Chocolate

INDUSTRIAL CODES

NAICS: 31-1320 Chocolate and Confectionery Manufacturing from Cacao Beans, 31-1330 Confectionery Manufacturing from Purchased Chocolate

SIC: 2064 Candy and Other Confectionery Products and Chewing Gum, 2066 Chocolate and Cocoa Products

NAICS-Based Product Codes: 31-132040, 31-132071, 31-13207111, 31-132072, 31-13207221, 31-13207231, 31-13207241, 31-13207251, 31-132073, 31-13207360, 31-13207371, 31-13207381, 31-13297391, 31-13301, 31-133010, 31-13301000, 31-13301001, 31-13301004, 31-13301007, 31-13301015, 31-13301021, 31-13301028, 31-13302, 31-133020, and 31-13302000

PRODUCT OVERVIEW

Chocolate is by far the favorite flavor of Americans. The National Confectioners Association (NCA) reports that in one survey, 52 percent of Americans named chocolate as their first choice, with the next flavor choices, vanilla and berry, tied at only 12 percent each. As if especially designed to appeal to humans, cocoa butter has a melting point of 90 to 93 degrees Fahrenheit, just below human body temperature, which explains why chocolate melts in the mouth.

Historically, chocolate has been seen as an aphrodisiac, a hangover cure, an antiseptic, and a cure for burns, fevers, listlessness, rheumatism, and snakebites. Modern scientists now tell us that dark chocolate is a heart-healthy food. Chocolate candy's rich emotional appeal gives it a significant role in such major holidays as Valentine's Day, Easter, Halloween, and Christmas.

Chocolate candy is also big business. The U.S. Census Bureau reported that in 2005 chocolate manufacturing (wholesale) shipments totaled $12.13 billion. The NCA estimated that U.S. retail sales of chocolate candy grew 3.1 percent from 2005 to a 2006 total of $16.3 billion. (This figure has been adjusted to include imported chocolate and exclude candy exported by U.S. manufacturers.)

All chocolate begins with cocoa beans, which grow in pods on the cocoa tree. This tree grows only in tropical regions around the world, with the Ivory Coast in West Africa being the largest producer of cocoa beans. Humans have been enjoying chocolate for at least 2,500 years, with some civilizations elevating it to almost mystical status.

Most archeologists believe that the Olmecs (1500–400 BC), a tribe that populated what is now an area of Mexico and Central America, were the first to consume chocolate. The knowledge passed to the Mayans and Aztecs, who cultivated the beans, which they believed were man's inheritance from the god Quetzalcoatl. The cocoa beans were crushed and made into an unsweetened drink, but they were so important to the Aztec civilization that they were also used as currency.

The Mayans called cocoa the food of the gods, and the Aztecs simply called the beans "chocolatl," warm liquid. Montezuma, the great Aztec monarch, reportedly drank 50 or more servings of chocolate a day from a golden cup.

Christopher Columbus brought the first cocoa beans to Europe in 1502, but they were largely overlooked among the many intriguing objects he brought to the Spanish court. Hernando Cortes, on the other hand, recognized the commercial potential of cocoa beans, experimenting with chocolatl and adding cane sugar to make it more appealing to Spaniards. He established additional cocoa plantings in the Caribbean before returning to Europe. The drink found favor with the Spanish aristocracy, which kept it a secret for almost 100 years. Eventually, the knowledge of the chocolate beverage spread across Europe, with the drink becoming a favorite at the French and British courts. British King William II drank chocolate to help him recover from nights of gambling and drinking, and by the 1590s chocolate was in such favor at Hampton Court that a special kitchen was built just for preparing the beverage. By 1657 London had its first chocolate house. In 1753 Carl von Linnaeus, named the genus and species of the chocolate tree: Theobroma cacao, literally cacao, the food of the gods.

The invention of the steam engine made it possible to mechanize cocoa grinding, and the price dropped enough to make chocolate affordable to the general public. The invention of the cocoa press in 1828 made it possible to squeeze out about half of the cocoa butter, leaving a cake-like residue that could be processed into a fine powder. This lowered the price even further and improved the quality of the drink, giving it a smoother consistency.

In 1847 melted cocoa butter that had been combined with sugar and cocoa powder was first sold as eating chocolate. The candy, which was far smoother than the old grained chocolate, quickly became popular. A further improvement came in 1876, when it was discovered in Switzerland how to add milk to create milk chocolate. In the United States, Milton S. Hershey brought the first Hershey's milk chocolate bar to market in 1900. In 1923 the Mars company introduced its first candy bar, the Milky Way.

