The Real Chocolate Company is a market follower in the gourmet segment

1         Introduction
The Real Chocolate Company is a market follower in the gourmet segment of America’s chocolate industry with less than 6 percent market share. The company’s products comprise of over 100 types of chocolate, 15 types of fudge and over 30 varieties of caramel-covered apples. Also on offer are more than 100 seasonal products. Distinctive products associated with the firm include “Paw” which is made of chocolate, caramel and roasted nuts. Other favourites produced by the firm include nut clusters, butter creams, truffles and toffee. The company also dips a variety of fruits, nuts, and cookies in milk, dark, or white chocolate. Recently introduced is a line of sugar-free and no-sugar-added sweets. Real Chocolate Company also offers on-site products such as fudge and caramel apples.
Key stakeholders in the company include the owner, Sarah Smith; employees, customers and suppliers of cocoa beans, sugar and dairy products. The strategic purpose of the company is to become the leading chocolatier in the U.S. The company hopes to attain this goal through the manufacture of high quality products.

2         External analysis
The following sections describe the political, economic, socio-cultural, environmental and legal aspects of the U.S chocolate industry.
2.1       Economic
According to NCA (2004g), the global chocolate industry is worth an estimated $60 billion. Estimates also indicate that 2005 sales in the U.S rose by 2.6 percent to stand at $15.7 billion. These rose to $16.3 billion in 2006 and are estimated to increase to $18 billion by 2011 (Packaged Facts, 2007). In the U.S also, the premium chocolate market is expanding rapidly, underpinned by rising demand in fair trade and organic products. This has more than made up for the fall in demand for sugar free and other innovative products (Packaged Facts, 2007). Gourmet chocolate comprises a tenth of the entire U.S chocolate market and was worth $1.3 billion in 2005. Forecasts show that this segment will expand by 6.4 percent to reach $1.8 billion in 2010. However, reduced economic growth occasioned by the global meltdown has led to lower disposable incomes and this may negatively affect the chocolate industry as chocolates are deemed to be luxury items.
2.2       Political
The chocolate industry, like other industries, is affected by political happenings. For example, America’s high sugar tariffs have made its chocolate less competitive. Chocolate made in Canada, for instance, is less expensive than that made in the U.S since Canada buys sugar from the international market which is 20-30 percent cheaper (South Grow, 2008). Political instability in major producers of cocoa such as Ivory Coast has at many times affected the global supply of cocoa beans.
2.3       Environmental
Global warming has impacted negatively on the quality of cocoa ingredients procured by many firms due to the higher shipping temperatures. If not redressed, this phenomenon may negatively affect chocolate companies in the long run. Diseases such as witches’ broom occasionally affect the global supply of cocoa hence the price of chocolate (Busi 0009, p.84).
2.4       Socio-cultural
Socio-cultural factors play a major role in the U.S chocolate industry. For instance, increasing health consciousness is a main driver for innovation and rising demand. Datamonitor (2005) (cited in NCA, 2009; NCA, 2004c) indicates that luxury chocolate products are in great demand from customers who need to meet their lifestyle needs. According to NCA (2004), holidays such as ‘Halloween/back to school, Easter, winter holidays (Christmas, Hanukah,  Kwanza) and Valentines Day provide great opportunities for the chocolate companies to rake in huge sales. Yet anther socio-cultural factor which impacts on this industry is that of ethics. The quest for fair trade has seen a surge in demand for socially responsible chocolate products (Global Exchange, 2005). Besides, the market offered by children is becoming more important because they are increasingly prone to make their own purchase decisions without reference to their parents. Parents are also becoming bolder in their choices (Frost & Sullivan, 2008). Reports indicate that chocolate is mainly consumed by younger unmarried adults and college graduates. Additionally, consumption of gourmet chocolate is not linked to high income groups. Regarding ethnicity, Asians are the largest consumers of gourmet chocolate (BUSI000, p.83).
2.5       Technological
Technology is important in the chocolate industry as high tech equipment is needed to provide the required products through stringent processes and controls. The rate of technological change is rapid and R&D is a critical aspect of the manufacturing process (NCA, 2004).
2.6       Legal
The industry is bound by FDA Standards of Identity (Guittard, 2007). The industry is also subject to various safety, health, hygiene and franchise operation laws. The Food Allergen Labelling and Consumer Protection Act of 2004 together with the Nutrition Labelling and Education Act of 1990 control the way chocolate products are packaged. In a move that could negatively affect the industry, candy taxes and vending restrictions have been introduced in several states. Other states have also introduced lead caps in candy. Positively though, the Central American Free Trade Agreement (CAFTA) was enacted four years ago and permits more sugar imports into the country (BUSI000, p.83).
2.7       Porter’s five forces
According to Porter (1998), any industry is affected by five forces. These forces include supplier power, barriers to entry, rivalry, the threat of substitutes, and buyer power. America’s chocolate industry is no exception as these forces also impact on it.
In this industry, supplier power is low. This is because suppliers are many and their offerings are tightly regimented. Additionally, inputs are not very well differentiated, switching costs are relatively low and the buyers are concentrated. Besides, there is always the possibility of forward integration by the chocolate companies. Finally, the products are commodity products.
The degree of rivalry in the chocolate industry is very high. This is because the market is highly fragmented, products are little differentiated and switching costs are extremely low. Additionally, the industry is highly concentrated as the two dominant players – Hershey’s and M;M/Mars- control about 67 percent of the American market (Global Exchange, 2005). Other factors which enhance the degree of rivalry include the high fixed costs especially as appertains to storage and the perishable nature of chocolates. Besides, high exit barriers, wide availability of proprietary products and highly diversified players are all key factors which play a major role in enhancing rivalry in this industry.
Barriers to entry are also high. These barriers are mainly occasioned by the high capital costs and large economies of scale needed to successfully compete in the market. Proprietary know-how manifested in the recipes is also required. There are also significant barriers related to distribution due to the high costs needed to set up selling outlets at prime locations. Besides barriers related to distribution, entrants need to satisfy a raft of legal requirements. The proprietary learning curve is very high, going by the sheer number of processes and procedures which go into the manufacture. These have substantially increased entry barriers
The threat of substitutes is high as buyers have a tendency to use other products. The extremely low switching costs also contribute to the high threat of substitutes. Finally, the buyer power is low. This is due to the high possibility of forward integration by the chocolate manufacturers. This is manifested by the many chocolate manufacturers with their own distribution systems. Additionally, the buyers are highly fragmented and do not have any big impact on pricing and product. The industry is currently in the growth phase of the product life cycle but is nearly reaching maturity.

