Does Good Chocolate Exist: an analysis of vertical product differentiation in the market for chocolate

The candy aisle in CVS features a colorful selection of sweet confections ranging from caramels to sour gummy candies. Of course, the most prominent appearance in the confectionery aisle is chocolate – chocolate in fact makes up more than 60% of US confection sales (National Confectioners Association). Within the chocolate category there is further variation in brand, flavor, and quality – marked by differences in prices. In the field of industrial organization (how firms make decisions), we call variation in a category of product that cannot be objectively determined as qualitative difference, horizontal differentiation. Variation that can be objectively determined as qualitatively specified is called vertical differentiation. Chocolate products exhibit both forms of differentiation – it is impossible to agree on the qualitative difference between one brand’s milk chocolate bar and dark chocolate almond bar (horizontal differentiation), but everyone can agree that a craft designed chocolate bar is qualitatively better than a generic Hershey’s bar (vertical differentiation).

In fact, the difference between chocolate candies and chocolate has become a source of great debate of recent, with eleven food producing associations, including the Chocolate Manufacturers Association, the Grocery Manufacturers Association, the Snack Food Association, and the National Cattlemen’s Beef Association, petitioning the FDA to expand the definition of chocolate to include products that use vegetable oils and fats instead of cocoa butter – products which currently must be called “chocolatey” or “chocolate-flavored” (May, 1). The debate speaks to an issue central to the commercial world of chocolate: what makes chocolate, chocolate, and what makes some chocolate objectively better than others? The factors that horizontally differentiate chocolate products simply cater to different tastes, and effectively offer separate subproducts. The vertically differentiated spread however, is more interesting because its factors are significantly more nuanced and shed critical light on the global chocolate industry. This paper will first discuss the chocolate industry’s vertical differentiation strategies, and then critique the assumption that more expensive chocolate is ethically and qualitatively better.

So what goes into the rise in price (upwards of double) from CVS’s chocolates in the candy aisle to those in the “premium chocolates” section just around the corner? First, we see a simple disparity in packaging. The recognizable brown and white Hershey’s bar, orange and yellow Reese’s Peanut Butter Cups, and colorful assortment of M&Ms is contrasted with the sleeker look of the premium chocolate bars. These bars are, impressively, all colored darkly, with gold lettering, or in the case of Ferrero Rocher individually wrapped in gold foil. Many of the bars are described with catch phrases, also in gold lettering, signaling to consumers that their products are superior to classic chocolate candies – Lindt’s “Excellence”, and Chuao’s “Gourmet Handcrafted Chocolate”.

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(The candy aisle  in Harvard Square CVS, showing Hershey’s Kisses and Reese’s Pieces in foreground)

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(Landscape layout of Hershey’s chocolate bars in candy section)

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(Premium Chocolates section around the corner from the candy aisle, notice gold lettering and clean portrait orientation of chocolate bars)

 

Brand/Product Name Price per ounce ($/oz) Motto/Catchphrase Additional Points
Hershey’s 0.47 Made with farm fresh milk “Cocoa is rich in antioxidants”
Reese’s (Hershey) 0.54 Filled with Reese’s peanut butter n/a
M&M’s (Mars) 0.53 Chocolate candies n/a
Lindt 1.14 Excellence, gourmet chocolate “Exotic Fruits” collection
Endangered Species 1.00 Indulge in a cause nonGMO, Fair Trade, gluten free, vegan
Ferrero Rocher 1.05 A tempting combination Individually wrapped in gold foil
Ghirardelli 1.14 From bean to bar Encourages use in cooking with recipes
Chuao Chocolatier 1.89 Gourmet handcrafted chocolate Chef name, master chocolatier’s message

 

Another tactic to show higher quality visually is the inclusion of diagrams, graphics, and special messages on the back of the bars. Ghirardelli bars include a four panel description of the production process “from bean to bar”, claiming that the company’s ability to control each of the steps causes their chocolates to have “ultimate quality”. Every Chuao chocolate bar is detailed with both an autograph from a particular chef, assumed to be involved in the specific flavor of chocolate bar, and a message from the “master chocolatier”. In comparison, the cheaper chocolates have essentially no additional information about the product – the classic Hershey’s Bar simply says “made with farm fresh milk”, Reese’s cups are “filled with Reese’s peanut butter”, and M&Ms are simply described as “chocolate candies”. The most subtle difference in packaging style is likely the orientation of the bar – while the candy chocolate bars are typically oriented landscape (so that when you read the front, the bar is wider than it is tall), whereas every bar in the “Premium Chocolate” section is oriented portrait (so that it is vertically longer than it is wide).

