focusing on the Dutch market The ‘’middle” chocolate market in the Netherlands A market differentiation study I am presenting the outcomes of the study on behalf of Matti Abdulmalik, Verina Ingram, Katja Logchagevaof LWI/WUR and myself. Matti was able to confirm his presence only Wednesday and we decided I will give the presentation. I am pleased to do so, as the involved study was actually inspired by Chocoa 2015, where we were discussing the missing middle. I remember there was also some critique, that although we raised an interesting question about whether there actually is a middle-segment in the cocoa sector, we did not really answer the question. What became clear is that the middle market means different things to different people. Our interest in defining and understanding this market segment better is that we assume this will contribute to understanding new routes that lead to sustainability: next to mainstream sustainability programmes and bean to bar and fine flavor cocoa. Understanding and investing in diversity create more choices for consumers, and also for farmers (different market outlets). Objective: Explore market differentiation and segmentation in the chocolate sector and identify the processes involved focusing on the Dutch market The objective of the study was phrased like this. But why we really wanted to look into the middle market was actually based on our experiences as chocoa organizers. As you know, chocoa stands for quality and sustainability. In the first years of chocoa we were mainly looking at two opposites: bulk versus specialty. Like a healthy economy we took up the assumption that a middle-market segment for cocoa and chocolate would contribute to a healthy sector. Leading questions were What does the middle market look like What business model is involved? Who are the players? What does this mean for the economic sustainability of the cocoa farmers Main motivation: explore different routes towards sustainability: beyond mainstream initiatives and beyond the specialty market. Recognizing that we need to think about different routes and diversify our sustainability strategies. Middle market measn different things, to different people The main findings are that a “middle market” is emerging between conventional and conventional certified low price, and high price, fine flavour chocolate products. This middle market is characterised by high quality, often certified chocolate products, higher prices and a focus on origin sustainability. Market differentiation away from conventional chocolate market has taken two directions. One is upscaling, for example Tony’s Chocolonely, the other is that conventional companies have introduced speciality, origin and quality products. The strategies used are often similar those used in the speciality chocolate market. Similarities include the integration of different activities into their business models, so as to have more control and higher quality - allowing significantly higher prices to be charged to consumers, reducing the costs of production, and a focus on taste (either due to cocoa variety/fermentation or by adding additional flavours). After the cluster analysis from the trade date, the Prices are on average was found to be 14.2 €/kg of chocolate in the conventional market, 47.07 €/kg in the middle market and 152.52 €/kg in the speciality market. Companies usually back their value propositions and business models with stories. These stories revolve around the origins of beans, quality, flavour, sustainability and higher prices they claim are being paid to farmers. The speciality market segment has seen fairly increasing turnover with modest growth in the last five years. Some of the manufacturers and retailers in the Dutch cocoa sector use sustainability as a marketing story, but the degree, extent of commitment and third party verification of actual practices vary.   Two models of having sustainable impacts were noted: upscaling models using segregated actors and an intensive impact model with integrated value chain processes. Companies engaging in latter model claim to have higher levels of impact and a high level of commitment to partners in the chain. Stakeholders and partners in both models are critical. For example, cocoa traders are important in sourcing high quality, sustainable and certified cocoa beans. Evolving trends in the Dutch chocolate market include an increasing differentiation by both conventional, and speciality manufactures and newcomers in the cocoa value chain which produces a ripple effect along whole cocoa chain. Farmers are being encouraged to plant different varieties to produce high quality cocoa beans. Traders are increasingly seeking certified cocoa farmers groups that produce quality beans. Manufacturers are also buying from an increasing number of specialized cocoa traders. Consumers are becoming more demanding and sophisticated, with more conscious chocolate consumption habits. New and different brands have been introduced in market that more strongly differentiate chocolate based on not only on tangible characteristics such as taste and cocoa content but also intangible characteristics such quality and the processes used to grow, produce and transport the chocolate. Abdulmalik Matti, Verina Ingram, Katja Logchageva, Anna Laven 5 February 2016 – Chocoa Conference A study as part of the “Sustainability of Dutch cocoa and coffee imports: Synergy between practice, policy, strategy and knowledge” project (BO-27.02-001-003), of the Dutch top sector program, supported by the Ministry of Economic Affairs, Wageningen UR, certification and private sector partners.

