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CASE: OB-50
DATE: 11/30/04

SCHARFFEN BERGER CHOCOLATE MAKER


(ABRIDGED)

op
yo

Both of us went into this without any preconceptions. We knew what we wanted to do, but didnt
know how to get there. We didnt have the money to say to suppliers, Heres $10 million, build
us a chocolate factory. And we were probably carried along a bit by our naivet. We didnt know
how difficult it was going to be. But both of us had a dream of doing something that was going to
be different from the products that were available.
Robert Steinberg, Co-Founder, Scharffen Berger Chocolate Maker1

On April 26, 2003, Scharffen Berger Chocolate Maker opened its second retail store in the newly
renovated San Francisco Ferry Building. It joined a number of other prestigious artisan food and
specialty retail shops at this prime location at the foot of San Franciscos Market Street. The
opening of this second store took place as Scharffen Berger was in the midst of rapid expansion.
The company had recently raised $4 million in its second round of funding, and it had been
growing at an average rate of 60 percent over the past five years.

No

tC

As the first new chocolate making company to open its doors in the U.S. in the last 50 years,
Scharffen Berger had achieved unprecedented success in an industry dominated by a handful of
large-scale producers. Since they first set up shop in 1996, the companys two foundersJohn
Scharffenberger and Robert Steinberggained national attention for their high-quality chocolate
produced with small-scale European artisanal methods. Through their dedication to quality,
Scharffen Berger became a media darling and an important player in the burgeoning gourmet
chocolate industry. Maintaining its carefully developed reputation for quality while expanding
production capabilities was likely to be a key issue for the company as it continued to grow.
FOUNDERS BACKGROUND
The seeds of Scharffen Berger began in May 1989. Robert Steinberg had always been interested
in fine food, and his general culinary interests turned towards chocolate after a casual
conversation with a friend, Bob Voorhees, in 1994. Bob Voorhees, a restaurateur and coffee
Bernard Pacyniak, Doctor, Vintner Turned Chocolate Makers, Candy Industry, November 2001, p. 31.

Do

This case is an abridged version of Scharffen Berger Chocolate Maker, GSB No. OB-46, written by Greta Hsu and Professor
Michael T. Hannan at Stanford Graduate School of Business as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation.

Copyright 2004 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or
request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing
Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of
this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any
means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate
School of Business.

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roaster, believed that chocolate would be a perfect product focus for Steinberg, given his
background in food and science and the scientific complexity of making chocolate. Steinberg
recounted, Bob loaned me a textbook on chocolate manufacturing, and I became excited almost
immediately. Before opening that book I had never thought about how chocolate was made. Id
never even cooked with it, so it was like venturing into an entirely new world.2

Steinberg became very interested in making his own chocolate, but he needed some practical
experience, so he wrote to Bernachon, a small family-owned chocolate maker in Lyon, France, to
ask whether it would be possible to work with them for a short time. To his surprise, Bernachon
agreed, and Steinberg was able to experience first-hand how chocolate was made on a small
scale. After this two-week apprenticeship, Steinberg began to think seriously about making
chocolate in the U.S.

op
yo

He discussed this project with John Scharffenberger, a friend with similar interests in food as
well as considerable experience in business, food technology, and agriculture. Scharffenberger
had previously founded a sparking wine company, Scharffenberger Cellars. The inspiration for
creating his own wine company began when Scharffenberger noted the mediocre quality of many
domestic sparkling wines during a tasting of Champagne and sparkling wines. He created
Scharffenberger Cellars with the idea of producing a product that could compete with French
offerings. His company was a critical and commercial success; he sold it to LVMH Moet
Hennessey Louis Vuitton in 1995.

tC

When Steinberg approached him for advice in 1996, Scharffenberger quickly recognized an
opportunity. None of the small number of producers making chocolate in the U.S. were
delivering a product whose quality compared favorably with European imports. Scharffenberger
noted: It seemed to me at the time that chocolate was in the same position that sparkling wine
was in when I first started in the business.3 He also believed that the growing acceptance of
artisan-made products such as cheese, bread, wine, and beer would help ensure a receptive
audience for high-quality artisan chocolate.

