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Mixed News From Hershey: Recession is Good - Closing Plants

Today, the Hershey company announced in an article in the Wall Street Journal (subscription required) that their "Profits Jumped 51% Amid Signs Consumers Are Trading Down but Not Giving Up Chocolate."

However, yesterday in an announcement reported in the San Francisco Gate that shocked many who live in the San Francisco Bay Area it was revealed that Hershey is planning to shutter BOTH the Scharffen Berger plant in Berkeley and the Joseph Schmidt plant in San Francisco.

From the article:

Hershey already makes the majority of its Scharffen Berger products in its newly upgraded plant in Robinson, Ill., said spokesman Kirk Saville from the chocolate giant's headquarters in Hershey, Pa. He said the plant closures will affect a total of about 150 employees from both facilities. Saville said Hershey intends to maintain the quality of the brands, which make up the company's wholly owned subsidiary, Artisan Confections Co. "We will continue to source the world's best cacao to create our rich and distinct chocolate," he said. "We will maintain the highest quality standard for all our artisan productions."

That provided little solace to Bay Area fans of the chocolate-makers. Both brands have created a strong legacy and helped increased the popularity of high-end, gourmet chocolates around the country.

What say you? Is this the beginning of the end for Artisan Confections Company brands? And what are your thoughts about how they are doing maintaining the quality of the brands?

From the Wall Street Journal article:

But, as with coffee, eating out, and apparel, the recession has consumers trading down with chocolate. Supermarket sales in the premium chocolate category in the fourth quarter were flat versus last year, Hershey Chief Executive David West told analysts Tuesday. Mr. West said he expects that to continue, adding that manufacturers have been making premium chocolates faster than consumers have been buying them and that retailers probably will devote less shelf space to them.

High-end chocolatiers have noticed. Katrina Markoff, president and founder of Chicago-based Vosges Haut-Chocolat, said sales slowed in the fourth quarter. People aren't splurging on offerings that cost $100 and up, she said, although sales of products in the $25-to-$50 range are growing.

Last Valentine's Day, she said, people spent an average of $75 to $80 on online orders; she thinks they will spend an average of just $50 this year. "People still want to have a little taste of luxury and decadence," she said.

At a Fannie May chocolate counter Tuesday in downtown Chicago, accountant Karen Martin said the recession hasn't dimmed her taste for chocolate -- but she is cutting back on price.

"I still indulge but not on huge items," she said. "When I want a really nice treat, I go out and buy it. It's like $2 -- maybe." Even thriftier, her friend Nora Wideikies snapped up four Santa Claus chocolates on sale for a dollar.

However, Jim Goldman, chief executive of Yildiz Holding's Godiva Chocolatier Inc., said he expects sales to grow. "One of our best-selling products this holiday season was the 'Ultimate Collection,' a $130 offering of the best of Godiva truffles, chocolate and biscuits," Mr. Goldman said in an interview. Lower-priced items also sold well during the winter holidays, and he said he expects strong Valentine sales.

Swiss chocolate maker Lindt & Sprüngli AG, maker of premium Lindt chocolates, reported a 5.8% sales increase in 2008, saying that was at the low end of its long-term goal of 6% to 8% annual sales growth.

"Considering the market conditions, this result is encouraging," the company said last week in a news release.

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Cybele:

One of the things that I had hoped would happen with the expiration of John's and Robert's contracts would be more transparency about the history of Scharffen Berger. Here's what I "know" from piecing things together from many sources. It many not be 100% accurate but in general it checks out.

In the very beginning, John and Robert approached Guittard to produce chocolate for them and, in fact, the earliest SB chocolate was produced by Guittard. Very quickly, Guittard backed away from the business, I think for several reasons, including they did want to create their own competitor, and people were heaping praises on the SB chocolate that they never heaped on Guittard.

Guittard really missed the boat here. By not entering the market aggressively after giving up the SB business, they let SB determine what "good" chocolate tasted like. I think that this has overall been a bad thing for the artisan chocolate maker business here in the US because there are more flavors in chocolate than red fruit and most SB chocolate (to my taste) has a pronounced acidic red fruit bias. This bias is not surprising given John's background as a champagne blender for Veuve Clicquot.

If you study carefully the plant in SF, it becomes very evident very quickly that the numbers don't match up. There is no way SB can produce the amount of finished chocolate they needed to reach the sales numbers they were quoting. In particular, the reliance on a single small (250kg) melangeur and two small (1tonne) conches tell the real story of their production capacity.

