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The State of Bean-to-Bar Chocolate 2017 — Part 3

Beans, nibs, and chocolate on display at Festival in Villahermosa, Tabasco, Mexico.©2016 Clay Gordon

Some concrete proposals the small maker community might consider as it ponders growth challenges

In Part 1 of this series I characterized that the market is fragile and gave some arguments in support of that position. In Part 2 I took a look at the growth of craft chocolate since 1997, calculating growth rates based on available information, and asked what it would take to double sales and consumption of beans—assuming a compound annual growth rate on par with what’s been experienced in the past five years—and proposed a list of actions that could help this happen.

I decided to wait to write this final part until after the semi-annual FCIA meeting and Fancy Food Show in San Francisco in mid-January then attending ISM/ProSweets in Cologne, Germany at the end of January to see if anything I learned there could inform what I had to say. I have also been preparing to present at the Roots of Cacao symposium at the Institute of Culinary Education and will be moderating several sessions at Chocoa in late-February so the topics are front of mind. As a result I have collapsed the points in the second article into groups for brevity and clarity.

Clarity of Voice and Messaging

It is hardly surprising that consumers are confused about what “craft” chocolate is and the value proposition it can deliver - because the small maker (a term I prefer over most definitions for craft) community cannot itself agree on a definition that makes sense. I will add one other criterion to the task of creating and agreeing upon definitions:

A good definition must also be one that Big Chocolate cannot co-opt, as they have done with bean-to-bar.

How is what small makers do different from what industrial makers do? What is craft chocolate? What is artisan chocolate? What is bean-to-bar chocolate?

Is there any meaningful difference between craft and artisan? Bean-to-bar is now essentially meaningless as a differentiator because many industrial-scale producers are, in fact, bean-to-bar chocolate makers.

In order to grow the market, the small maker community needs to:

  • Come up with an easily understandable definition for craft that clearly differentiates the value proposition in contrast with industrial chocolate.
  • Get all (or a large majority of) makers to agree to use the definition(s) in the same way.
  • Aggregate some resources to market the term to consumers effectively.
  • Stop marketing using phrases like, “Our chocolate is so good you don’t need to eat very much of it to feel satisfied.” It makes zero business sense to tell consumers they need to buy less of your product.
  • Increase transparency about the farm gate price of the beans being used.
  • Clearly articulate how many farmers are having their lives materially improved through their efforts. If a small maker is only buying 1 bag of beans from a farmer or co-op per year at a premium of $1000/MT over what others pay then the value of the impact is, in concrete terms, meaningless.
  • Address the gap between the purpose and promises of awards programs and the way they are negatively skewing markets.

I think it’s also important for the two-ingredient school of the craft chocolate “movement” to admit to itself and everyone else that nothing about it is actually revolutionary. Rather, it’s a return to a pre-industrial - specifically pre-1847 - style of making chocolate.

I have two ideas that I think the small maker community should work on that would help grow the market. If there is interest I am happy to help promote via TheChocolateLife.

  1. Expand the use of geographical indicators (or GI; e.g., AOC, DOC, PDO, DO). One way to increase consumer confidence in a scalable way that can be controlled locally (in-country) is to develop effective denominations of origin. The depiction of a GI on a package can carry as much weight as a social certification label and could be more meaningful and useful - to everyone - as a marketing tool in the long run.
  2. Create the craft chocolate equivalent of home brewer guilds. These groups would meet on a regular basis for the purpose of learning to make chocolate, sharing what they make, and learn, and educate themselves about chocolate in general. Imagine if 20% of the people who attended the NW Chocolate Festival purchased small equipment and purchased 2kg beans each month to make chocolate in the home. Now imagine chocolate guilds in every town and city where there is one or more craft brewery. Not only could these guilds more than double the global market for beans from small farmers, the members would be more appreciative of what goes into making a good bar and be more willing to pay for it.
What size does a small chocolate maker have to be to be sustainable as a business?

One of the reasons many small makers get into chocolate in the first place is they want to improve cacao farmer lives and livelihoods. This is a long-term commitment, so it makes sense that, first and foremost, makers take a close look at their businesses to see how sustainable they are.

However, most makers I have spoken with have only a vague idea of what their true cost of production is. And they don’t really have a clear idea about how to calculate their cost of production. They don’t know what the key drivers of cost are and they don’t know how to price their products properly. This means they don’t know what parts of the process are costing them the most and should be the focus of improving efficiency.

