Mapping the Cocoa-Chocolate Value Chain
10.07.22
Years before he schemed to become Twitter’s new overlord, Elon Musk dreamed of candy making. He accused the confectionary industry of failing to innovate, claiming it had abandoned the American consumer in favor of consolidation. “When was the last time there was some good candy?” Musk told the Wall Street Journal in late 2020. “What’s the forcing function for a new candy bar? I haven’t seen one in ages.”
In fact, the confectionary industry has tried to innovate for decades, only to be rebuffed by conservative American tastes. “There’s only so much you can do with chocolate, peanuts and caramel — if you get my drift,” said Richard O’Connell, former president of the Chocolate Manufacturer’s Association. “Besides, Americans are so nostalgic about their candy bars, it’s almost impossible to get them to try something new.”
The industry averages about 150 new products each year, yet most flop upon arrival. For example, when Mars introduced the Bounty bar, a coconut-covered chocolate bar meant to challenge Hershey’s Mounds bar, it failed within two years despite consumers preferring it 2 to 1 in blind taste tests. “In the minds of Americans, coconut bars mean just one thing: a Mounds or Almond Joy,” said Lizbeth Echeandia of Confectioner magazine. “Mars just couldn’t get past that nostalgia.”
Still, the confectionary business has reason for optimism outside of the US, with emerging markets such as India and China driving spectacular growth in recent years. Kalpesh Parmar, the country general manager of Mars Wrigley, India, says the company is on a localizing mission. He always carries chocolates in his pockets, including the vegetarian Snickers specially formulated by Mars for India. “I always tell visitors from international markets that if you are able to embrace the complexity of Indian cities such as Bombay, then that’s where the growth for the next 50 years is sitting.”
This week, as we approach Halloween, we discuss the commercial development of the chocolate confectionary business: how it evolved from a Lenten indulgence consumed by Jesuit priests into a secretive American rivalry whose entrepreneurs guarded their company secrets more zealously than the H-bomb.
Early Chocolate Uses
Christopher Columbus’s son, Ferdinand, first encountered cocoa beans in 1502 when the Spanish captured two Mayan trading ships. “They held these almonds at great price,” he recorded, baffled at the value of these strange brown pellets. “When any of these almonds fell, they all rushed to pick it up, as if an eye had fallen.”
Similarly, the Aztecs used cocoa beans as a form of coinage — Montezuma stored almost 1,000 million cocoa beans in the capital city of Tenochtitlan (one Spanish chronicler estimated its value: “a tolerably good slave” could be bought for one hundred beans, a rabbit for ten, and a prostitute for eight).
Chocolate — consumed by the Aztecs as an aphrodisiac and as a ritualistic element of human sacrifices — soon attracted interest from the Spanish crown, which tasked the Jesuit order with producing it. Jesuit priests were attracted to chocolate’s commercial potential as a nutritious beverage that could be consumed during Lent. Whereas coffee houses were considered “northern, protestant and middle class,” chocolate consumption became synonymous with “southern, catholic, and aristocratic” groups.
Chocolate cemented its image as a luxury good when Anna of Austria, who spent much of her childhood in Madrid, brought chocolate to the French court. “Here it managed to lose its Spanish, clerical aftertaste,” writes Wolfgang Schivelbusch in Tastes of Paradise. “It no longer carried associations of Jesuitical gloom, the Inquisition, and the Escorial; instead, it simply represented Rococo elegance. It became the drink of the European aristocracy, as much a status symbol as the French language, the snuffbox, and the fan.”
The Marquis de Sade, one of the first reported “chocoholics,” reportedly harassed his wife from prison to bring him more chocolate, aka the “foods of the gods.” Still, despite its popularity among European upper classes, cocoa consumption saw little diversification or widespread popularity well into the 1800s. “There was no concept of a mass-produced chocolate confectionary,” writes Deborah Cadbury in Chocolate Wars. And, since there was still no easy way to separate the fatty cocoa oils, the drink remained “visibly oily, the fats rising to the surface.”
Chocolate’s First Great Boom: 1880–1914
Ironically, a group of teetotaling Quakers ushered in chocolate’s first commercial boom. Product diversification, technical changes, the Temperance movement, and mass advertising all converged to remake chocolate into a modern blockbuster.
Governed by strict rules of religious behavior, Quakers had limited venues for career advancement. Chocolate — despite its decadent reputation — represented a unique opportunity to combine business with social activism, in that it was regarded as one of the only viable alternatives to alcohol. “Many products could replace the ‘demon drink,’ but beverages made with boiled liquids enjoyed a great hygienic advantage over cold drinks,” writes economist William Clarence-Smith. “Unlike most hot beverages available before 1914, chocolate had great nutritional value. Its high fat content, together with some protein, bridged the gap that often existed between stimulants and food.”
Several technical discoveries also aided chocolate’s success. In the Netherlands, Dutchman Coenraad Van Houten invented the Dutching process, which produced a much milder, more digestible drink. He also invented the cocoa press, which allowed cocoa to be divided into cocoa powder and cocoa butter — essential for the world’s first edible chocolate.
British chocolatiers George and Richard Cadbury — besieged by gin shops that promised, “Drunk for a penny. Dead drunk for two pence. Clean straw for nothing,” — made it their life’s mission to turn cocoa into an affordable drink to stop the spread of “mother’s ruin.” Intrigued by reports of Van Houten’s new machine, George believed the machine would guarantee Cadbury’s commercial success. “I went off to Holland without knowing a word of Dutch and saw the manufacturer with whom I had to talk entirely by signs and the dictionary,” reported George. He spent the remainder of his inheritance — close to £1000 — and brought home the defatting machine.
