Assuming that you haven’t had quite enough of chocolate after last Sunday, this week’s column is going to address some of the more interesting economic aspects of Easter. An estimated ten million Easter eggs were consumed over the recent holiday period, or effectively two eggs for every adult and child in Ireland. This translates into a market worth between €25 million and €30 million each year.
There is growing divergence between the luxury and budget ends of the market. Marks & Spencer’s €60 ‘Giant Golden Lattice Egg’ is an example of the former. Made for M&S; by master chocolatier Patricia Brady at Lir, the publicity generated by its expensive price tag meant that it flew off the shelves. Ireland actually has quite a number of artisan chocotaliers and we can assume that their online sales for Easter eggs rose significantly in recent weeks.
It is the budget end of the market that the economics of Easter eggs is more fascinating. At first glance, it is quite difficult to understand how the large multiples can sell a medium-sized (70 gram) egg for €1.50 and a small (24 gram) egg for €0.89. How can €0.89 cover all the costs of ingredients, wages, production, materials and transportation that go into getting the Easter egg on to a supermarket shelf? What profit margins can be left for both the supermarket and the chocolate producer at this price point?
For the major chocolate producers such as Nestle, economies of scale in terms of packaging and other production costs do apply of course. However, another factor at play is the growing use of hedging by the chocolate industry. The price of vital ingredients such as cocoa (the key ingredient in chocolate) has been fluctuating dramatically over the last few years. At the beginning of April 2015, the benchmark ICCO daily price for cocoa was US$2,795 per tonne. Over the past five years, the price has veered between a high of US$ 3,800/ tonne down to a low of US$2,200/tonne. The industry’s use of cocoa derivatives, such as options and futures, has helped stabilise these fluctuations. For example, the chocolate producer and cocoa supplier can enter into a contract three months before the cocoa is needed, within which the amount of cocoa is guaranteed at a set price. The use of such contracts is a powerful cost management tool that helps ensure the survival of the 89c egg.
In addition, there are other factors keeping prices low. First, the chocolate market is a very competitive industry where the big manufacturers operate in tight profit margins in order to grab market share from their rivals. Easter week accounts for ten per cent of the year’s chocolate sales, so it really is a critical time for the chocolate companies. Supermarkets are also competing fiercely. In addition, they use the tempting €1.50 egg to get shoppers in the door in the hope that they do their main Easter shopping while they are there.
A number of headlines last week warned that chocolate prices could double next year as the world runs out of cocoa. However, given the relatively low cocoa content of the €1.50 egg and the other competitive factors at play, the days of the cheap Easter egg are probably here to stay. Whether that is a good or bad thing, I will leave you to decide.