Chocolate and Confectionery Manufacturing in Australia Industry Report

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
2 2 2 2
About this Industry

Industry Definition Main Activities Similar Industries Additional Resources
23 Competitive Landscape
23 Market Share Concentration 23 Key Success Factors 24 Cost Structure Benchmarks 25 Basis of Competition 26 Barriers to Entry 27 Industry Globalisation
41 Key Statistics
41 Industry Data 41 Annual Change 41 Key Ratios 42 Historical Performance
3 4
4 4 5 9
Industry at a Glance Industry Performance

Executive Summary Key External Drivers Current Performance Industry Outlook
44 Jargon & Glossary
28 Major Companies
28 Kraft Foods (Australia) Limited 29 Nestle Australia Ltd 30 Mars Australia Pty Ltd
13 Industry Life Cycle
34 Operating Conditions
34 Structural Risk Index 34 Investment Requirements 35 Technology & Systems 36 Industry Volatility 37 Regulation & Policy 38 Industry Assistance 39 Taxation Issues
15 Products & Markets

15 Supply Chain 15 Products & Services 17 Demand Determinants 18 Major Markets 19 International Trade 21 Business Locations
www.ibisworld.com.au | (03) 9655 3881 | info@ibisworld.com
www.IbISwOrLd.COM.Au
Chocolate and Confectionery Manufacturing in Australia August 2010
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 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.
Main Activities
The primary activities of this industry are 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
$2.9bn
Profit
2.4% $197.9m $336.6m 179

Exports businesses
Revenue vs. employment growth
15 10 5 4
Annual growth 06-11
2.1%
Annual growth 11-16
Market Share
Kraft Foods (Australia) Limited 49.1%

% change
Downstream demand from supermarkets and other grocery stores
% change
Nestle Australia Ltd 21.5% Mars Australia Pty Ltd 14.3%
5 0 5 10
3 2 1 0
Year 01 Revenue
p. 28
03
05
07
09
11
13
15
Year
04
06
08
10
12
14
16
Employment
SOURCE: WWW.IBISWORLD.COM.AU
Business Locations
Key External drivers
downstream demand from supermarkets and other grocery stores Fat consumption world price of cocoa world price of sugar Health consciousness
4.2% 5.4% TAS

WA
1.7% 0.6%
ACT NT
10.3%
SA
38.1%
NSW
15.1%
QLD
p. 4
24.6%
VIC
SOURCE: WWW.IBISWORLD.COM.AU SOURCE: WWW.IBISWORLD.COM.AU
Industry Structure
Life Cycle Stage Revenue Volatility Investment Requirements Industry Assistance Concentration Level
Mature Medium Medium Low High
Regulation Level Technology Change Barriers to Entry Industry Globalisation Competition Level
Medium Medium Medium High Medium
FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIx ON PAGE 41
Industry Performance
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
Executive Summary | Key External drivers | Current Performance Industry Outlook | Life Cycle Stage
The presence of a mature and stagnant market has seen an increase in the volume of exports
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 industrys 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.
Key External drivers
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. 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 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. 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
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,
Downstream demand from supermarkets and other grocery stores
5 4
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
19.5
Kilograms Per Capita
% change
3 2 1 0
19.0 18.5 18.0 17.5
Year
04
06
08
10
12
14
16
Year 00
02
04
06
08
10
12
14
Current Performance
Australias 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 industrys major players have responded by introducing low-sugar or sugar-free versions of traditional products such as Wrigleys 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) 1,590.6 1,958.1 2,572.8 2,800.0 3,300.0 3,000.0 (% change) N/C 23.1 31.4 8.8 17.9 -9.1 Sugar (cents) 14.8 10.0 12.4 13.0 12.5 13.0 (% change) 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 industrys 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 Wrigleys. 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, Wrigleys 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 industrys major players enjoy a
Prot vs. wages
15 10
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 worlds most recognizable chocolate and confectionery brands are owned by the major players, it is a comparatively profitable industry.
Employees per establishment
50 48 46
% change
Ratio
5 0 5 10
44 42 40
Year 01 Prot
03
05
07
09
11
13
15
Year 01
38
03
05
07
09
11
13
15
Wages
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 worlds 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. Australias 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
10
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 industrys 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 industrys 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 industrys 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 Australias 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 companys 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
11
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
Prot vs. exports (% change)
20 10
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 industrys 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
380
Prot/employees ($ '000)
03 05 07 09 11 13 15
360 340 320 300 280
% change
0 10 20 30
Year 01 Prot
Year 01
03
05
07
09
11
13
15
Exports
12
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 Authoritys 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 industrys products.
13
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 segments tend to be focused in gourmet chocolate and sugar-free gum
% Growth of profit/GdP
30
25
Company consolidation; level of economic importance stable
Maturity
Quality Growth
High growth in economic importance; weaker companies close down; developed technology and markets
Key Features of a Mature Industry 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
10
Many new companies; minor growth in economic importance; substantial technology change
Milk and Cream Processing Cake and Pastry Manufacturing
Confectionery and Soft drink wholesaling
Chocolate and Confectionery Manufacturing
Shakeout
Sugar Manufacturing biscuit Manufacturing
Shakeout
decline
10 10 5
Crash or Grow?
Potential Hidden Gems

Future Industries 5 10 15 20
Time wasters
Hobby Industries 25 30
% Growth of establishments
14
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. Asias close proximity and its rising disposable incomes make it an obvious export target for Australian producers.
15
Products & Markets

Supply Chain
KEy buyING INduSTrIES
C2162 C2163
Supply Chain | Products & Services | demand determinants Major Markets | International Trade | business Locations
Cake and Pastry Manufacturing in Australia Cake manufacturers purchase chocolate products as inputs into some caking baking. biscuit Manufacturing in Australia Biscuit manufacturers purchase chocolate, and other confectionery products as ingredients in some biscuit lines. 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. Supermarkets and Other Grocery Stores in Australia The key industries purchasing the output of confectionery manufacturers include supermarkets and other grocery stores. Convenience Stores in Australia Convenience stores are purchasers of the output of this industry. Cafes and restaurants in Australia Restaurants acquire confectionery products as inputs into food production. Caterers and Food Service Contractors in Australia The Food Service industry acquires requires chocolate confectionery products as raw ingredients in food production.
F4716
G5111
G5112 H5731 H5732
KEy SELLING INduSTrIES

C2121 Milk and Cream Processing in Australia The confectionery industry derives its two major raw materials from Milk and Cream Processing Milk Powder Manufacturing in Australia The confectionery industry derives a major raw material from Milk Powder Manufacturing. butter and Other dairy Product Manufacturing in Australia The confectionery industry derives its key raw material inputs from Dairy Product Manufacturing. Sugar Manufacturing in Australia The confectionery industry purchases large quantities of sugar as inputs into chocolate and candy manufacturing. Chocolate and Confectionery Manufacturing in Australia Industry players sometimes purchase elementary chocolate products as inputs into high value added production. Tea, Coffee and Other Food Manufacturing in Australia The confectionery industry procures one of its major ingredients, cocoa from the Other Food Manufacturing industry. Paper wholesaling in Australia Confectioners typically procure product packaging from paper product wholesalers.
C2124 C2129
C2171
C2172
C2179
F4795
Products & Services
The confectionery industry can be broadly classified into three segments: chocolate, sugar confectionery, and chewing gum. Chocolate Chocolate is the industrys 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
16
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 Products and services segmentation (2010)
Chewing gum
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.
9.5%
Sugar confectionery
28%
62.5%
Chocolate
17
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 industrys 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 industrys 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 Valentines Day and Mothers 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
18
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. 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)
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
11.6%
Exports
Wholesalers and distributors
13%
75.4%
Retail trade
19
Products & Markets
Major Markets continued
often wield considerable power in supply relationships with this industry. 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
affect the products that are eventually stocked by retailers. 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 industrys products and unfavourable economic and exchange rate movements.
International Trade
Level & Trend
$ million
Exports in the industry are Medium and Increasing Imports in the industry are Medium and Increasing
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
Industry trade balance

