The Market for Differentiated Cocoa: A Market Opportunity Assessment for Small Cocoa Grower Organizations

Seth Petchers

DRAFT

Table of Contents
GLOSSARY OF TERMS ............................................................................................................................ 3 EXECUTIVE SUMMARY .......................................................................................................................... 5 1. DIFFERENTIATION AND COMPETITIVE ADVANTAGE ............................................................ 8 DIFFERENTIATION AND VALUE ADDITION IN AGRICULTURAL MARKETS .................................................... 8 DIFFERENTIATION AS AN OPPORTUNITY FOR COCOA PRODUCERS .............................................................. 9 2. OVERVIEW OF VALUE CHAIN FROM EXPORT TO CONSUMER PRODUCTS ................... 10 DEALERS ................................................................................................................................................... 10 PROCESSORS ............................................................................................................................................. 11 CHOCOLATE MANUFACTURERS................................................................................................................. 11 CHOCOLATE MARKETERS ......................................................................................................................... 11 COCOA INGREDIENTS DISTRIBUTORS ........................................................................................................ 12 FOOD MANUFACTURERS ........................................................................................................................... 12 IMPLICATIONS OF SUPPLY CHAIN STRUCTURE ON DIFFERENTIATION STRATEGIES AND OPPORTUNITIES.. 12 3. OPPORTUNITIES FOR DIFFERENTIATION ................................................................................. 14 EXISTING OPPORTUNITIES ......................................................................................................................... 14 Fine Flavor and Quality ....................................................................................................................... 14 Organic Certification ........................................................................................................................... 16 Fair Trade ............................................................................................................................................ 17 EMERGING TRENDS ................................................................................................................................... 18 Single Country of Origin ...................................................................................................................... 18 Single Estate ......................................................................................................................................... 19 FUTURE POSSIBILITIES .............................................................................................................................. 19 Appellation d'Origine Contrle for Cocoa ..................................................................................... 19 Other Social and Environmental Certification..................................................................................... 20 A WORD OF CAUTION: RETURN ON INVESTMENT IN AN ENVIRONMENT OF SMALL MARKETS ................. 24 4. MARKET SEGMENT PROFILES ...................................................................................................... 25 THE RETAIL MARKET FOR CHOCOLATE .................................................................................................... 25 Market Definition ................................................................................................................................. 25 Mass Market vs. Gourmet..................................................................................................................... 26 Market Size and Growth ....................................................................................................................... 26 Product Trends ..................................................................................................................................... 27 Industry Use of Cocoa Ingredients ....................................................................................................... 29 THE MARKET FOR SWEET BAKED GOODS ................................................................................................. 29 Market Definition ................................................................................................................................. 29 Mass Market vs. Gourmet..................................................................................................................... 29 Market Size and Growth ....................................................................................................................... 30 Product Trends ..................................................................................................................................... 30 Industry Use of Cocoa Ingredients ....................................................................................................... 31 THE MARKET FOR ICE CREAM AND OTHER FROZEN DESSERTS ................................................................ 31 Market Definition ................................................................................................................................. 31 Mass Market vs. Super-premium .......................................................................................................... 32 Market Size and Growth ....................................................................................................................... 32 Product Trends ..................................................................................................................................... 32 THE MARKET FOR DAIRY BASED AND ALTERNATIVE DAIRY BEVERAGES ................................................ 33 Market Size and Growth ....................................................................................................................... 33 Product Trends: Ready-to-Drink.......................................................................................................... 34 Product Trends: Flavorings ................................................................................................................. 34

Product Trends: Alternative Dairy....................................................................................................... 35 THE MARKET FOR BODY CARE PRODUCTS ............................................................................................... 35 Market Definition ................................................................................................................................. 35 Market Size and Growth ....................................................................................................................... 35 Product Trends ..................................................................................................................................... 37 Industry Use of Cocoa Ingredients ....................................................................................................... 37 CONCLUSIONS ........................................................................................................................................... 37 5. OTHER ISSUES AFFECTING THE MARKET ................................................................................ 39 INDUSTRY RESPONSE TO SLAVE LABOR ALLEGATIONS ............................................................................ 39 Background .......................................................................................................................................... 39 Implementation of the Protocol ............................................................................................................ 40 Industry Response to the Findings........................................................................................................ 40 Criticism of the Industry Report and Response .................................................................................... 40 Implications for Marketing Cocoa........................................................................................................ 41 THE NATURAL AND ORGANIC PRODUCTS BOOM....................................................................................... 42 Market Definition ................................................................................................................................. 42 Market Size and Growth ....................................................................................................................... 42 Product Trends ..................................................................................................................................... 43 SMALL PROCESSORS AND CHOCOLATE MANUFACTURERS ON THE HORIZON? .......................................... 44 WORLD COCOA PRICE OUTLOOK .............................................................................................................. 45 6. RECOMMENDATIONS ....................................................................................................................... 48 QUALITY ASSESSMENT.............................................................................................................................. 48 ACCESSING THE MARKETS FOR CERTIFIED PRODUCTS .............................................................................. 49 SINGLE ORIGIN AND ESTATE BRANDING ................................................................................................... 50 STRATEGIC CORPORATE PARTNERSHIPS ................................................................................................... 51 A NOTE ON PERCEPTIONS OF LABOR CONDITIONS .................................................................................... 52 NEXT STEPS: SELF ASSESSMENT FOR DIFFERENTIATION OPPORTUNITIES................................................. 52 APPENDIX 1 .............................................................................................................................................. 53 SELF ASSESSMENT FOR DIFFERENTIATION OPPORTUNITIES APPENDIX 2 .............................................................................................................................................. 56 PRODUCTION/ EXPORT OF FINE FLAVOR, ORGANIC, AND FAIR TRADE CERTIFIED COCOA BEANS BY COUNTRY APPENDIX 3 .............................................................................................................................................. 57 EXAMPLES OF TERROIR (SINGLE ORIGIN AND ESTATE) CHOCOLATES APPENDIX 4 .............................................................................................................................................. 58 GUITTARD PROPOSAL LETTER APPENDIX 5 .............................................................................................................................................. 62 NATURAL FOOD PRODUCTS CONTAINING COCOA INGREDIENTS APPENDIX 6 .............................................................................................................................................. 63 BEN & JERRYS NEW SOCIALLY ALIGNED SUPPLIERS SCREEN REFERENCES ........................................................................................................................................... 65

Glossary of Terms
Cocoa Butter: The fat obtained by pressing cocoa liquor. Cocoa butter is used to make chocolate, as well as some cosmetic products and baked goods. Cocoa Cake: The residual product left after cocoa butter has been pressed from cocoa liquor. Cocoa Nibs: Roasted cocoa beans separated from their husks and broken into small pieces. Cocoa Liquor: The product obtained from cocoa beans after they are roasted, husked, and ground. Cocoa liquor is the main cocoa ingredient in chocolate. It is sometimes referred to as cocoa mass or cocoa paste. Cocoa Powder: Ground from cocoa cake, cocoa powder is used as an ingredient in foods. It is often used as a beverage flavoring, and is a common ingredient in ice cream and baked goods. Commodity Cocoa: Undifferentiated cocoa priced on the basis of the New York or London exchanges, not on the basis of unique attributes or its value as a unique ingredient to manufacturers, marketers, or consumers. Compound Annual Growth Rate (CAGR): Compound annual growth rate is the rate at which a given value would grow each year to reach a given future value over a specific time period. Consumer Products: Products produced for purchase and consumption by individual consumers, as opposed to products used by manufacturing or other types of firms. Couverture: A glossy, professional-quality coating chocolate that typically contains at least 32 percent cocoa butter. Couverture is typically sold in blocks or in drops (i.e., chips) and then melted for use in molds or as a coating. Fair Trade Certification: The most well known system for social auditing of the global supply chain. Fair trade standards guarantee a minimum FOB price, as well as specific labor conditions and other terms of trade. In the US, TransFair USA, the US affiliate of Fairtrade Labelling Organizations, is the agency that provides fair trade certification. Free on Board (FOB): A pricing term used in contractual transactions indicating that the quoted price includes the cost of loading the goods into transport vessels at a specified place. Genetically Modified Organism (GMO): plants and animals that have been genetically altered by the addition of foreign genes to enhance a desired trait (e.g., increased resistance to herbicides or improved nutritional content).

Gourmet: The label "gourmet" is subjective, but in general, gourmet foods are perceived to have higher quality, more limited production, and more limited distribution than massmarket foods. In different industries, the terms gourmet, specialty, and premium are used interchangeably. Marketers: In the context of this report, marketers are companies that market and sell consumer products. Natural Products/ Ingredients: Though not a regulated term, natural typically denotes goods that are free of additives, contain no artificial ingredients or preservatives, and are minimally processed. Organic Certification: Now regulated in the US by federal guidelines, organic certification guarantees that no chemicals were used in the growing, processing, or manufacturing of a product. Pallet: The platform, typically constructed from wood, on which goods in a warehouse are often stacked to facilitate easy transport by forklifts or other machinery. In the context of this report, pallet quantity is used to distinguish purchases of smaller amounts of cocoa ingredients from larger quantities that would be shipped alone in a shipping container. The distinction is important because shipping smaller quantities is typically less cost efficient than shipping larger quantities. Prestige Products: Much like the term gourmet in the food industry, the term prestige in the body care market refers to products that are higher-priced and sold mainly in department and specialty stores. Single Estate Chocolate: Chocolate manufactured from cocoa that comes from a single estate or cooperative. Value Proposition: The unique added value a company offers customers through its products, services, or operations.

Executive Summary
Introduction In search of ways to break away from the risks associated with commodity pricing, cocoa producer organizations, non governmental organizations (NGOs) and international institutions have recognized the need for product differentiation. As a result, many organizations have recently begun promoting quality improvement, certification, and even yield improvement initiatives. Yet in many cases, disconnect from true market demands has left producers and aid agencies that have invested heavily in product improvements now unable to sell expensive products. While the emphasis placed on product improvements has met with mixed results, little focus has been placed on value addition through branding and product line development. Further, decisions to invest in product improvements are often made in a vacuum, not only neglecting the needs of cocoa dealers but also foregoing opportunities to differentiate by developing products that match the needs of consumer goods manufacturers. Objectives of This Study This paper provides small-holder cocoa producer organizations with an assessment of the market for differentiated cocoa. By examining the market landscape and its dynamics from the level of cocoa dealers to consumer goods marketers, the report will facilitate discussion of ways in which cooperatives can best match market demands with their own unique sets of characteristics and capabilities to develop effective and realistic differentiation strategies. Particular attention is given to trends in the consumer goods market, a topic about which producer organizations often receive little information. Differentiation and Competitive Advantage The notion of value addition through differentiation is a foundation of product development and marketing and is widely accepted both in business practice and theory. A differentiated product is one that has unique characteristics real or perceived that can be used to position it in such a way that it holds added value for a particular group of buyers. That added value translates into consumers willingness to pay a premium above the commodity price for the product. The evolution of the chocolate and cocoa-based ingredients markets in the US has begun to open up new opportunities for cocoa producers to differentiate their cocoa. With growing markets for gourmet, natural, and environmentally and socially responsible consumer goods, marketers are open to new ideas for differentiating their products, including the use of unique chocolate and cocoa as an ingredient. On the producer end of the value chain, successful differentiation requires a balance between production of cocoa with truly unique characteristics and enough of an understanding of the market to know

1) who is looking for those characteristics, 2) how to communicate with those buyers, and 3) how to create (or work within) supply chains to get ones cocoa to those buyers. Overview of Value Chain from Export to Consumer Products One of the major challenges to adding value at the cooperative level is the number of linkages in the value chain. From the time of export to distribution of consumer products, the chain includes some combination of dealers, processors, manufacturers, ingredients distributors, and marketers. The length of the supply chain has important implications on differentiation strategies for cocoa growers. Consumer products marketers, likely the most interested in differentiated cocoa, often have little control over where cocoa beans are sourced. This problem is exacerbated by the minimum production runs often imposed by processors and manufacturers. Further, the lengthy supply chain also makes communication between cocoa growers and marketers difficult. Thus, it is difficult to make a differentiated value proposition to marketers. Nonetheless, examples of marketers who have successfully worked with suppliers to source cocoa from particular sources do exist. Opportunities for Differentiation In spite of the structural hurdles of the supply chain, industry experts and buyers interviewed for this study generally saw opportunities for differentiation that could benefit cocoa growers, as well as product manufacturers and marketers. However, initiatives to create differentiation at the cooperative level as a means to add value to cocoa must be devised such that they meet the demands of the market. Conversations with key players in the chocolate and food industries suggest that the differentiation opportunities with the most market potential include high quality, single origin and single estate branding, organic and fair trade certification. Over time, other opportunities could include government sponsored systems to certify unique, regional cocoa origin or new types of social or environmental certification systems. When considering investment in any differentiation strategy, growers should understand that implementation does not guarantee markets for cocoa sold at a premium. Thus, cooperatives must carefully analyze their ability to access differentiated markets and make a realistic comparison of investment in differentiation and expected returns before moving forward. Market Segment Profiles Chocolate manufacturers provide the bulk of the market for processed cocoa. However, a substantial market for cocoa products exists in consumer goods markets other than chocolate, including baked goods, dairy products, and body care products. The health and trends of each of these industries will likely influence their level of interest in differentiated cocoa. While the mainstream segments of most cocoa using industries have matured to the level of price competition (i.e., products competing on price rather than uniqueness) certain segments of the markets, particularly the gourmet and natural products segments, are still open to product differentiation. These are the segments that

are looking for high quality, branded, and certified ingredients and could be willing to pay a premium for unique cocoa and chocolate. Other Issues Affecting the Market While the key factors that should contribute to cooperatives differentiation strategies are the industry and market trends, some additional factors are important to consider. Of particular interest are recent developments regarding concerns over the use of child labor in the production of cocoa in West Africa. While Central America was not singled out as an area of specific concern, media coverage and the potential for Congressional action has made the chocolate and cocoa industries particularly sensitive about the issue of labor conditions. Also important is the boom in the natural and organic product markets, which has resulted in mainstream consumer consciousness about natural and organic products that has translated into increased, mainstream supermarket shelf space. Specific to the chocolate market, there are rumblings of an up-and-coming presence of small processors and manufacturers. This could create an import market opportunity for grower cooperatives. Finally, the relatively flat world price for cocoa appears reasonably conducive to differentiation strategies, although cooperatives should watch price movement and consider potential implications on customer willingness to pay price premiums for unique cocoa. Recommendations Every cocoa producer organization finds itself with a unique set of resources, challenges, and priorities. Add to that the specific characteristics associated with the cocoa the organizations farmers produce and it is clear that there can be no single prescription for a differentiation strategy. Nonetheless, current market conditions suggest several general areas in which cocoa cooperatives can look for differentiation opportunities. In order to take advantage of these opportunities, cooperatives can consider a number of initiatives, some of which include quality assessment and improvement, accessing certified markets, incorporating single origin and/or single estate concepts into a branding initiative, pursuing strategic corporate partnerships via NGOs or specialized dealers, and proactively preparing for questions concerning labor conditions of farmer members and cooperative employees.

