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May 19, 2012

Mexico: A Land for Chocolate Conquerors?

CA1_blog_chocolate_IMG_1237_Analyst Insight by Francisco Redruello, Senior Foods Analyst at Euromonitor International

Ferrero's announcement in late February of its plan to spend US$190 million on the construction of a plant in the Mexican state of Guanajuato reflects the country's appeal to manufacturers of impulse and indulgence foods. The move might be followed by other chocolate manufacturers seeking to geographically diversify and reduce their reliance on mature developed markets. However, addressing current – as well as rising – consumer health concerns in Mexico remains crucial to commercial success over the medium to long term.

Targeting demand in Mexico and beyond

According to company sources, Ferrero's new production facility will manufacture Kinder and Nutella products both for the local market and for export to North America (US and Canada). The plant will begin production in May 2013 and, when at full capacity, will employ 500 people in addition to the 600 already working for BU Ferrero de Mexico.

Ferrero is already present in Mexico via several major brands, including Ferrero Rocher and Kinder Surprise (chocolate confectionery), Tic Tac (sugar confectionery) and Nutella (chocolate spreads). The company's confectionery sales reached US$130 million in 2010, according to Euromonitor International's estimates. In chocolate spreads, Ferrero's share stood at 71% of category retail value, equivalent to US$18 million.

Health awareness and employment woes hamper demand

Sales of chocolate confectionery in Mexico rose by just 1% in retail volume terms in 2011, down by two percentage points on the previous year. This sluggish growth is partly down to the current trend towards reducing consumption of foods high in sugar and a consumer base that remains unwilling to spend on products considered non-essential.

As part of a mounting trend towards healthier dietary options, consumers are increasingly monitoring their calorie intake more closely, often cutting consumption of products that add a significant portion of sugar to their diet, such as chocolate confectionery. In addition, although the economic crisis is now considered to have passed, employment and disposable incomes remain weak, making consumers more cautious with their spending.

Meanwhile, sales of spreads increased by 2% in retail volume terms in 2011, down from the 4% rise registered the previous year. As with chocolate confectionery, obesity concerns and competition from other “healthier” categories, such as snack bars, hampered demand for more traditional chocolate spread formats. The latter saw little innovation in 2010 and 2011, which, alongside concerns about future economic growth prospects, favoured demand for less expensive brands. Ferrero's retail value share in 2010 (71.2%) declined by 0.2 percentage points on the previous year.

2012: An opportunity for Mexican chocolate manufacturers

Despite mounting consumer health concerns and awareness, consolidation of economic growth in 2012 will underpin demand for impulse products in the country. According to Euromonitor International's Countries & Consumers database, Mexico's real GDP growth reached 4% in 2011, following a 6% rise in 2010 and a 6% decline in 2009. The International Monetary Fund predicts real GDP growth of 3.5% in 2012. That said, any deviations in this projected growth will very much depend on the strength of the US economy, Mexico's main trading partner. There is consensus among analysts, however, that Mexico's economic growth will remain positive in 2012 and 2013.

Demographics should also help to drive demand for Mexican consumer goods, including impulse and indulgence foods. According to Euromonitor International's Countries & Consumers database, Mexico entered a demographic dividend period in 2010 which is predicted to last for around 25 years. This should in turn raise overall consumption levels due to a higher percentage of the population being of working age (15-64 years). These consumers will have a greater propensity to consume than those in other age groups and provide significant opportunities to marketers of consumer goods and services.

Baby-boomers (those aged 40-60) represent Mexico's single largest demographic group, comprising 21.8% of the country's population in 2011. That figure is set to rise to 26.3% by 2020. This, coupled with a forecast rise in disposable income levels, will present good opportunities for packaged food manufacturers, including makers of impulse products.

Way forward

Sustained economic growth and changes in the national demographic make-up will play a positive role in the performance of chocolate and chocolate spreads in Mexico. However, consumer health concerns must be factored in to manufacturers' strategies before they embark on aggressive expansion.

Obesity is one major factor affecting demand for chocolate-based products in Mexico. Around 37% of the Mexican population aged 15 and above can be classed as obese (with a body mass index of 30kg/m2 or more), according to Euromonitor International's Countries & Consumers research. This percentage is predicted to increase to a staggering 46% by the end of 2016 at the current rate of growth.

Diabetes is another important issue in the country. According to statistics published by the Mexican Diabetes Federation (FMD) in 2011, around 11% of the Mexican population aged 20-69 suffer from diabetes. This percentage rises to 21% among adults aged 65-74. Health experts at the Universidad Nacional Autónoma de México (UNAM) point to genetic factors to explain the high prevalence of diabetes in Mexico. The genetic make-up of Mexicans is 70% indigenous and therefore more sensitive than Europeans to glucose intake.

In theory, the introduction of maltitol would help to overcome current health concerns regarding chocolate-based products in the Mexican market. However, existing sugar-free chocolate lines have not managed to make an impact in many developed markets, let alone a still developing market like Mexico. In Spain, for instance, reduced-sugar chocolate accounted for just 2% of total chocolate retail volume sales in 2011. This is mainly because consumers are still reluctant to view such offerings as “real” chocolate, and perceive them to be inferior in terms of taste and texture to standard chocolate.

A more practical alternative could be the introduction of premium dark chocolate in smaller formats. Targeting impulse consumption and highlighting the health properties of flavanols in cocoa – simultaneously reducing its calorific content through portion control – is a strategy worth trying. Other possible strategies include a more extensive use of active ingredients like Barry Callebaut's Acticoa, which allows for the preservation of a high flavanol content in chocolate.

Regardless, indulgence food manufacturers addressing the health issue in Mexico will be rewarded with sustained demand from more knowledgeable and cash-endowed consumers. Those ignoring it will face stagnation, or even oblivion.

 


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