600 300 0 300 600 900 1200
Year 01 Exports
03
05
07
09
11
13
15
Imports
Balance
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
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,
20
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...
China Indonesia
8%
8%
48%
Other
Singapore
6%
Hong Kong
6%
Philippines
3%
Belgium
8%
16%
Japan
Singapore
13%
New Zealand
45%
24%
Other
New Zealand
15%
Year: 2008
SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA
Total $331.1m
Total $769.8m
SOURCE: ABS
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 (<10) <25 <50 Hot zone (<100) Not applicable
TAS
4.2
22
Products & Markets
business Locations
Chocolate and confectionery manufacturing is primarily concentrated along the Eastern Seaboard. It is estimated that approximately 77.8% of production facilities will be situated in the three states of New South Wales, Victoria and Queensland. NSW is estimated to account for the majority of establishments with 38.1%, in addition to 33.5% of all employees within the industry. Victoria is expected to account for 24.6% of all industry establishments, along with 26.0% of all industry employment. Confectionery manufacturing tends to develop in metropolitan areas. Of those employed in this industry approximately 80% work in cities. Historically, the fragile and perishable nature of confectionery (especially chocolate) has made it necessary for confectioners to establish operations in close proximity to major consumer markets. This trend has continued and today, the majority of Australias confectionery makers are
Distribution of establishments vs. population
40 30
located in the surrounding areas of Melbourne and Sydney. Leading player, Cadbury Schweppes Australia has concentrated most of its production within Melbourne. Its facilities are spread across suburbs like Abbotsford, Prahran, Ringwood, Scoresby and Richmond. An advantage that Victoria has over other states is that it has the highest quality and cheapest milk compared to the rest of Australia. Although most confectioners are located in capital cities, operations in rural areas currently include the Cadbury Schweppes plant at Claremont in Tasmania and the Mars plant at Ballarat in Victoria. In recent years, the industrys top manufacturers have concentrated their operations on a small number of sites because high throughput, automatic equipment and almost continuous operation produce significant economies of scale. Products are then transported in bulk form to distribution centres across the country.
Distribution of establishments vs. employment
40 30
Percentage
20 10 0 NSW QLD ACT TAS VIC NT SA WA
Percentage
20 10 0 ACT NSW NT QLD TAS VIC SA WA
Establishments Population
Establishments Employment
23
Competitive Landscape
Market Share Concentration
Level The Chocolate and Confectionery Manufacturing industry is characterised by a high level of concentration. Although the industry has a number of small to medium sized operators, the majority of its turnover is generated by the major players. In 2010-11, IBISWorld estimates that the top four manufacturers will account for 89.4% of industry revenue. This concentration of ownership is primarily a result of an increase in acquisitions, along with organic growth for a majority of major players engendered by continued product innovation, strong brand loyalty and aggressive marketing. Concentration also varies between product segments. Chocolate production tends to be heavily dominated by a few foreign owned firms such as Cadbury, Nestle and Mars that account for around 80% of domestic production. Sugar
Market Share Concentration | Key Success Factors | Cost Structure benchmarks basis of Competition | barriers to Entry | Industry Globalisation
Concentration in this industry is High
confectionery and gum production however, is more fragmented and therefore less concentrated. Typically, the industrys larger firms tend to specialise in mainstream products targeting the low to mid-price range of the final market. Smaller firms tend to concentrate on specialty products that require short production runs and lower volumes. Despite the presence of smaller firms, confectionery manufacturing is moving toward, larger-scale, concentrated production and consequently has significantly fewer firms than a decade earlier. Today, fewer commercial confectionery manufactures are serving wider geographic markets. Improvement in transportation methods, ownership consolidation, and the development of extended shelf-life products are enabling manufacturers to reduce costs by centralising production facilities.
Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:
Marketing of differentiated products Branding is extremely important within certain market segments like chocolate. Effective marketing helps manufacturers capture maximum market share. Moreover, appropriate marketing of differentiated products avoids overreliance on core products. Economies of scope Scope economies achieved by producing a range of confectionery and related products. Economies of scope enable a company to modify its production output in response to changing conditions in various market segments. This can reduce volatility in sales. Economies of scale Strong price competition means that economies of scale are
particularly important for those participants not involved in the production of niche products. Ability to pass on cost increases The ability to raise product prices in response to cost increases is limited by high price elasticity. Establishment of export markets The importance of export markets reflects the saturated nature of the domestic market. Guaranteed supply of key inputs The price of raw inputs like sugar and cocoa can be highly volatile and is subject to market vagaries. Contracts with suppliers of raw materials such as sugar, milk powder, and cocoa reduce supply volatility.
24
Cost Structure benchmarks
Cost structures vary widely among industry players, depending on their size, scale of production, ease of access to production inputs, level of technology and capital investment etc. Typically, larger the manufacturer, the lower per unit cost of production tends to be. Over the past five years, the average size of an establishment is increasing due to industry consolidation, largely driven by the major players such as Mars acquisition of Wrigley. Profits IBISWorld estimates that net profits will account for 6.8% of industry revenue. The Chocolate and Confectionery Manufacturing industry is characterised by high profit margins primarily due to the high level of value addition during the production process. That is, manufacturers employ considerable resources and costs in terms of capital, technology and branding that translate Industry Costs and Average Sector Costs
Industry Costs (2011) 0
into high retail prices that are passed on to consumers. The difference between production costs and prices received for final products is therefore high which is reflected in higher profit margins. Purchases In 2010-11, purchases are expected to constitute the largest percentage of industry costs at approximately 63.4% of revenue. Key production inputs such as cocoa, sugar and milk represent the biggest expenses and their prices are largely a function of the world market. The past five years have seen dramatic fluctuations in the prices key inputs, especially that of cocoa and sugar, which have affected purchase costs and thus, profitability. Other inputs include flavourings, fruits, nuts, colourings, additives, and packaging materials. Of these, packaging is the largest expense, accounting for around 15% for the purchases of materials.
Profit rent utilities depreciation Other wages Purchases
Profit
1.1 7.6 6.8 3.5 1.0 0.3 8.1 4.3 11.5 0.9
100%
16.6 13.7
63.4 61.3
Average Costs of all Industries Profit in sector (2011)
INduSTry COdE ANd TITLE C2121 C2124 C2129 C2171 C2172 Milk and Cream Processing Milk Powder Manufacturing butter and Other dairy Product Manufacturing Sugar Manufacturing Chocolate and Confectionery Manufacturing
2005-2010
2011-2015
Costs for operators in the Chocolate and Confectionery Manufacturing industry are affected by the price of goods and services from supplier industries. IBISWorld has estimated the trends of key input prices over the previous five years and for the coming five years. is good news for this industry as IBISWorld expects the price of key inputs to fall; shows where this industry is negatively affected as IBISWorld expects the price of key inputs to rise; means price changes will not be a key issue for the industry.
25
Cost Structure benchmarks continued
Wages and salaries Labour costs represent the second biggest expense for chocolate and confectionery manufacturers. Wages are estimated to account for 16.6% of revenue and total $482.3 million. Over the past five years, wages have decreased their share of total costs falling from 18.6% of revenue in 2005-06, primarily due to select periods of rapid expansion and increase in employment. Further, as majority of new employment has been focused on food scientists and research and development (R&D) staff who command higher wages, thereby increasing the average industry wage. Selling, general and administrative costs Expenses relating to selling, marketing, promotions and administration comprise the third largest component of industry costs. Considering the importance of branding in driving sales revenue,
manufacturers invest heavily in aggressive advertising, marketing and promotional activities. As a result, manufacturers have designed sophisticated marketing and advertising strategies that aim to harness the power of their brands to increase customer loyalty and retention rates. These include expensive media advertisements, pointof-purchase tasting and displays, and related promotional costs. Such costs are estimated to account for approximately 5.1% of industry sales. Other costs Other costs that can significantly affect the industry include overhead expenses such as logistics and distribution, depreciation, interest rates, research and development costs, and utility costs. Collectively, IBISWorld estimates that these costs will represent approximately 8.1% of total industry revenue.
basis of Competition
Level & Trend
Competition in this industry is Medium and the trend is Increasing
The Chocolate and Confectionery Manufacturing industry is highly competitive, with the major players fiercely competing for market share. Relatively low barriers to entry further aid competitiveness, as new players enter the industry with niche products and sophisticated marketing strategies. Competition within this industry is primarily based on the following; Price The price sensitivity of consumers in the industry varies between product segments. Although the market is dominated by well established brand names, consumers are still price sensitive and can easily switch their preferences to a lower-priced substitute. The chocolate bar segment for example, is typified by a number of different brands and varieties and is highly sensitive to changes in price. Conversely, the chewing gum segment is less sensitive to price changes as they are of comparatively lower value
and tend to be dominated by fewer producers. Further, the growing segment of low priced, private label brands has made price-based competition more intense, especially given the current economic climate. Quality The perceived quality of particular brand will determine the price consumers are willing to pay for it. The industry is dominated with well-established brand names and producers, most of which have been in existence for nearly a century. Consumers are therefore highly brand loyal and have high expectations of quality from the industrys products, which forms a key base of competition. The sensitivity to quality also varies between product segments. For example, consumers of chocolate products are significantly more discerning to aspects such as quality, texture and taste compared to chewing gum or sugar based confectionery.
26
basis of Competition continued
Relationship with key suppliers Developing and maintaining strong relationships with downstream suppliers is also a critical area of competition. The ability to secure coveted impulse purchase outlets (such as check out isles) and supermarket shelf space has conventionally set market leaders apart from their competitors. Brands with the most recognizable products or packaging placed visibly at strategic locations, have the best chances of maximizing sales at the retail level. As competition intensifies, more manufacturers are expanding their traditional distribution networks to include convenience stores, drug and discount stores, shopping mall kiosks and other venues with high pedestrian traffic. Innovation and differentiation The ability to be innovative and differentiate a product/brand forms one of the key bases of competition within the industry. Considering the limited opportunities for growth, it is essential for manufacturers to distinguish themselves in order to maintain market share. Changing consumer tastes and dietary trends have further compelled producers to be innovative with packaging, marketing and labelling initiatives. Wrigleys for example, cites innovation as the most important element in its continued success, and
holds over 200 significant patents and trademarks relating to packaging, chewing gum confection processing, and product formulae. Further, in 2005, Wrigley opened its Global Innovation Centre in northern Chicago, dedicated to the research and development of new products and enhancement of its existing product lines. Branding and promotion Branding and promotion has historically played an important role in generating sales for confectioners. Generally, manufacturers heavily promote products through mass media advertising and in-store promotion. The latter is particularly important since consumers often purchase confectionery on impulse. The Confectionery Manufacturers of Australasia found that up to 75% of all chocolate and confectionery sales are made on impulse. Other popular marketing tools adopted by confectioners include prize give-aways and free gifts inside packaging. Major players like Mars Inc. also periodically increase chocolate bar sizes at no extra cost. Such tactics are often employed to ignite new interest in existing product lines. As competition in the branded segment intensifies, more manufactures are exploring nontraditional advertising method including event sponsorship.
barriers to Entry
Level & Trend
Barriers to Entry in this industry are Medium and Steady
The barriers to entry in the Chocolate and Confectionery Manufacturing industry are relatively low, as the absolute cost of entry is not prohibitive. Once again, barriers to entry vary between product segments. Chocolate production is more capital intensive and thus requires higher levels of investment to commence operations. Sugar confectionery and gum production however are more labour intensive and easier to enter, evidenced by the large number of players servicing those segments. The biggest threat facing potential new entrants is the extremely well entrenched
barriers to entry checklist