It takes about 400 cocoa beans to make one pound of chocolate, according to the NCA. Although there are a number of variations, the process is quite similar at most manufacturers. As the cocoa beans arrive, their variety and region of origin are carefully noted, because the flavor varies and the correct mixture of beans is needed for each product. The beans are cleaned, weighed, blended, and then roasted. After cooling, their thin, brittle shells are removed and blown away, leaving coarse pieces of chocolate known as nibs. Next the nibs are crushed between steel rollers or grinding stones. The nibs are about 53 percent cocoa butter, and the heat of the grinding process turns them to a liquid known as chocolate liquor.

If powdered cocoa is desired, hydraulic presses squeeze out much of the cocoa butter. The pressed cocoa cake is pulverized to make cocoa powder. For eating chocolate, cocoa butter is added to the liquid, enhancing the flavor and making the chocolate more fluid. Other ingredients such as sugar, vanilla, and milk are added, forming a paste. Conching—a form of machine kneading, and emulsifying—is done by beating the chocolate to break up sugar crystals, creating a smoother product. Careful cooling tempers the chocolate, which can then be poured into molds.

MARKET

The U.S. Census Bureau reports in "Confectionery: 2006," one in its series of Current Industrial Reports that American factories shipped $16.89 billion worth of confectionery products in 2006. This total is broken out into four categories, the largest of which (58.6%) was chocolate confections with 2006 industry shipments valued at $9.89 billion. Non-chocolate confectionery products had shipments of $4.73 billion, gums accounted for $1.77 billion, and an estimated half billion were shipped of unspecified confectionery products from firms too small to be included in the survey. By adding imports and subtracting exports, the Census Bureau estimated that consumption of chocolate candy in the U.S. market totaled $10.2 billion. Exports of all confectionery products totaled $511,286 and imports $781,747 in 2006.

The NCA reported that 2006 retail sales of all confectionery products totaled $28.2 billion, with $15.6 billion in retail sales of chocolate candy, $8.9 billion in non-chocolate candy sales, and $2.7 billion in retail sales of chewing gum.

The performance of premium and dark chocolate was particularly strong, according to Mintel International of Chicago. Mintel reported that sales of premium chocolate in food, drug, and mass merchandising stores (excluding Wal-Mart) increased 129 percent from 2001 to 2006, from $896 million to $2.05 billion. Dark chocolate sales increased 49 percent, from $1.26 billion in 2003 to $1.99 billion in 2006. Datamonitor, a market analysis firm, predicted that overall chocolate sales would grow 22 percent from 2005 to 2010, from $14 billion to $17.8 billion respectively. Dark chocolate sales, however, were predicted to grow 61 percent from $414 million in 2005 to $668 million in 2010.

The NCA reported that for the 52-week sales period ending April 22, 2007, chocolate candy sales had increased 4.4 percent, with chocolate boxes and bags up an impressive 9.3 percent, led by growth in the premium and dark segments. The NCA said 2007 sales through April 22 were supported by strong Valentine's Day and Easter seasons. These holidays, as well as Halloween and Christmas, are important for both the chocolate and non-chocolate candy industries.

The Chocolate Manufacturers Association (CMA) also cites the following figures as an indication of the size of the market it serves: 2005 exports of chocolate products (a broader category than chocolate candy) totaled more than $711 million to more than 160 countries around the world, and about 65,000 jobs in the United States were directly involved in the manufacture of these chocolate products.

The United States is the largest chocolate market in the world, according to statistics from the World Confectionery Report and Export Handbook and the NCA. These figures, only slightly different from the numbers cited above, put the 2005 U.S. retail sales market at $14.2 billion, 22 percent of the world total. The United Kingdom came next with $7.67 billion, or an 11.86 percent share; Germany at $7.23 billion, or 11.18 percent; France at $4.47 billion, or 6.92 percent; and Russia at $3.9 billion, or 6 percent.

KEY PRODUCERS/MANUFACTURERS

The largest chocolate candy maker in 2005 in terms of U.S. supermarket, drugstore, and mass merchandiser sales (excluding Wal-Mart) was Hershey with $1.9 billion in sales and a 43.5 percent market share. Masterfoods (renamed Mars in 2006) was second with $1 billion and a 22.89 percent share, and Nestlé third, with $368 million in sales and an 8.42 percent market share.

