Chocolate, at Any Cost: The Price Elasticity of the Candy Industry
“All you need is love. But a little chocolate now and then doesn’t hurt.”
― Charles M. Schulz
How much are we willing to pay for a candy bar?
- Despite the increase in health consciousness among consumers, chocolate and other confectioneries are still in high demand
- The new pricing methods for cocoa could cause candy makers to hike their prices
- Some candy products have more room to change their prices because their quantity demanded won’t shift substantially. Other products are completely the opposite.
- Candy is one of the most inelastic food categories, across all incomes.
The History of Chocolate
Chocolate has long been an indulgent food of choice. With an origin stemming back to Mesoamerica, where it was used for ceremonial purposes, to modern day snacking purposes, candy is currently a $494M industry, and is expected to grow at a 4.3% CAGR over the next 5 years.
That is primarily because of the diversity of candy offerings. There are different sizes, different shapes, and several different flavors. Every consumer has their own candy preference, as detailed by the United States of Candy map below.
However, developed countries are becoming increasingly health conscious. With recent trends such as alternative meats, iterations of cannabinoids, and various diets such as the keto diet or Beyonce’s Coachella diet, mainstream consumers haven health at the forefront of their minds more than ever.
What does that mean for the confectionery industry? How can they survive in the face of mushroom coffee and bee pollen? Many countries already tax sugar-sweetened beverages, in an effort to reduce obesity.
As the world becomes more health conscious, candy makers have adapted to the pressures. They are working with Partnership for a Healthier America on various programs, as well as have committed to 90% label transparency on packaging. They also have a goal to have “instant consumable” treats down to 200 calories or less by 2022.
However, that might not be enough. The chocolate industry is part of the broader “shrinkflation” movement. This is when the price of the product increases but the actual product shrinks, which often results in angry consumers. Hershey hiked wholesale prices by 10% back in July 2019, with Mars announcing a similar hike around the same time.
This coincides with the price of cocoa increasing substantially over the past year due to the much needed change in pricing in efforts to boost wages for West African farmers.
The new cocoa method pricing is expected to be implemented in October 2020. All of the candy makers are going to be impacted by the change, but some more than others. Posh chocolate, like Lindt’s truffles, are actually expected to be more insulated from the changes in price due to an evolving consumer preference for high quality (a byproduct of health consciousness).
The questions then becomes — what candies are more elastic than others? Which type will be more insulated from the change in dynamics? This is price elasticity. Consumers are more sensitive to price changes on some products as compared to others, and reduce the amount of product purchased if the price increases beyond a certain point. The exact relationship of elasticity is measured by:
For most items, the relationship between price and purchase is negative — if the price increases, consumers tend to buy less of it. However, for items that are inelastic, like medicine and other necessities, the price can increase substantially without consumer demand shifting. Chocolate bars, on the other hand, are assumed to be a relatively elastic good. We don’t need chocolate. We just like it.
Measuring the Elasticity of Candy
For a basic example, let’s assume that the price of a chocolate bar increased by one-third, from $1.50 to $2.00. 1,000 people bought the candy bar when it was $1.50, but now only 250 people buy it. A 33% increase in price resulted in a 75% drop in quantity demanded, resulting in an elasticity of 2.27. Generally, any elasticity measurement greater than the absolute value of one means that the product is elastic, and thus price greatly impacts demand.
However, if the price dropped by 25%, but the number of consumers only dropped by 20%, that would mean that the candy is inelastic. The change in quantity demanded is not as great as the change in price.
Posh Candies are Price Inelastic
For a real world example, UBS released this chart back in 2018, detailing the price elasticity of the different confectionery companies.
Lindt has the lowest price elasticity out of all the candy makers, with their main brand, Lindt at an elasticity of 0.7, which means that when prices increase for Lindt chocolates, quantity demanded doesn’t shift that much. However, Ghiradelli has a price elasticity of 1.3, so the quantity demanded of Ghiradelli is sensitive to changes in price. Consumers are more likely to continue buying Lindt after a price hike as compared to Ghiradelli.
Interestingly enough, Hershey company has the most price-sensitive products in KitKats and their Reese Peanut Butter Cup. They don’t have much room to increase prices without consumers responding negatively. Note: the Easter Egg, which is the literally Reese Peanut Butter cup in egg-form, is an inelastic good.
Perhaps companies need to repackage all their products into seasonal forms to avoid high price elasticity.
Consumer tastes are shifting, with more consumers preferring non-chocolate candy. Chocolate candy still leads the way in terms of sales, but non-chocolate candy is catching up. Gum is also a popular item, with 2% year-over-year growth.
Comparing Price Elasticity Across Industries
Sweets and sugars were actually one of the more inelastic food categories, according to research from Andreyeva, Long, and Brownell. The only good that was less responsive to changes in price were eggs. Soft drinks was one of the most elastic products, and consequently are the most responsive to changes in price.
There’s a reason that chocolate was so inelastic in the study above — it is a grocery cart staple. 69% of all households purchase chocolate once a month, without much variation between income classes, according to research from Smith, Cornelsen, Quirmbach, Jebb, and Marteau. Chocolates represent a small portion of total household expenditure (~2.8%), but it is consistent.
Conclusion: We Demand Chocolates, At Any Cost
The chocolate industry is relatively inelastic. As with all things, some products are more inelastic than others. Lindt Chocolates and other posh chocolates are more protected from price increases as compared to their Hershey and Mars counterparts.
That’s primarily because a shift in consumer mindset to “healthier” products, which can often be mistaken for more expensive products. The shift benefits the luxury candy makers, but could be impacting the lower-end products. Overall, candy is a relatively inelastic industry, and despite it being a small-part of consumer budgets, it is one of the most consistent items we purchase.
Also, if you want to change the demand for a product, make it into seasonal shapes.
Disclaimer: I have no affiliation with the candy industry