C2172 Chocolate and Confectionery Manufacturing in Australia ...

Organic, fair trade or dark: Chocolate takes on new characteristics to please ethical consumers

IBISWorld Industry Report C2172

Chocolate and Confectionery Manufacturing in Australia August 2010

Naren Sivasailam

2 About this Industry

23 Competitive Landscape

41 Key Statistics

2

Industry Definition

23 Market Share Concentration

41 Industry Data

2

Main Activities

23 Key Success Factors

41 Annual Change

2

Similar Industries

24 Cost Structure Benchmarks

41 Key Ratios

2

Additional Resources

25 Basis of Competition

42 Historical Performance

26 Barriers to Entry

3 Industry at a Glance

27 Industry Globalisation

4 Industry Performance

28 Major Companies

4

Executive Summary

28 Kraft Foods (Australia) Limited

4

Key External Drivers

29 Nestle Australia Ltd

5

Current Performance

30 Mars Australia Pty Ltd

9

Industry Outlook

13 Industry Life Cycle

44 Jargon & Glossary

34 Operating Conditions 34 Structural Risk Index

15 Products & Markets

34 Investment Requirements

15 Supply Chain

35 Technology & Systems

15 Products & Services

36 Industry Volatility

17 Demand Determinants

37 Regulation & Policy

18 Major Markets

38 Industry Assistance

19 International Trade

39 Taxation Issues

21 Business Locations

www.ibisworld.com.au | (03) 9655 3881 | [email protected]

Chocolate and Confectionery Manufacturing in Australia August 2010 2

www.ibisworld.com.au

About this Industry Industry Definition

This industry consists of establishments mainly engaged in manufacturing confectionery, chocolate or cocoa products, with or without sugar. Chocolate is produced from roasted ground cacao beans that are combined with other ingredients like milk and

Main Activities

The primary activities of this industry are

sugar. Cocoa is a powder produced from cocoa seeds that have been roasted, shelled, and ground. Sugar confectionery is produced by boiling, crystallizing, and moulding sugar or molasses into solid pieces that are usually coloured or flavoured.

Chewing gum manufacturing Chocolate manufacturing Cocoa products manufacturing Confectionery manufacturing Crystallised or glazed fruit manufacturing Drinking chocolate manufacturing Liquorice candy manufacturing Marshmallows manufacturing Nuts, candied, manufacturing Popcorn, candied, manufacturing

The major products and services in this industry are Chewing gum Chocolate Sugar confectionery

Similar Industries

C2163 Biscuit Manufacturing in Australia Establishments mainly engaged in manufacturing biscuits and cookie products. C2171 Sugar Manufacturing in Australia Establishments engaged in the manufacturing of cane sugar. C2175 Snack Food Manufacturing in Australia Establishments mainly engaged in manufacturing snack foods.

Additional Resources

For additional information on this industry www.candy.net.au Confectionery Manufacturers of Australasia www.confectionerynews.com Confectionery News www.icco.org International Cocoa Organisation



Industry at a Glance Chocolate and Confectionery Manufacturing in 2010

Key Statistics Snapshot

Revenue

Annual growth 06-11

Annual growth 11-16

Profit

Exports

Businesses

$2.9bn

2.1%

2.4% $197.9m $336.6m 179

Downstream demand from supermarkets and other grocery stores

Revenue vs. employment growth

Kraft Foods (Australia) Limited 49.1% % change

Nestle Australia Ltd 21.5% Mars Australia Pty Ltd 14.3%

15

5

10

4

5

3

% change

Market Share

0

2 1

−5 −10

Year 01

0 03

05

07

Revenue

09

11

13

−1

Year

15

04

06

08

10

12

14

16

Employment SOURCE: WWW.IBISWORLD.COM.AU

p. 28

Business Locations


4.2% 5.4% TAS

Downstream demand from supermarkets and other grocery stores

1.7% 0.6% ACT

NT

WA

38.1%

10.3%

Fat consumption

NSW

SA

World price of cocoa World price of sugar Health consciousness

15.1% QLD

24.6%

p. 4

VIC

Industry Structure

Life Cycle Stage

SOURCE: WWW.IBISWORLD.COM.AU SOURCE: WWW.IBISWORLD.COM.AU

Regulation Level

Medium

Revenue Volatility

Medium

Mature

Technology Change

Medium

Investment Requirements

Medium

Barriers to Entry

Medium

Industry Assistance

Low

Industry Globalisation

Concentration Level

High

Competition Level

For additional statistics and time series see the appendix on page 41

High Medium



Industry Performance

Executive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage Executive Summary