No

In the fall of 1996, Steinberg traveled to Venezuela to tour cacao plantations. He began a
working relationship with a small company that grew and exported cacao beans. After
purchasing beans, the founders headed for the kitchen and, through trial-and-error, eventually
settled on a chocolate recipe that yielded the flavor and consistency they wanted. By May 1997,
the founders were ready to begin making chocolate on a small mass-production scale. They had
developed a formula and process that they believed would result in a chocolate superior to
anything offered by other American producers. What remained to be seen was whether
American consumers would prove receptive to their particular brand of chocolate and whether
they would be able to establish a foothold in this intensely competitive market.

Do

SCHARFFEN BERGER CHOCOLATE MAKER


Early Decisions
Scharffen Berger began in 1996 in the midst of this dynamic and increasingly competitive
environment. From the beginning, Scharffenberger and Steinberg decided they would focus on

2
3

Pacyniak, op cit., p. 30.

Ibid., p. 1.

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dark chocolate. On a personal level, both founders preferred the taste of dark chocolate. This
was important, since a key goal for both founders was to make the kind of chocolate they would
themselves enjoy. Dark chocolate also represented the type of product and market to which the
founders wanted to appeal. Scharffenberger and Steinberg were interested in connecting with
consumers who appreciated the sophisticated and intense flavor of high-quality European dark
chocolates. Scharffenberger noted, When we started, the [American] chocolate industry was
where the coffee industry was 15 years ago. Nobody was making European-style espresso
because the prevailing belief was that Americans did not like strongly flavored products.4
With a $150,000 initial investment, the founders selected various pieces of used equipment with
a particular bent for vintage European pieces that reflected Steinbergs Bernachon experience.
Steinberg reflected on the factors shaping the acquisition of equipment:

No

tC

op
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The experience that I got at Bernachon really influenced what we ultimately did.
We had these constraints, and this was pretty early in the company. One was
financial. To get this machinery was prohibitive. The other one was size because
theres been so much consolidation in the chocolate industry over time, most of
the machines that are being produced are much larger than the ones we use.
There are smaller machines but theyre kind of like laboratory machines, almost.
The first thing that John and I did together was go to an equipment show in
Germany. I think we were a little bit discouraged because it was all these new
equipment dealers, but I ran into a used equipment dealer that I had actually met
earlier. He had a warehouse in the Bronx and I had visited this warehouse. He
was there trying to gather equipment from Europe and showing things and trying
to sell his equipment. He had a little booth. I just kind of passed him and I said
Hi, and he said, Well, let me just show you some stuff that I have. We were
flipping through this book and we saw a picture, which was an exact replica of
one of the machines that I had used at Bernachon. In the spirit of what we were
doing at that time, which I think was sort of acting first and thinking later, I said,
John, we have to get this machine. Part of the reason was that I knew how to
use it. I didnt know specifically why Bernachon was using it. Im not even sure
that they know other than its what they have been doing. When I say know, I
mean, if you use this machine versus that machine, would you get a better or
different product? But the other reason was that it was the machine that I think
more than any other [was] responsible for capturing my imagination and attention
about chocolate making. Its this open granite millthe melanger.... So I said,
we have to get that. As it turned out, and we only were able to kind of do some
experiments later on, I think that theres no question that using that machine
makes a difference in the flavor of the chocolate in a positive sense.

Do

Scharffenberger and Steinberg rented out two small industrial spaces (5,000 sq. ft. total) to house
their equipment. They then continued their trial-and-error method using a small mass-production
process, eventually settling on the flavor and consistency they wanted. The company started by
selling wholesale bulk chocolate only to restaurants and bakeries, believing that their strong dark
chocolate would appeal mostly to chefs and bakers. Scharffenberger had numerous contacts in
the food industry from his experience in sparkling wine and was able to quickly sign up with two
local foodservice distributors. Scharffenberger also focused on exposing the companys
4

Charity Ferreira, Best of the West: Innovators Raising the Bar, Sunset, November 2002, p. 14.

