Export Product Packaged: the Confectionery Industry: Cocoa and Chocolate

Export Product Packaged: The Confectionery Industry: Cocoa and Chocolate.

SIC Code: 180690

Prepared by: Fathima Amra

Sector Manager.

Table Of Contents

Contents

1.Introduction

2. Description of the Industry

3.Industry Supply Chain

3.2Geographic Position - Concentration of Companies Profiled per Province

Graph to insert.

4.Size of the Industry

4.2.Market Share and Potential By Country

4.3Summary of Main Players

5.State of the Industry

5.1Local

Trends

5.2Regulations

5.3Investments

5.4Continental

5.5Brands in Africa

5.6International

6. INFLUENCING FACTORS

6.1. Economic Environment

6.2. Barriers to Entry

6.3. Research & Development and Innovation

7.FUTURE OUTLOOK

8.References:

1.Introduction

(The information provided in this report is sourced from latest research 2015.)

The value of the South African confectionery market is between R11bn and R12bn with approximately half of this value comprising of chocolate confectionery. Multinationals present in South Africa are following global strategies of improving efficiencies in their supply chain which include selling off non-core brands and improving economies of scale by producing popular count lines in high-volume factories. This report focuses on the local confectionery market and specifically on the chocolate confectionery market which is growing at 10% per annum.

2. Description of the Industry

The confectionery market can be divided into chocolate confectionery, sugar confectionery, and gum. The cocoa, chocolate and sugar confectionery manufacturing industry involves:

• The shelling, roasting and grinding of cocoa beans to make chocolate cocoa products and confectioneries;
• The manufacture of chocolate products after the chocolate ingredient is bought from the producers; and
• The making of range of sugar and non-sugar sweets as well as chewing gum from ingredients such as sugar, syrup, starch, fruit preservatives, chocolate, nuts, emulsifiers and flavourings.

Sugar confectionery is dominated by two local companies, Candy Tops and Trade Kings. Candy Tops, which was established by the Dordrecht family in 1984 is marketed under the "Candy Tops" and "Sovereign" brands. It merged with Mister Sweet, marketer, distributor, and manufacturer of a wide range of sugar confectionery, in November 2011 when it was acquired by Lodestone Brands. Trade King, a Zambian company which expanded into South Africa in 2005 is a competitor in the confectionery industry in South Africa, other competitors include Aldor, Baxton and Manhattan, which has been owned by the Premier Foods since May 2013.

The three main chocolate manufacturers are Mondelez South Africa, Tiger Brands, and Nestle. KeesBeyers Chocolates is the largest private manufacturer of chocolate. Chocolate confectionery is manufactured into slabs and speciality chocolate which can also be manufactured from milk, plain, dark and which chocolate which may contain roasted nuts, etc.

3.Industry Supply Chain

The confectionery production process involves farmers, buyers, shipping organisations, processors, chocolatiers, confectioners and distributors. Suppliers to the industry include:

• Suppliers of raw materials and other ingredients such as nuts, sugar, syrup, starch, fruit preservatives, emulsifiers and flavourings.
• Suppliers of machines and plants.
• Suppliers of packaging technology and materials; and
• Suppliers of refrigeration and air conditioning/technology automation/data processing/control technology as well as safety, quality management and analysis, laboratory and measuring equipment.

The main inputs into the confectionery industry are sugar and cocoa. South Africa drives it sugar requirement from its annual domestic production of approximately 2,2million tonnes. Cocoa on the other hand is supplied from outside the country. Between five to six million small-scale farmers in regions within 20degrees north and south of the equator produce between 80% and 90% of the world's cocoa requirement. The largest producing regions in are Africa, Asia, and the America's with the largest cocoa-producing country still being Cote d'Ivoire in Africa with a 33% share of the world production. The cocoa beans are purchased by large scale grinders of beans, Cargill, Swiss Barry Callebaut, the world's largest cocoa maker, and Olam International.

