2 Key Tailwinds = Chocolate Stocks Long-term Winners

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The global chocolate confectionery market is about $83-$89 billion (depending upon source) in sizeTo put that figure in some context, ice cream and pizza, respectively, pull in roughly $55 and $36 billion per year.

The market has grown from about $50 billion in 2000, according to Euromonitor. That's some nice growth. And there are trends pointing to continued strong -- perhaps even accelerated -- growth. So, in addition to shopping for chocolates this Halloween season and beyond, you might want to consider shopping for a chocolate-related stock.  

Tailwind #1: Ballooning Middle Class in Emerging Markets 

One Billion New Consumers

There will be about one billion new members of the global "consumer class" living in urban areas by 2025, according to the McKinsey Global Institute. One billion! That's over three times the entire population of the U.S., and about twice the population of the E.U. 

That's one billion people hungry for things they couldn't previously afford. You can be sure a good number of them will find chocolate as delectable as those in the developed world have long found it.

Though chocolate is often considered an "affordable luxury," there is actually a strong relationship between income and demand. Rising income, is a -- if not "the" -- major reason why chocolate consumption has greatly increased in the emerging markets over the last few years. That trend should continue.

The Chocolate Markets in China, Brazil & India 

The chart below shows the 4-year compound annual growth rates (CAGR) of the chocolate markets in China, Brazil, and India. Notably, the chocolate confectionery markets in these countries have been growing at about twice the pace of the non-chocolate confectionery markets.

The period covered includes the global economic recession, which impacted consumer spending most heavily in 2008-2009. Thus, these growth figures are even more impressive. These markets have only just begun to have been penetrated.     

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>2010</p> </td> <td> <p>2009</p> </td> <td> <p>2008</p> </td> <td> <p>2007</p> </td> <td> <p>2006</p> </td> <td> <p><span><span>CAGR</span></span></p> </td> </tr> <tr> <td> <p><strong>CHINA</strong></p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Total Confection</p> </td> <td> <p>$9.5</p> </td> <td> <p>$8.7</p> </td> <td> <p>$8.3</p> </td> <td> <p>$7.8</p> </td> <td> <p>$7.2</p> </td> <td> <p>7.0%</p> </td> </tr> <tr> <td> <p><strong>CHOCOLATE</strong></p> </td> <td> <p>$1.4</p> </td> <td> <p>$1.2</p> </td> <td> <p>$1.1</p> </td> <td> <p>$1.0</p> </td> <td> <p>$0.9</p> </td> <td> <p><strong><span>11.0%</span></strong></p> </td> </tr> <tr> <td> <p>Non-Chocolate</p> </td> <td> <p>$5.8</p> </td> <td> <p>$5.4</p> </td> <td> <p>$5.2</p> </td> <td> <p>$5.0</p> </td> <td> <p>$4.7</p> </td> <td> <p>5.8%</p> </td> </tr> <tr> <td> <p>Gum</p> </td> <td> <p>$2.3</p> </td> <td> <p>$2.1</p> </td> <td> <p>$2.0</p> </td> <td> <p>$1.8</p> </td> <td> <p>$1.7</p> </td> <td> <p>8.2%</p> </td> </tr> <tr> <td> <p><strong>BRAZIL</strong></p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Total Confection</p> </td> <td> <p>$11.1</p> </td> <td> <p>$9.7</p> </td> <td> <p>$8.9</p> </td> <td> <p>$7.8</p> </td> <td> <p>$7.2</p> </td> <td> <p>11.4%</p> </td> </tr> <tr> <td> <p><strong>CHOCOLATE</strong></p> </td> <td> <p>$4.9</p> </td> <td> <p>$4.3</p> </td> <td> <p>$3.8</p> </td> <td> <p>$3.3</p> </td> <td> <p>$2.8</p> </td> <td> <p><span><strong>15.0%</strong></span></p> </td> </tr> <tr> <td> <p>Non-Chocolate</p> </td> <td> <p>$4.2</p> </td> <td> <p>$3.6</p> </td> <td> <p>$3.4</p> </td> <td> <p>$3.1</p> </td> <td> <p>$3.0</p> </td> <td> <p>8.7%</p> </td> </tr> <tr> <td> <p>Gum</p> </td> <td> <p>$2.0</p> </td> <td> <p>$1.8</p> </td> <td> <p>$1.7</p> </td> <td> <p>$1.4</p> </td> <td> <p>$1.4</p> </td> <td> <p>9.2%</p> </td> </tr> <tr> <td> <p><strong>INDIA</strong></p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Total Confection</p> </td> <td> <p>$1.6</p> </td> <td> <p>$1.3</p> </td> <td> <p>$1.1</p> </td> <td> <p>$0.9</p> </td> <td> <p>$0.8</p> </td> <td> <p>20.2%</p> </td> </tr> <tr> <td> <p><strong>CHOCOLATE</strong></p> </td> <td> <p>$0.8</p> </td> <td> <p>$0.6</p> </td> <td> <p>$0.5</p> </td> <td> <p>$0.4</p> </td> <td> <p>$0.3</p> </td> <td> <p><span><strong>25.4%</strong></span></p> </td> </tr> <tr> <td> <p>Non-Chocolate</p> </td> <td> <p>$0.6</p> </td> <td> <p>$0.5</p> </td> <td> <p>$0.4</p> </td> <td> <p>$0.4</p> </td> <td> <p>$0.4</p> </td> <td> <p>12.1%</p> </td> </tr> <tr> <td> <p>Gum</p> </td> <td> <p>$0.3</p> </td> <td> <p>$0.2</p> </td> <td> <p>$0.2</p> </td> <td> <p>$0.1</p> </td> <td> <p>$0.1</p> </td> <td> <p>28.9%</p> </td> </tr> </tbody> </table>

Source: Euromonitor

Per Capita Consumption -- Lots of Room for Growth

This chart gives you a good idea of chocolate consuming habits across the globe. Details follow. Don't get hung up on exact numbers, as numbers are a bit different according to the source.