1. Differentiation and Competitive Advantage

For many of the worlds cocoa producers, the price received for each years crop is determined in large part by commodity pricing systems, specifically the New York Board of Trade (NYBOT) and London International Financial Futures and Options Exchange (LIFFE) exchanges. By definition, commodity products are largely homogeneous. As such, commodity pricing revolves around worldwide cocoa supply and demand, largely ignoring differences attributable to where cocoa comes from, how it is grown, or who grows it. The notion of value addition through differentiation is a foundation of product development and marketing and is widely accepted both in business practice and theory. A differentiated product is one that has unique characteristics real or perceived that can be used to position it in such a way that it holds added value for a particular group of buyers. That added value translates into consumers willingness to pay a premium above the commodity price for the product. In his pioneering work in the field of business strategy, Porter (1980) identifies product differentiation as an effective means for creating competitive advantage (i.e., earning above average profits). He suggests that competitive advantage creates a defensible position for coping with five competitive market forces industry competition, supplier power, buyer power, potential market entrants, and substitute products. Building on the premise that competitive advantage yields sustained profits, Grant (1991) also asserts that differentiation is a key to creating sustainable, competitive advantage. Included in his discussion is the well-accepted theory that value is added to products through the process of matching consumer needs and interests with product attributes and associations. Relevant to evaluating opportunities for cocoa growers to add value through differentiation, Grant uses a value chain analysis to show how drivers of uniqueness incorporated at the bottom of the value chain can add value to consumer products. Differentiation and Value Addition in Agricultural Markets More recently, scholars and marketing experts have begun to incorporate the general principles of differentiation and value addition into the fields of agricultural economics and agricultural extension. Barone and DeCarlo (2003) liken the challenges of differentiating agricultural commodities (i.e., products that lack physical product distinction) to those facing producers and marketers of products in mature, nonagricultural industries. Hayes et al (2003) affirm the typical commodity farmers status as a price taker and then proceed to describe how farmer owned branding, a form of differentiation, transforms farmers into price makers. Several authors expand on the notion of value addition as a way for farmers to capture larger portions of retail prices. Ellerman (2003) shows that the portion of the consumers dollar that reaches the average US farmer decreased from 40 percent in 1910 to 10 percent in 1990. He then suggests that while value addition will not likely raise commodity prices, farmers can use value addition to increase their share of products

retail prices. Focusing specifically on value addition through brand development, Giddens (2002) suggests that branded agricultural products command a price premium from retailers because they stimulate increased consumer spending. Specifically pertinent to this paper, Barone and DeCarlo (2003) write that promotional focus on non-physical attributes and association with some type of quality guarantee are particularly useful for distinguishing agricultural commodities and thus adding value. In an attempt to show why the market will support a price premium for branded and other types of value-added food products, Coltrain (2002) cites data that show relatively constant real-food prices from 1960 through the present and a 300 percent increase in the average US households expendable income over the same period. These trends, suggest the author, have left consumers less sensitive to the price of food than in the past and more willing to pay a premium for high quality, convenience and gourmet branding. Differentiation as an Opportunity for Cocoa Producers The evolution of the chocolate and cocoa-based ingredients markets in the US has begun to open up new opportunities for cocoa producers to differentiate their cocoa. With growing markets for gourmet, natural, and environmentally and socially responsible consumer goods, marketers are open to new ideas for differentiating their products, including the use of unique chocolate and cocoa as an ingredient. On the producer end of the value chain, successful differentiation requires a balance between production of cocoa with truly unique characteristics and enough of an understanding of the market to know 1) who is looking for those characteristics, 2) how to communicate with those buyers, and 3) how to create (or work within) supply chains to get ones cocoa to those buyers.

2. Overview of Value Chain from Export to Consumer Products

One of the major challenges to adding value at the cooperative level is the number of linkages in the value chain. In order to begin to think about alternatives to the status quo commodity sourcing model it is important to understand to whom differentiation matters. As subsequent sections will illustrate, the most fruitful opportunities to market differentiated, value added cocoa will likely involve an active effort to coordinate with a number of companies at different levels of the chain. As such, an understanding of the different roles of companies in the chain is crucial. Box 2.1 puts the following descriptions into the context of the entire supply chain.
Box 2.1 The Typical Roles Played in the Supply Chain

Dealers In the most typical types of transactions, cocoa dealers are the first intermediaries to take possession of cocoa from the exporting agent. Few dealers are involved with the processing of cocoa beans or the manufacture of chocolate couverture, cocoa based ingredients, or finished consumer products. The vast majority of cocoa beans purchased by dealers are for use in mass market ingredients and consumer products.1 Such transactions most often involve commodity cocoa and thus any differentiation of cocoa beans will be of little importance. Yet even in the case of cocoa purchases for use in fine flavor and differentiated ingredients and consumer products, the fact that the dealers are so far removed from the manufacture and sale of consumer products has important implications for the cocoa exporter and producer looking to differentiate. As both a dealer specializing in fine flavor cocoa and US manufacturer of gourmet chocolate describe, most dealers are not concerned with differentiation based on quality or other factors above and beyond their customers requirements.2 This does

Cocoa Exporter

Dealers

Processors Cocoa Ingredients Distributors Food Manufacturers

Chocolate Manufacturers

Chocolate Marketers

Food Distributors

Retail Outlet

Consumers
1

According to the International Cocoa Organization and the US Department of Agriculture, only 3.2% of the worlds cocoa production in 1998/1999 was considered fine-flavor cocoa, the category typically (but not exclusively) associated with gourmet chocolate and cocoa ingredients (International Trade and Development Centre UNCTAD/WTO, 2001). 2 Discussions with these industry sources and others cited in this paper were conducted by phone during the winter and spring of 2004.

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not suggest that dealers do not contract and sample for quality or require proof of origin or certification. However, it is the manufacturers and marketers who are the drivers of the market for differentiated cocoa and who should be the target audiences of differentiation strategies. Processors Cocoa processors, sometimes referred to as grinders, roast beans and convert them into nibs, liquor, butter, cake and powder. The cocoa and chocolate industries differentiate between processing and chocolate manufacturing. While some of the major cocoa processors also manufacture chocolate, the majority of companies that manufacture chocolate do not have the capacity to process beans.3 Of the companies that serve both functions, very few manufacture consumer products in the US. Processors do manufacture cocoa powder in finished form, yet as is the case with chocolate, few processors market consumer cocoa powder products.4 Chocolate Manufacturers With the exception of the small number of companies that process and manufacture chocolate, chocolate manufacturers purchase cocoa liquor and butter from cocoa processors. It is as this stage in the value chain that significant choices about quality and origin are made. Manufacturers develop recipes that include various combinations of cocoa liquors and butters to create specific flavor profiles. Typically, manufacturers will create recipes that incorporate multiple origins. However, gourmet manufacturers are responding to a new and growing trend for single country of origin and even single estate chocolate. Chocolate Marketers Much of the chocolate sold in the US is marketed by companies that either purchase finished products (e.g., chocolate bars or chocolate drops) from manufacturers or purchase bulk chocolate in solid or liquid form and then mold and package it themselves. In either case, marketers often choose the chocolate for their products from a selection of standard chocolate recipes regularly produced by chocolate manufacturers. Because these chocolates are produced in large quantities, marketers benefit from scale pricing and are not faced with large minimum run requirements. Should a marketer choose to have chocolate manufactured to unique specifications, they must meet minimum run requirements and pay for the costs associated with cleaning equipment. Because of this dynamic, small chocolate marketers often have little control over the specific origin and quality of the cocoa used in their products. They do, however, control their own brands
3

Notable exceptions of processors who also manufacture chocolate in the US are ADM, Cargill, Nestle, Hersheys Chocolate, Worlds Finest Chocolate, Blommer, Guittard, and Scharffen Berger. Of these companies, only Nestle, Hersheys Chocolate, Worlds Finest Chocolate, Guittard and Scharffen Berger market consumer chocolate products. 4 Hersheys, Nestle, and Scharffen Berger are the only US processors who market cocoa powder to consumers.

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and positioning strategies and can thus incorporate the attributes of the cocoa into packaging and advertising to the extent that they are aware of its origin. Cocoa Ingredients Distributors Many small and medium sized consumer products food manufacturers purchase small quantities of cocoa ingredients from wholesale ingredients distributors. This is particularly true of small bakeries, which purchase from large, national distributors, specialty distributors that deal with niche markets like organic, and small, local distributors. Larger distributors typically buy ingredients from processors and chocolate manufacturers in container loads and often break up or repack them for resale. Dealing with these quantities, large distributors may have some amount of control over the origins of the cocoa used in their ingredients products. Smaller distributors buy in pallet quantities and break them up to sell to small customers interested in a single 55 lb. bag of cocoa powder or box of chocolate chips. These companies have much less market power than their larger competition and thus, like food manufacturers and small chocolate marketers, have little influence on the source of the cocoa used in their products. Food Manufacturers Like chocolate marketers, manufacturers of food products like ice cream, cookies, and chocolate milk are dependent on other companies for the chocolate and cocoa ingredients they use in their products. To minimize costs, it is typical for food manufacturers to choose chocolate and cocoa ingredients manufactured to a standard set of specifications rather than to have ingredients manufactured to unique specifications. According to the CEO of one high profile organic food marketer, buying chocolate ingredients made to standard specifications makes it nearly impossible to choose the source of the cocoa beans used in the manufacturing. That said, as questions about forced child labor in cocoa production have recently been raised, many companies express interest in sourcing fair trade certified ingredients if the quality is comparable to other products and the ingredients are available through typical suppliers. This example suggests that while there are supply chain hurdles to navigate, interest in differentiated products made from differentiated cocoa does exist. Implications of Supply Chain Structure on Differentiation Strategies and Opportunities The number of stages in the cocoa and chocolate supply chain alone makes the process of cocoa differentiation difficult. Unlike the supply chain in the specialty coffee market, in which a producer cooperative could, in theory, put ten sacks of green coffee on an airplane bound for a small roasters home town, the process required to transform cocoa beans into consumer products almost always involves several companies. Ironically, the companies most likely to be interested in using differentiated cocoa are small companies looking to differentiate their own products in a market dominated by larger players. By nature of their limited buying power, these small companies find it difficult to play a significant role in choosing the source of the cocoa used in their products.

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One of the biggest factors contributing to this dynamic is the minimum run requirements of processors and manufacturers. In order to specify a unique cocoa source, processors generally require minimum runs of at least one container (i.e., 12.5 metric tons or approximately 27,500 pounds). For a chocolate manufacturer or marketer, this represents roughly 17,500 kilograms (38,500 pounds) of dark chocolate or 27,000 kilograms (60,000 pounds) of milk chocolate.5 While these quantities may be insignificant for a large chocolate marketer, a small company wishing to maintain a diverse product range would have difficulty meeting these minimum requirements. Even if the differentiated cocoa beans were already in the supply chain, marketers face minimum run requirements from manufacturers. One gourmet manufacturer said that his companys minimum run to produce chocolate from a unique source would be approximately 6,000 pounds. In terms of quantity this would be far more manageable for a small marketer than the chocolate produced from a full container of beans. However, the manufacturers costs for cleaning machinery and switching to a unique cocoa source could make such small production runs infeasible. Despite these structural challenges, there are marketers who have managed to find solutions that enable them to specify the source of the cocoa used in their products. The Day Chocolate Company, Dagoba Organic Chocolate, and Newmans Own Organics (none of which process or manufacture beans or chocolate) all specify the source of the cocoa for their chocolate from small farmer cooperatives of their choosing. Above and beyond the challenges inherent in production, the length of the supply chain has historically prevented communication between marketers and producers. From the perspective of the marketer, this makes it difficult to identify producers who can provide differentiated cocoa that meets specified criteria. From the perspective of the producers, this makes it difficult to understand what types of differentiation the market is looking for and to know which companies to approach with unique value propositions.

Rough approximation based on a discussion with a representative from the Barry Callebaut chocolate company.

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3. Opportunities for Differentiation

In spite of the structural hurdles of the supply chain, industry experts and buyers interviewed for this study generally saw opportunities for differentiation that could benefit cocoa growers, as well as product manufacturers and marketers. However, initiatives to create differentiation at the cooperative level as a means to add value to cocoa must be devised such that they meet the demands of the market. A key question is the degree to which markets are looking for and are open to specific differentiators. Conversations with key players in the chocolate and food industries suggest that the differentiation opportunities with the most market potential include high quality, single origin and single estate branding, organic and fair trade certification. As new initiatives are launched, other opportunities for differentiation may become viable. Existing Opportunities While many unique opportunities to add value to cocoa beans may exist, those with the most proven track records in the US market are high quality/fine flavor, organic certified, and fair trade certified. Appendix 2 shows production (or export in the case of fair trade) of fine flavor, organic, and fair trade beans by country. Fine Flavor and Quality When asked for their opinions about the most important value added trends, nearly all of the industry sources from the gourmet segment of the chocolate market spoke first about fine flavor cocoa and quality. The chocolate and cocoa industries characterize criollo, trinitario, and the Ecuadorian grown nacional sub-species of forastero beans as fine flavor. Ordinary forastero beans are not considered fine flavor (chocophile.com, 2004). From the perspective of the grower, the ability to tap into the fine flavor markets represents an opportunity for significant premiums above commodity pricing. While premiums for fine flavor cocoa vary widely, the FOB price for some beans can reach up to $800 per metric ton more than the New York or London exchange prices in the most extreme cases.6 The premiums paid for fine flavor beans are supported through price premiums paid for gourmet chocolate and cocoa in the consumer goods market. As Table 3.1 illustrates, gourmet chocolate bars (typically made with fine flavor beans) retail at prices significantly higher than mass market bars (made from ordinary beans).

In an interview with one US bean dealer, Ocumare cocoa from Ecuador was given as an example of premiums that can be put on the most sought after beans. In a $1400 per metric ton market, these beans were selling for approximately $2200 per metric ton.

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Table 3.1 Gourmet Chocolate Bar Pricing as Compared to Hersheys Milk Chocolate (Mass Market) Brand Hershey's Milk Chocolate Terra Nostra Chocolate Valrhona Chocolate Newman's Own Organic Scharffen Berger Michel Cluizel Dark Chocolate Equivalent per/ pound Price $ 3.69 $ 7.73 $11.84 $13.20 $15.95 $20.80

While fine flavor beans are typically perceived to have a more intense flavor and aroma than ordinary forastero beans, the value placed on fine flavor depends as much on the quality of the individual beans as on their species. While marketers are able to use fine flavor, not to mention organic, fair trade, single origin, and other differentiators, in their branding strategies, companies selling gourmet products stress the need for high quality beans and report quality as one of the key factors in choosing a bean source. From the perspective of some of the individuals in the gourmet chocolate industry who are purchasing beans, quality is the biggest limitation for farmer cooperatives looking to enter the fine flavor market. Specifically, buyers point to poor post harvest processing as an area that they perceive to be responsible for reducing the quality of beans. As one industry expert suggests, it is difficult to evaluate the inherent quality of beans until the processing is done correctly. In addition to mold problems caused by inadequate drying, fine flavor buyers cite inadequate fermentation as a typical problem. Compounding the issue of improper fermentation, suggests one buyer, is misinformation about fermentation that some farmers receive from technical advisors. To maximize the value of the beans to buyers, the specific length of fermentation must be matched to the bean characteristics and climatic conditions. Buyers suggest that technicians often prescribe fermentation times by rote rather than in response to specific conditions and market needs. In the best of scenarios, the buyers themselves can work with technicians to determine the optimal length of the fermentation process. One high end processor recounts his interaction with a Costa Rican estate owner to perfect the fermentation process. At the start of the harvest, the manufacturer requested cocoa samples from the estate that were fermented for different numbers of days. Through a process of back and forth communication, the processor was able to instruct the estate on the ideal fermentation process that was then incorporated into post harvest processing for the remainder of the season. Clearly this process was simplified by the fact that the processors instructions did not need to be disseminated to hundreds of farmers. Nonetheless, it points to the value of tailoring the fermentation process to the specific processing conditions and to looking for ways to establish lines of communication between processors and growers. Further, opportunities for farmer cooperatives to solicit feedback from buyers on post harvesting do exist, sometimes free of charge (see Appendix 4 for one example).

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Organic Certification While still only a small percentage of the total market, organic chocolate and cocoa are growing in importance. Curtis Vreeland, a chocolate industry analyst who writes an annual summary of the organic confectionery market for Candy Industry magazine, cited a 30 percent growth rate for organic chocolate in 2003 (Vreeland, October 2003). This figure rose from 11 percent the previous year, and Vreeland expects growth to remain in the 20-30 percent range in the year to come. Vreeland attributes the surge to a number of factors, including the publicity generated by the new United States Department of Agriculture (USDA) organic standards, introduction of gourmet organic chocolate products, and the increased availability of organic chocolates as they make their way into national distribution channels (Vreeland, October 2003). The growth of organic chocolate is a part of a wider US trend in organic foods. By the year 2007, the US market for organic products is expected to reach $30.7 billion. This represents a compound annual growth rate (CAGR) of 21.4 percent, up slightly from the 21.2 percent growth rate between 1997 and 2002 (Organic Trade Association, 2004). Outside of chocolate, organic cocoa is used in a wide range of organic baked goods and dairy and soy products. Interestingly, some products marketed as containing organic ingredients include a small enough quantity of cocoa to use conventional rather than organic powder or chocolate ingredients, as per the USDA standards. This suggests that organic certification may not always be necessary to take advantage of the growing organic foods market. Over 60 percent of the organic cocoa beans being produced come from Central America and the Caribbean. The Dominican Republic alone produces more than half of the worlds organic bean supply (UNCTAD/WTO, 2001). While organic certification has added significant value for many farmers, many in the chocolate industry report disappointment in the quality of organic beans. One well respected industry source expressed concern that the majority of organic beans are being produced in countries that have lost their reputations for high quality production, in particular the Dominican Republic. On the consumer side, a 2002 study by the market research firm The Hartman Group indicated that consumers felt organic chocolates tasted flat and were not quality products (Vreeland, 2003). Given the disappointment in the quality of organic cocoa and the growth of the organic market, Curtis Vreeland suggests that there will always be a market for high quality, organic cocoa beans. That said, another industry expert believes that Central American and Caribbean organic growers could face serious competition if West African countries develop organic production of high quality beans that would have an inherently less acidic flavor profile because of where they are grown. There has been some discussion that organic conversion is under way in Brazil, Cameroon, Cte dIvoire, Cuba, Ecuador, Ghana, Guyana, Haiti, Honduras, Indonesia, Panama, Peru, the Philippines, Sao Tom and Togo (Sippo, 2004). However, it is unclear if and when these countries will be viable sources of organic cocoa.

