Investing in Chocolate: Sweet Comforts for Difficult Times?

by: Carol Flake Chapman

One of the things I love about the stock market is the window it opens onto the reality of who we are, without illusion, telling us in numbers what we want and what we fear. I think the downturn has required investors to look deep into our own lives and desires to see what’s really essential in the material world when we have to make hard choices. Is it soup, is it shoes, is it oil, is it wine and roses?

I’ve been watching trends among anxious consumers as jobs disappear and retirement vanishes into the distance. And while Americans may be cutting back on certain dispensable luxuries, like Starbucks (NASDAQ:SBUX) lattes or auction-house Picassos, there are other items that appear to be necessities during uncertain times. The need for some of these cheaper indulgences actually appears to be hard-wired in the brain, which would certainly make these desires appear to be recession-proof, or even recession-boosted.

One of these apparent necessities is sweets – and in particular, chocolate. When is there a better time for comfort foods than a downturn? The New York Times reports that the recession seems to have a sweet tooth: “As unemployment has risen and 401(k)’s have shrunk, Americans, particularly adults, have been consuming growing volumes of candy, from Mary Janes and Tootsie Rolls to Gummy Bears and cheap chocolates, say candy makers, store owners and industry experts.”

The Times reporter cites different theories on the growing taste for sweets: “For many, sugar lifts spirits dragged low by the languishing economy. For others, candy also provides a nostalgic reminder of better times. And not insignificantly, it is relatively cheap.”

Women who are eating more chocolates may also be obeying some deeper instincts. Chocolate, according to researchers, may act as a kind of stress-reducer and sedative, making it a genuine comfort food. In a study published in Hypertension journal, researchers from Italy found that dark chocolate may lower blood pressure inn people with hypertension.

But the benefits don’t end there. Reports suggest that men actually prefer heftier women during a downturn. Two researchers studied Playboy centerfolds over the years, determining that leaner times produced heftier centerfolds. Similarly, Dr Leif Nelson, of NYU's Stern Business School, designed a series of experiments to test whether men's attitudes to women and their bodies were altered by how well-off they were feeling. The results? The male subjects who were made to feel insecure about their finances reported a preference for women who were, on average, roughly two pounds heavier than their financially confident counterparts. “When the economy is clearly and uniformly tanking,” Dr. Nelson told a reporter for The Daily Beast, “what will emerge is some kind of a shift to more of an ideal of a fuller, plumper woman.”

There is historic precedent to the strength of the candy business during hard times. According to the Wall Street Journal, the industries that were able to make solid gains after the crash of ’29 were the makers of cigarettes, cigars and tobacco, sugar and confectionary products, and fats and oils. Which may bode well for the purveyors of these cheap vices, as some have dubbed them, but it doesn’t bode well for personal health, if history repeats itself..

According to the New York Times, candy companies thrived during the 1930s, introducing the brand names of confections that remain popular today. Snickers started in 1930; Tootsie Pops appeared in 1931. Mars bars and Three Musketeers followed in 1932. Hershey was the dominant candy brand during the Depression, and it fared well enough through the 1930s for the company to finance its own work program for the unemployed.

If we look at the companies in the candy business these days, many of the same names are still around, though the business has experienced consolidation. And as it happens, the confectionary business currently has been ranked highest of all industries by some analysts.

However, not all chocolates are faring equally. According to Reuters, consumers in Europe are bypassing expensive candies in favor of cheaper brands that use a smaller percentage of cocoa. As a result, stocks of unsold cocoa are piling up as consumers turn to those cheaper brands that use less cocoa. Which means, presumably, that the price of cocoa will be coming down, alleviating the sharp rise in cocoa futures seen in 2008.

So what does all this mean for investors who would like to add heft to their portfolio, if not necessarily to their waistlines? The main choices for candy makers include Hershey (NYSE:HSY), Cadbury (CBY), Tootsie Roll (NYSE:TR) and Nestle (OTCPK:NSRGY), although Nestle’s confectionary business accounts for only ten percent of its food and beverage sales.

With Nestle, which also owns Jenny Craig, you get two of the world’s top obsessions, indulgence and diet. So after the downturn, Nestle may be the way to go. But right now my favorite in the group is Hershey. Hershey, which was struggling in 2008, got a boost from speculation that Nestle might be interested in taking them over, but fell when that rumor appeared to be unfounded. Some analysts have pointed out that a coming price hike, which follows the “high” chocolate season of Valentine’s Day and Easter, will depress sales. However, if stores of cocoa are piling up, that means less pricing pressure on Hershey and other candy companies. With Hershey, you also get a bite of Cadbury, as they are licensed to produce Cadbury products in the U.S.

By the way, not all cheap vices appear to be thriving. The world’s second largest brewer SABMiller plc (SBMRY.PK), which makes some of the best selling adult beverages, reported that shipments have fallen in the third quarter, with demand dropping most in the U.S. and European markets. The results are troubling, according to a report in Reuters, because they go against the conventional wisdom that brewers are particularly resistant to recessions. The logic being that as economies get worse people will be more inclined to drown their sorrows in their favorite, relatively inexpensive beer.

According to Reuters, up until this latest report, the conventional wisdom seemed to be holding true. But consumers of beer are now cutting back on purchases as they are conserving cash in fear of an ever worsening economy. The joint venture of MillerCoors in the U.S. saw sales decline 2.3%.

My own theory is that while men may prefer heftier women during a downturn, the converse may not be true. Apparently, women may not be looking for men with a growing beer belly during hard times! It might be time to look into ab-builders.