  1. The price of cocoa beans is not a key driver of the retail price of a chocolate bar.
  2. The price of labor is a key driver.
  3. Batch and bar size are key drivers; small batches cost more; bigger bars might be more profitable than smaller ones.
  4. The cost of distribution is a key driver.
  5. And we haven’t even talked about the cost of packaging, the cost of equipment, and the cost of overhead.
    Layered into all of the above points is a discussion of scale. How many tonnes of beans does a small chocolate maker need to produce in order to be consistently profitable? 4MT/year? 6MT/year? 12? 25? 50?

The answer, of course depends up on the cost structure of the business, and in particular the distribution of labor costs across the entire manufacturing process from reception of beans through cleaning to wrapping and packing.

But I will argue that more important to the discussion is product mix. There is a tendency for makers who self-identify as bean-to-bar makers to make nothing but bars. Chocolate bars, and especially two-ingredient single-origin/varietal bars, is an increasingly competitive marketplace with many distribution infrastructure challenges. Makers would be well served to consider the question, ‘I make chocolate, now what can I make with it?” There are many things that can be made with chocolate that have higher profit margins than bars and that are kid-friendly (70% two-ingredient chocolates are not kid-friendly). And if a maker is not offering up something with salted caramel in it they are leaving tons of money on the table.

In Closing
  • The world does not need another partially conched 70+% two-ingredient Madagascar made with under-roasted Akesson Estate beans processed in a wet grinder made in India. There are literally hundreds already and consumers are having a hard time differentiating between existing ones.
  • Big chocolate is paying attention … but small makers have no control over what is co-opted or how. They will make products that echo every single successful initiation small chocolate tries, making it harder for small chocolate to distinguish what it does and grow its audience and market.
  • Expect every one of the messages that small chocolate uses to be used by Big Chocolate, if they think it can be used successfully. Bean-to-bar is no longer a meaningful differentiator. At ISM I saw the phrase, “Made in an artisanal way” on one stand. What does that even mean, other than to reinforce that unclear definitions of artisan cannot be a meaningful differentiator.

Great report, Clay. Your article confirms my observations as well.
I see a major detriment the fact that most of the nano-/micro-batch chocolate makers tend to believe that winning awards is all they need to demonstrate their products are successful and will keep doing well in the long run or raise above the competition. It's time to wake up, your article is eye-opening. And yes, there's still so much need of transparency, under any lens, to define this niche and make it really sustainable.
Another issue is a refusal/lack of interactions with the big players in cacao. They seem all intrigued by the new Ruby chocolate but the pride to deny a hunger for new processes and possibilities is too high.

@foodensity -

Thanks for the kind words. The challenges facing the sector are many and complex. One of the challenges I see - and this was reinforced by my participation in the Roots of Cacao Symposium at the Institute of Culinary Education yesterday - is that many small makers have very little perspective about even the recent (past 20 years) history of cacao and chocolate. This ignorance, coupled with a lack of broad experience, means they are not as open to new ideas as they need to be in order to create sustainable businesses.

They are all up for talking about sustainable cocoa farming and sourcing while not paying enough attention to creating sustainable businesses. The small maker/specialty community is not going to be able to fulfill its "promises" to small farmers if their businesses aren't sustainable first.

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Great write-up as usual, Clay. I really like this point: "A good definition must also be one that Big Chocolate cannot co-opt, as they have done with bean-to-bar." That is a long-term but important consideration for the industry. Regarding your point about chocolate making guilds, are you concerned that that could lead to more proliferation of "bad" craft chocolate, which could turn consumers away?

@foodensity @NateKostelnik

The idea of the equivalent for chocolate of home brewer "guilds" is to provide a place where people who are interested can explore their love for craft chocolate by through sharing, and the central focus is sharing chocolate they make at home. The home brewer guilds in craft beer (which result in the making of a lot of bad beer) are, I think, one of the foundations of success of craft beer. Beer lovers could get together and geek out and learn what it takes to make good chocolate consistently. Many home brewers invest thousands of dollars in equipment and hundreds of hours in experimentation. This drives a better understanding and appreciation of the value propositions craft chocolate offers. Very few home brewers (as a percentage) go into business brewing beer and I would not expect a high percentage of members of home chocolate maker guilds (clubs might be a better word) to go into business either. But those who do will have learned the techniques of making chocolate in a supportive environment.