Competition Concentration Life cycle stage Investment requirements Technology change Regulation & policy Industry assistance
Level Medium High Mature Medium Medium Medium Low

position of the industrys major players. These companies enjoy high brand and customer loyalty and have considerable
27
barriers to Entry continued
resources to invest in advertising and promotions to protect and grow their market share. Further, the major players enjoy favourable contracts with key suppliers such as grocery stores and supermarkets that maybe difficult for new entrants to secure. All of the industrys major players have very strong product portfolios with most of the worlds best known chocolate and confectionery brands being owned between them. Enormous advertising budgets allow them to aggressively promote their products through a range of media outlets that are simply inaccessible
to new entrants. Incumbent firms also enjoy efficiencies created by economies of scale and scope. Lower per unit costs of production and varied product lines combined with high levels of investment in technology and equipment make competition very difficult. Nevertheless, new entrants have established themselves within the industry, with the majority in the lowpriced, non-branded segment. Other smaller players have managed to carve out regional market niches, thereby reducing the directness of competition from the major players.
Industry Globalisation
Level & Trend
Globalisation in this industry is High and the trend is Increasing

International trade is a major determinant of an industrys level of globalisation. Exports offer growth opportunities for firms. However there are legal, economic and political risks associated with dealing in foreign countries. Import competition can bring a greater risk for companies as foreign producers satisfy domestic demand that local firms would otherwise supply.
The Chocolate and Confectionery Manufacturing industry is exposed to a high level of globalisation. All of the industrys major players are owned and controlled by foreign multinationals such as Cadbury (United Kingdom), Nestle (Switzerland), and Wrigley
(USA). The presence of these firms has greatly increased the industrys exposure to globalisation by introducing technology sharing, trans-national marketing, and global sourcing into the Australian marketplace.
Trade Globalisation
200 150 100 50 0 Local 0
Going Global: Chocolate and Confectionery Manufacturing 1996-2010

Global
Exports/revenue
200 Export 150 100 50
Export
Global
Exports/revenue

Import
40 80 120 160
1996 2010
40 80 120
0 Local 0
Import
160
Imports/domestic demand
Imports/domestic demand
28
Major Companies
Major players
(Market share)
Kraft Foods (Australia) Limited | Nestle Australia Ltd Mars Australia Pty Ltd | Other
Nestle Australia Ltd 21.5%
15.1%
Other Mars Australia Pty Ltd 14.3% Kraft Foods (Australia) Limited 49.1%
Player Performance Kraft Foods (Australia) Limited Market share: 49.1%
In January 2010 after months of fierce negotiations, Kraft Foods Inc., the worlds second largest food company, acquired the worlds largest confectioner, Cadbury plc for an estimated $18.6 billion. Globally, the group would be number one in the chocolate and sugar confectionery segments and a strong number two in the high growth gum segment. Cadburys leading brands, such as Cadbury, Trident and Halls, are highly complementary to Krafts portfolio and would benefit from its global scope, scale and array of proprietary technologies and processes. In addition, the acquisition of Cadbury will significantly enhance the strength of Krafts presence in the confectionery sector, enabling Kraft Foods to leverage Cadburys product development capabilities. Established in 1824, Cadbury is the worlds largest confectionery company by market share. The company has an estimated 10% share of the international confectionery market, and currently employs more than 50,000 staff in 60 countries worldwide. Cadbury merged with Schweppes, a mineral water business, in 1969 to become Cadbury Schweppes plc. However, on 7 May 2008, the company finalised the separation of their confectionery business from the Americas Beverages business. The de-merger followed a series of disposals by the company during 2007 which were intended to streamline operations. The split meant that the confectionery business was now separate from the North American beverage unit, which is now known as Dr. Pepper Snapple Group (DPS). Cadbury Schweppes Australia Ltd. was a wholly owned subsidiary of UKbased Cadbury plc. However, in March
2009, it was announced that Cadburys Australian Schweppes Beverage business will be sold to Asahi Breweries for an estimated $1.1 billion. The company has a well-entrenched position in the Australian market, with two of its flagship production facilities located in Claremont, Tasmania and Ringwood, Victoria. Cadbury owns a number of iconic chocolate and confectionary brands including; Cherry Ripe, Crunchie, Freddo, Roses, and Dairy Milk that are household brand names and enjoy a high level of customer loyalty. Sustained new product introductions such as Boost, Time Out, and Breakaway have also stimulated demand and consumption. Despite the recessive climate that dampened spending and confidence over 2009, revenue increased 4.8% to $1.0 billion. Consumers sought respite from the gloom through simple and inexpensive indulgences such as chocolate and confectionery. Cocoa and sugar prices eased, while new product introductions helped sales volumes. NPAT grew dramatically driven by lower production costs, higher volumes of high-margin indulgent products. In 2008, Cadbury Australia sales revenue decreased by 0.7% to $985.5 million, despite rising world cocoa prices that increased by 37.9% during the year. Growth within the Asia Pacific region, inclusive of Australia, was driven by strong growth in the emerging markets of India, and China, driven by increased chocolate sales. The deteriorating economic climate in Japan, Australia and New Zealand however, partially offset the above gains. Cost cutting initiatives continued during the year, with the
29
Major Companies
Player Performance continued
closure of around 10 of the companys manufacturing sites, and corresponding downsizing of 15% of the workforce by 2011. In addition, Cadbury announced a $135 million proposal to improve the productivity and efficiency at their chocolate manufacturing sites in Tasmania, Victoria and New Zealand. In 2006 and 2007, Cadbury Schweppes achieved revenue declines of 13.4% and 48.7% for each year respectively. Despite strong growth in the Australian confectionery market, Cadbury attributed the slower revenue growth to a combination of retailer de-stocking and a reduction in their promotional activity. Cadbury Schweppes rebounded after 2003, with revenue growth of 9.2% and 6.8% in 2004 and 2005 respectively.
The strong results saw revenues reach nearly $2.3 billion, while NPAT reached $234.2 million. The launch of the Boost bar was a major driver behind growth over the period, as it was the top selling medium-sized bar in the grocery channel for that year. The company posted its ninth consecutive rise in revenue during the year ending December 2003, with total revenue growing by more than 24% to $1.9 billion. However, in the same period, after strong growth in the past four previous years, net profit after tax only reached $61 million as a result of a poor first half year. Lower profitability over the year was related to the companys acquisition of The Natural Confectionery Co., which played a role in raising total business costs.
Kraft Foods (Cadbury division) financial performance

