Gloucestershire University

Theo chocolate case analysis

CASE OF SUSTAINABLE CHOCOLATE PRODUCER

AUTHOR: PHAM THI HONG NHUNG

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[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013

Table of Contents
EXECUTIVE SUMMARY ........................................................................................................................ 2 I. II. 2.1 2.2 2.3 III. 3.1 3.2 3.3 3.4 IV. 4.1 CASE BRIEF ....................................................................................................................................... 3 INTRODUCTION........................................................................................................................... 5 Statement of problem: .................................................................................................................. 5 Research aim and objectives ........................................................................................................ 5 Report structure............................................................................................................................ 5 CASE PROBLEM STATEMENT, LITERATURE REVIEW AND PLAN OF ANALYSIS.. 7 Case problem statement: .............................................................................................................. 7 Literature review .......................................................................................................................... 7 Plan of analysis ............................................................................................................................ 8 Sources of data ............................................................................................................................. 9 FINDINGS AND ANALYSIS ...................................................................................................... 10 External analysis: ...................................................................................................................... 10 Porters five forces model: .................................................................................................. 10

4.1.1 4.2

Internal analysis: ....................................................................................................................... 11 SWOT analysis: .................................................................................................................. 11

4.2.1

4.2.2 Strategy analysis & current market position evaluation: ........................................................... 14 V. VI. RECOMMENDATIONS .................................................................................................................. 16 CONCLUSION: ............................................................................................................................ 19

References .................................................................................................................................................. 20

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 EXECUTIVE SUMMARY Theo chocolate is a newly established chocolate manufacturer in the U.S with a differentiation strategy of providing high quality chocolate that made from organic raw materials and fair trade to farmers. After few years of operation and innovative marketing, Theo chocolate has gained some initial successes and established their brand name to certain number of consumers. However, the company is yet to gain strong profit. Hence, the company leaders are at the point where they have to decide whether to keep holding on to their core value or to compromise at some level in order to be more price competitive. This current report shall investigate the case of Theo chocolate using internal analysis (SWOT and strategy analysis) as well as external analysis (Five forces model) to evaluate the benefits and challenges Theo is facing in pursuing this strategy. Upon analyzing, recommendations on how Theo could improve their current market positions shall be made.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 I. CASE BRIEF

Most organizations are nowadays facing many challenges such as market saturation, fierce competition, high market volatility, rapid advancement in technologies or rapid changing consumer demands etc. All these factors impose numerous difficulties on organizations in almost every industry to survive and make profits. As the profit pool shrunk, each company tries to outperform their competitors in order to grab a greater market share and compete fiercely for profits. This is what experts call a red ocean that businesses are desperately competing against each other. In such market condition, many organizations decided to move away from the existing red ocean and approach untapped market space and demand where there is no such fierce competition and there is higher opportunity for making strong returns. Theo Chocolate was started by Joe Whinney in Seattle in 2006 with its name inspired from Theobroma Cacao, a Greek word means Gods food. Theo Chocolate was established based on the vision of creating an environmental friendly chocolate and fair trade to farmer. Joes vision is to create a business model similar to Starbucks, the difference is green chocolate instead of coffee. Joe was also ambitious to educate US consumers to care more about environmental protection and fair trade which will also be building block for Theos long term success. After several years of operation, Theo recognized that they have not been able to shift consumers preference, in fact their customers are a defined group of well-educated individuals whom care about environmental and fair trade and the business has not been gaining profit either. Theo Chocolate continues to build up on their production and strengthen their marketing activities such as welcoming consumers to visit their chocolate factory tours or opening courses that teach chocolate related topics. These changes in marketing strategies clearly improve Theos performance in terms of increasing consumers awareness about their products. Theo has several distribution channels such as wholesale distributor, sales broker or direct retail stores. However, after 3 years of operations with positive improvements Theo is at the cross-road of facing the decision whether to continue preserving their value or compromise their value at some level and start making profit. Clearly this is an interesting case of an innovative organization which tries to captivate a niche market with their idea and is facing challenges in implementing. In the time when the traditional market place is saturated and profit pool is highly shrunk and organizations are