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I can’t help but notice the irony that the consistency of quality so valued by Big Food and Big Chain Restaurants is exactly what now repels many consumers who favor artisan food and chocolate. Big Chains love to brag that the fries you get in Cleveland will taste as good as the fries in Phoenix. In the artisanal/craft world, flexibility from batch to batch is proof of “artisan quality,” whatever that means. Somewhat less consistency is excusable because of the authentic, “made-with-love” factor.
What Clay states about the world not needing another “70+% two-ingredient Madagascar….” is true. I’m not a chocolate maker, I’m a chocolate consumer. As a consumer, my interest is in finding a great-tasting chocolate bar that stands out, and I’m willing to pay a premium for that. Big Chocolate knows this and they’re coming after consumers like me. I’d love it if small makers can provide it, as I have a soft spot for the small business person, having grown up in a small family business and know the risks involved. It may be useful for small chocolate to combine forces a bit. Artisans are scattered everywhere though, making it difficult to share resources and work together.
As for Big Chocolate, economies of scale are what they are, and Big Chocolate has shown efficiency that small businesses will have difficulty replicating, especially in the arenas of labor and distribution. For small chocolate to survive, makers may need to, if not compromise, at least re-think their approach to business.

"Very few home brewers (as a percentage) go into business brewing beer and I would not expect a high percentage of members of home chocolate maker guilds (clubs might be a better word) to go into business either. But those who do will have learned the techniques of making chocolate in a supportive environment."

Exactly!

Interesting idea, Clay. Could be an opportunity for some makers to start some local guilds.

Good analysis and recommendations Clay. The "small is beautiful concept" has its flaws. I'd rather like a comparison with the specialty coffee sector. It is much more innovative and has more sales points. The specialty chocolate producer have to increase their efforts (put capital in sales) towards its customers and be more attractive than putting a bar in a shelf and wait that someone picks it up.

@NateKostelnik

Actually, I think that it would be a bad idea for chocolate makers to start and operate the guilds because there would be a tendency to promote their style of chocolate making and approaches. Imagine if Goose Island were to set up a craft home brewers guild. It would not be taken seriously. Goose Island exists because of home brewer guilds/clubs.

I think specialty chocolate retailers would be a better option. Or even existing home brewer guilds.

@Tranquilidad -

I think it might be better stated, "Small CAN BE beautiful," not is. There are good analogies in specialty coffee, but it's important to know where the analogies break down and no longer apply.

Specialty coffee works in part because of the fact that much of the consumption is social. I go to some place and I interact with the person actually making my cup and I get to make the call personal and customize the cup to my preferences.

All of that is missing in chocolate bar retailing and part of the challenge is that there is a focus on bars above all else.

Expanding a bit on the use of geographical indicators, the ICCO has a panel that decides on a list of countries that they see as exporters of fine flavoured cacao (along with the percentage of total exports considered fine flavour). I can’t judge the quality of the process of setting up this list, but it is independent, and if I wanted to differentiate myself from Big Bulk Chocolate, using this list might be worthwhile.

How to do this then? Maybe an idea would be that all small makers use a little standardized picture of the world map on their wrappers, which should bring two points forward:

  1. There is a distinction between 'normal' cacao and 'fine flavoured' cacao (and where it comes from)
  2. The origin of the chocolate in that wrapper and in which of those two categories it falls

This first point would help educate people about the existence of fine flavoured chocolates (very much required if we look at the earlier parts of this series), and the second point would be a meaningful differentiator with bulk chocolate. This can also not be copied by Big Chocolate, as the countries they import from will probably not be in the 'fine flavoured' category (Ivory Coast and Ghana are not on the list. And Belgium isn't either ;) ).

There is a grey area of course, and it would probably be good to have a standardized story on the website of the chocolate producer that explains these grey areas (for instance, the producer might sell very good chocolate with beans from a country not on the list). Or one general website with that story. The information on the wrapper will have to be kept simple and short.

Over time, once people start to recognize this and see its value, it could achieve the same effect as a fair trade label, for instance. Later on perhaps, things like 'Direct Trade' could be added in a similar way. The general website can maybe be used by the community of small makers to bring forward the differentiating factors they have when compared to Big Chocolate. If all bars have a QR code referencing to that general website, it could become quite powerful.

Maybe this is something (or an variation on this proposed concept) that could help the small maker community. It will however require some sort of organization on the part of the small makers community.