year 2005-06 2006-07 2007-08 2008-09 2009-10 revenue ($ million) 2,233.6 1,935.3 992.1 985.5 1,032.5 (% change) N/C -13.4 -48.7 -0.7 4.8 NPAT ($ million) 234.2 467.5 172.6 212.9 460.0 (% change) N/C 99.6 -63.1 23.3 116.1
SOURCE: IBISWORLD
Player Performance Nestle Australia Ltd Market share: 21.5%
Nestle Australia Ltd, a wholly owned subsidiary of Nestle SA of Switzerland, is the worlds largest food and beverage company, employing more than 250,000 staff across 500 sites in 86 countries. Nestles Australian operations are part of the Oceania geographic segment, which employs 4,700 staff across Australia, New Zealand and the Pacific Islands. The Oceania segment operates across five product categories: Beverages; Milk Products and Ice Cream; Prepared Dishes and Cooking Aids; Confectionery; and Pet Care. Specific to this industry, the Confectionery segment accounted for 11.8% of revenue in 2008.
Nestle owns some of the countrys most recognized chocolate and confectionary brands including, Aero, Milky Bar, Kit Kat, Smarties, Wonka, Milo, Smarties, Life Savers, Minties etc. Similar to competing producers, Nestle has sought to revamp popular products in order to increase its market share. For example, the launch of the Kit Kat Temptations range that included the introduction of new flavours such as Coconut eclair, Hazelnut Praline and Caramel Fudge, accelerated company growth 7% in the first six months of their introduction. In 2008, total revenue increased by
30
Major Companies
3.3% to $2.7 billion, despite the year being typified by unprecedented and rapid changes in economic environment, rising unemployment and volatile commodity and currency prices. The impact of rising input costs was partially offset by the increase in selling prices, while the companys flagship branded products, Kit Kat and Nescafe achieved organic growth of almost 10% respectively. Over the 2007 financial year, the company performed modestly, with revenue increasing by 2.2% to $2.6 billion, and a net profit after tax (NPAT) of $95.2 million. On 24 June 2008, Nestle announced it had sold its yoghurt and dairy dessert business, including its Echuca factory, to Fonterra. The agreement became effective from September, 2008 and Nestle has indicated that a large number of employees will be moving across to Fonterra.
In 2006, total revenue increased modestly by around 3.0% to $2.5 billion, partially due to unrelated declines across major product segments. However, chocolate brands such as Kit Kat showed moderate growth, with other confectionery brands also showing marginal growth. NPAT increased by 17.9% to $60.0 million due to higher average selling prices and lower operating costs. The 2005 years saw sales revenue increase by 1.7% to reach $2.5 billion, with much of this growth coming from the companys other food products. In particular, sales were boosted by the launch of the Cheerios breakfast cereal in July 2005. The product is currently the top-selling cereal brand in the US market and has generated significant sales in the Australian market. NPAT declined by 62.5% to $50.9 million because of higher advertising costs and investment costs.
Nestle Australia financial performance

year 2005-06 2006-07 2007-08 2008-09 2009-10 revenue ($ million) 2,450.1 2,523.6 2,579.4 2,727.5 2,784.8 (% change) N/C 3.0 2.2 5.7 2.1 NPAT ($ million) 50.9 60.0 95.2 86.4 162.3 (% change) N/C 17.9 58.7 -9.2 87.8
SOURCE: IBISWORLD
Player Performance Mars Australia Pty Ltd Market share: 14.3%
Mars Australia Pty Ltd is a proprietary company that supplies local and export markets with food, pet care, and snack food products. Although most of Mars sales revenue is derived from its domestic operations, the company exports to more than 30 countries. The Australian business began in 1954 with the sale of the Mars bar. The first factory was built in 1967, and operations have since expanded to six manufacturing sites across Australia, and employment of
more than 2,500 staff. The companys headquarters are located in Wodonga, Victoria. Mars Australia is wholly owned by US-based diversified food wholesaler Mars Inc. Across its product categories, established brands include Pedigree and Wiskas (two of the worlds leading brands of food for dogs and cats respectively), and Masterfoods (herbs, spices and condiments), Dolmio (pasta sauces), Kan Tong (marinades), and Uncle Bens (rice, sauces and curries).
31
Major Companies
Specific to the Chocolate and Confectionery Manufacturing industry, the company produces and markets a number of household brands including Mars, Maltesers, M&Ms, Snickers, Skittles and Starburst. The Snackfood operations were established in Ballarat in 1979, and a second manufacturing site was acquired in Melbourne in 1997. Mars Snackfood employs more than 800 associates, and exports to over 12 countries including New Zealand, the Middle East, Japan and markets throughout Asia and the Pacific. Mars exports account for more than half of Australias total confectionery exports. Mars Inc. has been adopting a fairly aggressive position as a part of its strategy to raise its competitiveness in the non-chocolate confectionery segment. Recent years have seen the introduction of a number of product extensions, including ice cream lines and various biscuit-confectionery hybrids. In April 2008, Mars Inc., along with Berkshire Hathaway Inc., acquired market leader Wrigley Company, for an estimated $23 billion. The two companies together, are expected to generate sales in excess of $27 billion and unseat Cadbury as the worlds largest confectioner. IBISWorld estimates that revenue from the companys confectionery interests account for an estimated 18% of its total revenue. No public results for Effem Foods are published at the divisional level; however its confectionery division, Mars, is believed to have performed relatively well during the past decade.
At a broader level, the companys consolidated accounts reveal a steady upward trend in sales revenue, increasing by an average of 1.5% per annum. During this period, revenue results were helped by a series of acquisitions including the purchase of Kenman Kandy Australia Pty Ltd in late 1997. Kenman Kandy reportedly added an extra $40 million worth of sales or the equivalent to three percent to Effems share of the confectionery market. By 2005, revenue declined for the second year in a row, falling by 5.9% to $1.3 billion. This was largely as a result of an incident that occurred in July 2005 involving an extortion threat that led to the recall of 3 million chocolate bars from more than 5,500 stores across New South Wales stores. In August, the company re-launched the two chocolate bar lines with an extensive mass media campaign. Industry analysts believe that the brief recall cost Mars several million dollars. Revenue in 2006 was still slightly affected from the previous years events, falling by 1.3% to $1.30 billion in 2006, while NPAT declined by 41.3% because of increased advertising costs. Wrigley Company Pty Ltd The William Wrigley Jr. Company is the worlds largest manufacturer of chewing gum, with a 63% share of the world market. The Wrigley Company was founded in 1891 in Chicago, Illinois and has since expanded operations to service over 180 countries worldwide with 22 manufacturing facilities in 14 countries.
wrigley Company Pty Ltd financial performance

year 2003-04 2004-05 2005-06 2006-07 2007-08 revenue ($ million) 143.3 147.7 151.8 165.1 186.9 (% change) N/C 3.1 2.8 8.8 13.2 NPAT ($ million) 21.1 18.2 22.4 20.6 24.0 (% change) N/C -13.7 23.1 -8.0 16.5
SOURCE: IBISWORLD
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Major Companies
The company produces some of the worlds most recognizable confectionery brand names such as Juicy Fruit, Big Red, Wrigleys Spearmint, Eclipse, Airwaves, Life-Savers, Extra, Orbit, Freedent etc. As of December 2007, the company recorded total sales revenue of $5.4 billion, employing 16,400 people worldwide. In April 2008, the Wrigley Company was acquired by its major competitor and confectionery giant, Mars Incorporated for an estimated $23 billion. As part of the merger, Mars non-chocolate sugar brands including Starburst and Skittles were to be added to Wrigleys confectionery portfolio in an attempt to increase its competitiveness in the non-chewing gum segment. In Australia, Wrigley Company Pty Ltd has been manufacturing chewing gum since 1915, and is a wholly owned subsidiary of its US-based parent. With operations in most Australian states, Wrigley employs a workforce of around 328 people. The company distributes a mix of locally produced and imported gum, including the Juicy Fruit, P.K, Arrowmint, Hubba Bubba, Extra and Airwaves brands. Locally, the company invests heavily in advertising and
promotion. Over the past decade, Wrigley has successfully boosted sales via a series of campaigns based on dental hygiene that promoted the benefits of their range of sugar-free chewing gum. Wrigleys flagship sugarfree brand, Extra, now commands nearly 60% of the local market and the company holds over 90% of the Australian chewing gum market. The company has since launched several new chewing gum products, mints and premium hard candy products. In 2004, the company launched its Extra Drops range of favoured sugarless gums that are also designed to assist dental hygiene. Already a big market in the US, the introduction of sugarless candy grew rapidly in Australia, helped by strong media advertising. More recently, sales have been driven by new products which include, Extra Liquid Blast, Extra Fruit, Extra Professional Mints, as well as continual growth of the Eclipse brand of mints that was launched in 2005. In 2007, Wrigley Australia also launched Solano, a premium hard candy product, in order to reduce its reliance on the gum and mints markets.
Mars Australia financial performance