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 trying to captivate new market as present Theo Chocolate case is absolutely a useful lesson. By identifying Theos current market position, their strengths, weaknesses, opportunities and where the business struggles in pursuing this idea is a valuable lesson for all business.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 II. INTRODUCTION 2.1 Statement of problem: Presently, competition in most industry is intensifying thus organizations must develop more new and innovative idea in order to survive the competition. Especially when globalization is emerging and many merger and acquisitions are undertaken. It means, competitors for organization are now getting larger and many of them come from foreign countries as well. It is undeniable that the present is harder than ever for companies to sustain their competitive advantages. Thus many organization realized the need to explore new market and develop their business in that new market/market segment where competitors foot prints are few or even none has been there yet. Theo Chocolate has recognized their blue ocean where competitors are few and there are opportunities to make profit and that is the environmental friendly and fair trade chocolate. However, in the process of implementing this business idea, Theo faces numerous difficulties at the same time of gaining certain successes. Thus analyzing the case of Theo Chocolate will give us a valuable lesson for any business in the hard time at the present. 2.2 Research aim and objectives The main aim of this report is to evaluate current market position of Theo Chocolate and to investigate the opportunities as well as challenges posed to organization when they choose to operate in niche market. In order to achieve this main aim, this report will investigate the case of Theo Chocolate in great depth and from both external and internal perspective. In order to support findings this report will use several analysis tools such as Porters five forces model, PESTEL analysis, SWOT and organizational strategy analysis. Upon gaining a comprehensive of the firm current position, recommendations on how to improve the current position shall be made. 2.3 Report structure This report shall be structured chapter by chapter. Chapter I is briefly identify the background of this report. In this chapter the importance of why this research should be conducted is disclosed.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 Chapter II is the introduction of this research. This chapter includes problem statement, research aim and objective as well as research structure. Chapter III includes a statement of problem in the case, literature review of tool employed in the report, plan of analysis and data sources details. Chapter IV presents the full assessment of the case study Chapter V provides recommendations from author on how organization could improve on their strategy and current position. Chapter VI presents the conclusion of the study.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 III. CASE PROBLEM STATEMENT, LITERATURE REVIEW AND PLAN OF ANALYSIS 3.1 Case problem statement: Theo Chocolate joined the chocolate industry in 2006 positioned their business base as a socially responsible and sustainable business practice. Their proposition value is a company produces chocolate using sustainable ingredient and fair trade to suppliers. Theo Chocolate is a late comer into the market when other giant competitors have been operating successfully such as Cadbury, Hershey, Nestle and Mars. Thus, the company chose to target at a specified segment in the market which is the eco-friendly and fair trade chocolate. Its vision is to change the way American think about chocolate and sustainability. However, it turned out its vision was a tall order. It occurred that only a segment of consumers (high education, below 40 & conscious about environment) are willing to pay higher for chocolate with sustainability and socially responsible label. Besides, Theo is also finding them facing challenges in keeping the business profitable at the same time with keeping its value proposition. The organization after few years of operation is at a cross-road and they are facing the decision whether to continue to try and keep their value or to compromise that value in order to stay profitable. Clearly, Theo Chocolate is facing issues in approaching a niche market. This issue sometimes occurs to niche market strategy when organization grows quickly and needs to expand. The problem is niche market as its name indicated is only a segment within the general market with limited consumers. Thus after sometimes of operation, organization will have to come up with solutions to increase their customer base and profits. The issue Theo Chocolate is facing is also an established issue recorded in temporary management literature and it is an important topic to investigate as we all know that the existing market is now saturated for all most every industry, organizations are striving to seek out untapped market segments that makes this topic worth studying. 3.2 Literature review An analysis is only insightful if it analyzes from different dimensions and that analysis should be accompanied by relevant analysis tools. There are around 72 essential analysis tools which researchers tend to use to assist with their work, some are more common than others namely