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Fair Trade Alongside the growth in concern for how companies source the ingredients for their products, consumers have become increasingly interested in rewarding companies that actively support good causes. Cone, Inc. and Roper Starch Worldwide, Inc., both market research firms, began tracking public attitudes about cause related marketing in 1993. Their second study, tracking consumers between 1993 and 1998, suggests that consumer interest in cause related products has remained strong. In the midst of this general trend, the market for fair trade certified products has seen tremendous growth since mainstream introduction in the US in 1999. Fair trade certified coffee, the fair trade certified product with the largest sales in the US, has seen an increase of sales from 1.9 million pounds in 1999 to 18.7 million pounds in 2003. In 2000, the first certified tea products were introduced in the US market, and in 2002, the first certified chocolate and cocoa products. In 2003, TransFair USA, the US fair trade certification agency, certified 258,000 pounds of cocoa in the form of chocolate and other products. While fair trade in the US is still in its infancy as compared to Europe, a recent article in The Natural Foods Merchandiser suggests significant potential for growth. Citing a 2003 survey by The Natural Marketing Institute, the article reports that 51 percent of the 2,000 general population respondents said that fair trade certified ingredients were very or somewhat important in their purchase of a particular product. Of respondents considered to be Lifestyles of Health and Sustainability consumers, fair trade importance jumped to 76 percent (Nachman-Hunt, 2003).
Box 3.1 Fair Trade Pricing Standards The fair trade minimum price for all standard grades of cocoa is $1,750 FOB per metric ton. This fair trade minimum price includes a fair trade premium of $150 FOB per metric ton. If the world market (i.e., exchange price) rises above the $1,600, the fair trade minimum price is fixed as follows: world market price + fair trade premium of $150 per metric ton. For example: when the world price is $1,650 per metric ton, the fair trade price is $1,800 per metric ton. When the world price is $1,300 per metric ton, the fair trade price is $1,750 per metric ton. When the world price is $1,200 per metric ton, the fair trade price is $1,750 per metric ton. Source: Fairtrade Labelling Organizations

The world market for fair trade cocoa beans has grown at an average annual rate of 19.2 percent between 1997 and 2003. Nonetheless, fair trade certified producer organizations are selling only a portion of their cocoa eligible for fair trade certification at a fair trade price. Interestingly, about 50 percent of the beans exported on fair trade terms are also organic certified, which suggests that the quality issues facing organic production also affect at least some of the fair trade producers. Discussions with bean buyers, manufacturers, and marketers lend support to this concern. Recently, Fairtrade Labelling Organizations (FLO), the international fair trade certification agency, instituted a fee for certification at the level of the producer organizations. This change not only has financial

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implications but may also increase the number of organizations competing for fair trade sales, as certification will be open to all organizations that can pay the associated fees and meet the certification criteria. Farmer cooperatives that have faced quality issues in the past may find themselves at a particular disadvantage if new organizations with higher quality beans become certified. Emerging Trends Among the emerging trends in the chocolate industry, the two that hold the most opportunity for growers to add value are single country of origin and single estate chocolates.7 Because both models incorporate cocoa origin into the brand identity of the chocolate, chocolate manufacturers and marketers become dependent on their bean sources. While this dynamic has discouraged many companies from launching single origin or single estate products, increasingly sophisticated and adventurous consumers are putting pressure on marketers to introduce more single origin and single estate products. To the extent that countries, regions, and cooperatives can deliver a consistent volume of high quality cocoa with a unique flavor profile, there appear to be increasing opportunities to develop long term relationships with manufacturers and marketers who are willing to pay a premium for their cocoa. Single Country of Origin Over the past two to three years, an increasing number of chocolate marketers have launched chocolate products with cocoa from single countries of origin. Appendix 3 lists some of the single origin products that can be found in the US market today. Experts from the chocolate industry express different opinions about the continued growth of single origin chocolate. While Barry Callebaut, a multinational chocolate manufacturer that supplies the US market, has a line of single origin chocolate couverture, a representative from the company reports that the market for these products is small and sees limited growth over the next few years. Meanwhile, other industry analysts and chocolate marketers see the trend continuing, particularly among a growing number of small marketers who are looking for ways to differentiate their products from those of larger, more well known companies. Support for these opinions can be found on the shelves of many upscale retail outlets where a number of single origin chocolates have begun to appear. If single origin chocolate does continue to grow in popularity, manufacturers will face certain sourcing challenges that will influence their decisions about which origins to choose for their products, as well as which growers to choose to provide the beans. The first consideration is choosing origins that produce cocoa with a flavor profile that is not only unique but is also able to a stand alone (i.e., not blended with other origins) in chocolate with 70 percent cocoa content. In a typical gourmet chocolate bar, beans from
Single country of origin or single estate chocolates are sometimes referred to as terroir, single origin, pure origin, or grand cru chocolates. The term varietal refers to chocolate made from cocoa from a single species of bean.
7

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two or more origins are mixed to create a complex flavor. Asked about single origin chocolates, representatives from two well-known manufacturers expressed their opinion that the complexity of single origin chocolates could not match those of blends. On the opposite extreme, some in the chocolate industry regard the flavor profiles of some origins, including many Central American countries, as too harsh. Where a mild bean from Sao Tome can work well in a 70 percent cocoa chocolate, a more acidic bean from countries like Costa Rica could be too bitter for most palates. A second major consideration in choosing single origin sources is the quality and consistency of supply. Manufacturers and marketers who incorporate single origin chocolates into their product range risk the inability to deliver product should the supply of quality beans from a single origin run short. For that reason, any sensible manufacturer or marketer will carefully evaluate the supply and quality consistency of beans from a particular origin before launching a product made with beans solely from that origin. From the producers side, this means a burden of proof to show the ability to deliver high quality cocoa in sizeable and consistent quantities over multiple seasons. Single Estate While only starting to emerge, there has been recent interest in chocolate made with cocoa that comes not just from a single country of origin but from a single estate or cooperative. In terms of this differentiation strategy, there is no difference between cocoa from a single estate or single grower cooperative. However, for the moment, the chocolate industry typically uses the terminology single estate to refer to actual estates as well as cooperatives. Notable single estate products are marketed by Cluizel Chocolate of France, which offers single estate chocolate with cocoa from Los Ancones estate in San Domingo, Dominican Republic and Hacienda Concepcion estate in Venezuela, and Dagoba Organic Chocolate, which recently launched a fair trade and organic certified single estate bar with cocoa from the CONACADO cooperative in the Dominican Republic. Though single estate chocolate compounds the issue of supply and quality consistency, one small marketer hopes to move increasingly in the direction of offering single estate chocolates as a way to differentiate in the crowded market. In preparation, this marketer (who hopes to begin processing and manufacturing in the next two to five years) is already looking for sources of unique, high quality, single origin and single estate cocoa. While the market for single estate beans is likely to remain small, it seems as though opportunities to market branded, single estate cocoa may begin to appear for at least a limited number of fine flavor bean producers. Future Possibilities Appellation d'Origine Contrle for Cocoa The Appellation d'Origine Contrle (AOC) system grants certain French wines, cheeses, butters, and other agricultural products certification of regional origin by the governments Institut National des Appellation d'Origine (INAO). French law makes it

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illegal to manufacture and sell a product under one of the AOC-controlled names if it does not comply with the criteria of the AOC. These criteria specify: The product will be produced consistently in the traditional manner. It will be produced with ingredients from a designated geographical area, and will be made and at least partially aged in this area. The characteristics of the product will be consistent and in line with clearly defined standards. The production is strictly regulated by a control commission following AOC-defined standards (Wikipedia, 2004).

Similar certification of regional origin exists in Italy (Denominazione di Origine Controllata), Spain (Denominacin de Origen), Portugal (Denominao de Origem Controlada), Austria (Districtus Austria Controllatus), and South Africa (Wine of Origin). Gourmet chocolate manufacturers and industry analysts, including Clay Gordon of the consulting firm pureorigin, suggest that there are opportunities for creating systems of certifying regional origin of cocoa beans. Where the commodity market values all cocoa equally, gourmet and fine flavor buyers could begin to value unique cocoa from specific regions at a premium. From the perspective of growers, such systems could add value by adding a level of legitimacy to the process of creating a differentiated identity. While an appealing concept, industry experts caution that in order to create effective regional origin certification there must be capacity to specify and enforce minimum quality requirements and the infrastructure and discipline to separate out beans that do not meet those requirements. One bean buyer uses the example of Ecuadors Arriba Summer Season grading standard as an example of a system that has lost its value because its integrity has not been maintained. Designed to indicate a growing season and region that yields unique bean characteristics, failure to enforce grading criteria has left the appellation significantly less meaningful to buyers. Other Social and Environmental Certification Forest Stewardship Council Non Timber Forest Product Certification: While most of the products certified by the Forest Stewardship Council (FSC) are timber and manufactured wood products, FSC has somewhat recently initiated a program to certify the sustainable production of non timber forest products (NTFPs) grown in FSC-certified forests. FSC defines NTFPs as all forest products except timber, including other materials obtained from trees such as resins and leaves, as well as any other plant and animal products (Brown, Robinson, and Karmann, 2002). One of the challenges of NTFP certification is that at present, certification criteria for individual products grown in individual forest ecosystems must be developed separately. This makes certification of new products time consuming and often prohibitively expensive. Additionally, it makes it difficult to understand exactly which NTFPs are eligible for certification. To date, cocoa is not among the NTFPs certified by FSC (see

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Table 3.2 for a list of NTFPs currently certified by FSC). While a representative from FSCs US partner SmartWood indicated that cocoa would be eligible for NTFP certification, a researcher on forest certification systems from the US NGO Forest Trends suggested that as an agricultural product, cocoa would not qualify for certification.
Table 3.2 Non Timber Forest Products Certified by The Forest Stewardship Council as of October 2002 Product Description Chicle (latex) Ingredient in chewing gum Maple syrup Food product-sweet syrup Acai juice Beverage Palm hearts Food product 30 species of plants Ingredients in cosmetics Brazil nuts Food product Oak tree bark Incense Venison Food Product Source: Forest Stewardship Council Country Mexico USA Brazil Brazil Brazil Peru Denmark Scotland

Another important caveat of NFTP is that products must be grown in forests that are fully FSC certified. In other words, NTFP certification is a supplement to certification of sustainable forest management that includes timber. For communities that have markets for FSC certified timber, investment in NTFP certification of cocoa may be a way to add value. For those communities that do not anticipate selling wood into the FSC market, full forest certification, a prerequisite for NTFP certification, will not likely make sense. Thus, a cooperatives economic decision to pursue FSC certification should be primarily based on the return on investment of timber certification, not on NTFP certification of cocoa. Finally, it is important to understand that at present, the FSC label does not have a significant presence on consumer goods. While some manufacturers and retailers mention FSC timber certification in their company literature, few actually place the logo on consumer products. Although certified timber suppliers are receiving a premium for their wood, a representative from Forest Trends suggests that this premium is associated with the current scarcity of certified timber rather than value placed on the certification itself. On the NTFP side, there are currently no certified products that display the FSC logo in the US market. Thus, for the moment, it is unlikely that cocoa growers would be adding significant value to their crops by obtaining the two FSC certifications necessary to sell cocoa as FSC-certified. MesoAmerican Biological Corridor Certification: The MesoAmerican Biological Corridor (MBC) is a conservation initiative aimed at preserving biodiversity through much of the Central American region. The MBC runs through eight countries from Southern Mexico to Panama, comprising 30% of Central America. Participants in various projects to protect the MBC have included partner governments, as well as international institutions such as the World Bank, GEF, GTZ, USAID, UNDP and UNEP (Comisin Centroamericana de Ambiente y Desarrollo, 2004).

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Along with efforts focused on the physical environment, the consortium of groups working on the MBC initiative has incorporated a component focused on creation of economic incentives to encourage and facilitate environmentally sustainable livelihoods of the communities that live within the MBC. Among the products produced by communities in the region, cocoa, wood, coffee, bananas, wicker, and cashews have been identified as those that could lend themselves to incentivized sustainable production (M.Castro-Salazar, personal interview, February 27, 2004).8 The business plan for development of the MBC produced by Comisin Centroamericana de Ambiente y Desarrollo (CCAD) includes two potential opportunities for cocoa producers in the region. The first opportunity is technical assistance, which the business plan suggests will focus on improving flows of information to small/ medium enterprises and civil society organizations, as well as export marketing and promotion (Comisin Centroamericana de Ambiente y Desarrollo, 2002). While the business plan outlines sizeable budgets, it is unclear to what extent the programs outlined in the business plan have been implemented. Nonetheless, to the extent that support of quality improvement, certification, marketing and promotion falls under the guidelines of CCAD programs, there may be interesting opportunities for funding. The second opportunity mentioned in the MBC business plan is development of MBCspecific certification. Like other certification systems, an MBC certification would attempt to add market value to products that bear an MBC label or other type of accreditation. In evaluating potential participation in an MBC certification program, grower organizations should understand that to date MBC certification has no presence in the US market. Further, while the CCAD business plan includes over $15 million for communications programs, there is presently little if any recognition among most US consumers of the MesoAmerican Biological Corridor project. Thus, in the short term it is somewhat unlikely that MBC certification will add significant value. Nonetheless, the MBC story would probably resonate with some consumer segments and could thus be incorporated as one component of a consumer products branding. With reference to products like Ben & Jerrys Rainforest Crunch ice cream or the Endangered Species Chocolate Companys products, grower cooperatives may be able to distinguish their cocoa in the market through MBC branding regardless of the certification initiative. Rainforest Alliance Certification: While the focus of the Rainforest Alliance (RA) certification program has been coffee, RA has worked with cocoa growers since the mid 1990s. To date, there are no RA certified chocolate or cocoa products in the US market, but a representative from RA suggests that introduction of the first certified products is likely by summer 2004. Currently, RA certified cocoa comes from a single source a cooperative of small growers in Ecuador. In partnership with the local NGO Conservacin y Desarrollo, RA worked to organize and build the grower cooperatives it now certifies. Much of the support provided by Conservacin y Desarrollo consisted of capacity building in the
8

Mauricio Castro-Salazar is the ex-Secretary General of the Comisin Centroamericana de Ambiente y Desarrollo.

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areas of business infrastructure, cocoa processing, and technology transfer. With the capacity in place for commercial operations, RA is now working to help connect the growers cooperative with potential buyers. While the model of infrastructure development, certification, and marketing support will appeal to many cocoa cooperatives, a representative from RA clarified that initiatives undertaken with individual producers and within individual countries are not homogeneous. Because RA typically works by supporting its network of local NGOs, the specific nature of a given project is shaped by the unique competencies of each partner. In the case of the Ecuador project, the cocoa project was shaped by Conservacin y Desarrollos core competency in cooperative organization and infrastructure development. However, future work with other cocoa producer organizations may be quite different from the RAs work in Ecuador and, depending on the circumstances, may only involve certification. The RA certification aims to help farmers add value to their products. However, unlike the fair trade certification model, RA certification does not mandate that a minimum price is paid to cooperatives. Instead, grower cooperatives are at liberty to negotiate price premiums for certified product with buyers. Although there is not yet a track record to evaluate premiums received for RA certified cocoa, RA reports that premiums for certified coffee has ranged from $0.05-$0.55 above the typical market value (typically $0.10-$0.40 per pound above the exchange price for conventional specialty or organic coffee, respectively). As a point of comparison, fair trade certified coffee sells for a minimum of $1.26 per pound for conventional coffee and $1.41 per pound for organic coffee (approximately $0.45 on average above the typical market value in todays market).9 Because RA certification does not yet have a presence in the chocolate or cocoa ingredients markets, any opportunities to add value to cocoa that the initiative may create will not be short-term opportunities. Further, because the RA cocoa program is in its infancy, it is unlikely that many cooperatives will be able to become part of the system immediately. Nonetheless, where there are opportunities to work with RA and its network of NGO partners to develop infrastructure and markets, there may be very tangible benefits that could come from the relationship. Further, while the RA label does not have a presence on chocolate or cocoa products, RA approximates that 100 companies are using the label on coffee products in the US market (Rainforest Alliance representative, personal interview, April 30, 2003). Thus, unlike certification programs that have yet to register any consumer recognition, the RA label on chocolate and cocoa products will likely resonate with some consumers as soon as it reaches the shelves.

Estimation based on an assumption of market value of $0.05 over an exchange price of $0.75 per pound for conventional specialty coffee and $0.20 over an exchange price of $0.75 per pound for organic coffee.