You will also notice that there is no cocoa butter press, so they were buying both butter and powder, and there was no filling machinery, so someone else was packaging their powder and nibs. Also missing was any wrapping machinery, so the vast majority of that was outsourced as well.

As near as I can tell, the only products reliably produced from bean to bar in the SB factory were the limited edition bars. The entire plant is geared towards that production, from my perspective.

I did have a long talk with John about production capacity about 8 months before the Hershey announcement. From that talk I gleaned a couple of nuggets:

The capacity of the plant, running a single shift, five days a week, was about 20 tonnes of LIQUOR. SB shipped this liquor to others to finish. Among these other companies was Blommer, an industrial manufacturer. In particular John told me that they searched long and hard for the milk used in their first milk chocolate bar. Because the SB Berkeley plant is certified kosher pareve there is no way the milk product was being made there.

If you taste the SB milk chocolate against most European milks, and even the Guittard Orinoco, you'll notice that the SB milk has a distinct sour taste that mirrors the taste of Hershey milk. It is my conclusion that the milk chocolate was a deliberate attempt to update and upmarket a "grown-up" version of plain old Hershey milk chocolate.

As far as the factory closing is concerned. Hershey is a public company that is under pressure to perform up to analysts' expectations. Hershey has an army of accountants and others who analyze all of the (money) variables around decisions to move production and close plants. The decision to move production from Berkeley to Illinois instead of keeping it in Berkeley or moving it to another Hershey facility nearby was made as a result of examining hundreds of different factors. In the end, the one that was "cheapest" in the long run is the one they went with.

Of course, straight financial decisions like these never take into account that intangible known as "good will." Examined from that perspective, the decisions to close down and move may cause irreparable damage to the brands. And not just SB, but Schmidt (which is being shuttered entirely) and Dagoba as well as the Artisan Confections brand. This is a disastrous move for Hershey and a lesson for the entire artisan chocolate industry.

When I learned about Hershey's acquisitions I opined that they were good for the industry because they were an indication that if someone built a thriving business that there was an exit strategy. These moves indicate the downside of giving up control - the potential to completely destroy a business that took years (decades in the case of Schmidt) to grow.

PS. Ironically, two days after the news I received an envelope with two new SB bars. A 68% milk (that high because it contains nibs) and a new Brazilian origin bar.
Hey Clay, I missed seeing your posting of this article, and so just posted another containing text for the SFGate article.

I do want to comment on a point made by Cybele -- and that is Scharffen Berger as a public education facility these past few years.....

In my opinion, those tours did WONDERS for the average non-"chocolate life" person's understanding of what artisan chocolate means. I dragged many a "regular" chocolate lover there for the tour, and always came away knowing that person's idea of what good chocolate is would be forever changed. It was the experience that did the trick. Most people do not read and are not as interested in chocolate as we are to sit here at our computers and forever learn more and more. A real willy wonka-like factory tour can bond a person to your products like no other experience, if done in the manner of SB, with knowledgeable docents, show and tell, product tastings, meeting the workers, and a walk on the production floor. It did it for me.

And I, for one, will miss it dearly.
The following was posted by Truffles in a discussion about the Demise of the Joseph Schmidt Brand. Because I had already started this discussion I closed that one to further comments, asking people to reply here. Here is Truffles' post:

I saw the news that Hershey's was closing the San Francisco chocolate manufacturing of Scharffen Berger and Joseph Schmidt chocolates. Scharffen Berger manufacturing is being moved to Hershey's revamped Illinois plant. But no news on what's happening with Joseph Schmidt.

I just spoke with a wholesale customer service representative at Joseph Schmidt and she said that the employees were just told today that the Joseph Schmidt brand was being discontinued by Hershey's and all production will stop by summer 2009.

I'm so sad about this news. Joseph Schmidt is a strong brand name and made good truffles at a reasonable price point. Yes, there are other artisan chocolatiers and truffles that are superior, but Joseph Schmidt was really good for the price.

Why would Hershey's kill off the brand?
I just got an anonymous comment on my blog that this person got an official notice from Artisan Confections that confirms that Joseph Schmidt is ceasing production completely.