The Australian Chocolate and Confectionery Manufacturing industry has remained resilient despite a recessive economy, falling disposable incomes, volatile commodity prices and increasing import competition. The advent of the health conscious consumer has required producers to be innovative with their product lines, and adapt them to constantly changing consumer trends. In the five years leading up to 2010-11, industry revenue

increased at an annualized rate of 2.1%, to total $2.9 billion. The high level of value addition during the production process has enabled the industry’s major players to realize high profit margins and perform well in spite of recessive economic conditions. High brand and customer loyalty commanded by the major players, have also contributed to high profit margins and sales growth. The presence of a mature and stagnant market has seen an

increase in the volume of exports, which is expected to increase by 3.6%, to account for an expected 11.6% of industry revenue. Further, the volatility of key inputs such as cocoa and sugar has also resulted in strong import growth, as producers have had to resort to foreign markets to source their products. The appreciation of the dollar over the current performance period further aided import growth, which is expected to have grown by 5.6% over the past five years. Further, as economic conditions improve, IBISWorld expects sustained consumption of chocolate and confectionery as consumers choose to indulge themselves in inexpensive, ‘feel good’ luxuries such as candy, in an attempt to ease more pressing concerns such as mortgage or loan re-payments. Strong brand loyalty combined with new product innovations and aggressive marketing strategies will see the industry ride through the current economic storm relatively unscathed. To this end, IBISWorld predicts that the industry will grow at an annualised rate of 2.4% until 2015-16, with revenue totalling $3.3 billion.

Downstream demand from supermarkets and other grocery stores Supermarkets and grocery stores are key stockists of confectionery products. Demand for confectionery by retailers is a function of final consumer demand. This is influenced by factors affecting consumption levels such as health concerns and eating patterns.

World price of cocoa Besides sugar, cocoa is also a key input into confectionery, especially in chocolate. An increase in the price of cocoa will increase production costs in confectionery manufacturing. This impacts heavily on overall profitability unless firms can pass the increased costs onto final consumers.

Fat consumption Nutritional factors can affect sales relative to substitutes. Generally, increased public awareness about health and nutrition is having an adverse impact on confectionery sales. In particular, the growing popularity of low-fat diets is leading to lower chocolate sales since the average chocolate bar contains a high proportion of fat.

World price of sugar Sugar is a primary input in the Confectionery Manufacturing industry. Given this, an increase in the price of sugar will inflate production costs. Higher sugar prices will reduce manufacturing profitability unless firms can pass these cost increases on to consumers. Further, as trading conditions in Australia and overseas are

The

presence of a mature and stagnant market has seen an increase in the volume of exports





Key External Drivers continued

highly competitive, there is usually limited opportunity for manufacturers to implement selling price increases for their products. Health consciousness Nutritional factors can affect sales relative to substitutes. Generally,

increased public awareness about health and nutrition is having an adverse impact in some traditional confectionery markets such as chocolate. The opposite is true for confectionery promoted on a healthy platform such as sugarless candy and gum. Fat consumption

Downstream demand from supermarkets and other grocery stores 5

19.5

Kilograms Per Capita

% change

4 3 2 1 0 −1

Year

04

06

08

10

12

14

16

19.0 18.5 18.0 17.5

Year 00

02

04

06

08

10

12

14

SOURCE: WWW.IBISWORLD.COM.AU

Current Performance

Australia’s sweet tooth has seen the Chocolate and Confectionery Manufacturing industry remain resilient despite being faced with some onerous challenges over the past decade. The industry has had to contend with an increasingly health conscious marketplace, changing dietary trends, rising input prices, increasing import penetration and

recessive economic conditions. There has also been a rise in consumption of healthy substitute products such as snacks, cereals, nuts, yoghurt, and fruit that has further squeezed demand. However, in the five years leading up to 2010-11, industry revenue is estimated to increase by an annualized rate of 2.1% to total $2.9 billion.

Recessional resilience

From the late 1980s to early 2008, chocolate producers have focused on the trend of ‘premiumisation’, in line with periods of robust economic growth. Consumers, especially in the developed world, looked to trade up to more luxury food products with indulgences in higher priced products and premium brands. The deterioration of the economic climate in late 2008 saw a dramatic fall in discretionary spending as unemployment levels soared and

consumer confidence plummeted. Sales of chocolate and confectionery however, remained firmly resilient as it offered temporary respite from more pressing issues such as loan repayments and falling house prices. Over 2010-11, as global economic conditions begin to trend upward and developing economies continue to grow, sales of chocolate are expected to remain strong. Amongst the developed world, there exist strong opportunities within




Recessional resilience continued

the organic and fair trade segment, which represent the fastest growing segments in the EU, North America and Australia. Presently, fair trade cocoa still captures less 2% share of the world cocoa market, while the organic segment represents less

1% of the world cocoa industry. Further, as evidence of the economic recovery became more pronounced, discretionary spending is also expected to increase with a shift back towards premium brands and indulgent choices.