3         Internal analysis
3.1       SWOT analysis
3.1.1       Strengths
The Real Chocolate Company has various strengths which have enabled it to sustain its market share. First, the company has a high brand visibility with well-known trademarks and compelling packages. Secondly, the company has a good reputation for quality. Thirdly, The Real Chocolate Company has numerous proprietary recipes which ensure that high quality and distinct products are manufactured. Fourthly, the company is renowned for its good customer service. Besides, the company has a diversified product mix which includes a range of more than 100 chocolate types, 15 varieties of fudge and more than 30 different types of caramel-covered applets. Other strengths include well branded stores, skills in chocolate production and an extensive distribution network consisting of strategically located stores. The company ranks among the top firms in the country in terms of growth. Finally, the company has a strong innovation culture manifested in unique products such as sugar free and no-sugar added sweets.
3.1.2       Weaknesses
Weaknesses of the company include its concentration in a small market segment and an over-reliance on franchisees. The company mainly targets the gourmet segment which forms only 10 percent of the entire chocolate market. This has limited the firm’s revenue base. Regarding the over-dependence on franchisees, the company gets more than 70 percent of its income from sales to franchisees and 20 percent from franchise and royalty fees. Only 8 percent of the income is attained from company-owned store sales.
Finally, the Real Chocolate Company uses manual processes to manufacture its products, a factor that hampers process efficiency.
3.1.3       Opportunities
Opportunities in the U.S chocolate industry are many and include an increasingly health conscious populace in America which forms a big market for innovative products. Research indicates that chocolate does not cause acne as previously believed, has almost non-existent amounts of caffeine, does not cause dental caries, does not lead to higher cholesterol levels and has no effect whatsoever on weight gain. Benefits offered by chocolate include the high level of essential nutrients such as proteins, iron, riboflavin, calcium, niacin, potassium and zinc. Additionally, chocolate has flavonoids which can help the heart. These benefits are causing Americans to consume more chocolate and products with companies that can leverage the benefits have an opportunity to substantially increase their market share (NCA, 2004c).
The organic segment equally provides a big opportunity for chocolate companies to cash in. According to Articlesbase (2008), many customers have a preference for organic chocolate. Besides, a rising appetite for black chocolate and ethical and exotic flavours also portends opportunities for chocolate manufacturers. Another opportunity is caused by American’s tendency to eat out. According to Frost ; Sullivan (2008), more and more Americans are eating out. Estimates show that out-of-home events will rise by 8.8 billion while snacking events will rise by 7 billion this year as compared to 2003 figures. It is also forecast that an additional 3 billion food service dealings will be carried out this year compared to 2004. This presents a huge opportunity for the company to cash in on the demand
3.1.4       Threats
The company is faced by many threats. Perhaps the most potent of these is the global economic meltdown which is bound to negatively affect chocolate sales since chocolates are essentially luxury items. Additionally, it has constrained the availability of credit hence financing for expansion activities. Besides the threat posed by poor economic performance, another threat includes the wide availability of substitute products. Legislative initiatives to subject the industry to FDA content standards also pose threats to the company. Global warming has had undesirable impacts on shipping temperatures hence the quality of cocoa ingredients procured by many firms. If not redressed, this can negatively affect the company in the long run. Cheaper products by companies such as Hershey and those from more efficient producers such as Canada are another threat. Ethical issues facing the industry such as a public outcry on the use of child labour in cocoa farms and exploitative practices of the chocolate companies also threaten the survival of the company. Alongside this, the Real Chocolate Company-like many other chocolate companies- is expected to adhere to fair trade practices and socially responsible products in a bid to redress the ethical concerns (Frost ; Sullivan, 2008). This will indubitably increase costs and make the firm’s products more costly. Other threats include cocoa diseases such as witches’ broom, black pod and frosty pod leading to global yield losses and erratic supply.
3.2       Critical success Factors
Critical success factors (CSFs) refer to those mission-critical processes essential for the success of any given business (Clint Burdett, 2008). The most important CSF in America’s chocolate industry is a reliable supply of the basic ingredients namely cocoa, dairy ingredients and sugar. Of particular importance is the procurement of the highest quality cocoa beans which can give the end consumers the desired taste and consistency. Another important CSF is the availability of a good distribution network with strategically located stores. Top secret recipes which especially specify the temperatures applied, the percentage of ingredients used, blending formulas and the time interlude used need to be carefully form another critical success factor. Other important CSFs are production which needs to be innovative and top-notch, technology and cost management.  Technology is important as it helps to improve the physical appearance, flavour and shelf life all of which are important for the success of chocolates.
3.3       How is the company performing?
Whereas the revenues of the Real Chocolate Company are on upward trend and the firm has recorded a steady and rapid expansion in recent times, its sales form less than 6 percent of the total gourmet market sales. The company is a market follower, trailing far behind competitors such as Godiva Chocolatier (annual sales = $825 million), Russell Stover, (annual sales = $450 million) and See’s Candies (annual sales = $325 million). Recent years have seen an increase in its net margins, indicating that profitability has been increasing over the last three years. Other positive indicators include higher return on assets (ROA), return on equity (ROE) and leverage. This implies that the company has efficiently used resources at its disposal and that shareholders continue to get good returns for their investment. Over the same period, the company has had marginal declines in its current and quick ratios and total asset turnover. This means that Real Chocolate Company is not very liquid and may find it hard to settle current liabilities when they become due (see Appendix B).
