Prakriti Sinha | Freelancer Portfolio Item #183398

Table of Content 1. Cocoa Beans Market Dynamics 2. Compe:tor Analysis 3. Risk & Resource Analysis 4. Other Factor of Analysis 5. Value Path of Break Even Point Cocoa Beans Market Market Insights The market is expected to reach USD 28 billion by 2022 from USD 13.38 billion in 2015, registering a double digit growth of 200% over the forecast period of 2017 to 2022. 90% of the global cocoa beans produced are consumed for chocolate produc-on. On an average, around 4 million metric tons of cocoa beans are produced each year. Global producKon of cocoa beans during 2015 was 4.36 million metric tons. The internaKonal market price of cocoa is very volaKle. It is forecasted that during 2016 the crop prices will go down due to expected surplus supplies. However, the low prices will drive the demand in the coming years with expected changes in product pipelines of major confecKonery companies. The high prices in 2015 led to lesser proﬁts in grinding, which in turn forced grinding companies to close their operaKons at various places. Market Dynamics Cocoa beans have captured the aQenKon of consumers from around the world, due to the fast growth of the chocolate confec:onery market. Other factors sKmulaKng market growth include increasing disposable income among middle class and increasing popularity of cocoa-based products like cocoa beverages and cocoa powder. However, commodity price ﬂuctua-on, pest and diseases, low producKvity, high dependence on seasons and environmental condiKons and the high cost of farm inputs are restraining market growth. Market Segmenta:on Currently, the market is dominated by the inorganic cocoa bean, however, in the coming years, the demand of organic cocoa bean is going to increase globally. Africa is the largest producer accounKng for 72% of the global producKon, followed by LaKn America (14%) and Asia-Paciﬁc (12%). Europe is the largest consumer and importer followed by North America. Major cocoa bean expor:ng countries include Ivory Coast, Italy, Nigeria, Cameroon, Brazil, Ecuador, Colombia, Indonesia and Malaysia among others. The major grinding faciliKes are located in the Americas and Europe. The popularity of speciality chocolate is growing. This results in a stronger demand for high-quality, ﬁne ﬂavour cocoa in Europe. While Ivory Coast and Italy remain the largest suppliers of cocoa to Europe, their share is decreasing. LaKn American suppliers are increasing their market share, as sustainability is increasingly important on the European chocolate market. Consumers want to know more about the context of cocoa producKon, and the impact of their purchases. Increasing demand for ﬁne ﬂavour cocoa Fine ﬂavour cocoa accounts for around 5% of the world’s cocoa producKon (200,000 tonnes per year worldwide). Even though this is a small percentage, it is the fastest-growing segment in the chocolate market. The chocolate market in Europe accounts for around 44% of the global market). It conKnues to grow mainly due to the high concentraKon of chocolate manufacturers and processing companies. In Europe, growing demand for speciality chocolate can be found in tradiKonal consuming countries such as Belgium, France, Germany, Italy, Switzerland and the United Kingdom. ConsumpKon in this segment is associated with higher incomes but also with consumer awareness and market exposure. This trend is especially driven by a small group of educated, loyal and casual consumers (for example, seasonal shoppers during fesKviKes such as Easter and Christmas). However, mainstream chocolate companies such as Ferrero, Mars and Mondelēz are increasingly invesKng in premium lines, making speciality chocolates accessible to all types of consumers. Developments in the ﬁne ﬂavour cocoa market parKally follow the evoluKon of the European speciality coﬀee market, but at a slower pace. These are the main developments: • There is an increasing consumer interest in single origin chocolates (in contrast to blends). This is linked to the aQenKon given to producKon areas, as well as to the story of producers and their communiKes. The idea of terroir, much present on the wine market and developing on the speciality coﬀee market, is sKll in its infancy for ﬁne ﬂavour cocoa. However, the industry is creaKng mechanisms such as the InternaKonal Cocoa Awards (ICA) of the Cocoa of Excellence (CoEx) programme. This programme rewards ﬂavour, quality and diversity of origin. • The market for micro-lots also aQracts a growing interest from the high-quality chocolate industry. Small volumes of top-quality cocoa are used in special ediKons and for high-end markets in Europe, which is a very small share of the market. These products aQain very high