SIC 2066
CHOCOLATE AND COCOA PRODUCTS



Included in this industry classification are establishments primarily engaged in shelling, roasting, and grinding cocoa beans for the purpose of making chocolate liquor—from which cocoa powder and cocoa butter are derived—and in the further manufacture of solid chocolate bars, chocolate coatings, and other chocolate and cocoa products. Also included is the manufacture of similar products, except candy, from purchased chocolate or cocoa. Establishments primarily engaged in manufacturing candy from purchased cocoa products are classified in SIC 2064: Candy and Other Confectionery Products.

NAICS Code(s)

311320 (Chocolate and Confectionery Manufacturing from Cacao Beans)

Industry Snapshot

The chocolate and cocoa products industry has traditionally been subject to significant fluctuations in demand. Chocolate products tend to be seasonal in nature, with demand increasing sharply during the holidays. Typically the third and fourth quarters reflect the highest sales. In addition, several consumer trends have had an impact on demand. These include rising sales of premium-priced chocolates and the growing concern about the health risks associated with the consumption of such high-fat foods like chocolate.

The number of establishments producing chocolate and cocoa products in the United States was 995 in 2000. California and Pennsylvania boasted the largest number of such establishments, with 107 apiece. Retail sales of chocolate products for 2001 was $13.1 billion. Total chocolate consumption that year was 3.1 billion pounds.

Organization and Structure

All cocoa beans processed by U.S. manufacturers must be imported, by direct purchase or through the services of a broker, as cacao trees require a tropical climate to flourish. Growers are paid for the beans at market price, which is determined primarily by the quality and availability of the crop worldwide. A testament to cocoa's importance as a commodity is the existence of cocoa exchanges, similar to standard stock exchanges, in New York City, London, Hamburg, and Amsterdam. The beans are then processed to make chocolate liquor, which is in turn used to further manufacture such products as cocoa, chocolate syrup, and solid chocolate chips and baking bars. The chocolate liquor is also often sold to other manufacturers that combine it with additional ingredients to produce confections, bakery items, and dairy products.

Manufacturers roast, shell, and grind the beans to produce unsweetened chocolate, the chocolate liquor that is the basic ingredient of all chocolate products. Further processing of chocolate liquor falls into two categories: cocoa manufacture and chocolate manufacture.

In cocoa production the fat is pressed from chocolate liquor, leaving cocoa cake that is crushed to form cocoa powder. The powder may be sweetened and sold as a cocoa beverage or left unsweetened for use in bakery and dairy products and for home cooking use. Cocoa butter, the fat removed from the chocolate liquor, is used mainly in sweetened chocolate, but is also used as a moisturizer in soaps, creams, and medications.

The production of chocolate requires the addition of sugar or other sweeteners and cocoa butter to chocolate liquor. Milk solids are also added in the manufacture of milk chocolate. Bulk quantities of sweetened chocolate (blocks of at least 4.5 kilograms) are considered chocolate coating and are used for candy coverings and baked goods. Chocolate coating is generally more expensive than the confectioners' coatings, which are made from cocoa powder.

Chocolate manufacturers sell these semi-processed cocoa products to other firms that use the items in the production of confectionery, baked goods, and dairy products such as chocolate milk. In addition, some producers also manufacture their own confectionery. Exports of chocolate products consist mainly of confectionery items rather than semi-processed chocolate.

Background and Development

The history of the chocolate and cocoa products industry in the United States dates from 1765. In that year, supplied by cocoa beans from the West Indies, the first chocolate factory was established in New England. Physician James Baker funded the venture, whose brand (Baker's) continue to be produced today by Kraft General Foods, Incorporated.

During World War I, the U.S. government recognized chocolate's worth as both nourishment and a morale booster to those in the armed forces. Space was made on cargo planes coming into the country so a sufficient supply of cocoa beans would be available to manufacture chocolate products. The U.S. Army D-rations still include 4-ounce chocolate bars, and cocoa bean products are part of the rarified rations of NASA space travelers.

The chocolate industry did not escape the effects of the recession of early 1990s. Few cocoa-based companies in North America have not experienced layoffs, mergers and consolidations, plant closings, shift cutbacks, advertising budget slashes, and operational streamlining, reflected in poor sales figures and fiscal restraint. Between 1989 and 1991, the industry experienced 50 acquisitions, mergers, licensing agreements, or joint ventures, and companies have been intent on expanding and diversifying their product base.

The decline in world output of cocoa and the increase in demand for chocolates in new markets such as China, Russia, and other emerging economies indicate the arrival of a long-awaited bull market in cocoa. Another area in which the demand for cocoa increased was the beverage industry. Of the 2,894 new product introductions in 1995, approximately one-half of the beverage products consisted of either cocoa, coffee, or tea.

In the mid-1990s, more producers began catering to health conscious consumers. Popularity of lite (low-fat) candy and lite desserts increased dramatically. Bakers also began offering reduced fat and fat-free chocolate items.