There are a variety of distribution channels used by manufacturers in this sector including independent and large chain wholesalers, general and convenience retailers. Imported sweets are often distributed by speciality wholesales, such as Sweet Hypermarket and DB Cash & Carry in Johannesburg. The sale of sweets to spaza shops and hawkers after purchase from wholesalers has not been measured, but it is believed to be considerable. According to a survey conducted by Who Owns Whom, retail outlets are the largest distributors of chocolates, whereas wholesalers distribute most of the sweets and chewing gum I the local market. A number of chocolatiers have their own retail outlets. Geldhof Chocolates has set up five GeldhofChocolatier outlets in Gauteng. KeesBeyers distributes via retail outlets such as Spar, Shoprite, Woolworths under its private brand label and Clicks und the d.licious brand.

3.2Geographic Position - Concentration of Companies Profiled per Province

Graph to insert.

The following graph from the Sector Skills plan for Food and Beverages manufacturing sector 2014/2015 shows the provincial spread of employees for the baking, cereals, confectionery and snacks sub-sector.

4.Size of the Industry

According to the FoodBev Seta there are 311 companies registered in the Baking, Confectionery and Snacks sub-sector in 2013. Industry experts estimated that the value of the industry is at R10,6bn in 2013 having grown at a compound annual growth rate of 3.9% from 2009 to 2013. Chocolate makes up half of the value growing at a faster rate of 10% annually with Frost & Sullivan predicting that the industry will be worth R8bnby 2018. This sector is dominated by three big companies, Mondelez South Africa, Nestle' and Tiger Brands. Imported brands like Lindt, Ferrero and small niche chocolatiers are growing their market share. Kees tonnes of chocolate every week, and develop approximately 150 new products every year.

4.2.Market Share and Potential By Country

• The table below depicts current potential of export markets for HS 180690 for South Africa. It identifies 200 markets for one product.

• The table below shows us the top 8 countries as realistic export potential markets.

Country / Total Exports from KZN / Total ZAF Exports as % / [A] Realistic Export Potential to Target Market(s) ('000 US$) / [B] Total Exports from ZAF to Target Market(s) ('000 US$) / [C] = [B] / [G] Total Exports from ZAF / Target Market(s) Total Imports % / [D] = [B] / [A] Total Exports from ZAF / Realistic Export Potential % / [E] Target Market(s) Imports from T6 (Excl ZAF) ('000 US$) / [F] Target Market(s) Imports from Rest (Excl ZAF) ('000 US$) / [G] Target Market(s) Total Imports ('000 US$)
2.8% / 1435236.91 / 1743.21 / 0.0% / 0.1% / 8611421.43 / 1551249.59 / 10164414.23
United Kingdom / 2.8% / 144840.13 / 460.30 / 0.0% / 0.3% / 869040.80 / 180592.26 / 1050093.36
Germany / 2.8% / 138696.87 / 11.48 / 0.0% / 0.0% / 832181.20 / 239672.69 / 1071865.37
France / 2.8% / 135469.02 / 27.56 / 0.0% / 0.0% / 812814.13 / 82968.54 / 895810.23
United States of America / 2.8% / 131491.08 / 118.44 / 0.0% / 0.1% / 788946.45 / 136533.68 / 925598.57
Netherlands / 2.8% / 108417.01 / 52.32 / 0.0% / 0.0% / 650502.05 / 55201.00 / 705755.37
Canada / 2.8% / 72799.17 / 564.47 / 0.1% / 0.8% / 436795.00 / 72460.06 / 509819.54
Russian Federation / 2.8% / 64856.66 / 5.14 / 0.0% / 0.0% / 389139.94 / 91232.93 / 480378.01
Spain / 2.8% / 50224.81 / 1.01 / 0.0% / 0.0% / 301348.88 / 34639.42 / 335989.31

