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

SIC Code: 180690

Prepared by: Fathima Amra

Sector Manager.

Table Of Contents

Contents1. Introduction.......................................................................................................................................................2

2. Description of the Industry.........................................................................................................................3

3. Industry Supply Chain.....................................................................................................................................4

3.2 Geographic Position - Concentration of Companies Profiled per Province.....................................5

Graph to insert.....................................................................................................................................................5

4. Size of the Industry.........................................................................................................................................6

4.2. Market Share and Potential By Country.....................................................................................................7

4.3 Summary of Main Players......................................................................................................................9

5. State of the Industry......................................................................................................................................11

5.1 Local........................................................................................................................................................11

Trends.............................................................................................................................................................11

5.2 Regulations...........................................................................................................................................13

5.3 Investments..........................................................................................................................................13

5.4 Continental............................................................................................................................................14

5.5 Brands in Africa....................................................................................................................................14

5.6 International..........................................................................................................................................15

6. INFLUENCING FACTORS............................................................................................................................16

6.1. Economic Environment...........................................................................................................................16

6.2. Barriers to Entry.......................................................................................................................................17

6.3. Research & Development and Innovation..........................................................................................17

7. FUTURE OUTLOOK...................................................................................................................................18

8. References:....................................................................................................................................................20

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 IndustryThe 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.

Kees Beyers 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 ChainThe 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 Geldhof

Chocolatier outlets in Gauteng. Kees Beyers distributes via retail outlets such as Spar, Shoprite,

Woolworths under its private brand label and Clicks und the d.licious brand.

3.2 Geographic 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 IndustryAccording 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 R8bn by 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

4.3 Summary of Main Players

Summary of Main Players

Company Name Employees TurnoverTurn Year End

Turnover Comment

Confectionery Brands

Gauteng

Dicks Sweets cc 15 Dick Sweets

Ethnic Candy cc 76

Imsofer

Manufacturing (Pty)

Ltd

150 Ferrero,Tic Tac,

Kinder Joy

Inkanyezi Chocs (Pty)

Ltd t/a Arriba

Chocolates

18

Kees Beyers Chocolate cc

358 Beyers

Lodestone Brands

(Pty) Ltd

180

Mondelez South

Africa (Pty) Ltd2,200 R39,290.0m 2014

Mondelez

International:

Eastern

Europe,

Middle East &

Africa

(EEMEA)

Nestle (South Africa)

(RF) (Pty) Ltd3,220

3in1, Acqua Panna, 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,

Frogz Eggz, Gold Cross,

Heaven, Ideal, Jive, Just

Magic, King Cone, Kit Kat,

Klim, Lactogen, Maggi, Marsh

Company Name Employees TurnoverTurn Year End

Turnover Comment

Confectionery Brands

Nan, Nescafé, Nespray,

Nesquik, Nestea, Nestlé,

Nestlé Aquarel, Nestlé

GOLD,

Nestlé Nutrition, Nestlé Pure

Life, Nestum, NIDO, Nutren,

Nutren Ricoffy, Nutrition,

Orange Maid, Passions,

Peptamen, Perrier, Prebio3,

Prebio1, Probiotics bifidus 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

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

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's & Moni's, Fizz Pop,

Golden Cloud, Hall's,

Hugo's, Ice Cap, Ingram's,

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5. State of the Industry

5.1 Local

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 Kees Beyers have indicated flat volumes but

increased turnover which in the case of Kees Beyers 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 Ferrero Rocher 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.

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Kees Beyers 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 Kees

Beyers who 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,

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Hagart Road Pinetown.

5.2 RegulationsIn 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.

5.3 InvestmentsIt 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.

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In early 2013 Mondelez made a decision to discontinue the Sweetie Pie range due to its

small

consumer base. It was acquired by Kees Beyers Chocolates and relaunched in July

2014.

5.4 Continental

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.

5.5 Brands in AfricaSouth 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, Gawad

Abaza 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.

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5.6 International

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%.

15

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.