4         Problem Diagnosis
Several problems facing the Real Chocolate Company were identified in the preceding section. First the company is faced with the prospect of slow sales and the unavailability of credit to fund expansion due to the poor economic climate in the United States. Secondly, the company has a small revenue base as it primarily concentrates on the small gourmet market. This focus strategy may backfire as other broad market leaders can quite easily come up with products to serve sub-segments of this market, compete against the company on price and grab a substantial market share. Besides, it is entirely possible for other more efficient producers to slice out some sub-segment which they are able to serve better. A case in point is the organic chocolate market where many big players are getting in. To conform to current expectations, the company is also faced with the demands for production of fair trade and socially responsible products. Additionally, the company has to contend with stiff competition from other more efficient producers of chocolate. Another problem facing the Real Chocolate Company is the relatively weak performance of its retail stores, with more than 90 percent of its revenues accruing from franchise fees, royalties and franchisee sales. Finally, the Real Chocolate Company is faced with the problem of high threat of substitutes.
In order to maintain its market share and achieve its strategic objective of being a market leader, the company needs to find solutions to these problems. What can the company do to enhance its sales with the current global economic crisis? How can the company fund its future expansion? How can the company increase its revenue and produce fair trade and socially responsible products? What strategies can the company use in order to overcome the stiff competition and sustain its market share? Finally, what options does the company have in its quest to ensure that substitute products do not hurt its bottom-line? The following section explores the different strategic options available to the company.
5         Generation of Strategic Options
According to Arnsoff’s matrix, companies can expand their market share through market penetration or product development. In the former, the objective is to attain increased growth using the available products so that the market share can be enhanced. In the latter, the aim is to target the available products at new market segments. Companies can also attain growth by creating new products which are aimed at existing segments. Finally, increased growth can be attained through diversification
A cursory look at the chocolate industry in the United States reveals several facts. One, switching costs are quite high. To take advantage of this observation, the Real Chocolate Company could strive to build customer loyalty through several methods. An important strategy which can help the company attain this goal would be through production of differentiated chocolate products. In the Arnsoff matrix, this compares to producing new products at existing market segments. If well implemented, this can help the company introduce differentiated and highly visible brands and enhance market penetration by locking in loyal customers (Porter, 1998).
Secondly, the company needs to diversify its product mix so that it can serve the mass market and other bigger chocolate market segments other than the gourmet segment. This will help increase the company’s revenue base, increase its market share, and reduce the uncertainty associated with over-dependence on a small segment. Additionally, this move will enable the company to weather the current economic crisis better since it will have recourse to an expanded market. Besides, it will reduce the covert threat posed by chocolate substitutes. To capture the mass market, the company needs to have products that can compete on the basis of price. As such, it could adopt the cost leadership strategy.
To take advantage of the opportunities proffered by the emergent organic chocolate, ethnic and exotic flavour and health conscious segments of the market, the Real Chocolate Company would do well to invest in procurement, R&D and technology processes that would help it obtain the required input and innovate new products for these segments. Technology would improve the physical appearance, flavour and shelf life of its products, a factor that would help raise its profile among connoisseurs of chocolate. The company would need to raise additional cash to fund these strategic initiatives. With the current credit crunch and high interest rates, funding from the banks may not be immediately forthcoming or would be a tad too expensive. To overcome this problem, the company can raise an initial public offering (IPO) and sell a stake to the public. Alternatively, the company can enter into strategic alliances or make targeted acquisitions of smaller entities which are focussed on specific niche markets.
Moreover, the company can turn to the Caribbean countries for the principal supply of cocoa beans. This would be a clever move in several respects. First, it will enable the company to obtain the highest quality cocoa beans in the world and thus ensure that its products are unquestionably of the best quality. Secondly, it would ensure a steady supply for the company in the foreseeable future and do away with the often erratic supply occasioned by political instability in major producers such as Cote de Ivoire. Third, almost all organic cocoa comes from this region and this would help the firm satisfy the emergent organic segment. Finally, cocoa beans from the Caribbean are not associated with child labour and exploitative practices. This would do away with the ethical problems facing the company (Suma, n.d).
In addition, the company could open a manufacturing plant in Canada, more so for its products which are marketed there. This will help lower the price of its products especially since it would be able to import sugar from the international market which is cheaper as the Canadian government imposes no tariffs on sugar. Since sugar forms close to 20 percent of the chocolate production costs, this would indubitably help the company compete on the basis of price.
Finally, the company can solve the problem of poor retail sales through a number of initiatives. To do this, the Real Chocolate Company can resort to improve the sales by utilizing non-traditional retailers such as cash registers at national stores. Besides fully exploiting the Halloween, Easter, Christmas and winter holidays, the company can also concentrate on conventionally non-candy holidays such as July 4th. Another strategy which the company can make use of is to cross sell its products with other related items such as wine and greeting cards. The company can also use other mass distribution channels to sell its gourmet products.
6         Evaluation of Strategic Options