4.3Summary of Main Players

Summary of Main Players

Company Name / Employees / Turnover / Turn
Year
End / Turnover
Comment / Confectionery Brands
Gauteng
Dicks Sweets cc / 15 / Dick Sweets
Ethnic Candy cc / 76
Imsofer Manufacturing (Pty) Ltd / 150 / Ferrero,TicTac,
Kinder Joy
InkanyeziChocs (Pty) Ltd t/a Arriba Chocolates / 18
KeesBeyers Chocolate cc / 358 / Beyers
Lodestone Brands (Pty) Ltd / 180
Mondelez South Africa (Pty) Ltd / 2,200 / R39,290.0m / 2014 / Mondelez International: Eastern Europe, Middle East & Africa (EEMEA) Segment
Nestle (South Africa) (RF) (Pty) Ltd / 3,220 / 3in1, AcquaPanna, Aero, Alta
Rica, Bar-One, Ben10, Cap
Colombie, Cerelac, Cheerios,
Choc Stick, Chocolate Log,
Classic, Condensed Milk, Cool
Fruit, Country Fresh, Cream
Soda Float, Cremora, Crisp,
Crunch, Dessert Cream,
Dialite, Easy Melt,
Farmhouse, Foodservices,
FrogzEggz, Gold Cross,
Heaven, Ideal, Jive, Just
Magic, King Cone, Kit Kat,
Klim, Lactogen, Maggi, Marsh
Mallow Goo, Mega, Milky
Bar, Milky Choc, Milo, Miniz,
Company Name / Employees / Turnover / Turn
Year
End / Turnover
Comment / Confectionery Brands
Nan, Nescafé, Nespray,
Nesquik, Nestea, Nestlé,
Nestlé Aquarel, Nestlé GOLD,
Nestlé Nutrition, Nestlé Pure
Life, Nestum, NIDO, Nutren,
NutrenRicoffy, Nutrition,
Orange Maid, Passions,
Peptamen, Perrier, Prebio3,
Prebio1, Probioticsbifidus B L,
Pure Life, Purina, Quality
Street, Ricoffy, ROLO,
S.Pellegrino, Sally Williams,
Schoonspruit, Smarties,
Striker, Tex, Treat, Valvita,
Vittel, Wafer Wizz,
Wotalotigot, Zooty Fruit
Premier Foods (Pty) Ltd / 3,790 / BB, Blue Ribbon, Braaipap, Impala, Invicta, Iwisa, Just Baked, Lil-lets, Manhattan's, Mr Bread, Nyala, Premier
Foods, S.U.B, Snowflake, Star
Bread, Super Sun, SuperC
Sally Williams Fine Foods (Pty) Ltd / 112 / Sally Williams
Tiger Brands Ltd / 16,365 / R3,0 126.0m / 2014 / (R22,373.2m - SA; R4,578.7m - Non-SA)
R8,043.0m - Milling & Baking;
R2,905.6m - Other Grains;
R3,968.7m -
Groceries; / Ace, Airoma, Albany, All Gold, Allsorts, Anytime, Aunt Caroline, Beacon, Bio, Black Cat, Bokkie, Colman's, Cresta, Crosse & Blackwell, Dolly Varden, Doom, Energade, Enterprise, Expert Kair, Fatti'sMoni's, Fizz Pop, Golden Cloud, Hall's, Hugo's, Ice Cap, Ingram's, Jelly Tots, Jeyes,

5.State of the Industry

5.1Local

Trends

• The South African confectionery industry is valued at approximately R10.6bn. Chocolate confectionery makes up approx. R5,03bn of this value. According to supplier Chocolate Direct, the sole supplier of Barry Callebaut chocolate and cocoa to manufacturers, artisans and chefs, the market growing at 10% per year. This is being driven by improving disposable income and a growing middle class.

• Manufacturers such as Tiger Brands and KeesBeyers have indicated flat volumes but increased turnover which in the case of KeesBeyers is due to price increases. Confectionery is a price-sensitive category and volumes drop off after price increases but then pick up once people have grown accustomed to the price adjustment.
• Nestlé’s performance for the 2014 financial year was down from the previous two years.

