Blog Business Agility When the Key Ingredient Costs More: How chocolate manufacturers can adapt to skyrocketing cocoa prices

When the Key Ingredient Costs More: How chocolate manufacturers can adapt to skyrocketing cocoa prices

When a business relies on a few key ingredients, and those key ingredients get more costly, what can it do to adapt? This is the situation playing out in the confectionary industry today with the rapidly rising cost of cocoa. Since the beginning of 2024, cocoa prices have more than doubled as the demand for cocoa is by far outstripping supply, causing an upward pressure on the price. 

The world’s biggest confectionery players such as Nestle, Mondelez, Hershey, Ferrero Rocher, etc. have taken internal actions to cut production costs fast. There have been reorganizations due to increased factory automation and network consolidation. Compared to smaller manufacturers, big players have high volume, long-term cocoa contracts that protect them (temporally) from the surge in price. Perhaps more importantly, they own global brands (e.g., KitKat, Cadbury, Reese’s, Kinder) with strong pricing power which allows them to raise prices without significantly affecting the demand. Smaller manufacturers do not have those advantages and the surge in cocoa prices is starting to erode their bottom lines. 

This article walks through this example and offers solutions for chocolate manufacturers, yet the lessons translate to many other industries. Read on for four strategies that manufacturers can take to lower production costs and uplift their revenue:

  1. Considering alternative ingredients
  2. Adjustments to packaging 
  3. Diversifying product assortment  
  4. Exploring innovative manufacturing solutions

Supply and demand challenges

Chocolate used to exhibit relatively inelastic demand as a consumer product – price changes had relatively little impact on demand. It makes sense, as chocolate is popular both in times of celebration and despair. Global consumption volume of chocolate has risen by 8% compared to pre-Covid levels and is expected to grow by 3% in 2025 and 3.1% in 2026 (Source: Statista)

But with overall price increases across most consumer goods, chocolate demand becomes more elastic, meaning consumers might seek other alternatives to fill their emotional support candy needs. Especially if rising materials cost gets passed along to the consumer. 

On top of fluctuating consumer demand, the supply of cocoa has been plagued by numerous problems. West Africa represents 75% of the global production of cocoa, and flooding on the Ivory Coast and in Ghana has severely affected cocoa production. There are aging and sick cocoa trees that will need to be replaced by new, higher yielding and disease resistant variants, which will take years. Moreover, the high inflation of the last two years and the low income for the cocoa farmers have made it impossible to invest in fertilizers and pesticides to boost crop yields.

A market equilibrium will eventually be reached. However, this may take 2 to 3 years and most likely by bringing down demand for cocoa instead of seeing any surge in cocoa supply. JP Morgan Research expects that in the medium term, cocoa prices will come down from today’s $11,000 level to around $6,000 per ton. This will bring some relief to the chocolate manufacturers, but this price level is still much higher than the average of $2,500 per ton that we have seen in the last few years.

Whether a small or large manufacturer, all chocolate manufacturers need to take notice and prepare to move quickly if needed. By taking fast action, chocolate manufacturers can (at least partially) offset the negative effects of the high cocoa prices. 

Based on years of experience working for clients in the confectionery industry, here are four actions I recommend manufacturers take to lower production costs and uplift their revenue.

1. Minimize the cocoa solids in products by using alternatives.

One strategy when a material’s price becomes prohibitively expensive is to consider viable alternatives to that material.  

Chocolate manufacturers should investigate the use of cocoa butter alternatives to drive down product cost. The most common alternatives are cocoa butter equivalents (CBE). For instance: palm oil, illipe butter, shea butter, kokum butter or sal nut fat. 

It is important to check local regulations because chocolate is a legally protected product. The EU only allows the addition of up to 5% of vegetable fats other than cocoa butter in the weight of the end product. In the U.S., 100% cocoa butter must be used in order for the product to be called chocolate. 

There are fewer alternatives available in the market for cocoa powder. One possible alternative is barley and malt extract. This can be used as a partial replacement, typically 20-30% of the cocoa powder can be substituted. As an added benefit, malt has a lower carbon footprint than cocoa powder and can be sourced in Europe or in North America.

There are several food start-ups that specialize in developing sustainable, plant-based alternatives to cocoa. One example is Californian-based Voyage Foods. They recently signed a commercial partnership with food conglomerate Cargill. Another example is Munich-based Planet A Foods. Lindt launched a vegan chocolate which contains Planet A Foods’ cocoa alternative.

Problem: Due to rising cocoa costs, a chocolate wafer product needed to take aggressive action to reduce the amount of cocoa butter used in its production. 

Solution: Not only were alternative ingredients considered, but also changes to production and resulting consumer satisfaction. The company made the decision to use 100% CBE for the wafer’s outside coating. The process from testing recipes to running production took 6 months, including an accelerated shelf-life study. The use of alternatives resulted in similar sensory attributes and did not impact line efficiency and overall productivity. The recipe change also required new packaging, which was able to be taken as an inventory write-off.

