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JULY 31, 2000


Chocolate Explosion

How three Web vendors are scrambling for a bite of the boom

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Dan Cunningham wants to be the Ben & Jerry's of chocolates. The twentysomething Vermont native's title is chief chokolada (no joke), and he's the founder of online gourmet chocolate purveyor Dan's Chocolates. Pierrick Chouard learned about chocolates tramping through Tahiti and New Caledonia, where he studied warm-weather crops. Now he runs Echocolates.com, a Web business selling top-grade chocolates from a perch at the end of the Newark International Airport runway. Arjun Reddy left India to build a successful beer distributorship in Britain. These days he's forging PlanetChocolate, a Web marketplace that aggregates mom-and-pop chocolatiers online with storefronts and order-processing capabilities.

The trio have taken different approaches. Cunningham runs a small chocolate factory and controls every facet of his supply chain. Chouard works only with small chocolatiers and handles shipping and logistics himself. Reddy welcomes all comers from giant Ghirardelli to tiny Kailua Chocolate Co. on the Big Island of Hawaii. Unlike the other two, he neither carries inventory nor arranges for shipping.

CHUNKY MARKET
-- These are merely three examples of a welter of Web sites seeking to take a big bite from a rapidly growing market and expand their distribution and recognition which, until now, were bounded by geography. The Internet, of course, changes all that: It allows small stores to reach across the country to find buyers. And the market for these stores is rapidly growing. Cunningham estimates that high-end chocolates account for $2.5 billion in annual sales in the U.S. alone.

That segment is growing by 10% to 20% each year as yuppies snap up designer confections, much like what happened with wine, bread, olive oil, tea, and coffee in the past decade. "The brands are coming up to the forefront. At restaurants, you see not just a chocolate souffle but a souffle with dark Valrhona chocolate. And now people have a heightened awareness of them," says Sarah Jaye, who manages the growing gourmet chocolate selection for online grocer Webvan.

Add to this mix the rising popularity of chocolate for corporate gift giving plus recent indications that dark chocolate may be actually be healthy for you -- and you have the makings of a veritable boom. In fact, some high-end chocolate companies are reporting annual sales increases of well over 100%, particularly in dark chocolates. A growing proportion of these sales are coming from the Web. Take Bay Area dark-chocolate specialty wholesaler Scharffen Berger Chocolate Maker. Last year the company had $3 million in gross sales, with about 10% of that via the Net through Webvan or smaller online chocolate retailers. "Our sales were up 300% last year and 250% this year," says CEO John Scharffenberger.

BUILDING BRAND RECOGNITION
-- The three online chocolate sites seek precisely this success. But they will have their work cut out for them -- each in their own way. Dan Cunningham is going down an expensive path by deciding to build his own brand. The company has spent $3 million on marketing already, out of a $10 million seed round.

Much of the funding went to radio spots during a four-week campaign this spring and a widely publicized taste test that offered the public boxes of Dan's Chocolates for $1 and asked them to compare Dan's to anyone else's. To be sure, Cunningham has prime real estate on Excite@Home's Blue Mountain Arts greeting card site (Excite is an investor in Dan's) and a partnership with Blue Mountain.

To make sure the operation stays nimble, Dan's Chocolates has only three slots on its board of directors. "It's a bit unusual, but it allows us to move quickly," says Cunningham. Being unusual doesn't bother him. The company is mirroring Ben & Jerry's brand strategy with its quirky product monikers -- like Udder Delights and Almondanza. "We basically sit around, get giddy, and make up names," says Cunningham, who went so far as to name one chocolate the Chief Chokolada.

Although running his own small chocolate factory exposes Cunningham to industrial complexities, having the added control over his product is important. It allows him to keep a close eye on margins, which the company hopes to push into the 50% range in the next year. More important, controlling the whole chain means guaranteed freshness, an important issue with these unstable sweets that can go stale in 30 days. "People are eating our chocolate within a week of it being made. That doesn't happen very often in America," says Cunningham, who is expecting $5 million in gross sales this year. That's not too shabby considering the company launched just last December.

RETAIL AND WHOLESALE
-- Unlike Dan's Chocolates, Echocolates did not have to build from scratch. Founder Pierrick Chouard already had an existing and profitable brick-and-mortar wholesale business in high-end chocolates -- located at the end of the Newark Airport runway -- which did $1 million in annual sales. So Chouard thought building an e-commerce capability and creating a retail sales channel was a no-brainer given that he was already handling even more complex logistics issues in his brick-and-mortar business.

His location makes it relatively easy to ship products and keep inventory stocked. But since he's not making chocolates, Chouard has somewhat less control over the quality. To compensate, he maintains rigid quality-control standards and plans to restrict his offerings to only 100 or so of the top chocolatiers. "The idea is to be the gateway for the public to see what new quality chocolates are being made in this country -- chocolates they have never heard of," says Chouard.

Unlike Dan's, Echocolates must build brand-name recognition for its own site and for the small chocolatiers on the site. That could be expensive. And for that reason, he's seeking $7 million in venture-capital money for marketing efforts and to build a bigger Web site. Monthly sales currently average in the thousands of dollars, but Chouard says that sequential sales growth month-to-month is in the thousands of percent. "I hope to grow this into a $100 million-a-year company," says Chouard.

PURELY ON THE WEB
-- The only virtual pure-play of the bunch is PlanetChocolate, which aspires to be a one-stop shop for chocolate. On the consumer side, company founder Arjun Reddy has aggregated 30 consumer chocolate and candy companies and given them online stores housed inside PlanetChocolate. To do business with PlanetChocolate, these stores must abide by quality guidelines and freshness guarantees. That said, PlanetChocolate merely handles transactions and probably has less direct quality control than either Dan's or Echocolates.

Reddy says he is adding 170 more companies, including big names like Ghirardelli and Brown & Haley. To allay small regional chocolatiers' fears that the big brands would dominate the site, Reddy plans to create a special section for independent makers. For companies that already have online stores, PlanetChocolate offers them an extra distribution channel.

Aside from this consumer capability, Reddy is also building a business-to-business capability that will allow everyone from cocoa bean growers to equipment manufacturers to restaurant supply companies to link up and sell to each other online. "We are giving anyone in the chocolate business a place to buy or find out about everything and anything they might need," explains Reddy.

To that end, Reddy is looking for $1 million in the short run to help build a strong foundation for the site and a future funding round of $5 million to $10 million. With sales expected to hit $4 million this year and $20 million next, PlanetChocolate's revenue stream looks solid for such a small company. Reddy added heft to the venture when he managed to snag as a board member the former president of U.S. operations for chocolate behemoth Nestlé, C. Alan MacDonald. "What he brings to the table are contacts and a lot of experience," says Reddy. Reddy brings to it the spirit of a man who, before leaving for Britain, traded gunfire with communist Naxalite guerrillas to defend his family farm in India.

While all three of these companies appear to have bright prospects, their path to profitability could hit some rocky patches. Popularity of chocolates could mean more intense competition. And getting noticed in the growing crowd will take marketing dollars in most cases. Furthermore, as good chocolate becomes more mainstream, both wholesalers and retailers are already widening their offerings. "It's like pet supplies. Why go and get your pet stuff from one guy online and get your toilet paper from another?," says Jon Scharffen Berger, who thinks many sites will do well, though some won't.

That's the prevailing view for most of this sector, where a single bad year can upend a fledgling company. But entrepreneurs behind these e-companies don't seem too concerned. "Slowly you will see the chocolate industry walk in the footsteps of the wine industry and the olive-oil industries," says Chouard. That could mean a smooth ride up to sweet profits.


By Alex Salkever

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