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chocolate to pastry chefs and others in the foodservice sector. Jan Leigner, the companys sales
operation manager, noted:
John, very fortunately, brings a level of celebrity and contact all his own in the
food business to the table, with his name. His name is a brand. His name was a
brand before this company. At the onset, because of that and some other
connections that John and Robert together had, they were able to get the very first
batches of chocolate into the hands of people like Julia Child and Jacques Ppin
who gave it the thumbs up. And that really gets you off the ground in pretty good
fashion.

op
yo

While both founders believed that their product would appeal to professionals within the
foodservice sector, they were surprised to discover that their chocolate had appeal among nonprofessional consumers. We underestimated peoples tastes and their acceptance of a wellmade, smooth, and intensely flavored dark chocolate, noted Scharffenberger.5 He recalled how,
early on, he had gone to a San Francisco farmers market with about 100 of their candy bars and
sold out within an hour. Later that same year, Scharffen Berger began providing bulk chocolate
to retailers. Despite the founders expectation that their products would sell primarily in the
foodservice sector, the converse turned out to be true. For example, their sales in 2001 broke
down into 30 percent foodservice, 70 percent retail.6

tC

John Scharffenbergers reputation also helped attract retailers to sell their products. Dennis
Garcia, owner of JJ&F Food Store in Palo Alto, CA recalled that he first chose to sell their
products in 1997 because: I knew how well [Scharffenberger did] in the wine industry... their
sparkling wine was as good as any in California. And I just knew that when they set out to
accomplish something, they do their homework, and they do it right. Garcia was also
influenced by the companys use of European equipment to manufacture its chocolate:
Knowing that they had gone to, I believe it was Germany, to buy all this chocolate equipment to
start out, I knew that they were going to have a superior product.

Do

No

Sales and awareness of Scharffen Berger grew rapidly, in large part due to the considerable
exposure that the company enjoyed in the media. Articles about the company appeared in The
New York Times, SF Chronicle, Bon Appetit, Food Art, W, Fine Cooking, Wine Spectator, and
Forbes, among others, as well as on television programs such as The Today Show and various
Food Network programs. Much of this media attention could be attributed to the companys
openness about their operations. The companys PR representative, Deborah Kwan (VP of SFbased Magnet Communications), noted that much of her early efforts were targeted at educating
the media on the companys chocolate-making process.7 In an industry in which most producers
were extremely secretive about their operations, Scharffen Bergers founders were
uncharacteristically willing to open up their doors and share their manufacturing process with
their public. The founders believed that allowing people to actually see and understand the
chocolate making process would help them in generating interest and demand for their product.
Scharffenberger reflected:

5
6

Pacyniak, op. cit., p. 34.

Ibid., p. 34.
7
The Right Ingredients Make for Tasty PR, PR statement, Vorhaus Public Relations, January 29, 2001.

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The fact that we opened the factory up so completely, allowing people from
newspapers, magazines, and television to see how chocolate is made, helped. It
enabled us to demonstrate how excited we were about what we were doing. It
helped people to understand how much care was taken to make our chocolate,
giving them a better appreciation for the product. This was our way of getting our
message out, differentiating from the mainstream.8
Strategy: Quality Focus

op
yo

The company also differentiated itself from mainstream American chocolate manufacturers
through its commitment to producing an intensely flavored dark chocolate. Scharffenberger
described their approach as flavor-oriented. From the very start, the founders believed that
they could produce a chocolate superior in taste to any other U.S.-manufactured chocolate by
focusing on the quality and flavor of their cacao beans. They devoted a great deal of attention to
selecting beans whose flavor and acidity would blend together to make a chocolate with intense
flavor.
Scharffenbergers prior experience in the sparkling wine industry proved useful in helping to
determine the specific blend of beans that would result in the right flavor. He noted that the
artisan aspects of making chocolate were very similar to those involved in sparkling wine
production: Were very scrupulous about the beans and how we blend them, very much like
wine. Everything is small-batch roasted and blended to taste, not to some formula, like the
industrialized chocolates made in America.9 Scharffenberger also found that many wine-tasting
terms could usefully be applied to chocolates. Consider, for example, a company press statement
describing its chocolate: The Scharffen Berger blend results in a chocolate that, like a fine wine,
possesses a complexity, a distinct fruitiness, balance, intense flavor, and lingering finish.

