The German Market

Part 1: Market overview

Authors: Michiel Arnoldus & Kerry Kyd, Sense It’s big, but very competitive

THE CHOCOLATE MARKET It’s big, but very competitive

• Consumption: 649,000 tons/ 7.8kg per person • Sales value in 2013 of between EUR 6.5 and 9.23 billion • 233 German chocolate producers & hundreds of imported brands

• Average retail price per 100 gram: EUR 0.95 (source: canadean 2014 euromonitor 2013) • Profit margin of chocolate producers is only 6.8% • Highest number of new product launches in chocolate in the world

Left: a small selection of 70% cocoa bars in German retail

Right: Organic Fair trade high cocoa chocolate for 1,49/ 100 grams in supermarkets THE CHOCOLATE MARKET The Big Players, their brands & estimated market share

Ferrero (Kinder, Rocher, Mon Cheri, Hanuta) 21%

Mars (, , M&Ms, , , etc.) 12.2%

Mondelez (Milka, Côte d’Or, Toblerone, Suchard) 11.8%

Private labels 10%

Nestlé (KitKat, Smarties, Quality street, Aero, After Eight) 9%

Lindt (Lindt, Lindor) 8.5%

Barry Calebaut (couverture for luxury stores) 4.5-8%)

Stolwerck (Alpia) 4.7% 10% of chocolate Ritter (Ritter Sport) 3% producers have 59% Storck (Merci) of market

Source: Canadean 2014, Euromonitor 2013 THE CHOCOLATE MARKET

Saturated market in status quo: big brands battle for each 0.1% market share

• Only 1.5% growth in retail sales, driven by inflation (consumption is not growing, only prices are increasing) • Despite high number of launches no real product innovation in the last 5-10 years à (Not even from Ferrero, which competes on innovation) • Market share per type (bars, pralines etc.) is not changing • Heavy marketing spend, particularly in-store is essential to compete • Brands are desperately looking for new products & mkt channels

Value Volume Growth Growth Price/Kg (€ Million ) (1000 Tons) Boxed (Pralines) 1873 1,30% 129,1 0,54% 14,51 Classic bars 1784 1,48% 202,7 0,16% 8,80 Candy Bars 1552 1,70% 233,2 0,12% 6,66 Seasonal specials 990 1,76% 79 0,12% 12,53 Mini bars in bag 348 1,75% 42,1 0,15% 8,27 Other 77 1,83% 9 0% 8,56 Source: Canadean 2014 THE CHOCOLATE MARKET Segmentation by product & packaging format: stable for the past 5 years Current posion of Ecuador

Market share on value (€)

Candy Bars Classic bars 24% Seasonal 27% specials 15% Boxed Mini Bars in (Pralines) bag 28% 5%

Opportunies for Ecuador Source: Canadean 2014 THE CHOCOLATE MARKET Segmentation by type of chocolate/ flavour

• 34%, white 6% • Largest category: Chocolate with fillings (40%): – Popular: Nuts, caramel, chocolate mousse – New: fruit & exotic flavours – Includes candy bars & pralines – Outside can be milk or pure • 20% of market is pure chocolate (>35% cocoa) • Consumption of high cocoa chocolate (>50%) relatively common • Many eat milk & pure, depending on occasion; for example milk at work & pure after dinner with coffee Source: Barry Callebaut 2012 THE CHOCOLATE MARKET The standard range each brand has: probably 80% of the market in bars

White Hazelnut Milk Pure/ dark Very dark 70% plus Weiss Hazelnuss Milch Vollmilch Halb bier/ Zart bier/ Edel Zart bier bier 20% 20% 35% 50% >70% 100 other flavours: to claim space in shelf THE CHOCOLATE MARKET Segmentation by consumer need

Indulgence Gifting rush More conscious buying Token of appreciation for friends, when you visit Impulse buying Quite moments alone people, small with tea or coffee celebrations, seasonal During work & travel After dinner (particularly for children) & sport Sharing with friends/ Packaging, originality & Larger quantity in visitors story is important one go Boxed , Quality instead of Milk & White & quantity special bars Candy bars Pure: if you are sure More luxury, pure & filled people like it, otherwise & high cocoa Milk Current posion of Ecuador Opportunity RETAIL CHANNELS Chocolate sales per channel

• Supermarkets & Convenience stores dominate with sales of big brands • Drug stores & Pharmacies (e.g. Rossman) & webstores are winning market share from department stores, variety stores & others

Source: Canadean 2014 RETAIL CHANNELS Supermarkets, discounters & convenience

• Mass market driven by massive marketing budgets & scale • In-store visibility is key: – Range of at least 10 flavours and variants, preferably 50 – 100 – In store displays & promotions are crucial & common • Lindt is dominating the pure quality chocolate category • € 2,5/ 100 gram is maximum price for bars • Edeka & Rewe offer best opportunities for premium chocolate • Occasionally smaller brands appear in organic & fair trade isles • The competition is already there: Rausch. Fine flavour single origin chocolate at €1,92/ 100 gram or €2,95 for a bag with 125grams of individually wrapped mini-bars.

