WITH everything else that has been going on – soaring inflation, record-high interest rates, warnings of a looming global recession, let’s pause for a chocolate break.
The demand for chocolate has always been largely undeterred by the economic downturns with some reports going as far as calling it a recession-proof industry.
Recently, Hotel Chocolat, the British chocolatier and cocoa grower, told Reuters it is confident that people will turn to chocolate and treats to help lift their spirits in a recession, as it prepares for a very busy Christmas period. The company notes that it has “seen this in other recessionary times before”, for example in 2008, in which they were “very resilient then”.
Last month, Oreo maker, Mondelez International Inc witnessed sustained demand for its chocolates and biscuits even as treats got more expensive.
Local cocoa manufacturing giant Guan Chong Bhd
is banking on the robust demand for chocolate to buoy earnings in the quarters ahead. Already, as managing director and chief executive officer Brandon Tay Hoe Lian tells StarBizWeek, the group has secured a substantial volume of forward sales for 2023.
“Based on the strong forward sale for cocoa ingredients, demand for chocolate is still resilient. Not only that, multinational confectionery giants such as Hershey’s and Mondelez are still recording growth in earnings from chocolate product sales, which affirms the outlook,” he says.
Having earned a name for itself as the top cocoa grinder in Asia and one of the top four in the world going by production volume, Guan Chong’s expertise lies in manufacturing of coca-derived food ingredients.
Tay adds the recovery of air travel and tourism after being hit by the Covid-19 pandemic helped to boost the sales of chocolate. On top of that, festive seasons also provide a multiplier effect on chocolate demand. In fact, the group continued to rope in sales for cocoa powder as consumers still sought out chocolates during the pandemic.
“During the Covid-19 era, we saw consumer spending in premium range chocolate plummeting in Europe, which affected our cocoa butter revenue.
However, we also saw the demand for cocoa powder increase as consumers shifted to affordable chocolate products and this led to higher average selling prices for the powder, mitigating the weaker market in Europe and the United States,” he says.
Hotel Chocolat states rather than the outlook of chocolate demand, most manufacturers, especially in Europe, are more concerned with inflationary pressures that continue to drive energy bills upward, a situation that was further compounded by the energy crisis that is haunting the region now.
This has impacted Guan Chong’s operations particularly in its industrial chocolate subsidiary, SCHOKINAG-Schokolade-Industrie GmbH (SCHOKINAG), in Germany.
Higher energy costs in SCHOKINAG was one of the attributable factors that dragged down Guan Chong’s net profits for the third quarter ended Sept 30, 2022 (3Q22) by 11%, aside from unrealised foreign exchange loss of RM17mil due to the strengthening of the US dollar.
“SCHOKINAG contributes about 25% to our revenue. In terms of profits, it is still largely from our cocoa ingredients divisions in Malaysia and Indonesia, which make up the remaining 75%. Hence, we are still well protected from the full impact of the crisis.
With an annual bean grinding capacity of 277,000 tonnes, the group has production facilities that span across three continents in Indonesia, the United States, Germany, the United Kingdom and more recently in Ivory Coast, West Africa. Locally, Guan Chong is based in Pasir Gudang, Johor.
Tay reveals that for now the group will offset the higher energy costs by implementing price hikes and reducing switches between product ranges to maximise production output.“Currently, the energy cost makes up about 17% of SCHOKINAG’s total production cost. We have been closely monitoring energy prices in Germany. This issue will not be resolved easily and quickly as this is a geopolitical matter, but we will factor these into our pricing.
“We have been periodically increasing our selling prices and found that customers are still willing to accept it. In the interim, we are also installing energy generating devices such as rooftop solar panels and boilers to optimise costs,” he says.
In the meantime, the German government has announced several measures through the €200bil (RM931bil) “defence shield” to help households and businesses fight skyrocketing energy prices.
“Under the initiative, the government implemented a price cap for gas and electricity at reduced rates for a fixed volume of supplies. Slated to become effective in March 2023 but will also retroactively cover higher costs in January and February 2023, the laws would remain until at least April 2024.
“The reduced prices for larger industrial companies will apply to 70% of their consumption in 2021, hence helping mitigate a substantial portion of cost increase,”says Tay.
In its 2021 annual report, Guan Chong made known its plans to allocate RM50mil this year towards upgrading SCHOKINAG’s existing production lines. The funds will also go into financing additional machinery which is projected to expand its annual production capacity to 100,000MT from 90,000 tonnes.
In a bid to position itself better by gaining direct access to raw materials in the world’s largest cocoa bean producing country, Guan Chong embarked on a project to set up a cocoa processing facility in Ivory Coast.
Producing about 2.2 tonnes of cocoa beans annually, Ivory Coast is the leading producer of cocoa globally. On the whole, West Africa accounts for two-thirds of the world’s cocoa crop.The facility is slated to pump up cost efficiencies by enabling the direct supply of cocoa ingredients to the group’s operations in Germany and the United Kingdom has commenced its operations in. The plant’s full contribution is expected come FY23.
“Our new facility in Ivory Coast is undergoing trials for full operations. This facility will add 60,000 MT or 22% to our total annual capacity to reach 330,000 MT and enable us to achieve next level earnings growth moving forward. Our clients’ responses so far have been encouraging, and we are optimistic of our prospects as the new capacity will sustain our earnings growth,” says Tay.
Meanwhile, Ivory Coast is also facing its own set of challenges. Mired with long-standing issues of child labor, deforestation, and poverty among cocoa bean farmers, the choruses for greater traceability in cocoa supply chains are increasingly amplified.
In 2019, the authorities in Ivory Coast and Ghana introduced the living income differential policy (LID) to tackle poverty among cocoa farmers. The policy dictates that a premium of US$400 (RM1760) per tonne be charged on all sales of cocoa beans beginning with the 2020 and 2021 harvest.
All these challenges have a direct impact on the pricing of cocoa beans.
“Interest rates play only a minor role in impacting our margins. Our interest coverage ratio is 5.3 times as at 30 September 2022. In the last few years, our grinding margins were more affected by uncertainties in pricing caused by the LID. However, we have since moved out from the challenges already.
“Our business model is based on the tolling model, where we generate our income based on production volume. Eventually when supply of beans is more than demand, the favourable selling prices for cocoa ingredients would incentivise the demand in the market,” says Tay.
Going forward, he adds that the group’s growth will essentially be capacity driven as it continues to look for opportunities that can complement and add value to its core business of producing cocoa ingredients.
“Our outreach into new terrains such as Ivory Coast, Germany, and the United Kingdom since 2019 is an example of our ambition for long-term growth. The Ivory Coast plant is set to be another boost for the group’s earnings and catapults us to becoming a stronger global player in the chocolate supply chain,” says Tay.
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