On a global scale, Candy Industry magazine published a list of the top 100 candy makers in January 2007, but these statistics are for all candy, not just chocolate. Cadbury Schweppes PLC led the list with $10.5 billion in sales, Nestlé was second with $9.7 billion, and Mars was third with $6.67 billion. Next came the Ferrero Group with $6.7 billion, Hershey Foods Corp. with almost $5 billion, and Wrigley with $4.7 billion.

Hershey Foods Corporation

Hershey's brands include Hershey's, Reese's, Hershey's Kisses, and Ice Breakers. Dark and premium chocolate brands include Hershey's Special Dark, Hershey's Extra Dark, and Cacao Reserve by Hershey's. In addition, Artisan Confections Company, a wholly owned subsidiary of Hershey, has acquired several premium chocolate makers and now markets Scharffen Berger, Joseph Schmidt, and Dagoba Organic chocolates. Hershey also has license agreements with Cadbury Schweppes affiliated companies to market and distribute York, Almond Joy, and Mounds worldwide as well as Cadbury and Caramello products in the United States. The company has an agreement with Societe des Produits Nestlé S.A. to market Kit Kat and Rolo products in the United States. On a dollar basis, Hershey's sales are about 75 percent chocolate and 25 percent non-chocolate products.

Milton S. Hershey, who owned a caramel manufacturing company, bought chocolate-making equipment at the 1893 Columbian Exposition in Chicago and began producing baking chocolate and cocoa as well as coatings for his caramels. Hershey built his own milk-processing plant and worked for three years to become the first American with a formula for manufacturing milk chocolate. The Hershey bar that resulted was an immediate success.

Hershey, located in Hershey, Pennsylvania, is the largest North American candy maker, and it employed more than 13,000 people worldwide in the middle of the first decade of the 2000s. After improving sales helped push up stock prices from 2001 to 2005, momentum slowed. The company's net sales fell 0.7 percent to $1.37 billion in the fourth quarter of 2006 from the year-earlier quarter, while net income dipped 10 percent to $153.6 million or 65 cents per share. Hershey responded in early 2007, announcing major restructuring that included cutting 1,500 jobs, eliminating one-third of its production lines, outsourcing cheaper items, and building a plant in Mexico.

In April 2007 Hershey announced a new strategic supply and innovation partnership with Barry Callebaut, the world's largest manufacturer of high-quality cocoa and industrial chocolate. The companies agreed to partner on a wide range of research and development activities. Callebaut also agreed to build and operate a facility to provide chocolate for Hershey's new plant in Mexico and to lease part of Hershey's Robinson, Illinois, plant and operate chocolate-making equipment there.

Mars, Inc.

This company is an $18 billion, privately owned business operating in more than 65 countries. Its headquarters are in McLean, Virginia. Mars markets pet food, beverages, dinner products such as Uncle Ben's rice, and information services as well as candy. Its chocolate brands include M&M's, Mars, Milky Way, Snickers, and Twix.

Mars was founded in 1911 when Frank C. Mars opened a candy factory in Tacoma, Washington. He relocated to Minneapolis, Minnesota, in 1920 and introduced the Snickers and Milky Way bars. Mars and Hershey have fought each other over the years for leadership in the U.S. candy market. Mars acquired Dove International in 1986, and began marketing not only Dove candy and ice cream bars, but ice cream versions of 3 Musketeers, Milky Way, and Snickers as well.

In the candy market, however, Hershey regained first place in 1988 by acquiring the right to produce and market Mounds and Almond Joy bars. Mars responded in 1990 with the successful introduction of peanut butter M&M's, which cut into the market for Hershey's Reese's peanut butter cups.

Nestlé S.A.

Nestlé, a Swiss company, is the largest food and beverage company in the world in terms of sales. It was founded by Henri Nestlé to market baby formula for infants who could not breastfeed. Today, Nestlé's 7,500 brands include coffee, bottled water, breakfast cereal, dairy products, ice cream, baby formula, and pet food as well as chocolate.