No

tC

In searching for the perfect blend, the founders personally selected cacao beans from plantations
around the world. They purchased a wide variety of beans to use in their chocolates. For
example, in 2001, the company bought 12 different types of beans, with the bulk of its products
coming from seven types, most of which originated in Venezuela, the Dominican Republic,
Ghana, Malaysia, and Sulawesi. Because taste was the companys priority in selecting beans, the
founders consistently paid above-market prices to secure the right beans.10

Do

Scharffenberger and Steinberg also devoted extra resources to the processing of their beans. For
example, the company roasted each variety of bean separatelya costly and time-consuming
process that many other chocolate makers chose to avoid, instead roasting all of their beans
together in one batch. Although it requires extra resources, this procedure allows chocolate
makers to tailor the roasting process to elicit the best qualities from each variety. With other
ingredients, Scharffenberger and Steinberg also took care to select high-quality products that
would enhance the flavor and texture of their chocolate. They blended their cacao with wholebean Madagascar and Tahitian vanilla, pure large crystal sugar, and a small amount of lecithin (a
soy emulsifier). Steinberg noted:
Something that we do that is somewhat unusual is using whole vanilla beans, but
when I was first learning about this process in France in 1995, this was before

Pacyniak, op cit., p. 32.


Gugino, op cit.
10
Sampson, op cit., p. 26.
9

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Scharffen Berger existed, they were using whole vanilla beans as well. We
started doing that just as a matter of course, but I think Ive come to understand
the rationale for using the basic product. I dont think I understood at the time
that I was in France. It just seemed like this luxury, in a sense. It was like, OK,
you could have used powdered vanilla. But what I have come to understand after
spending time just looking at the range of quality in vanilla is that its huge, and
when theyre making this powdered vanilla, Im sure that their mixing quality is
lower or they are using lower quality beans. So thats another part of it that
makes a difference.

The founders continued to follow the European tradition of manufacturing chocolate in small
batches. This allowed them to carefully monitor each of the different steps in the chocolate
making process and ensure greater consistency in taste and texture. As Ishikata noted:

tC

op
yo

Robert tastes every batch to this day and gives his immediate feedback. Hell say,
You know, there was something really exceptional about this bar. What did we
do? Between his feedback and Johns feedback and the interaction with our
chocolate maker, were able to pinpoint what was good about it. He might say,
Something is a little off there. Its fine, but its a little too acidic. Is there a
change in the recipe because a certain bean wasnt available? Thats how
consistency is maintained, basically, by tasting every single batch that comes in.
It goes down to every single batch of beans that are roasted and are tasted by the
roaster, and adjustments are made from the very beginning. So not only do you
make on an overall scale adjustments for the chocolate recipe, but you also make
adjustments on the beans, and youre basically breaking it down. In our case, I
think now there are eight or nine beans in one recipe, so you break it down into
eight or nine steps. Thats one of the reasons why it takes so long because we
actually try to extract the maximum amount out of each step. If it means taking
eight steps, were going to take eight steps, unfortunately, to do it.
Ishikata also encouraged careful attention to quality among employees within production:

No

Its important to do quality work, so we very rarely come down on somebody


because theyre working too slowly, because we stress that we want it to look
right and we want it to taste right.... Thats the kind of thing we try to engender
here. So we look for reliability, consistency, people that get what were here for.

Do

While Scharffenberger admitted this careful attention to quality resulted in margins that are
usually less than the margins that are typical, it appeared to pay off for the company. At JJ&F,
Garcia reported that, Scharffen Berger is outselling everything in the store right now... I think
the bottom line is just quality. You know the saying, the taste is in the pudding. All you have to
do is just taste it, and you can tell its superior from anything else on the shelf. You know,
Nestles has been in the business for years, and Ghiradelli has been in the business for years, but
I mean, its definitely a step up. And I would say, like, five steps up!
EXPANSION: FINDING A NEW FACTORY

The companys flavor-centered approach struck a chord with American consumers, and sales of
Scharffen Berger chocolates jumped 83 percent from 1998 to 1999. By the end of 1999, the

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company began looking for a larger facility that would allow them to increase production.
They eventually settled on a historic brick industrial structure in Berkeley built in 1906 by the
San Francisco Sulfur Company.