Middle-Market, a matter of size? Make clear that it

Mean Price And Std. Deviation And a matter of price? Retailer positioning of chocolate Retail price differentiation MARKET POSITIONING N MEAN PRICE AND STD. DEVIATION Higher End 219 40.77±25.43 High 483 20.18±15.12 Medium 330 16.19±12.28 Low 120 10.66±5.33 Total 1152 21.96±18.86 Average prices for chocolate with different cocoa content Quality Categories N Mean price and std. Deviation Chocolate 256 23.96±16.93 Milk Chocolate 225 22.53±22.54 Family Chocolate 74 26.31±28.16 White Chocolate 344 18.10±11.92 Others 253 23.40±20.68 Total 1152 21.96±18.86 Data shows: First table: market prices differ between market segments. Retail price differentiation: shows that price differentiation in high-end is much larger than the differentiation in low end Examples of high end: ekoplaza, low Liddl Average price for quality… in case you define higher cocoa content as higher quality  the hypotheses that market prices differ between all chocolate of qualities is rejected. WE DEFINE QUALITY DIFFERENTLY I don’t get the clustering…… Quality: based on cocoa content Market positioning: four categories: in report figure 3. classify retailers JFK In report: based on type supermarkets. Price based on chocolate price? Mean price Higher end supermarkets. Figure 3. albert heijn versus aldi Revisit it: maybe retail price differentiation will be central General market data, maybe present at the beginning. It shows supermarkets are also classified. Based on service and price. Strong differentiation between products. Chocolate is quarter of the price in cheaper and less differentiation in price in low end in high end they sell cheap products. But their cheapest is not as cheap as lower quality… Prices of certified and non-certified products Presence of Certification N % Mean Price And Std. Deviation Certified 430 37% 24.88±19.32 Non-certified 722 73% 20.22±18.38 Total 1152 100% 21.96±18.86

Market size/value of the product The middle market for chocolate in the Netherlands Price* High 2600€ 500€ 120€ The middle market Fine flavour & speciality Certified Market size/value of the product high 3€ Market size/value low 2.65€ Certified chocolate if the cocoa sector wants to reach out effectively to consumers, it has to stand united in being fully accountable on three basic requirements: 1. enhanced transparency of supply chains in order to reassure consumers’ interest to know where a product comes from and how it has been produced; 2. clear explanation of what is being done to increase farmers’ income; and 3. a strong commitment to eradicate child labor. The differentitaition is illustrated by a dichotomy, with conventional products, with typically low per unit prices, high volumes of sales and specialty products commanding higher prices, with low volumes I like this figure! We should be clear whether we only talk about the Dutch market – dutch consumers…. More clearlyWe should agree if we talk only about the middle-market, or if we have specific attention for SMEs (which companies are in between the big multinationals and the high end market) and even middle-sized farmers. Who are the producers that supply to the middle-sized market? Interesting to make clear that middle market can both be created by bottom-up initiatives (upscaled/replicated) and by large players who diversify their market by also putting hgh quality products in the market - DONE 2€ Average prices on Dutch market 14.2 €/kg conventional segment 47.07 €/kg middle segment 152.52 €/kg speciality segment Conventional chocolate Price of product Low 1€ *Indicative- price per product- should be comparable eg per kg

Differences between markets & their products Conventional chocolate products Middle-market chocolate products Specialty products Quality low medium high Price Low Medium Sustainable cocoa Certification Certification, story telling & branding Story-telling, bean2bar, traceability Origin Important for blending Important for marketing Important for taste Region Focus on West Africa and Asia All regions Focus on Latin America Size of company Large Medium-large Small-medium Example of companies Nestle, Mondelez, Mars, Hershey, Ferrero Tony Chocolonely, Lindt, Mondelez, Chocolate makers Pacari, Marou, Original Beans, Duffy, Akkessons Example of products Chocolate products chocolate bars & chocolate milk Chocolate bars Example of retailer Albert Heijn, Coop, Jumbo, Plus Marqt, Ekoplaza, Ahold, chocolatiers Marqt, coffee shops, Online, Trade fairs Differentiation is not only about adding value, it is also about offering choices