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A Word of Caution: Return on Investment in an Environment of Small Markets While these opportunities for differentiation are promising, it is important for grower cooperatives to understand that the market for differentiated cocoa is limited. While the markets for fine flavor, organic, fair trade, and single origin consumer products are growing, opportunities for cooperatives to sell into these markets are limited by 1) demand and 2) access. Every differentiation opportunity described above would require some type of investment by cooperatives, whether to pay for certification fees, develop branding strategies, or simply make the necessary connections to open up market access. Like any business decision, it is crucial that investment in differentiation strategies be weighed against expected returns. A premium price for just one or two containers of differentiated cocoa could cover the investment associated with a differentiation strategy. However, the real question a cooperative must ask before making investments in differentiation is whether or not it will actually be able to find buyers for those one or two containers after the investment has been made. As one fine flavor dealer remarked, cooperatives with limited resources may get a better return on investment in organizational strengthening, basic post-harvest process improvements, and diversification options than from investments in the marketing infrastructure needed to launch a differentiation strategy. Box 3.2 illustrates one way in which cooperatives can begin to evaluate the benefits and costs of investing in certification.
Box 3.2 Sample Evaluation of Certification Benefits and Costs Using the Fair Trade System as an Example Estimated Sales of Certified Cocoa (Containers) Price Premium Above Market Value Initial Certification Fees Annual Certification Fees Volume Based Certification Fee Setup and Maintenance of Control Process Value of Human Resources Allocated to Certification Year 2 Year 5 2 3 6 $ 7,000 $ 10,500 $ 21,000 $ 4,300 $ 238 $ 3,000 $ 600 $ 600 $ $ 357 $ $ 1,000 $ $ 600 $ 600 714 1,000 600 Year 1

Net Revenue from Certification $ (1,138) $ 7,943 $ 18,086 *Assumes constant exchange price of $1,400/ MT. Certification fees estimated based on information from Fairtrade Labelling Organizations (Fairtrade Labelling Organizations, 2004) While this model may not reflect exact costs or incorporate all costs associated with fair trade certification, it illustrates a simple way for cooperative management to assess the merits of investing in various types of certification. A more sophisticated analysis would include the opportunity costs of investing in certification instead of other initiatives. For example, what if the $8138 invested in certification in year 1 was spent on a quality improvement initiative that could raise the value of all of the cooperatives cocoa by $400 per metric ton? If this cost is incorporated into the analysis, net revenue associated with certification will decline. Additionally, there may be some benefits that are difficult to quantify but worthy of consideration. For example, a buyer attracted to the cooperative because of fair trade certification may also become a new customer for conventional beans. Further, fair trade may open up opportunities for pre-harvest financing or provide other benefits, economic or otherwise.

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4. Market Segment Profiles

The value of differentiation, whether by product profile, quality, branding, or certification, will ultimately be judged at the consumer products level. Very few companies will invest in value added differentiation (even fair trade or other social or environmental certification) unless that differentiation is somehow meaningful on the supermarket shelves. For that reason, it is product marketers (responding to consumers) who drive the demand for differentiation. Chocolate manufacturers provide the bulk of the market for processed cocoa. However, a substantial market for cocoa products exists in consumer goods markets other than chocolate, including baked goods (e.g., chocolate chip cookies), dairy products (e.g., chocolate milk), and body care products (e.g., cocoa butter soaps and moisturizers). The health and trends of each of these industries will likely influence their level of interest in differentiated cocoa. While the mainstream segments of most cocoa-using industries have matured to the level of price competition (i.e., products competing on price rather than uniqueness), certain segments of the markets, particularly the gourmet and natural products segments, are still open to product differentiation. In order for cocoa cooperatives to best position their products to capture added value, it is important to understand which segments of cocoa using industries will be looking for ways to differentiate their products in the market. These are the segments that are looking for high quality, branded, and authenticated or certified ingredients and could be willing to pay a premium for unique cocoa and chocolate. The Retail Market for Chocolate Market Definition The retail market for chocolate includes not only chocolate bars but also boxed/ bagged candy, snack-sized candy, and gift box chocolate, as well as chocolate chips, baking chocolate, and dessert toppings sold to retail consumers. The chocolate candy segment makes up approximately 90 percent of the total chocolate market. It is noteworthy that within this 90 percent, chocolate candy bars make up just one quarter of chocolate candy sold. This suggests the importance of other products in the market (see Table 4.1 for complete market breakdown by product).10

10

For purposes of this sections discussion, market refers to retail sales only, not sales or consumption by manufacturers of other products like cookies or ice cream.

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Table 4.1 Share of Non-Seasonal Chocolate Candy Sales Through Information Resources, Inc. Tracked Outlets by Product Segment, 1998 vs. 2002 1998 2002(estimate) Box/Bag/Bar Chocolate Candy of 3.5 oz. or More 39.50% 42.60% Chocolate Candy Bar of Under 3.5 oz. 29 26.3 Snack-Size Chocolate Candy 20.8 21.6 Gift-Box Chocolates 10.1 9.3 Novelty 0.6 0.3 Total 100.00% 100.00% Source: The US Market for Chocolate, Candy, Gum, and Mints 2003, p. 24

Mass Market vs. Gourmet Another important aspect in defining the market is the distinction between mass market and gourmet (or specialty) chocolate. From the manufacturing standpoint, gourmet products are typically distinguished by higher percentages of cocoa, premium/high quality natural ingredients, unique formulas, and distinctive packaging. Since many aficionados would argue whether or not some products that position themselves as gourmet really fit these criteria, it may be more useful to think of gourmet as a positioning strategy rather than as a product trait. According to estimates, the gourmet segment of the chocolate candy market comprised approximately 7.5 percent of the total market (The Chocolate Market, 2001). Market Size and Growth The overall market for chocolate reached $13.7 billion in 2000, growing at a CAGR of 4.5 percent from 1996. During this period, the growth rate of different segments of the market varied (see Table 4.2).
Table 4.2 US Retail Sales of Chocolate, 1996-2002 (in millions) 1996 2000 All Chocolate Candy $10,500 $12,500 Chocolate Chips/Baking Chocolate (supermarkets, mass $399 $444 merchandisers, and drugstores sales only) Chocolate Syrup/Dessert Toppings (supermarkets, mass $227 $262 merchandisers, and drugstores sales only) All Chocolate (chocolate candy, chocolate chips/baking $11,500 $13,700 chocolate, powdered cocoa mixes, and chocolate syrup/dessert toppings) Source: The Chocolate Market, 2001, p. 51; Gourmet/Specialty Foods, 2001, p. 271 CAGR 4.5% 2.7% 3.7% 4.5%

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The market for gourmet chocolate was valued at $1 billion for 2002 (Gourmet/Specialty Foods, 2001). Unfortunately, the data that track total retail sales of gourmet chocolate candy over time are not available. However, the data that are available, along with anecdotal evidence, suggest that gourmet chocolate candy is the market segment with the most significant growth. Specifically: AC Nielsen data for the year ending April 13, 2002 show mainstream-market sales of premium chocolates up almost 28 percent, and sales for market leader Lindt up 42 percent, against flat growth for chocolate candy overall (Gourmet/Specialty Foods, 2001). The Seattle Chocolate company reported a 17 percent growth rate in a Seattle Times feature in September, 2001 (Seattle Times, 2001). Market leader Godiva reported that sales of its chocolate bars were up almost 30 percent in 2001 and 20 percent in 2002 (Candy Industry, 2002). The Day Chocolate Company reports sales of its premium, fair trade Divine chocolate bars have tripled since their US introduction in 2001 (Day Chocolate Company Representative, personal interview, April 29, 2004).

A mix of factors, including access to new distribution channels, demographic shifts, home baking habits, and the proliferation of gift-giving occasions will net a very slight increase in the overall markets rate of growth through 2005 to an estimated CAGR of 5 percent. Forecasting out another two years, estimates show overall chocolate candy sales netting a CAGR of 4 percent. Though specific predictions for growth in the gourmet candy market are not available, qualitative assessment suggests continued strong growth (The Chocolate Market, 2001). Table 4.3 shows all growth estimates from 2000-2005.
Table 4.3 Estimated US Retail Sales of Chocolate, 2000-2005 (in millions) Chocolate All Chocolate Candy Chocolate Chips/Baking Chocolate (supermarkets, mass merchandisers, and drugstore sales only) Chocolate Syrup/Dessert Toppings (supermarkets, mass merchandisers, and drugstore sales only) All Chocolate (chocolate candy, chocolate chips/baking chocolate, powdered cocoa mixes, and chocolate syrup/dessert toppings) Source: The Chocolate Market, 2002, p. 89 The US Market for Chocolate, Candy, Gum, and Mints, p. 24. 2000 $12,500 $444 $262 $13,700 2005 $15,954 $515 $289 $17,485 CAGR 5.0% 3.0% 2.0% 5.0%

Product Trends In 2001, the chocolate industry introduced 1,216 candy products (measured in stock keeping units, or SKUs), up from 1,177 in the previous year (The US Market for

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Chocolate Candy, 2002). These products and those introduced subsequently reflected a number of trends in the industry. Dark Chocolate: Unlike the rest of the world, America has not always shown a great interest in dark chocolate. However, with the growth of the gourmet market, Americans have shown new enthusiasm. Many marketers now include the percentage content of cocoa on the packaging as an indication of just how dark the chocolate is. As the percentage of cocoa increases, the specific taste profiles of the cocoa beans (both desirable characteristics and defects) become more a prominent component of the overall flavor of the chocolate. Single Origin: Industry consultant Curtis Vreeland cites three reasons for the single origin trend: the quest for unique flavors, for marketing differentiation, and for meeting the increasingly sophisticated tastes of die-hard chocolate lovers (Vreeland, May 2003). Still an emerging trend, companies that offer country of origin chocolate either one origin or a line of several - are distinguishing their products whether consumers can actually taste the difference or not. International Chocolate Company offers single origin chocolates with cocoa from Mexico, Ecuador, and Cote dIvoire. The Omanhene Chocolate Company offers only single origin chocolate made with Ghanaian cocoa beans. In the wake of slave labor allegations, single origin has also become a way for companies to show they are not sourcing from areas specifically mentioned in the allegations typically Cote dIvoire or West Africa in general. Flavors: Many marketers, particularly of gourmet chocolate bars, have introduced flavored chocolate products. Flavors like hazelnut and orange zest are among the more common added to lines of dark and milk chocolate. Dagoba and Endangered Species, which offer 12 and 16 different bar products, respectively, offer flavors including lime, cherry, and chocolatt. Organic, Natural, and Fair Trade: The natural and organic food markets have grown hugely in recent years, creating opportunities for chocolate companies marketing natural and organic products. Cloud Nine, Newman's Own Organics, and Rapunzel are all companies that have found a place in this niche and have availed themselves of the mainstreaming of natural and organic foods in supermarkets like Whole Foods. This success is not limited to marketers of chocolate bars. Increasingly, companies like Tiny Trapeze have introduced other types of natural and organic candies. While relatively new to the US chocolate market, fair trade is also growing. As of April 2004, nine fair trade certified chocolate bars are currently being marketed in the US (Divine, Marche du Monde, Cocoa Camino, Dagoba, Equal Exchange, Shaman Chocolates, Omanhene Chocolate, Art Bars, and Green & Blacks). Chocolate Covered Salted Snacks: While these products have been in the mass market for some time, gourmet versions have been among recent product introductions. Michael Season's Gourmet Chocolate Covered Potato Chips were introduced in 1999. In 2000, David & Sons launched Davids Sunflower Kernels in Rich Nestl Chocolate.

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Industry Use of Cocoa Ingredients The 1997 US Economic Census reports that manufacturers making confectionery from purchased chocolate (as opposed to beans) consumed cocoa ingredients as shown in Table 4.4.
Table 4.4 Cocoa Ingredients Consumed by the Manufacturers Making Confectionery from Purchased Chocolate (1000s Tons) Chocolate coatings (including couverture) Unsweetened chocolate (chocolate liquor) Cocoa, pressed cake and powder Cocoa butter Source: US Economic Census, 1997 1000s Tons 277.6 88.6 20 n/a

Chocolate used in confectionery (either as a coating or for solid bars) typically contains approximately 30-70 percent cocoa content. The Market for Sweet Baked Goods Market Definition The sweet baked goods market includes cookies, pastries, snack cakes, doughnuts, cakes, pies, and muffins. Many of these products feature chocolate ingredients and are included in this report for that reason. Two major segments make up the sweet baked goods market: packaged sweet baked goods and fresh sweet baked goods. Packaged sweet baked goods are often shelf stable (i.e., they do not spoil or become stale quickly) and are nearly always branded products (e.g., Barbaras Bakery). Fresh sweet baked goods are produced for immediate or near immediate consumption. While products do not typically display a unique brand themselves, the bakeries that produce them are branded (e.g., Au Bon Pain). The distinction has important implications for chocolate and cocoa suppliers. Packaged sweet goods manufacturers can use packaging to identify unique chocolate and cocoa thus associating it with individual products. Fresh sweet baked goods manufacturers may be less likely to identify unique ingredients unless they fit into a broader message associated with the companys brand. Mass Market vs. Gourmet Like the chocolate market, the sweet baked goods market (both the packaged and fresh segments) are comprised of both mass market and gourmet products. The gourmet subsegment makes up just a small portion of the total segments (e.g., 7 percent of packaged sweet baked goods in 1999). Nonetheless, it is the gourmet sub-segment that is most likely to look for chocolate and cocoa with unique characteristics as opposed to the least expensive chocolate or cocoa available. One gourmet cake manufacturer interviewed for this report described a six-month process to identify a high quality cocoa powder with the

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perfect flavor profile. Such interest in the differentiating qualities of chocolate or cocoa would be unlikely in the mass market sub-segment. Market Size and Growth Sales of packaged sweet baked goods reached nearly $12.4 billion in 2002. This reflects a mere 1 percent of annual growth, which followed a year of negative growth in 2001. Experts suggest that this poor performance is due at least in part to the economic downturn. Because many sweet baked goods are used in offices (e.g., donuts, coffee cake) or when individuals are entertaining at home, the economic downturn has likely caused consumers to cut back on purchases. As the US economy regains momentum, slow growth in the packaged sweet baked goods market is expected to follow. Experts predict a CAGR of 2.8 percent between 2002 and 2007 (see Table 4.5).
Table 4.5 Estimated Growth of US Retail Dollar Sales of Packaged Sweet Goods by Category, 1998-2007 (in millions) 1998 2002 CAGR 2007 CAGR 1998-2002 (estimated) 2002-2007 $ 1,120 $ 1,235 2.5% $ 1,419 2.8% Source: The US Market for Sweet Baked Goods, 2003, p.3, 9

Sales data for fresh sweet baked goods are not available. However, while slightly dated, data reflecting the number of retail bakery outlets give some sense of the scale of the market if not total sales. By the end of 1998, there were an estimated 26,000 stand-alone retail bakeries operating in the US. At 1997s end, 22,407 bakeries were operating in US supermarkets. Because of the huge boom of the US specialty coffee industry, the increase in the number of retail cafs also has implications for the fresh sweet baked goods market. The Specialty Coffee Association of America estimates that the number of cafs in the US reached 14,000 in 2003. These outlets typically serve muffins, cookies, biscotti, and other baked goods purchased from local bakeries or wholesalers. According to one study, 23 percent of customer orders at cafs include a baked product of some kind (Bakery Production and Marketing, 1998). Product Trends Chocolate: As a recent consumer trend toward indulgence foods has replaced the previous fat-free trend of the 1990s, the use of chocolate in sweet baked goods has become more prevalent and more sophisticated. Often the types of chocolate used in products has become richer and chunkier and is a focal point in product positioning. As Specialty Retailer reports, Specialty [products] takes chocolate to the head of the class by using fine German, Swiss, or Belgian Chocolate (The US Market for Sweet Baked Goods , 2003). Some examples of recent chocolate-centered introductions include Bahlsens Choco Friends wafers dipped in chocolate, Nabiscos Mint Cream Snackwells cookies, and Marie Callendars Chocolate Satin frozen pie. As is true in the packaged sweet baked goods market, chocolate remains a favorite flavor of most fresh sweet baked 30

goods consumers. According to Baking Buyer magazine surveys, the best-selling cookie variety is chocolate (Baking Buyer, 1996). In interviews with Baking Buyer, executives from several bakery chains revealed the most popular cookie varieties. At Marshall Field's, the most popular cookie variety is frango minto chocolate mint chip followed by shortbread, key lime cookies, pecan cookies, and biscotti. At Perkins Family Restaurant, the most popular cookie variety is chocolate chip followed by sugar, peanut butter, oatmeal raisin, and chocolate chunk. At Great American Cookie Co., the favorite is a chocolate chip cookie cake followed by peanut butter, oatmeal raisin, and white chocolate macadamia. At Mrs. Fields Cookies, the number one variety is semi-sweet chocolate chip cookie followed by milk chocolate chip, white chunk chocolate with macadamia nuts, oatmeal raisin with walnuts and semi-sweet chocolate chip with walnuts (Baking Buyer, 1997). Industry Use of Cocoa Ingredients The 1997 US Economic Census reports that the cookie and cracker manufacturing industry and frozen cake, pie, and other pastry manufacturing industry consumed a combined total of 284.6 million pounds of cocoa ingredients. The Census also indicates that the commercial bakeries industry consumed a total of 100.5 million pounds of cocoa ingredients that same year. The Market for Ice Cream and Other Frozen Desserts Market Definition The ice cream/frozen desserts market includes ice cream (which is sometimes broken out by fat content), frozen yogurt, sherbet, sorbet, and frozen novelties (e.g., ice cream sandwiches, fudge bars). Though not included in the data presented here, non-dairy frozen dessert manufacturers (e.g., soy ice cream) could be important users of specialty cocoa ingredients, particularly if they are tied to a social or environmental message. Table 4.6 shows the breakdown of the market.
Table 4.6 Share of US Dollar Retail Sales of Ice Cream/Frozen Desserts by Category Percent of Market Percent of Market 1997 2001 Ice Cream 63.0 60.8 Frozen Yogurt 9.1 7.2 Sherbet/Sorbet/Water Ice 4.9 4.1 Frozen Novelties 23.0 28.0 Total 100.0 100.0 Source: USDA in The Market for Ice Cream and Other Frozen Desserts, 2000 Category