Current Conditions

After falling from $4.57 billion in 1998 to $3.95 billion in 1999, the value of chocolate shipments rebounded to $4.01 billion in 2000. In 2001, American chocolate consumption totaled 3.1 billion pounds annually, down slightly from 3.4 billion pounds, or 12.2 pounds per person, in 1998.

Despite denials by the Chocolate Manufacturers Association and the National Confectioners Association, reports continued to circulate about a coming chocolate shortage and an increase in prices. Unfavorable weather and plant a disease were cited as the primary reason for possible shortages. El Nino was blamed for dry conditions in cacao-growing regions. Witches' broom, a fungus that rots the cocoa pod, caused irreparable harm to Brazil's cocoa production; the company dropped from the world's number-one grower in the 1970s to fifth place by the end of the century. Growers feared that the fungus would spread to neighboring countries.

Additionally, the depletion of the tropical rainforest in the primary cacao producing countries of Brazil, Costa Rica, Ghana, Trinidad, Malaysia, Cote d'Ivoire, and Indonesia was of great concern to American Cocoa Re-search Institute (ACRI). A continuing demand for cocoa products led to an increase in cocoa farming acreage to 16.3 million, much of it in cleared areas. According to the Institute, the cacao tree's natural habitat is in the shade of the rainforest where pollination and pest control occur naturally. The transfer of trees to open areas results in increased use of fertilizers and pesticides.

In response to this concern, the ACRI established the Sustainable Cocoa Program to assist farmers in increasing or maintaining productivity at levels that are "economically viable, ecologically sound, and culturally acceptable." The program's go alisto establisha sustainable and geographically diverse supply of cocoa by 2010.

Industry Leaders

Industry leaders at the end of the twentieth century included Hershey Foods Corporation, Farley Candy Company, World's Finest Chocolate, Inc., Merckens Chocolate Company, and Ghirardelli Chocolate Company.

Hershey Foods Corporation is a multinational corporation that grew from the company founded by Milton S. Hershey in 1894. Hershey has two divisions—one domestic and the other international. Hershey Chocolate North American is the domestic producer of chocolate, confectionery products, and chocolate-related grocery products. Hershey International oversees the corporation's international operations and exports to more than 90 countries. In 1998, the corporation posted net sales of $4.4 billion and employed 15,000 workers. In July 1999, citing rising production costs, Hershey announced that it would no longer process its own cocoa.

Research and Technology

In an effort to compensate for lagging sales, a number of chocolate and cocoa-based companies have adopted technological solutions to increase efficiency and lower production costs. Grace Cocoa's new Chocolate Americas Division headquarters, for example, built a$95-million plant with 335,000 square feet of computer integrated manufacturing constructed on a barren site in a Milwaukee, Wisconsin, industrial park. According to a Candy Industry interview with Dave Pollock, director of manufacturing at the new factory, "this really is the future."

Part of the new technology in the plant includes the computerization of a number of production processes. While this has helped facilitate more efficient productivity, it also has engendered a number of challenges. One of these was retraining employees who were familiar with only rudimentary chocolate making procedures. The state of Wisconsin helped offset some of the retraining costs by contributing 50 percent of the cost of employees' tuition at local technical colleges.

Cocoa has become such an intrinsic and valuable part of the U.S. economy that efforts by industry and science are underway to better understand the bean itself. The American Cocoa Research Institute contributed $1.5 million to Penn State University's Molecular Biology of Cocoa program. The main objective of the program is to increase understanding of the biology, botany, and genetics of the cocoa plant. The objectives of the study include the study of disease resistance, quality, plant delivery, and tools.

Further Reading

American Cocoa Research Institute. "ACRI Sustainable Cocoa Program Overview," 5 November 1999. Available from http://www.acri-cocoa.org .

Candy USA. "U.S. 2001 Statistics." Available from http://www.candyusa.org .

"Charlie and the Chocolate Plantation." E, July 1999.

"Chocoholics' Plight: Bad Weather, Disease, Force Coca Prices Up." St. Louis Post-Dispatch, 27 October 1997.

Chocolate Manufacturers Association. "No Need To Panic: Chocolate Supplies Are Ample," 9 July 1999. Available from http://www.candyusa.org .

Dornblaser, Lynn. "Adult Drinks Lead the Beverage Pack." Prepared Foods, 15 April 1996.

Ingram, Molly. "Glaze, Drizzle, Dip and Chip—Chocolate Does It All." Bakery Production and Marketing, 15 February 1996.

Lemonick, Michael D. "No Wonder You Can't Resist: Chocolate and Marijuana Share the Same Chemistry." Time, 2 September 1996.

Sanik, Sholom. "How 'Bout a Nice Hot Cocoa Contract." Futures, December 1996.

Sulon, Bill. "Hershey Foods to End Cocoa Processing." The Patriot News, 14 July 1999.

United States Census Bureau. "Statistics for Industries and Industry Groups: 2000." Annual Survey of Manufacturers. February 2002. Available from http://www.census.gov .



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