From the foregoing, it would seem that the company is not short of ideas which it could implement in order to overcome its weaknesses, threats and other problems facing it. The selected strategy should be able to ensure that the company maintains its current share of the market and increases its market penetration while developing products for the emerging market segments. Based on the industry characteristics described, the cost leadership strategy would seem to be the Real Chocolate Company’s optimal strategy. This is because America’s chocolate industry is fast approaching the maturity phase, meaning that firms which are able to compete on the basis of price will sustain a larger market share in the long run. Since the company’s key competency is its distribution channel and the firm has access to a reliable supply of high quality cocoa beans, this particular strategy would seem to be a feasible option. The strategy is also plausible considering America’s economic meltdown. However, the strategy also calls for high capital requirements which the company may not realize in the short term, and also requires unrivalled production skills. The strategy also demands efficiency in production processes and the company may be hard pressed to attain this as it has manual production processes. A solution in this regard would be for the company to invest in automated and top-notch technology. However, the rapid change of technology mentioned previously would mean that its competitors would almost certainly acquire better technology and wipe out any advantages enjoyed by the Real Chocolate Company. Besides, the industry leaders are more efficient producers and can sustain a long drawn out price war.
A more feasible strategy for the company is thus needed. A differentiation strategy whose target scope is industry wide seems to be the best strategic choice the company can adopt.  This strategy is suitable because the company has a good reputation for high quality products and its trademark is well renowned. Moreover, the firm has a powerful sales team which can ably communicate the differentiated products’ strengths. Besides, the company has a rich tradition of research and innovation as evidenced by its existing products. These skills and innovative strength make the differentiation strategy to be highly likely to succeed. The threat of imitation by competitors would be very low because of the company’s IP policy which safeguards its top-secret recipes. Through this strategy, the Real Chocolate Company will be able to diversify into other market segments and thus expand its market share and revenue base. It will also be able to build customer loyalty, weather the current economic crisis, substantially reduce the threat of substitutes, and take advantage of the emergent market segments.
7         Description of Selected Strategy
The differentiation strategy requires that companies originate novel products which provide its customers with unique features and which are seen to be superior to other existing products. Due to their unique features and superior value, the products are able to command a premium price (Porter, 1998). Since the selected strategy is industry wide, it means that the company will create products targeted at all market segments.
Using this strategy, the Real Chocolate Company would produce differentiated organic chocolate products. The company would also produce a diverse range of flavoured products with both ethnic and exotic flavours as well as products with unique tastes. The strategy would additionally see the company tap into the healthy segment market with highly differentiated products that give its customers a number of health benefits. For instance, the company could develop chocolate with omega 3 fatty acids and calcium to compete with products from Nestle, Ghirardelli and Botticelli. The company would also come up with chocolates fortified with vitamins, flavoured skin enhancing ingredients and branded sugar free sweets.
According to statistics, dark chocolate sales rose by almost 50 percent from 2003 to 2006 and provide a viable segment for companies in this industry (BUSI000, p.83). By producing differentiated dark chocolate, the Real Chocolate Company would challenge for market leadership in this category. The company can also produce differentiated products which are targeted at other market segments such as baking chocolate. Production of dutch chocolate products would enable the company to target bakeries, ice cream manufacturers, beverage companies and households. On the other hand, differentiated products with chocolate flavoured coating would be tailored at the lower end market.  Other differentiated products would include white chocolate. To further tap into the market formed by ethically conscious individuals, the Real Chocolate Company could have its products certified as fair trade brands.
Resources required to ensure that the strategy is well executed are listed as follows
–          investment in research and development
–          Investment in fair deal certification. The company will also need to contract only the suppliers who meet the minimum fair trade standards
–          investment in skilled personnel
–          investment in technology
–          promotional budget
8         Action Plan for Implementation
The action plan for implementation is presented in the following section and is condensed in table 1 below. The entire plan revolves around the ability of the company to raise the money required for the plan’s execution. As such, the initial step is the financing part. It is proposed that the firm raise the required funds through an IPO. The funding process will involve the shareholders and management and is expected to take close to a year. Once the funding has been secured, the next stage will be the acquisition of new technology. This will be carried out by the firm’s management after a due diligence of the available options.  All employees will be trained on the new technology as well as the strategic direction to be followed and training will be continuous rather than a one-off event. Once the technology is acquired, the next step will be for the company to set up processes that will help it to attain fair trade certification. Concomitant with this will be the setting up of an active R&D department which will drive the innovation process. After these have been implemented, the next stage will involve the creation of new selling channels. The firm’s management and employees will all participate in these plans.
Table 1: Action plan for implementation
Activity
Timeline
Parties Involved
Financing
1 year
Shareholders, management
Acquisition of new technology/automation
6 months
Management
Training of employees
Continuous
Employees, consultants, management
Fair trade certification
6 months
Employees, management
Creation of a R&D department
2 months
Management, employees
New selling channels
2 months
Management, employees
Innovation
Continuous
R&D, employees, management
Promotion
Continuous
Employees, management