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Mass Market vs. Super-premium The ice cream/ frozen desserts market, too, consists of both mass market and gourmet (known as super-premium) products. The super-premium ice cream sub-segment makes up 8.5 percent of the total ice cream market. Like the chocolate and baked goods markets, it is the gourmet sub-segment that is most likely to look for unique chocolate and cocoa. Market Size and Growth The total market for Ice Cream/ Frozen Desserts reached $19.9 billion in 2000, capping off three years of growth at an average annual rate of just 1.9 percent. Overall sales of ice cream alone grew even more slowly at an average annual rate of 1.1 percent. Though super-premium makes up a small percentage of total ice cream sales, the sub-segment grew at a far faster rate than mass market, registering an average annual rate of 9 percent during the period. Table 4.7 shows market growth by sub-segment.
Table 4.7 US Sales of Ice Cream/Frozen Desserts (in millions) CAGR 1997-2000 Super-premium Ice Cream $812 $1,050 8.9% All Ice Cream $11,850 $12,231 1.1% All Ice Cream/ Frozen Novelties $18,800 $19,902 1.9% Source: The Market for Ice Cream and Other Frozen Novelties, p. 67 Gourmet/Specialty Foods, 2001, p. 233, 243 1997 2000 2005 CAGR Forecast 2000-2005 $1,473 11.9% $12,874 1.7% $22,010 3.4%

Between 2000 and 2005, the outlook for all sub-segments of the ice cream/frozen dessert market will improve. In the overall market, expansion will be driven largely by frozen novelty products. Though a small share of the entire market, super-premium growth is also expected to be noteworthy at an annual average rate of 11.9 percent. Product Trends With intense competition for limited freezer space in retail outlets, marketers make increasingly creative efforts to create stand-out products that catch the consumers eye. Innovative Theme Flavors: Ben & Jerrys was the innovator in what has been called the pack as much as you can into a pint concept. Themed products like Ben & Jerrys Karamel Sutra, which includes soft caramel candy surrounded by chocolate and caramel ice creams and fudge chips, have become standard fare among offerings from many companies marketing premium products. Ben & Jerrys has also incorporated its social and environmental message into the theme of some of its flavors. This has included past offerings like Rainforest Crunch, which included sustainably grown nuts, and the more recent Chocolate, Vanilla, and Coffee for a Cause flavors which include ingredients that Ben & Jerrys claims are sourced in ways that support growers. Dreyers has taken a

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more mainstream approach to its themes, including the recent introduction of two flavors based on the 2003 animated film Finding Nemo. Inclusions: Long a tradition in the form of chocolate chips, themed products have given rise to innovative types of inclusions that feature heavily in product marketing. Chunks of cookies, brownies, and candies of all types can be found in many offerings. Chocolate: Chocolate remains a favorite among consumers. In 1998, it was Americas third favorite flavor with 8 percent of sales. Many of the theme and inclusion flavors focus on chocolate ingredients, including Dreyers Triple Chocolate Thunder, Ben & Jerrys New York Super Fudge Chunk, and Haagen Daazs German Chocolate Cake. The Market for Dairy Based and Alternative Dairy Beverages Where do dairy and cocoa meet? Chocolate milk. And with the rise of dairy alternatives like soy milk, a new breed of chocolate beverages is gaining popularity. The dairy based beverage market consists of ready-to-drink flavored beverages, including flavored milk, pre-packed milk shakes and yogurt drinks, as well as milk flavorings like syrups and drinking cocoa. The dairy alternative beverage market includes soy, rice, and nut based products. Market Size and Growth Ready-to-Drink: Pushed forward in the 1990s by the popularity of single serve products, sales of all ready-to-drink flavored dairy products reached $1.4 billion in 2001 with average annual growth of 11.9 percent between 1997 and 2001. Of particular note was the boom of Chocolate Milk, which grew at a CAGR of 13.2 percent over the period. Single serve convenience, health consciousness, and shelf-stable technology are all predicted to keep ready-to-drink dairy growing. Total sales for the category are predicted to grow to $2.4 billion between 2001 and 2006 at a CAGR of 10.6 percent. Assuming no change in market share from 2001, chocolate milk sales will hit $1.7 billion (see Table 4.8). Milk Flavorings: In recent years, milk flavorings did not fare as well as convenient, ready-to-drink alternatives. Total sales for the category were $545 million in 2001, with a CAGR of just 2.3 percent between 1997 and 2001. Cocoa mixes and flavorings, a largely mature market, grew at a CAGR of 2.0 percent over the period. The lackluster growth trend of the flavorings category is expected to continue through 2006, with a CAGR for all products at 1.6 percent. Cocoa mixes will show some growth at a CAGR of 2.1 percent over the period.

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Table 4.8 US Retail Sales of Ready-to-Drink and Milk Flavorings, 1997-2001 (in millions) CAGR 2006 CAGR 1997-2001 Forecast 2001-2006 Chocolate Milk $637 $1,046 13.2% $1,730 10.6% Cocoa Mixes & Flavorings (e.g., syrups) $243 $263 2.0% $292 2.1% Source: The US Market for Dairy Beverages, 2002, p. 9, 46, 52 The US Market for Dairy Beverages, 1998, p. 56, 65-66 1997 2001

Dairy Alternative Beverages: Unfortunately, older market data for flavored dairy alternatives are not available. Still, the market size in 2003 and the forecast for growth give a good sense of market dynamics. In 2003, the flavored dairy alternative market reached $818 million. It is expected to grow at a CAGR of 16 percent through 2008, with estimated sales reaching nearly $2 billion (Flavored Dairy/ Soy Beverages, 2004).
Table 4.9 Estimated US Retail Sales of Flavored Dairy Alternatives, 2003-2008 (in millions) 2003 2008 (estimated) $818 $1993 Total Source: Flavored Dairy/ Soy Beverages, 2004, p. 3 CAGR 16.0%

In 1998, estimates for future growth predicted a CAGR of 9.1 percent for alternative dairy beverages. However, soy milk alone grew at a GAGR of 41 percent between 1997 and 2002, and estimates place annual growth at 10-20 percent over the next several years (Natural Grocery Buyer, 2002; nutraceuticalsworld.com, 2003; The US Market for Dairy Beverages, 1998). Product Trends: Ready-to-Drink Marketing to Adults: The convenience of single serve packaging, along with renewed acceptance of milk as an important source of calcium, has shifted targeting of flavored milk more towards adults than ever before. As a result, more sophisticated and premium flavors have been introduced by marketers appealing to the adult market. Upstate Farmers Cooperative offers one such product, Intense Chocolate, a single serve milk product with whole milk, four kinds of cocoa, and natural sugar. Product Trends: Flavorings Premium and Unique Flavors: Little distinguishes one dairy flavoring from the next. What little growth the segment has seen has been in premium, upscale cocoa products and new mixes like chai and coffee flavorings. On the heels of the specialty coffee craze, some companies, like Dagoba and Lake Champlain Chocolates, have introduced gourmet quality drinking cocoas that have met with success.

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Product Trends: Alternative Dairy Flavors: Once limited to vanilla and chocolate, dairy alternative products are now offered in such flavors as coffee, hazelnut, and chai. Silk brand soy milk flavorings are among the most innovative. Product offerings include Soynog and Soylatt. Though not a new flavor in the traditional sense, Eden now offers a soy/rice milk blend that combines the unique flavors of soy and rice milk. The Market for Body Care Products Market Definition What this section calls the Body Care Products market is often disaggregated into bath and shower care and skin care. Because available data makes these distinctions, this section will present information separately as appropriate. However, since many of the trends and players in the two markets are similar, both markets are covered in one section. With the heavy use of cocoa butter in body care products marketed towards African Americans, specific market data for products marketed toward African Americans are included where available. Bath and shower care products include body washes, bath additives, after bath products and specialty bar soaps. Sales take place through mass market, alternative (i.e., specialty retailers, salons, health food stores, direct marketing and door to door), and prestige (i.e., department and specialty stores) channels. Mass market lines include commodity products that rely on brand recognition, such as Oil of Olay or Dove, and specialty products with upscale positioning, such as Dials Freeman Beautiful Bath or Sarah Michaels lines. Skin care products include hand and body moisturizers, facial moisturizers, and facial cleansers. The industry further breaks these categories into mass market and prestige products, groupings distinguished by price and sales channel. As is the case in each of the markets described in this report, the prestige sub-segments of bath and shower care and skin care are areas where distinction based on ingredients is likely to take place. Market Size and Growth Bath and Shower Care: Total retail sales of bath and shower care products ended 2001 at $2.6 billion. Though sales fell 1.7 percent from 2000 to 2001, overall growth between 1997 and 2001 was respectable, showing a CAGR of 8.1 percent (see Table 4.10). Favorable demographic trends and technological advances have analysts predicting increasing growth of bath and shower care sales through 2006. A pattern of technology yielding growth was seen in the 1990s with the emergence of a number of well

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publicized cosmeceuticals ingredients.11 The popularity of newly engineered ingredients, as well as increased marketing of natural ingredients, is likely to appeal to the countrys aging population. The growth estimate for the entire market appears in Table 4.10.
Table 4.10 US Retail Dollar Sales of Bath and Shower Care Products by Category, 1997-2006 (in millions)12 CAGR 2006 Forecast CAGR 1997-2001 2001-2006 Total Bath and Shower Products Market $1,931 $2,640 8.1% $3,768 10% Source: The US Bath and Shower Care Market, 2002, p. 5-7, 9 1997 2001

Skin Care: The overall skin care market recorded sales of $4.5 billion in 2000, with mass market sales and prestige sales reaching $2.4 billion and $2.1 billion, respectively. In the midst of this market activity, the market for skin care products targeted at African Americans grew at a CAGR of 1.4 percent from 1997-2001, reaching $110 million at the periods end (The US Market for Ethnic Hair Care, Skin Care, and Color Cosmetics, 2002). With the recent stagnation of the US economy, experts expect combined sales of the mass and prestige markets to grow at a CAGR of 3.9 percent between 2000 and 2005 (as compared to a CAGR of 8.3 percent between 1996 and 2000). This estimate was made with the assumption of an economic upturn in 2003, the existence of which was questionable. The individual growth levels of the mass and prestige markets are too uncertain to predict. However, some experts predict that the slow shift of sales from the prestige to the mass market will continue as more and more sophisticated products are available in the mass market. The length of the economic slowdown could contribute to this trend as consumers realize they can get similar products for less in the mass market. In the African American skin care market, sales are only expected to grow from $110 million to $121 million between 2001 and 2006, amounting to a CAGR of 1.9 percent (The US Market for Ethnic Hair Care, Skin Care, and Color Cosmetics , 2002).
Table 4.11 US Mass Market Retail Dollar Sales of Skin Care Products by Category, 1997-2001 (in millions) 1996 2000 CAGR 2005 Forecast 1996-2000 7.7% 8.9% 8.3% n/a n/a $5,442 CAGR 2000-2005 n/a n/a 3.9%

Prestige Skin Care Products $1,538 $2,066 Mass Market Skin Care Products $1,722 $2,425 Total Skin Care Products Market $3,260 $4,491 Source: The US Skincare Market, 2001, p. 62-63

The term cosmeceutical is a blend of the words cosmetic and pharmaceutical. It refers to a product which is marketed as a cosmetic, but which contains biologically active ingredients that have an effect on the user. Examples are anti-wrinkle creams, baldness treatments, moisturizers and sunscreens. 12 Note: variation in CAGR from total computed with given figures comes from rounding.

11

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Product Trends All Natural Ingredients: With consumers increasingly interested in natural products, many marketers are emphasizing natural ingredients in their products. Popular bath and shower ingredients include flower and fruit extract. Consumers often associate natural ingredients with purity and environmental friendliness. Environmentally Friendly, Socially Responsible, and Cruelty Free: Growing consumer concern for the footprint left by products and their manufacturers has given rise to products that position themselves as environmentally and socially responsible. The Body Shops recycled packaging, community trade initiative, and guarantee not to test on animals exemplify this strategy. Industry Use of Cocoa Ingredients The quantity of cocoa butter used in bath and shower care and skin care products varies significantly. Some cocoa butter moisturizer products contain 100 percent cocoa butter and others 20 percent. Other composite products may contain as little as .01 percent to 5 percent cocoa butter. Though both the bath and shower products and skin care products markets are predicted to continue growing (the former at a much faster rate than the latter), the biggest obstacle to sales of cocoa ingredients to the market is the shift away from cocoa butter products. Interviews with several companies, including Kiss My Face and Aveda, suggested a very limited and decreasing number of cocoa butter body products on the market. Among manufacturers of prestige and natural products, fair trade and organic certified cocoa may be of interest. However, the apparent shift toward mainstream products suggests that the fair trade and organic concepts may meet a cool reception in the industry. Conclusions The preceding information on consumer products markets will be most useful to grower cooperatives as a means to understand in which subsegments demand for differentiated cocoa is likely to exist. With this information, it is envisaged that cooperatives can match differentiation strategies with areas of actual demand (e.g., quality with the growth in gourmet products) and begin to develop a sense of what types of marketers could be most effectively approached for potential business relationships and partnerships. As will be discussed in more detail in a subsequent section, it may be most effective for such proposals to come from cooperatives via an intermediary. Still, cocoa cooperatives should understand the market dynamics such that they can play active roles in the process of targeting markets and in the proposal process once initial contact with potential partners has been made. While each of the industries that use cocoa ingredients is unique, some common trends stand out. First, the mass market segments of all of the industries mentioned are experiencing slow growth. These segments are generally mature and saturated with products. As such, competition has largely devolved to price wars between marketers 37

an environment in which premium cocoa and chocolate will not be particularly attractive. In contrast, the high-end (i.e., gourmet or premium) sub-segments in most of the industries profiled show much higher rates of growth than the mass market. While the smaller marketers who produce high-end products often have less buying power than mass market behemoths, the competition in the areas of the market where they operate is much more likely to revolve around product uniqueness than price. This environment will be far more conducive to differentiated cocoa. Another important factor to understand is the range of markets that could provide opportunities for differentiated cocoa. Interviews with manufacturers and marketers in the baked goods, flavored milk, and ice cream industries suggested that select companies are very open to the idea of using ingredients made from high quality cocoa sourced from small farmer cooperatives. Even in the body care products industry, which appears the least attractive of the markets profiled above, The Body Shop has partnered with Kuapa Kokoo, a fair trade cocoa cooperative from Ghana, to provide the cocoa butter for its line of products. Finally, it is interesting to note that in the food product markets, chocolate flavors are already seen as an industry trend and a factor on which to differentiate. This suggests an open door for cocoa cooperatives that are in a position to offer new and innovative ways for manufacturers and marketers to differentiate their chocolate products or ingredients.

