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Can Swiss chocolate giant Lindt thrive with sky-high cocoa prices?

Lindt production line
Lindt production line Copyright JAN C.BRETTSCHNEIDER/Copyright:2011 JAN C. BRETTSCHNEIDER
By Piero Cingari
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Chocolate prices in the EU have surged by 11.1% on average over the past year, driven by tripled cocoa costs due to supply disruptions in West Africa. Swiss chocolate producer Lindt is expected to manage these increases through price adjustments, according to Bank of America.


Chocolate lovers may have noticed a bitter surprise on store shelves, as the prices of their favourite sweet treat have soared over the past year.

Consumers across the European Union have faced double-digit annual inflation rates for products like chocolate and cocoa powder.

Between April 2023 and April 2024, chocolate prices have risen by an average of 11.1% year-over-year in the European Union, with Hungary experiencing a peak increase of 23.7%, followed by Slovakia at 14.5% and Germany at 14.1%.

The primary driver behind these sharp price hikes is the skyrocketing rise in cocoa prices. For instance, a tonne of cocoa traded at around $3.000 (€2.700) in May 2023, while today its cost has tripled.

This surge is attributed to adverse weather conditions affecting harvests in key West African producers like Ghana and Ivory Coast, which together account for 70% of the world’s cocoa, compounded by the intensifying El Niño effect impacting Latin American farms.

Amidst this backdrop, a crucial question arises: Is the business of European chocolate sellers becoming more profitable, or are rising cocoa costs eroding their margins and profits?

How are rising cocoa prices affecting Lindt business?

Bank of America Securities recently provided insights on this issue, focusing on Swiss Chocoladefabriken Lindt & Sprüngli AG, a global leader in the premium chocolate segment.

"We think Lindt can navigate short-term cocoa price volatility, with an attractive set-up for the coming years," research analyst Antoine Prevot noted in a recent report.

The investment bank described Lindt as "a quality growth compounder" despite the near-term risks posed by a tight supply/demand balance in the cocoa market.

Unlike most of its branded competitors, Lindt is a vertically integrated chocolate producer, purchasing cocoa beans directly from farmers and distributors. Major rivals such as Mars, Nestle, Ferrero, Hershey's, Unilever, and Mondelez acquire chocolate in liquor or butter form, making them more susceptible to supply/demand fluctuations.

According to Bank of America, Lindt's integrated model offers better management of cocoa costs, supported by its premium positioning, which should facilitate "easier" pricing pass-through to consumers. Additionally, 50% of its sales are related to seasonal and gifting products, which historically have lower volume elasticity compared to everyday products.

Furthermore, Lindt's management decided a year ago, after observing potential issues in the cocoa supply chain, to increase their cocoa inventory for 2024.

"We have a much longer inventory physically in our warehouses of cocoa beans than we would usually have. So, at the moment, there's absolutely no problem for us with regards to that. We have enough supply," Martin Hug, Lindt & Sprüngli CFO, stated during the latest earnings call.

Chocolate maker plans developing world expansion

Europe is Lindt's largest market, accounting for 46% of sales, with Switzerland and Germany contributing approximately 20% of sales combined. The company is also expanding in the US, Brazil, and other developing markets.

Bank of America's Prevot believes Lindt is capable of passing higher cocoa costs onto consumers, given the company's leadership in the premium chocolate market and the relatively inelastic demand from European consumers. This implies that sales volumes are unlikely to decline significantly despite the rising prices.

"We expect the higher costs to be more than covered by price increases," Prevot wrote.

Bank of America believes Lindt can implement at least a 10% price increase over the next two years without experiencing a drop in sales volumes in its established markets, such as Europe. This should more than offset the higher cost of materials and ongoing global wage inflation. Additionally, they expect Lindt to maintain the price increases implemented over the past couple of years, as it has done previously. This, in turn, should improve margins once cocoa prices begin to decline.

The US investment bank assigned a "Buy" rating to Lindt stock (ticker LISN) and set a CHF 127.000 (EUR 128.300) one-year price target, implying an 18.7% upside from current levels.

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