year 2005-06 2006-07 2007-08 2008-09 2009-10 revenue ($ million) 1,320.4 1,302.8 1,272.2 1,331.2 1,293.0 (% change) N/C -1.3 -2.3 4.6 -2.9 NPAT ($ million) 18.8 52.8 71.4 121.0 79.1 (% change) N/C 180.9 35.2 69.5 -34.6
SOURCE: IBISWORLD
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Major Companies
Other Companies
Ferrero Australia Pty Limited
Estimated market share: 4.5% The Italian family-owned and operated Ferrero S.p.A Company was founded in 1946 by Pietro and Giovanni Ferrero. The Ferrero Group now employs around 19,600 staff across 36 operating companies and 15 manufacturing sites worldwide. Ferrero established operations in Australia in the early 1970s and became an incorporated company in 1974. Ferrero Australia Pty Ltd operates solely in Australia. Its production facility is located in the rural New South Wales town of Lithgow. From here, Ferrero Australia manufactures the sugar candy, Tic Tacs, and the chocolate table spread, Nutella. In addition, the facility repacks specialty chocolates imported from Italy. The Ferrero range of products are marketed and sold within Australia to different segments of the retail market. For example, the premium Ferrero Rocher brand of chocolate is marketed as a luxury chocolate for special occasions, while the Kinder Surprise line is marketed towards parents and children as a treat. Kinder Surprise is a confectionery/toy product that was released in the Australian market in the early 1990s. Retail sales of Kinder Surprise are estimated at $17 million. Employing around 77 people in 2005, the financial position of Ferrero has experienced positive growth in recent years, with the company generating sales revenue of $106.1 million in 2005, an increase of 15.5% from the previous year. In 2006, revenue increased a further 6.2% to $112.7 million, with the number of employees growing to 134. Stronger demand at the retail level is likely to have been a key factor behind the companys increased sales volume. As of 31 August 2007, company revenue totalled $122.0 million, representing an increase of 8.0%.
Darrell Lea Chocolate Shops Pty Ltd
Estimated market share: 4.1% Darrell Lea Chocolate Shops is a proprietary company, and is the largest Australian-owned confectionery manufacturer/retailer. Darrell Lea produces a range of boxed chocolates, confectionery bars, liquorice, rocky road, and other confectionery products. Based in Kogarah, New South Wales, Darrell Lea has approximately 400 retail outlets throughout Australia, and employed around 540 staff as at June 30, 2007. Products are sold to over 1,100 retail outlets worldwide, with Darrell Leas key export markets being the UK, US, Canada, South Africa and New Zealand. In 2000-01 a number of products that were producing minimal sales were removed as a result of a new strategic plan to lift sales, along with the plan to increase export levels. By 2006-07 sales revenue reached $97 million, an increase of 10.2% from the previous year. The company endeavours to grow more substantially over the next two years, with a factory upgrade planned to boost its offshore expansion.
Aussie Sweets Pty Ltd
Estimated market share: 1.8% Based in Sydney, New South Wales, Aussie Sweets Pty Ltd is a division of Cumberland Industries Ltd, a not-forprofit disability employment service. The company commenced operations in 1985, manufacturing under five product categories: caramels, fudges, nougats, musk and fruit sticks. The product range has since expanded to 30, and Aussie Sweets provides vocational training and employment to around 500 people with a disability. Sales are predominantly through national bulk confectionery re-packers, private label products and, to a lesser extent, branded products under the Aussie Sweets label. Customers include major supermarket chains.
34
Operating Conditions
Structural risk Index
Industry relax Points Exports revenue Volatility Industry Pressure Points Imports Levels of Assistance
Structural risk Index | Investment requirements | Technology & Systems Industry Volatility | regulation & Policy | Industry Assistance | Taxation Issues

Barriers to Entry
Manufacturing
Barriers to Entry
C
Reve nu eV ola
Reve nu eV ola
ity til
ity til
on titi pe om
on titi pe om
52.4
Score
s ort Imp
61.9
Score
s ort Imp
Life Cycle
Life Cycle
Expor ts
Expor ts
IBISWorld has scored key elements of industry structure on a scale of 1 to 9 the higher the figure, the greater the risks to businesses operating in the industry. Operating conditions in the Chocolate and Confectionery Manufacturing industry are less risky than in other
ge Sta
Le ve ls o f As sistance
industries in the Manufacturing division. The industry structural risk index totals 52.4 points compared to 61.9 points for the Manufacturing division as a whole (100 points equates to extremely poor operating conditions).
ge Sta
Le ve ls o f As sistance
Investment requirements
Level
The level of investment required is Medium
Chocolate and Confectionery Manufacturing requires a medium level of capital investment, as measured by the capital to labour ratio. IBISWorld estimates that the capital to labour ratio in this industry is approximately 4.7:1. This means that producers require $4.70 worth of labour for every $1 worth of capital invested. Modern manufacturing plants require high levels of capital expenditure on sophisticated technology and equipment that aim to increase productivity without the need for additional labour. However, this industry requires more labour than related food manufacturing industries due to more complex product sorting and a greater diversity in output. The level of capital intensity also varies greatly among industry players.
Capital units per labour unit 0.50 0.40 0.30 0.20 0.10 0.00 Economy Manufacturing Chocolate and confectionery manufacturing
Capital intensity
Dotted line shows a high level of capital intensity
Unsurprisingly, the major producers have invested substantial amounts of capital relating to technology and production over the last decade.
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Investment requirements continued
However, the relatively simple technology necessary for most confectionery production means that there are still a large number of small producers that heavily depend on labour in the production process. However, across the industry, the level of capital intensity is generally rising. The introduction of new technology and the
adoption of greater automation are inevitably reducing the role of labour in the production process. This is especially true in the larger factories where high speed production lines have dramatically increased throughput, allowing manufacturers to significantly raise production without requiring corresponding increases in labour.
Tools of the Trade: Growth Strategies for Success

New Age Economy recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation. Investment Economy Information, Communications, Mining, Finance and real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan.
Capital Intensive
Labour Intensive
Confectionery and Soft drink wholesaling
Milk and Cream Processing
biscuit Manufacturing Traditional Service Economy

wholesale and retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth.
Sugar Manufacturing Old Economy Cake and Pastry Manufacturing Agriculture and Manufacturing.
Traded goods can be produced using cheap labour abroad. To expand firms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products.
Change in Share of the Economy
Technology & Systems