A good differentiation would be not between "bulk" vs. "fine" cacao, but "bad processed" vs. "well processed" cacao. Actually, countries like Ghana won among the best 18 in the last edition of the Cocoa of Excellence Awards. I also noticed other countries in South or Central America had strong cocoa flavor backgrounds in the graphics, so the focus should be on quality.
What may be considered "specialty" rather than strictly "fine flavor"?

The ICCO process is quite subjective actually and the numbers represent the percentage of the cocoa that is exported. The definition of export also includes regional exemptions. So, Nicaragua can sell cacao rojo (unfermented cacao) to Guatemala, Honduras, and El Salvador but those sales are not counted as exports.

To make this work, each country has to have its own process to determine what GIs to create. While they tend to focus on agricultural products and origin and local processes, they don't tend to focus on quality.

To be called Champagne the requirement is to be made in the Champagne region using specific grapes and methods. There is no discussion of the quality of the Champagne.

In cocoa there are grading standards that vary from country to country and these could be used in addition to the GI or be made a formal part of the GI. In our project in Mexico my team proposed making the fermentation protocols we were developing an optional component.

But it all comes down to political will and the commitment to implement the policies in a way that is neither too restrictive nor too costly, and the commitment to police the GI so it is not subverted nor abused.

Hi Clay
Really eye opening post, enjoyed it.
I agree with your points, and appreciate the research and consideration you put into it.

Big chocolate can have cheap prices with same % of cocoa that Small makers are doing. If someone, untrained in fine chocolate, were to ask why a Small maker's bar was so expensive ... would it be 'wrong' to say that Small makers are paying more for the beans ? I get asked this question A LOT, and typically I go down the 'it's made in small batches...' route, obviously giving more explanation, but the price of cocoa (being 'fairer') is a big part of my response.

I only ask this because you point that "price of cocoa beans is not a key driver" of retail price; it's the labour, batch size, distribution costs, packaging, etc. I understand this, but i've spoken to many makers and they typically suggest the price of the beans is the reason their chocolate is more expensive . I guess this could just be a marketing thing......

Anyway, your key drivers have reminded me how to explain the pricing associated with Small chocolate. Thanks!

Harmony -

I have created a modeling tool in Excel that small makers can use to examine different assumptions when making their chocolate - and I presented it here at Chocoa in Amsterdam yesterday. It's from my creating and testing that tool that my observations in the prior article were based: the cost of labor that contributes more to the high price of bars from small makers that the differential cost of beans. One purpose of the tool is to get small makers to think about what their costs of production are. Most don't know how much labor they put into things and they don't properly account for the cost. Most don't know how much it costs to run their machines, either, a calculation that includes the cost of rent and electricity.

Keep in mind the costs of distribution. If a bar is being sold at retail through a broker/distributor, to have a bar with a retail price of $4 means that the maker has to be profitable when selling the bar at wholesale ... for $1.40 or less.

Hi Clay, great post and analysis, as usual from you. Sounds like what you're saying is that many small chocolate makers need to learn more about the business of chocolate, not just the making of it. All small businesses have a high mortality rate and much of the reason is that they're undercapitalized. They have a great idea, but try to hit the market before they're ready and before their model is fully thought out.

Clay, you’re right about many small makers have “only a vague idea of what their true production cost is.” That’s not a sustainable business model, big or small. There is absolutely no way any Big Chocolate company would not have a handle on the “true productions cost” of any of their products. Not happening. That’s a clue.

One issue I do see is that Big Chocolate may see “artisan” as a marketing tool (also “organic”, “small batch”, “craft”, etc.) to make their products SEEM this way when they really are not. Hard to push back though, without any real definition of the terms. They can make mass-produced products but give them all the look of artisan products, even distancing themselves by giving the bar a name different than the parent company.

As for claims on labels, I always think it’s odd when I see a label that says something like, “we pay above fair-trade price to our farmers…”. Great, but I figure they probably aren’t buying in large quantities, either, so of course they’d have to pay more per unit weight.

As for making other things with their chocolate, your point is well taken. Not by me, as I tend to like bars more than what I’d call “candy,” but most people would prefer additional ingredients and “particulates”, such as nuts, dried fruits, caramel, potato chips, and on. These additions bulk up the weight of the product with less expensive ingredients yet appeal to a much wider audience. Maybe the message is, for a business to be sustainable, it’s often necessary not to let your personal preferences dominate. You can still have integrity and ethics, while respecting your customers’ preferences.

(edited)

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