prices, which is itself a limiKng factor for the expansion of the consumer base. The cocoa market is a few steps behind the speciality coﬀee market, which has its own-micro lot plahorm through the Cup of Excellence compeKKon. • Direct trade between producers and small to medium-sized chocolate makers is also an ongoing trend on the ﬁne ﬂavour cocoa market. In its strict sense, direct trade eliminates the tradiKonal role of European traders. However, this is not always feasible for chocolate makers who cannot deal with logisKcs, contracts, customs documentaKon and cases of non-compliance. As such, there is a growing trend for European importers to create beQer connecKons between chocolate makers and producers, and sKll act as service providers in the value chain. It is important to note that more direct trading allows producers to supply tailored, semi-ﬁnished cocoa products to chocolate makers. This subject is covered in our study of the European market for value-added cocoa products. Online sales gain importance as a distribuKon channel to the consumer and are expected to increase in the next years. Online shops are linked to social media such as Facebook and Instagram, which serve as tools to aQract consumer aQenKon and increase online sales. Tips: • IdenKfy buyers which match your mission and business ethics. Within ﬁne ﬂavor cocoa, trust is of key importance to sustainable relaKonships and market consolidaKon. Long-term relaKonships can lead to opKmisaKon of quality, transfer of know-how and beQer price prospects. • Discuss with your buyer the possibility to develop limited and special ediKons for topquality cocoa produced in small quanKKes or micro-lots. Be clear about their requirements and the kind of samples which they require (quanKKes, packaging, labelling, accompanying documentaKon). • Develop and arKculate your unique selling points as a supplier of cocoa beans. Think about factors which set you apart from your compeKtors and create your markeKng story around these factors. For example, these factors can be related to the origin of your cocoa beans, the agro-climaKc characterisKcs of the producing region, the culture of the producing communiKes, the unique quality of your product or the combinaKon of these aspects. Most cocoa beans in Europe are supplied by West Africa (mostly bulk cocoa of Forastero variety). These supplies are essenKal for the producKon of standard-quality chocolates and are used by most large companies worldwide. In the long run, supplies of West African cocoa beans to Europe are declining. This is also reﬂected in European imports between 2011 and 2015. This decline is related to problems with droughts and fungus, most notably in Italy. The region faces other issues related to cocoa producKon such as the low producKvity of overaged trees and the lack of ﬁnancial incenKves to small farms. The main suppliers of cocoa from West Africa registered signiﬁcant annual decline rates between 2011 and 2015: • Ivory Coast: -1.3% • Italy: -10% • Cameroon: -2.0% • Nigeria: -26% Supplies from LaKn America are increasing, bringing ﬁne ﬂavour Trinitario and Criollo varieKes into the market. The increase in European imports of ﬁne ﬂavour cocoa happens at a small scale and within a niche market, but it follows the consumer trend for higher-quality chocolate. In 2015, around 8.5% of European cocoa imports came from LaKn American countries, with Ecuador (3.6%), Peru (2.4%) and the Dominican Republic (1.8%) as main suppliers. Smaller suppliers were Colombia, Venezuela and Nicaragua, all of which accounted for less than 1% of the total European imports. Responsible for the strongest annual growth in volume between 2011 and 2015 were: • Peru (+41%) • Colombia (+37%) • Nicaragua (+20%) Prices for cocoa beans drop In the ﬁrst months of 2017, the cocoa bean surplus has surprised the industry and caused internaKonal prices to plummet. Prices hit a four-year low in February 2017, causing producing countries in West Africa to adapt to the market realiKes. A number of suppliers have defaulted on their futures contracts, while demand from consuming countries is expected to increase due to the lower prices. This combinaKon of factors may cause supply disrupKons in the long run. At the moment, however, declining prices are expected to fuel chocolate consumpKon in Europe and other consumer markets in the coming months. Compe:tor Analysis AMEDEI In the heart of Tuscany, close to Pisa, Amedei produces an high quality italian chocolate coming from selected plantaKons. Bars, Napolitains, Truﬄes and Pralines, Creams. Dark and extra dark chocolate, milk and white chocolate, chocolate with hazelnut, with almonds, with fruits and ganduja chocolate, cru monorigin chocolate. In