In converting the structure into a modern manufacturing plant, the founders were careful to retain
the historical look of the building, which housed 20-foot-high vaulted ceilings and thick, exposed
interior brick walls. This historic interior meshed well with their vintage European
manufacturing equipment. Scharffenberger also found their new location very appealing:
Berkeley is the ideal location for us since it has so many culinary landmarks... Its kind of a
cradle of culinary innovation.

op
yo

In May 2001, Scharffen Berger settled into their new factory. While the company could only
produce 6,000 pounds of product weekly in its old location, it reached production of 15,000
pounds of product weekly in 2001 after its move. The new factory also facilitated public access
to the companys operations. The company began to offer free regularly scheduled tours of their
factory. Visitors learned about the history of chocolate, viewed Scharffen Bergers collection of
vintage equipment, watched the companys chocolate-making process, and sampled its
chocolates. The company also opened a small retail shop in the same location. According to
Norm Shea, Scharffen Bergers Marketing Coordinator, Its a pretty important part of the
marketing scheme because that brings in a lot of people. They tell people. They see the website
and sign up on the Web site. So I think its a really good tool. Gets them in the store.
Scharffen Bergers free tours attracted many newcomers to the world of intensely flavored dark
chocolates. Teresa Chan, manager of the companys Berkeley store, observed:

No

tC

You get all kinds. You get the people who are severe addicts, Scharffen Berger
addicts. Theyre over here all the way from New York, and they purposely came
to visit the factory. And then you get the other end of the spectrum, people who
were just on vacation... who dont know anything about our chocolate who
dont like dark chocolate Ive talked to a lot of people who walk in the door
and theyre like, Oh, you only make dark chocolate? Sometimes they just turn
around and walk out the door. But other times [they] go on the tour, and we
explain to them this concept about the flavor of chocolate. Its not just about
sugar. Then theyll taste the chocolate, and theyll sometimes be very impressed.
Basically, we change their minds on the tour.

CONTINUED GROWTHRETAIL OUTLETS

Do

By 2003, Scharffen Berger became profitable with annual sales reaching $5.8 million (see
Exhibit 1). The company sold its products through a variety of outlets, including a large number
of gourmet and specialty food stores, specialty wine, cheese, and coffee shops, luxury mail order
catalogs, its online Web site, and its own retail store in Berkeley. And on April 26, 2003,
Scharffen Berger expanded its retail operations with the opening of its second retail store,
located in San Francisco at the Ferry Building Marketplace. Shea described the Ferry Building
project as a top tier artisanal extension of the farmers market. This prestigious and highprofile venue was viewed as an important move for the company. The Ferry Buildings typical
customer was similar to Scharffen Bergers, and so this second store was viewed as a good way
to increase its consumer base.

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Increased Organizational Structure


Promotion of employees from within and the expansion of employees responsibilities over time
were common within the company. Scharffenberger noted:
I think people like to be working with something thats growing, and I think
theres a lot of opportunity for people because of that. Our shipping guys are now
managers, and we have this data entry person who is now running marketing.
Weve been trying to grow internally as an organization as much as we can.

Managing and coordinating a greater number of employees required more structure. Ishitaka
noted that increasing organizational structure required some attention to the needs and responses
of employees:

op
yo

As you get bigger, it comes with the territory.... There has to be some structure.
Some people dont like that, and other people welcome it, and you just have to
kind of nurture both of them. You have to on the one hand tell some people that
we need this structure because of this, and then on the other hand, I have to go to
the other group and say, Im not really stifling your creativity because were
allowing you to do this. Youre straddling the fence, but you need more structure
as you get bigger. You have to set up the controls because the numbers get too
big. You make a little mistake when youre small and its not a big deal. You
make a mistake when youre a bigger company, then it can be very costly.

Scharffenberger noted that keeping bureaucracy and hierarchy to the minimal level necessary
was an important goal for the company as it progressed:

tC

Structure is helpful and also hurtful. An organization doesnt need to be where it


doesnt have to be. So were trying to have some modicum of hierarchical setup,
but with a huge amount of communication that isnt hierarchical. I think a lot of
it is letting everybody take responsibility, but its hard to instill that.
DECISIONS IN THE MIDST OF EXPANSION

No

Acquisition of Additional Equipment

Do

As it expanded, the company confronted a number of decisions regarding how it would continue
its rapid pace of growth. Continuing to attract new customers and increase demand for its
products required the founders to consider some choices that did not necessarily fit Scharffen
Bergers traditional artisanal image. For example, increased production required the acquisition
of additional equipment. The company had customarily purchased vintage European equipment
that reflected traditional approaches to chocolate manufacturing. It emphasized its use of vintage
machinery in a variety of ways, including the prominent display of vintage equipment on factory
tours and on its corporate website. Scharffen Berger also commissioned a poster in 2003 of its
melangeur-broyeur, a machine used by chocolate makers in the 1890s, to celebrate the
companys artisanal, old-world methods of chocolate making.
Obtaining vintage equipment in good working condition, however, was difficult. In addition,
modern equipment offered increased production capacities. The founders primary concern was