Consumption trends

In 2009-10, industry revenue is estimated to increase by 3.3% to total $2.8 billion, largely driven by the expected recovery of the Australian economy during the latter half of the year. As consumer sentiment and spending begin to be restored to prerecession levels, chocolate and confectionery demand is also expected to rebound. Further, given the emphasis on healthy eating and living, industry producers are expected to continue to introduce sugar free confectionery and gum, along with dark, organic and naturally produced chocolate products. Prices of key inputs such as cocoa, sugar and milk are all expected to decline over the year, translating into lower retail prices and thus, higher sales growth. In 2008-09, Chocolate and Confectionery Manufacturing industry revenue is estimated to total $2.7 billion, representing an increase of 130% from the previous year. Following a year of excessively high input prices, especially that of cocoa and sugar, a substantial tempering is expected in the current period. One of the most important developments affecting the industry has been the importance of health and nutrition in driving consumption choices.

Australians have become increasingly wary of their food intake and account for factors such as sugar and fat content, quality of ingredients, packaging etc. before deciding on a brand or product. This has consequently resulted in a number of product extensions and introductions in order to address these changing needs and drive sales revenue. The industry’s major players have responded by introducing low-sugar or sugar-free versions of traditional products such as Wrigley’s sugar-free Extra chewing gum and Eclipse sugarfree mint drops. A recent study conducted by industry publication Retail World, found that 76% of consumers eat mints to freshen their breath or mouth. Given rapidly deteriorating incomes and rising unemployment, chocolate sales are expected to perform modestly, with gourmet and specialty producers being particularly affected. The 2007-08 year saw industry revenue increase by 1.9% to total $2.7 billion. The year was characterized by unduly high key input prices, with sugar prices increasing by 25.0% and cocoa prices rising by 31.3%. This considerably affected supply levels, which resulted in manufacturers having to raise the

word indicator prices year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Cocoa ($US per tonne)

(% change)

Sugar (cents)

(% change)

1,590.6 1,958.1 2,572.8 2,800.0 3,300.0 3,000.0

N/C 23.1 31.4 8.8 17.9 -9.1

14.8 10.0 12.4 13.0 12.5 13.0

N/C -32.4 24.0 4.8 -3.8 4.0 SOURCE: IBISWORLD




Consumption trends continued

average selling price in order to offset the increase in production costs. The industry’s major players were successfully able to pass on majority of the cost increases down the supply chain, evidenced by the growth in revenues. The industry was also aided by new product introductions, particularly in the natural, organic and fortified product lines. Further, the 3.7% increase in household discretionary income over the period, largely drove sales for premium, indulgent, dark and gourmet chocolate products. Chewing gum and mint confectionery also performed well over the year, driven by strong innovation from category leader Wrigley’s. During the 2006-07 period, industry revenue increased modestly by 1.9% to $2.6 billion. The 23.1% increase in cocoa prices was partially offset by the 32.7% fall in sugar prices. New product

introductions in the sugar-free and diet chewing gum and mint segments stimulated demand for non-chocolate confectionery. The mint category alone grew by more than $27 million over the past three years, driven by clever and timely product innovation that addressed pressing consumer concerns of health and convenience. For example, Wrigley’s introduced Extra Professional, a mint that claims to “clean the tongue and reduce oral bacteria by up to 74%”. Chocolate producers aggressively promoted the health benefits of cocoa and dark chocolate, while also fusing traditional chocolates with fruits, nuts and other functional ingredients such as Mars’ CocoVia range. The 4.6% rise in household discretionary income further aided sales of premium and gourmet chocolates such as Lindt and Ferrero Rocher.

Decreasing profitability

Industry profitability is estimated to be 6.8% of revenue recording a marginal decrease of 0.2% from the previous year. The high level of value addition during the production process, combined with a highly concentrated market allows manufacturers high gross margins and lower per unit costs. The increasing level of capital intensity within the industry reduces labour costs, resulting in improved profitability. The industry’s major players enjoy a

high level of brand and customer loyalty, allowing them to pass on unexpected cost increases down the supply chain with only marginal impact on demand. Further, as branded products also attract a premium price, they are inherently a high-margin sale, and therefore more profitable. Given that majority of the world’s most recognizable chocolate and confectionery brands are owned by the major players, it is a comparatively profitable industry. Employees per establishment

15

50

10

48 46

5

Ratio

% change

Profit vs. wages

0

42

−5 −10

Year 01 Profit

44

40 03

05

07

09

11

13

15

38

Year 01

03

05

07

09

11

13

15

Wages SOURCE: WWW.IBISWORLD.COM.AU




Health and nutrition

One of the most important developments affecting the chocolate and confectionery industry has been the importance of health and nutrition in driving consumption choices. Australians have become increasingly wary of their food intake and account for factors such as sugar and fat content, quality of ingredients, packaging etc. before deciding on a brand or product. This has consequently resulted in a number of product extensions and introductions in

order to address these changing needs and drive sales revenue. Traditionally, most Australian consumers have based purchasing decisions on taste, quality, price and use-by-dates. However, the increasing sophistication of consumers in the past five years has driven greater product development than recent decades. IBISWorld expects this trend to continue as the confectionery industry faces an increasingly dynamic and evolving marketplace.

