The State of Bean-to-Bar Chocolate 2017 — Part 1

Ecuador, along the Rio Napo, 2003©Clay Gordon

2017 marks the 20th anniversary of the beginnings of the American bean-to-bar (aka craft/artisan) chocolate movement.

Scharffen Berger Chocolate Maker opened its doors in 1997. It’s also about a decade since the growth of small makers showed its first real uptick, and it's 10 years since the publication of my book, Discover Chocolate.

This makes now a good time to look back and assess where the market is (this post) and look forward to the next decade (next post in this series).

I did a lot of traveling over the last year in preparation and doing research on this topic: Mexico, The Netherlands (twice), Iceland, Belize, Canada, Nicaragua (three times), Peru, Brasil, China, Belgium, and France. I just returned from the Northwest Chocolate Festival, capping off visits to five chocolate festivals in six weeks; with one stretch of four festivals over four consecutive weekends. In May and September I co-taught two bean-to-bar chocolate making classes in Las Vegas. As a result I have had an unusual - and unusually intense - view of the cocoa and chocolate markets from the farm to the factory to the mouth and it’s from this perspective and experience that I am writing.

Much of the approach for this series comes from experience with the launch of Ruby chocolate (here and here) by Callebaut in Shanghai this past September. The response was widespread – global – and highly polarized. However, when you look closely at the market for chocolate in 2017, it’s clear that incremental innovation (e.g., a new flavor of KitKat) is not enough to drive the kind growth necessary to sustain the industry.

The place to start ...

... is with a realistic assessment of the sizes of markets associated with bean-to-bar chocolate makers that are typically represented by the group exhibiting at the NW Chocolate Festival - excluding companies like Guittard and Valrhona, which cannot be considered craft makers.

There are several estimates of the number of bean-to-bar chocolate makers, using a definition of bean-to-bar that does not count larger industrial producers. These estimates tend to cluster around approximately 300 makers in the Americas and another 200 makers outside the Americas for a total of about 500 worldwide. I would call these close order estimates by which I mean that the number is not 50 and the number is not 5000. It’s also not 500 exactly, but using a nice round number like 500 makes the maths easy.

The estimates I heard for the quantity of beans that these companies purchased and processed over the past year range from 300MT on the low end (for the 300 US chocolate makers only) to 1,000-1,200MT in the middle to 6,000MT on the high side for the estimated 500 makers globally.

From what I can tell from anecdotal reports, there is a fairly large cluster of makers purchasing and processing 2-4MT year, with fewer purchasing and processing 10MT per year. There is a cluster of makers that purchased and processed 30-50MT over the past year.

The 300MT number for US bean-to-bar chocolate makers is low, given the estimate of the number of makers in the US is 300. This would mean that each maker purchased and processed, on average, 1MT of beans from all origins in the past year. That’s an average of 1.25, 65kg bags of beans, per month, per maker. If this figure is correct then it’s a miracle that most makers are still in business. Keep in mind that several of the larger bean-to-bar makers in the US process upwards of 30-50MT/yr each, making the 300MT estimate unsupportable.

1000-1200MT across 500 producers is probably also low because, the average (purchasing and processing 2~2.4MT/yr) is still too small for most makers to stay in business. This mid-range total does not easily accommodate larger makers (e.g., Taza, Theo) further supporting a conclusion that the estimate is low.

In order to get to 6,000MT it’s necessary to include the relatively small number of bean-to-bar companies processing 100MT/yr and more. It’s a stretch (because it requires a generous definition for bean-to-bar that goes beyond craft/artisan, but there are anecdotal reports to support this level of bean purchasing and processing and this makes the most sense as a close order estimate.

Assuming a total global production figure of 4 million MT, 6000MT represents 0.15% of the global harvest. If the total production for all fine flavor cacao varieties is 10% of total production that’s 400,000MT, 6000MT is 1.5% of those beans.

Next, we need to settle on an estimate of the average farm gate price - the price paid to the farmers, before any markup and certainly not the delivered price - of those beans. Based on the discussions I have had on this topic over the past year, I am going to set the estimated average farm gate price at $4,000/MT.

6000MT at $4000/MT is $24,000,000 (twenty-four million dollars) — the total value to every farmer for all the beans purchased by this segment of the market. Most farmers are paid a discount to the farm gate price, so the good news is that chocolate makers often pay a significant premium - often as much as 250% and sometimes much more - over typical farm gate prices. The sad news here is that so few farmers see these premiums.

Estimates of the total sales of this sector of the industry range from $100 million to $250 million. No one I spoke with could tell me if this was total retail sales, wholesale sales, or a mix of the two. Finding retail sales figures is probably easiest so this means the average retail sales of a bean-to-bar maker probably ranges between $200,000 and $500,000. Gross revenue to the chocolate maker must be discounted from these numbers, but to what extent is hard to know. To make the maths easy these are nice round figure to work with.

The above figures are not meant to be precise, they are meant to be easy to work with and to use to help corroborate each each other and to ensure that we’re in the ballpark, that the order of magnitude of things is correct.

The good news is that the number of small batch/craft chocolate makers is increasing. The sad news is, on the surface, many, if not most of them, appear to be unsustainable in the long run as businesses.

The good news is that the farmers these chocolate makers buy from often earn a significant premium over market. The sad news is that not enough farmers benefit.

How is this back of the envelope analysis helpful?

Because while being optimistic for the future of small batch/craft chocolate is important, it’s equally important to be realistic. In the absence of precise numbers it’s still important to try to create a model that assists in planning.

