The Sweet Business of Gourmet Chocolate

Sales and profits are up in the high-end chocolate segment as consumers continue to splurge on these affordable indulgences

by Sonal Rupani

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Is Campbell's getting out of the chocolate market at just the right time? Earlier this month, the $7.34 billion Camden (N.J.) soup maker disclosed that it is looking to sell Godiva Chocolatier after more than 40 years of ownership. The announcement came as a wave of new competitors has entered the premium chocolate market and as the cost of raw materials has skyrocketed (see BusinessWeek.com, 8/14/07, "Chocolate Prices on the Rise").

The popular luxury chocolate brand, which brings in $500 million in annual sales, is expected to sell for more than $1 billion, according to analyst estimates. Campbell's (CPB) acquired Godiva in 1966 and expanded the company to more than 450 boutiques in over 80 countries. "Godiva has been doing a great job in the last five years in reinvigorating the brand," claims Clay Gordon, chocolate critic and author of the forthcoming book Discover Chocolate.

Godiva's strong global brand image and established presence in the luxury market makes it a hot target for acquisition. Major chocolate players such as Hershey (HSY), Cadbury Schweppes (CSG) and Lindt & Sprüngli (LISN) have been discussed by analysts as potential suitors, with possibilities outside the industry including luxury brand group LVMH Moët Hennessy Louis Vuitton (LVMHF) or even private ownership.

A Taste for the Good Stuff

Godiva has played a large role in the way premium chocolates are consumed in the U.S. For years, the chocolate giants—Hershey, Nestlé Mars, and Russell Stover (the maker of Whitman Samplers)—dominated the American candy counter. Today more consumers are indicating that if they are going to indulge, they want to do it in style. In much the same way that Americans have acquired a taste for single-malt whiskey, craft beers, and gourmet coffees, they are now also choosing premium chocolates over Snickers bars.

Sales of all chocolate in the U.S. reached $15.6 billion in 2006. Premium chocolate made up over 13% of the market with $2 billion in sales, up from 9.1% in 2002, according to the Chicago branch of market research company Mintel International Group. In comparison, while the overall market grew at a rate of 16.6% from 2002 to 2006, the premium sector grew at a rate of 67.8% in the same period. Future growth forecasts predict the overall chocolate market will grow 13.5%, to $17.8 billion by 2011, while the premium segment is expected to grow 73.4%, to $3.6 billion in the same five-year span.

Marcia Mogelonsky, a senior research analyst at Mintel International, says the increased accessibility of premium chocolates coupled with increasingly sophisticated consumer tastes has led to the strong growth of this sector. "I think it changed when three or four years ago Lindt came out with those Lindor truffle balls that are now ubiquitous," she says. "They're not super-expensive, they're enough to satisfy whatever craving you might have, and it's really fine-quality chocolate."

The Zurich-based chocolatier's business strategy has worked out well for shareholders, too. When it announced its semiannual earnings Aug. 21, the company saw record sales growth of 15.7% to CHF1.138 billion ($943 million) from January, 2007 to July, 2007 as compared with CHF983.4 million ($815 million) for the same six-month period in 2006, along with a doubling in operating profits.