Organically sweet

IBISWorld expects greater development in the area of organic foods that also include chocolate and confectionery. This trend has already begun to take off in the US, United Kingdom and many European countries where consumers can now access a wide variety of organic products in major supermarket chains.

However, the success of organic confectionery in the Australian market will depend on the availability of organically produced inputs such as milk powder and butter. Currently, there are already a number of organic chocolate brands, with more expected to be launched in the near future.

Change of process

One of the key features of the Australian food manufacturing sector has been the shift from primary processing of raw materials to semi-processing and final processing. This has had a direct impact on elementary confectionery production, as much of this shift has represented value adding initiatives. Today, industry

players themselves are moving into downstream food manufacturing in response to greater demand for convenience by consumers. This trend is expected to persist into the future, especially as improving infrastructure encourages higher primary processing by developing and transitional countries.

Improved access to foreign markets

As a result of improvements in production technology, manufacturers can now distribute confectionery products over longer distances and thus, service wider markets. In the future, ongoing

investment in new processing technologies is likely to result in greater competition between domestic confectionery makers servicing previously distant markets and from rising import competition.

Ethical consumerism

The recent emergence of the ethical consumer has seen a shift towards more sustainable methods of production with an emphasis on fair and equitable trading conditions. Given that majority of the world’s cocoa is produced in small farms

in countries with low or very low GDP, the buying practices of multinational corporations have come under scrutiny for unfair and exploitative treatment of cocoa farmers. Consumers have become more wary of where their chocolate is




Ethical consumerism continued

sourced from, evidenced by the rapid increase in sales of fair-trade labelled products that increased 37% in 2006-07. This issue is critical as the ethics of

chocolate production can seriously affect demand for a particular product or brand and erode the credibility of the manufacturer involved.

Industry Outlook

The future prospects of the Chocolate and Confectionery Manufacturing industry are relatively modest. Over the next five years leading up to 2015-16, IBISWorld estimates that industry revenue will increase at an annualized rate of 2.4% to

total $3.3 billion. Principally driving this outcome is expected to be a function of moderating commodity prices, health and dietary changes, product innovation, and advancements in technology and production.

Market trends

Forward indicators suggest that growth in domestic demand will be modest, reflecting a general saturation in overall consumption across industrialised countries. Two key factors expected to affect domestic demand and consequently determine future consumption patterns is the emphasis on health and nutrition in making dietary choices, and the changing demographic profile of the Australian population. The wave of health consciousness sweeping the nation is expected to adversely affect demand for sugar-rich, high-cholesterol products such as sugar based confectionery. However, this has also forced producers to innovate and provided opportunities in growing segments such as low-sugar confectionery, sugar-free chewing gum,

organic and natural chocolate etc. This trend is expected to continue into the next five years, as more products addressing these trends are introduced into the market. Another key factor expected to affect consumption is the changing demographic composition of the average Australian household. Typically, teenagers are the largest consumers of confectionery products as people tend to develop a preference for savoury food with age. Australia’s ageing population will see the size of this consumer segment fall, leading to lower aggregate sales. Further, as adults living in households with children are also more likely to consumer chocolate and confectionery products, demand from this segment is also expected to fall.

Revenue growth

Industry revenue is expected to increase at an annualized rate of 2.4% to total $3.3 billion in 2015-16. In comparison, Industry Value Added is expected to increase at an average of 2.1% over the same five year period. Improved efficiency is expected to be one of the main contributors to the faster growth in IVA. Competitive pressures also seem likely to produce further rationalisation of plants, leading to modernisation, reduced duplication and economies of scale in production. Complementing this trend will be a move toward higher

The

wave of health consciousness sweeping the nation is expected to adversely affect demand margin products. IBISWorld expects greater focus on high quality, premium chocolate bars as well as premium priced functional confectionery. Slightly offsetting these developments will be the expected increase in sugar




Revenue growth continued

prices over the period. This is primarily due to the vast increase in demand for ethanol which has adversely affected the supply of sugar, thereby increasing its price. However, cocoa, the industry’s other primary input, is expected to decline over the period. Farm gate milk prices are forecast to decrease marginally over the next five years, which will put downward pressure on the prices for the industry’s products. Milk prices are forecast to decrease over the period as global supply growth of dairy products exceeds global demand growth. Although, prices are forecast to remain firm due to continued strong global demand for dairy products, high costs of milk production with forecast continued high feed and oil prices, and low world dairy product stock levels. Despite overall moderation in raw material and input prices compared to the current period, post-production costs

like advertising are expected to increase in the period. The Australian confectionery industry is highly competitive as indicated by the large number of new product lines introduced by the major producers. Furthermore, in the last few years, brand proliferation in the confectionery market has created the need for extensive promotion and marketing programs. The importance of advertising is set to increase as a growing number of industry players seek a larger share of the industry’s profits. The industry is expected to remain profitable over the next five years, with an average of 7.0% share of overall industry revenue. This represents an increase of 0.2% when compared to the current performance period. Gains from production efficiencies and lower labour costs are expected to be partially offset by higher spending on advertising and marketing activities.