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maintaining the flavor of their product. Whether or not this was possible with vintage versus
modern equipment varied by the specific type of equipment needed. Ishikata observed:

op
yo

If youre talking about roasting it the same way and winnowing it the same way,
there is no new equipment. They dont make those kinds of machines any more.
If youre talking about a conch, from our research, those are best bought new
because old ones are suspect. You have to basically rebuild them. From our
experience, in rebuilding 30- or 40- or 50-year-old-equipment, its really not cost
effective. When you add up all the labor, time and effort that you put into it,
youre better off buying new. The next question is if you buy the next generation,
which is completely different, instead of manufacturing it the way we do, if we go
that way, will it change the flavor? Thats right where we are right now. Were
in the process of trying to set up testing for next year in a test lab that mimics the
new equipment, and then evaluate it and say, Robert, is it acceptable? Is the
flavor basically the same as doing it this way? Because the throughput is several
times faster, but we dont want to lose what we call the Scharffen Berger flavor.

While maintaining flavor quality was the most important consideration in equipment selection,
Steinberg admitted that acquiring modern equipment could potentially weaken the companys
artisanal image:
I think that the machinery has been an extremely important part of the image that
weve created. From a marketing standpoint, I dont know what we could have
done without that. It has really been integral to the story and to some of the
interest which has grown up around that.

tC

Teresa Chan, manager of the Berkeley retail store, agreed that the Scharffen Berger story was a
significant draw for visitors to the Berkeley factory:

No

I think the story is kind of, its a cute story, and people like to learn about it.
Especially so, when people are already eating our chocolate, and they already like
it, and then when they find out about the story theyre like, wow, thats really
amazing. Other people come in already knowing the story. They dont know
anything about the chocolate, but they saw it somewhere, or they read it in the
paper, and they want to hear it straight from us, they want to hear it again.

Do

However, the founders believed that quality was more important than image in the companys
success. Scharffenberger asserted: Its not just artisanal for artisanal sake. Its all about the
product. And Steinberg stressed that flavor remained the key consideration in equipment
selection, maintaining, I wouldnt want to use a machine that was old simply for the sake of
using an old machine.
Introduction of New Products
While Scharffen Berger initially began selling chocolate bars, it expanded its line of products
over its five years of operation to include a variety of chocolate offerings, including cocoa
powder, cacao nibs, chocolate sauce, gift boxes, kits for making European style truffles, and
chocolate hand-dipped crystallized ginger and apricots. The founders viewed the continuous
introduction of new products as a key component in expanding the companys market share.

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While most of these new offerings were produced by Scharffen Berger, the company relied on
outside manufacturers for the production of their cocoa powder and milk chocolate. Reliance on
others to produce their products initially presented some issues for the company, which prided
itself on its strict quality control. For example, Steinberg recounted the companys initial
struggles with its cocoa powder:

op
yo

When we first started working with this company, and weve now made about
four batches with them, we kind of said what kind of beans we wanted to use, but
we used their beans. Part of the reason that happened is that I didnt understand
enough about how to get things from one place to another, and how extreme the
differences in quality could be. The first time we used all their beans. The second
time we used some of their beans and some of our beans. The third and fourth
times, Ive had control over all the beans that were used in it. I just got a sample
back of this last batch that we did, and each time its gotten a little bit better.

The founders benefited from this experience of outsourcing cocoa powder production when they
decided to produce milk chocolate in 2003. Steinberg observed: For the milk chocolate, were
not only sourcing the beans, were actually making the chocolate in an unsweetened form and
then sending them the unsweetened chocolate. So we have even more control in that.

tC

A separate issue raised by the production of milk chocolate was whether or not this new product
was consistent with Scharffen Bergers image. The founders choice to sell milk chocolate
marked a sharp departure from their traditional focus on intensely flavored dark chocolates.
While dark chocolates appealed to the sophisticated palates of the companys core consumers,
the founders recognized that there existed a broad class of consumers who preferred the taste of
milk chocolate. Despite its clear market potential, the move towards milk-chocolate products
appeared to meet some reluctance. Steinberg noted:

No

We presented ourselves, really from the beginning, as a company that was making
chocolate that was intense and had all these cacao flavors. I think that in many
peoples minds, milk chocolate is sort of the opposite of that. I think frequently,
for people who like dark chocolate, milk chocolate is kind of anathema because it
doesnt have the chocolate flavor. For people who like milk chocolate, they may
not be able to express it in many cases, but its exactly the lack of those flavors
and the lack of the bitterness that they like about milk chocolate. They like
something thats softer and creamier and so on. The idea of doing milk chocolate
was to a large extent market driven in the beginning. I think we sort of ran into
enough people who said, `How come you dont make milk chocolate? I really
would love it if youd make milk chocolate, because they consider themselves
chocolate lovers, even though the chocolate that they love is milk chocolate.