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5. Other Issues Affecting the Market

Industry Response to Slave Labor Allegations In 2001, a series of newspaper articles published by the Knight Ridder news agency in the US brought to light allegations that child slave labor was prominent in the production of West African cocoa. In the United States, the stories prompted a response by national legislators which ultimately resulted in an agreement for voluntary cooperation from the chocolate industry to address the problem. This process, outlined in the Global Protocol (previously known as the Harkin-Engel Protocol), is still underway. As a 2005 deadline for action approaches, it is likely that the issue of slave labor in cocoa production will again be pushed into the spotlight and could well create interest in fair trade or labor friendly cocoa ingredients. Background Though allegations of slave labor in West African cocoa production had been documented as early as 1998 by UNICEF, the publication of a series of articles by Knight Ridder in June 2001 put the issue on the agenda of US legislators. During the same week the articles were published, the US House of Representatives voted 291-115 in favor of legislation introduced by Representative Eliot Engel that would establish a labeling system to guarantee consumers that slave labor was not used in production of the chocolate products that they purchase (Robbins, 2002). As Senator Tom Harkin pushed a version of the legislation through the US Senate, the chocolate industry, which had formerly denied the existence of slave labor in cocoa production, agreed to implement a voluntary program in which the chocolate industry would create a system to ensure that the worst forms of child labor would cease to be used in cocoa and chocolate production by 2005 (Johnson &Abbott, 2002). Known as the Global Protocol, the October 2001 agreement took the place of the Congressional legislative mandate. The Global Protocol lays out a six step process to address the issue of child slave labor in cocoa production. This process includes a four year timeline that culminates in establishment of voluntary industry standards and a certification process to be implemented by July 2005. Prior to this step, the industry agreed to: 1) issue a public statement on the need for and terms of an action plan; 2) form a multi-sectoral advisory group and launch an investigative survey in West Africa to assess the prevalence of child labor; 3) sign a joint statement of shared concern; 4) issue a memorandum of cooperation outlining ways in which the multi-sectoral group will operate; 5) establish a foundation to oversee and sustain efforts to eliminate the worst forms of child labor.

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Implementation of the Protocol By November 2002 the first five steps of the Protocol were complete. Most of the steps were achieved within the initially agreed upon timeline. The exception was the investigative survey, slated for completion in 2001 but only released in part in August 2002. The investigative survey was carried out by the International Institute of Tropical Agriculture (IITA) and consisted of three parts: a producer/worker survey, a community survey, and a baseline producer survey (aimed at collecting data to analyze macro level issues like agricultural extension, labor supply, and business support services). The results of the investigative survey released to the public in 2002 suggested that, while child labor does exist in the West African cocoa sector, the problem is not as pervasive as originally reported. The IITA report estimates that just 2 percent of the children working on cocoa farms have no familial ties to the farm owner. While there was indication that some children working for a salary could not leave their work freely, the forty-four children interviewed did not suggest that they were recruited by force. The report did find that a significant number of children were involved in the use of machetes and pesticides (Children Still in the Chocolate Trade, 2003). Industry Response to the Findings While the IITA survey did show evidence of child labor, the chocolate industry used the report to exonerate itself from the worst accusations. Media reports that followed the release of the survey reported that the industry did not find that child trafficking and labor in West Africa was the huge problem originally reported. Susan Smith of the Chocolate Manufacturers Association (an important US trade organization) reflected that the survey confirmed the direction we have been taking, such as promoting safe and responsible cocoa growing and trying to improve the well being of cocoa families (Tedesco, 2002). An anonymous industry expert was quoted by Dow Jones Newswires as saying The criticism over child labor in those countries is more a misinterpretation, a lack of understanding of the whole West African society, a lack of understanding of their values in addition to the fact that from the economic point of view theres not really much else they can do (Tedesco, 2002). Criticism of the Industry Report and Response The fact that a number of advocacy groups have criticized the conclusions made from the IITA report suggest that any slave free certification and other solutions that the chocolate industry implements as the final step of the Protocol could receive significant public condemnation. Save the Children Canada released a response to the IITA report in April 2003 that outlined five major problems with the IITA survey methodology.

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1) The survey was administered to only 44 children workers. 2) The estimation that most child workers had familial ties to farm owners was based on responses from farm owners who have incentives not to report the use of child labor. 3) The survey was limited to examination of machete and pesticide use and thus did not examine psychological and physical abuse. 4) The survey did not investigate child trafficking, nor did those collecting data venture into remote rural locations where farms are located. 5) The survey was conducted outside the peak season for harvesting cocoa and thus data collected did not accurately reflect the child labor used during the most concentrated parts of the production process (Children Still in the Chocolate Trade, 2003). In its criticism of the timing of the survey, Save the Children recounts its own experience in Mali just one month after the IITA survey was released to the public. In August 2002, Save the Childrens Malian office alerted local authorities to a tip that two busloads of child laborers were being transported to a location 50km from the border with Cote dIvoire where they were to be ferried across the border in small groups. Save the Children suggests that this example shows that had the IITA survey been conducted into the October harvest period the results could have been quite different. Implications for Marketing Cocoa As the July 2005 self-imposed deadline for an industry certification system approaches, it is very possible that the issue of child slave labor in cocoa production could again be brought into the spotlight. If the industry is able to implement the final step of the protocol in time it appears as though there will be organizations ready to carefully scrutinize the efficacy of the voluntary certification system in truly addressing the problem of child labor. If the industry is unable to meet its deadline, these same groups, and perhaps US legislators, may question the efforts of the chocolate industry. In either case, the story will be ripe for media attention. In the wake of consumer campaigns against alleged labor abuses by Nike, Starbucks, and The Gap, renewed publicity of the slave labor issue could make cocoa with a no child labor guarantee very attractive to companies that use cocoa ingredients. Likewise, renewed publicity about the slave labor issue would likely heighten companies insistence for guarantees that no child labor is being used in production of their cocoa, whether from West Africa or elsewhere. Interviews with food manufacturers showed some general awareness of the issue of slave labor, though not of the steps being taken as part of the Global Protocol. Whether or not manufacturers would choose to place some type of guarantee or certification on their products, the interviews conducted suggest that some manufacturers were interested in a clean supply chain should they ever be questioned about the source of their cocoa ingredients. Other manufacturers did not express specific concern about consumer or media pressure to prove a slave free cocoa source but did express a company commitment to do the right thing in light of the allegations of slave labor.

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The ice cream manufacturer Ben & Jerrys is an example of one company that has incorporated the issue of labor conditions into its sourcing guidelines and product differentiation. On its website, Ben and Jerrys describes its stance on cocoa sourcing: Being able to track cocoa to its source is important because it tells us about a lot more than just where its from: It tells us that the farmers who grow and harvest cocoa beans for Chocolate for a Change are organized into cooperatively-run farmer associations and have signed a Code of Conduct pledging to protect and uphold the human rights of all workers.(Ben & Jerrys, 2004) The Natural and Organic Products Boom Market Definition While the US Food and Drug Administration (FDA) does not regulate use of the words natural or health, the terms generally refer to products that are free of additives, contain no artificial ingredients or preservatives, and are minimally processed. In contrast, use of the term organic is regulated and refers to products that meet specific guidelines recently overhauled by the USDA. Growth figures and market information for natural products included below refer both to non-organic natural products as well as organic products. Where information is available for organic products alone that information is given separately. Market Size and Growth The market for all natural products (food, nutritional supplements, and personal care products) reached $36.4 billion in 2002. Since 1999, the markets CAGR was a respectable 9.1 percent. Unfortunately, definitive data for the natural food category is not readily available. However, extrapolation from the data that is available suggests that the natural food category reached $14.6 billion in 2002 with a CAGR of 14.2 percent since 2000.
Table 5.1 US Sales of All Natural Products (in millions) 13 1999 2002 $28,000 $36,400 Source: The Natural Foods Merchandiser, 2000-2003 CAGR 9.1%

13

Note that there have historically been discrepancies in valuation of market size from one analyst to another.

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Table 5.2 US Sales of Natural Foods (in millions) 2002 $11,200 $14,600 Source: The Natural Foods Merchandiser, 2000-2003 2000 CAGR 14.2%

Data that report growth of organic foods alone is also difficult to come by. However, the information that is available shows a CAGR of 24 percent from 1996-2000, with sales topping out at $7.8 billion by that periods end.
Table 5.3 US Sales of Organic Foods (in millions) 2000 $3,300 $7,800 Source: Economic Research Service/USDA, 2001 1996 CAGR 24%

Although growth estimates for coming years are not available, anecdotal evidence suggests that the US economy may have some effect on sales of natural products. Despite the fact that many natural products retailers reported steady or even increased sales from 2001 to 2002, others saw stagnant results. Yearly growth suggests a slowdown as the US economy weakened in 2001. That said, some of the apparent slowdown may be a sign that new, mass market channels which began to take on natural products in the late 1990s and early 2000s are now stocked, suggesting that new growth reflects real consumer sales increases (Market Overview: Sales Top $36 B, 2003). If both factors are at play, an upturn in the US economy will likely be reflected in a moderate growth increase, but perhaps not as great as was seen when the industry boomed in the 1990s. Product Trends As natural foods continue to grow out of their niche status, consumers are increasingly looking for products that mimic those found in the mainstream. Taste: Unlike the stereotypes of the past, todays successful natural foods products emphasize quality and taste. But interestingly, the word gourmet is out, replaced by the newest buzzwords: artisan, handmade, homemade, imported, natural, and heritage. According to one retailer, consumers are willing to pay extra for quality products if they feel that it will make a difference in their cooking (Everitt, 2003).

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No Genetically Modified (GMO) Ingredients: The new USDA organic standards prohibit the use of GMO ingredients in products labeled organic.14 Nonetheless, many organic certified products, as well as conventional natural products, are marketed as GMO-free. A 2001 survey of Bakery-net.com users (assumed to be bakers) revealed a surprisingly high resistance to GMO ingredients even in cases of cost savings. The result of the survey are shown in Table 5.4.
Table 5.4 Responses to Bakery-net.com Industry Survey on GMO Ingredients, January 200115 Response #1 Response--37.5% Assuming comparable quality and costs, if given a choice between genetically altered or unaltered ingredients I would pick un-altered ingredients. #2 Response--28.6% I would pay more for genetically un-altered ingredients if I thought it was important to enough of my customers. Explanation Bakers--at least those in our pollseem reluctant to embrace the new technology as 37.5% indicated a preference for un-altered products, price not being a factor. For 37.5% of bakers to state they would prefer not to change to genetically modified products is not so surprising--but for more than 1/4 to say they would pay more for un-altered products suggests that proponents of the new technology have a real p/r battle awaiting them. Even if a baker's costs were reduced, quality was comparable, and health risks were not a concern, only 16% of bakers would embrace the new technology. Nearly 11% of respondents indicated that their customers have already questioned their usage of genetically-altered ingredients--a surprisingly high level of customer concern. 7.1% of responding bakers state that neither they nor their customers are concerned about genetically altered foods.

#3 Response--16.1% If there were no proven health risks, quality was comparable, and price was less, I would prefer to use genetically altered ingredients. #4 Response--10.7% Some of my customers have asked if I use any genetically altered foods in my products. #5 Response--7.1% Genetically altered foods are not a concern to me or my customers. Source: bakery.net, 2001

Small Processors and Chocolate Manufacturers on the Horizon? As previously discussed, the number of stages in the supply chain makes it extremely difficult for cocoa cooperatives to communicate directly with the smaller companies most likely to be interested in differentiated cocoa. Discussions with some industry experts suggested that over the next five to ten years, the US chocolate industry could see some attempts to start small, gourmet processing and manufacturing facilities that would also market consumer chocolate products. If this trend does take root, there could be interesting opportunities for cocoa cooperatives to connect directly with companies that
The Organic Trade Association quotes Dr. Lynn Hartweek, who defines a Genetically Modified Organism (GMO) as "an organism that has been modified by the insertion of DNA by human intention. It is usually DNA which has been modified or engineered to suit a particular purpose (Organic Trade Association, 2004). Consumers and food manufacturers are divided in their opinion about whether GMO food production and consumption is safe. US organic criteria prohibit inclusion of GMO ingredients in organic certified foods. 15 Note: Total number of respondents not indicated.
14

44

would be most likely to value differentiated cocoa. Box 5.1 illustrates how the emergence of small processors and manufacturers could shorten the supply chain. Currently, just one small processor Box 5.1 and manufacturer operates in the US. Emergence of Small Processors and Manufacturers Would Eliminate Steps in the Supply Chain Scharffen Berger, founded in 1997, processes beans, manufactures chocolate, and markets consumer Small Processors/ Status Quo Manufacturers products from its Berkeley, California plant and offices. In 2003, Scharffen Berger recorded $6 million Cocoa in sales. While this pales in Cocoa Exporter comparison to larger processors, Exporter manufacturers, and marketers, some in the industry suggest that Scharffen Dealers Berger has shown that it is possible Dealers for small companies to find a niche in a market dominated by much larger competition. A small marketer Processors (annual sales less than $1 million) interviewed for this report expressed intention to follow Scharffen Chocolate Bergers lead with an investment in a Manufacturers Chocolate small processing and manufacturing Marketer with facility sometime in the next five Processing and years. Additionally, an industry Chocolate Manufacturing analyst shared rumors about a Marketers Capacity Seattle-based company recently purchasing a bakery that it planned to convert into a small processing and chocolate manufacturing facility. While these rumblings are far from a market signal to cocoa cooperatives, they suggest a possible trend that should be watched for and understood. World Cocoa Price Outlook Despite some brief periods of more extreme fluctuation, the world cocoa price on the New York exchange has remained in the range of $1400-$1600 per metric ton since May 2003. While 2003s fears of supply shortages caused by fighting in Cote dIvoire helped push the exchange price to $2375 in February 2003, the most recent reports from Cote dIvoire, as well as other major producers like Ghana, Nigeria, and Ecuador, show that production is actually on the rise (ED&F Man, 2004). Given this information and other trends, one broker from a major trading house envisions prices remaining in the $1300$1500 range over the next six to twelve months. The principle behind selling differentiated cocoa to premium and niche markets is to move away from standard commodity pricing. Nonetheless, cocoa priced as a

45

commodity will be a benchmark to compare costs for many companies. With the commodity price of cocoa in a slight downward trend, a cocoa cooperative offering a differentiated product must be wary of the marketer who faces cost competition from companies who do not use differentiated cocoa. A price premium added to cocoa beans is not simply passed down through the links in the supply chain to the consumer. Because margins are typically calculated on a percentage basis, those premiums are multiplied with each transaction, thus making a significant impact on the price of consumer products. This speaks to the importance of communicating differentiation in a clear and meaningful way. If a marketer does not recognize the uniqueness of the cocoa, the point of differentiation will be overshadowed by the difference in price. Discussions with manufacturers of consumer products that include cocoa ingredients revealed some sensitivity to the price of cocoa. One gourmet cake manufacturer described how intense price pressure from national supermarket chains forced the company to count every penny when choosing its ingredients. Nonetheless, this company has a track record of incorporating social responsibility into its business practices and expressed interest in programs like fair trade certification as long as the costs were manageable. Other companies showed less concern. Particularly in the case of smaller companies or those with a solid position in a premium, niche market, companies were more concerned with fluctuation in ingredients prices than in the absolute price. For many companies other than chocolate manufacturers, cocoa comprises a relatively small part of overall product cost. So long as wholesale or retail prices can be set with some
Box 5.2 Fair Trade Price vs. Market Price

3.00

2.50

FOB Prices in US$/Kg

2.00

1.50

1.00

0.50

Area where fair trade/ conventional price difference is unpredictable

0.00
-9 D 8 ec -9 8 M ar -9 9 Ju n99 Se p99 D ec -9 9 M ar -0 0 Ju n00 Se p00 D ec -0 0 M ar -0 1 Ju n01 Se p01 D ec -0 1 M ar -0 2 Ju n02 Se p02 D ec -0 2 M ar -0 3 Ju n03 Se p03 Se p

FT Minimum FOB Price US$/kg

Average World Monthly Prices FOB in US$/kg

Source: Fairtrade Labelling Organizations

46

expectation of price stability, most manufacturers and marketers suggested that they could absorb slightly higher costs of differentiated cocoa ingredients. In the specific instance of fair trade cocoa, a drop in the exchange price has unique implications. The fair trade price for cocoa remains above the market price under any market conditions. However, while the price differential between fair trade and conventional cocoa is a constant $150 per metric ton when the world price is $1600 per metric ton or above, the price differential increases unpredictably beyond $150 per metric ton as the market falls below $1600 per metric ton (see Box 5.2). If the exchange price for cocoa settles into a period of fluctuation between $1300-$1500 as analysts predict, that means that the difference between fair trade and conventional cocoa beans will lie somewhere between $250 per metric ton and $350 per metric ton. This has an important implication for users of fair trade cocoa ingredients. A fall in the world price of cocoa will lower margins vis--vis the competition and raise the possibility that a fair trade company would be outpriced were competitors to respond to lower cocoa prices by lowering wholesale and retail prices.

