Photo: File
By Katishi Masemola
ACCORDING to Squicciarini and Swinnen (editors of the book titled “Economics of Chocolate”), cocoa was produced by tribes and empires for hundreds of years as a source of drink for the elite and wealthy in central America, before the Spanish colonisers introduced it to the rest of the world in the 14th to 16th centuries.
With chocolate, made from cocoa, getting popular in Europe and North America, the spread of cocoa reached Asia and Latin America. And by the 1960s, West Africa dominated global production of cocoa, yet this was only introduced in Africa in the 19th Century.
With the rise of incomes of the poor following the Industrial Revolution, there was scientific innovation in transforming manufacturing of chocolate as a source of energy for the masses, and there was a rapid growth in its demand in the 19th Century.
The commercial production of sugar was introduced in South Africa in the 1820s by the British colonial forces when they rolled out sugar plantations in parts of present-day KwaZulu-Natal and (later) Mpumalanga provinces.
According to Wikipedia, the plantations and use of sugar in manufacturing is traced back to India and subsequently spread to parts of Asia and (later) to other tropical parts of the world, including Brazil and some areas of Latin America.
Like cocoa, sugar underwent transformation and innovations which saw it becoming affordable to ordinary people and becoming a cheaper source of input for industrial users engaged in manufacturing of sweets and soft drinks, among others. In 2019, India, Brazil and Thailand were, respectively, the largest, second, and third largest producers of sugar with SA standing as the 17th largest in the world.
The 2020 global trade on chocolate confectionery reflects Germany, with $4.96 billion (R75bn) of value of sales, as the leading exporter of chocolates, followed by Belgium ($2.5bn), Italy ($2.09bn) and Poland ($2.08bn).
According to worldtopexports.com, the top importer of chocolates is the US, valued at $2.88bn, followed in Europe by Germany ($2.39bn) and the UK ($2.23bn) as the second and third largest, even though there are steady above-average growth rates in chocolate consumption in Africa, Asia and Latin America. These growth rates, as in the previous centuries, are a function of rising incomes among the populations.
In the sweets (sugar-based confectionery, excluding biscuits and other baked products), Germany retains top spot as an exporter with shipments valued at $1.3bn, followed by China ($803.2bn), Mexico ($635.9bn) and the Netherlands ($604bn) in 2020. The figures reflected the US as a top importer with $1.9bn in imports, followed by Germany ($716.5 million) and the UK ($596m).
As with other products, the global production of confectionery products was dominated by transnational companies that had their origin, and are still domiciled in North America and Europe.
Like in India (where Mondelez International has 56.3 percent to Nestlé with 21.3 percent market shares in 2013). in SA Nestlé and Mondelez are dominant in the chocolate market.
In the SA sweets market, the two locally born or domiciled big players are dominant, with Tiger Group’s Beacon Sweets having the highest market share with Premier Foods (after acquiring Mister Sweets in 2021) at 13.8 percent of the market.
However, there are several small, medium and micro enterprises (SMMEs) in the form of locally family-owned companies such as Broadway, Richester and JCJ on the sweets side, with Beyers Chocolate and a few others on the chocolate side. SA’s SMME players remain concerned about domestic sugar cost pressure on the input side, and unfair imported competition on the trading side.
The domestic markets of chocolate and sweets confectionery were estimated to be worth R6.4bn and R12.5bn to R13.5bn, respectively, in 2020. The global market for confectionery in 2021 was estimated to be worth $125bn and that of sweets was estimated at about $217.8bn in 2020.
The growth of chocolate consumption in Africa was more rapid than any other part of the world with 104 percent compared to global growth average of 28 percent between 2000 and 2013. Between 2000 and 2011 the import of chocolate boomed by 389.8 percent in Africa (26 563 to 130 116 tons), and 165.5 percent for sub-Saharan Africa (21 338 to 56 658 tons), with the latter including South Africa at 221.2 percent (4 441 to 14 263 tons). China and India also recorded import growth of 113.2 percent and 735.4 percent, respectively, from 39 843 to 84 931 tons and 1 730 to 14 452 tons.