Production issues

IBISWorld projects a moderate rise in the real price of confectionery over the next five years. Price increases will largely stem from the introduction of higher valued product lines, reflecting the growing popularity of specialty and premium chocolates. Real confectionery prices are also set to rise as manufacturers pass on higher input costs to customers. Production volumes are forecast to increase at an average rate of 1% per annum over the five years to 2015-16. Higher output will depend heavily on exporting activity undertaken by the industry. In the short term, production may fall following the closure of manufacturing plants, including Nestle Australia’s sugar confectionery manufacturing plant in Maryborough, Victoria, after the company discovered that it could produce Kit Kat chocolate bars in New Zealand 10% cheaper than the Australian product. The coming few years should witness

some changes to the distribution of production. Confectionery manufacturing in Australia will continue to be dominated by a few major ‘mass’ producers. However, scope exists for the establishment and/or expansion of specialist confectionery producers. The next few years should also see the direct entry of a couple of existing importers. Jacobs Suchard for example has tabled the possibility of local plant. Given the company’s interest in Asia, Australia would be a suitable base from which to supply the region, particularly in view of the availability of sugar and milk. Although chocolate confectionery will continue to dominate local production, there are likely to be some changes in the product mix in the next five years. The chewing gum segment is forecast to increase as it outperforms chocolate and sugar confectionery in sales growth. This trend will reflect underlying changes in consumption patterns as consumers shift from




Production issues continued

traditional confectionery products toward functional/fortified food and healthy snack foods. Underpinning growth in the chewing gum segment will be the ongoing production of gum

products promoted as heaving dental health benefits. This will be further enhanced by the new trend of banning vending machines that offer confectionery in Australian schools.

Regulation outlook

Confectionery manufacturers are also likely to face greater regulatory restraints over the next five years, especially in relation to product labelling and food safety following increased lobbying from consumer groups. The impact of tighter restrictions on confectionery manufacturers is likely to vary among different segments. To date, larger establishments have been successful in implementing requirements such as those under the Food Standards Code and food safety programs. However, anecdotal evidence shows that costs for implementing legislative requirements can disproportionately affect small manufacturers. Expected increases in regulatory requirements are likely to increase costs that manufacturers. However, there is scope for confectionery producers to benefit from pre-emptive regulatory compliance, particularly those relating to food labelling. The ‘%DI’ (percent daily intake) front-of-pack nutritional labels have been broadly adopted across

several food manufacturing industries over the past year, and IBISWorld expects an increasing number of firms across this industry to follow suit over the next five years. Further, as confectionery manufacturers face external competition from producers of muesli and snack bars (who have wholeheartedly embraced the new labelling format), IBISWorld believes there is opportunity for producers to highlight the benefits and comparability of their products. For instance, the kilojoules and fat content of some of the industry’s chocolate bars is lower than some nut and muesli bars, thus confectioners have the opportunity to objectively state this through their nutritional labels. One regulatory area currently being aggressively targeted is chocolate and confectionery advertising. In a survey of Australian parents, the consumer group, Choice, found that 82% parents were in favour of increased government regulation over the way high sugar and fat foods are marketed to children. Choice has joined a contingent of more Productivity

Profit vs. exports (% change)

380

Profit/employees ($ '000)

20

% change

10 0 −10 −20 −30

Year 01 Profit

03

05

07

09

11

13

15

360 340 320 300 280

Year 01

03

05

07

09

11

13

15

Exports SOURCE: WWW.IBISWORLD.COM.AU




Regulation outlook continued

than 50 consumer groups globally backing a voluntary code of practice which includes tight restrictions on television and internet advertising, and has since called on the Australian government to support the proposal. However, the Federal Government has said that it will not change existing

regulations until later this year after the Australian Communications and Media Authority’s report on junk food advertising for children is released. Going into the future, any such ban would extend to confectionery products, and consequently impact the current marketing of the industry’s products.



Industry Performance Life Cycle Stage

Innovative packaging and product development is stimulating some industry growth The industry is a market characterised by well-established brand names Industry growth and consumption over the past decade has been moderate

% Growth of profit/GdP

Growth segments tend to be focused in gourmet chocolate and sugar-free gum

Maturity

30

Quality Growth

Company consolidation; level of economic importance stable

25

Key Features of a Mature Industry

High growth in economic importance; weaker companies close down; developed technology and markets

Revenue grows at same pace as economy Company numbers stabilise; M&A stage Established technology & processes Total market acceptance of product & brand Rationalisation of low margin products & brands

20

15

Quantity Growth

Many new companies; minor growth in economic importance; substantial technology change

10

Milk and Cream Processing

5

Confectionery and Soft drink wholesaling

Cake and Pastry Manufacturing 0

Shakeout

decline

Crash or Grow?