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 SWOT, Porter five foces model, value chain analysis, PESTEL, balanced score-card, strategy analysis etc (Downey 2007). As the current research has certain limitations on size and resources thus only most relevant tools will be used for analyzing which are SWOT, Five forces and strategy analysis. SWOT analysis as its names abbreviates analyzes strengths, weaknesses, opportunities and threats of an organization (Fine (2009). SWOT analysis is actually both an external and internal analysis as opportunities and threats are in fact external point of view however this tool is more commonly used as an internal analysis (Cadle et al 2010). In this case SWOT would be relevant and useful to identify Theo Chocolate current position. Furthermore, more insightful into internal environment of an organization could be obtained by using strategy analysis. Organizational strategy is absolutely important factor that influences its success or failure thus it is vital for researcher to investigate it (David & Dess 2003). In terms of external analysis, perhaps Porters five forces model is one of the most well -known framework. This model assists researcher in analyzing the external environment of a company in five important dimensions which are threat of new entrants, bargaining power of buyer, bargaining power of supplier, threat of substitution and rivalry as according to Porter (2004). In conducting this analysis, researcher should have a clear understanding of the industry Theo Chocolate is operating in and how these factors might affect Theo Chocolate market position. Another essential tool in analyzing external environment is PESTEL analysis. PESTEL basically stands for political, economic, social, environmental and legal aspects which might influence an organization (Roger 1999). 3.3 Plan of analysis This report will analyze Theo Chocolate case using external and internal analysis: External analysis: analyzing the external environment Theo is operating in. It would be the U.S chocolate industry and more specifically the sustainable chocolate producer segment. Porter five forces model and PESTEL shall be employed to accomplish this task.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 Internal analysis: a SWOT analysis will be conducted to identify strengths, weaknesses, opportunities and threats they are facing. Strategy analysis: analyzes the strategy/strategies Theo are leading, what have they done successfully and what are the issues with their strategies. Upon completion of analysis, author will also propose recommendations on what organization should adopt to improve their current position. 3.4 Sources of data This study will be using secondary data such as journals, e-journal, books, from reliable databases (Ebcohost, Central Quest, Sage public and Emerald). Besides, newspaper, and other web-based sources will be employed as well.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 IV. FINDINGS AND ANALYSIS 4.1 External analysis: 4.1.1 a. Barrier to entry: Barrier to entry in chocolate industry in US is at medium level. New entrant is required a certain amount of capital to set up factory for production and opening at least one retail stores. There are also cost for raw materials and machinery to facilitate production. Besides, chocolate producers must also comply with certain regulation in terms of health and safety for food products. Threat of substitutes: Substitutions for Theo chocolate are categorized into two types which are general substitutes and specific substitutes. In terms of general substitutes there are quite many options consumers might choose from such as other brand of chocolates like Mars, Hersheys, Nestle etc or other type of confectionery like candies or sweets. In terms of specific substitutes there is only few choices for sustainable chocolate product and fair trade like Theo at present. b. Bargaining power of buyer: There are two types of buyers, general chocolate buyers and specific chocolate buyers. General chocolate buyers do not pay much attention to environmental friendliness or fair trade of products, they only care for taste and price hence their bargaining power is high since there is a wide range of options to choose from with lower price. However, the specific buyers whom are conscious about sustainability will have low bargaining power since there are not many options to choose from besides Theo chocolate. c. Bargaining power of supplier: For Theo chocolate, they are very particular in selecting cocoa beans for production hence their bargaining power of supplier is slightly higher as they cannot just buy from any supplier. The suppliers they buy from must be reputable and must produce the most suitable quality to their choice. Porters five forces model:

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 d. Rivalry level: Rivalry level in US chocolate manufacture market is intense with reportedly 400 manufacturers whom produce 90% of chocolate consumed in US and other international giant producers such as Mars, Nestle, Hershey as well as foreign producer such as Ferrero of Italy or Nestle of Swizeland (Timothea 2013). It means Theo chocolate is facing intense competition from the industry. 4.2 Internal analysis: 4.2.1 a. Strengths: After several years of operation, Theo has created certain strengths. Firstly, it has developed a good reputation within the industry and clients. Secondly, they have developed a strong marketing and sales strategy. For instance, their successful marketing technique was to introduce the factory tour which turned into greater consumers brand awareness. Similarly they also developed courses and classes that teach consumers about goodness of chocolates or things people can do with chocolate. They have also clearly defined their distribution channels for sale which are food distributors, direct to retailers, co-packing arrangement and owned retail stores. These have been the right moves that helped Theo Chocolate to improve their market position. b. Weaknesses: As Theo chocolate promotes environmental protection they use green energy to manufacture as well as organic materials so their cost of production is higher than competitors. Green energy also requires high maintenance cost. When cost of production is high it increases the price of finished goods and currently Theo chocolate prices are above competitors price offer. This is a difficulty for Theo as they are a new comers and their brand awareness is still limited to majority of consumers. Besides, consumers have been consuming products that contain chemical to enhance flavor thus they might find Theo chocolate tastes to be rather plain. SWOT analysis:

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 c. Opportunities: There are new technology advancements that are possibly reduce the costs of using green energy which would help Theo chocolate to lower down their cost of production hence price of finished products. Furthermore, each year there are several holidays when chocolate is purchased a lot such as Thanksgiving, Halloween or Christmas which are opportunities for Theo to come up with innovative products and capitalize consumers interest as well as increasing consumers knowledge of their brand and goodness of organic chocolate. Besides, general public is getting more concern toward environmental friendly products and these products are getting high attention. Study showed that US citizens are getting more socially conscious with their purchase and prefer to buy from sustainable and organic source (KPMG 2012). Thus if Theo chocolate could keep up with their good marketing strategy they can get the attention they deserve in the near future. It is forecasted that demand for chocolate has not been decreased despite of the global recession and the demand for more innovative, differentiated products in chocolate market is expected to increase. Demand for chocolate products is expected to exceed 4.5 million ton in 2020. Hence, it is a strong opportunity for Theo to step up and strengthen their competitive market position. The chart below demonstrates the constant increase in revenue of chocolate industry through recession:

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013

(Source: KPMG 2012)

d. Threats: Apart from opportunities there are threats to Theo as well. Theo is operating in a low growth industry and competition level is increasing. Hence Theo will have to constantly be creative with their products and marketing strategies in order to compete. Besides, cocoa bean price is quite a volatile commodity. It has been recorded that this commodity had been through a 27 years of low price at only $714 per ton but also 32 years of high price at massive $3775 per ton (Fair Trade Foundation 2011). Currently the price appears to increase which might imposes additional difficulties for Theo in terms of keeping the cost of production low. Below is the graph illustrating the changes in Cocoa price in the last decade.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013

(Source: Fair Trade Foundation 2011)

4.2.2 Strategy analysis & current market position evaluation: It is clearly in the case that Theo Chocolate is pursuing a niche market strategy. Niche market strategy is a type of focus differentiation strategy which concentrates on serving specific needs and wants of a group of consumers (Dawn 2008). There are many benefits Theo Chocolate gains in approaching a niche market. Firstly, consumers in niche market demands specific products and if an organization offers the exact products would make it easier for them to pick it out from the mass-produced products offered by the main stream (Juliet 2006). Besides, as according to Maria and Susan (2001) consumers are willing to pay for a higher price for products that are labeled eco-friendly. It means, when Theo Chocolate targets this niche market segment which is smaller as requirements are more specific they earn profit by charging a higher premium in order to deliver products as consumers desire. Also, clearly in this niche market, competition Theo Chocolate faces is not as fierce as in the broad market so Theo Chocolate is likely to achieve the expert position within the segment and their brand recognized so when consumers think of that specific area, they would think of your brand (Juliet 2006). For instance, in the case study, there are few competitors to Theo Chocolate in the eco-friendly chocolate products segment, in fact it is claimed to be one of the pioneer in this area. Therefore, as time passes, if Theo Chocolate continues to accelerate they could be the name consumers always think of when it comes to eco-

