China Consumer


Ferrero to open first chocolate plant in China

Rocher_Ferrero w

The first record of chocolate in China is from the court of the Kangxi Emperor in 1706. A papal legate by the name of Charles-Thomas Maillard De Tournon brought some with him in order to charm the Chinese monarch. Unfortunately the cocoa-based product, which at that time was served as a drink, failed to impress. One account of the imperial tasting holds that Kangxi took a sip and declared he would much rather have a cup of longjing tea (a specialty from Hangzhou in Zhejiang province).

Three hundred years later and there are still many Chinese who would agree with Kangxi. The sweet, creamy taste  and texture of chocolate – now mainly consumed in solid form – is too rich for many Chinese who grew up with little or no dairy in their lives.

But that is changing rapidly. The Chinese confectionary market is growing between 10% to 20% annually, depending on who you ask, and the big players are all jostling for sales (for an earlier overview of the market, see WiC55).

Cue another Italian from Piedmont – Giovanni Ferrero, the head of the family-run business that produces Nutella and the gold-wrapped Ferrero Rocher balls. He sees Asia as the main source of his candy company’s growth in the coming years and this summer he will open a Rmb5 billion ($800 million) factory in Zhejiang, reports China Business Journal.

In 2013 the notoriously private CEO told the Wall Street Journal that “the strength of the Rocher brand [in Asia] is an early indicator of the route to follow”.

Four companies currently dominate the Chinese chocolate market – Mars, Nestle, Ferrero and local brand Le Conté. Mars, which has the biggest market share, has two factories in China, producing Snickers and Dove bars, and M&Ms. Mars also makes a locally available rice-infused chocolate called Cui Xiang Mi.

Hershey’s, the world’s fifth largest chocolate maker, has also launched a major offensive: buying Shanghai candy maker Golden Monkey last year and opening a research centre in the city in 2013.

The feeling is that urbanisation, rising wealth and an increasing interest in non-Chinese foods will keep the market growing. Annual Chinese chocolate consumption is currently only 200 grams a year per person. If the average Chinese were to consume even a quarter of the 11kg of chocolate the British munch annually, it would result in more than $20 billion in additional sales for the confectionary industry.

Last month Hershey’s predicted the Chinese market as a whole would be worth $3.4 billion by 2019, up from $2.7 billion today (the global chocolate market will next year grow to $98 billion according to research by the consultancy Markets and Markets).

Ferrero, which had revenues of $8.7 billion last year, is the only one of the major players not to have some kind of Chinese facility.

This, however, is very characteristic of the privately-held company which began life as a pastry shop in Alba. In the years following the Second World War, Giovanni’s grandfather Pietro began mixing cocoa with ground up hazelnut. The result was a solid, chocolatey block. His son Michele – who died last month at the age of 89 –  then came up with the idea of mixing it with vegetable oil to make it spreadable. As Nutella sales surged, an empire was born.

Michele insisted on growing the company naturally and resisted making any acquisitions bar one – a small hazelnut company in Turkey. His son Giovanni, who has been running the company since 1997 shares his father’s business philosophies.

“We’re not interested in maximising revenue in the short term, like everyone else. If we were listed, we would be under short-term pressure to deliver dividends and profits,” the WSJ quoted him as saying in 2013. Indeed, while other multinationals have moved production away from China recently (see WiC273), Ferrero’s long-term mindset has led him to make a major investment instead.

In the short term it may hurt its margins in China. That’s because some Chinese have been heard to moan about the price of imported Ferrero Rocher chocolates. As the Beijing Commercial Daily pointed out, after Ferrero opens its 30,000 tonne a year plant it will be harder for the company to justify the price tag for the locally-made versions. “Ferrero’s price has always been higher than other brands, but Chinese customers won’t accept this once the company reduces their transportation cost.”

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