Rising Cocoa Prices: Implications for the Confectionery Industry

Financial Impact of Rising Cocoa Prices

Rising cocoa prices are significantly impacting the confectionery industry, with major players like Hershey and Mondelez likely passing costs to consumers. However, uncertainties remain regarding their ability to fully cover these costs, potentially affecting revenue, margins, and overall profitability.

"bean and push prices higher. The rising cost of cocoa will continue to impact publicly traded chocolate makers such as %HersheyCo (NYSE:HSY) and %Mondelez (NASDAQ:MDLZ), who in turn pass the cost onto consumers." --- (HSY/MDLZ, press release, 2024/07/15)

"The rising cost of cocoa will continue to impact publicly traded chocolate makers such as %HersheyCo (NYSE:HSY) and %Mondelez (NASDAQ:MDLZ), who in turn pass the cost" --- (HSY/MDLZ, press release, 2024/07/15)

"When prices increase, we may or may not pass on such increases to our customers, which may result in reduced volume, revenue, margins and operating results." --- (PEP, sec filing, 2024/Q2)

"The decrease was partially offset by $74.6 million in higher commodity costs, primarily driven by cocoa, an increase of $8.1 million of incremental business realignment costs, as well as unfavorable mix." --- (HSY, sec filing, 2024/Q2)

"It is possible that we may not be able to increase prices sufficiently to fully cover the incremental costs of cocoa prices in this environment and/or our hedging strategies may not protect us from increases in cocoa costs, which could result in a significant impact on our profitability." --- (MDLZ, sec filing, 2024/Q2)

Pricing Strategies Amid Cocoa Price Increases

Confectionery companies are implementing strategic price increases to mitigate the impact of rising cocoa costs. Mondelez International emphasizes the importance of pricing adjustments for 2024, while Hershey reports a 5.2% net sales increase driven by higher list prices. Kraft Heinz also utilizes hedging techniques to manage commodity volatility.

"I think in the end, what will really matter is the amount of pricing we would have implemented and how much pricing we're going to take into next year in light of whatever cocoa is going to be come the end of 2024." --- (MDLZ, earning call, 2024/Q2)

"The net sales increase reflects a favorable price realization of 5.2% driven by higher list prices primarily within our North America Confectionery and North America Salty Snacks segments." --- (HSY, sec filing, 2024/Q1)

"We manage commodity cost volatility primarily through pricing and risk management strategies including utilizing a range of commodity hedging techniques in an effort to limit the impact of price fluctuations on many of our principal raw materials." --- (KHC, sec filing, 2024/Q2)

"Similar to last year, you've been going through another round or you went through, I guess, at this point, another round of price increase with retailers to cover the higher commodity costs, namely cocoa." --- (MDLZ, conference, 2024/06/13)

"The decrease was partially offset by favorable price realization of approximately 1%, primarily due to list price increases on certain products across our portfolio." --- (HSY, sec filing, 2024/Q2)

Consumer Demand Trends During Price Increases

Rising cocoa prices have led to a shift in consumer behavior, with many opting for lower-priced products, particularly among lower-income consumers facing economic pressures. As consumers adapt to new pricing, brands are experiencing volume declines, indicating a significant impact on demand trends during these price increases.

"As a result, consumer behavior related to our products has shifted. As such, during the six months ended June 30, 2024, we continued to experience a dynamic macroeconomic environment, including price volatility related to select commodities, resulting in corresponding incremental costs and gross margin pressures, and net sales and net income declines." --- (HSY, sec filing, 2024/Q2)

"However, overall volume mix declined, as some consumers continue to seek out products with lower absolute price points, impacting brands like Chips Ahoy!." --- (MDLZ, earning call, 2024/Q2)

"That means a gradual waning of the challenging industry trends seen throughout fiscal '24, as consumers adapt and establish new reference prices." --- (CAG, earning call, 2024/Q4)

"So the lowered-income consumers are challenged with interest rates remaining high, gas prices elevated and savings dwindling." --- (KHC, earning call, 2024/Q1)

"period. And in emerging markets where because the way we implement pricing, which is a lot of price pack architecture, so playing with the sizing of the packs, consumer doesn't necessarily have this elasticity." --- (MDLZ, conference, 2024/06/04)

Supply Chain Challenges in Cocoa Sourcing

Rising cocoa prices are prompting confectionery companies to innovate and adapt their supply chains. Hershey is accelerating its sustainability goals, while Kokomondo is leveraging cell-cultured technology. Additionally, ADM and ConAgra Foods are focusing on logistics and cost-saving measures to navigate sourcing challenges effectively.

"In 2023, Hershey accelerated its commitment by five years to achieve a deforestation and conversion-free supply chain for cocoa, palm oil, pulp and paper, and soy to December 31, 2025." --- (HSY, press release, 2024/06/18)

"Utilizing ultrafast micro-batches it can be programmed to deliver personalized, consistent, smooth end products. Kokomondo: This Israel-based company uses cell-cultured technology to navigate supply chain challenges by creating real, controlled, climate-resilient cocoa." --- (MDLZ, press release, 2024/09/04)

"I don't have top of my head where we export those from in terms of plants. But at this point in time, I would say the challenge, not the challenge, but maybe the activity has been on the logistics side to make sure that we can fulfill all the exports and we can get the materials to the ports, because, as you said, and I said before, demand has been very strong, and margins are very good, so we need to take advantage on that. Plants are running well." --- (ADM, earning call, 2024/Q2)

"That work we've got going on in supply chain to really maximize cost savings, provides critical fuel for growth and we expect that to continue." --- (CAG, earning call, 2024/Q1)

"Obviously, the hedging program and the financial side is one way to deal and then the supply chain side making sure we've got diverse sourcing." --- (HSY, earning call, 2024/Q1)

Market Dynamics and Competitive Landscape Shifts

Rising cocoa prices are reshaping the confectionery landscape, prompting companies like Hershey and Mondelez to innovate and leverage unique market capabilities. Hershey's strong market share and initiatives supporting cocoa farmers, alongside Mondelez's focus on volume improvements and price negotiations, highlight strategic adaptations to these market dynamics.