One phenomenon I have noticed over the past year of my travels is there is an oversupply of beans from many new bean suppliers. Everywhere I turned there was a new supplier or eleven from an existing origin and a new supplier or three from a new-ish origin who wants to sell beans and has tonnes of beans to sell.

I have huge respect for these new bean providers, especially those who are championing new business models, new supply/value chains, new ways to provide market access to farmers who have historically been denied access, and whose businesses are mission-oriented.

But one very real problem that needs to be acknowledged is there is virtually no way existing small batch/craft makers – and new ones now coming online – can absorb the supply of beans, at least the way their business are currently constituted. Continued sustained 10% overall year-over-year growth in this sector may be possible … but will it be enough to address what is obviously a fragile market?

This makes finding answers to the following questions, among others, important:

  • Can we do a better job of defining what the market actually is? What is the upper production limit for still being considered a small batch/craft maker? This is a non-trivial philosophical question for many makers and could be a deterrent to building a sustainable business.
  • What are the capital requirements that will enable small batch/craft makers to finance the growth in manufacturing capacity and increased inventory carrying costs and overhead?
  • Even if a company has the ability to finance the increase in manufacturing capacity, does the company have the ability and resources to sell all of the product it makes?
  • Are there sales channels that can accept the increase in volume and turn around and sell to customers?
  • Can all this growth be supported at the price points small batch/craft chocolate makers need to get to be sustainable businesses?

My thoughts on what might lead to sustainable long-term growth can be found in the second installment of my 2017 State of the Market series.

Comments
No. 1-16
DiscoverChoc
DiscoverChoc

Editor

@Olando - do you agree or disagree?

Olando
Olando

Really strong perspectives shared.

Keith_Ayoob
Keith_Ayoob

@DiscoverChoc @thehighfivecompany and @chocoladeverkopers Maybe you're all right in some way. Much of my career (not in the chocolate field, but nutrition & health care) has focused on dealing with consumers. Believe me, ultimately taste rules. Far and away it's number one. After that, it's convenience and price and which of those dominates depends on the food. for sustainability in the bean-to-bar chocolate world, the market has to keep expanding.

But the people you need to be reaching are still having a hard time spending more on a small, 60- or 70-gram chocolate bar than they would for a bottle of wine they could share with a few friends. More importantly -- will they KEEP buying such bars the way they buy wine (by that I mean regularly and frequently enough)?

Often what the average consumer wants isn't even chocolate, but rather chocolate-covered candy. That's fine, and more consumers are getting into higher-end bars as their level of sophistication increases. That bodes well for the industry as a whole, but the chocolate industry will always be vulnerable to the global economy in general, because chocolate is perceived as a luxury item and not a dietetic staple (I know it is for all of us but you know what I mean). As such, in a rough economy, it's the first thing to drop from the food budget.

Cultural trends can also impact demand in the bean-to-bar world. We're in the midst of "sugar-phobia", yet consumers can be resistant to extremely high percentages of cocoa. I always think it's a bit of a disconnect for people who balk at 85% cocoa because "it's so bitter" but they take their coffee black, no sugar and they like martinis super-dry ;] It's hard to have sweet chocolate without sugar, so when consumer trends strike out against sugar, foods like chocolate, even excellent bean-top-bar chocolate, can take a hit.

If the bean-to-bar movement is aiming its efforts at the elite market, it's still a fairly small one and maybe what's needed is to understand the elite eater in more detail. Here comes the basic marketing that @thehighfivecompany is talking about, although diving into the analytics gets too costly for small producers, who probably are more interested in securing good ingredients and making good bars.

I grew up in a small family business (not food-related) and these struggles aren't unique to chocolate makers. Most people have no idea of the difficulty of starting and maintaining a small business.

thehighfivecompany
thehighfivecompany

Great piece, spot on. Puts things into perspective. One of the challenges, to my opinion, is to have makers make what the customer wants. The market as tiny as it is is not interested in yet another Madagascar 70% bar (Clay ;-)). This B2B 'industry' is not so much different from any other industry. The challenge goes beyond creating another single origin, two ingredient chocolate, beyond designing a nice wrapper, beyond posting on Instagram every day telling how wonderful we are and how good we do for farmers, the environment, etc. it starts by defining 'what the customer actually wants', basic marketing really. Chocolate making as a hobby cannot be successful, bottom line it's a business like any other.

chocoladeverkopers
chocoladeverkopers

I agree on 1, and was already typing these next 3 sentences before your message: Because chocolate makers are making chocolate, some might be very creative, but reaching audiences, journalists, etc is different than working a melanger. And they don't have the time. I might be wrong about the numbers, and i know you have met a lot of people and a lot of knowledge in chocolate markets, facts etc, so if you say you're not convinced there is room for much growth i take this as a serious matter to think about further, i actually share some concerns, and certainly see fundamental issues with the chocolate market, but most of the issues i see are with the chocolate market as a whole, and don't have much to do with b2b and if it's capable of doubling marketsize. And point 2 -> don't leave it to the makers either. They know all the details, but people really don't care about how chocolate makers define bean to bar, and argue about which bars to include. I'd propose to use a term like 'better chocolate' and stick with that. Also, there's a lot of (wonderful) small makers, and a lot of attention for origins, the process of making chocolate, etc, but how many people have you met that really thought about branding, growth, social media strategies, using influencers / blogs, etc? Maybe i'm wrong but i think it's an unexplored area. Thanks to the internet it's cheaper and easier than ever to have big reach. Even with just sending out samples to blogs, and writing proper texts for google you can reach so many people. For free.