Nestle sees stagnant chocolate market as cocoa prices soar

Nestle SA, which plans to start making Fairtrade-compliant KitKat bars in the U.K. next month, predicts the country's chocolate market will be little changed in 2010 as the price of cocoa hovers near a 30-year high.

"With those record high cocoa prices, I think the costs for all confectionery manufacturers in the U.K. are going to be very, very tight," David Rennie, head of Nestle's U.K. confectionery business, said in a phone interview. "What's going to be tough is a cost basis increasing dramatically, and that's going to put pressure on our business."

Locally, Nestle USA has operations in Buffalo Grove, Naperville, Woodridge and DeKalb.

Cocoa futures for March delivery fell 0.7 percent to $3,394 a metric ton yesterday on ICE Futures U.S. in New York. Futures, which are up 27 percent this year, reached $3,437 a metric ton, the highest level for a most-active contract since June 1979.

Northfield-based Kraft Foods Inc. has intruded on Nestle and Cadbury's battle over the U.K.'s 5.5 billion-pound ($8.9 million) confectionery market with its 10.3 billion-pound bid for London- based Cadbury. The U.K. maker of Creme Eggs switched its Dairy Milk brand to Fairtrade in the U.K. in July, and Nestle on Dec. 7 said KitKat four-finger bars will have such certification from January.

Rennie declined to comment on Cadbury.

Cocoa prices are soaring as cocoa trees in countries such as the Ivory Coast are becoming too old, leading to poor harvests, Rennie said.

Nestle has said it plans to provide as many as 12 million stronger, more productive cocoa trees to farmers over the next decade. The company has said it will spend 460 million Swiss francs ($445 million) on cocoa, coffee science and "sustainability" projects over the next decade.

Chocolate makers in the U.K. sold 28 million pounds' worth of Fairtrade chocolate in the country last year. The share of Fairtrade in that market will rise to 10 percent in 2010 because of Nestle and Cadbury's changes from 1 percent in 2008, Eileen Maybin, a spokeswoman for Fairtrade in the U.K. said Dec. 7. The Fairtrade designation requires chocolate makers pay an extra $150 per ton of cocoa and guarantee a minimum price of $1,600 a ton, she said. The extra money is used for development projects.

Consumer purchases of chocolate should "hold up" next year, according to Rennie.

"People still need a little affordable treat," he said. 'There's a general truth which has been borne out over the past year and a half that confectionery doesn't suffer in demand terms during recessions."