Are chocolate companies' stocks a wise investment choice for Easter?
Amid a steep decline from late 2024's peak, cocoa prices persistently remain above their long-term average, sparking concerns for chocolate manufacturers this upcoming Easter. The persisting impact of President Trump's tariffs, along with rising costs and diminished cocoa output in West Africa, serves as the primary culprit behind the uncertainty.
As revealed on April 16, cocoa futures currently hover above the $8,000 per metric ton mark. The cause has been attributed to subpar West African harvests, accounting for about 70% of the world's cocoa supply. In their February earnings call, chocolate producer Hershey expressed concerns that elevated cocoa prices would adversely affect their earnings in 2025, echoing similar sentiments from Mondelēz, forecasting a 10% decrease in adjusted earnings per share due to "unprecedented cocoa cost inflation."
Lale Akoner, global market analyst at eToro, maintained that manufacturers are adopting strategies such as increasing prices, reducing product sizes, and exploring alternative ingredients in an attempt to maintain profitability. However, these changes carry risks, as consumers might respond negatively to altered recipes or smaller chocolate bars. For example, Cadbury recently faced public criticism due to the removal of one Twirl from a multi-pack.
The other viable option for manufacturers is to raise prices, but with continued inflationary pressures on consumers, there exists a limit to this approach. This predicament leaves the chocolate industry in a challenging position, potentially faced with consumer backlash and disrupted supply chains.
Furthermore, Donald Trump's extensive tariffs hold the potential to inflate cocoa prices even further, leading to more expensive chocolate. On April 2, Trump announced a 21% tariff on imports from the Ivory Coast, the world's largest cocoa producer. These tariffs originally included a 90-day suspension, with a 10% "baseline" tariff taking effect instead. Ghana, another key cocoa producer, now faces a 10% tariff.
Akoner cautioned that these tariffs could drive up production costs for American chocolate companies, leading to higher consumer prices and supply chain strains. Aggravated circumstances could arise if retaliatory measures are implemented, as threatened by the Ivory Coast's agricultural minister Kobenan Kouassi Adjoumani, who promised to "increase the price of cocoa" in response. Although cocoa prices are influenced by the global market, the Ivory Coast could potentially raise export taxes on cocoa to generate additional revenue, worsening cost pressures for both chocolate producers and consumers.
Investors are encouraged to evaluate potential investment choices in light of these developments, bearing in mind that the cocoa issue is predominantly relevant to the chocolate industry. While this crisis presents specific difficulties for chocolate companies, the tariff issue transcends sector boundaries. To weather the storm, it is essential to identify companies better positioned to handle the tariff-related volatility.
Hershey's and Mondelēz's share prices have shown resilience amid market turbulence, with Hershey's stock growing 0.2% since Trump's tariff announcement on April 2, and Mondelēz climbing 0.5%. Both have outperformed the S&P 500 consumer staples sector, falling only 1.1% in the same period. Investors seeking exposure to the chocolate industry may want to consider major players such as Hershey, Mondelēz, Nestlé, and Lindt and Sprüngli. Other notable companies like Mars are privately held; meanwhile, Cadbury remains owned by Mondelēz.
It is worth mentioning that each of the anointed companies spearheads a unique business model. Hershey, primarily manufacturing its products and selling them in North America, may be susceptible to supply chain cost increases and potential market contractions in response to the aggravated US economy. In contrast, Mondelēz, although American, boasts a diverse global footprint and product range, which further reduces its exposure to tariffs.
Nestlé might prove an attractive proposition for investors seeking a more diversified play, as it operates as a fast-moving consumer goods company rather than a chocolatier. Only 9% of the company's sales stem from confectionery, and it manufactures 90% of its goods locally, providing a barrier against tariffs. Recent statements by CEO Laurent Freixe reinforce this strategic positioning: “We are in a unique, privileged position…we have always had the strategy that we produce where we sell."
Given its focus on chocolate, Swiss company Lindt and Sprüngli presents a less diversified investment alternative. However, its significant market share in the US (39% of sales) suggests potential exposure to tariffs. CEO Adalbert Lechner believes the impact may be minimal, since the majority of the company's US production is manufactured domestically (around 95%).
- The persisting cocoa price elevation, influenced by factors like tariffs and West African harvests, has sparked worries among chocolate manufacturers as they prepare for Easter, with predictions of lower earnings from Hershey and Mondelēz.
- In an attempt to maintain profitability, manufacturers are implementing tactics such as raising prices, reducing product sizes, and exploring alternative ingredients, but these come with risks, like consumer backlash and negative market response.
- Trump's tariffs, notably the 21% imposed on imports from the Ivory Coast, the world's largest cocoa producer, could further inflate cocoa prices, potentially leading to higher consumer prices and supply chain strains.
- Acknowledging the potential impacts, Lale Akoner, a global market analyst, recommends identifying companies better equipped to handle tariff-related volatility, as demonstrated by the resilience of Hershey's and Mondelēz's stock performance since the tariff announcement.
- As the crisis unfolds, investors must consider companies with unique business models, such as the diverse global footprint and product range of Mondelēz, or the more focused chocolatier Lindt and Sprüngli, before making investment decisions.
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