LONDON - An assumption that chocolate is a recession-proof treat that consumers continue to buy despite the grim economic outlook was proven wrong on Thursday by the sharpest fall on record in Europe's quarterly cocoa grind - an indicator of demand.
Analysts said worsening economic conditions in the euro zone had prompted a sharp slowdown in European demand for chocolate, and the outlook could deteriorate further if the crisis deepens.
The Brussels-based European Cocoa Association (ECA) reported that Europe's second-quarter cocoa grind tumbled 17.8 percent from the same period last year to 292,551 tonnes, far worse than even the most pessimistic predictions of a fall of up to 12 percent.
"We think the current slowdown in grindings reflects worsening economic conditions in the euro area. If contagion spreads to Spain and Italy, this would have undoubtedly an impact on demand for indulgence products like chocolate," said Francisco Redruello, senior food analyst at Euromonitor International.
In Switzerland, the world's top chocolate consumer, domestic chocolate consumption dropped about 8 percent by volume in the first four months of the year, said Franz Schmid, managing director of the association of Swiss chocolate manufacturers Chocosuisse.
Swiss chocolate exports - of which around two thirds are destined for Europe - also fell about 12 percent in the January to April period. Schmid said the strong Swiss franc also had hurt exports.
In Germany, one of the world's largest chocolate consumers, retail sales of chocolate bars by tonnes fell 7.3 percent on the year in the first four months of 2012, according to the association of German confectionery producers BDSI.
Following the grindings data, benchmark ICE September cocoa futures fell 5 percent to $2,177 per tonne 1516 GMT.
"It is by far the worst ever result in a quarter since the ECA began reporting these figures. It is reflecting the reality of the demand picture in Europe," said Javier Almela, head of cocoa purchasing at Spanish cocoa processor Natra Cacao.
In Spain, where unemployment is high and consumers are feeling the pinch, chocolate consumption is expected to suffer.
According to market research firm Mintel's June chocolate confectionary report, only 44 percent of Spaniards agree that chocolate is value for money, while 43 percent claim that they will cut back on purchasing chocolate if the value of their favourite bars rises.
"Given these responses it is not unreasonable to assume that consumers are likely to be cutting back on purchasing some forms of chocolate," said Marcia Mogelonsky, global food and drink analyst at Mintel.
Cocoa demand growth typically tracks GDP growth, and with many European countries in recession plus cocoa processing margins being squeezed, analysts had expected a negative grind number - just not of this magnitude.
Some are adjusting their global supply and demand balance sheet accordingly.
"This transforms a flat supply and demand picture into looking like a meaningful surplus for the year. We are now looking at a 2011/12 surplus of over 100,000 tonnes," said Jonathan Parkman, joint head of agriculture at broker Marex Spectron.
In May, the International Cocoa Organization (ICCO) forecast a 2011/12 global cocoa deficit of 43,000 tonnes.
Until now, growing global demand was attributed to strong cocoa powder demand from emerging markets including Brazil and China, but Parkman said the weak grind data throws this into question.
When cocoa beans are ground, they produce roughly equal parts of butter, which makes chocolate melt in the mouth, and powder, used to flavour products including cakes and biscuits.
"Everyone is aware that powder demand has been holding grindings up and yes margins were negative, and that's what caused this slowdown in grindings, but the European grind also suggests the powder demand story has been exaggerated. Powder demand certainly doesn't seem to be growing," said Parkman.
(editing by Jane Baird)