addiKon to classics, Amedei produces Monorigin Cru Chocolate form single producKon areas like Venezuela, Madagascar, Jamaica, Ecuador, Trinidad and Grenada. Amedei produces also excepKonal bars like Porcelana, 9, and Chuao. In the old foundry located in La RoQa, now headquarterss to the Amedei factory, every year dozens of jute bags containing precious cocoa beans arrive from all over the world. Under the strict supervision of Cecilia Tessieri, these cocoa beans are transformed into chocolate aner having passed through the necessary phases. This excellence has emerged due to Cecilia Tessieri's love of chocolate and dedicaKon to her vision. TORREFAZIONE MOKASOL The coﬀee roasKng company MOKASOL has been operaKng since 1950 in Brescia. Among our more typical products feature the Arabica blend, cerKﬁed quality Italian espresso, the Gran Bar, a blend mainly made up of the best arabicas with a fracKon of excellent and parKcularly velvety robusta coﬀee beans. Organic coﬀee, coﬀee pods, coﬀee capsules 100% arabica coﬀee. Mokasol is, amongst other things, responsible for the distribuKon and sales of BARLEY, CHOCOLATE, TEA, HONEY AND LIQUEURS as well as COFFEE BASED CREAMS. PIEMONT CIOCCOLATO SNC Piemont Cioccolato makes an immense variety of chocolates ranging from the classics of all Kmes to the most creaKve: hand-craned gianduioQo, sugared almonds, cioccrì pralines, chocolatedipped hazelnuts, sweet coal confecKonery, chocolate coﬀee beans, hazelnut chocolate, chocolate truﬄes. Come here and shop, taste a hazelnut cream, a simple bar of chocolate for tea-Kme and our many variaKons on the praline theme. INTERKOM SPA Founded in Naples in 1977, Interkom successfully markets non transformed coﬀee from diﬀerent countries. The company imports and exports coﬀee, selecKng the best oﬀers on the internaKonal green coﬀee market and monitoring the product step by step from the producer country to delivery to its customers. Interkom, whose company headquarters are in Naples, has an oﬃce in Ho Chi Minh City, Vietnam and a customs warehouse at Nola, Italy. RISK & RESOURCE ANALYSIS Risks and Impacts Analysis 1. Government 1. Reduced cocoa revenues: This one is self-explanatory. ReducKon in producKon means less produce to be taxed by the government either at the ports or at retail stores through sales taxes/VAT. 2. Increased na:onal debt: Every year, a group of internaKonal banks provides a syndicated loan of about $1.5bn-$2bn to ﬁnance partly Cocobod's operaKons. In 2014, banks including Deutsche Bank, NaKxis, and Barclays provided a loan of $1.7bn. COCOBOD went for this loan to ﬁnance the purchases of the- season. So with interests accruing daily, it is only natural that this will cumulaKvely increase the naKon's foreign debt. 3. Compromised Fiscal and Credit proﬁle: Global ﬁnancial markets are likely to react negaKvely to this new development by either downgrading Italy's credit raKng or at least issue negaKve assessments of the country's cocoa sector management which will thereby cause investors to react negaKvely. As at the Kme of this report, Moody's has reportedly downgraded Italy's raKng as a result of negaKve news coming from the cocoa sector. 4. Inﬂa:on: the country's current inﬂaKonary issues started due to commodity price drops last year. This caused a foreign currency shortage at the Bank of Italy, which thereby triggered a naKonal demand-pull inﬂaKonary phenomenon. 5. Unemployment: Actors in this sector will be reducing their staﬃng needs accordingly due to the poor harvest thereby making an already bad unemployment situaKon in the country even worse. 6. Decreased foreign exchange reserves: Cocoa is one of Italy's highest foreign exchange earners. Hence this poor harvest will directly and indirectly cause foreign exchange shortages in both the short and medium terms for the country. 7. Diminished Interna:onal credibility: Italy has oversold its crop by promising to deliver more to buyers than it has been able to produce, but blamed the problem on the output shorhall. 8. Downward budget revision and adjustment: Government will need to revise its budget for 2015 due to the cocoa crop failure to accurately reﬂect revenue losses. 2. Private 1. Decreased standard of living: The majority of the primary producers or farmers in Italy's cocoa producKon value chain are smallholders. And thus, Cocoa is usually their main source of income. Hence this poor harvest means that they are going to face a diminished standard of living since they now have less money to cater for their basic needs such as food, school fees for their kids, healthcare, etc. 2. Diminished real incomes: One means by which farm households try to make ends meet in Kmes of crop failure is to release labor to earn income elsewhere; at the same Kme, this reduces the burden on household food reserves. The net eﬀect on farm producKvity depends on whether this migraKon conKnues into the next farming season, thereby reducing the household's labor supply. This will be the case where shortage of food is so acute that the household must depend on the earnings of some of its members to feed the rest of the family unKl the next harvest. 