The economics of artisanal chocolate

By Felix Salmon
November 28, 2012

[youtube]http://www.youtube.com/watch?v=9uFdjTQCwi4&feature=share&list=PL8B23AC66D3BDAD1D[/youtube]

Who doesn’t like hanging out in a chocolate factory? My visit to Cacao Prieto, in Red Hook, was fascinating: what I wanted to do was understand the reason why artisanal chocolate (or artisanal coffee, or even artisanal mayonnaise, for that matter) seems to be such a fast-growing market these days.

Both Dan Preston, of Cacao Prieto, and Tim McCollum, of Madécasse, agreed that at the supply end of the chain, nothing much has changed. They’re using Victorian technology, largely (although Preston has built some clever new machines of his own), and relying much more on a simple back-to-basics approach than on anywhere that buzzwords like “scalable” might apply. That said, the marketing at least has got to be much easier these days; the Cacao Prieto website, in particular, is gorgeous, at a cost which would be a rounding error in the context of a big chocolate company’s ad budget.

And the demand end of the chain has changed a lot: as Dan says, there’s a whole new market now for what he calls “fine chocolate”, as opposed to “confections”. And truth be told, that split makes a hell of a lot more sense than, say, the creation of “super-premium vodka”, which is to all intents and purposes identical, in everything but price, to any other vodka. Chocolate, even more than coffee, has a depth and richness of flavor, when it’s carefully and lovingly made, which is easily worth six bucks. (Compare, for instance, the amount you’d pay for a very good coffee, or a very good glass of wine.) If you cultivate an audience of people who consider themselves connoisseurs, they will happily follow you to a world of unprecedented pricing.

On top of that, artisanal chocolatiers, much like Fair Trade coffee merchants, can tell a true story of how they’re doing a very good job of treating developing-world farmers with respect and high prices. That message resonates to differing degrees with different people, but at the margin it certainly helps.

Why are these kind of businesses cropping up now, in particular? I think there are a few reasons. Firstly, money has appeared to fund them for pretty much the first time. In a zero interest rate environment, risky businesses with little correlation to anything else look increasingly attractive — and on top of that, the number of socially responsible or impact investors is rising impressively, and chasing a relatively small number of opportunities.

Secondly, food prices in general have been making up a smaller and smaller proportion of household expenditures for generations now. Here’s food-price inflation, in blue, charted against personal consumption expenditures, in red: the gap just keeps on growing. And in that gap, there’s room for people to spend a little bit more on edible luxuries, without significantly increasing the proportion of their budget that goes to food.

Finally, consumers of pretty much any product, from duvets to dishwashers, tend to become increasingly sophisticated over time. The low end of the market becomes commoditized, and the margins migrate to the high end. This kind of chocolate doesn’t scale to Nestlé or Hershey size: as Dan explains in the video, Hershey was not able to maintain Scharffen Berger’s quality after they bought it. But both Cacao Prieto and Madécasse have room to grow a very great deal from where they are right now. Which is good news for their investors, and good news too for the many parts of America which have yet to discover the wonders of artisanal chocolate.

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Comments
One comment so far

Cool video. One factor they didn’t go into is that with agricultural products like cacao and coffee, there are a number of varieties of beans with different qualities, some of which are more difficult and costly to produce, and limited in supply. The big industrial players like Nestle and Hershey can’t use the better grades simply because they cost too much and aren’t available in the gigantic quantities they need. They have to buy on the open commodity markets. Whereas the opposite is true for smaller operators: it is to their advantage to be selective about the suppliers they buy from.

And if you really want to do it, for a cost of about $1000 in gear, you can set yourself up with a countertop chocolate making operation in your own kitchen.

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