Emerging middle market Upscaling of niche product/brand model Figure Revenue Tonys Chocoloney Product differentiation by conventional multinational chocolate companies, introducing origin products and/or taking over smaller brands Stronger positioning of large-medium scale companies as quality brand, investing in value chain relations. The main findings are that a “middle market” is emerging between conventional and conventional certified low price, and high price, fine flavour chocolate products. Tony Chocolonely: from 2,4 in 2011 to 14.6 last year. Market differentiation away from conventional chocolate market has taken two directions. One is upscaling, for example Tony’s Chocolonely, the other is that conventional companies have introduced speciality, origin and quality products. The strategies used are often similar those used in the speciality chocolate market. Similarities include the integration of different activities into their business models, so as to have more control and higher quality - allowing significantly higher prices to be charged to consumers, reducing the costs of production, and a focus on taste (either due to cocoa variety/fermentation or by adding additional flavours). After the cluster analysis from the trade date, the Prices are on average was found to be 14.2 €/kg of chocolate in the conventional market, 47.07 €/kg in the middle market and 152.52 €/kg in the speciality market. Companies usually back their value propositions and business models with stories. These stories revolve around the origins of beans, quality, flavour, sustainability and higher prices they claim are being paid to farmers. The speciality market segment has seen fairly increasing turnover with modest growth in the last five years. Some of the manufacturers and retailers in the Dutch cocoa sector use sustainability as a marketing story, but the degree, extent of commitment and third party verification of actual practices vary.   Two models of having sustainable impacts were noted: upscaling models using segregated actors and an intensive impact model with integrated value chain processes. Companies engaging in latter model claim to have higher levels of impact and a high level of commitment to partners in the chain. Stakeholders and partners in both models are critical. For example, cocoa traders are important in sourcing high quality, sustainable and certified cocoa beans. Evolving trends in the Dutch chocolate market include an increasing differentiation by both conventional, and speciality manufactures and newcomers in the cocoa value chain which produces a ripple effect along whole cocoa chain. Farmers are being encouraged to plant different varieties to produce high quality cocoa beans. Traders are increasingly seeking certified cocoa farmers groups that produce quality beans. Manufacturers are also buying from an increasing number of specialized cocoa traders. Consumers are becoming more demanding and sophisticated, with more conscious chocolate consumption habits. New and different brands have been introduced in market that more strongly differentiate chocolate based on not only on tangible characteristics such as taste and cocoa content but also intangible characteristics such quality and the processes used to grow, produce and transport the chocolate. Upscaling model by having segregated actors: separate main actors in the chain, making sure they perform their functions independently Intensive impact model: smaller size , having personal relationships Market differentiation away from conventional chocolate market has taken two directions: Upscaling, for example Tony’s Chocolonely Conventional companies introduced speciality, origin and quality products Text matti: two main models tow achieve sustainable impact in the chocolate sector There are different models…. Differentiation within From small to big From large to differentiation

Middle market and sustainability? Provides more choices for consumers: requires transparency and traceability Risk management strategy for farmers, companies and governments Creates space for alternative business models Higher quality translates in higher price, also for producers: show evidence! Closer collaboration with value chain actors, including farmer (organizations): avoid captive relations

Options for scaling up differentiation in the Dutch chocolate market Using origin indication Improving bean quality at source Securing high quality bean sources Branding and stories Increase consumer awareness Awards to increase consumer recognition Engaging in chocolate tourism E-branding Verifying sustainability claims – certification or other means Innovations in post-harvest practices, processing and transport The aim of this study was to outline market differentiation and product segmentation in the chocolate sectorwith a focus on the Netherlands, to identify the processes involved, and the characteristics of how products are differentiated. The study also aims to the business models used by companies in the sector.   It is concluded that segmentation and differentiation is already happening in the Dutch chocolate market and over time it will become increasingly obvious. A clear middle market is emerging, with companies using a range of strategies such as to differentiate their products further than the two main existing chocolate models used in the market: speciality and conventional chocolate. Interviews with stakeholders in the chocolate industry indicate that seven distinct characteristics of the middle market can be recognized; Price, sales point, quality, origin, size, certification and the stories behind products. Given these characteristics, a middle market can be seen emerging betweenspecialty and conventional products. This market is growing. TWO business models are being used to scale-up market differentiation; improving quality through production and providing more access to information for consumers. The main findings are that a “middle market” is emerging between conventional and conventional certified low price, and high price, fine flavour chocolate products. This middle market is characterised by high quality, often certified chocolate products, higher prices and a focus on origin sustainability. Market differentiation away from conventional chocolate market has taken two directions. One is upscaling, for example Tony’s Chocolonely,the other is that conventional companies have introduced speciality, origin and quality products. The strategies used are often similar those used in the speciality chocolate market. Similarities include theintegration of different activities into their business models, so as to have more control and higher quality - allowing significantly higher prices to be charged to consumers, reducing the costsof production, and a focus on taste (either due to cocoa variety/fermentation or by adding additional flavours). After the cluster analysis from the trade date, the Prices are on average was found to be 14.2 €/kg of chocolate in the conventional market, 47.07 €/kg in the middle market and 152.52 €/kg in the speciality market. Companies usually back their value propositions and business models with stories. These stories revolve around the origins of beans, quality, flavour,sustainability and higher prices they claim are being paid to farmers. The speciality market segment hasseen fairly increasing turnover with modest growth in the last five years. Some of the manufacturers and retailers in the Dutch cocoa sector use sustainability as a marketing story, but the degree, extent of commitment and third party verification of actual practices vary. Due to the limitations of the methodology, it is recommended that further research could address more producers especially and market data should be gathered to estimate the value of the different market segments and changes over time, also to look at a European scale. Measure margins/feeling of farmers involved in different models …. What do want to say? Upscaling … it is not necessirly by growing bigger. Scale goes not easy with strong relations with consumers… options for whom? for new companies, for conventional companies? for consumers? for producers? I like to think that market differentiation services consumers (choice), producers (risk management) and traders (outreach). Link to ongoing work Less cosumer point of view but more for companies…. Production process/supply chain