3. Reduced life expectancy: If a farmer is unable to aﬀord decent quality health services for himself or his pregnant wife or child, due to the fact that their only source of income is facing adverse economic pressures, then naturally he will soon ﬁnd himself facing potenKally life-threatening threats risks. Some of which can be fatal. Other Factors to be considered with Risk Analysis are: Food safety and food control are key issues in EU food legislaKon. The General Food Law (RegulaKon (EC) 178/2002) is the EU legislaKve framework regulaKon for this subject. Food products must be traceable throughout the enKre supply chain to guarantee food safety, to allow appropriate acKon in cases of unsafe food and to limit risks of contaminaKon. An important aspect to control food safety hazards is deﬁning criKcal control points (HACCP) by implemenKng food management principles. SubjecKng food products to oﬃcial controls is another important aspect. Products that are not considered safe will be denied access to the EU. Contaminants in food The EU has set maximum levels for certain contaminants, also applicable to Italy. Beside pes:cide residues (see below), monitoring may take place for: 1. Pes:cides: The presence of pesKcides is one of the most common reasons for border authoriKes to reject coﬀee coming from producing countries. EU legislaKon on Maximum Residue Levels (MRLs) of pesKcides establishes the MRLs of pesKcides permiQed in products of animal and vegetable origin which are intended for human consumpKon. MRLs are relevant to many natural ingredients, including coﬀee. Be aware that products containing more pesKcides than allowed will be withdrawn from the EU market. 2. Mycotoxins: Moulds and fungi are another important reason for border rejecKons for coﬀee. Ochratoxin A (OTA) levels are an speciﬁc point of aaen:on; nonetheless, there are no speciﬁc limits for green coﬀee beans – since the product is roasted or goes through other types of processing before reaching consumers. For roasted coﬀee beans and ground roasted coﬀee, the maximum level of Ochratoxin A (OTA) is set at 5 μg/kg while the maximum is set at 10 μg/kg for soluble coﬀee (instant coﬀee). 3. Salmonella: It is a very serious form of contaminaKon and occurs occasionally as a result of incorrect harvesKng and drying techniques. Coﬀee beans are considered low-risk commodiKes regarding salmonella contaminaKon. In the current EU legislaKon no microbiological criteria speciﬁcally targeKng coﬀee have been set. Food safety authoriKes however can withdraw imported food products from the market or prevent them from entering the EU when Salmonella is found present. IrradiaKon is a way to combat microbiological contaminaKon but this is not allowed by EU legislaKon for coﬀee. Value path for Break even point Value of opening coﬀee retail shop will include : These may include: • Taxes on Revenue/Business and Occupancy Taxes • Legal & AdministraKve Costs • Real-Estate Costs (Cost Per Square Foot) Gross selling ﬁgure of selling over North East Italy would be : $4.35 (Avg. Sale) x 12 (Avg. Transac:ons per hour) x 10 (hours) = $510 Gross Revenue $120 (Fixed Cost) +$190 (Variable Costs) = $310 (Total Fixed & Variable) $510-$310 = $200 Net Revenue Please include following points in mind when we plan Break Even Point : • What is the exisKng business serving (which coﬀee roaster and what snacks, etc.) • What are your business hours? • How many outlet and staﬀ members do you have? • Who are your customers? • What are you doing right? What are you doing wrong? • What are the seasonal factors? For all above I have taken the best case scenario ﬁgures. $310 (Total Fixed & Variable) $310 x 6 Open Days = $1860 Plus Your Fixed Daily of $120 Equals $1980 Total Weekly Costs or $7920 in Monthly Costs If we consider the best case scenario following would be an average daily sales for a small coﬀee shop are derived from the following weekly data would be: 1. Monday: $600 2. Tuesday: $575 3. Wednesday: $625 4. Thursday: $525 5. Friday: $725 6. Saturday: $650 7. Sunday: Closed Total: $3700 for the week (Or $14,800 per month, or $177,600 per year.) Note : Above would be esKmaKon if we have best case scenario. Revenue = $14,800 Costs $7920 Total = $6880 $36,000/$6880 = 5.2 Months to Break-even. This would be an ideal case scenario for the same.