Divine Chocolate recently announced it is merging its US and UK businesses to "strengthen" its structure and gain a "wider consumer reach". The news will see the dots joined between Divine's businesses on either side of the pond. Sophi Tranchell, who headed up the UK business and has taken over as group CEO, spoke to just-food about how the move will benefit the company and where Divine plans to grow its global premium chocolate business.
just-food: The merger of the US and UK businesses is a massive shift for Divine Chocolate. Can you talk me through the strategic rationale?
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Sophi Tranchell: We've developed a really good team in the USA and excellent chocolate credentials. The US team have built up a good pipeline for growth, and we have managed to get into a lot of new places where our sort of chocolate has never been before… By merging the two teams together we can share the UK team’s expertise in NPD and marketing – so building the international brand. We will also be able to mobilise more competitive finance because the UK company has a longer track-record.
j-f: Does increased access to finance mean you plan to step up investment?
Tranchell: It is about using the right tools for the right job. For a company that has only just hit profitability [in the US], mobilising money for things like exchange rate currency coverage is quite hard… That sort of finance is easier to mobilise once we make the company a [single] group. It will help debt finance as well. At this stage we are not looking for more investment.
j-f: You mentioned new channel growth in the US. What areas are you moving Divine into there?
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By GlobalDataTranchell: Historically, products that are Fairtrade have been sold in the natural channel. We've also been selling in the solidarity channel. The team has managed to get us into grocery and speciality. We are able to bridge those two things because we offer fantastic quality chocolate as well as having unique farmer-owned credentials. We fit well in natural as well as in speciality and grocery.
j-f: How does Divine meet consumer trends such the desire for provenance, sustainability, quality or health?
Tranchell: Farmer ownership, as well as flagging up a fairer and more empowering deal, is also a nice short-hand for things like traceability and sustainability. The fact that we are so clearly owned by cocoa farmers is very helpful in addressing that trend – and is something that is less abstract to communicate than traceability and sustainability.
We focus on the flavours and premium, using quality ingredients that the farmers take pride in creating. The farmers are part of our quality story.
In terms of addressing health, higher cocoa means lower sugar. We have a policy not to use palm oil, so we only use cocoa butter which makes, I think, a better product. We are in the process of removing the soy lecithin and replacing it with sunflower lecithin, which is something environmentalists and people with allergens are concerned about. We also have a range of products that are non-GMO certified and most of our products are kosher and/or halal certified.
Finally, but probably most importantly, everything that can be Fairtrade-certified is. So our sugar is coming from Malawi… the vanilla from Madagascar, the almonds from Pakistan. We know where they are coming from and about the farmers that are supplying them.
There is a sense that the mainstream market is driving interest through innovation… but they are not responding to the increased interest in both provenance and health. In the long term, it begs the question, is this delivering sustainable growth?
j-f: Farmer ownership differentiates you from mainstream chocolate makers. Does the merger of the US and UK business water down farmer co-operative Kuapa Kokoo's stake?
Tranchell: No. Kuapa Kokoo has a very significant scale of ownership of something that is more valuable. They are the largest shareholder. Directors appointed by shareholders sit on our board and there are two people appointed by Kuapa Kokoo. The representatives of the farmers get complete transparency, they are influencing strategy and have an ability to call us to account.
In the UK, the business model has not only delivered the Fairtrade premium for every tonne of cocoa bought, but also invested 2% of our turnover in a programme that we call Producer Support and Development… The American company has not been able to do that up until now because it hasn't been profitable. This year will be the first year that we put 1% of US turnover into producer support and development.
j-f: Given concern over the stability of cocoa supply, does your farmer ownership provide an operational advantage?