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 friendly and fair-trade chocolate producers just as in the coffee industry, people would always think of Starbucks. Dawn (2008) also offered another insight is that in niche market, since ideal customers are identified, it is easier and less costly for Theo Chocolate marketing to reach out for these customers. In spite of all the benefits, there are issues Theo Chocolate must face as well. Clearly, o Theo Chocolate chooses to focus on certain group of consumers to avoid intensified competition within the market, however that does not guarantee that there is no one would try to imitate their difference and try to out-differentiate them and this is one of the challenge business such as Theo Chocolate has to face using their differentiation strategy as according to Jeff (2009). Another disadvantage suggested by Jeff (2009) is that in such market, when products are getting more familiar to the customers and more competitors coming into the picture, it is harder for organization to maintain the premium price. Consumers become smarter about what they buy and become less willing to accept premium price. All in all, focus strategy or targeting at a niche market would be a wonderful idea at the beginning however as business grow and the market segment grows difficulties will occur on how organization can expand their business while keeping its core value at the same time as keeping business profitable which is the situation Theo Chocolate is facing in the case.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 V. RECOMMENDATIONS

After several years of operation and gaining certain successes, Theo chocolate is currently facing an important decision whether to continue preserving their value or compromising their core value to compete in terms of price. It is recommended that Theo chocolate keep holding on to their core value of creating organic and fair trade chocolate product because that is their competitive advantage, once they compromise their value, they will lose this competitive position. Although, it will take Theo a while more to be profitable but the future seems positive. Below is the chart showing the increased in global organic and fair trade cocoa value in the last few years. Clearly, the demand for sustainable chocolate products is increasing and it is a great opportunity for Theo chocolate. Theo is leading on the right track, what they need is more time and some improvements in their sales and marketing strategy.

(Source: Fair Trade Foundation 2011) Clearly, the demand for sustainable chocolate products is increasing and it is a great opportunity for Theo chocolate. Theo is leading on the right track, what they need is more time and some improvements in their sales and marketing strategy. In order to increase profit, Theo is recommended to come up with more innovative packaging of their chocolate. As it has been demonstrated, there is a variety of chocolate products

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 currently being sold in the US. What makes Theo chocolate stands out on a shelf is packaging hence they should come up with more eye-catching package for their products. Besides, Theo emphasizes on their chocolate quality thus they could also market to consumers an innovative kind of package to persevere that quality, for instance a package that prevent chocolate from melting in hot weather. Theo is also recommended to create more robust marketing campaign that heavily emphasizes the social goodness of their chocolate as well as goodness for health. They should also use more social marketing tools, TV shows or marketing campaigns to create viral effects among consumers. They can target their marketing at young people, health concerned people and parents as either people who care about environment or health are likely to pay attention to Theos products. For instance, children would prefer sweeter chocolate but parents would choose ones with health benefits. Furthermore, it is a reality that many people who care about sustainability but disposable income is not in line with their belief. Hence, Theo chocolate should really consider increasing the ranges of their products. They should provide more choices for consumers if they are to target at larger consumer groups. Their products should have several price ranges and various sizes to facilitate with the financial aspects of consumers. For example, middle class consumers could purchase slightly lower price chocolate at Theo and lower class consumers could purchase a smaller size chocolate for the lower price. Besides, Theo chocolate currently offers fewer flavors compared to others. Therefore they should invest more in research and development to come up with more innovative flavors which again emphasizes their goodness of organic products. Also, at current trend, unusual flavor can get consumers excited for instance the combination of sweet and savory. However, for Theo, perhaps they should create more earthy flavors with earthier name for their products such as including herbs or flowers to create new flavors. They should as well research on enhancing flavor using natural process to compete with the tastes of other chocolate brands. Moreover, Theo chocolate needs to recognize their differences with Starbucks. Although as Theo chocolate belief Starbucks is successful due to using organic coffee and fair trade is