9         Conclusion
This paper looked at the Real Chocolate Company in depth and sought to craft a strategy which will help it attain its objective of being a leading chocolate company. Whereas the firm has attained high profitability and achieved rapid growth in recent times, it is faced with many threats which could potentially derail it. These threats include cutthroat competition, a shrinking economy, a hostile legislative environment, and ethical issues among others. There are also numerous opportunities which the company needs to exploit. For the company to take advantage of these opportunities and overcome the threats and its weaknesses, it needs to come up with an effective strategy. It is recommended that the Real Chocolate Company adopts a differentiation strategy with an industry wide target scope. This will enable it to serve the emergent segments and gain increased market penetration by developing new products for the existing segments.

10    References
All Business. 2009. Organic market. [Online]
<http://www.allbusiness.com/wholesale-trade/merchant-wholesalers-nondurable/676051-1.html> [Accessed on 5th March, 2009]
All Business. 2008. Desire grows. [Online]
<http://www.allbusiness.com/wholesale-trade/merchant-wholesalers-nondurable/4495110-1.htmlb> [Accessed on 6th March, 2009]
Articles base. Nov, 11th, 2008. Cocoa Beans and the Fierce Competition in the Chocolate
            Industry. [Online]
http://www.articlesbase.com/chocolate-articles/cocoa-beans-and-the-fierce-competition-in-the-chocolate-industry-637666.html [Accessed on 5th March, 2009]
BUSI0009 Business Strategy 2008-2009 pp.83-5
Business Insight. 2009. [Online] Types of chocolate.
<http://globalbusinessinsights.com/content/rbcg0125m.pdf
> [Accessed on 5th March, 2009]
Clint Burdett. 2009. Define Critical Success Factors (CSF). [Online]
            <http://www.clintburdett.com/process/08_synthesis/synthesis_02_csf.htm>
            [Accessed on 6th March, 2009]
Dark Chocolate. 2008. [Online]
<http://www.chocolatebenefits.us/chocolate-history.shtml
-http://www.clintburdett.com/process/08_synthesis/synthesis_02_csf.htm>
[Accessed on 5th March, 2009]
Frost & Sullivan. 2008. Consumer Trends in the Flavour Industry – Study. 8th October,
            2008. Flex News
Global Exchange. 2005. “The Chocolate Industry: Abusive Child Labour and Poverty
Behind the Sweetness.” 20th September, 2005. [Online]<http://www.globalexchange.org/campaigns/fairtrade/cocoa/background.html > [Accessed on 5th March, 2009]
Guittard. 2007. Proposed Industry Changes in the Recipe for Chocolate Threatens What
Consumers Love about Their Chocolate. News Release – Tuesday, April 10, 2007. Guittard Chocolate Company.
Hubpages.2008.Top ten chocolate brands. [Online]
< http://hubpages.com/hub/Top-Ten-Chocolate-Candy-Bars>
[Accessed on 6th March, 2009]
Hui- lin, G.; Hwa, L.G; Teo, T. & Zheng, S. n.d  The Secret Ingredients: patent maps
            [Online]
<http://www.patentmaps.com/pubs/Chocolate_Patent_Mapping.pdf> [Accessed on 5th March, 2009] pp.1-8
Marples – http://www.recchiuti.com/media/ChocolateFactsFigs.pdf
Mind branch. 2008. U.S market for chocolate. [Online]
< http://www.mindbranch.com/Chocolate-R567-622/ > [Accessed on 5th March, 2009]
NCA. 2004a. History of chocolate [Online]
            <http://www.candyusa.org/Chocolate/history.asp> [Accessed on 5th March, 2009]
NCA.2004b. Cocoa bean [Online] <http://www.candyusa.org/Chocolate/cocoa.asp>
            [Accessed on 5th March, 2009]
NCA.2004c. Chocolate and health [Online]
            <http://www.candyusa.org/Chocolate/health.asp> [Accessed on 5th March, 2009]
NCA.2004d. Tastes of chocolate. [Online]
<http://www.candyusa.org/Chocolate/choc_tastes.asp>[Accessed on 5th March,
2009]
NCA.2004e. Types of chocolate. [Online]
<http://www.candyusa.org/Chocolate/choc_types.asp> [Accessed on 5th March,
2009]
NCA.2004f. Faq. [Online] <http://www.candyusa.org/Chocolate/faq.asp> [Accessed on
 5th March, 2009]
NCA.2004g. Trends. [Online] http://www.candyusa.org/Classroom/Trends/default.asp
 [Accessed on 5th March, 2009]
NCA.2004h. 2004 trends http://www.candyusa.org/Classroom/Trends/2004.asp
NCA.2004i. Heart benefits antioxidant. [Online] <
            http://www.candyusa.org/Media/Nutrition/chocolate_antioxidant.asp > [Accessed
            on 5th March, 2009]
NCA.2004j. Cholesterol.
[Online] < http://www.candyusa.org/Media/Nutrition/chocolate_cholesterol.asp > [Accessed on 5th March, 2009]