Millions (USD)* / 2014 / 2013 / 2012
Chocolate / 7,301 / 7,740 / 7,792
Sugar Confectionery / 1,188 / 1,273 / 1,356

*Annual reports figures converted at 1.00 CHF = 1.03519 USD

[Source: Nestlé Annual 2014 Report]

• The market share of the largest three companies is being eroded by imported brands and the produce made by niche chocolatiers. As mentioned, market share for the big three Mondelez, Nestlé and Tiger Brands has dropped to between 75% and 80%. This is because of the trend for premium imported chocolate. There is currently no import duty on finished chocolate, which is advantageous for the larger companies as they are able to source special varieties for Easter and Christmas. Lindt and FerreroRocher are the most popular imported brands.
• Local niche chocolatiers such as Beyers Chocolates are gaining ground particularly since the import duty on cocoa was abolished three and a half years ago. Before this, import duties had to be paid on imported raw materials but not on imported finished products. KeesBeyers is the largest private manufacturer of chocolate in the country and is reporting spectacular growth.
• A trend for international companies is to focus on global brands, centralise production and to sell off smaller brands. This is also advantageous for local smaller players such as KeesBeyerswho re-launched the Sweetie Pie range which was discontinued by Mondelez South Africa (then Kraft South Africa) in 2013. The Mondelez Manhattan range was similarly picked up by Premier Foods in 2013. The local Mondelez factory now only produces Cadbury slabs, PS and Lunch Bar so other products such as the Cadbury Milk Tray range are imported. Nestlé is similarly centralising operations with its UK York factory manufacturing approximately 6 million Kit Kat bars a day as well as brands Aero, Milky Bar, Polo and Yorkie.
• Chocolate Manufacturers in KwaZulu-Natal

Tiger Brands Snacks Treats & Beverages. / 106 Phoenix Industrial Park
Arriba Chocolates / 369 Umgeni Road Greyville, Durban, 4001.
Chocolate Dreamz / 17 Station Ridge Road, Parkhill, Durban
Floretines Luxury Handcrafted Chocolates / 950 Farm, Allermans Drift, Howick, KZN.
Forest Fairies / 115 Jacob Road Clairwood, Durban
La Boutique du Chocolate / Musgrave Centre, 115 Musgrave Road Durban
Bidvest Bakery Solutions / 279 Inanda Road Springfield Park.
Jennings Fine Food / 30 Wareing Industrial Park, 2 Wareing Road, Hagart Road Pinetown.

5.2Regulations

In May 2014, the Department of Health published draft regulations relating to the labelling of foodstuffs. Consistent with what is happening internationally, R429 will put a restriction on advertising unhealthy foodstuffs to children. Guideline 14 defines an unhealthy foodstuff as “an energy dense, nutrient poor food and/ or non-alcoholic beverage, which is high in fat, sugar or salt.” This definition will refer to almost all confectionery to the concern of manufacturers in this sector. In terms of R429 unhealthy foodstuffs cannot be marketed to children under 18 via any of the following methods:

Advertising which includes product packaging, print media, in-school marketing or outdoor advertising;

Cross promotions where for example unhealthy foodstuffs are linked to movie characters, incorporating celebrities, cartoon-type characters or the like; and

Television programme sponsorships.

5.3Investments

• It was announced in March 2015 that Heinz is to take over Kraft Foods and the combined entity will be known as Kraft Heinz. It will be 51% controlled by Heinz. The combined business will have annual revenues of US$29bn, which will make it the fifth-biggest food and beverage company in the world. The purchasers Brazil 3G Capital and Warren Buffet of Berkshire Hathaway will look to implement cost-cutting measures equating to US$1.5bn annually up to 2017.
• In November 2014 Mondelez advised that it would invest US$24 million to increase capacity of its confectionery plant in Gebze, Turkey, “to support growth in the company’s global confectionery business”. A complete new production line will be added and will be operational by the end of 2015.
• In August 2014 Tiger Brands commissioned a new R160m gums and jellies plant in Durban allowing for “further innovation”.
• Barry Callebaut built a new chocolate factory in Eskisehir, Turkey which opened in October 2013 at a cost of US$17m. Its initial capacity is 14,000 tonnes to supply the whole Eastern Europe, Middle East and Africa region.
• In early 2013 Mondelez made a decision to discontinue the Sweetie Pie range due to its small
  consumer base. It was acquired by KeesBeyers Chocolates and relaunched in July 2014.