In 1875 Daniel Peter of Switzerland discovered how to combine Nestlé's condensed milk and cocoa to make milk chocolate. Peter, a neighbor of Henri Nestlé, founded a company that quickly became the world's leading maker of chocolate. As Nestlé's company grew, it also began making and selling chocolate, and in 1928 the company merged with Peter, Cailler, Kohler, and Chocolats Swiss, a company resulting from the merger of several Swiss chocolate makers including the firm founded by Peter. This merger added 13 chocolate plants in Europe, South America, and Australia.

In the United States, a subsidiary, Nestlé's Food Company Inc., was formed. The company's candy brands, including Nestlé's Crunch, Baby Ruth, and Butterfingers, are now produced by the snack division of Nestlé USA.

Cadbury Schweppes

Global leader Cadbury Schweppes resulted from a merger of the Cadbury candy company in Birmingham, England, and Schweppes beverage company in Geneva, Switzerland, in 1969. In early 2007 the company separated its beverage and confectionery units, dividing confectionery into four regional divisions: the Americas, Asia Pacific, Europe and a single unit focusing on Britain, Ireland, the Middle-East, and Africa.

Russell Stover

Another name worth noting in the list of chocolate makers is Russell Stover. In the United States, Russell Stover, which also owns the Whitman brand, dominates candy box sales. Russell Stover's 2006 sales totaled $93 million, with Whitman sales at $41 million.

MATERIALS & SUPPLY CHAIN LOGISTICS

Materials used by chocolate candy manufacturers include cocoa beans and products made from the beans such as chocolate liquor, chocolate cake and powder, chocolate coatings, and cocoa butter; sweeteners, including high-fructose corn syrup and cane and beet sugar; milk and milk products; nutmeats; fresh and dried fruits; and coconuts.

Hershey states on its Web site that cocoa is its most significant raw material, with other principal materials being, in order of magnitude, sugar, milk, peanuts, almonds and coconut. Chocolate makers globally use around two-fifths of the world's almonds and one-fifth of the world's peanuts. In the United States, chocolate manufacturers use about 3.5 million pounds of whole milk every day.

The supply chain for cocoa beans begins with small farmers in the Ivory Coast, Ghana, and other cocoa exporting countries. The farmer dries the beans, packs them, and delivers them to an exporting company, who inspects the cocoa and trucks it to a warehouse near a port. At the port, an independent grading agency inspects the beans before they are loaded onto ships. When the ship reaches its destination, it is unloaded and taken to a pier warehouse where it is sampled and inspected by the importer and declared to customs. Trucks then carry the cocoa to the manufacturer's facility.

The need for cocoa beans has drawn the industry into the contentious question of living and working conditions in the areas of West Africa where 70 percent of the beans are grown. In response to reports that child slaves were working on cocoa farms while living under inhumane conditions, particularly in the Ivory Coast, the World Cocoa Foundation (WCF) was formed in 2000. The goal is to promote "a sustainable cocoa economy through economic and social development and environmental conservation…." Its 60 candy company members include all of the major producers.

Working through this organization in the early 2000s, the cocoa industry, the United Nations, associations such as NCA and CMA, and local governments are together sponsoring programs to: (1) eliminate forced labor, (2) see that children are not harmed while working on family farms, (3) help small farmers get a better economic return on their produce, and (4) protect and enhance the environment in cocoa-growing regions. In one program, the NCA announced a partnership with UNICEF to provide greater access to education for children in the cocoa communities. Mars was participating in an initiative to provide vocational education in the Ivory Coast. Hershey was supporting another to provide teacher training in the cocoa-growing regions of Ghana and the Ivory Coast.

The WCF's Initiative for African Cocoa Communities (IACC) was formed in 2002 to bring together industry, farmer groups, non-governmental organizations (NGOs), development groups and others in an even stronger commitment of improving the lives of cocoa farmers and their families. Small cocoa farmers lose an average 30 percent of their crops to pests and disease, and at times they are faced with total crop failures. The IACC supports programs to educate farmers on more productive farming methods, as well as on better labor and environmental practices. The organization also deals with community issues such as HIV/AIDS and access to education. In another initiative, the United States adopted legislation setting up a protocol agreement that established a cocoa certification process that includes reports on the worst forms of child labor and forced labor and progress in reducing its incidence.

Ghana issued its first certification report in early 2007 as part of its own National Cocoa Child Labor Elimination Program. It stated that most children working in the country's cocoa industry are working on family farms and living with parents or a close relative. It added, however, that many children are still involved in hazardous tasks not appropriate for helping out on a family farm.

