Reason behind starting a local processing unit
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Recently, Mondelez international gave a good quarterly results. It was mainly driven by reduced raw material prices and particularly cocoa cost and volume led growth. How will this impact/would have impacted Manorama’s business? It will be better if someone can explain this.
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My current understanding of the thesis is built on three key pillars:
- The Volume Effect: When overall chocolate and snack consumption grows, manufacturing production lines run faster. This inherently increases the baseline demand for Manorama’s specialty fats, oils, and functional ingredients, driving positive volume growth.
- Sticky Recipe Reformulations: Manufacturers that adopted Cocoa Butter Equivalents (CBEs) during the recent price spike have already completed rigorous testing to prove product quality, sensory taste, and consumer acceptance. Once these recipe reformulations are scaled up on production lines, there is very little financial logic or incentive for brands to switch back to expensive cocoa butter.
- Margin & Contract Protection: Manorama’s supply contracts with confectionery giants like Mondelez are typically locked in for 9 to 12 months with fixed volumes. Because they operate on a cost-plus margin basis, any potential raw material price corrections will only reflect in the next inventory procurement cycle, starting right from the raw nut purchase price.
The recent drop in cocoa prices will serve as the ultimate testing ground for this CBE theory. It’s time to see if the management’s (Manorama and other CBE players) long-standing narrative—that cocoa prices don’t negatively impact their business—actually holds true.
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