Oct. 26--MUMBAI -- Biting cocoa prices have left a bitter taste in the mouths of chocolate makers such as Nestle SA and Cadbury in India ahead of the Diwali festival, when demand for confections peaks.
The price of cocoa, which accounts for more than half of the input costs for making chocolates, has surged 21.5% since March as production shrank in West Africa, squeezing the margins of chocolate makers.
To make matters worse, the prices of other raw materials such as milk have also risen.
Chocolate makers fear that raising the price may dampen demand and encourage consumers to make gifts of traditional Indian sweets and nuts -- rather than chocolates -- during Diwali. Chocolate sales, estimated by market researcher Mintel at Rs.6,007 crore in 2013, typically receive a boost during the festival season.
"Large manufacturers like Cadbury may increase prices in niche premium segments like Silk and Bournville, where consumers might not mind rising prices, but the real impact would be seen in lower (priced) segments," said Rachna Nath, leader of retail and consumers at consulting firm PricewaterhouseCoopers in India.
Cadbury and Nestle have in the past successfully used advertisements and promotions to position chocolates as an alternative to traditional gift options such as Indian sweets and dry fruits during Diwali.
Chocolate sales rose to Rs.4,914 crore in 2012 from Rs.1,011 crore in 2005, according to Mintel. Sales are expected to rise 22.24% in 2013.
Chocolate prices are estimated to rise 9.84% to Rs.574.70 per kg in 2013 from an average of Rs.523.20 per kg in 2012, according to Mintel.
Prices may rise even faster in the coming days if the production of cocoa continues to shrink. Still, demand for chocolates may be sustainable even if prices rise because of Diwali, according to analysts.
"Chocolate manufacturers have significant pricing power and are likely to pass on the rising input prices to consumers soon," said Dhananjay Sinha , co-head of institutional research (economist and strategist) at Emkay Global Financial Services Ltd . "In the past, cocoa prices have moved in tandem with demand for chocolates. Rising cocoa prices are likely to post a significant challenge for chocolate manufacturers to post healthy margins."
The monthly price of cocoa beans hovered around $2,275 per tonne in January and rose to $2,616 per tonne in September, according to data portal Index Mundi.
Rising cocoa prices are not the only concern for chocolate makers.
Brokerage Credit Suisse, in an 11 October report, said that with fodder prices going up 23% from a year earlier and rural wage rates still rising at more than 15%, the inflationary pressure on milk is likely to continue.
The cost of milk production has grown at an average annual pace of 14%.
Cadbury, a part of Mondelez International Inc., declined to comment on commodity prices.
"Cost inflation is an ongoing concern in the current environment, but...we are constantly driving cost efficiencies within our operations. We try to mitigate the impact through R&D (research and development), improved technology and other global best practices and increasing prices for the consumers is the last resort," said a spokesman for Nestle India Ltd.
Satvik Shahapur, co-founder of Happiness Bars, an online chocolate seller, said: "Our clients usually work on a fixed budget on corporate gifts, and we promise to deliver the products on a predetermined price -- hence it is difficult to pass on the price (rise) to such customers."
"Smaller players who focus on premium products, which are highly priced, would find it difficult to pass on the rising input price to consumers and justify the same," Shahapur said.
To be sure, since Diwali is early this year (3 November), the full impact of the global cocoa price hikes may not affect sales. But if the predictions of a poor crop in Africa turn out to be true, price hikes will be inevitable.
"Consumers are likely to feel the impact through price hikes. And, like consumers in other markets, they may feel the necessity of cutting back or trading down," said Marcia Mogelonsky, director of insight at Mintel Food and Drink. She has studied the confectionery market in India.
Vanmala Nagwekar, an analyst with India Infoline Ltd, a brokerage firm, said: "Market leaders would find it easier to pass on the rising input prices to consumers... Moreover, since the contribution of chocolates to the portfolio of such firms is lower...they will only hike price when it starts to put pressure on margins."
Shradha Mehra, owner of Neeru Cakes and Desserts, a popular confectioner in Mumbai, said: "With input prices going up, we will pass it on to consumers... If consumers are not willing to pay the higher prices, we will offer them the Indianized chocolates, though it compromises on taste and quality, and would also hurt our brand."