Conclusion: difficult space to compete for Ecuadorian brands RETAIL CHANNELS Organic supermarket, store & reformhaus

• Often chains of 50-150 stores, e.g. Denn’s, Engelhardt • Focused on environment & healthy living • Large assortment of high quality (pure) chocolate • Dominated by small(er) producers & brands, e.g. Vivani, Rapunzel original beans • Home to new trends & specialties: raw chocolate, new flavours, vegan, lactose free, country specials etc. • Smaller stores=less space, fewer brands & smaller assortment • Original packaging and large range (10+) essential to stand out in shelf • Up to €5/ 100 grams possible for very special products, but bulk of sales is between €1- €2

Conclusion: Potentially important channel for Ecuador, but already very competitive. It may not be easy to claim shelf space. RETAIL CHANNELS Department stores: home of the luxury brands

• Examples: Galeria Kaufhof, Karstadt etc. • Shop-in-Shop concept: Each brand has an own isle, Large assortment needed to fill an isle • Dominated by Medium and large German & Swiss brands with a premium positioning • Focus on gifting & indulgence • Little if any organic & fair trade • Terms of trade comparable to supermarkets, but more focused on luxury store concept

Conclusion: Can be an opportunity for brands from Ecuador with a very strong & distinctive product story & packaging style, but a large assortment is needed. Perhaps a combined effort from Ecuador producers to fill an isle. RETAIL CHANNELS

Fair trade stores: niche with focus on ethics & gifting

• More than 800 stores selling only fair-trade products • Often independent stores with (some) volunteers and non-profit • Can source directly, but mostly buying in groups. Weltladen and Contigo are the most common buyer groups • Focus on gifting • Many different products (from hammocks to crockery, clothing, wallets, lamps to coffee and chocolate) but only 2-3 brands or versions of each product • Only 1-3 brands of chocolate, with a strong fair trade story and suitable for gifting

Conclusion: Not an easy opportunity, because you need to replace an existing brand that performs well (e.g. Zotter in Contigo) RETAIL CHANNELS Specialist stores: domain of Barry Callebaut couverture

• 2 main types : • Confiserie: a store specialised in chocolate, often independent • Chain stores for boxed pralines: Godiva, Neuhaus & Leonidas • Both make their own chocolate bars & pralines from couverture; Barry Callebaut dominates with wide assortment of cheaper and expensive blends. A few niche players are active (e.g. Valrhona) • Very limited if any space for branded bars: • Godiva etc. only sell pralines • Most confiseries only sell ‘home made’ bars, some shops add a few special & exclusive brands supplied by wholesalers/ distributors/ agents • Gifting is very important in this segment • This is where ‘the chocolate connaiseurs’ go, they may come once a month from far to stock up on their favourite bar

Conclusion: Limited opportunity with independent confiseries, network of agents/ distributors is needed to convince them to place your brand in store RETAIL CHANNELS Delicatessen stores & coffee houses: new channel for fine flavour • Delis (Feinkost laden): independent stores specialised in high quality food, often Mediterranean. They typically sell olive oil, bread, sausage, olives, pasta, freshly cooked meals, fresh fruits& vegetables etc. • Coffee houses: serve high quality coffee & tea with cake & pastries in relaxed atmosphere. They often also sell coffee, tea & snacks for home consumption – Thousands of independent stores – Biggest chains are Tchibo (500 stores), Starbucks (164) & Balzac (32) • Increasingly sell (fine flavour) chocolate, typically only 1-3 brands, but many do not sell chocolate yet • Suitable for more expensive chocolate because they attract wealthy consumers who are prepared to pay for a quality product with a story about origin (Tea, coffee, olives, oil etc. are increasingly marketed by origin, variety etc.)