Tranchell: I think that gives us a more secure supply chain. It is a completely traceable and I think it is more sustainable. If there is a real crisis in cocoa then it’s going to be problematic for everybody… The emphasis that we have been making is that it is incumbent on the chocolate industry to make cocoa farming worthwhile. Cocoa farmers need to earn a better income so that the next generation takes it up… The rest of the chocolate industry has been very concerned about there not being enough cocoa going forward and their focus has been increasing yield – but this is not necessarily increasing farmer income.
j-f: Do you see the US as your biggest growth opportunity?
Tranchell: I think it is because we are at an earlier stage, it is a very big chocolate market and people like the flavour of Divine. We are seeing growth at more than 20% this year in America. We have been operating in Britain for much longer, and retail in Britain is facing a much more challenging time.
j-f: Can you sustain that growth rate in the US?
Tranchell: Yes I think we can for a while.
j-f: How does the UK compare?
Tranchell: UK retail is much more challenging: 60% of all chocolate sales go through the five major multiples, and all of the multiples are having a challenging time. I think their response is interesting. We are seeing some of them reducing consumer choice and others are increasing their range to demonstrate their premium chocolate credentials. When they chose to do that, we have a really good range to offer.
We are seeing really good sales in places like Waitrose. Recently our all-year-round products have come out of Tesco and Sainsbury's, which is disappointing but the situation is always changing… We are building our sales in the places that view us as an asset and we are exploring new flavours and ingredients. We are enhancing our offer at key chocolate occasions like Christmas, Valentine's and Easter. Our range this Easter was our biggest ever, and we partnered with Aardman Animations, to create the Shaun the Sheep Easter egg.
j-f: Can Divine bring something to the chocolate category that would enable retailers to build the sector rather than the value destruction we are seeing at the moment?
Tranchell: I think so. The story we are telling explains why you would value this product enough to pay for it. Certainly that has been our experience in Waitrose – but it is a store that talks clearly about provenance. You can put a value on provenance. I think it would be interesting if, for example, Tesco did go in that direction. As a retailer if you want premium chocolate offer to be compelling and distinctive, you need to be offering an interesting choice… The decision to reduce choice and to run really deep and constant promotions has affected the value of the premium chocolate category.
j-f: Are you developing your seasonal offering in the US and UK?
Tranchell: Bars are very much our flagship product. However Christmas and Easter are fantastic opportunities for people to trial our product in a different format… Our UK seasonal business is more developed. It’s quite challenging doing seasonal ranges in America because most of our manufacturing is happening in Europe. It takes a month to get things from Europe to America. That said, we are growing our seasonal offer in the US. We have been doing two or four limited edition bars for Christmas. We have done all sorts of special flavours, such as Christmas cookies.
j-f: Would you ever look at moving production to the US?
Tranchell: We have a long-term relationship with our base chocolate manufacturer in Germany who has really supported our growth. The quality of our chocolate is down to them and they have been key to our new product development. That relationship is valuable. In the future it would be interesting to look at some new directions for our chocolate, for example making more novelty items, and whether that would make sense to make those in America so you were shipping less "air" around the world.
j-f: You have distribution in other markets too. Which ones are doing well for you?
Tranchell: We have been working for a long time with a Fairtrade distributor in Sweden and we are seeing really nice growth there. We are also working with distributors in Norway, Holland, and South Korea where it has been quite challenging. Particularly in Holland, Fairtrade has reached an unusual stage – they were the first market doing Fairtrade, there are a lot of products, including a lot of chocolate products – so that market is harder work. We can see that, from a very low base, our sales in places like Australia and Japan are growing nicely. Through some of our UK customers who are international distributors we are seeing more Divine presence in what I would class as international cities like Hong Kong and Dubai.
j-f: Are you also looking to expand in other international markets?
Tranchell: We are in the process of completing a five-year strategy, which will include how we approach which export territories. In that strategy we will look to see if there are other territories that we would like to enter. We recognise that that is an opportunity but at the moment we are supporting places where we have good sales. It is very encouraging to see that a desire for fairer trade is spreading around the world, and presents a fantastic opportunity for us.