2. Explore new packaging options and keep pure chocolate for premium products.

When material replacement isn’t an option (or in addition to material replacement), consider packaging adjustments and prioritize where the primary material should be used.   

Rather than simply passing the increasing cocoa costs directly on to consumers, chocolate manufacturers could reduce the size or quantity of the product while maintaining the price. This practice is known as shrinkflation. However, this only goes so far before consumers spot the changes and adjust their purchases. 

Another option is to consider launching new sharing packaging formats. For example, stand-up pouches have been popular with bite-size products that consumers can buy to share with friends and explore a variety of flavors.

With high cocoa prices, pure chocolate should be kept for premium products. Mainstream chocolate bars and tablets should be filled. Everything seems to be possible in terms of filling: nuts, peanuts, rice, fruits, caramel, cookies, and all sorts of cremes. It could be worthwhile to look at the big players for filling ideas. Their global brands typically have an assortment with dozens of filling varieties that can vary across markets.

3. Expand to other confectionery categories (gummy, jelly, wafer, and biscuits).

Until now, the chocolate consumer has shown impressive resilience in the face of continued price hikes in the last two years. It appears consumers got used to the higher prices. However, some consumers will start modifying their purchase behavior by trading down as prices become too high and chocolate becomes a luxury treat. Other indulgence categories could benefit from those consumers switching to less expensive products.  

One category that could emerge as a winner is sugar candy, and more specifically gummy and jelly products. According to Grand View Research, the European gummy market is expected to grow at a CAGR of 11.5% from 2024 to 2030. 

Another category that could attract consumers that are switching is wafer biscuits with its diverse flavors and varieties in fillings. Market research by Technavio reported that the global wafer biscuit market is forecasted to grow at a CAGR of 5.84% from 2024 to 2028.

Problem: Facing material supply constraints and decreasing consumer spend, a regional confectionery company needed to expand its product assortment.

Solution: The confectionery company expanded its gummy product portfolio from just six SKUs to more than 30 gummy varieties in different textures, flavors, and in various forms and packaging formats. This change enabled the company to respond to downtrading consumers and maintain market share.

4. Engage an external contract manufacturing or co-packer.

Explore price optimizations in other aspects of the manufacturing process. Contract manufacturing and co-packing is a form of outsourcing where a third-party is responsible for the production or only the packaging of products. An external partner can provide chocolate manufacturers access to new or additional process or packaging technologies and deliver cost efficiencies that they may lack internally. 

In contrast to the consolidating contract manufacturing landscape in the U.S., there are hundreds of small and medium sized contract manufacturers in the EU which can make the search and selection process challenging. For example, while with a major U.S. confectionery company on a project to establish a European footprint, I screened dozens of potential contract manufacturers and visited a handful before eventually landing and contracting the ideal partner. It is important to find reliable, trustworthy partners to protect intellectual property.

Engaging an external partner also makes sense when it comes to expanding to other product categories. Investing in new processing and packaging technologies requires capital and it takes time. For example, a gummy line with packaging solution will quickly cost more than $2 million and delivery times are 12 to 16 months from ordering to operating. Engaging the right external partner only requires small investments and takes months instead of years to operationalize.

Finally, seasonal occasions (e.g., Valentine, Easter, Halloween, Christmas) are very important to drive margin but chocolate manufacturers often cannot achieve the same efficiency levels on seasonal items compared to the normal portfolio. Working with an external co-packer could not only lower packaging costs but also solve staffing scheduling constraints and shortages in labor.

Looking forward

It is very likely that high cocoa prices are here to stay. Chocolate manufacturers will have to get used to it and explore these recommended strategies. Keeping the production costs low by minimizing cocoa solids or engaging an external contract manufacturer are important but focusing only on that is not sufficient. Chocolate manufacturers should also investigate new packaging formats and expand to other confectionery categories.

To be successful in those actions, manufacturers will need to master new capabilities on top of their current product knowledge, technical skills, and command of managing external partners. Hiring an experienced Independent Catalant Expert to cover gaps in expertise or to benefit from fresh innovative thinking can help bring those actions successfully over the finish line.

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Meet the Author

Mathieu Van Assche is an Expert on the Catalant platform with 20 years of experience in Growth Strategy, Business Agility, Performance Improvement and Transformation. He focuses on advising food companies, from big players to regional champions, as well as private label brands and contract manufacturers. Mathieu spent a decade at Nestlé and worked as an independent consultant for Food Industry clients such as The Hershey Company, Migros Industrie, Dr. Oetker and RAP Confectionery. Mathieu has an MBA from the Ross School of Business at the University of Michigan and a M.Sc. in Business Engineering from the University of Antwerp.

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