Conclusion: Promising channel but needs investment in sales (agent/ distributor RETAIL CHANNELS Central Procurement department & shop owners are the entry point

• Chocolate assortment for supermarkets, faire trade & organic chains & coffee house chains is determined at corporate level; individual stores can deviate, but for chocolate this is not common – Most chocolate producers sell directly to these chains, but some use a distributor/ sales agent • Individual Confiseries buy: – Finished products (e.g. packaged bars) from agents/ distributors – Couverture from wholesalers or agents/ distributors • Delicatessen stores & individual coffee houses buy from a wholesaler/ agent/ sales representatives

à Small producers need to recruit agent/ distributors who can sell to individual stores & chains

IMPORT & EXPORT German producers are net exporters of chocolate

• Chocolate Exports in 2013: 775,665 tons (EUR 3.2 billion) • Chocolate Imports in 2013: 419,643 tons (EUR 1.5 billion), which is 40% of consumption: • 32% of chocolate is imported as bulk blocks, slabs and bars • 68% as finished products • May include German companies producing abroad • 60% of consumption is produced locally, using 343,946 Tons of imported cocoa beans, powder, butter & paste • Includes foreign brands producing in (i.e. Lindt from producing in Aachen, Germany)

Chocolate Imports in Germany in 2013 Volume (tons) Value (Million EUR) Bulk chocolate (blocks, slabs, bars >2kg) 133,930 32% € 363,193 24% Finished chocolate products (<2kg) 285,713 68% € 1,180,072 76% Total Chocolate 419,643 € 1,543,265 Source: ITC Trademap 2014, Euromonitor 2013 IMPORT & EXPORT

99% of chocolate imports are from Europe Value 2013 Quanty

(1000 EUR) 2013 (tons) • , , Switzerland, Poland, World 1543265 419643 & are the biggest suppliers Belgium 345922 114037 Netherlands 282453 96681 • About 1% comes from Russia, China, US & Switzerland 231684 49712 Canada and other non-European suppliers Poland 146530 23555 • Only 0.01% is supplied by cocoa producing France 128299 33926 Austria 105957 30652 countries Côte d'Ivoire 447 174 • In 2013 Ecuador exported 13 tons with a value of Ecuador 142 13 142,000 EUR to Germany Brazil 26 0 Mexico 20 0 Colombia 16 0 Peru 9.79 0 El Salvador 5.27 1 Nicaragua 5.27 0 Ghana 3.76 0 Viet Nam 3.76 0 Bolivia 1.51 0 Venezuela 1.51 0 Costa Rica 0.75 N/A Source: ITC Trademap 2014 Source: ITC Trademap 2014 IMPORT & EXPORT Ecuador is important cocoa supplier for high quality chocolate

• 4.3% of cocoa used by German chocolate producers is from Ecuador • Reputation as high quality cocoa, though importers know that most fine flavour cacao is ‘secretely’ blended with CCN • Used for high quality chocolate: Added to blend of cheaper West African cocoa to improve flavour MARKET TRENDS 1. Big players are forced to move away from the middle

Luxury Discounters chocolate

• Discounters are winning market • Producers search new products/ share from traditional markets with higher margin supermarkets: • They are moving towards the fine- • Brands need to offer cheaper flavour niche of Ecuador products to maintain market • Increasingly through buying smaller share brands focused on these niches MARKET TRENDS 2. Pure and high cocoa (70%) chocolate

• Drivers: – Aging population & change of flavour profile as people get older (bitter instead of sweet) – Health: concerns about sugar & stories about good properties of cocoa (more cocoa, less sugar)

3. Social sustainability

• Stories about poverty, slave & child labour in Cocoa production drive consumer demand for sustainable cocoa • Producers are responding with ambitious targets • Certification is crucial & increasing: – Fair trade: Growing but remains niche – Utz Certified: Minimum standard, exponential growth MARKET TRENDS 4. Fruit & Experimental flavours Drivers: • More variants to claim shelf space & increase in-store visibility • Producers trying to target variety seeking consumers • Producers trying to target younger consumers with fruit flavours

Classic Experimental Fruit

Marzipan Sea-salt Cranberry Chocolate mousse Chili pepper Strawberry (Rhum) raison & nuts Peppermint Mango Nuts ( etc.) Roses Mocca/ coffee Yoghurt Blueberry Sheepmilk Pineapple Biscuit/ crisps Cherry Caramel Sck to classics and a few experimental e.g. sea salt

MARKET TRENDS 5. Fine flavour & Single origin: new trend or extreme niche?