Has anyone else heard anything? They were just displaying his wares at the Fancy Food Show in San Francisco.
Let's consider the phrase "Artisan Confections" - confections made by the hands of artists. Those of us who visited the Scharffen Berger facility, a factory in a funky warehouse in Berkeley with exposed red brick and bottomless samples of perfect hot cocoa, felt the artisan origins of that company. John Scharffenberger and Robert Steinberg were rebels in the chocolate industry. "Why make your own chocolate?" people routinely asked them in the early days. "Just buy it from a big manufacturer." But Steinberg in particular had a vision - he wanted to make sustainably produced chocolate in small batches the way the artisans he met in Europe made it. When he tells the story (see ESSENCE OF CHOCOLATE BY John Scharffenberger and Robert Steinberg) of his cancer diagnosis, his bittersweet exit from his job as a doctor and his turn to food for inspiration, you'll hear the voice of a very non-corporate guy. He decided to grind fresh beans in his coffee mill at home then melt the paste with a hair dryer and scour trade shows looking for used equipment to bring about a new American chocolate. Did he worry about efficiencies and shipping costs? Absolutely. Scharffen Berger was an extremely successful business. But did those concerns impinge on his product? Not too much, he made a great one.

Hershey's, also founded by a visionary, bought the company as a prestige brand with a market niche they didn't control. So they'll close the Berkeley factory for efficiency sake, they'll make good chocolate, much like Steinberg & Scharffenberger made, but something will be missing. The personal choices - Robert pulling twigs out of jute sacks of cocoa beans from Venezuela or proudly smelling the day's batch in the old-fashioned conch machine - will be made by committees and robotic machines. I believe Hersheys will still make a fine chocolate. But the important point is for artisan chocolatiers - those of us poking around cacao plantations, tempering, molding, using our senses, adding a touch of sugar here, a 1/2 ounce of anise there - to continue the personal, unpredictable, passionate, artistic work of guys like Steinberg and Scharffenberger.
Well said!
I agree with John; good shot, Susie.

Here’s some more information on the industry, the recession troubles and the perspective from a small bean-to-bar manufacturer.

http://www.news-leader.com/article/20090130/BUSINESS04/901300335/10...

There are still discretionary dollars to be spent but artesian chocolate makers in their retail shops and small bean-to-bar manufacturers will have to be ever more creative in order to capture their share of those dollars. And to stay in business, watch your overhead at every turn.

In a local newspaper article yesterday (1-30-09) on the release of Shawn Askinosie’s new chocolate bar made with cacao from the Philippines the question was asked: “How do you sell an $8.00 bar of chocolate in a recession?”

In the current economy, how does a small chocolate factory sell $8 bars?

(Askinosie Chocolate) Sales had plunged in October -- a reflection of the lack of consumer confidence, he said. Then in December, sales rose 8.8 percent over December 2007, and overall fourth quarter sales were up 40 percent from the same period in 2007.
However, sales were under his target and he had to make difficult changes. He laid off three employees; others who left the factory were not replaced.
He and the staff more tightly control inventory, making only what they need, when they need it.
"We feel people still love chocolate and will splurge to buy the little pleasures ... But we have to be careful not to take that for granted, regardless of what the statistics say."


Here’s another opinion from me …. (not that it’s worth anything): I’ll bet that in 5 years there will be dozens of small bean-to-bar manufacturers of very, very good chocolate. Some will supply high end pastry chefs, some will sell retail over the internet and from their specialty shops and some will process their country of origin chocolates into artesian confections for sale over the counter in their store front shops. How could there be such a radical change in a stodgy old industry as bulk chocolate processing?

Here’s how. As always: Economics and Demographics. The Boomers (demographics: largest population segment) are entering their retirement years but can’t; due to the financial meltdown (economics). We’re going to be looking to change careers; not retire. Can’t afford to now.

Artisanal food and beverage are very attractive. Examples: More wineries opening every day in the U.S. Now wineries in every state in the Union. Micro breweries in every medium-sized town in America. There used to be only 4 or 5 big breweries in the U.S.

Coffee shops. Tens of thousands of them where beans are roasted on-site. There never used to be small , bean-roasting coffee shops when I was kid, where you can see fresh roasted beans by country of origin displayed in showcases in the store. Now, a town of 100,000 people will have several such shops. How did this happen? Well, people figured out that it’s not that difficult to buy small equipment and supplies and process the farm product: wine grapes, coffee, hops for beer, just a step above home hobby level; and then sell retail.

Dozens of web sites sell green coffee beans to home hobby roasters http://www.sweetmarias.com/ or http://www.coffeestorehouse.com/.

For $20 you can buy a hot air popcorn popper at WalMart (trust me…you don’t need a link. If you don’t have one in your town, you’re going to get one in about 15 minutes) and order a pound of green coffee beans off the net to roast at home. If several thousand people do this as a hobby, then some percentage of them will have the thought to scale it up and start a business selling coffee retail or wholesale.