The outlook for household consumption and improved disposable income is poor as a

result of fuel and electricity price increases. Food price inflation is also expected, due to

drought in the maize-growing areas and although the Reserve Bank decided in March 2015

to keep interest rates unchanged at 5.75%, analysts expect an increase before the end of

the year. In March 2015, the South African Rand plunged to a 13-year low against the US

Dollar. Although a weaker Rand supports local exports, input costs are adversely affected.

A respondent mentioned that confectionery is considered “recession-proof” and local

chocolate sales have remained buoyant, growing at 10% annually. Faster growth has been

recorded in the premium categories because of the growing middle class. In an attempt to cut

costs, Nestlé and Cadbury reduced the size of chocolate bars.

According to the Nestlé 2014 Annual Report, globally the company was affected by greater

economic volatility in emerging markets due to slow growth rates and weakening currencies

and deflation and lower consumer demand in the developed markets.

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Chocolate confectionery is a seasonal business with the peak manufacturing season

occurring between August and March. Manufacturers increase production for Christmas,

Valentine’s Day and Easter. Seasonal weather cycles play a role in that research

indicates that chocolate sales, particularly bars and slabs, are higher in colder weather.

6.2. Barriers to Entry

Richard von Gesau of Gesau Chocolates has said that a barrier to entry for him was the

difficulty in obtaining government support via the Department of Trade and Industry (DTI).

The other barrier is the lack of training in confectionery production. It is not a capital-intensive

business although a tempering machine that costs approximately R120,000 is necessary

for making hand-made chocolates. He thought that about R250,0000 would be required

to start a chocolate confectionery business.

6.3. Research & Development and Innovation

The multinational companies have established R&D divisions. Much of the research focuses

on health issues.

Swiss-based Nestlé is conducting research to adjust 75 recipes of confectionery to

meet a commitment to remove artificial ingredients from 250 confectionery

products by the end of 2015. They are looking into using alternatives such as

annatto, a natural colourant derived from the seeds of the achiote tree rather than

using colourants Red 40 and Yellow 5.

American company Hershey stated in December 2014 that it was also looking into

replacing high-fructose corn syrup, a cheap sweetener, with sugar. The

controversial ingredient has been labelled as driving up diabetes levels.

Mars pledged in 2012 to reduce the calorie content of its single-serve products to a

maximum of 250 calories.

Innovation is a key differentiating factor for chocolate manufacturers in the current economic

climate. According to the Tiger Brands 2014 Annual Report, confectionery falls within the

Snacks and Treats division which “operates in a very price sensitive category” and

requires continuous innovation. The need to innovate applies equally to niche

chocolatiers as it does for the large multinationals. Kees Beyers develops approximately

350 new products annually with matching exotic names.

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The following are some new innovations.

Aerated Top-Deck Cadbury Dairy Milk since May 2014 following on from the original

Bubbly and Bubbly Mint variations.

Cadbury Dairy Milk and Oreo combination since August 2014.

Nestlé introduced a reminiscence pack “featuring wrappers and packaging from

its confectionery archive to help trigger happy recollections among those with

dementia or memory problems.” This was developed with advice from the UK-

based Alzheimer’s Society.

7. FUTURE OUTLOOK

For the foreseeable future factors such as slow economic growth and depressed

consumer spending will have a negative effect on demand for confectionery and Tiger Brands

reported that “no significant improvement” is anticipated in the next 12 months. Companies

are focusing on maintaining market share through cost savings and efficiencies, ensuring

innovation and competitive pricing. Despite per capita demand having slowed in Western

markets, the developing markets of Africa, Asia and Oceania are providing growth rates of

10% and the value of the local chocolate industry is expected to reach R8n by 2018.

18

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8. References:

Nestlé Annual Report 2013

Tiger Brands Ltd Integrated Annual Report 2014

Pioneer Foods Integrated Annual Report 2014

Draft Guidelines to Draft Regulations Relating to the Labelling and Advertising of

Foods (R429 of 29 May 2014)

Sector Skills Plan for the Food and Beverages manufacturing sector 2011/12-2015/16

FoodBev Seta Sector Skills Plan 2014/15

Deloittes Global Manufacturing Competitiveness Index 2013

Enhancing Manufacturing Competitiveness in South Africa, Deloittes

Supermarket & Retailer, May 2014

2014 Food, Drink and Consumer Goods Industry Outlook and Survey, KPMG

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