• Too small for mainstream brands; Lindt developed origin bars (e.g. Ecuador) but stopped due to low sales (‘consumers didn’t understand it’) • Local brand Hachez had origin bars in supermarkets, but seems to refocus on 3 types of cocoa (Arriba, Macaibo, Wild Amazonas) • Niche player Rausch is trying to enter main stream market (Edeka supermarket) with single origin assortment • Small brands have single origin bars in organic & fair trade stores; Ecuador is a common variety The German Chocolate Market

Part 2: Buyer Requirements BUYING CRITERIA & TERMS OF TRADE Supermarkets

• Buying criteria for premium chocolate: – Maximum expected wholesale price: € 2.35 for €3.50/ 100 gram retail price incl. VAT – Unique addition to assortment – Professional & attractive packaging – Marketing support: advertisement, in-store promotions etc. – Reliable supplier of high volumes of consistent quality – At least 10 varieties are needed to stand out in shelf – HACCP certification • Terms of trade: – 40% Retail margin for premium products such as premium chocolate – 60 day payment terms – Shelf ready packaging – You may need to pay listing fees – Retailer determines consumer price

BUYING CRITERIA & TERMS OF TRADE Organic stores: comparable but less strict

Buying criteria for premium chocolate: • Organic certification, or strong story to prove you are organic • Health benefits are important • Unique addition to assortment • Reliable supplier, but volumes are smaller than in supermarkets 60 days payment terms common but exceptions possible

Fair Trade stores: Gifting is important Buying criteria: • Fair trade certification & Interesting story about producers • Openness/ response to questions about working conditions etc. • Suitability for gifting (quality, format, packaging, story) • Unique addition to assortment Payment terms are negotiable & retail margins are lower

BUYING CRITERIA & TERMS OF TRADE Delicatessen stores & Coffee houses

• High quality product • Interesting story about origin & flavour • Sustainability story is more important than certification • Brands that is not sold in mass retail (supermarkets etc.) • Retail margin at least 40% • In-store displays may be required • Payment terms are usually negotiable

CERTIFICATION

• HACCP: Essential for sales in mass market (supermarkets etc.) • Organic : For organic & health shops & to support product story – Many premium chocolates are organic – Organic stores are important channel for premium chocolate – Bio and Rainforest Alliance are well known

• Fair trade: To qualify for fair trade stores & support product story: – Growing importance due to concerns labour conditions of farmers – Utz is minimum ethical certification intended for the mainstream market, Fair Trade is more thorough but for niche market

• Consumer trust in organic & fair trade certification is decreasing: A good environmental & social story is more important than certification • Several producers/ retailers have developed their own organic & fair trade standards & programs, e.g. Naturland & Gepa – They set their own rules, no third party verification – They develop logos & stories that look like the ‘official’ certification Conclusion: Go for organic certification & a good social story LEGAL REQUIREMENTS

• EU regulation is leading • EU regulation for foods is extensive. See an overview on chocolate product & labelling legislation. • Also see buyer requirements as presented on the CBI website • Contact a local expert before designing a product

Rausch fine flavour assortment in Edeka supermarket MARKETING STRATEGY FOR ECUADOR Product & packaging

• Develop new product formats aimed at gifting & suitable for consumption in small bits – Mini bars & pralines in metal & wooden boxes, mini-bars in bags etc. – Blend of flavours in one package – Well executed product & origin story supported with online information, to make it an interesting gift with a story • Develop a product range of at least 10 flavours to claim shelf space and get noticed by shoppers, but stick to the proven classics (i.e. mousse, nuts, , praline etc.) • Include at least one ‘vollmilch’ for gifting to people who do not like dark chocolate • Develop unique packaging style that stands out: – Examples: Vivani, Labooka – Avoid: classic designs & colors that look like Lindt, Hachez, Feodora etc. (black & gold colours) • • Organic certification supports story

MARKETING STRATEGY FOR ECUADOR Examples of gift packaging MARKETING STRATEGY FOR ECUADOR

Distribution

Channels with most potential: 1. Development of coffee houses & delicatessen stores channel 2. Organic stores (particularly independent), fair trade stores & independent confiseries

• What is needed is a professional German distributor: – That can assist with product development & testing & packaging & instore display design – With sales agents throughout the country, who can go from store to store to promote the product – With access to central purchasing departments – Who can help you sell a container in stead of a box. • Or find German experienced agents/ sales reps • Finding a distributor/ agent: ask confiseries, coffee houses, delis & organic stores who supplies their chocolate & visit trade shows • Sales Target: 30 units per store per week

MARKETING STRATEGY FOR ECUADOR

Promotion

• Develop a unique product story & execute it well: (with packaging, Facebook, internet, video & photography) • Visit trade fairs & chocolate festivals: Anuga, ISM, Biofach, Salon de Chocolat, ChocolART • Organise chocolate tastings together with stores & coffee houses • Develop in store product displays: both smaller counter top and larger stand-alone displays • Sales reps that visit stores • Enroll in chocolate competitions to win prices that support the story

