There may be one less gift option for your Valentine as a global chocolate shortage crisis is among us. Time for some macroeconomics basics – shortages exist when the demand for a good or service exceeds the availability of that good or service. In 2013, the world collectively consumed 70,000 metric tons more cocoa than produced. This statistic is anticipated to reach 1 million metric tons by 2020 and 2 million by 2030. This shortage has resulted in a more than 60% increase in cocoa prices in 2013.
Being faced with a supply shortage, what are companies left to do?
Option 1: Find an alternative product.
Option 2: Take it on the chin and pray to the chocolate gods for a better season next year.
Option 3: Find ways to cut other costs to make up for the declining profit margins.
Option 4: Raise prices to consume to reflect the increase in cost of sales.
When your business is chocolate, Option 1 is not an option at all, Option 2 is not much better, and Option 3 can prove to be quite difficult especially for smaller main street businesses. As such, chocolatiers have been forced to raise prices (with market giant, Hershey’s leading the way).
One of our primary roles in analyzing companies is to identify risk factors that either currently pose a threat or present a dependency on an outside relationship and/or factor out of the business owner’s control. It’s best to be proactive and identify any red flags in order to put stop gaps in place. These preventative measures will not only help you sleep better at night, but will command a higher market value in the event of a future sale.