The large amount of sugar used by candy makers has involved the industry in trade policy. The NCA has for years argued that sugar price supports and trade restrictions put U.S. candy makers at a competitive disadvantage against manufacturers in other countries who can buy cheaper sugar on the global market. NCA says this is causing the loss of American manufacturing jobs, and it has lobbied in support of trade agreements such as the U.S. Central American-Dominican Republic Free Trade Agreement (CAFTA) and the North American Free Trade Agreement (NAFTA) that allow U.S. manufacturers to purchase some sugar from Central American growers at world market prices.

In 2006 the industry became involved in an effort by the Grocery Manufacturers Association to convince the U.S. Food and Drug Administration to revise food regulations to allow more flexibility. Of particular concern was a change that would allow manufacturers to substitute vegetable fat for cocoa butter and lower-cost milk substitutes for genuine milk products. Some chocolate companies such as Guittard Chocolate and See's Candies indignantly opposed the changes, while others, including Hershey saw no problem with them. It was predicted that it would be years before the FDA finally settled the issue.

Meanwhile a compromise within the European Union allows chocolate sold there to contain 5 percent non-cocoa vegetable fat so long as these nut butters come from an approved list of other tropical nuts. The presence of fats other than cocoa butter can be listed near the end of the list of ingredients rather than on the front of packages, as once had been suggested.

Another regulatory concern for chocolate makers arises when alcohol is used in candy fillings. In the United States, the use of alcohol in the fillings of some chocolate candies has subjected candy makers to different regulations in every state. Alabama, for example, prohibits the sale of candy containing "any vinous, malt, or spirituous liquor," while California permits the retail sale of any confectionery that contains less than 5 percent alcohol by weight.

DISTRIBUTION CHANNEL

Chocolate candy is sold through a varied and diverse network of distributors and retailers. The Hershey Company, for example, stated on its Web site that the company sells to grocery wholesalers, chain grocery stores, candy distributors, mass merchandisers, chain drug stores, companies that manage vending machines, wholesale clubs, convenience stores, concessionaires, and food distributors, for a total of more than 2 million retail outlets in North America. The product travels from manufacturing centers to a network of distribution centers and field warehouses located throughout the United States, Canada, and Mexico. The company generally uses contract carriers to deliver product from these warehouses to customers. Hershey's uses a real-time computing service, available 24 hours a day, seven days a week, to allow business customers to place and track orders.

Confectioner magazine reported in April 2005 on distribution channels for all candy. Although these figures included sales of non-chocolate candy, they provide a good indication of where chocolate candy is being sold. According to this report, 28.6 percent of candy was being sold in supermarkets, with 16.8 percent going directly from manufacturers to supermarkets' own warehouses or stores, 8.7 percent going indirectly to supermarkets by way of wholesale grocers and co-ops, and 3.1 percent going indirectly by way of candy and tobacco or specialty food distributors. The magazine said 7.8 percent of candy was going to wholesale clubs, although these clubs were only selling 3.9 percent of candy directly to consumers. The rest was being sold to small retail outlets or distributors and resold.

Confectioner listed a wide variety of independent retailers and alternate outlets, while noting that none was large enough to warrant individual designation on the chart. These outlets included beauty parlors, card and gift shops, video stores, college book shops, craft and hobby stores, hardware and home improvement outlets, liquor stores, toy shops, specialty stores, candy shops, and office supply and service outlets, as well as small independent outlets. Another group of sellers that did not warrant individual designations included manufacturing retailers (candy sold through company-owned stores), fund-raising operations, and government and military stores.

Basing its figures on input from Chicago-based Information Resources, Inc. (IRI), NCA's and CMA's monthly shipping reports, and the U.S. Department of Commerce, the NCA listed the following sales totals for various outlets from January through December, 2006: supermarkets, $4.3 billion; Wal-Mart, $3.2 billion; mass market stores other than Wal-Mart, $1.3 billion; convenience stores, $4.2 billion; drug stores, $2.4 billion; warehouse club stores, $2.1 billion; dollar stores $0.8 billion; vending machines, $1.2 billion; and bulk sales, $1.5 billion. A factor that must be considered in all warehousing and ship-ping of chocolate candy is its vulnerability to light, heat, humidity, and odor contamination.