This has just in the past couple of years started in the home chocolate roasting arena. Clay Gordon would know about this better than I but I’ll be there are maybe only 50 of us bean heads roasting at home. He offers some fermented beans for sale at

(http://www.thechocolatelife.com/page/cocoa-beans ) as does Chocolate Alchemy .

John Nanci over at Chocolate Alchemy has developed a system of small counter top machines that you can use to process home roasted cocoa beans into finished dark or milk chocolate and he also has a few countries of origin beans for sale. I predict that as more people pick up this hobby, as happened in coffee, some will get the idea to make a business of it. Not just in the U.S. but in all the consuming countries.

As to travelling world-wide buying direct from farmers and giving back to them, that takes some money and dedication. There may also be more of this in my hypothetical future as these imagined small American roasters become successful and can afford to search out new countries of origin.

Let’s look forward to it. I’m not trying to make this financial mess look good, my retirement portfolio gets smaller by the day. But I think there will be more people with good taste looking to pursue artisanal dreams. We should expect a great future for really good chocolate.

Forgive me for wasting your time here, these are just some half-roasted thoughts from a neophyte bean head. All the best tasting to you.
Here’s another opinion from me …. (not that it’s worth anything): I’ll bet that in 5 years there will be dozens of small bean-to-bar manufacturers of very, very good chocolate. Some will supply high end pastry chefs, some will sell retail over the internet and from their specialty shops and some will process their country of origin chocolates into artesian confections for sale over the counter in their store front shops. How could there be such a radical change in a stodgy old industry as bulk chocolate processing?

I agree that there is an untapped market for small, local, artisan chocolate makers. Few of these will provide couverture as it takes a great deal of skill to make chocolate with consistent workability.

Why is this happening? People are becoming more interested in supporting local food businesses, people are interested in knowing more about the food they eat, people are more interested in origins, people are more interested in experimenting, people are interested in sharing experiences.

Why do brew-pubs exist when there are all these big breweries? The big breweries obviously don't meet some needs. Same with chocolate.

However - and this I caution everyone who wants to start making chocolate to sell - comparing chocolate making with roasting coffee, or brewing beer or making wine doesn't work. The processes are very different.

Three things are holding up the movement:

1) Educational infrastructure
2) Easy access to small-scale equipment
3) Easy access to quality beans

I am working an all three and it's taking a lot longer than I thought to put things into place.
Hi Clay,

Could you give me information on where to access small scale cacao processing equipments such as stone grinders capacity (20 kg per batch) are they the same as melangeurs? And equipments for cocoa butter extracting? We make chocolate tablets (100% ground cacao nibs) in the Philippines called tablea.
Thanks in advance.
"1) Educational infrastructure"
Not only for the chocolate maker, but also the customers. Chocolate tasting instructions. In my market, people eat chocolate so fast that is impossible to taste anything but sugar. When a representative of Vahlrona came to Israel and tasted Israel's chocolate company his response was "they use high quality sugar"! The public needs to be reintroduced to the concept of chocolate.
For 2 & 3 thanks for helping Clay.
Jo
After I saw Gwen's comment about buying artisan chocolate, I told Clay about Foodzie, where I work, and that I thought it might be useful to talk about in the context of this thread...so I hope it is!

Foodzie is a new online artisan food marketplace that wants to connect great small food companies with less price sensitive foodies ... the ones who are going to keep consuming artisan made chocolates during a "dip" like this one.

It's been interesting to see a few things :
1) The chocolatiers on Foodzie have had brisk sales both during and after the holidays...especially the companies with interesting/unique and high quality products at a variety of points. I'm sure all the news of Obama's love of sea salted caramels didn't hurt either.
2) Wales are coming from literally all over the map, not just the areas you would typically think of as affluent.

FYI these are the current chocolate companies. http://foodzie.com/categories/chocolate

For launching a chocolate business, Foodzie would be useful as an easy and cost effective way to test the marketability of various products with a food lover/connoisseur audience, beyond the local farmer's market or your own website. Feel free to ping me if you'd like to chat about this and perhaps I will start another discussion if there's interest.

As an aside, in the last year I've literally seen a different indi confectioner at each farmer's market in the San Francisco area...and cookie businesses are popping up equally as quickly it seems. I can list the companies if you like.
why did SB and Schmidt sell to Hershey's to begin with ?

I cant speak for joseph but john scharfenberger told me shortly after the sale...''They paid me so much money I dont care if they break my baby"

It was honest.

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