The challenges facing West Africa’s chocolate industry

This article was produced for the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.

West Africa, the world’s leading cocoa producer, is grappling with the aftermath of a disastrous 2016/17 cocoa season. Over the last year, international cocoa prices have collapsed by one third to ₤1,529 (US$2,077) by end-August 2017.

The drastic drop in prices reflects softening chocolate demand and a historically large cocoa crop from West Africa. The region is on track to produce an estimated crop of 3.44 million metric tonnes (MT), up 20% from the 2015/16 season. The impact of the cocoa price slump has been devastating. Cocoa farmers’ incomes were slashed, leading to panic in cocoa growing communities; government budgets were gutted with billions of dollars in losses from cocoa export earnings; and, child labour resurged on cocoa farms.

The price crash revealed, yet again, the inherent weakness of the region’s cocoa sector. Despite controlling over three fourths of the world’s supply, West Africa is a price taker, making it vulnerable to the volatility of commodity markets. Moreover, the region’s cocoa producers capture a tiny share of value in the cocoa value chain, estimated at 3% to 6%. Processors of semi-finished products (cocoa liquor, butter and powder) hardly fare better, capturing only 8% of the value. The lion’s share of value, 80%, is unlocked at the chocolate manufacturing and retail levels. In an effort to climb the cocoa value chain, and reduce exposure to volatile cocoa prices, the region’s cocoa producers – led by Côte d’Ivoire and Ghana, which together hold over two thirds of global supply – have focused their discourse on producing chocolate and confectionery for export.

However, West Africa, as the world’s dominant cocoa producer, is not ipso facto well-positioned to produce and export chocolate. While local chocolate producers have attracted attention in the press, they are unable to absorb even a tiny share of the region’s behemoth cocoa crop, owing to their niche production levels in the face of weak demand. Given that West Africa faces significant barriers to entry in making chocolate, the region should instead refocus its energies on further expansion in cocoa processing capacity.

West Africa’s chocolate industry faces systemic barriers

Despite controlling the cocoa supply, West Africa is unable to leapfrog to chocolate manufacturing. One key reason for the absence of a thriving local chocolate industry is high manufacturing costs. High production costs make West Africa an unattractive location for chocolate production as factories require imports of key chocolate ingredients (sugar, milk powder, nuts and other flavours) and lack a steady power supply, which prevents them from running at full capacity. Moreover, chocolate is costly to ship. As cocoa butter has a low melting point at 34°C, chocolate is shipped in cold storage containers to consumption markets, leading to a dramatic increase in already high shipping costs.

Therefore, unlike other finished goods (like apparel and footwear), chocolate production needs to be close to the final consumption market, as chocolate companies constantly refine their products to meet changing consumer tastes. As a result, R&D and marketing represent the bulk of costs in chocolate production, which has historically been aimed at European and North American tastes. As consumers in Europe and the US become more health conscious, eating less sugar and curbing their chocolate intake, it is crucial that manufacturers be able to react quickly to changing trends.

An equally important factor holding back the development of West Africa’s chocolate industry, is weak local consumption. Africa’s chocolate consumption per capita is a mere 0.5kg on average, starkly low as compared to developed markets like Switzerland (5.7kg), Germany (4.2kg), and the US (2.3kg). North Africa and South Africa are the key chocolate consumption markets, owing to their higher GDP per capita and more developed consumer markets, while little chocolate is consumed in key cocoa producing countries. Chocolate is simply too expensive for the average African consumer. For example, a box of (imported) Ferrero Rocher costs XOF9,000 ($16.42) in Abidjan, Côte d’Ivoire, which is equivalent to 10% of the minimum wage. Although locally produced chocolate bars are more affordable (notably in Ghana and Côte d’Ivoire) and are targeted at Africa’s consumer class, they have a tiny market share.

Extremely sensitive to price point, African mass-market consumers eat more chocolate paste and powder. These products are more affordable as they are made of powder, which is less expensive than cocoa butter (the key ingredient in chocolate bars), and mixed with cheap filler ingredients like palm and peanut oil. Cocoa powder and paste products are better adapted to the retail sector in West Africa, which is largely informal. These products, which unlike chocolate bars do not melt in heat, can be sold in informal corner stores, making them more accessible to mass-market consumers. However, cocoa pastes and powders contain a negligible amount of cocoa, averaging 2% to 3%, and therefore do not represent a viable way to absorb West Africa’s abundant cocoa production.

Cocoa producers need to expand grinding capacity

However, West Africa needs to continue to expand local grinding capacity in its quest to extract more value from its cocoa crop. Over the last twenty years, the region’s governments, with Côte d’Ivoire and Ghana at the forefront, have prioritised the expansion of a processing (grinding) sector, attracting investors to build factories. The policy was a success as West Africa’s cocoa processing took off in two decades. West Africa’s grindings surged to 788,000 MT in 2015/16. Côte d’Ivoire represents the lion’s share of the regional cocoa grind, producing 510,000 MT of cocoa products in 2015/16, and is vying with the Netherlands for the spot as the world’s leading grinder. West Africa’s earnings from cocoa product exports were worth $1.67bn in 2016, of which Côte d’Ivoire controlled 92% of the total.

Moreover, cocoa grinders are enjoying the highest prices in years, owing partly to the collapse of cocoa prices. The combined cocoa ratio – the aggregate sales price for cocoa butter and powder relative to the London futures cocoa price – is the key pricing metric for products, with a ratio of 3 to 3.2 representing the break-even point for processors. As the combined ratio has held steady at 3.5 since the beginning of this year, owing to the low bean price and a strong butter price, cocoa grinders’ profitability has surged. While West Africa’s cocoa sector has suffered a painful blow from the low bean price, the brighter short-term outlook for the region’s grinding sector is a silver lining, as higher earnings from product exports help to offset the gap in lower revenues from bean exports. To move further up the processing value chain and lift earnings from grindings, West Africa needs to produce more cocoa butter and powder rather than liquor, which represented 50% of cocoa product exports in 2015/16.

The way forward

As West Africa’s leading soft commodity export, cocoa is held up as the archetypal case study of how the region is failing to extract value from its commodities. Indeed, the region’s governments bemoan the fact that the region is exporting raw commodities and importing finished goods, with the president of the African Development Bank (AfDB), Akinwumi Adesina, baldly stating that it was “stupid” for Africa to export cocoa beans and import chocolate. As long as West Africa does not consume chocolate in large quantities, owing to its high cost and infrastructure requirements, it is not commercially viable for the region to manufacture chocolate for the world market.

However, the region can extract more value from its cocoa production by continuing to invest in grinding lines, especially in cocoa butter and powder, which command a higher price than block cocoa liquor. An expansion in cocoa processing capacity, coupled with a control of its cocoa crop so that output stays in tandem with global demand, are critical in helping West Africa extract more value from its abundant cocoa production.

The author, Victoria Crandall, is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was specifically written for the NTU-SBF Centre for African Studies