–10 –10

–5

Sugar Manufacturing biscuit Manufacturing

Shakeout

–5

Chocolate and Confectionery Manufacturing

0

Potential Hidden Gems

Time wasters

Future Industries 5

10

Hobby Industries

15

20

25

30

% Growth of establishments SOURCE: WWW.IBISWORLD.COM.AU




Industry Life Cycle This

industry is Mature

The Chocolate and Confectionery Manufacturing industry is in its mature life cycle stage, characterised by a saturated domestic market and a range of well established products and manufacturers. Although barriers to entry remain relatively low, the industry is typified by a few, large producers who fiercely compete for market share thus, restricting the number of new players entering the industry. In the five years leading up to 2010-11, there were only an additional five enterprises within the industry. Industry value added increased at an annualised rate of 0.2% between 200506 and 2010-11. Over the same period, real GDP grew by 2.1% and household discretionary incomes increased by 3.6%. This indicates a mature and stagnant industry, one that is growing at a slower pace compared to the Australian economy. Given a high level of saturation, it is imperative for manufacturers to constantly introduce

new products in the marketplace, so as to stimulate sales growth and differentiate themselves from their competitors. This has particularly been the case in the chewing gum and mint segments, with a number of new product introductions and innovative packaging and marketing initiatives being implemented each year. However, the confectionery market in Australia is reaching saturation. Confectionery has been widely available and affordable for the last century. Consequently, the domestic market is characterised by well-entrenched brands and product lines. It is not surprising that industry sources believe that long-term increases in domestic demand will largely reflect population growth. As the domestic confectionery market matures, more manufacturers will seek growth through exporting opportunities. Asia’s close proximity and its rising disposable incomes make it an obvious export target for Australian producers.



Products & Markets

Supply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

Supply Chain

Key buying industries C2162

Cake and Pastry Manufacturing in Australia Cake manufacturers purchase chocolate products as inputs into some caking baking.

C2163 Biscuit Manufacturing in Australia Biscuit manufacturers purchase chocolate, and other confectionery products as ingredients in some biscuit lines. F4716

Confectionery and Soft Drink Wholesaling in Australia Confectionery Wholesalers purchase the output of this industry for distribution to supermarkets, grocery stores and other food service operators.

G5111

Supermarkets and Other Grocery Stores in Australia The key industries purchasing the output of confectionery manufacturers include supermarkets and other grocery stores.

G5112

Convenience Stores in Australia Convenience stores are purchasers of the output of this industry.

H5731

Cafes and Restaurants in Australia Restaurants acquire confectionery products as inputs into food production.

H5732

Caterers and Food Service Contractors in Australia The Food Service industry acquires requires chocolate confectionery products as raw ingredients in food production.

Key selling industries C2121

Milk and Cream Processing in Australia The confectionery industry derives its two major raw materials from Milk and Cream Processing

C2124

Milk Powder Manufacturing in Australia The confectionery industry derives a major raw material from Milk Powder Manufacturing.

C2129 Butter and Other Dairy Product Manufacturing in Australia The confectionery industry derives its key raw material inputs from Dairy Product Manufacturing.

Products & Services

C2171

Sugar Manufacturing in Australia The confectionery industry purchases large quantities of sugar as inputs into chocolate and candy manufacturing.

C2172

Chocolate and Confectionery Manufacturing in Australia Industry players sometimes purchase elementary chocolate products as inputs into high value added production.

C2179

Tea, Coffee and Other Food Manufacturing in Australia The confectionery industry procures one of its major ingredients, cocoa from the Other Food Manufacturing industry.

F4795

Paper Wholesaling in Australia Confectioners typically procure product packaging from paper product wholesalers.

The confectionery industry can be broadly classified into three segments: chocolate, sugar confectionery, and chewing gum. Chocolate Chocolate is the industry’s major product category, accounting for approximately 62.5% of industry

revenue. The chocolate segment is highly concentrated and characterised by a small number of well-established brands. The Confectionery Manufacturers of Australasia reported that the top ten selling brands accounted for approximately 70% of sales in 2008. Further data suggests that roughly 40% of total chocolates sold are chocolate



