate and a third find it more indulgent. Dark chocolates growth over the past five years has been steady but unspectacular; however, the launch of mainstream brand extensions, such as Kit Kat Four Finger Dark 70%, might make it more appealing to a broader consumer base. One in five consumers buys fair trade chocolate when it is available but only 14% believe it is better quality and only one in ten prefers the taste of fair trade chocolate. This highlights the fact that fair trades USP is viewed by consumers to be its ethical positioning as they do not see it as a marker of quality or superior taste. It is surprising that the 2009 rollout of Cadbury Dairy Milk bars carrying the Fairtrade Mark has not had a more positive impact on Fairtrades quality positioning.

Chocolate Confectionery Executive Summary UK April 2011

Chocolate in moderation The majority of consumers believe chocolate is OK in moderation for children, with only 6% disagreeing with this notion. Less than one adult in seven wont buy chocolate for their child, but a significant majority (51%) appear unsure about this statement, possibly because of the media focus on obesity and in case it shows them in a negative light. Around half of adults also treat themselves to chocolate although a high proportion has cut back on quantity consumed for health reasons. Unsurprisingly, women are most likely to have cut back, also consumers aged 25-34 and 55+, part-time workers and university-educated ABC1s.

The pricing issue is a gamble. While rising costs are putting pressure on margins, brands risk losing consumers to competitors and to other categories by pushing up prices. However, the FSA is increasing pressure on brands to voluntarily reduce pack sizes for public health reasons, painting this as an increasingly inevitable step, which could also help alleviate the cost equation. Furthermore, companies are reducing packaging in the interests of the environment and carbon footprint another step towards smaller products. However, transparency and honesty are central for brands taking such steps to avoid alienating customers, as found in Mintels consumer research. The chocolate confectionery market relies on a mix of NPD activity and brand promotion in order to stimulate consumer interest and distract them from health and budgetary concerns. New packaging concepts will help draw attention away from smaller packs and higher retail selling prices. The biscuit category has demonstrated that it makes financial sense to adapt products to cater to the health-conscious, and much the same is happening in chocolate. Rather than being subdued by ongoing health concerns, the industry has really begun to embrace the opportunities which lighter and sharing options present, while growing (and in some cases winning back) its consumer base and creating new consumption occasions. Sharing formats and seasonal chocolate are the main growth opportunities for chocolate confectionery. Consumers are treating themselves less often and to smaller quantities of chocolate, therefore limited editions are increasingly important to create excitement and drive sales. The simple concept of sharing helps offset any calorific guilt. Meanwhile, behind the challenges it faces, the chocolate confectionery market enjoys many strengths. It may be a mature market but all brands show a healthy level of momentum, while consumers profess unparalleled enjoyment of the products and a reluctance to give them up, which supports market initiatives going forward.

What we think
The chocolate confectionery market is facing a number of challenges, both in terms of health perceptions and in terms of rising costs. However, its not alone in this situation; other treats face pressure to reduce saturated fat content and take steps to make their products healthier, while rising commodity prices affect every product that contains wheat, cocoa, sugar or glucose. Looking across competing categories, we can see that similar trends in recipe and format are being replicated in other snacking areas for example biscuits and crisps, such as the sharing concept, bitesize, portion control, price-marked packs, and enhanced quality of ingredients. Chocolate brands must therefore continue to invest in innovative concepts to stay ahead of competing snack categories.

Chocolate Confectionery Executive Summary UK April 2011

Ben Perkins
Head of UK Food & Drink Research
E-mail bperkins@mintel.com Telephone +44 (0) 20 7606 4533

Benmanagesthepublicationofeveryreportpublishedinthe UKfood,drinkandfoodserviceseries.BenwasHeadof EuropeanRetailandEuropeanConsumerGoodsuntil2009. BenjoinedMintelin2001asSeniorEuropeanRetailAnalyst. BeforejoiningMintel,heworkedonUKandEuropeanretail reportsatCorporateIntelligenceGroup.HehasaBA(Hons)in EnglishLanguageandLiterature.