<img height="380" src="/media/images/user_13269/choc-2_2_large.jpg" width="454" />

Sources: The World Atlas of Chocolate (Switzerland, U.S., and Greece); Euromonitor (others)

The Swiss usually rank #1 in chocolate consumption. The next group of high-rankers, eating an average of 17-20 lbs of chocolate per person per year, are the Austrians, Irish, Germans, Norwegians, and Danish. The other Western European and Nordic countries also rank highly.

The U.S. usually ranks #11 -- hard to believe we're out-consumed by 50% to nearly 100%! 

It's no surprise the average American and Western European gobbles up considerably more chocolate than the average person who lives in an emerging market. However, just how much more might be a bit surprising. 

Indians eat an average of only 165 grams (less than 6 ounces) of chocolate a year and the Chinese eat an average of 99 grams (3.5 ounces). The average-sized Hershey bar is 1.55 ounces, so the average person in India eats an equivalent of less than four Hershey bars per year, while the average person in China consumes the equivalent of about two Hershey bars per year! (Brazilians, according to one source, eat an average of about 2.3 lbs per year, though another source had the figure higher. The 2.5-3.5 lbs range is a good estimate.)

So, Western Europeans living in the top few chocolate consuming countries are eating, on average, over 50 times as much chocolate as Indians and over 90 times as much as the Chinese. We in the U.S. are out-"chocolating" the Indians and Chinese by roughly 30 times and 52 times, respectively.

The growth potential is HUGE, even if the Indians and Chinese only "catch up" to, say, the Greeks, or even the Brazilians.

Tailwind #2: Growth in Premium Chocolate Demand

While the overall chocolate market has been growing slowly in the mature markets of the U.S. and Western Europe, the premium chocolate niche has been growing at a fast clip. These tend to be higher profit margin products.

High cocoa content dark chocolate sales grew over 15% per year for the five year period to 2008, per Euromonitor. Other premium segments experienced similar annual growth rates during that period: Single-origin chocolate grew by over 20% and organic-certified chocolate grew by almost 20% per year. 

The dark chocolate trend has largely been driven by research showing its purported health benefits. There is research that suggests these possible benefits:

  • Flavanols, nutrients found in cocoa that act as antioxidants and anti-inflammatories, could play a role in preventing heart disease and cancer, and treating stroke and dementia.
  • Phenylethylamine in cocoa causes your brain to release endorphins, which are "feel-good" substances. Endorphins are also the cause for the falling-in-love and runners' highs.
  • Various benefits from the minerals -- potassium, copper, nmagnesium, and iron - contained in dark chocolate. Copper and potassium help prevent stroke and cardiovascular ailments; iron helps prevent iron deficiency anemia; and magnesium helps prevent type 2 diabetes, high blood pressure and heart disease.

Given the aging populations in the developed world, the demand for dark chocolate -- as well as organic chocolate -- should continue to grow at a strong pace.

What Chocolate Stocks Can an Investor Buy?

First, here are the top ten global confectionery companies that manufacture some form of chocolate, listed by confectionery sales in 2011:  

<table> <tbody> <tr> <td>                                                             </td> <td>Sales ($mill)                   </td> </tr> <tr> <td><strong>Kraft Foods</strong> <span class="ticker" data-id="204170">(NASDAQ: <a href="http://caps.fool.com/Ticker/KRFT.aspx">KRFT</a>)</span> (U.S.)                        </td> <td>19,965</td> </tr> <tr> <td>Mars Inc. (U.S.)</td> <td>16,200</td> </tr> <tr> <td><strong>Nestle SA (NASDAQOTH:NSRGF.PK)</strong> (Switzerland)</td> <td>12,808</td> </tr> <tr> <td><span><span>Ferrero</span></span> Group (Italy)                      </td> <td>9,612</td> </tr> <tr> <td><strong>Hershey Co.</strong> <span class="ticker" data-id="203954">(NYSE: <a href="http://caps.fool.com/Ticker/HSY.aspx">HSY</a>)</span> (U.S.)</td> <td>6,112</td> </tr> <tr> <td><span><span>Lindt</span></span> & <span><span>Sprüngli</span></span> AG (Switz.)             </td> <td>2,796</td> </tr> <tr> <td>August <span><span>Storck</span></span> KG (Germany)</td> <td>2,205</td> </tr> <tr> <td><span><span>Yildiz</span></span> Holding (Turkey)</td> <td>2,095</td> </tr> <tr> <td>Meiji Holdings (Japan)</td> <td>1,791</td> </tr> <tr> <td><span><span>Arcor</span></span> Group (Argentina) </td> <td>1,716</td> </tr> </tbody> </table>

Source: Candy Industry, Jan. 2012

If you want to stick with major chocolate manufacturers trading on major U.S. stock exchanges, Hershey and Kraft  are your only two options to investigate. Hershey is the pure play on chocolate, while Kraft, who owns Cadbury, is a diversified food company. Swiss-giant Nestle SA is another option if you're OK with investing in stocks that trade over-the-counter. There's also Rocky Mountain Chocolate Factory (NASDAQ: RMCF) to look into if you're interested in investing in a smaller company.

Stay tuned for Parts II (analysis of RMCF) and III (analysis of Hershey and Kraft).  


BAMcKenna has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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