NCA.2004k. Types of Chocolate. [Online]
<ttp://www.candyusa.org/Media/downloads/NCA_Types_of_Chocolate.pdf > [Accessed on 5th March, 2009]
NCA.2004l. Story of Chocolate. [Online]
<http://www.candyusa.org/Media/downloads/NCA_Story_of_Chocolate.pdf
NCA.2006. New products. [Online] <
http://www.candyusa.org/Media/General/newproducts_2006.asp > [Accessed on 5th March, 2009]
Packaged Facts. 2007. US Market For Chocolate. pp. 267
Porter, Michael, 1998, on Competition, Harvard: Harvard Business Press
Southgrow. 2008. [Online]
            <http://www.southgrow.com/_data/datadocs/confectionprofile.pdf.> [Accessed on
            5th March, 2009] pp.1-2
Suma, N. n.d. Fairtrade & Cocoa Workshop. [Online]
<www.fairtrade.com.au/producer/resources/Capacity%20Building%20with%20Fair%20Trade%20orgs.ppt> [Accessed on 5th March, 2009]

11    Appendices
11.1  Appendix A
11.1.1  PESTEL Analysis
Table 2: PESTEL Analysis
Political
Economic
Ø  America’s high sugar tariffs
Ø  Reduced economic growth
Ø  Political instability in major cocoa producers e.g. Cote de Ivoire
Ø  Lower disposable incomes
Ø  Credit crunch – no funds for expansion
Socio-cultural
Technological
Ø  Increasing health consciousness
Ø  The rate of technological change is rapid
Ø  Lifestyle needs
Ø  high tech equipment is needed to provide the required products through stringent processes and controls
Ø  Celebration of candy holidays
Ø  Surge in demand for socially responsible and fair trade chocolate products
Legal
Ø  Demographics – chocolate is mainly consumed by younger unmarried adults and college graduates
Ø  Bound by FDA Standards of Identity
Ø  Ethnicity- Asians are the largest consumers of gourmet chocolate
Ø  Subject to various health, safety, hygiene and franchise operation laws
Ø  No correlation between consumption of gourmet chocolate and high income groups
Ø  The Food Allergen Labelling and Consumer Protection Act of 2004
Ø  Nutrition Labelling and Education Act of 1990
Environmental
Ø  Candy taxes
Ø  Global warming
Ø  Vending restrictions
Ø  Cocoa diseases such as witches’ broom
Ø  More sugar imports due to the Central American Free Trade Agreement (CAFTA)