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6. Recommendations
Every cocoa producer organization finds itself with a unique set of resources, challenges, and priorities. Add to that the specific characteristics associated with the cocoa the organizations farmers produce and it is clear that there can be no single prescription for a differentiation strategy. Nonetheless, the market conditions described in this report should provide cocoa cooperatives with a guide to choose a differentiation strategy that will return the most value in the market. By matching market demands with the cooperatives capabilities, marketing and export managers stand the best chance of devising a differentiation strategy that is both profitable and feasible for that organization. The following paragraphs synthesize the market data presented in this paper and present general recommendations for taking advantage of the most promising differentiation opportunities. Quality Assessment Of all the opportunities for value addition, high quality was the differentiator that buyers and industry experts valued most. For many in the gourmet chocolate industry, quality is synonymous with fine flavor. Yet buyers from gourmet chocolate companies explained that much of the criollo and trinitario crop being grown around the world does not meet the standards that they use to identify cocoa sources. Whether or not these chocolate companies are truly as discriminating as they purport to be, its seems clear that cooperatives whose farmers produce high quality criollo and trinitario beans will be at an advantage in finding buyers willing to pay premium prices. That said, there are cocoa cooperatives like Kuapa Kokoo in Ghana who have been able to penetrate differentiated markets with forastero beans.16 In order to assess the viability of a differentiation strategy based on quality, farmer organizations should first solicit an outside assessment of the current quality of their production. While such assessments could potentially come from a number of sources, the most valuable feedback would come from sources closest to the consumer markets high end chocolate manufacturers. Two gourmet chocolate manufacturers expressed willingness to analyze cocoa samples for producer organizations and to provide detailed feedback on their perceptions of quality. One of those manufacturers, Guittard Chocolate, has an established program to provide quality analysis to cocoa growers at no cost. Details about this service are included in Appendix 4. It must be noted that samples sent for analysis should be representative of cocoa that is available for shipment in container quantities. Often, grower organizations hand pick a sample of very high quality product that can not be reproduced in large quantities. This gives both buyers and sellers a false sense of the products value and will not lead to a meaningful assessment of quality. With results from the initial assessment, cocoa cooperatives can begin to examine ways to maximize the potential for high quality production. If the initial results do not show
16

Kuapa Kokoo is a Ghanaian farmers cooperative that sells both to the fair trade and conventional markets.

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optimum quality, it is important to determine to what extent problems lie in post harvest processing and which are inherent in the beans themselves. Working with technicians and, if possible, buyers like Guittard, cooperatives should aim to determine optimum post harvesting processes and implement them on small quantities of cocoa. In particular, buyers and industry experts emphasize the need to pinpoint the optimum fermentation period. Having produced small quantities of cocoa under optimum conditions, cooperatives should have samples analyzed again. These results will give a sense of, as one industry expert said, what is possible given the characteristics of the cocoa trees and the growing conditions. While it may not be feasible to implement such ideal post harvest processing on a large scale, it may be useful for cooperative management to have a benchmark with which to assess overall production. Further, if it is determined the quality deficiencies are a function of the beans and not the processing, the cooperative will be able to make a more realistic assessment of its options. Finally, industry experts report noticeable differences in quality between cocoa produced from older tree varieties and newer hybrids, the former typically being more desirable. If cooperatives are made up of communities where different varieties of trees have been planted, it may be useful for them to evaluate the feasibility of segregating cocoa on the basis of region. If container quantities of more desirable varieties of cocoa can be segregated, some farmers may be able to benefit if their cocoa can be marketed separately. Accessing the Markets for Certified Products Rising demand for fair trade and organic consumer products suggests that demand for certified cocoa will continue to rise as well. This notion is supported by industry experts and certification agencies, which anticipate market growth. Yet there seems to be consensus among those in the industries that use cocoa that the market for fair trade and organic cocoa will be largely limited to producers of high quality cocoa. The companies that manufacture and market fair trade and organic products for sale in the US typically position their products as high quality offerings. These companies see certification as a way to add additional value to high quality cocoa, not as a substitute for quality. Thus, cooperatives that are seriously interested in accessing the fair trade and organic markets should consider implementing a quality assessment initiative like that described above. Now that both fair trade and organic certification come at a cost to farmer cooperatives, it is important for the organizations to do a cost/ benefit assessment of the investment in certification. For example, there are fair trade certified cooperatives that have sold little or no cocoa to the fair trade market. These organizations and others that are considering certification must determine whether or not their cocoa will be of interest to fair trade buyers. If the answer is no, fair trade certification may be a secondary priority to other initiatives that would make the cocoa desirable to fair trade buyers (e.g., quality improvement) or other options all together. The same principle holds true for organic certification. That said, buyers interviewed for this paper are extremely eager to find unique, high quality, fair trade and organic cocoa. If cooperatives can offer cocoa that fills this need, buyers suggest that markets do exist.

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As for other types of certification programs, there may be some medium-to-long term opportunities for value addition. However, cooperatives must understand that certification systems only become sustainable sources of premium prices when the certification adds value at the consumer products level. Moreover, the costs associated with building a nationally recognized certification brand in the US are tremendous, and until certification labels are recognized by consumers, there is little value added to consumer products that bear those labels. Thus, investment of capital or human resources into certification systems that have yet to establish a presence on the shelves of US supermarkets is not likely an investment that will pay off quickly or possibly pay off at all. Most important, if a cooperative has not been able to penetrate the markets associated with established certification systems, it is crucial for that organization to ask what barriers have prevented market access and whether or not those same barriers will inhibit sales under the new certification regime. If, for example, quality concerns have stymied fair trade or organic sales, it is not likely that a new certification system alone will attract new buyers. Single Origin and Estate Branding To some degree, the ability of cooperatives to access the market for single country of origin cocoa is limited by a countrys reputation for the quality of production. In cases where a country is not known in the cocoa industry for quality, government cocoa federations or country-wide growers associations could play a role in implementing and publicizing quality improvement initiatives or marketing campaigns to reposition perceptions of the countrys cocoa. Individual cooperatives can, however, work to ensure consistency of their own high quality cocoa supply. While the countrys supply of cocoa as a whole may not be seen as a source for single origin products, individual manufacturers and marketers who are able to identify cooperatives that can deliver unique cocoa consistently may be willing to launch single origin products despite perceptions of the rest of the countrys supply. Examples of such buyers include Dagoba Chocolate and Michel Cluizel, both of which have launched single origin chocolate bars from the Dominican Republic. If a cooperative is able to produce cocoa with a flavor profile that is unique and able to stand alone in a chocolate bar, it may be able to access the small but growing market for single estate chocolate. Perhaps the best way to assess the feasibility of such a differentiation strategy is to solicit feedback from chocolate manufacturers who are willing to provide a general assessment of quality. In the most ideal cases of single estate sales, cooperatives could work with dealers or marketers to create a brand identity that is meaningful within the cocoa industry or on the consumer products level. Such cooperative-specific brands could stand for quality and association with a particular region, ecological growing practices, or unique cultures (e.g., indigenous communities). The branding initiatives that some coffee cooperatives have launched are an excellent model of opportunities to create single estate brands. COOCAFE, R.L. in Costa Rica has created seven unique brands of coffee grown in the different regions in which the

50

organizations farmers live.17 One of its brands, Caf Monteverde, is positioned as coffee from the cloud forest and is known in the specialty coffee industry for its unique solar dryer project. Similarly, Central de Cooperativas Cafetaleras de Honduras (CCCH), has developed seven brands, each associated with a unique region, community of growers, growing environment, and quality standard. Cooperatives interested in pursuing a single estate branding strategy should remember that the biggest fear of marketers who launch a single estate product is that an interruption in cocoa supply could mean failure to deliver product. Thus cooperatives interested in this market will need to demonstrate the ability to deliver a consistent supply of cocoa. Strategic Corporate Partnerships One of the more difficult to implement but potentially rewarding strategies for differentiation is direct partnerships with consumer goods marketers. Such partnerships could resemble a single estate strategy but just as easily target marketers in industries other than chocolate. While quality would be one component of the relationship, factors like social benefit to a specific community of growers or protection of a particular ecological region could also play a significant role. The most strategic approach to forging partnerships with marketers is to target those companies who position themselves to customers who would value specific sources of cocoa, particularly cocoa grown by small scale producers using environmentally sound practices. Companies that sell to the natural products market are the most obvious place to begin. A sample list of companies that market natural products with cocoa ingredients is included in Appendix 5. While smaller companies may purchase limited volumes of cocoa ingredients, they may be easier to make connections with and have more flexibility in changing their supply sources. However, companies that buy a very limited quantity of cocoa ingredients may not have enough market power to control their supply sources. Nonetheless, contacts with these companies may be good ways for cooperatives to get a foot in the door, even if partnerships are not the immediate result of conversations. While partnerships are potentially fruitful opportunities, many cooperatives will likely face significant challenges contacting US companies directly. Not only will language and cultural barriers create obstacles, but companies may not feel secure establishing a relationship with a commercial organization from another country that it is unfamiliar with. For these reasons, cooperatives interested in pursuing a strategy of direct relationships should consider finding an intermediary like a US NGO or US dealer to help broker relationships with US marketers. While such intermediaries will add an extra layer (and in the case of dealers, potentially an extra cost) to the partnerships, cooperatives are far more likely to forge partnerships with marketers if initial contact is made by someone whose cultural familiarity and/or reputation will facilitate rapport most quickly. The specialty coffee market provides models of successful cooperative/ marketer partnerships facilitated by both NGOs and dealers. Conservation International worked with Starbucks Coffee to forge a partnership with grower cooperatives in
17

These brands are described in detail at www.coocafe.com/english/greencoffees.htm.

51

Chiapas, Mexico.18 Sustainable Harvest Coffee Importers has built its business model on the concept of relationship coffees and works to build strong, transparent ties between specialty coffee roasters andconscientious farmers (Sustainable Harvest, 2004). A Note on Perceptions of Labor Conditions Though allegations of child slave labor in the production of cocoa were limited to production in West Africa, grower cooperatives all over the world should understand the new found sensitivity of many US corporations to labor issues. In recent years, companies like Starbucks, Nike, and The Gap have been the targets of activists and media who questioned labor practices on the farms and factories in which products are produced. Whether or not clean sources are part of a companys social mission or not, many corporations are scrutinizing labor practices much more closely for fear of being caught in a scandal. While small-grower cooperatives are far less likely to have labor practices questioned than large plantations or factories, cooperative management should think about whether any of the cooperatives practices could raise concerns for potential customers. Such concerns, whether fair or not, could prove to be barriers to accessing certain value-added markets. One area to consider is the ages and salaries of individuals who are involved with sorting cocoa or preparing it for shipping. Cooperatives should also give thought in advance to questions that may be asked about children working on their families farms and whether or not that work affects the ability for children to attend school. While such concerns in the context of small, family farms may not reflect a nuanced understanding of rural agriculture in many countries, they still may pose market barriers if left unaddressed. Appendix 6 shows questions that Ben & Jerrys, an ice cream company owned by Unilever, asks of its suppliers. While Ben & Jerrys is known for particular concern about its ingredient sources, the questions provide some insight into a growing trend in the US market that cooperative management should be familiar with. A cooperatives first step in considering the issue of labor conditions and potential market barriers they could create would be to practice answering the questions posed by Ben & Jerrys. Next Steps: Self Assessment for Differentiation Opportunities To facilitate a cooperatives process of matching market demands with unique characteristics, cooperative management should conduct a self assessment that highlights both current areas of uniqueness and competency, as well as action items that should be undertaken in order to maximize differentiation opportunities (e.g., quality assessment or benefit/ cost analysis). Appendix 1 provides a checklist against which cooperative management can systematically assess its organizations opportunities.

18

http://www.starbucks.com/aboutus/chiapas.asp

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Appendix 1
Self Assessment for Differentiation Opportunities Yes/ No Quality Quality Analysis/ Assessment Cocoa Meets Industry Standard of High Quality Comments

Bean Characteristics Fine Flavor Beans Criollo Trinitario Nacional

Farmers Growing Hybrid Varieties Farmers Growing Traditional Varieties Cooperative has Capacity to Segregate Traditional Varieties

53

Post Harvest Processing Consultation on Post Harvest Techniques by Industry Expert Optimum Fermentation Time Identified with Assistance from Industry Expert Cocoa is Adequately Fermented

Certification Organic Cocoa is Currently Certified Cooperative is Selling to the Organic Market Organic Benefit/ Cost Analysis Completed

Fair Trade Cocoa is Currently Certified Cooperative is Selling to the Fair Trade Market Fair Trade Benefit/ Cost Analysis Completed 54

Other Certification or Authentication Under Consideration Benefit/ Cost Analysis Completed

Branding Opportunities Country has Reputation for High Quality Production Characteristics of All or Part of Cooperative's Cocoa are Unique Cooperative has a Unique Story to Tell About its Members Cooperative has a Unique Story to Tell About its Physical Environment or Location Cooperative has a Unique Story to Tell About Sustainable Growing Practices Cooperative Can Deliver Consistent Supply of Unique Cocoa from Year to Year Partnership Opportunities Relationship with NGO that can Facilitate Partnerships with Marketers Relationship with Dealer that can Facilitate Partnerships with Marketers Labor Issues Ben & Jerry's Supplier Screen Completed 55

Appendix 2
Production/ Export of Fine Flavor, Organic, and Fair Trade Certified Cocoa Beans by Country
Fine Flavor Percentage of Annual Percentage of Percentage of Cocoa Total Fine Production Total Organic Total Fair Production, Flavor Organic Certified Production Trade 1998/1999 Production Cocoa 1999/2000 1999/2000 Exports 2001 (000s tons) 1998/1999 (tons) Africa Cameroon Ghana Madagascar Sao Tome Tanzania Uganda Mexico/Central America/ Caribbean Belize Costa Rica Dominica Dominican Republic Grenada Jamaica Mexico Nicaragua Panama Trinidad and Tabago South America Bolivia Ecuador Peru Venezuela Asia and Oceania Fiji Indonesia Papua New Guinea Sri Lanka Vanuatu Total 6,000 6.6% 2,800 24.0% * * 3,200 2,800 3.5% 3.1% 1,200 1,000 600 8,400 9.3% 7,330 30 200 6,000 1,100 1,500 1.2% 1.7% 300 300 500 2.6% 2.6% 4.3% * 10.3% 8.6% 5.1% 62.8% 0.3% 1.7% 51.4% * * * 42.0% 28.0%

1,000 2,000

1.1% 2.2%

1,000 1,800 51,400 49,800 1,600 9,900 2,000 6,300 1,600 90,300+

1.1% 2.0% 56.9% 55.1%

700 600 100

6.0% 5.1% 0.9%

30.0% * *

1.8% 11.0% 2.2% 7.0% 1.8% 100.0% 500(est) 11,680(est) 4.3% 100.0% 100.0% 550 50(est) 4.7% 0.4% 0.0%

+Includes 200,000 tons from miscellaneous countries not listed *Country exports of fair trade not listed to protect confidentiality of the marketing cooperatives Note: categories are not mutually exclusive

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Appendix 3
Country Colombia

Examples of Terroir (Single Origin and Estate) Chocolates19

Manufacturer Guittard Description Colombia E. Guittard Vintage line 65% mass Criollo & Trinitario Guyave Origen Unico line 71% mass Trinitario Ampamakia 64% mass Tasting Notes High chocolate essence Fruity, nutty Well rounded Similar to high quality Venezuelan Medium to high chocolate essence Fruity notes Winey Good eating bar or for sauce or coating Medium to high chocolate essence Good mouth feel/good melt Vegetative notes Great ingredient for sauce Nutty, like walnuts Fruity Well blended Clean finish High floral, almost perfumy Dried fruit Apple cider fermented taste Medium to high chocolate essence Intense nutty, roasted notes Fruity Winey Berry/cherry fruit Some green vegetative notes Medium chocolate essence Nutty Clean finish Good balance of flavors

Grenada

Chocovic

Madagascar

Valrhona

Trinidad

Valrhona

Gran Couva 64% mass Trinitario Sur del Lago Original Vintage line 70% mass Criollo Sur del Lago E. Guittard Vintage line 65% mass Criollo & trinitario

Venezuela

Domori

Venezuela

Guittard

Venezuela

Michel Cluizel

1st Cru: Hacienda Concepcion 66% mass Criollo & trinitario

19

This list was taken from the article Single Origin Chocolate: Does a Cacao Bean's Pedigree Matter so Much? by Curtis Vreeland. Chocolates included in the list were selected by a panel of experts as clearly extraordinary among a group of thirty samples.

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Appendix 4
Guittard Proposal Letter The letter that follows, written by Ed Seguine of the Guittard Chocolate company, conveys an offer to cocoa growers to provide bean quality and flavor analysis free of cost. Mr. Seguine expressed his willingness to share this letter with cocoa grower cooperatives but requested that it not be forwarded to other companies involved in chocolate manufacturing or cocoa bean sourcing. The letter was reproduced from an electronic version sent by Mr. Seguine.