One distribution issue that has been of concern to the industry is an October 2005 decision by the National Motor Freight Traffic Association, the group that maintains a freight classification system for the trucking industry, to change the classification for chocolate and other candy. The price of sending less-than-truckload shipments is negotiated based on this classification, which takes into consideration such transportability characteristics as density, stowability, ease of handling, and liability.

This group surveyed truckers and concluded that average density of candy shipments was less than was required for its classification of "65," which meant that a given number of pounds of candy was taking up more room in a truck. In 2005 the industry reclassified candy as "92.5," which resulted in higher shipping rates for the entire industry. The NCA appealed, and while it did not get candy back to its old classification, it obtained an agreement with the trucking industry on a sliding classification based on actual density. This meant that shippers of dense packages were charged less.

KEY USERS

Almost everyone eats chocolate candy. One small exception may be very young children. The CMA states on its Web site that older children are significantly more likely to prefer chocolate than younger children. With a large variety of reputedly healthier dark chocolates, sugar-free chocolates, and diet chocolate, even diabetics and those concerned about health or weight can and do eat chocolate candy.

ADJACENT MARKETS

Compared to other food products, candy and gum occupy a growing portion of the marketplace. IRI data for the year ending December 2006 show that in food, drug, and mass merchandising channels, candy and gum ranked third in volume of all food categories, behind carbonated beverages and milk. The confectionery category was growing, however, while carbonated beverage and milk sales were flat or declining. A more direct sales competitor, salty snacks came in fourth, and that category was also growing even faster than candy.

It can be argued that candy sales are increasing even more rapidly than shown in this survey, because dollar stores, which are increasingly stocking candy, and Wal-Mart are not included.

NCA figures also show that while candy and gum sales grew in 2006 in supermarkets, drugstores, and mass merchandisers (excluding Wal-Mart), snack food categories grew faster. Miscellaneous snacks grew 28 percent to $220 million; snack and granola bars, 4.3 percent to $1.9 billion; coffee, 3 percent to $3 billion; bakery snacks, $3.5 percent to $860 million; salty snacks, 2.6 percent to $7.46 billion; and candy, 1.6 percent to $8 billion. Ice cream decreased 0.3 percent to $4.4 billion, and cookies, decreased 0.6 percent to $3.9 billion.

Within the U.S. candy category, IRI offered a breakdown of sales in 2006. U.S. chocolate candy sales totaled $4.58 million, non-chocolate candy totaled $2.3 billion, and gum, $1.1 billion.

Another way of looking at adjacent markets is to consider non-edible cocoa bean products such as cocoa butter and cocoa shell mulch. Cocoa butter is used in various skin-care products, while cocoa shell mulch is prized for its landscaping qualities, flexible use, and sweet aroma. Compared to candy, these cocoa bean-based products represent a very small market, and sales figures are not readily available.

RESEARCH & DEVELOPMENT

Those involved in the chocolate industry sponsor and conduct research in several areas. Pennsylvania Manufacturing Confectioners Association (PMCA), an international association of candy manufacturers, for example, awards one or two annual grants for graduate-level, non-proprietary university research in areas relevant to candy, manufacturers' problems, or industry issues, as well as one annual grant for research at Pennsylvania State University (Penn State).

Penn State has a long history of confectionery research, beginning in the 1920s. In addition to PMCA, support for Penn State candy research has come from a number of companies and organizations, including M&M/Mars, Hershey, CMA, the American Cocoa Research Institute, the American Association of Candy Technologists, and Dairy Management Inc. (on the use of fractionated milk fat in milk chocolate).

Research topics have varied widely, including work on the flavor and sensory quality of chocolate, the impact of cocoa butter in the diet, flavor-fade in peanuts, the continuous conching of chocolate, the influence of particle size and size distribution on the flow and sensory properties of chocolate, and the genetic transformation of the cocoa tree for improved disease resistance and seed quality.

Individual companies also conduct research, largely to develop and introduce new products. Candy Industry magazine reported on its Web site on a survey of 500 food and beverage processors by New Products Magazine. The magazine noted that while snack and candy makers as a whole devote 3 percent of their workforce to new product development, chocolate R&D accounts for less than 1 percent of the industry workforce.

CMA's Web site lists a number of 2006 and 2007 research publications on the health effects of chocolate. Flavanols are a class of chemicals found in raw cocoa beans, red wine, and green tea. Mars, Hershey, and Barry Callebaut are among the companies that have developed processes to retain most of the flavanols during processing, and they are marketing healthy chocolate with more flavanols.

