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On average, a U.S. citizen consumed 5.3 kilograms of chocolate last year, a tiny fraction of the 3.6
million tons of cacao harvested [17]. Chocolate is a big industry; in the United States in 2002, chocolate
confectionary generated 13.7 billion dollars in sales. It is also an industry that is dominated by big players;
Hershey's , Mars, and Nestle hold 75% of the market share. In the upscale sector of American producers,
Campbell Soup Company's subsidiary, Godiva, reigned. These mass-producers hold their market share
secure with their brand-recognition and economies of scale, but have not wholly blocked out smaller
producers of artisan chocolate from the market. The confectionary market, like many gastronomical
markets, is strongly differentiable on the high-end. One firm to brave the barriers to entry is Scharffen
Berger, a fledgling chocolate maker from food-trendy San Francisco area, first conceived of by a wine-
maker and a doctor in 1994 and is now considered one of the highest-quality American chocolate-makers
Chocolate comes from cacao, the fruit of the mesoamerican tree, Theobroma cacao. When the
Spanish conquistadors arrived to the Americas, the cacao beans were used as a currency by the Aztecs,
and chocolate was only enjoyed as a beverage by the aristocracy, clergy, and warrior classes. The Aztecs
mixed ground beans with water, and flavored it with maize, chili pepper, and ear flower.. The colonial
Spanish, fascinated by the natives' fascination with the drink, altered it to suit European tastes, flavoring it
instead with vanilla, anise flower, and cane sugar, and imported it to Europe, where it was likewise
Chocolate remained a luxury commodity until the nineteenth century. The dutchman Van
Houten's cocoa press, invented in 1828, separated the cacao butter, and the remaining cacao solids could
be ground into the powder we know as cocoa. The inexpensive cocoa became a huge success with the
working classes, whose purchasing power increased in the wake of the Industrial Revolution. The
audience of chocolate also began to change, primarily towards women and children. In 1849, Fry's, ,an
English chocolate company, introduced "Chocolat Délicieux à Manger", the world's first mass produced
chocolate bar [9]. 1879, Henri Nestlé, a Swiss, invented powered milk, which allowed him to produce milk
chocolate. In the same year, another Swiss, Budolphe Lindt, invented the conche, a machine that churned
the chocolate to create the smooth, creamy mouthfeel that we have come to associate with chocolate.
The industry proceeded to grow at a rapid pace with the birth of other large chocolate makers, such as
Cadbury's, Walter Baker, and Hershey's. The industry stratified into two primary camps: large scale
chocolate makers that processed beans into chocolate, both for professional and consumer consumption,
and chocolatiers who bought, couverture, to finish to create their own pastries and confections.
The chocolate manufacturing process is involved and delicate, as cacao is a fickle plant. The three
major varieties of T. cacao are criollo, trinitario, and foastero. The latter is the the hardiest and most
productive, and accounts for 90% of the world crop, but has a strong bitter taste. The fruitier criollo was
the predominant strain in pre-colonial Mesoamerica, but its low productivity and susceptibility to disease
caused it to almost be eradicated. It now counts for only 2% of all cacao production. Trinitario is a hybrid
of the two, originating in Trinidad in the eighteenth century. Currently, the Ivory Coast is the world's
largest producer of forastero cacao, producing for over 40% of the world's cacao crop.
Cacao is grown in shaded plantations, within 20 degrees of the equator. The trees give two crops a
year, which are picked by hand. The cacao pods are opened and the beans are left to dry and ferment in
the sun to remove acidity from the flavor. The beans are then shipped to the chocolate-maker's facilities,
where they are roasted and the inedible husks are winnowed. The beans are then ground in a mélangeur
into a semi-liquid. Sugar, flavorings (such as vanilla), and an emulsifier (most usually soy lecithin) are
often added. The chocolate is then churned extensively in a conche, which, at their most simple, are large
vats with granite rollers, to reduce particle size and improve flavor and mouthfeel. The chocolate is then
The upscale chocolate industry, which generated 1.2 billion dollars in annual sales in 2005, is tiny
compared to the mass industry. However, recent years has seen a renaissance in gastronomy and artisan
foodstuffs. Chocolate in particular has recieved positive attention from the middle class's recent obsession
with connoisseurship. High-end chocolate is being marketed much like wine, complete with its own
tasting vocabulary. Recent scientific studies highlighting the potential heath benefits of the anti-oxidents
found in high cacao content chocolate have also help increase demand. The industry is embracing this
marketing and exposure, and the premium chocolate sector has growth rates predicted to range between
15% and 20% per year for the next decade compared to the 1-2$ for the mass industry [24].
