How Big Chocolate is taking over – and the smaller brands that are fighting back
The founders of luxury chocolate brand Hotel Chocolat must feel like Charlie Bucket did on winning a golden ticket to Willy Wonka’s factory, as food and confectionery goliath Mars has agreed to buy the business for £534m.
The deal is a triumph for Angus Thirlwell and Peter Harris, who opened their first Hotel Chocolat branch in 2004 and turned it into an empire. Revenues now total more than £200m, supported by 124 UK branches, an e-commerce site and a cacao farm in St Lucia. But the company recently found itself in a sticky spot. In the year to July, sales fell by 10 per cent, profits turned into losses, and the company stumbled on the path to international expansion. The Mars deal came at just the right time.
The sale also underscores the bitter sweet nature of the chocolate industry, and how Big Chocolate – the industrial giants that produce the bars we buy in their millions – is partial to gobbling up smaller players. Mars – the behemoth behind Maltesers, Mars Bars and Celebrations – isn’t the first to do it. In 2005, Cadbury Schweppes snaffled British organic chocolate maker Green & Black’s for a reported £20m. And in 2015, Ferrero, the Italian company famed for its gold foil-wrapped chocolate clusters beloved of ambassadors, bought Derbyshire-based Thorntons for £112m.
Clearly, there are enormous potential profits to be made in chocolate – if chocolatiers can navigate the rocky road to success.
On the one hand, chocolate is always in demand. While sales in the UK have slipped over the past two years following our chocfest during the pandemic, they’re forecast to rise by 11 per cent to £7bn by 2028, according to consumer research company Mintel.
“There’s a strong feeling among consumers that it’s affordable, even in tough economic times,” explains Richard Caines, Mintel’s chief food and drink analyst. “For example, 81 per cent of people see chocolate as an affordable treat and 68 per cent say it’s also a mood booster.” In fact, two-thirds of British consumers eat chocolate at least twice a week, according to Mintel. That amounts to an average 11kg each per year, one of the highest consumption rates in Europe.
But our tastes are changing. Increasingly, we’re opting for quality over quantity, reaching for pricier but better bars. “In recent years, people have preferred a smaller amount of premium chocolate rather than loads of cheap chocolate,” Caines says. This is partly because we’re becoming more discerning in our chocolate tastes, and we’re also choosing bars with less sugar. (There’s no technical definition of premium chocolate, but it often has a higher cocoa content and less sugar than the cheap industrially produced bars.) Good quality dark chocolate also contains compounds that benefit our health, mounting evidence suggests.
This shift in preferences explains partly why Mars wanted to scoop up Hotel Chocolat; it fills a gap in its portfolio with an established premium brand that has a chain of swanky retail outlets across the UK. It also potentially gives Mars a lucrative foothold in Asia (Hotel Chocolat recently announced plans for a joint venture in Japan).
But grabbing a share of the chocolate market isn’t so easy for small, niche brands. “It’s a very competitive and vast category,” says Duncan Macaskill, a director at food and drinks consultancy Levercliff. “If you go down the supermarket aisle there’s overwhelming choice. The big brands occupy a lot of shelf space, and you have to work very hard in the face of their strong, promotional activity.”
Tony’s Chocolonely, the ethical Dutch chocolate maker, has successfully muscled in on some of Big Chocolate’s territory. It only appeared on our shelves four years ago, but the chunky colourfully wrapped bars, innovative flavours and ethical philosophy has won over British consumers. The UK is now Tony’s second biggest market outside the Netherlands, delivering revenues of roughly €24m last year. That’s despite the fact it’s not cheap.
“You’re looking at about £3 for a Tony’s bar, while you might pay half that for Cadbury’s,” Macaskill says. “They’ve persuaded consumers it’s worth paying extra.”