Beyond the fancy packaging, the most expensive chocolates justify their higher prices with claims to better ingredients. On each of the higher end chocolate brand’s websites, stress the importance of using “superior ingredients” in their chocolates. Asides from claiming that the ingredients selected for their chocolates are better than those used in cheaper chocolates, premium chocolates are marketed as having ingredients specifically selected from specific regions around the world. This is especially true for Craft Chocolates, a category of chocolates too luxurious to be included even in the premium chocolates section in CVS. Potomac chocolates for example, which sell at a whopping $5.11 per ounce, are sold in bars horizontally differentiated according to cocoa bean source. Consumers are essentially paying the extra dollars to taste specific regional cocoa beans in their chocolate.

Screenshot 2017-05-05 at 3.59.08 PM

Potomac chocolate bars differentiated according to source of cocoa beans (https://www.potomacchocolate.com/shop/ )

Some chocolates, including Endangered Species chocolate, also adhere to specific dietary demands by highlighting the use of gluten free or vegan ingredients. Although these specifications don’t objectively imply a change in quality of the product, they do appeal to consumers who have specific diets and can afford specific diets.

The final factor that plays into the quality difference across chocolates is the process of chocolate production. As aforementioned, Ghirardelli is especially proud of their control on the entire chocolate-making process “from bean to bar”, so much so that they include a diagram of it on each chocolate bar. The claim here is the same as with many craft chocolatiers – that with the ability to control each step, from roasting the beans, to grinding, to milling, and conching, comes the opportunity to create both a unique and elite product. Although not necessarily a factor into the flavor of the product, many premium chocolates also boast ethically sourced ingredients, organically farmed ingredients, and environmentally conscious processes. Frequent appearances include the simple use of the phrase “ethically sourced ingredients”, Fair Trade certification, nonGMO certification, and USDA Organic. Endangered Species chocolate is not only a brand that displays all of the above certifications, but is also a brand completely devoted to environmental conservationism – particularly the preservation of endangered species, as its name suggests. The company pledges to donate 10% of net profits from its chocolate sales, and each chocolate bar is dedicated to an endangered animal, including interesting information about the animal and its status. The video below describes the process of Endangered Species’ involvement in aiding the recovery of endangered species around the globe.

Though again, saving endangered species has no direct effect to the quality of the chocolate, it adds a side value to the product, so that consumers willingly choose to pay more for the double benefit of chocolate and saving endangered animals.

As presented, there are myriad factors that play into the price spread across chocolates of assumed differentiated quality. We will now evaluate these factors in order to cement whether the most expensive products are justifiably priced as better products than generic chocolate candy bars.

The most noticeable difference between cheap and pricier chocolates, at first glance, is packaging. Aesthetically packaging is obviously a marketing tactic, and to some degree, consumers are paying for a prettier box around the chocolate, with better sounding catchphrases. Although the flowery language may not actually provide useful information about the product, this kind of product differentiation could in fact be an effective method to signal, in an effort to combat market information asymmetry. Information asymmetry is an economic concept describing a transactional state where one or more sides of the transaction is not fully informed about the transaction or product – a market inefficiency that could result in no transactions taking place, even though the buyer and seller could feasibly form an agreement if the necessary information was fully disclosed. Signaling is a strategy that the supplier can utilize to signal to consumers that their product is in fact a high quality product – advertising, for example, signals to consumers that a firm is well-established enough to even afford advertising, and by extension their products must be trustworthy (Investopedia, 1). In the market for chocolate, unless consumers choose to try all chocolate products that exist on the market and determine, by tasting, which products are in fact the best (which is unlikely – consumer behavior tends to favor revisiting familiar products), it is up to chocolate makers to accurately reveal their value to consumers. Spending extra money per bar of chocolate to decorate the bar with fancy text, textured paper, diagrams, and heartfelt messages from the makers of the chocolate signals to chocolate buyers that these products took more effort, money, and care to create, and that thus they must be better than the less-aesthetically wrapped chocolates.

A second claim held by many of the most expensive chocolate brands is superior or specific ingredients. In terms of ingredients, the cheaper chocolates are surprisingly not particularly different from expensive chocolates, when the cheaper chocolate is simply chocolate. However, when a Hershey’s bar adds some peanut butter and becomes a Reese’s Peanut Butter Cup, suddenly ingredients like partially hydrogenated vegetable oil make an appearance – an ingredient which “distorts cholesterol levels, encourages obesity, causes inflammatory conditions, and can even be a cause of infertility” (Collier, 1). Contrarily, expensive brands have significantly shorter ingredients lists, and maintain healthier ingredients even when the flavors become more complicated; for example, Lindt truffles use vegetable oil, but avoid refined or hydrogenated oils. From a health perspective then, plain chocolate (milk or dark) is generally as healthy in cheap chocolates as in expensive chocolates when eaten in moderation, while the chocolates in the more interestingly flavored category are definitely healthier in expensive brands.