Products & Markets

Products & Services continued

bars. The top three selling bars in Australia are currently Mars Bar, Kit Kat, and Cherry Ripe. Chocolate blocks are another important segment, with retail sales of an estimated $860 million in 2006-07, which is believed to be the highest within the chocolate segment. Gourmet chocolates, in particular dark chocolate have become a new growth segment in recent years, with a number of specialty chocolate cafes opening in most major cities. This has been supported by consumers becoming more health conscious and informed about chocolate. Sugar confectionery Sugar confectionery is the second major product segment, and is expected to account for approximately 28.0% of revenue. This includes, mints, hard candy, sugar candy packs, candy rolls, and medicated candy products. Unlike chocolate, this segment is highly fragmented and caters to niche markets and needs. As sugar manufacturing is less capital intensive than chocolate production, it tends to attract a greater number of small players. Leading brands within this category are Minties, Cool Mints, Jaffas, Snakes Alive, and Fantales. Nestle, Cadbury and Mars (Masterfoods) dominate the market, commanding

around 60% of domestic segment sales. Gum Gum is the smallest product segment, generating approximately 9.5% of total industry revenue. Gum production in Australia is highly concentrated, with segment leader Wrigley accounting for majority of sales. Brands such as Extra, Juicy Fruit and P.K. have been in existence for over 60 years and have an extremely high level of customer loyalty. However, the introduction of sugar-free gum represented a significant shift in consumption and stimulated demand for gum products. Today, Australian consumers spend around $162 million each year on sugar-free gum, which is likely to continue to grow at a fast pace. Within each major segment, the breadth of variety is increasing. A maturing domestic market has resulted in greater diversification in the past decade as manufacturers have aggressively defended market share and attempted to tap into the limited opportunities for developing new niche markets. Most notably, this has extended to the introduction of hybrid products that cross over into other industries such as combining biscuits and ice cream, but are classified and included within their respective industries.

Products and services segmentation (2010)

9.5%

Chewing gum

28%

62.5% Chocolate

Sugar confectionery




Products & Markets

Demand Determinants

A broad range of factors influence the level of demand for confectionery, such as consumer incomes, trends & preferences and the natural dynamics of the industry. Discretionary income Typically, a rise in disposable income will increase expenditure on discretionary items such as confectionery. However, an increase in income may also encourage consumers to simply switch to more expensive chocolates rather than increase the volume of confectionery purchased. Given this, a long-term rise in income should see production shift from lower margin to higher margin products (such as premium chocolate). Pricing and presence of substitutes A rise in the price of chocolate and confectionery can adversely affect demand. For instance, a significant increase in the price of chocolate bars may persuade consumers to switch to sugar-based confectionery instead. Additionally, the presence of alternative substitutes can also influence the level of demand for the industry’s products. Today, there is an increasing range of products competing for the coveted discretionary dollar, such as snack foods, cakes, cereal, and biscuits. Health and nutrition The industry’s products have for long, been perceived as unhealthy and harmful due to their high sugar and calorie content and the publicised risk between obesity and heart disease. Increased concern about dental health has also discouraged consumption of candy and chewing and bubble gum. There has however been increasing evidence that certain chocolate, in particular dark chocolate is healthy as it is rich in antioxidants, and can be beneficial in many ways. Some confectionery makers have also responded to consumer concerns by releasing reduced-fat or sugar-free product lines. For example, The Wrigley

Company has been very successful in capturing a large-share of the sugar free market. Its ‘Extra’ chewing gum range currently commands 88% of the sugarfree gum segment. Moreover, a number of industry players are introducing certified organic products to capitalise on this developing niche market. Innovation and branding Given the highly saturated domestic market, clever and timely innovation, branding and promotional initiatives can significantly stimulate demand. The past five years have seen a number of such initiatives, especially in the low-fat, low-sugar chocolate segment and in the sugar-free and functional gum segment. Meanwhile, line extensions have also proven to be a popular method of igniting interest in existing products. In the last couple of years, manufacturers have released white chocolate versions of Kit Kat, Aero bars, and Maltesers. Seasonality Confectionery consumption is influenced by the seasons, the time of day and the scheduling of special events. Chocolate sales are also seasonal and tend to be highest in the colder months between May and July. Peak confectionery sales are also recorded during special Christian events like Easter and Christmas. Australians are among the largest consumers of Easter eggs in the world. According to the Confectionery Manufacturers of Australasia Limited, the average Australian consumes around ten chocolate eggs each Easter. Other special gift occasion like Valentine’s Day and Mother’s day also generate demand for confectionery, especially boxed chocolate. Distribution Distribution is an important determinant of demand as confectionery items constitute an impulse purchase, that is, an unplanned or spontaneous purchase. The presence of chocolate, candy, chewing gum, and mints prominently displayed at strategic locations such as



Products & Markets

Demand Determinants continued

checkout aisles and vending machines can trigger purchases that may have otherwise not been considered. The pricing of these items also affects demand, as consumers will not pay higher prices for a product that they did

not intend to purchase. Further, as parents make majority of the candy related purchases for their children, higher retail prices may result in increased purchases of private label confectionery products.