The mass chocolate manufacturing sector is a highly competitive industry dominated by a few
small players who aggressively protect their market share. However,American mass producers focus on
milk chocolate, which the FDA requires to be only 10% cacao solids [13], which is less than half of that
required by the European Union regulations [11]. High cacao content chocolates are primarily produced
European companies, such as Valrhona, Lindt, Barry Callebaut, and Bonnat. The American chocolate
industry held the opinion, much like the one the coffee industry had a couple decades back, that
Americans do not like strong flavors and they did not see see a market for premium dark chocolate.
However, a growing demand for premium chocolate reflected shifting consumer preferences and there
grew a a vacuum in the market niche of artisan American chocolate makers. Indeed, a new chocolate
maker had not been seen in the United States in fifty years.
Enter Scharffen Berger. In 1989, Dr. Robert Steinberg was diagnosed with leukemia and he gave
up his practice to pursue a career in the culinary arts. He became enamored of the idea of chocolate
making. He spent a few weeks in France with Bernachon, a traditional small-scale chocolate maker, which
gave him a feel for what he wanted to do. In 1994 he approached John Scharffenberger for advice. John
had recently sold his winery, and was looking to try something new that appealed to his entrepreneurial
The original plan was to produce small batch chocolate primarily for use by culinary professionals.
At the 1996 candy equipment show in Düsseldorf, they saw machinery for large-scale production, with
mélangeurs costing upwards of $350,000. Those prices were utterly unaffordable. their entire start-up
budget was $150,000. Steinberg and Scharffenberger's plans were met with skepticism of whether they
could complete against entrenched industry participants. Equipment manufacturers told them that they
were better off buying couverture from an established large-scale producer. However, they finally found
a small used mélangeur for $6,000, of the same type that Steinberg used when working with Bernachon.
This had the advantage of being a machine that he already knew how to use, and had some sense of the
flavor it produced. They also bought an ancient leather-belt driven winnower for $20,000, and a
Macintyre grinder-conche.
Normally, obtaining start-up capital for a risky venture like chocolate manufacturing is very
difficult. Initial equipment and production investment is high and reasonable returns on investment are
dubious given the competitiveness of the market and the fickleness of the cacao. However, their
ambitions for small-batch production using old-style European equipment fit within the budget they were
constrained by. Since the pair were the only initial investors in their company, they had much greater
control over their procedures and less pressure to produce immediate results and profits. While the pair
were assuming all the financial risk, neither of them seemed risk-adverse. Scharffenberger had previous
experience of a similar venture with his winery, and the success of that presumably gave him confidence
as well as knew how to minimize risk. Steinberg was assuming a shortened life expectancy and thus
probably felt like he had less to lose by taking risks. Furthermore, $150,000 is not a devastating amount
to lose, especially when compared to the millions of dollars required for large scale production
Their next step was finding a supplier of cacao beans. Robert went down to Venezuela to negotiate
with the farmers themselves, as well as learn about T. Cacao as a plant and crop. Instead of finding a
distributer, Scharffen Berger chose vertical integration of bean sourcing, allowing them to pay a price for
their cacao that is lower than one that included middleman profits yet still higher than market.
Furthermore by fostering a relationship with their bean suppliers, Scharffen Berger has worked with
them to control the quality of the beans and the plantations. They are able to better control the flavors by
The market price of cacao in 2006 ranged between $0.67-$0.75 per pound of beans[1], which
primarily represents bulk purchases of forastero beans from Africa. Fair trade standards mandates a
minimum price of $0.80 per pound or market, whichever was higher [12]. Retail prices for large Criollo
purchases range around $10 per pound [5]. While no direct data for Scharffen Berger costs is available, an
estimate of $1-3 per pound is reasonable given their commitment to sustainable and fair farming practices
as well as the high quality of beans that they source. The higher pricer of beans is directly reflected in
Scharffen Berger's retail prices of chocolate, which range $1-2 per ounce compared to $0.35 per ounce for
Steinberg created the first batches of Scharffen Berger chocolate in his kitchen. He roasted the
beans in his oven, winnowed them by hand, and ground them in a coffee grinder. The primitive
experimentation methods kept costs down. They minimized risk and waste by allowing them to
experiment with how proportions and processes affected the sensitive flavor of the chocolate without
Their first distribution batch of chocolate used a blend of cacao beans from eight different
plantations, four from Venezuela, and one each from Ghana, Papua New Guinea, Bahia, and Madagascar.
