100% traceable fairtrade products: The next super-premium niche in chocolate?

With consumers becoming increasingly demanding when it comes to the ethical values surrounding food, there is mounting pressure within the industry to determine exactly what is ‘fairtrade’. Crucially, manufacturers that are able to show full-ingredient traceability might be in a position to open a new growth niche in the fairtrade chocolate market.

‘Mass balance’: A compromise for large-scale fairtrade production

According to fairtrade certification organisations, certified fairtrade ingredients can be bought only from independently audited and certified fairtrade farmers. They receive at least the fairtrade minimum price and/or (as relevant in accordance with scheme standards) a premium which is used to invest in community development.

To make sure that fairtrade-certified farmers receive the correct price and premiums for all relevant ingredients, the amounts used in products carrying the ‘fairtrade mark’ are carefully monitored by the fairtrade system.

This ensures that the volume of finished products that carry the fairtrade mark directly relates to the equivalent volume of fairtrade-certified ingredients traders have bought. The farmers receive full fairtrade benefits for every product sold carrying the fairtrade mark on its packaging.

Where possible, the fairtrade system seeks to ensure full physical traceability of certified products. However, ingredients like cocoa, tea, juice and sugar can come from many different farms and countries and often have to be mixed together, fairtrade with non-fairtrade, for purposes of transport and production. Unless volumes are very small or extremely large, it is often impractical or too expensive to keep them completely separate.

In practical terms, if one chocolate manufacturer mixes one tonne of fairtrade cocoa beans with 10 tonnes of conventional ones, it is allowed to market as fairtrade 10% of its ‘hybrid’ fairtrade and conventional cocoa bean-sourced output.

Demand for fairtrade chocolate weathers recession

Global retail value sales of fairtrade chocolate confectionery surpassed US$300 million in 2009, according to Euromonitor International estimates, up 21% on 2008. This growth was driven by the extraordinary performance of the UK market, which accounted for around 50% of total fairtrade chocolate confectionery retail values in 2009.

Consumer demand for fairtrade chocolate in the UK has been driven by intense manufacturer activity, particularly from Cadbury Plc through its Green & Black’s and Cadbury Dairy Milk ranges. More and more private label fairtrade chocolate confectionery lines have further bolstered retail sales in both value and volume terms.

Conversely, global growth was hampered by the relatively poor performance of fairtrade chocolate in the US in 2009, which saw sales decline by around 25% in retail value terms. US sales were greatly constrained by the country’s economic recession, which prompted many consumers to trade down to more affordable conventionally-sourced chocolate confectionery offerings.

Similarly, growth of fairtrade chocolate in other Western European countries has been relatively stagnant as consumers turned to more affordable formats in supermarkets and hypermarkets, where the presence of fairtrade items remains relatively low.

Nevertheless, 2009 saw the continued expansion of hybrid formats combining organic and fairtrade positions, and available at comparable prices to solely organic or fairtrade chocolate. This “super ethical” trend could very well help revive sales from 2010, to the betterment of future retail performance.

Future direction

Overall, global fairtrade chocolate sales are set to grow strongly in 2010 and 2011, albeit from a relatively modest consumer base.

This expansion will be driven by greater awareness of ethical food items in developed markets and intense promotional activity from mainstream manufacturers such as Cadbury Plc and Nestlé SA to support their existing product lines. Organic fairtrade chocolate confectionery is also predicted to take further share from merely organic lines, particularly in highly developed markets such as the UK.

That said, the speed of expansion for fairtrade chocolate will remain constrained by the monetary and temporal costs associated with the sourcing of fairtrade ingredients in developing countries such as the Ivory Coast. Fairtrade certification is quite a complex procedure which demands the traceability of all the ingredients used. It therefore requires comprehensive on-field documentation for a large part of the supply chain.

The global economic recovery will ultimately determine future retail prospects for fairtrade chocolate in the US and Western Europe. At a global level – and assuming a full economic recovery- Euromonitor International predicts retail value growth for fairtrade chocolate of 25% and 18%, respectively, in 2010 and 2011.

That said, and while a full economic recovery (FER) might lead to global real term GDP growth of 5% in 2010 and 4% in 2011, there are still widespread concerns that high sovereign debt levels in Western Europe and high unemployment in the US might lead to a less robust partial economic recovery (PER). In that case, growth for fairtrade chocolate might be lower and take longer to really take off compared to predictions given an FER scenario.

Way forward

There is consensus within the food industry that there exists a significant group of consumers willing to pay an additional premium for products that show absolute transparency when it comes to the ethical provenance of their ingredients.

From a production perspective, however, the exclusive use of fairtrade ingredients requires a relatively modest amount of production capacity. Interestingly, chocolate processors with a larger output capacity are highly unlikely to devote an entire supply production line to one single fairtrade chocolate line in exclusivity.

They would rather mix different cocoa qualities (fairtrade and conventional) in order to achieve a steady output flow and benefit from the subsequent economies of scale in terms of energy and labour use.

Conversely, chocolate processors with small production facilities are better positioned to allocate entire – albeit still modest in size – production lines to fairtrade-sourced chocolate. Euromonitor International research on sourcing and supply chains shows that small-scale fairtrade food production provides a better fit for tailored support of relatively isolated communities in developing countries.

Furthermore, it contributes to reducing the amount of paperwork and payment traceability linked to the large-scale supply of fairtrade cocoa.

In focusing on small-scale fairtrade production, small chocolate producers might achieve further differentiation from current fairtrade chocolate offerings, as well as the broader chocolate confectionery market, and open a new super-premium ‘100% traceable fairtrade chocolate niche’.

Strategically, large multinational chocolate manufacturers such as Kraft, Mars and Cadbury should pay increasing attention to any such smaller processors focusing on the ‘100%-traceable fairtrade niche’ and adjust their acquisition strategies accordingly.

In doing so, they could tap into an added-value category predicted to gradually move from specialist outlets for connoisseurs to gourmet sections in supermarkets across most developed markets.