Level
The level of Technology Change is Medium
Overall, the industry employs worldstandard technology, which has gradually improved over the past decade. The dominant presence of foreign owned firms in the industry has meant that all of the intellectual capital (i.e. technology, process, patents, recipes etc.) is owned by European and American companies. Except for the industrys largest players, Australian confectionery makers lack the critical mass necessary to conduct basic
research in food science. In many cases, limited funds make the commercialisation of high-technology products in Australia difficult. The concentration of industry ownership also means that most industry R&D is maintained in-house, further restricting the sharing of production innovations. However, some public sector R&D still occurs through government-funded institutions like Food Science Australia.
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Technology & Systems continued
However, this work typically focuses on technical issues relating to inputs rather than on confectionery research itself. The basic principles of confectionery manufacturing have altered little over the past century. In chocolate confectionery, cocoa beans are transformed into cocoa butter through a process of cleaning, roasting, winnowing, milling and pressing. Other ingredients like milk and sugar are then added to the cocoa butter. After conching, this mixture becomes milk chocolate that can be used in the production of chocolate bars, blocks, Easter eggs etc. In the case of sugarbased confectionery, glucose, sugar, starch, milk and fat are mixed (in varying proportions according to the specific products), then boiled. Colourings and flavourings are added as required and the mass is then cooled. Once cooled, the product can may be enrobed and/or cut and packed. Whilst basic production processes remain unchanged, new technology in the industry is focusing on recipe development and automation. Recently, some Australian chocolate makers have been changing their recipes and using new production technology to produce the flavour of top quality cocoa beans from inferior inputs. Elsewhere in the industry, the main technological advances have been made in the areas of computerisation. The introduction of computer directed controls and computer aided design has helped lift equipment to
precise calibration and tolerances. Ultimately this has allowed greater quality control in the confectionery production process. While the core methodology remains unchanged, businesses continue to refine production processes with the introduction of new machinery and the adoption of applied science. Generally, the adoption of new technology for chocolate production has improved cost and operating efficiencies. Over time, refining technology is becoming more complex with the broadening of the product range and increased product differentiation. In terms of marketing and distribution systems, E-commerce has been providing manufacturers with improved customer and supplier arrangements, leading to cost savings through better inventory and production planning. In some cases, e-commerce is also being utilised to track exports. So far, the adoption of this tool has been largely confined to major players. Penetration into smaller and mid-sized firms continues to be obstructed by cost issues. Further, the uptake of best practice programs is playing a key factor in ensuring high product integrity in chocolate manufacturing. The introduction of quality assurance programs like Hazard Analysis Critical Control Point (HACCP) has helped the industry improve food safety. High food safety standards play a vital role in preserving the industrys reputation as a clean and reliable food manufacturer.
revenue Volatility
Level
The level of Volatility is Medium
Industry volatility is a function of fluctuations in the cost of raw materials, energy and oil prices, weather conditions, household incomes and changes in downstream demand conditions. Commodities like cocoa, sugar, milk, flavourings, sweeteners and oils represent primary inputs in the production process and any changes in their price impacts industry supply. In
the five years to 2010-11, prices of these commodities have been subject to dramatic fluctuations, which have impacted production costs and thus, profitability. Chocolate and confectionery maybe classified as a discretionary purchase, implying that demand is non-essential and therefore sensitive to changes in price. Consumers purchase
37
revenue Volatility continued
confectionery frequently and for a large number of households, it forms an integral part of their everyday lives. However, due to the presence of a large number of substitute products, demand for a particular brand will still be affected by price increases. The current
A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment. When a firm makes poor investment decisions it may face underutilised capacity if demand suddenly falls, or capacity constraints if it rises quickly.
economic climate however, has seen an increase in the consumption of chocolate and confectionery products as consumers choose to indulge themselves as a means of nostalgia or escapism without feeling guilty or incurring high costs.
Volatility vs. growth

1000
Hazardous
rollercoaster
revenue volatility* (%)
100 10 1 0.1
Stagnant
30 10

10 30 50
blue chip
70
Five year annualised revenue growth (%)

