CONSUMER: Chocolate Aims To Track China’s Coffee Boom
Bottom line: China’s chocolate market could follow the recent boom for coffee as a lifestyle product, benefiting foreign names like Nestle, Hershey and Dove that can tap the preference for premium brands.
A couple of chocolate stories were in the headlines over the Lunar New Year holiday, spotlighting the big potential for the foreign treat to boom in a similar way that coffee has over the last few years. One story had Swiss giant Nestle (Zurich: NESN) saying it will look to chocolate and premium coffee to boost its stagnating China sales. The other had US chocolate giant Hershey (NYSE: HSY) also predicting strong growth for the China market, following its own recent local acquisition.
Chocolate and coffee have many similarities, as both are quite foreign and relatively new to Chinese palates. But there are also some big differences that could allow chocolate to track a different course from coffee. Most notable of those is the lack of a retail dining culture surrounding chocolate, which contrasts sharply with the explosion of Starbucks (NYSE: SBUX) and other shops that have helped to fuel the rapid rise of coffee. But chocolate has some different advantages, including more natural compatibility with Chinese tastes and its suitability for gift giving, that should allow it to thrive in a different way from coffee.
Let’s start our chocolate round-up with Hershey, which has forecast the China chocolate market will grow by nearly 60 percent over the next 5 years, to $4.3 billion in 2019. (English article) Hershey said its own China sales should grow by a breakneck 35 percent pace this year to $450 million, as it starts to see contributions from its purchase about a year ago of the locally popular Golden Monkey brand. (previous post)
I should be quick to point out that Hershey’s broader market forecast equates to an annual growth rate of around just 10 percent, roughly in line with China’s broader economic growth. Still, there’s probably some room for upside if companies like Hershey, Nestle and Dove, which are all already popular in China, can boost their appeal as “lifestyle” brands similar to what Starbucks has done for coffee.
Next let’s look at Nestle, which has said it will turn to chocolate and also premium coffee in a bid to jump-start stalling growth in China, its second largest global market. (English article) Nestle posted about $7 billion in China sales last year, which was roughly flat from the previous year. The company was hurt by waning demand for some of its more ordinary products like biscuits and lower-end beverages.
Despite the poor performance, Nestle said 3 areas where it performed well in China last year were high-end coffee and ice cream, which cater to wealthier young Chinese who have excess cash to spend on such premium items. In an attempt to better serve that audience, the company said it is in the process of moving its current line of Hsu Fu Chi chocolates upscale through improved packaging and more products.
As a resident in China, I can say that chocolate is now quite common in many grocery, convenience and other retail stores in large and even mid-sized cities. But I’m also often a little perplexed that I don’t see more people actually eating chocolate, the same way many like to be seen walking down the street holding a cup of premium coffee.
My conclusion is that chocolate is mostly a product eaten at the home or office, and a large part of spending probably goes to nicely packaged products that are given as gifts. That’s not a bad thing in face-conscious China, where giving a box of premium chocolate could gradually become the preferred choice over more traditional treats like fruit or biscuits. At the end of the day, such gift giving is really just another form of lifestyle choice, and should bode well for the future of chocolate consumption in China.
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