Countertop display MARKETING STRATEGY FOR ECUADOR

Price

• For a simple 100gram bar of excellent quality with great design packaging & story suitable for gifting the optimal price is between €2,50 and €3,50 incl. 6% VAT and a 40% retail margin. • Other formats suitable for gifting can be sold for much more (reference point is the cost of pralines at Neuhaus or Godiva

Consumer reference point: Excellent 73% cocoa chocolate sold for €0,99/ 100 grams The German Chocolate Market

Part 3: Doing Business in Germany GERMAN BUSINESS CULTURE

Formal & conservative culture: – Use formal titles and qualifications (Herr, Frau (Mr./Ms./Mrs.), Professor, Doctor (Phd, Msc. Etc.) in written and spoken communication until other part confirms this is no longer necessary – Wear formal suit (men with tie) first time – Love for official logo’s, stamps and certifications

Hierarchical culture: – The Manager/ owner decides everything – Employees only work on things their boss has told them to do – Know what decisions your counterpart is allowed to take to avoid wasting your time GERMAN BUSINESS CULTURE Communication

• Pünktlich (Punctual): – Arrive on time, call on agreed time – Respond to emails & voicemails same day! • Agreed is agreed: – Do what you promise/ agree – Respect contracts, even if the situation changes… – No news is good news: if you don’t tell them there is a problem, they will assume the goods arrive exactly at the agreed time… • Face-to-face meetings remain important • Business fairs/ trade shows are essential to spot trends & network & find new customers • Communication style is direct (more than in Southern Europe) • Having lunch or coffee together is common, dinner is less so GERMAN BUSINESS CULTURE

German language is important

• Many people even in higher management speak limited English, particularly over 45 years of age • Even those who do speak English are often not comfortable (Very self conscious, afraid to make mistakes in front of superiors/ employees) • Making an effort to speak (some) German greatly appreciated • To do a lot of business you need to work in German

German cultural is the reference point • Germans may have difficulties understanding your challenges in Ecuador and why you can’t do certain things that are standard in Germany • Germany has its own culture, type of humour etc.

GERMAN BUSINESS CULTURE

Culture is changing…but slowly

• More people speak English; – Young people learn on Internet, TV, School – International business has forced older people to learn English – English is slowly replacing German in business with Neigbouring countries (i.e. Netherlands) • Importance of official titles is declining • Email & Skype make contact less formal • More travel & international business increase cultural understanding

à Beware: It may appear you wont need German language & customs, but it will make a difference! GERMAN BUSINESS CULTURE There are regional differences

• The South is more formal & conservative & Catholic and well organised. • The North is less formal, Lutheran, and less organised. • Berlin is more alternative & Arty & cosmopolitan with less industry and more public sector

Pralines for gifting & indulgence in Leonidas store in AN OVERVIEW OF THE GERMAN FOODS MARKET

Every foods manufacturer wants to be in Germany: • Biggest population in Europe: 83 million people in 2013 • Low unemployment (5.2% in 2014) & High disposable income per capita ($30,000 in 2012)

Population: • Not growing & aging • Decentralized: Many big cities that are spread over the whole country • Large cultural differences North & South and distinct from other EU countries • Few people are comfortable in English language.

(source: euromonitor 2013) (source: euromonitor 2013) AN OVERVIEW OF THE GERMAN FOODS MARKET

Competing in Germany: Scale, scale and scale

• German consumer is quality & price oriented: value for money • Highly competitive market because every big company want to be in Germany • Even niche markets are crowded • Everything is big: population, distances and one small chain of shops has hundreds of stores • Competition is driven by scale

AN OVERVIEW OF THE GERMAN FOODS MARKET The retail environment

• 67,000 stores selling foods • Supermarkets compete on value for money • Discounters are popular and growing at the expense of supermarkets.. • Germany is still a market for luxury stores • 42% of food products sold are private lable, and this market share is growing • Retailers have the power in the value chain to set prices and impose their conditions on producers AN OVERVIEW OF THE GERMAN FOODS MARKET

The big players in German food retail

Source: Euromonitor 2012 REFERENCES FOR IMAGES

• All images used in this presentation have either been take in German stores with the consent of the store manager, or downloaded from the public websites of the producers/ brands. • Market Research, markeng & branding • Value chain Analyses • Entrepreneur financing • Training • Development program strategy • Implementaon assistance