* Axis is in logarithmic scale
regulation & Policy

Level & Trend
The level of Regulation is Medium and the trend is Steady
Chocolate and confectionery manufacturers must adhere to stringent food and health regulations. These are aimed at maintaining high levels of food hygiene and safeguarding the community against health scares associated with poor food safety. Currently, producers are regulated by Food Standards Australia New Zealand (FSANZ). This regulatory agency is responsible for the implementation of the Australia New Zealand Joint Food Standards Code (The Code). Released on December 2002, this code represents the complete set of food regulations for both Australia and New Zealand. Under the new code, chocolate products must contain at least 20% cocoa and are not permitted to include more than 5% of oils other than cocoa or dairy fats. This replaces previous requirements that placed heavy specifications on the composition of chocolate products. Although the amendments offer greater flexibility to manufacturers, some industry players
are unhappy. They fear that the relaxation of composition requirements will signal an increase in the use of inferior ingredients, which to some extent, has already begun. Industry players have started to modify their recipes and adopt new technology to reproduce the flavour of cocoa beans. The Code also places labelling requirements on industry players. Importantly, compliance with the Code requires manufacturers to provide information on the percentage share of ingredients used as well as some nutritional information. These requirements have been widely criticized for placing significant costs on the industry. However, with consumer groups intensifying their calls for more nutritional information on food labels, the industry has articulated their intention to improve labelling. IBISWorld expects an increasing number of confectionery manufacturers to introduce front-of-pack, %DI labelling over the next few years, as the debate about the introduction of
38
regulation & Policy continued
traffic light labelling continues. In addition to the above regulations, the Australian government has also recently introduced steps to monitor the production of genetically modified food. Since December 2001, all food manufacturers (including confectionery makers) have been required to take reasonable steps to establish whether their raw ingredients contain any genetically modified food. Final food products must be labelled accordingly to provide consumers with adequate information. This move by State Health Ministers was aimed at addressing perceived health and safety issues in the community. Although welcomed by consumers, future testing required for compliance is likely to be costly for manufacturers. Confectionery producers are among those affected by this requirement since they are users of fruit and nuts, as well as dairy products. On a broader scale, confectionery manufacturers must abide with regulations relating to employment and the environment. There are various laws governing wages and employee rights. Today, most employees operate under Enterprise Bargaining Agreements although these must exceed minimum
state and federal wage floors. Like all manufacturers, confectioners must also ensure that they comply with Occupational Health and Safety Regulations. Manufacturers can face stiff penalties for non-compliance. Finally, Australian confectionery manufacturers must comply with environmental regulations set out by the Federal and State governments. Generally these regulations relate to odours, water usage, wastewater generation and the treatment of waste arising from production. Failure to comply with regulations, laws and other rules governing confectionery manufacturing can subject industry players to legal action, administrative penalties, and possible recalls of products. It can also result in considerable negative publicity that can damage the reputation and public image of producers. Non-compliance can therefore potentially have a material effect on the earnings and competitive position of firms operating in this industry. It is worth noting that industry sources believe that laws and regulations relating to food production are becoming more stringent, resulting in increasing compliance costs for Australian confectionery manufacturers.
Industry Assistance
Level & Trend
The level of Industry Assistance is Low and the trend is decreasing
Government assistance for Australian confectionery manufacturers is limited. Up until the late 1980s, the industry received substantial assistance in the form of tariff barriers. Since then, free market trade policies adopted by successive federal governments has resulted in progressive lowering of tariffs. Today, the general tariff on imported confectionery is just 5%. Meanwhile, imports sourced from nations classified as developing countries are subject to a special tariff of 4%. In some respects, the Federal Governments low tariff policy has resulted in reciprocal access for Australian confectioners to overseas markets. Australias free-trade agreement with the
United States (2005) is one such example. In the future, a free trade agreement with China has been tabled as a possibility. Given rising disposable incomes and expanding diets in the Asian Giant, improved access for Australian exports could signal significant opportunity for industry expansion in the future. To some extent, the industry is protected from foreign competition by natural barriers. Historically, Australias small domestic market and its geographic distance from Northern Hemisphere competitors have discouraged large volumes of imported confectionery. This competitive advantage is however disappearing as improvements in transportation systems continue to
39
Industry Assistance continued
reduce importing costs. Currently, there are no government subsidies or grants targeting confectionery manufacturers. In 1995-96, the Industry Commission (now the Productivity Commission) estimated that confectionery makers received an effective rate of assistance averaging 8%. The current rate is likely to be smaller. Ongoing reductions in tariffs and a change in government policy toward the privatisation of research are likely to contribute to the decline. Australian confectionery manufacturers can also take advantage of a range of assistance programs offered across the manufacturing sector. In late 2002, leading player Cadbury Schweppes took advantage of the Governments new Enhanced Project By-Laws Scheme (EPBS). Under the scheme, capital equipment that is either not made in Australia or is technologically superior to Australian-made equipment can be imported duty-free. The EPBS scheme aims to help local manufacturers remain competitive in overseas markets. At the state level, export driven funding initiatives are also helping confectioners in the export sector. In Victoria, for example, the State government unveiled an export plan worth $11 million dollars in October 2004. Although aimed at the wider food sector, the package includes financial and other forms of assistance open to confectionery manufacturers. The
Key tariffs
Goods Sugar and other confectionery Singapore, Malaysia, PNG, NZ & developing countries Low rate 5 4 High rate 5 4
SOURCE: CUSTOMS
program is primarily focused on developing capacity in Victorian food manufacturing to meet increasing volume, quality and seasonal requirements of major global buyers in foreign markets. Finally, confectionery manufacturers continue to benefit from the lobbying efforts and public relations work conducted by peak industry associations. Membership organizations like the Confectionery Manufacturers of Australasia (CMA) have played a prominent role in promoting the interests of the industry since its inception in 1969. Today, CMA has more than 200 member manufacturers. Money raised through the membership fees and government assistance is used to fund policy initiatives and advisory services. For example, in 2004, the association received a $15,000 grant from the government to explore e-business opportunities for confectionery manufacturers.
Taxation Issues
Level
The level of Tax Burden is Medium
Industry products are subject to the 10% Goods and Services Tax (GST) which is imposed on the supply of most goods and services consumed within Australia. A number of food items are exempt from the GST, however the following confectionery products are GST taxable; chocolate and compound chocolate; chewing gum; confectionery; and crystallised or glace fruit. GST is paid at each stage along the
supply chain. Under the system, firms are charged GST by upstream suppliers. Similarly, they charge downstream customers GST. At the end of each quarter, firms registered for GST must submit the money they have collected to the Australian Taxation Office (ATO). As a business, they receive tax credits for GST incurred through the purchase of raw materials and other business items. Most items produced by this industry
40
Taxation Issues continued
are subject to the GST since the Australian Taxation Office has classified confectionery as non-basic food. This means that manufacturers must charge GST on supplies to downstream retailers and customers. However, industry players are still entitled to claim input tax credits for GST paid on purchases.
The introduction of the GST is believed to have increased the tax compliance costs of confectionery manufacturers. So far, higher costs have been associated with the greater administration required for businesses to track and claim GST credits in the supply chain.
41
Key Statistics
Industry data
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Sector rank Economy rank revenue ($m) 2,146.4 2,310.4 2,538.7 2,592.7 2,643.3 2,619.4 2,656.7 2,706.5 2,741.8 2,832.2 2,910.0 2,972.8 3,043.5 3,112.6 3,196.5 43/147 243/500 Industry Value Added ($m) 903.5 893.6 1,009.9 1,043.9 1,071.9 1,065.5 1,073.3 1,087.5 1,081.0 1,102.5 1,075.1 1,110.0 1,119.0 1,140.0 1,165.0 26/147 200/500 Establishments 153.0 156.0 163.0 165.0 168.0 168.0 171.0 174.0 178.0 181.0 179.0 183.0 186.0 189.0 193.0 85/147 396/500 Enterprises 134.0 136.0 139.0 140.0 142.0 142.0 145.0 147.0 146.0 147.0 147.0 151.0 152.0 155.0 156.0 79/145 362/493 Employment (People) 6,288.0 6,154.0 6,854.0 7,347.0 7,865.0 8,048.0 8,262.0 8,465.0 8,661.0 8,696.0 8,745.0 8,784.0 8,826.0 8,867.0 9,015.0 32/147 254/500 Exports ($m) 409.4 443.3 450.2 395.7 359.3 282.5 276.3 294.5 318.8 331.1 336.6 358.6 377.2 403.1 428.4 46/142 83/221 Imports ($m) 503.1 537.3 621.9 578.5 626.0 599.3 625.6 695.5 724.8 769.8 785.9 834.8 896.5 956.4 1,022.2 56/141 72/199 wages ($m) 415.9 389.6 430.0 456.6 468.2 486.3 491.6 491.3 494.0 496.4 482.3 488.5 496.8 501.1 509.5 36/147 231/500 domestic demand ($m) 2,240.1 2,404.4 2,710.4 2,775.5 2,910.0 2,936.2 3,006.0 3,107.5 3,147.8 3,270.9 3,359.3 3,449.0 3,562.8 3,665.9 3,790.3 43/140 70/197 Production Volume (Tonne) 159,836.3 160,878.3 162,092.5 162,859.5 163,861.3 166,494.3 167,245.0 163,709.0 164,032.2 164,266.8 164,347.9 166,977.5 169,649.1 172,363.5 174,949.0 N/A N/A
Annual Change
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Sector rank Economy rank revenue (%) 7.6 9.9 2.1 2.0 -0.9 1.4 1.9 1.3 3.3 2.7 2.2 2.4 2.3 2.7 18/147 97/499
Industry Value Added (%) -1.1 13.0 3.4 2.7 -0.6 0.7 1.3 -0.6 2.0 -2.5 3.2 0.8 1.9 2.2 39/147 175/500
Establishments (%) 2.0 4.5 1.2 1.8 0.0 1.8 1.8 2.3 1.7 -1.1 2.2 1.6 1.6 2.1 14/147 64/500
Enterprises Employment (%) (%) 1.5 -2.1 2.2 11.4 0.7 7.2 1.4 7.1 0.0 2.3 2.1 2.7 1.4 2.5 -0.7 2.3 0.7 0.4 0.0 0.6 2.7 0.4 0.7 0.5 2.0 0.5 0.6 1.7 20/145 36/147 101/493 192/500
Exports (%) 8.3 1.6 -12.1 -9.2 -21.4 -2.2 6.6 8.3 3.9 1.7 6.5 5.2 6.9 6.3 38/142 50/221
Imports (%) 6.8 15.7 -7.0 8.2 -4.3 4.4 11.2 4.2 6.2 2.1 6.2 7.4 6.7 6.9 27/141 38/199
wages (%) -6.3 10.4 6.2 2.5 3.9 1.1 -0.1 0.5 0.5 -2.8 1.3 1.7 0.9 1.7 50/147 253/500
domestic demand (%) 7.3 12.7 2.4 4.8 0.9 2.4 3.4 1.3 3.9 2.7 2.7 3.3 2.9 3.4 21/140 37/197
Production Volume (%) 0.7 0.8 0.5 0.6 1.6 0.5 -2.1 0.2 0.1 0.0 1.6 1.6 1.6 1.5 N/A N/A
Key ratios
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Sector rank Economy rank IVA/revenue (%) 42.09 38.68 39.78 40.26 40.55 40.68 40.40 40.18 39.43 38.93 36.95 37.34 36.77 36.63 36.45 17/147 174/500 Imports/demand Exports/revenue (%) (%) 22.46 19.07 22.35 19.19 22.94 17.73 20.84 15.26 21.51 13.59 20.41 10.78 20.81 10.40 22.38 10.88 23.03 11.63 23.53 11.69 23.39 11.57 24.20 12.06 25.16 12.39 26.09 12.95 26.97 13.40 78/140 61/142 88/197 91/221
revenue per Employee ($000) 341.35 375.43 370.40 352.89 336.08 325.47 321.56 319.73 316.57 325.69 332.76 338.43 344.83 351.03 354.58 77/147 223/500
wages/revenue (%) 19.38 16.86 16.94 17.61 17.71 18.57 18.50 18.15 18.02 17.53 16.57 16.43 16.32 16.10 15.94 61/147 220/500
Employees per Est. 41.10 39.45 42.05 44.53 46.82 47.90 48.32 48.65 48.66 48.04 48.85 48.00 47.45 46.92 46.71 23/147 69/500
Average wage ($) 66,141.86 63,308.42 62,737.09 62,147.82 59,529.56 60,424.95 59,501.33 58,038.98 57,037.29 57,083.72 55,151.52 55,612.48 56,288.24 56,512.91 56,516.92 70/147 201/500
Share of the Economy (%) 0.10 0.09 0.10 0.10 0.10 0.10 0.09 0.09 0.09 0.09 0.09 0.08 0.08 0.08 0.08 26/147 200/500
Figures are inflation-adjusted 2011 dollars. Rank refers to 2011 data.
42
Key Statistics
Historical Performance
Chocolate and Confectionery Manufacturing revenue increased by just over 1.8% per annum between 1980-81 and 1989-90. However, the rate of growth fluctuated from year to year, declining in some years in the first half of the 1980s. Growth was stronger in the second half of the decade, where the industry entered a small growth phase. In part this growth was attributable to the increased number of establishments in the industry. It also resulted from increased advertising, the introduction of new products to supply niche markets, increased exports and some import replacement. These developments enabled turnover to peak in 1990-91 before difficult market conditions resulting from the recession, caused turnover to decline slightly in the early 1990s, during when the industry entered a mature phase. Turnover increased by just 1.1% over the five years to 1994-95, reflecting the difficult market conditions. Prices declined in 1992 and 1993 not because product prices per item declined but due to increased product volume in each item; that is real price per gram declined. In part this strategy was intended to counter the adverse impact of unfavourable economic conditions on demand. During 1993 there was deep price cutting for sugar products; this also had an impact on the prices of chocolate confectionery. Price discounting continued throughout 1994-95. By 1997-98, industry revenue increased by 9.1%, as segments of the market remained highly profitable. In particular, chocolate bars as a proportion of total sales continued to expand. It is estimated that chocolate bars accounted for $660 million of total chocolate sales (1998 calendar year). In the same year, sugar confectionery retail sales were valued at $657 million, thus capturing 28% of the confectionery market. This was partially offset by growth in a number of snack food products competing against confectionery for the consumer dollar. Over the twelve months to June 1998, the ABS reported a
staggering 22.5% rise in the value of imported confectionery. Australias confectionery industry continued expansion into 1998-99. The ABS revealed a marginal increase of 0.6% in industry revenue in real terms, as domestic producers also faced stronger competition from substitute foods and confectionery imports. Aggressive marketing campaigns, particularly from salty snacks, contributed to lower sales. Also, the industry battled against imported confectionery that was often cheaply priced. However, during the year, the industry was helped by the world price of cocoa collapsing, dropping by more than 32.6%. This lowered purchasing costs for companies across the industry. Finally, key industry players embarked on high cost advertising strategies. According to the industry association, around $100 million was spent by the industry on brand promotion. In 1999-2000, the industry delivered a modest rise in revenue of 2.7%. Healthy growth in real household incomes helped life discretionary spending in the local market. Meanwhile, further falls in the price of raw materials and a series of depreciations in the Australian dollar impacted favourably on the competitiveness of local producers. Abroad, the industry achieved a sharp rise of 24.1% in export sales. After two years of successive growth, revenue among confectionery manufacturers fell in 2000-01 by 7.9% to $1.9 billion. The year witnessed a change in business conditions facing confectionary makers. As much of the world went into a synchronised slowdown, growth in Australias real GDP was reduced to 1.8%. This rocked consumer confidence thereby stemming the consumption of discretionary items like confectionery. On the bright side, downstream demand was mildly affected by a change in the taxation of confectionery. In July 2000, the Australian Federal Government replaced the Wholesale Sales Tax with the Goods and Services tax. This produced a minor
43
Key Statistics
Historical Performance continued
reduction in the retail price of confectionery sales. Tax payable on confectionery fell from 12% to 10%. Estimates suggest that industry revenue grew in 2001-02, 2002-03, and 2003-04. Moderate growth in economic activity provided the foundation for expansion in the confectionery industry during these years. A subsequent rise in household incomes, combined with historically low interest rates, fanned consumer spending. Conditions were tougher in the global marketplace. There was a strong increase in imports as a result of the drought, partially offset by low sugar prices. Production increased by 3.4% per annum during the 1980s, somewhat faster than the increase in turnover. This implies that average product prices were declining. The production of chocolate confectionery increased faster than sugar confectionery. While domestic demand grew fairly slowly, exports of confectionery from Australia, although small, grew significantly especially during the latter half of the 1980s. Between early 1985 and 1988, devaluation of the Australian dollar aided the development of confectionery exports and made it less profitable to import confectionery into Australia. However, the production of Jacobs Suchard products in Australia ceased late in 1988 and thereafter these products were supplied from Switzerland (the product range was also extended), as the company was acquired by Philip Morris. Production increased strongly in 1990-91 as higher incomes meant higher discretionary spending which favoured the products of this ANZSIC Class. Production subsequently slowed in 1991-92 as Australia entered recession, but increased in 1994-95 before slowing in 1995-96. Value added increased much faster than turnover during the 1980s, the average increase being 3.7% annually. This resulted from increased efficiency
associated with industry rationalisation and the introduction of improved technology. This was also reflected in increased productivity. Value added continued to increase in 1990-91 but declined between 1991-92 and 1993-94 as the effects of the recession were felt. Cocoa prices rose strongly in 1993 partly due to concerns about production but also due to concerns about the political stability of some of the major suppliers. Value added declined on average by 2.5% in real terms between 1989-90 and 1995-96. Industry profitability appears to have increased quite strongly during the 1980s. The profit ratio, that is the ratio of the difference between value added and labour costs to turnover, rose from around 14% in the early 1980s to around 31% in the late 1980s. This was favourable relative to other food manufacturing activities. This also fluctuated along a downward trend during the early 1990s. The profit ratio declined with the recession in the early 1990s. It fell from approximately 30% in 1992-93 to 17.4% in 1995-96. However, it should be remembered that the profit ratio has not had interest, depreciation and tax netted out. Overseas parent companies often restricted export activity as potential export markets for Australia were supplied direct by the parent. For example, the United Kingdom parent company of Cadbury Schweppes gained full ownership of the Australian company in 1989. The aim of this move appears to have been to integrate the Australian business into the wider group and then to use Australia as a base for expansion into the Asia-Pacific region. Changes in export policy by major companies were partly responsible for the sharp increase in exports in 1993-94. In 1994 a number of small confectionery companies formed Southern Gold Ltd primarily to facilitate export to Asia.
44
Jargon & Glossary
Industry Jargon
ENHANCEd PrOJECT by-LAwS SCHEME (EPbS) Under the scheme, capital equipment that is either not made in Australia or is technologically superior to Australian-made equipment can be imported duty-free. FOOd STANdArdS AuSTrALIA NEw ZEALANd (FSANZ) Released on December 2002, this code represents the complete set of food regulations for both Australia and New Zealand.
HAZArd ANALySIS CrITICAL CONTrOL POINTS (HACCP) Is a systematic preventative approach to food safety that addresses physical, chemical and biological hazards as a means of prevention rather than a means of final product inspection.
IbISworld Glossary
bArrIErS TO ENTry Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry. CAPITAL/LAbOur INTENSITy An indicator of how much capital is used in production as opposed to labour. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3-$8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation. dOMESTIC dEMANd The use of goods and services within Australia; the sum of imports and domestic production minus exports. EMPLOyMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees. ENTErPrISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry. ESTAbLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates. EXPOrTS The total sales and transfers of goods produced by an industry that are exported. IMPOrTS The value of goods and services imported with the amount payable to non-residents. INduSTry CONCENTrATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 70% of revenue; Low is less than 40%.
INduSTry rEVENuE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded. INduSTry VALuE AddEd The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added). INTErNATIONAL TrAdE The level is determined by: Exports/Revenue: Low is 0-5%; Medium is 5-20%; High is over 20%. Imports/Domestic Demand: Low is 0-5%; Medium is 5-35%; and High is over 35%. LIFE CyCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each. NON-EMPLOyING ESTAbLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals. VOLATILITy The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than 20%; High Volatility is between 10% and 20%; Moderate Volatility is between 3% and 10%; and Low Volatility is less than 3%. wAGES The gross total wages and salaries of all employees of the establishment.
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Chocolate and Confectionery Manufacturing in Australia Industry Report