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Proposal for Collaborative Partnership in Evaluating Cacao Guittard Confidentiality and Security Policy: It is Guittards belief that a strong adherence to principles of confidentiality and ownership must underpin any collaborative work in a partnership. We recognize and respect the fact that there is genetic material and breeding work that is unique and special to each institutionbe it a formal institution or a farmerthat we work with and that all rights both intellectual as well as physical samples rest with the institution, group, or farmer who provided the sample of beans to Guittard. We maintain a strict policy that under no circumstances will we release in any form information, photos, flavor evaluations, samples of prepared liquors, or beans to anyone. We are insistent that if any such material or samples are to be shared, the sharing must be done through the individual, group, or institution that sent us the samples in the first place. Strict adherence to this Guittard policy has allowed us to interact freely with many groups. Of course, the individual supplying the bean sample is always free to share whatever they wish with whomever they wish and whenever they wishwithout restriction or need for consent by Guittard. Guittard in this project to serve our partner. Project Proposal: You would send samples of beans representing material of interest to me at Guittard. Ideally, samples of 1 kg are most useful as they allow complete profiling to be conducted with several roastings if needed. We begin by roasting at a standard condition either selected by you or using one of the standard conditions we are using in other projects, such as the CFC/ICCO Fine Flavor Project--110oC x 25 minutes. Later, following tasting of this liquor, we may run additional roastings. We have found this to be of value as each bean type and bean dryness requires somewhat different roasting conditions to maximize the expression of its flavor elements. This becomes particularly important when there are dominant acidic, fruity, and floral notes in a sample. After receipt of the beans, we do the normal assay for bean count/bean weight. Normally we do not perform weight distribution functions unless requested or appropriate due to high bean weight variability in the sample. Photographs are taken with a digital camera under standard conditions and background to document the bean appearance. With a second person present, we perform a 50 bean cut test using a Magra cutter. While digital photographs are being taken of the cut test (both full field and close up photos), another QC person is evaluating the cut using a standard profile that provides the number of beans in each category as follows: 50 beans cutslaty purple partly purple light brown brown dark brown white/ivory fully fermented by cotyledon fissuring

59

mouldy infested After completion of the cut test and photography, additional whole beans are evaluated for % moisture both to document the incoming moisture content as well as guide any non-standard roasting runs. Roasting of 100-140 grams of beans is performed on a perforated tray in a low velocity, convection lab oven holding loC tolerance both during the course of the roasting as well as across the tray in the oven. While we prefer to roast 140 grams for best performance of our equipment, we have found that we can run with as low as 75 grams if the sample is small. When we do have small samples, we often will not run all of the earlier destructive tests to insure that we have enough for roasting. Breaking is performed on a lab breaker and winnowing on a John Gordon lab winnower. Although we calculate both stuck shell on the nib and the overall yield of clean, shell free nib from the raw beans, these are always much higher on this lab equipment than occurs in production equipment. We do use this as a guide, however, to roasting conditions as well as an indicator of the inherent adherence of the shell to the cotyledon. We do not attempt to remove germ before milling. Because of the particularly long time for the analysis, we do not determine % shell on the raw cacao. Clean nibs are milled to create a smooth liquor. Since removal of pieces of nib with stuck shell is a manual process, we have found that if the beans and roasting conditions are such that poor shell removal occurs, we will have some shell carried over into the milling. When this happens, we find that there are larger shell pieces floating in a matrix of finely ground liquor but these are easily ignored. Liquor is evaluated for % fat using a Brucker PNMR instrument. Liquor evaluations are performed two ways, first by Guittard internal profiling followed by profiling using the CFC/ICCO Fine Flavor Project scoring method. The following is an example of the flavor profiles which we generate: ESS: ColorColor density like E but more of a flatter, plain brown hue. AromaInitial sharp acidic notes then a browned fruit / raisin note. FlavorTart, slightly sharp dried fruit notes with a warm, deeper winey character that appears in mid taste. Has a very strong aromatic quality that is almost floral in its notes. Very interesting fragrance. Also carries with it slightly more bittemess and astringency but these clear the mouth quickly in the end taste. This bean could be of particular value in a dark chocolate blend, competitive in utility with good quality Trinidad beans although fruity notes are less dominant and floral notes are present. CFC/ICCO Flavor Project Scoring: Cocoa=4 Acidity=4 Bittemess=4 Astringency=3 Fruity=5 Floral=4 Other=6 pronounced center aromaticity Off Flavors Smoky=0 Mouldy=O Raw/beany/Green=0 Other=

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The liquor sample is then split (we retain half of the sample in our internal private library) and send 1 set of 8x10 high resolution prints of all of the photos (we are happy to print more if they are needed), a CD with all of the JPEG files (each file is about 1.4 MB), our physical measurements and flavor evaluations, and the split sample of liquor back to you. While 1 kg is desirable, we can often get most of what is needed done with 600 grams. The 1 kg gives us more of an opportunity to look at the flavor and, then, to go back and conduct several roastings with different conditions if we feel that the flavor expression for that sample has not been reasonably optimized. Occasionally, we also run addition cut tests. In receiving samples, we have found that it is often of value to have several different fermentation regimes for each genetic / plant location material. This allows you to determine which fermentation and drying protocol best expresses the beans characteristics. Guittard pays all costs of our evaluations and processing work as well as the cost of sending the evaluation materials back to you. We would be most interested in working with you in your evaluations. I look forward to your consideration of a partnership in this area. Sincerely, Ed Seguine Contact: Edward S. Seguine Vice President, Research and Development / Quality Assurance Guittard Chocolate Company 10 Guittard Rd. Burlingame, CA 94010 Phone: 650-697-4427 ext. 200 FAX: 650-692-2761 Email: seguine@guittard.com edwardseguine@comcast.net

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Appendix 5
Natural Food Products Containing Cocoa Ingredients (Excludes Chocolate Bars)
Product Name Parent Co. Company Location Product Type Price Quantity Cocoa Cocoa Ingredient(s) Butter Liquor "Chocolate" Organic Ingredients Health Natural Organic Ecofriendly Special Diet Positioning and notes Home made/ family Kids Charity Association Other

Cocoa Almond Breeze Ah!laska baking chocolate Baking Chocolate Chunks Vegan Choc Brownie Choc Truffle Brownie Mix Ultra Chocolate Brownie Mix Boulder Brownie Simple Organics Organic Choc Cake Mix Baked Good (various) Fruit Source Malt Balls Misc bulk choc (chips, covered nuts) Organic Chocolate Chips Organic Choc Milk Tropical Source Chocolate Chips Health Valley Low-Fat Chocolate Tarts All Natural Chocolate Sauce Deathly Choc Immortal Dessert Sauce King's Reward Chocolate Sauce Truffle Almonds Cocoa Powder Natural Cocoa Powder Beth's Heavenly Little Choc Chip Cookies Brown Bear Cookies Choc Chip Cookies Choc Covered Pretzel cookies Chocolate Sandwich cookies Chocolate Snaps Cookies (various) Cookies (various) Double Choc Coffee Toffee Cookies Double Dutch Choc Crisp Cookies Double Fudge Brownie Cookies Frookie Choc Chip Cookies Fudge Thumbprint Meringue Cookies Premium Choc Chip Cookies Sugar Free Choc Chip Cookies Sugar Free Choc Cream Cookies Balance Bar Cliff Bar Go Lean Odwalla Bar Mini Waffles Organic Go Go Grahams Bensdorp Cocoa Drinking Chocolate Organic Hot Chocolate Edy's Dreamery Ice Cream Ice Cream Soy Ice Cream Sandwiches Mixed nuts, etc Mixed nuts, etc Cocoa Nibs Tom's Choc Chip Cookie Dough Organic Pudding Rice Dream - chocolate Rugelach Soy Delicious Soy Dream Soy Ice Cream (various) Choc Soy Milk Light Soy Soy Beverage Soy Milk Chocolate Soy Nuts O Soy Ah!laska Choc Syrup Organic Choc Syrup Yogi Cocoa Spice Tea Non Fat Yogurt Organic Yogurt Yogurt Blue Diamond Ah!laska/ Nspire Christopher Norman Chocolate Frankly Natural Bakery The Gluten Free Pantry Pamela's Products Boulder Brownie Company Oetker, Ltd Just Desserts Nspired Foods Sunspire Sunspire Horizon Organic Nspired Foods Hain Sharffenberger Pemberton's Gourmet Foods Westfork Creations Maisie Jane Frontier Natural Products Sharffenberger Beth's Fine Desserts Our Family Farm Brent & Sams J&J Snack Foods Country Choice Naturals American Natural Snacks Newman's Own Whole Foods Organica Foods Barbara's Bakery Country Choice Naturals Parmalat Bakery Heaven Scent Miss Meringue Heaven Scent Joseph's Lite Cookies Barry's Bakery/ Source Bakery Balance Bar Cliff Bar Kashi Odwalla Van's International Foods Barbara's Bakery Dean and Deluca Cadbury Green and Blacks Edy's Cascadian Farm Stony Field Farm Imagine Foods Sunridge Farms Tropical Sharffenberger Tom's Cookies Horizon Organic Imagine Foods Steve's Mom Turtle Mountain Imagine Foods Tofutti Silk/ Whitewave Vita Soy Westsoy (Hain) Whole Foods Gen Soy Stony Field Farm Ah!laska/ Nspire Santa Cruz Natural Golden Temple Stony Field Farm Stony Field Farm Brown Cow CA, Sacramento AK, Homer NY CA, San Diego CT, Glastonbury CA, South San Francisco CT, Stamford Ontario, Mississauga CA, San Francisco CA, San Leandro CA, San Leandro CA, San Leandro CO, Boulder CA, San Leandro CA, Irwindale CA, Berkeley ME, Bremen MT, Red Lodge CA, Chico CO, Boulder CA, Berkeley CA, Sonoma Newport, KY AR, North Little Rock CA, Vernon Minneapolis, MN Canada CA, Aptos TX, Austin CA, Tolusa Lake CA, Petaluma Minneapolis, MN IL, Des Plaines CA, Santa Monica CA, San Marcos CA, Santa Monica NM, Deming NV, Las Vegas NY, Ryebrook CA, Berkeley CA, La Jolla CA, Half Moon Bay CA, Torrace CA, Petaluma UK UK CA, Oakland Almond Milk Baking Choc Baking Chocolate Brownie Brownie Mix Brownie Mix Brownies Cake Mix Cakes, Cookies, etc Candy Candy Choc Chips Choc Milk Chocolate Chips Chocolate Cookie Bars Chocolate Sauce Chocolate Sauce Chocolate Sauce cocoa covered almonds Cocoa powder Cocoa Powder Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Cookies Energy bar Energy bar Energy bar Energy bar Frozen Waffles Graham Crackers Hot Cocoa Powder Hot Cocoa Powder Hot Cocoa Powder Ice Cream Ice Cream Ice Cream Ice Cream Sandwiches Mixed nuts, etc Mixed nuts, etc Nibs Pre-made cookie dough Pudding Rice Milk Rugelach (pastry) Soy Ice Cream Soy Ice Cream Soy Ice Cream Soy Milk Soy Milk Soy Milk Soy Milk Soy Nuts Soy Yogurt Syrup Syrup Tea Bags Yogurt Yogurt Yogurt $1.99 32oz $3.59 8oz $15.00 16oz 2.8oz $4.79 26oz $4.99 16oz $1.79 2.5oz $2.49 17.1oz x x x x x x x x

Other x x x x x x x non-dairy "Fair Trade", fat free Gourmet, est. 1923, professional chefs, association with Shokinag Not tested on animals (tested on humans) Gluten Free Wheat Free, natural process cocoa Taste on a higher plateau No chemicals, pure x x Local Ingredients, communty development, doing well by doing good Juice Sweetened Grain Sweetened No chemicals Dairy Free, Vegan , Tropical, fun Natural goodness Pure, Dark Heavenly, from the depths of the soul of chocolate Gourmet no pesticides, California sunshine x From Tropical equator regions, quality The finest all natural x x x x x x x x x x x x x x x x x x x Very chocolate x x x For Diabetics, great taste Each bite a sweet delight Smart Nutrition for smart living Nutrition for Sustained Energy Includes 7 grains No GMO, Ingredients you can pronounce No GMO Great taste w/out compromise, % profits donated to charity Top quality, oldest chocolate production method from Holland Just add milk Direct from farmers Ben & Jerry's Concept Copy x x x x Old fashioned, Swedish style, Cane Juice Sweetened Sustainable Agriculture Good Food Dedicated to chocoholics Wheat free, milk free Gluten Free x Proceeds to charity, Baking the World a Better Place Gourmet

x x x

x x x x x x

x x x x x x x x x x x

$3.49 $1.59 $3.55 $3.19

Bulk Bulk 9oz quart 16oz 8.5oz

x x

x x x

x x x x

x x

$7.00 11.5oz $8.50 10oz $4.99 6oz $7.00 16oz $8.50 6oz $6.75 7oz $1.99 $3.49 $3.99 $2.79 $2.99 $2.49 $2.99 $2.69 $3.29 $2.49 $2.69 $3.99 $2.69 $4.59 $3.19 $1.39 $1.39 $1.49 $2.49 $3.29 $12.50 $6.50 $12.50 6oz 7oz 15oz 12oz 10oz 10oz 7.5oz 8.5oz 7.25oz 12oz 6oz 5.4oz 6oz 11oz 8oz 1.69oz 68g 2.75oz 2.2oz 8oz 6.5oz 12oz 250g 10.6oz

x x x x x

x x x

x x x

x x x x x x x

x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x

x x x x x x x x x x x

x x

x x

x x x x x x

x x x x

x x

x x x

CA, Palo Alto CA, Santa Cruz NC, Charlotte CA, Berkeley CA, San Francisco CO, Boulder CA, Palo Alto NY, Brooklyn OR, Junction City CA, Palo Alto NJ, Crawford CO, Boulder CA, San Francisco NY, Uniondale TX CA, Fairfield NH AK, Homer CA, Chico OR NH NH CA, Antioch

$3.29 12oz Bulk Bulk $8.50 6oz $3.99 16oz $2.79 4oz x4 $1.49 32oz 7oz $2.99 pint $2.99 pint $1.89 $1.99 $1.99 $1.19 3.97 $2.99 $4.59 $2.99 $3.79 quart 32oz 32oz 33.8oz 8oz 4oz x6 20oz 15.5oz 1.27oz

x x x x x x x x x x x x x x x x x x x x x x x x x x

x x

Dream, rewarding Farm Direct Snack from everyday to gourmet From the best sources in Venezuela, Caribbean and Africa local, served in White House

x x x x x x x x x x x x x x x x x x x x x x x x x x

x x

non-dairy, great taste Award Winner Save the Turtles, pure, decadent Dream, rewarding Fat Free, dairy free, premium non-dairy, Dutch process cocoa For over 60 years non GMO Premium, European Chocolate

x x x x

x x x x

x x

x x x

x x

Fat Free, Dairy Free, % of profits to wildlife orgs 100% certified organic Reminiscent of drinking cocoa as child, Our mission is to serve your spirit

$0.89 8oz $0.89 6oz $0.89 8oz

x x x

x x

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Appendix 6

Ben & Jerrys New Socially Aligned Suppliers Screen20 1. Is the product Certified Organic, organically grown, or other? 2. What is the organizations position, current or future, on GMO? 3. Where the product is interplanted with other crops, what are the agricultural practices used to grow the other crops (organic, gmo, etc.) 4. What is the organizations stated position on supporting small scale farming vs. agrobusiness? 5. What % of the growers are small-scale farmers? If not small scale, explain. 6. What (who) are the funding sources for the economic activities of the project? 7. Where is their labor force derived from (families, casual hired labor,regular hired labor etc.)? 8. What are the standards around labor conditions (working conditions, age, worker rights, etc.)? 9. Has the number of farmers producing this product increased/decreased since the start of the project? 10. Are farmers organized in any kind of cooperative, association, organization, union? 11. How are prices paid to farmers determined? 12. What is the stated position on environmentally friendly practices, agro chemicals, and resource management? 13. Are there any mechanisms in place to provide affordable financing, financial assistance, prepayment to farmers, credit arrangements? 14. Any provision for a guaranteed minimum price to farmers? See above. 15. Any provisions for long-term cooperation through contracts or other arrangements? 16. What is the Government role in the project? 17. Is there a measure used to determine socio-economic improvement such as medical care, education, housing, general quality of life indicators?
20

Source: Ben & Jerrys Ice Cream, 2002.

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18. Is there any formalized mechanism (Foundation, Board, Association, Formula) for returning profits to the community? 19. Are there any specific community projects, past or projected, directly associated with the product/project (school, clinic, energy, etc.)? 20. Are there any unique or specific services (extension work to improve farm management techniques, sustainable agriculture training, womens issues, community outreach, etc.)? 21. Are there any third party objective sources to which the project is accountable for reporting (USAID, Transfair, funding sources, etc.)? 22. Does the project have endorsment or certification from a third party human rights or environmental group? 23. Does the project have a written code of standards, conduct, membership requirements, etc.? 24. Does the project have a mission statement? 25. Is the project endorsed or certified by a third party human rights or environmental organization?

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