Scharffen Berger chocolate is a contrast to mass-produced chocolate, like Hershey's, whose use of low-
quality foastero beans reflect a reliance on artificial flavor modifications as well as from recent trends in
premium chocolate which emphasize single-origin beans and flavors. Also, y using beans from several
different geographic regions, Scharffen Berger mitigates the risk of supply shortages from regional crop
disturbances. Furthermore, Scharffen Berger's palatable use of whole vanilla beans, instead of the more
common powdered vanilla or vanillin, gives their chocolate a memorable taste, distinguishable even to
those with uneducated palates, which is particularly important for creating broad consumer appeal.
Scharffen Berger debuted their product at the 1996 Aspen Food and Wine Show, where their
chocolate received compliments from Jacques Pepin and Julia Child. They also received glowing reviews
from local tasters. Their location in San Francisco, currently the hub of culinary fashion, gave them a
Scharffen Berger originally targeted culinary professionals and they visited many restaurants and
pastry chefs, giving out many free samples. They received a limited response, but less than they had
anticipated, and less than they needed to stay in business. They had not estimated the high switching
costs the chefs had with regard to chocolate. Couverture is a pastry chef's biggest expense, and switching
to an unknown producer is risky. Most chefs already had a supplier they were satisfied with and new
chocolate-maker does not have an established history of consistent quality. Furthermore, chefs rarely
purchase directly from the producer, rather usually going through distributers. It took Scharffen Berger a
few months and the influence of Scharffenberger's culinary celebrity to find a distributer who would be
willing to take a chance on them. A distributer has to protect their reputation of offering products of
consistent high quality, and there are significant expenses associated with promoting a new brand. Here
the variability of chocolate is again a problem. If a batch turned out bad, the distributor's reputation, and
However, Scharffen Berger was not without any network advantage. John Scharffenberger has a
strong positive reputation from his winery of the same name, which was known for creating high quality
Californian sparkling wines and creating demand for a market niche that previously did not exist; which
he was not trying to do for chocolate. Culinary professions, distributors, and retailers were more willing
to take a chance on Scharffen Berger chocolate because they were familiar with John's wines and held him
Scharffen Berger did not strongly consider retail sales until John set up a table at the San Francisco
Farmers' Market in 1997. He anticipated to sell mostly to serious home chefs, but it was their 3-ounce
sample bars that went the quickest. They sold over $1,000 of chocolate in one day. Before then, John and
Robert held a similar opinion as the industry, that there just was not a strong consumer demand for high
cacao-content chocolate. Their experience proved to them that a retail market would be worth pursuing.
Here again John's culinary connections proved invaluable, as retailers familiar with his wines were more
inclined to carry his chocolate, assured of his reputation for quality. Fortunately, the target audience for
high end wines has strong overlaps to that for high end chocolate. Both sets of consumers must be
willing to spend significant money on a product are are willing to experiment with new ones. Their sales
boomed from $600,000 in 1998 to 2.3 million dollars in 2000. In 2001, their sales were 70% to retail and
30% to the food industry. Trader Joe's, their largest customer, accounts for 20% of their total sales. Other
major retailers carrying Scharffen Berger are Whole Foods and William and Sonoma [24].
Chocolate, as previously mentioned, is extremely temperamental, and the flavor is affected even
by subtle variations in bean origin, fermentation time, roasting temperature, conching time, and must be
tempered to degree-precision. This is especially true with high-cacao content chocolate, whose flavor is
almost solely dependent on the quality of the cacao, instead of relying on high proportions of milk, sugar,
vegetable fat, and other additives commonly found in mass produced milk chocolate. Scharffen Berger
emphasizes their commitment to quality. However, their narrow margin for quality variation is reflected
in their profit margins, which Scharffenberger admits are below the industry average, despite their high
prices.
While data for Scharffen Berger is not directly avaliable, two of premium chocolate
manufactures, Barry Callebaut and Lindt & Sprüngil had net profit margins of 4.31% and 8.05%,
respectively, inthe past year. Scharffen Berger's profit margins are probably to those of Barry Callebaut,
and Lindt generates a significant amount of revenue from sales of truffles and similar confections.
Hershey's, on the mass production side, had a net profit margin of 11.31% [14].