"I would say that overall, it was in line with our expectations. However, our market share did exceed expectations and our strength was really driven by very strong performance in seasons both overall and takeaway as well as market share and also the strengths that we had in innovation with Reese's Caramel, which not only did well with consumers, was the best innovation in the category and also was able to drive strong merchandising for us, particularly as we launched around Super Bowl." --- (HSY, earning call, 2024/Q1)

"The unique capabilities we have, particularly in emerging markets, in some of the categories, I think it is clearly giving us the competitive edge to push this company to the next level." --- (MDLZ, conference, 2024/06/13)

"I think you're still there. Thank you for all your help over the years. And Anoori, congrats on your new increased role.I wanted to ask within North American Confectionery this quarter, as you mentioned, there was 6% impact from lower retail inventory and around 2% to 3% from the Halloween shift." --- (HSY, earning call, 2024/Q2)

"So I don't expect any particular change in dynamics into Q2 specifically, but we should see, particularly on volume, some sequential improvement as we go through the year, as we land some of the price negotiations, particularly in Europe." --- (MDLZ, earning call, 2024/Q1)

"In 2023, we launched an income accelerator program in Cote D'ivoire aimed at building economic resiliency and increasing savings for cocoa farmers, and we're expanding this initiative in 2024." --- (HSY, event transcript, 2024/05/06)

Alternative Ingredients and Strategies for Confectioners

Confectioners are adapting to rising cocoa prices by enhancing ingredient profiles and focusing on innovative product development. Mondelez emphasizes mindful snacking and sustainable sourcing, while exploring cocoa processing solutions and alternative ingredients to maintain consumer interest and loyalty in their chocolate offerings.

"We also delivered significant improvements in advancing our mindful snacking priorities, including enhancing nutrients and ingredient profiles, promoting active lifestyles, and empowering consumers to make more mindful eating choices." --- (MDLZ, earning call, 2024/Q1)

"And it's for us to one advantage that we have with our focus on growth and flavors and enhancers is that we don't have to go in to teach consumers how to use a product." --- (KHC, conference, 2024/05/30)

"Partnering with Lotus will enable us to simultaneously scale our sweet biscuit business in the important emerging market of India while also innovating our strong European chocolate business with new products to grow consumer interest and loyalty.As we strive to lead the future of snacking by winning in chocolate biscuits and baked snacks, M&A and ventures remain an important part of our growth strategy." --- (MDLZ, earning call, 2024/Q2)

"We're dedicated to ensuring that every step of our snack-making journey positively impacts those involved, from the farmers and communities supplying our ingredients to the consumers savoring our snacks. Today we’re (cont)" --- (MDLZ, Twitter, 2024/04/15)

"This year's cohort represents technologies that can help advance the future of snacking in areas such as cocoa processing solutions, well-being snacks and ingredients, more sustainable packaging and manufacturing, and elevated sensory experiences." --- (MDLZ, press release, 2024/09/04)

Long-term Trends in Cocoa Supply and Demand

Long-term trends in cocoa supply and demand indicate a shift from previous tight supplies to more ample availability, which has pressured prices and affected farmer selling behaviors. This transition suggests a more stable supply environment, impacting future cocoa demand in the confectionery industry.

"These ample supplies have also pressured commodity prices compared to the past two years, resulting in slower-than-expected farmer selling relative to last year and the five year averages." --- (ADM, earning call, 2024/Q2)

"Great. I glean from all of that, that your long term optimism in the categories that you're focused on, chocolate, sweet and savory biscuits, baked snacks has not diminished through this all." --- (MDLZ, conference, 2024/06/04)

"I know share trends have been weaker I think than expected particularly in everyday items even though Hershey is lapping some share losses in core chocolate last year." --- (HSY, earning call, 2024/Q2)

"So this is a transition period for the industry, if you will. We're going from a couple of years of tight supplies to ample supplies." --- (ADM, earning call, 2024/Q1)

Regulatory and Environmental Factors Affecting Cocoa Prices

Regulatory and environmental factors, including geopolitical impacts and customer price negotiations, are significantly influencing cocoa prices. Companies are adapting by ensuring product quality while managing costs, as fluctuations in cocoa prices affect both revenues and product costs equally.

"Melissa Poole: Thanks, Michelle. Given high cocoa prices, how is the company working to ensure products remain safe and high quality at a reasonable price?" --- (HSY, event transcript, 2024/05/06)

"Overall, unfavorable volume/mix was driven by volume declines, due to expected customer price negotiation disruptions in Europe, softer consumer demand in the U.S. and geopolitical impacts in parts of AMEA, which were partially offset by favorable product mix." --- (MDLZ, sec filing, 2024/Q1)

"As a result, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold." --- (ADM, sec filing, 2024/Q1)