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 true but it is not the only factor. Starbucks is also successful for creating a coffee experience rather than just selling coffee and Starbucks offers a wide range of products besides coffee drinks. Another point is that chocolate is slightly different from coffee, people can drink more than a cup of coffee a day and even daily but chocolate consumption tend not to be that much. Thus, Theo chocolate also needs to create something more than just an organic and fair trade bar of chocolate, they need to create a chocolate experience or something with greater impact on consumers perspective. Lastly, Theo should have a future plan to cope with the potential of cocoa rising price since it will increase their cost of production and ultimately affecting their prices. Hence they should research and develop more methods to reduce costs of production in order to sustain their competitive advantage.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 VI. CONCLUSION:

In conclusion, Theo chocolate is an innovative organization which has recognized the market for organic and fair trade chocolate is in demand and taking approach to satisfy this demand. Theo chocolate has been operating for several years and has gain certain success in introducing their brand name to consumers however the company is still facing difficulties in terms of profit. The company is at a cross road of deciding whether to compromise their core value to solve financial issue or continue to preserve that value. Study showed that that there are great opportunities for Theo as demand for sustainable chocolate products increasing and consumers are getting more concerned about environment and health thus it is recommended that Theo continue to pursue their value because if they continue to do well they will be able to capitalize a strong market share since they are pioneer in this segment. However, in order to capitalize this opportunity Theo chocolate needs to invest more on creating a strong impact about their brand to consumers in terms of packaging, variety and innovative campaigns to reach out to more consumers. Besides, in order to change consumers perspective to care more about the environment would take time however the advantage of Theo is that they do not have to do it alone, the government and other organizations are also trying to educate consumers to care for sustainability. Hence, in long terms, Theo chocolate needs to focus on quality, variety and reaching out to more consumers for greater success.

[THEO CHOCOLATE CASE ANALYSIS] November 10, 2013 References Cadle J. & Paul D. and Turner P. 2010, Business Analysis Techniques: 72 Essential Tools for success, Business management, BCS The Chartered Institute for IT 2010. Dawn T. 2008, What are niche markets? What advantages they offer?, Western center for risk management and education, Colorado State University, United State of America. Dean M. and David A. 2009, Niche Marketing, Agrilife Extension, Texas A&A system, United State of America. Downey J. 2007, Strategic Analysis Tools, CIMA, Topic Gateway Series No.34, United Kingdom. Jeff B. 2009, Building and sustaining competitive advantage, Atlantic International University, Honolulu, Hawaii May 2009. Juliet A. 2006, 67 Surefire ways to attract clients, retrieved October 9th <www.julietaustin.com > KPMG 2012, The chocolate of tomorrow: What todays market can tell us about the future, Consumer market, KPMG LLP, UK . Faire Trade Foundation 2011, Fair trade and cocoa, Fair Trade Foundation, London, UK. Fine G.L. 2009, The SWOT Analysis, Kick It LLC. Maria L. and Susan H. 2001, Discovering Niche Market: A comparision of Consumer Willingness to pay for a Local (Colorado Grown), Organic and GMO-free product, American Agricultural Economics Association, United State of America. Timothea X. 2013, Chocolate industry analysis, Retrieved October 2013 2013 at

<http://smallbusiness.chron.com/chocolate-industry-analysis-69812.html> Porter M.E. 2004, Competitive strategy: techniques for analyzing industries and competitors. New York; London: Free Press.