The growth in local supply, and imports of sweets in South Africa mirrors those of chocolates. Market Research.com asserts that the sweets market registered a positive compound annual growth rate (CAGR) of 7.14 percent from 2015 to 2020, with sales value of R7.7 million in 2020, an increase of 6.01 percent in 2019 – its strongest performance in 2016, when it grew by 7.93 percent over its previous year even though it is forecast to reach $507.9m (in retail prices), thus increasing at 3.25 percent CAGR per annum from 2020 to 2024, with while the chocolate confectionery forecast to reach $1.03bn (in retail prices), thus increasing CAGR of 5.98 percent per annum for the period 2020 to 2024.
In the 2000s domestic sweet manufacturers came under severe strain from imports, both the legal, but dumped and illicitly traded sweets products, the latter as a result of mis-invoicing and under-declaration at customs. After hard lobbying and sustained advocacy by the industry, the SA Revenue Service (Sars) and other government agencies and departments, clamped down on these activities and the situation subsided with trading conditions for locals improving.
But currently, the double whammy challenges remain as domestic sweets manufacturers must contend with high domestic sugar prices, while chocolate manufacturers have to compete with cheap imports produced in jurisdictions with cheaper sugar and subsidised raw materials.
At this juncture, both the confectionery segments faced different challenges in SA. On the sweets side, the manufacturers saw the domestic price of sugar doubling to that of world prices as a result of dollar-based reference pricing, an effective tariff placed on imported sugar. On the chocolate side, imports from elsewhere in which sugar is cheaply available could only be slapped with 37 percent import tariff – the maximum permissible in terms of the World Trade Organization (WTO) rules, of which SA is a signatory. Some segments of chocolates from Europe are exported to SA duty-free, as their sugar content may be lower to trigger tariff protection.
It has become tempting, and even commercially viable for SMME manufacturers of sweets and chocolates to switch over from local production of some products and become conduits of imports, given that domestic manufacturing of sweets, using between 30 percent to 65 percent of sugar in final products, has proved expensive lately. This also applies to chocolate manufacturers who also use sugar but are mostly reliant on imported cocoa.
In fact, the Nestlé and Mondelez have moved (or reduced the scale of) some of their SA operations to other countries, and have resorted to importing those products from elsewhere (offshoring), resulting in the loss of domestic manufacturing jobs. For instance, recently, Mondelez launched their Chappies cherry candy in SA yet made in Pakistan, not even eSwatini made the cut for manufacturing this product.
SA’s confectionery market was and still is lucrative for both sweets and chocolates, hence the initial “setting up of shop” in the country by both Nestlé and Mondelez (then Cadbury) in the 20th Century. Research and Markets.com places SA as the 32nd largest consumer of confectionery out of 200 countries studied.
If the government’s initiated Sugar Sector Plan, as I have argued before, was to lead to lowering of domestic sugar prices and the shielding of domestic players from dumped and illicitly traded imports as well as opening market access for export opportunities – noting both the potential growth in domestic markets and opportunities for growth in exports, particularly in China and India as well as the rest of Africa – then the sweets and chocolates manufacturing sector stands to survive, thrive and create much-needed jobs, particularly from the medium-sized players.
It is thus justified for SA’s confectionery industries to be protected from unfair import competition on the chocolate (and even sweets) side, and there are valid grounds for the downwards revision of sugar prices in support of sweets manufacturers.
There are attractive prospects arising out of helping local confectionery SMMEs to increase capacity utilisation in existing production facilities and/or embarking on greenfield investments in creating new production plants to take advantage of the growing local demand and export opportunities in the growing markets of China and India, as well as on the African continent and beyond.
Katishi Masemola is the director of Semo Advisory & Consulting, and Project Consultant of the SA Sugar Converters Association.