Consumers are certainly more discerning about chocolate these days, says Spencer Hyman, co-founder of Cocoa Runners, an online retailer of high quality, sustainable ‘craft’ bars made by chocolatiers who focus on flavour and source their cocoa beans directly from growers. “The number of craft makers has been skyrocketing,” Hyman says. “A decade ago, there were two in the UK, but now we know of at least 100.”
There’s also a vast slew of middle ground companies, like Hotel Chocolat, that buy ready-processed cocoa liquor (cocoa mass) to which they add flavourings and then mould into bars. “There are literally thousands of this sort of ‘maker’, and they produce everything from bars to bonbons, brownies to bags of buttons,” Hyman says.
The key challenge for small chocolate makers is finding ways to make themselves known and available to consumers. “Unlike speciality coffee, there aren’t thousands of craft chocolate locations,” Hyman says.
Supermarkets aren’t necessarily the solution. Award-winning Suffolk-based Pump Street started out as a bakery, then diversified into luxury bean-to-bar chocolate in 2013. Co-founder Joanna Brennan says supermarkets wouldn’t pay enough for their product to make it financially viable, even if she wanted to head down that sales route. Pump Street only buys the highest quality cocoa beans and pays farmers what they deserve, which means costs are extremely high. “The average price we pay for our beans is certainly double the commodity price,” Brennan says. “We just don’t have the margin that supermarkets require.”
To stay in business, and ahead of the competition, Pump Street constantly innovates while sticking firmly to its core values of quality and ethics. Its Bakery Series is hugely successful, combining chocolate with the products made in its bakery: think bars studded with crumbled chocolate chip cookies, Eccles cakes, croissants, maple pecans, sourdough crumbs and more. “We’ve probably brought out at least one new bakery series bar a year since we started. It’s constant,” Brennan says. “But being innovative is now necessary at all ends of the market. Even Dairy Milk and KitKats – long standing mainstays of the bigger chocolate market – are doing new things all the time.”
It’s been a challenging but successful strategy. A 70g Pump Street chocolate might set you back a chunky £6.75 – but sales of the bars have soared by 50 per cent over the past four years. What’s more, the business recently won the King’s Award for Enterprise after breaking into the North American and Chinese markets.
An enormous challenge facing all chocolate producers is the soaring price of cocoa beans – chocolate’s key ingredient – which recently reached record highs. Demand is also outstripping supply, thanks in part to extreme weather conditions impacting growers in West Africa. Recently, one commodities company reportedly tried to corner the futures market in order to source large and urgently needed supplies of beans.
Helen Pattinson, co-founder of Suffolk-based ethical chocolate company Montezuma’s, knows all about the challenges facing the industry. The ex-lawyer started the company with her husband Simon in 2000 from their kitchen. In the first year, they produced 15 tonnes of chocolate and went on to make that amount every three days.
But earlier this year, Montezuma’s went into administration, and was rescued by new owner, the Paramount Retail Group. Pattinson, who now heads up the revived business as joint managing director with her husband, says soaring costs played a part in the company’s financial problems.
“Cocoa and sugar prices have increased significantly in the last 18 months, but so have many other raw materials, which have impacted so many industries,” she says. The bigger problem was the failure to pass on necessary price increases to customers. “So many businesses, and particularly those that are backed by investors wanting high growth, are tempted to resist price increases and keep pumping cash that they don’t have into customer relationships.” Eventually, cash flow is squeezed, and businesses start to fail. “This has resulted in the downfall of several smaller chocolate businesses but also many other food and drink brands,” she says.
Montezuma’s prices have now been raised to better reflect those higher costs, something customers have accepted “without exception”. Their bars are widely available in supermarkets, department stores, and the company’s retail outlets, and Pattinson says she is confident the brand can be restored to its previous financial success.
While chocolate delivers joy and deliciousness to those who eat it, it’s clearly not necessarily a smooth ride for those who make it, despite significant consumer demand. At the end of Roald Dahl’s book, Charlie and the Chocolate Factory, the boy ends up winning the whole factory. In the real world, his golden ticket may not have turned out to be as shiny as it first seemed.