Do

The companys founders decided that, if they were going to branch out to milk chocolate, they
would do so in a way consistent with their focus on flavor and quality. Steinberg explained:
I think one principle that we tried to observe was to take a product that was
common and make it better in terms of its basic elements. In my mind, how could
you make milk chocolate better? You could have it have more chocolate flavor.
You could have it have a cleaner, milkier flavor... You could sort of say to

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p. 11

Scharffen Berger Chocolate Maker OB-50

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yourself, well, if you dont look at it as a capitulation to the forces of the least
common denominator, but rather to trying to elevate a product that just wasnt
being done as well as it could, then you could kind of say, were being true to our
basic philosophy about the company. I think that weve been able to do that
because of the fact that the beans are good enough in their own right to be raised
to a level that isnt true of most chocolate.
FUTURE OUTLOOK

op
yo

Six years after its founding, Scharffen Berger had succeeded in establishing itself as a major
presence in the U.S. chocolate industry. It was often rated as one of the highest quality
American manufacturers of dark chocolates. For example, in a blind taste conducted by Eating
Well magazine in Fall 2003, Scharffen Bergers 70 percent bar was judged the top dark
chocolate, out-ranking products from competitors such as Dolfin, Lindt, Valrhona, El Rey,
Ghirardelli, and Newmans. Similarly, a 2002 tasting by Cooks Illustrated of unsweetened
chocolates also ranked Scharffen Berger as first overall, ahead of other gourmet marketers such
as Callebaut, Ghirardelli, and Valrhona. And, in 2000, the National Association of Specialty
Trade Foods voted Scharffen Bergers Nibby Bar to be the Confection of the Year.

Importantly, since the companys inception, the founders had continued to place a great deal of
emphasis on doing something that they personally enjoyed. Steinberg noted, To me, the reason
that I did this is not because I wanted to get into the business or to necessarily manufacture
chocolate, but it was kind of an extension of what I was doing anyway just for myself and for
friends. Scharffenberger added, We didnt do this to go public. We did this to have fun in the
garage and make something delicious, and its maintained that fun-ness. Now its almost like
its too good to be true.

No

tC

Continuing to grow while adhering to strict quality standards would likely pose a considerable
challenge for Scharffen Berger in the future. The particular flavor and consistency of their
products was something the founders had carefully developed and maintained on a relatively
small scale. As production expanded, maintaining the quality and flavor of their products was
likely to become increasingly difficult. At the same time, determining how to grow the
organization as production expanded was also likely to be challenging. Over the past few years,
the founders had wrestled with balancing the benefits of increased organizational structure with
the value that employees placed on independence and flexibility. These issues were only likely
to become more salient in the future.
Pam Williams, chocolatier and founder of Ecole Chocolat, observed that many in the chocolate
industry were interested in and watchful of Scharffen Bergers progress:

Do

Chocolate is a huge, enormous industry. And so if Scharffen Berger can get 5 or


10 percent of whats happening, thats not bad! ... I think everybodys been
watching what theyre doing, with a little bit of, its not, awe isnt the word, but
its, I think everybodys rooting for them to be successful. And I dont even think
that their big competition is wishing them not to be successful... I think everybody
is keeping their, kind of holding their breath a little bit to see if theyre going to
survive the long term, because theyre in a very niche market.

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p. 12

Scharffen Berger Chocolate Maker OB-50

sales
0.6
1.1
2.3
3.1
4.1
5.8
8.5*

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year
1998
1999
2000
2001
2002
2003
2004

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Exhibit 1
Scharffen Berger Annual Sales (in millions $)

Do

No

tC

*projected
Source: Scharffen Berger Chocolate Maker

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Permissions@hbsp.harvard.edu or 617.783.7860