Flavanols have been shown in some studies to relax blood vessels and increase blood flow, possibly lowering blood pressure and guarding against heart attacks. Other researchers have said flavanols may potentially balance the immune system, restrain brain aging, and even curb cancer cell production. Most health professionals warn, however, that chocolate is very high in calories and that unless portions are limited, it will contribute to obesity and associated heart risks.

CURRENT TRENDS

Premium chocolates and the overlapping category of dark chocolates were continuing to grow in popularity throughout the first decade of the 2000s. Mintel International reported that after 2002, when the premium chocolate category began to gain traction, it grew at a rate of about 14 percent a year, with consumers interested in dark chocolate both for rewarding themselves and because of the positive health news about dark chocolate. The importance of health as a motivation is illustrated by strong sales of non-premium dark chocolate such as Hershey's Special Dark bar.

Dark and premium chocolate cannot be completely combined into one category, however, because Mintel's survey showed that 43 percent of premium customers prefer dark chocolate while 42 percent favor milk chocolate. The health trend can also be seen in the strong growth of dietetic chocolate. Sales of low-sugar and no-sugar-added chocolate in U.S. food, drug, and mass merchandising stores (excluding Wal-Mart), according to ACNielsen, grew 478.2 percent between 2000 and 2005. Portion-control chocolate packaging was also gaining popularity as consumers looked for ways to control their weight. White chocolate was winning fans as well because it could boast that it contained no caffeine.

Premium no-sugar-added varieties appeal to diabetics as well as dieters. Guylian Chocolate of Englewood Cliffs, New Jersey, for example, established a premium no-sugar-added line, which uses Belgian chocolate and an extended conching process to give the bars a smooth texture and rich flavor. The bars are made with maltitol, a natural sugar substitute. Despite these trends, a great many chocolate buyers are not worrying about their weight. In fact, the sale of chocolate in bars, boxes or packages greater than 3.5 ounces has been increasing steadily.

The market for organic chocolate products was also expanding rapidly in the first decade of the twenty-first century. Dagoba Organic, sold by the Artisan Confections Company, a subsidiary of Hershey, and Theo Chocolate of Seattle, Washington, are two organic manufacturers who are gaining market share. Dagoba's new Apothecary line features a Cacao Elixir that is glycerin-based, sugar-free, and alcohol-free, and it offers botanical infusions made with cacao nibs. Theo Chocolate roasts its own Fair Trade-certified cocoa beans, noting that consumers are becoming increasingly aware of the child labor issues surrounding some cocoa beans.

As part of the gourmet chocolate trend, some observers predict that the most discerning consumers will search for cocoa from different continents, countries, or regions. More interest in ethnic chocolate is also expected, with dark chocolate being marketed with flavorings such as black or cayenne pepper, ancho chilies, lemon and lime, intense cinnamon, ginger, paprika, pine nuts, cloves, sea salt, rosemary, and even sun-dried tomatoes.

TARGET MARKETS & SEGMENTATION

Chocolate candy makers are not forgetting their core customers—women ages 25 to 40, who according to Mintel International, eat an average eight servings per month. New dark chocolate products aimed at this group are proliferating. Candy producers, however, are also looking for ways to appeal to other groups. Many of the new health-oriented varieties are particularly aimed at the aging Baby Boom generation (born between 1945 and the early 1960s).

Some new boxed candy collections are designed to attract younger, hipper buyers who have the money to treat themselves to an upscale assortment. One version is Target's new Choxie brand. Fanny May's new gourmet line, marketed under the Harry London brand, was presented in a sophisticated black-hinged box and featured richer, subtler flavors. In fact, new packaging is a popular way to reach targeted groups. Labels highlight the product's purported health benefits or other attributes. As seen above, portion control packaging, with individual packets containing 90 or 100 calories, has also been popular with consumers.

Retailers try to draw attention to new or gourmet products with various displays, including off-shelf displays in flower and greeting card sections. Store-within-a-store boutiques, positioned near such departments as the bakery and artisan breads section, can call attention to premium products. Giant Eagle stores in Pittsburgh, Pennsylvania, have even begun cross-merchandising dark chocolate in the wine department, touting red wine and chocolate as an appealing combination.

