One of the chocolate industry’s seasonal peaks, Easter is upon us with eggs from the world’s major brands adorning retailer’s shelves.

Chocolates are tough for consumers to resist at this time of year, but is this an opportune time to put money to work with purveyors of one of the world’s most popular little luxuries?

SWEET CONSUMER CATEGORY

According to MarkNtel Advisors, the global chocolate market was valued at $421 billion in 2023 and is forecast to grow at a CAGR (compound annual growth rate) of around 4.7% between 2024 and 2023, with growth supported by the consumer’s sweet tooth and increasing demand for organic, vegan, sugar-free, and gluten-free chocolates from more health-conscious chocoholics.

Chocolate, snacks and confectionery have been great consumer categories for decades and with consumption rising in emerging markets amid the expansion of the middle classes, exciting long-run opportunities exist for the snack food conglomerates that dominate the industry.

Sales growth from this sub-sector of the consumer staples industry can be pedestrian at times, but resilient demand and the pricing power the key players possess, conferred by must-have brands, translates into robust cash flows and progressive dividends which investors can then reinvest. This means the small band of publicly listed chocolate sellers have the capacity at least to deliver decent total returns.

INFLATIONARY PRESSURES LEAVE SOUR TASTE

However, as prices have risen to offset elevated cocoa and sugar costs, chocolate market growth has recently slowed in the EU and the US, as the Morgan Stanley charts provided demonstrate, and the risk is further price increases will impact volumes going forwards.

Cocoa is scaling record highs as adverse weather in major growing regions, tree illness and capacity shortages lead to expectations of an even wider supply deficit this season, which could create a headwind to volumes for chocolate companies as prices rise.

Industry heavyweights Hershey (HSY:NYSE), the Milton Hershey-founded, Michele Buck-bossed chocolatier behind some of planet Earth’s most popular candies, and Dairy Milk maker Mondelez International (MDLZ:NASDAQ), have recently served up slower growth as consumers rein in spending in response to price hikes.

As Morgan Stanley has noted, recent cocoa price moves are ‘reinforcing our cautiousness on EU chocolate producers, elevating the risk of a more challenging consumer demand backdrop for chocolate’. The investment bank warned: ‘A strong El Nino season could cause cocoa bean supply to decline further, possibly keeping costs high for longer.’ At the same time, investor concerns over the impact of weight-loss drugs are an overhang on the consumer staples sector, giving risk-averse investors additional things to consider.

HOW CAN YOU INVEST IN CHOCOLATE?

The world’s largest chocolate goods producer is Mars, maker of the namesake bars and as well as Snickers, Skittles, Maltesers and M&M’s, but this US giant is not listed on the stock market, being privately owned by the Mars family.

Frustratingly for retail investors, Mars recently gorged itself on the last remaining UK stock market-listed chocolates pure-play, Hotel Chocolat.

The British chocolatier was de-listed from AIM in January on completion of Mars’ £534 million takeover, pitched at a sweet 170% premium but leaving UK investors bereft of chocolatiers to put money to work with. However, Mars’ willingness to pay such a fat premium for Hotel Chocolat demonstrated its faith in the strength of the brand and its growth potential.

Hotel Chocolat’s UK stock market exit followed 2015’s £112 million purchase of another British chocolatier, Thorntons, which was snapped up by Ferrero, the Italian manufacturer famed for its Ferrero Rocher nutty chocolates wrapped in gold foil.

Before that, US food giant Kraft snaffled iconic British chocolate maker Cadbury in a controversial 2010 takeover. In 2012, Kraft spun off its grocery business into Kraft Foods, which later bought Heinz to become Kraft Heinz (KHC:NYSE). Dairy Milk and cream eggs maker Cadbury stayed in the remaining business, which was renamed Mondelez and has subsequently flourished.

CONTINENTAL SELECTIONS

Investors can still gain chocolate exposure through European stocks including the world’s largest food and beverages company, Nestle (NESN:SWX), which started selling chocolate for the first time back in 1904. Nestle’s strong long-term growth drivers include coffee, pet care and even plant-based food, but the Swiss food producer remains a leading player in chocolate and confectionery through iconic brands such as KitKat, Smarties, Aero, Quality Street and Milkybar.

But the world’s largest manufacturer of chocolate is actually a much smaller market cap company, namely Barry Callebaut (BARN:SWX). This resilient Swiss-Belgian cocoa processor and chocolate manufacturer is in the midst of an efficiency drive under CEO Peter Feld, while its range of pricing mechanisms, as recently observed by Berenberg, provides insulation from higher cocoa and sugar costs.

Also listed in Europe is Lindt & Sprungli (LISP:SWX), the premium Swiss chocolatier famed for its Lindor balls and gold foil-wrapped Easter bunnies whose brands include Lindt, Ghirardelli, Russell Stover and Caffarel.

Lindt & Sprungli, which also has a network of retail chocolate shops to showcase its brand, trades on almost 40 times forward earnings, a large premium to EU staples peers that reflects its higher growth rate and superior pricing power. Morgan Stanley says: ‘We continue to view Lindt as a long-term structural winner,’ said the broker says. ‘But rising commodity prices could slow consumer demand near term.’

Barry Callebaut trades on a lower valuation than Lindt & Sprungli, although Morgan Stanley thinks the former’s earnings ‘could also be pressured by a prolonged destocking environment, a declining combined ratio that could impact profitability, and increased capex needs’.

It worries that ‘Lindt and Barry may face challenges with raising prices in a largely disinflationary environment, which could pressure volumes and margins near term.’

Less well-known, in the West at least, is Wawel (WWL:WSE) a Polish confectionery firm offering a play on rising affluence in the Eastern European nation. Wawel produces a variety of chocolates, wafers, chocolate bars and snacks and Wawel is a well-recognised candy brand in the country.

TWO TASTY TOTAL RETURNS TREATS

Mondelez International (MDLZ:NASDAQ) $72.10 

Market cap: £75.4 billion

A year-to-date correction at Cadbury Dairy Milk-to-Toblerone maker Mondelez represents a compelling entry point at a high-quality compounder and progressive dividend payer that should continue to deliver steady earnings growth no matter what the economic weather. At a recent consumer analyst conference in New York, Mondelez, whose other chocolate brands include Milka, Alpen Gold and Cote d’Or, shared the statistic that 97% of Americans snack at least once per day, underscoring the resilience of a business with pricing power and tasty long-run growth prospects in emerging markets. The snacking giant, which delivered organic growth of 9.8% in a more challenging fourth quarter of 2023, is a longstanding position in Nick Train’s Finsbury Growth & Income Trust (FGT), inherited from its earlier holding in Cadbury, and has proved a steady performer for the well-followed ‘buy and hold’ investor. Mondelez, also known for iconic brands including Oreo biscuits and Ritz crackers, currently trades on a forward PE (price to earnings) ratio of 20.3, a discount to 2022’s PE high north of 30 times.

Hershey (HSY:NYSE) $199.5

Market cap: £31.6 billion

Also listed in the US is Hershey, whose beloved candy brands include the eponymous Hershey’s as well as Reese’s, Twizzlers and IceBreakers. Hershey shares were sweet performers until recently and remain up 80% over five years, although they are down 17.3% over one year, having soured on concerns over the potential impact of anti-obesity drugs on snacking habits. Recent results (8 February) showed organic growth of 7% for the full year, but a 0.1% decrease for the final quarter, and CEO Michele Buck conceded that historically high cocoa prices will limit earnings growth this year. Nevertheless, Shares believes the drawdown presents a tasty buying opportunity for the patient portfolio builder given Hershey’s strong brands, pricing power and high ROCE (return on capital employed).

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