Major Markets

Australian confectionery manufacturers sell their output to two major purchasing groups: large retail outfits and wholesalers. Large supermarket chains, convenience stores, petrol stations, and department stores typically enter into direct supplier agreements with manufacturers. Recently, the concentration of ownership among these large customers has caused some concern among confectionery producers. Smaller customers like milk bars and specialty shops usually have to source their confectionery supply from grocery wholesalers and distributors.

and grocery chains are using their enormous buying power to negotiate lower prices from producers, thereby squeezing their margins. The route distribution channel is much smaller and diverse, ranging from convenience stores, petrol stations to vending machines. The structure of this channel is however changing as more corner stores disappear. The Confectionery Manufacturers of Australasia reported that over 1000 corner stores have closed over the past decade. In the same period, the number of convenience stores has risen by around 30%. A smaller proportion of industry sales are made to companies in the hospitality industry. Motels, hotels, restaurants, fast food chains and convention centres purchase large quantities of foodstuffs (including confectionery products) for use in their kitchens. Sometimes these are purchased directly from manufacturers at reduced cost. Like supermarkets, large restaurant chains

Retail trade At the retail level, consumers may purchase chocolate and confectionery products through two main distribution channels; grocery and route. The grocery channel comprises large supermarkets and other grocery stores, with this segment expected to account for 75.4% of industry revenue. In recent years, an increasing number of large supermarket Major market segmentation (2010)

11.6% Exports

13%

Wholesalers and distributors

75.4% Retail trade




Products & Markets

International Trade Level & Trend xports in the E

industry are Medium and Increasing Imports

in the industry are Medium and Increasing

often wield considerable power in supply relationships with this industry.

affect the products that are eventually stocked by retailers.

Wholesalers and distributors Grocery wholesalers and distributors are expected to account for 13.0% of revenue. They in turn supply supermarkets, convenience stores, drug and discount stores and other specialty stores. This market is essentially the most important link in the supply chain because relationships with wholesalers

Exports Exports are expected to account for approximately 11.6% of industry revenue. The contribution of exports has declined over the past five years, primarily due to the perishable nature of the industry’s products and unfavourable economic and exchange rate movements.

In 2004, Australians consumed 3.7 kg of sugar confectionery and 4.4 kg of chocolate per capita and are amongst the highest snack food consumers in the world. Chewing gum consumption has increased strongly as a result of continued product innovation, for example the introduction of sugar free chewing gum has lifted sales significantly. The consumption of chocolate is also estimated to have increased strongly, as a result of continued media releases and growing evidence on the benefits of chocolate, in particular dark chocolate. According to Confectionery Manufacturers of Australasia (CMA), nine out of ten Australians consume confectionery on a regular basis. Eighty percent of these consume a combination of chocolate and sugar confectionery. According to industry-based studies, females are the biggest purchasers in Australia, however, this finding may simply reflect the fact the females tend to The Bigger Picture Of

the 499 industries in the Australian economy, 79 have medium exports – but only 35 of those are experiencing an increasing trend as is the Chocolate and Confectionery Manufacturing industry

Industry trade balance 600 300

$ million

Major Markets continued

0 −300 −600 −900 −1200

Year 01 Exports

03

05

07

Imports

09

11

13

15

Balance


be the principle food buyers in most households. In the five years to 2010-11, the value of imports is estimated to have increased by 5.6% per annum, totalling $785.9 million and comprising 31.9% of domestic demand. In recent years, the flow of imports has risen as more local manufacturers have begun importing products from their sister/parent plants overseas. New Zealand is expected to account for majority of imports, with 15.2%, followed by Singapore (13.1%), Belgium (8.1%), China and Indonesia (7.6% respectively). International market In the five years to 2010-11, the value of Australian exports is expected to have increased at annualised rate of 3.7%, to total $336.6 million, accounting for 11.6% of revenue. In the past five years,



Products & Markets

International Trade continued

the importance of export markets has grown as producers have taken advantage of growing disposable income in the Asia Pacific Region. However, tariff barriers continue to dampen exports levels for Australia. Exports to...

Approximately 70% of confectionery exports are chocolate products. Sugar confectionery reportedly accounts for around 22% of total exports with chewing gum making up the balance of total sales.

Imports from...

8%

China

48%

8%

Indonesia

6%

6%

Hong Kong

3%

Other

8%

Philippines

Belgium

Singapore

16%

13%

Japan

Singapore

45%

New Zealand

24%

15%

Other

Year: 2008 SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA

New Zealand

Total $331.1m

Total $769.8m SOURCE: ABS


Chocolate and Confectionery Manufacturing in Australia August 2010

21

Products & Markets Business locations 2011

NT 0.6

QLd 15.1

wA 5.4

SA 10.3

NSw 38.1

ACT 1.7

VIC 24.6

Establishments (%) Cold zone (