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

IBISWorld Industry Report C2172

Chocolate and Confectionery Manufacturing in Australia

About this Industry

Industry at a Glance Industry Performance

44 Jargon & Glossary

13 Industry Life Cycle

15 Products & Markets

www.ibisworld.com.au | (03) 9655 3881 | info@ibisworld.com

Chocolate and Confectionery Manufacturing in Australia August 2010

About this Industry

Chocolate and Confectionery Manufacturing in Australia August 2010

2.4% $197.9m $336.6m 179

Annual growth 06-11

Annual growth 11-16

Kraft Foods (Australia) Limited 49.1%

Downstream demand from supermarkets and other grocery stores

Nestle Australia Ltd 21.5% Mars Australia Pty Ltd 14.3%

Key External drivers

4.2% 5.4% TAS

Mature Medium Medium Low High

Medium Medium Medium High Medium

Chocolate and Confectionery Manufacturing in Australia August 2010

Key External drivers

Chocolate and Confectionery Manufacturing in Australia August 2010

Key External drivers continued

Kilograms Per Capita

19.0 18.5 18.0 17.5

Chocolate and Confectionery Manufacturing in Australia August 2010

recessional resilience continued

word indicator prices

Chocolate and Confectionery Manufacturing in Australia August 2010

Consumption trends continued

Chocolate and Confectionery Manufacturing in Australia August 2010

Health and nutrition

Improved access to foreign markets

Chocolate and Confectionery Manufacturing in Australia August 2010

Ethical consumerism continued

Chocolate and Confectionery Manufacturing in Australia August 2010

revenue growth continued

Chocolate and Confectionery Manufacturing in Australia August 2010

Production issues continued

360 340 320 300 280

Chocolate and Confectionery Manufacturing in Australia August 2010

regulation outlook continued

Chocolate and Confectionery Manufacturing in Australia August 2010

Company consolidation; level of economic importance stable

Milk and Cream Processing Cake and Pastry Manufacturing

Confectionery and Soft drink wholesaling

Chocolate and Confectionery Manufacturing

Sugar Manufacturing biscuit Manufacturing

Potential Hidden Gems

Chocolate and Confectionery Manufacturing in Australia August 2010

Industry Life Cycle This industry is Mature

Chocolate and Confectionery Manufacturing in Australia August 2010

Products & Markets

G5112 H5731 H5732

KEy SELLING INduSTrIES

Products & Services

Chocolate and Confectionery Manufacturing in Australia August 2010

Products & Markets

Products & Services continued

Chocolate and Confectionery Manufacturing in Australia August 2010

Products & Markets