In today’s Finshots, we see why India’s demand for chocolate isn’t budging despite rising costs.
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The Story
Chocolates!
An amazing invention.
Nailed a promotion? You give away chocolates. Celebrating with your significant other? Chocolates would set the right tone. Feeling sullen? Maybe grab a bit of chocolate.
It works, almost everywhere, on every occasion. And this isn’t a by product of chance. Chocolate is meant to make us feel better. For instance, it contains tryptophan — a type of amino acid that can aid serotonin production. Serotonin by the way is a neurotransmitter that can make you happy.
Chocolate also contains something called phenylethylamine — a natural antidepressant. And it has theobromine — a compound known to relieve stress.
But if you’re wondering why we’re going on and on about chocolates, let us explain. Inflation has been on the rise in many parts of the world. Growth has been mellow and everybody’s talking about an impending recession. So naturally, people are being prudent with their spending and they’re cutting back on frivolous expenses.
But they’re not cutting back on their chocolate consumption it seems.
In fact, if you ask Mondelez India, the makers of Cadbury, they’ll say that they’ve been having a great time. In FY22, their revenue grew 16% compared to the previous year. And according to Deepak Iyer, president at Mondelez India, the trend is likely to continue this year with double-digit growth in volumes.
Now, remember, this is coming at a time when other FMCG products are facing headwinds. Total volumes of most FMCG companies are expected to rise by 1–2% only.
So what’s happening here? Why is chocolate bucking the trend?
Well, one answer is that the “chocolate effect” is similar to the “lipstick effect”.
Remember that?
As Nykaa’s beauty e-commerce CEO pointed out in July, “…beauty as a category is a small luxury. If you are sacrificing some of your large luxuries like maybe you’re putting off buying a car, handbag but beauty is part of your everyday routine it’s essential to your lifestyle.”
So even during an impending recession, you need to hold on to something to keep yourself from feeling low and despondent. And for a lot of people, it’s self-care that fits the bill. It helps maintain sanity! And much like beauty products, chocolates can be a perfect fix when you’re feeling blue.
Look at how demand for chocolate changes when its prices rise. Usually, you’d expect demand to fall linearly as prices rise.
But when a research firm looked at recent data from the US, they saw something else. The demand elasticity for chocolate stood at -0.4. Meaning that a 10% increase in price resulted in only a 4% drop in sales by volume.
Also, finding a close substitute for chocolate can be hard. You could argue that ice cream is a good replacement. But it’s not an all-weather comforter like a bar of chocolate. Also, other types of Indian sweets can’t induce the happiness and highs, chocolate can produce. Their molecular chemistry is different.
So, the demand for chocolate remains steady.
And you can see the phenomenon playing out everywhere.
In the US, chocolate sales hit $17.7 billion by 30th October this year. This is 21% higher than the pre-pandemic year of 2019. Companies such as Hershey’s have already told investors that their sales are exceeding expectations and they’ve revised their forecasts upwards.
And all this is happening at a time when chocolate makers are introducing price hikes. In the past year, the price of a Kinder Joy has risen by 16%, while a regular Hershey’s chocolate costs 15% more. In Ireland, while sales at grocery stores have dropped by 1%, shoppers have bought £1.8 million worth of extra chocolate when compared to the previous year.
So chocolate is on a bull run.
But things could change. The chocolate effect could die out. Especially in the western world. The per capita chocolate consumption in Europe and the US is already upwards of 7 kg per year. There’s not a lot of room for growth especially if people are turning health-conscious. Also, while the market continues to expand, the rate of growth is slowing.
So chocolate makers are eyeing unexploited territories. For instance, they’re looking at countries such as India which has a per capita chocolate consumption of a tiny 140 gms. To capture a larger share of this market, in 2016, Mondelez spent $190 million to open its biggest Asia-based chocolate factory in Andhra Pradesh. And today, even Blas Maquivar, head of global emerging markets at Mars Wrigley says and we quote, “If you go to India, you go to Mexico right now, you will see new offerings [from] us that are playing at the lower price point that didn’t exist [before].”
So yeah, even if the chocolate effect slows down in other countries, chocolate makers are eyeing markets like India to keep their sales churning.
Anyway, that’s it from us today. But don’t forget to let us know your thoughts. Have you cut down on chocolate consumption or are you binging on this stuff like there’s no tomorrow?
Until then…
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