EUR 850.00 For Business Accounts Only

Morningstar | BARN Reports Strong 3Q Sales With Asia-Pacific Continuing to Surprise on the Upside

Barry Callebaut's position in its industry is significant, considering that it sources one fourth of all cocoa beans produced worldwide and has a 37% share of the outsourced chocolate market. However, we believe economic returns could prove fleeting because we do not think the firm has secured a durable competitive advantage.Barry Callebaut supplies a basic and unbranded raw material to clients, separately from its gourmet business. The latter accounts for 12% of volume and carries a far higher margin than basic ingredients. Sensitivity to volatile raw material prices is limited by pass-through cost clauses in long-term contracts, which smooth the impact of changes on margins. Price changes generally reflect raw material costs volatility, with almost all revenue growth being volume driven.Volume growth at Barry Callebaut has been above the market average. Relative to the low-single-digit growth rates of the chocolate market, Barry Callebaut's volume growth has averaged 3.6% in the past 10 fiscal years and 5.9% over the past five fiscal years. This outperformance is supported by increasing outsourcing of chocolate needs (the market is 50% outsourced) and the firm’s exposure to emerging markets (35% of sales), where industry growth is typically in the high single digits.Our no-moat rating is based on the absence of the three primary sources of moats for ingredient companies: customer switching costs and intangible assets (proprietary technology) as well as the lack of a moatworthy cost edge. The critical difference between Barry Callebaut and other ingredient companies is that it does not supply customized ingredient formulations using proprietary technology. Instead, it supplies relatively undifferentiated cocoa and chocolate, which are readily available from a host of other suppliers, and this implies customer switching costs are nonexistent. Barry Callebaut's relatively commoditized position is evidenced by its low research and development spending (0.3% of sales versus more than 5% for other ingredient companies) and its modest EBIT margin (8% in fiscal 2018), far below the levels of other ingredient companies.