The focus on specific sourcing of cocoa beans is a particularly nuanced strategy for vertical differentiation of chocolate. The theory that contextualizing a food infuses the food with another layer of flavor is part of the “psychology of taste” discussed by Carla Martin in her April 19th lecture. In this lecture Martin described the particular contextualizing of a food’s origin as Terroir, or “the set of special characteristics that the geography, geology and climate of a certain place, interacting with the plant’s genetics, expressed in agricultural products”, or simply a “sense of place” (Martin, 4/19). Terroir is a legitimate factor that affects flavor, and products that are able to bring out the Terroir in the chocolate by single-sourcing, simplifying other ingredients or simply bringing the cacao source to attention arguably do in fact offer a unique (and justifiably more expensive) product. There is however an important caveat to the use, or abuse, of Terroir.

Social activist Bell Hooks writes of the problem of “Othering” in Western consumer culture in his work “Eating the Other”, a concept that can absolutely be related to many food industries in the US, including the chocolate industry. In her work Hook describes the use of ethnicity as spice – “when race and ethnicity become commodified as resources for pleasure, the  culture  of  specific  groups,  as  well  as  the  bodies  of  individuals,  can  be  seen  as constituting an alternative playground where members of dominating race […]  affirm  their  power-over  in  intimate  relations  with  the  Other.” (Hooks, 2). For the most part chocolate companies seem to be able to utilize Terroir without objectifying foreign culture, but the line between an appreciation for source and the commodification of other cultures is grey and difficult to clearly draw. It is important that chocolate firms don’t simply repeat the chocolate industry’s historical trend of cultural appropriation, slavery, and exploitation, by commodifying a region of the world and its inhabitants as a flavor.

The final category of factors that seem to affect chocolate quality is the use of ethically and environmentally conscious processes. The goals behind certifications like USDA Organic, Fair Trade and other ethical trade certifications are generally ethically fantastic goals, like environmental conservation and the abolition of child slavery in cacao farms. However the efficacy of each certification is not always straightforward. In an April 5th lecture Carla Martin described a list of problems with Fair Trade, including problems with product quality, issues with corruption and favoring richer farmers, harming farmers who don’t have access to Fair Trade, and ethical questions in marketing (Martin, 4/5). Other trade organizations like Direct Trade and the organizations to which Endangered Species Chocolate donate face similar critiques. In addition, a Fair Trade and USDA Organic certification does not necessarily imply that the entire product is completely fairly traded and organic, because they allow products to have categoric certifications with certain percentages of fairly traded or organic ingredients. These certifications then, don’t necessarily imply that a product is 100% ethically, environmentally, and economically conscious. Regardless of actual effect, products marketed as being certified by one or more of these organizations appeal to the goodwill of consumers, and take advantage of a “feel good” factor in consumer “taste” preferences.

Perhaps unsurprisingly, not all of the factors assumed to boost chocolate products’ value are as ethically conscious or environmentally helpful as they seem to be. However, in general, high-end chocolates are in fact healthier and better quality products, and are signaled as such with more extravagant packaging, leaving cheaper chocolate confections to rely on consumer familiarity to continue to sell. At first glance, attention to details in production processes, Terroir, and side goals (like animal and environmental concerns) seem to simply be added to “spice” up products; which would be horizontal differentiation and not justifying of higher prices. However there is some backing to added value in elements of taste idolized by haute cuisine, like Terroir and a sense of doing good in the world. Ultimately, prices are determined by consumer demand, and it seems consumers are becoming increasingly excited buyers of premium chocolates, as demand for premium chocolates is currently growing at 11% – the largest sector of growth in the confection market (Zhang, 1). Although preferences for the chocolate we find in the candy aisle will likely always exist, and the quality and ethical concern of the best chocolate is not quite perfect, the increased awareness for issues in the chocolate industry and higher expectations for product quality reflected in this consumer sector growth is encouraging. Chocolate can only get better.

Sources Cited

Collier, Andrew. “Deadly Fats: Why are we still eating them?”. Independent UK. 9 June 2008. Web. 05 May 2017. <http://www.independent.co.uk/life-style/health-and-families/healthy-living/deadly-fats-why-are-we-still-eating-them-843400.html&gt;

Hooks, Bell. “Eating the Other: Desire and Resistance.” Black Looks: Race and Representation. PDF. 1992.

Investopedia. “Signaling Approach”. Investopedia. Web. 05 May 2017.<http://www.investopedia.com/terms/s/signallingapproach.asp&gt;

Martin Carla. Lecture. April 5, 2017. Chocolate, Culture, and the Politics of Food. Harvard University.

Martin, Carla. Lecture. April 19, 2017. Chocolate, Culture, and the Politics of Food. Harvard University.

May, Cybele. “Hands off my chocolate, FDA!” Los Angeles Times. 19 April, 2007. Web. 05 May 2017. <http://www.latimes.com/la-oe-may19apr19-story.html&gt;

National Confectioners Association. “Data & Insights”. Web. 05 May <2017. https://www.candyusa.com/data-insights/>

Zhang, Yu. “5 Facts About the Chocolate Industry.” Reynolds Center. National Center for Business Journalism, 12 Oct. 2016. Web. 05 May 2017. <http://businessjournalism.org/2016/10/5-facts-about-the-chocolate-industry/&gt;.

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