One group the candy industry wants to be careful about targeting is children. The NCA has announced guidelines on responsible confectionery marketing for its members. The organization has also joined the Children's Advertising Review Unit that seeks to ensure that advertising to young children is "truthful, accurate, and sensitive." In addition, the NCA joined the Ad Council's Coalition for Healthy Children to promote healthy lifestyles to children and parents, and has made materials available on nutrition and physical activity.

RELATED ASSOCIATIONS & ORGANIZATIONS

American Association of Candy Technologists (AACT), http://www.aactcandy.org

Chocolate Manufacturers Association, http://www.nca-cma.org

National Confectioners Association, http://www.candyusa.org

Pennsylvania Manufacturing Confectioners Association, PMCA: An International Association of Confectioners, http://www.pmca.com

Retail Confectioners International, http://www.retailconfectioners.org

World Cocoa Foundation, http://www.worldcocoafoundation.org

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"Confectionery Industry Review, 2006 Year-End." National Confectionery Association. Available from ?http://www.ecandy.com/ecandyfiles/2006_Annual_Industry_Review_February_2007.ppt#387,1,Slide1?.

Covino, Renee M. "Counting Candy: Sure There Are Industry Pressures, but the Confectionery Industry Numbers Tallied Up Nicely for 2006—with 2007 Already Breaking One Seasonal Record So Far." Confectioner. April 2007, 31.

"Dark Chocolate: Now That the 'Chocolate Bar' Has Been Raised Toward More Premium Varieties, Retailers Need to Strategize to Capture an Even Higher-Impulse Chocolate Market." Confectioner. March 2007, 28.

Darnay, Arsen J. and Joyce P. Simkin. Manufacturing & Distribution USA, 4th ed. Thomson Gale, 2006.

"Ghana Cocoa Certification Report to Guide Efforts to Help Children on Cocoa Farms." World Cocoa Foundation. Available from ?http://www.worldcocoafoundation.org/commitements/ghana.asp?.

"Hershey and Barry Callebaut Announce Strategic Supply and Innovation Partnership." Hershey Company. 26 April 2007. Available from ?http://www.hersheycompany.com/news/release.asp?releaseid=001642?.

"Industry Performance: Dept. of Commerce Annual Confectionery Report." National Confectioners Association. Available from ?http://www.ecnady.com?.

"Investor Relations: FAQs." Hershey Company. Available from ?http://www.thehersheycompany.com/ir/faq.asp#37?.

Kennedy, Maev. "Palace Serves Up History of Chocolate." The Guardian, (London, England). 14 April 2001, p 5.

Kolenc, Julie. "Chocolate Bar Sales Soar: Chocolate Bars Are Grabbing the Headlines as Consumers Discover New Varieties and React to Health Claims." Professional Candy Buyer. March-April 2007, 26.

Lazich, Robert S. Market Share Reporter 2007. Thomson Gale, 2006, Volume 1, 139-143.

Liebeck, Laura. "Sweet Ride: Candy's Gotten a Shot in the Arm from Popular Chocolate Segments Such as Dark, White, and Dietetic." Progressive Grocer. 1 March 2006, 58.

Marter, Marilynn. "A Turn for the Bitter in Chocolate Market: Sales of Dark Varieties Are Rising, Driven in Part by a Notion of Healthfulness." The Philadelphia Inquirer, (Philadelphia, PA). 26 October 2006.

Pacyniak, Bernie. "Don't Mess with the 'Gold Standard.'" Candy Industry. April 2007, 6.

Penn, Catherine. "Fast and Furious" Candy Industry. May 2007. Available from ?http://www.candyindustry.com?.

Rehan, Kelly. "Delving Deeper into Dark: From Low-Sugar to Fair Trade, Organic to Dark, Chocolate Bar Manufacturers Expect to Turn Many of Last Year's Biggest Trends into Successful Mainstays in 2007." Candy Industry. January 2007, 40.

??????. "From Farm to Pharma: Chocolate's String of Health Claims Ranges from Lowering Blood Pressure to Even Preventing Some Cancers." Candy Industry. April 2007, 12.

Roberts, Williams A. Jr. "Confounding Confections: With Gum and Mints Accounting for $3.3 Billion in Sales, Premium Chocolate Selling $1.5 Billion Worth Per Year and Sugar Confectionery Tallying $11.3 Billion Annually, There Is No Doubting the Vast Size of the Overall Confectionery Category." Prepared Foods. July 2005, 18.

see also Candy, Snack Foods