11.1.2  Internal capabilities versus the CSF of the industry
Table 3: Critical Success Factors
Critical success factors
Core competencies
Distinctive core competency
Procurement

Reliable supply of inputs, MRP II System
Production

Distribution
Well located franchises,

Innovation

Cost management

Own transport fleet, back-hauling of 3rd party products
Technology

11.1.3  Segmentation of the confectionary industry
Figure 1: Segmentation of the chocolate industry

     Confectionary industry

Sugar candy     chocolate and other cocoa products          gum producers

                                               Boxed chocolates
                                               Chocolate bars
                                               Seasonal products

11.1.4  Segmentation of Chocolates According to taste
Table 4: Segmentation of Chocolates According to taste
Segment
Product
Baking chocolate
Dessert recipes
Sweet or dark chocolate
Chocolate chips, candy bars, coatings for fondants, nuts, bakery items e.g. cookies
Bittersweet or semi-sweet chocolate
Chocolate chips and bakery coatings
Milk chocolate
Candy bars – solid or enrobed, chocolate chips
Cocoa
Ice cream, syrups, chocolate flavoured coatings, reduced fat and calorie recipes,
Dutched chocolate
Baked goods where deep colour is desired, ice cream, beverages
Chocolate flavoured coating
Alternative to all chocolate uses where cost and ease of use are important.
White chocolate
Candy bars; baking chips; bakery coating
Source; NCA, 2004
11.1.5  Top Ten Chocolate Flavours

Table 5: Top Ten Chocolate Flavours

1.
Clove and Green Apple
2.
Thyme and Tangerine
3.
Tellicherry Black Pepper and Berry
4.
Sea Salt and Smoked Tea
5.
Lavender and Honey
6.
Crystallized Ginger and Salted Pistachio
7.
Cumin and Apricot
8.
Toasted Mustard and Fennel Seeds
9.
Wasabi and Maple
10
Caramelized Garlic and Riesling Vinegar

11.1.6  Top Ten Candy Bars in America
Table 6: Top Ten Candy Bars in America
Brand
Company
1. Snickers
M&Ms Mars
2. Peanut Butter Cups
Reese
3. Kit Kat
U.K
4. Butterfinger
Curtiss Candy Company of Chicago
5. Milky Way
M&Ms Mars
6. Musketeers
M&Ms Mars
7. Baby Ruth
8. M&Ms Plain Chocolate
M&Ms Mars
9. Oh Henry
Williamson Candy Company
10. Hershey bar
Hershey
Source: Info Woman, 2009
11.1.7  Chocolate products by popularity
Table 7: Chocolate products by popularity
1.
Candy bars
2.
Block chocolate
3.
Box chocolate
4.
Other chocolate candies
5.
Chocolate spreads
Source: IBIS, 2008
11.1.8  Global Industry leading players
Table 8: Global Industry leading players

The Hershey Group
Aeroflex, Inc.
Nestle SA
Russell Stover Candies, Inc
Source: IBIS, 2008
11.1.9  Important industry statistics
Table 9: Important industry statistics
Industry Revenue
11,458
Mil Revenue Growth
.9
% Industry Gross Product
7,624.
Mil Number of Establishments
*1,049
Number of Enterprises
*983
Units Employment
*26,098
Units Exports
*1,387
Mil Imports
*1,586.7
Mil Total Wages
1,053.4
Source: IBIS, 2008

11.2  Appendix B
Figure 2: Value chain

11.2.1  Financial Ratios
Table 10: Financial Ratios
Ratio
2007
2006
2005
Industry Averages
Net margin
0.187
0.182
0.171
Total asset turnover
1.372
1.172
N/A
Return on Assets (ROA)
0.257
0.213
N/A
Return on Equity  (ROE)
0.326
0.262
N/A
Current Ratio
3.304
3.591
N/A
Quick Ratio
2.23
2.58
N/A
Leverage
1.271
1.23
N/A
Formulae
Gross Margin   =   Gross Profit / Sales
Net Profit Margin   =   Net Income / Sales
Total Asset Turnover   =   Sales / Total Assets
Return on Assets (ROA)   =   Net Income / Assets
ROA is a measure of the return on money provided by both owners and creditors, and is a measure of how efficiently all resources are managed.
Return on Equity (ROE)   =   Net Income / Equity
Liquidity
Current Ratio: = Current Assets / Current Liabilities
Quick Ratio: = Quick Assets / Current Liabilities.

