Grow Your Business, Not Your Inbox
Don't mess with Warren Buffett's chocolate.
Improbably, the Oracle of Omaha, who might not be blamed if he said he had more important things to do, finds himself enmeshed in one of the odder food fights of late-a regulatory dustup over whether the traditional standards for making chocolate in the United States ought to be changed. It revolves around the question of whether a simple and elegant ingredient known as cocoa butter, which gives chocolate its creamy smoothness and texture, can be replaced, at least in part, by cheaper ingredients.
The disagreement involves the Food and Drug Administration, the federal arbiter of food standards, and has pitted mass candy manufacturers such as Hershey and Nestl? against smaller, higher-end chocolate makers such as 139-year-old Guittard Chocolate and See's Candies.
To detractors of the proposed change, what's at stake is the very future of the nation's chocolate industry and its $16.3 billion in annual sales. Buffett's interest is certainly pecuniary. His holding company, Berkshire Hathaway, got into the chocolate business when it bought See's, an old-line San Francisco Bay Area chocolate maker, for $25 million in 1972. Given that See's sales, these days more than $300 million annually, depend largely on the company's reputation for quality, there are no plans to mess with any formulas, Buffett says. "If you've got recipes that people like, you don't change them."
Meanwhile, supporters of the move suggest high-end chocolatiers are overreacting. "I don't think there's any cause for alarm," says Robert Earl, senior director of nutrition policy for the Grocery Manufacturers Association, a trade group that represents some of the big chocolate makers and has been pushing for the change. "Nothing is mandatory. The language regarding chocolate is just descriptive."
Here's the issue: For as long as chocolate has been made, it's been smoothed out with the elixir called cocoa butter, an emulsified form of cacao that gives the finished product its silky texture. In the United States, the F.D.A. mandates that a product can't legally be labeled as chocolate unless cocoa butter is part of the formula. But because of a drought and political violence in Ivory Coast, a major source for cacao beans, the price of cocoa butter has skyrocketed. This has prompted some of the major chocolate makers, Hershey among them, to lobby the F.D.A. by way of a trade-group petition for a change that would let them substitute such cheaper ingredients as vegetable oil and dried milk for cocoa butter and still call their products chocolate.
Complicating matters is a dramatic shift in the chocolate market. Since 2001, sales of premium chocolate have climbed 129 percent, while at some large manufacturers, sales of mass-produced chocolate have declined. During the first six months of 2007, Hershey's earnings dropped to $97 million, compared with $220.4 million in the same period of 2006. Mix in the sharp spike in cocoa-butter prices, and big chocolate makers have found themselves in a jam. Earlier this year, Hershey announced plans to shut down at least three of its 17 plants in the U.S. and lay off thousands of workers.
But many of the smaller chocolate makers see the effort to replace cocoa butter as a ploy that would allow the major companies to cut costs without risking their reputation-or sales. And that, the smaller companies argue, would not only mislead consumers but also give mass chocolate makers an unfair advantage.
The potential savings are substantial. By substituting other vegetable fats, chocolate makers could shave at least 50 cents a pound off the cost of producing their candy, estimates Fabrizio Parini, vice president of marketing for Ghirardelli Chocolate, which opposes the change.
Furthermore, premium-chocolate makers fret that the change could spark a consumer revolt against all chocolate. "It would be like saying margarine spreads could be called butter," says Brad Kinstler, See's chief executive, who's decked out in a white lab coat and matching hairnet as he gives me a tour of his South San Francisco plant. A glimpse at the production line helps explain why See's charges a premium for its candies: Workers are painstakingly painting chocolate onto caramel-almond chews that are moving along a conveyor belt toward a cooling tunnel.
The cocoa-butter controversy began in October 2006 at a Washington board meeting of the Chocolate Manufacturers Association, a trade group dominated by the biggest names in chocolate: Hershey, Nestl?, Mars, and Archer Daniels Midland. The board was considering whether to support the Grocery Manufacturers Association, which includes some chocolate makers, in petitioning the F.D.A. to update U.S. food standards. The grocery manufacturers group, which happens to be chaired by former Hershey C.E.O. Richard Lenny, routinely submits such petitions when changes in food science demand it. But deep within the fine print of the document-in the last section of a 12-page appendix-lurked the clause allowing the cocoa-butter substitution. Most small chocolate makers were absent from the meeting, and there was no vote on the petition.
Gary Guittard, a member of the Chocolate Manufacturers Association and the owner of Guittard Chocolate, a boutique chocolate company started in 1868 by his great-grandfather in Burlingame, California, had been digging into the petition's fine print when the phone rang. It was a Chocolate Manufacturers Association representative, who was polling members on the proposed F.D.A. standards. Guittard voiced objections to the cocoa-butter clause, but a few weeks later, the chocolate trade group announced its support for the petition-including the cocoa-butter swap.
"The phone vote was weird," the 60-year-old Guittard recalls, speaking from his desk in the same brown office his chocolate-making predecessors occupied in the 19th century. Guittard swung into action, conducting his own informal poll of premium-chocolate makers and their allies, alerting them to what he saw as a threat. Soon they banded together and created a website, DontMessWithOurChocolate.com. They denounced the proposed change as a "mockolate conspiracy" and bombarded the F.D.A. with protest letters and emails. As a result, the F.D.A. extended the public comment period and said it wouldn't be deciding anytime soon.
Major industry players don't want to talk about this, though Mars broke ranks with other big makers and recently came out against the change. Archer Daniels Midland and Nestl? would not comment specifically on the debate, and a Hershey spokesperson deflected comment to the Grocery Manufacturers Association.
Meanwhile, the fracas has created strange bedfellows. With the growth in premium-chocolate sales, some big chocolate makers have been trying to cash in by investing in boutique candymakers. Hershey, for example, recently spent $46.6 million to buy premium chocolatier Scharffen Berger. When I spoke to Ray Major, master chocolate maker at Scharffen Berger, he said adamantly, "We won't be changing our chocolate." He then invited me to come by Scharffen Berger's factory in Berkeley, California-subject to approval from his new parent company.
Ten minutes later, Hershey's press office called to rescind the invitation.Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.