The slimness of Scharffen Berger's profit margins can be attributed primarily to their high quality
of inputs required by their production. Their ingredients, both beans and vanilla, are of much higher
quality than mass market, and their products contain a much higher percentage of cacao, instead of
substituting cheaper substitutes. Compare Hershey's milk chocolate with 12% cacao solids versus
Scharffen Berger milk chocolate with 41% cacao solids. Furthermore, small batch production prevents
economies of scale and production time is not minimized, with the conching in particular taking up to 60
hours per batch. A kilogram of retail Scharffen Berger costs $24.67 at its cheapest (62% semi-sweet
purchased in a 3kg block), and over $100 per kilogram at its most expensive (82% bitter purchased in 12 x
5 gram squares) [22] while a kilogram of retail Hershey's costs $19.38 at its most expensive (unsweetened
purchased in 4 x 12 oz blocks) [2]. However, since Scharffen Berger was a private company, they did not
have shareholders pressing them to maximize profit. More money could be spent in quality control and
A large factor in the overwhelming positive response to Scharffen Berger is their openness about
their production methods, a rarity in the secretive chocolate industry. As noted in an Associated Press
article, Scharffen Berger "...was the first U.S. [chocolate maker] to feature the cacao count prominently on
its wrappers" [3]. This packaging differentiated their chocolate from the American chocolate already on
the market, associating it more with the gourmet European brands that it was influenced by. Their
chocolate seems less generic, and it appeals to the increasingly health and ingredient-conscious consumer
base.
Scharffen Berger offers free factory tours, showcasing the process of chocolate making "from bean
to bar," as well as providing free samples of their chocolate. Their factory in Berkeley was refurbished
and laid out to maximize the visual appeal to improve their public image. Many consumers are swayed
by the company's history and the old-fashioned European style of equipment and production. The
founders even published a book, The Essence of Chocolate, which alternates chapters of recipes (all using
their chocolate, of course) with chapters detailing the company history, production methods, and cacao
sources. The book was good marketing, romanticizing their company image while connecting with the
consumer. Scharffen Berger appeals to the public's curiosity about the industry of chocolate, as well as
giving them the ability to interest consumers who are otherwise indifferent to gourmet chocolate, and
However, by creating new consumers for artisan chocolate, Scharffen Berger also risks creating
more competition for themselves. Retail chocolate consumers have essentially zero switching costs, and
consumers of high end food products are often very willing to experiment with new products. So
Scharffen Berger has to maintain rigorous quality and public relations standards to retain a loyal
following.
Scharffen Berger's openness with the press in particular garnered a positive response, and glowing
reviews and interviews gave the fledging company much-appreciated free advertising. By their
willingness to talk to the public, they are able to gain exposure and control their public image while
having no advertising budget. The press and consumers are guided to the same conclusions that Matt
Rosenblum reached in his book on the culture of the chocolate business, Bittersweet, ""When you see an
operation like Scharffen Berger, you know its products are good. Tastes might be personal, but when
individuals put so much care itno getting each detail of their chocolate right, and take pride in showing it
Demand for Scharffen Berger chocolate far exceeded even the founder's expectations and they are
quickly becoming a major player in artisan chocolate manufacture. In his interview with Matt
Rosenblum, John told him, "We're one-twentieth the size of Valrhona, tiny in the world of
chocolate...We'd like to settle into the range of $5 million a year in sales. That's about the size of one
healthy McDonalds" (274) [21]. Scharffen Berger broke $5 million in 2003, and are now projecting revenue
of four times that amount for 2006. But their popularity is a double-edged blade. It has been difficult to
maintain the quality of their product while increasing the scale of production to meet demand. Sourcing
beans becomes more difficult as a limited consistent supply is matched against increased global demand.
Cacao prices are already on the rise. Also, obtaining and restoring vintage equipment, which the
company relies upon to help produce their unique flavor has become increasingly difficult and less cost
effective. New machinery produced unacceptable alterations in flavor. Recently, the company acquired a
custom ball mill conche which allows for larger batches as well as reducing conching time per batch from
fifty hours to fifteen. However, at their current rate of growth, it is quite possible that Scharffen Berger
However, the big players of the chocolate industry were not blind to the success of the upstart
chocolate maker. In July 2005, Hershey's announced its impending acquisition of Scharffen Berger under
their wholly owned subsidiary, Artisan Confections Company. The terms of the deal remained
confidential, but Scharffen Berger has been quick to assure consumers that their production methods
would not be affected. The acquisition however has given them greater capital to use for equipment,
bean sourcing, and expansion. Growing demand for their product and continued rave reviews have
given weight to the company assurances. And while Hershey's might own Scharffen Berger on paper,
there is no mistaking a Hershey's bar for a Scharffen Berger one or visca-versa. Hershey's is candy.
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