11.2.2  SWOT Analysis
Table 11: SWOT Analysis
STRENGTHS
WEAKNESSES
Ø  High brand visibility with well-known trademarks and compelling packages
Ø  Concentration in a small market segment
Ø  A good reputation for quality
Ø  Over-reliance on franchisees
Ø  Proprietary recipes which ensure that high quality and distinct products are manufactured
Ø  limited revenue base
Ø  Good customer service
Ø  Uses manual manufacturing processes
Ø  A diversified product mix
Ø  Extensive distribution network consisting of strategically located stores
Ø  Effective franchise model
Ø  Strong innovation culture manifested in unique products such as sugar free and no-sugar added sweets
OPPORTUNITIES
THREATS
Ø  Big market for innovative products
Ø  The global economic meltdown
Ø  An increasingly health conscious populace
Ø  Wide availability of substitute products
Ø  An expanding organic segment
Ø  Legislative initiatives to subject the industry to FDA content standards
Ø  Increasing out-of-home events
Ø  Global warming
Ø  Increasing preference for ethnic and exotic flavours
Ø  Stiff competition from efficient producers
Ø  Rising demand for fair trade chocolate and socially responsible products
Ø  Ethical issues
Ø  Cocoa diseases such as witches’ broom, black pod and frosty pod

11.2.3  Porter’s Industry Analysis of the U.S Chocolate Industry
Table 12: Porter’s industry analysis
Supplier power = low
Degree of Rivalry = high
Ø  Suppliers are many
Ø  The market is highly fragmented
Ø  Inputs are not very well differentiated
Ø  Products are little differentiated
Ø  Their offerings are tightly regimented
Ø  Switching costs are extremely low
Ø  Switching costs are low
Ø  the industry is highly concentrated
Ø  Buyers are concentrated
Ø  high fixed costs especially as appertains to storage and the perishable nature of chocolates
Ø  High possibility of forward integration by the chocolate companies
Ø  high exit barriers
Ø  inputs are commodity products
Ø  wide availability of proprietary products
Ø  highly diversified players
Barriers to entry = High
Threat of Substitutes = High
Ø  High capital costs
Ø  Buyers have a tendency to use other products
Ø  Large economies of scale
Ø  Extremely low switching costs
Ø  Need for proprietary know-how
Ø  high distribution costs
Ø  Legal requirements
Ø  The proprietary learning curve is very high
Buyer Power = low
Ø  High possibility of forward integration by the chocolate manufacturers
Ø  Buyers are highly fragmented and do not have any big impact on pricing and product

11.3  Appendix C
11.3.1  Porter’s Generic Strategies
Figure 3: Porter’s Generic Strategies

SCOPE

ADVANTAGE

Low cost

Uniqueness of products

Broad (Industry wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy
(Low cost)

Focus Strategy
(Differentiation)
11.3.2  Arnsoff’s Matrix
Figure 4: Arnsoff’s Matrix

Existing products

New products

Current market

Market penetration
Product development

Emerging markets

Market development
Diversification

11.4  Appendix D
11.4.1  Balanced Score card
Figure 5: Balanced score card
Source:

11.4.2  Financial
Table 13: Financial perspective

Objectives
Measures
Targets
Initiatives
To succeed financially, how shall we appear to our shareholders?
Return on Equity (ROE)
Attain ROE at or above industry averages
Carry out prudent corporate governance
Total assets turnover
Attain total asset turnover at or above industry averages
Current ratio
Attain current ratio at or above industry averages
Profit margin
Attain profit margins at or above industry averages
11.4.3  Internal Business Processes
Table 14: Internal business perspective

Objectives
Measures
Targets
Initiatives
To satisfy our shareholders and customers, what business processes must we excel at?
To be the number one producer of chocolates
Market share
Attain a 10 percent market share and grow it by an average of 5 percent over the next 5 years
Introduce new differentiated products
Serve all market segments

11.4.4  Learning and growth
Table 15: learning and growth perspective

Objectives
Measures
Targets
Initiatives
To achieve our vision, how shall we sustain our capacity to change and improve?
To create a dynamic organization which quickly responds to changes in the market
Innovate
Number of new products
Invest in R;D
Type of technology utilized
Utilize the latest technology at any one time
Acquire new technology
Employee skills upgrade
Level of employee skills
Continuous training
Conduct active market research
Number of patents obtained
Create a suitable IP Policy
11.4.5  Customer
Table 16: Customer perspective

Objectives
Measures
Targets
Initiatives
To achieve our vision, how shall we appear to our customers?
To provide high quality products that exceed the highest expectations of our customers
Quick service
Fresh products
On site production
Highest quality products
To provide excellent customer care
Client satisfaction
SERVQUAL score greater than 95 percent
Provide organic products
Provide products with health benefits
Conduct socially responsible business
Attain fair trade certification
Procure inputs from fair trade certified suppliers
11.4.6  Shareholders
Table 17: Shareholders perspective

Objectives
Measures
Targets
Initiatives
To succeed financially, how shall we appear to our shareholders?
To provide consistently attractive returns to our shareholders
Earnings per share (EPS)
Provide EPS at or above industry averages
Judicious corporate governance
Dividends
Consistently pay dividends
Stock price