The market for cocoa quickly bifurcated: “drinkable chocolate from cocoa powder became the chocolate for the masses, and eatable, solid chocolate from cocoa butter became the chocolate for the rich.” Smith estimates that exports from cocoa-exporting territories grew at an average annual rate of 4.85% per cent between 1880 and 1914, as compared with only 1.9 percent between 1850 and 1874. “The explosive growth of a mass market for chocolate from the 1880s transformed world consumption more radically than at any other time in history,” he concludes.
Birth of the American Market: 1894–1950
The American commercial market for chocolate — virtually nonexistent before 1894 — was catapulted by two entrepreneurs: Milton Hershey and Forrest Mars, described by one reviewer as “the good and evil twins” in the “soap opera of the candy business.”
Hershey, a gentle Mennonite who enjoyed smoking Corona-Corona cigars and playing solitaire, introduced the world to the nickel chocolate bar. “Milton Hershey completely ruined the American palate with his sour, gritty chocolate,” said Hans Scheu, a Swiss chocolatier and former president of the Cocoa Merchant’s Association. “He had no idea what he was doing.”
Scheu finds the Hershey flavor so repulsive (like most Europeans) that he believes it was created by accident after Hersey ordered a massive batch of powdered milk from Europe that started to turn. “He was a cheap Pennsylvania Dutchman; he didn’t want to waste his money, so he used it in his chocolate, and that became the special Hershey flavor,” said Scheu. “But I wouldn’t call it special.”
Many would dispute this claim — Hershey was famed for his generosity and became known for turning Hershey, Pennsylvania into a breathtaking utopia in the middle of a cornfield — but Hershey’s greatest insights were investing in industrial level machinery, expanding distribution outlets, and developing a close relationship with the U.S. military.
“Hershey wanted to broaden the outlets where chocolate was being sold,” writes Joel Glenn Brenner in The Emperors of Chocolate. “He envisioned his nickel bars resting on counters at luncheonettes, grocers, bus stops and newsstands. This was a new concept in candy sales, which had previously been limited to candy stores and druggists.” Hershey was also unique in being the first candy supplier to the U.S. military: together, they developed the Field Ration D, “a nutrition-packed ‘subsistence’ chocolate” that could “withstand temperatures of up to 120 degrees Fahrenheit and contained 600 calories in a single serving.” By the time World War II was over, Hershey had supplied more than one billion rations to U.S. soldiers.
Meanwhile, Forrest Mars spent years infiltrating the factories of European chocolate makers as a hapless American worker. The son of Frank Mars, a Chicago chocolatier, Forrest was determined to replace Hershey as the number one confectioner in America. “Mars aimed for huge economies of scale by streamlining production to serve a few blockbuster brands: 3 Musketeers, Snickers, Milk Way, and Mars bars,” writes Cadbury. “For this to work, he had to shift volume. Executives’ success was judged by the returns they made on each brand.” Punctuality and cleanliness were highly prized, with employees receiving a 10 percent bonus just for being on time.
Notoriously secretive (other confectioners claimed he acted as if he were making “bombs, not bonbons”), Mars fanatically expanded the family business. Shortly after he gained control of his father’s Chicago factory, he entered the boardroom and said, “I’m a religious man,” before dropping to his knees and declaring, “I pray for Milky Way,” followed by, “I pray for Snickers…”
Intent on expanding into emerging markets, Mars grilled Dominic Cadbury on potential new hot spots. Mars asked, “What is the population of South Africa?” Cadbury told him about 20 million. “It’s not large enough to be interesting,” replied Forrest, instead setting his sights on India. Still, Mars’ cutthroat tactics, high wages, and terrifying managerial style paid off: today, Mars is the leading confectionary company in the world with annual sales of $20 billion (although it still comes in second to Hershey in the U.S. market).
The Second Chocolate Boom: 1990 — Present
The second global boom in chocolate production began in 1990, thanks to rising demand in India, China, Brazil, and South Africa. Despite slowing growth in Western countries (health consciousness, sustainability concerns, and market saturation have all contributed to falling consumption), emerging markets are expanding so rapidly that some worry there will be a global shortage in cocoa.
Traditionally, emerging markets were a confectionary graveyard for chocolatiers, who struggled to combat suffocating heat, lack of refrigeration, government regulations, and lower incomes. One manager at Cadbury Schweppes, which first tried to penetrate the Indian market in the late 1940s, recalled how Cadbury developed its “own dairy herd by inseminating cattle that were accustomed to the heat from Rajasthan in northern India with imported Ayrshire semen from England.” Problems arose when the cows stopped producing. “It was not acceptable for them to go to slaughter,” writes Cadbury. “Cadbury Schweppes found themselves in possession of a growing herd of non-productive ‘sacred cows.’ Small wonder that the corporate finance director could see no prospect of a viable Indian business.”
Still, working closely with the local community, Cadbury developed a series of temperature-tolerant products better suited for the Indian market. Today, Cadbury, Nestlé, and Mars have all filed patents for temperature-tolerant chocolate, the key to further tapping India’s huge market potential until cold storage capacity is improved.
“In countries like India, you need to keep your business very simple,” says Parmar. “The focus has to be simple. If you can get your top 10 SKUs in as many stores as possible and focus on growing brand awareness, the business can take off,” he says. “And that’s where Mars has had good success. But this is just the beginning. India will be the third largest snacking market in the world by 2040… To exist as a company for the next 100 years, we have to win in emerging markets like Brazil and India. I think we should be able to do the job.”
About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.