5.4Continental

Africa is seen as increasingly attractive to retailers because of the following factors.

• The International Monetary Fund (IMF) estimates Sub-Saharan growth to reach 5.8% in 2015.
• Increasing urbanisation.
• A 2013 Deloitte study states that the African middle class has tripled over the last 30 years.
• McKinsey Consulting predicts that Africa’s spending power will be US$1.4-trillion by 2020 up from US$860m in 2008.
• The World Bank estimates foreign direct investment (FDI) into sub-Saharan Africa will reach US$54bn by 2015, up from US$37.7bn in 2012.

5.5Brands in Africa

• South Africa is seen as a “gateway” for Mondelez SA operations in Southern and Central East Africa as far as Ethiopia. According to Mondelez SA Managing Director, GawadAbaza the expansion of the Cadbury brand is set to continue. In 2013 Mr Abaza stated that growth would be driven by a variety of product offerings which included smaller affordable pack sizes for the lower end of the market.

o In the rest of Africa Tiger Brands has manufacturing facilities in Cameroon, Ethiopia, Kenya, Nigeria and Zimbabwe. It has “meaningful minority shareholding interests” in UAC Foods Limited in Nigeria and National Foods Holdings Limited in Zimbabwe.

• Nestlé has designed a modular factory which can be used for expansion within Africa. This type of factory “can be built in half the time of a more traditional one for about 50%-60% of the cost”. According to reports in 2014 it is hoping to apply this concept to expansion within Africa and Asia. The company has 25 factories on the African continent.

5.6International

• Estimates vary but approximate revenue for the global confectionery market in 2014 was US$160bn.
• Chocolate confectionery is becoming increasingly popular with a greater demand for premium products in both developed and emerging markets. Factors such as fine flavour, origin specific cocoa and responsibly-sourced chocolate are key influencing factors. Milk chocolate still accounted for 40% of total global sales in 2014.
• The table below provides a list of the top ten global confectionery companies, manufacturing some form of chocolate, by net confectionery sales value.

[Source: Candy Industry, January 2015]

• In the US the chocolate confectionery market grew by 15%. Hershey and Mars together accounted for 65% of sales with no other company having more than 5% of sales. Increased sales mostly came from price increases and ongoing innovations.
• Trends in the US are towards miniaturised versions of popular products. Hershey and Mars released Kit Kat Minis and Snicker Bites in 2013. Again in 2014 the companies released York Peppermint Patties Minis and Twix Bites.
• According to Nestlé’s 2014 Annual Report, sales declined in every confectionery category with the biggest fall occurring in chocolate. Sugar confectionery fell by 6.6%. Its biggest fall in sales occurred in the Asia, Oceana and Africa region by 17.5%.
• Family business Ferrero is the “second largest confectionery company in the world after Nestlé” and uses a quarter of the world’s supply of hazelnuts. In 2009 the company made a bid for UK Cadbury but later dropped out of the bidding.
• Since the takeover of Cadbury by Kraft in 2010 there has been a revamp of the rules governing how foreign firms buy UK companies. After the acquisition of UK-based Cadbury by Kraft, the Cadbury factory in Bristol was closed in January 2011 with the loss of 600 jobs. The Panel of Takeovers and Mergers reviewed the laws which led to changes to the Takeover Code in September 2011. As a result target countries can demand more information from bidders concerning their intentions.

6. INFLUENCING FACTORS

6.1. Economic Environment

In 2015 the South African economy is forecast to grow by around 2%. Many economists believe that the country remains firmly in the grip of ‘stagflation’ and that power shortages will continue to constrain activity in the manufacturing sector. They warn that downwardly revised GDP growth, inflationary pressures, a depreciating currency, unemployment of around 24% of the working population, coupled with power shortages make for an economic environment that is not conducive to growth.