March 28, 2016
| Atlanta (US)
ORTEC's Bobby Miller Featured in Wall Street Journal Story on E-commerce
The rise of online shopping has put chocolate makers in a sticky situation.
High Cost of Keeping Chocolate Cool Tempers Online Sales
With gear like ice packs, coolers to prevent melting, shipping expenses for e-commerce orders can far exceed price of the candy.
Chocolate often melts during shipping in the summer months and in warmer climes, or arrives covered in “bloom,” a white film that coats the chocolate when sugar or fat rises to the surface.
Companies like Hershey Co. and Mars Inc. typically hire refrigerated trucks to ship pallets of their products to stores. But when a customer places an order online—a fast-growing segment of the market—shipping costs can skyrocket. Such orders usually surge around holidays like Valentine’s Day, Christmas and Easter.
Keeping a small shipment of chocolate cool can cost more than the product itself. Hershey charges $6.95 to ship a $4.25 bag of Kisses ordered on its website. In a notice on the site, the Pennsylvania-based maker of Kit Kat and Reese’s also “strongly suggests” that customers buy liquid ice packs and a foam cooler for an additional $4.99. That, plus the recommended expedited shipping, would bring the cost to $20.20, before taxes.
As they come under increasing pressure to offer direct online ordering, chocolate makers have yet to figure out how to control online shipping costs. That can alienate customers who are used to free shipping on many small online purchases. It doesn’t help that FedEx Corp. and United Parcel Service Inc. have introduced new shipping rates that charge extra for bulky packages, making it more costly to encase a small amount of chocolate in a foam cooler stuffed with liquid ice packs.
“Every consumer-goods manufacturer is trying to figure out how to do direct shipping so they can say…they’re an alternative” to Amazon.com, said Bobby Miller, a partner at Ortec International, a consulting firm and supply-chain software designer whose clients include Hershey and Ferrero Rocher maker Ferrero U.S.A. Inc.
“If they have to pay someone to pick a product [off a shelf], put it in a car, and drive it to someone’s house, all their margin just went out the door. They can’t make money doing that.”
Last month, Hershey accepted its final entries in a competition with a prize of $25,000 for whoever designs the lightest, most-affordable packaging to keep chocolate from melting for at least 48 hours. It hasn’t announced the results.
“We were talking about it, and our e-commerce team said, ‘We need to find a better solution,’” said Eric Zampedri, a packaging engineer in Hershey’s research and development office. “If we can reduce the cost for us, we can reduce it for consumers too.”
Overall, U.S. online chocolate sales rose more than 80% between 2010 and 2015, to $341.7 million annually, according to data provider Euromonitor International, and e-commerce represented 1.9% of all chocolate sales last year, up from 1.2% five years earlier.
To fill its online orders, which it says grew 80% last year, Hershey ships products from its distribution centers in Pennsylvania using parcel carriers like UPS and Deutsche Post AG ’s DHL unit. A 5-pound box of chocolate, if shipped to a warmer destination, generally requires 2 to 3 pounds of ice packs to keep it cool, said Mr. Zampedri.
High-end chocolatiers are likewise struggling with shipping costs. Vosges Haut-Chocolat, a Chicago company that sells truffles and chocolate bars in flavors like coconut ash and chipotle chili, says it loses money on most cold shipments to consumers. Online sales made up 20% of the company’s $26 million in revenue last year.
Vosges imposes a $10 shipping surcharge to cover cool shipping on e-commerce orders, which it says are growing much faster than sales at its six boutiques. The company is experimenting with different combinations of gel packs and dry ice, trying to reduce shipping costs.
“The biggest hurdle is…maintaining that balance of what the customer is willing to pay for, and how to ship it to them in the best condition possible,” said Zach Jarosz, Vosges’s supply-chain planning manager.
The most effective cool-shipping technology is a box made of vacuum-sealed panels, said Faryar Tavakoli, a product-testing engineer at Insulated Products Corp. in Rancho Dominguez, Calif. But even a small “VIP” box costs about $200, and is practical only for high-value goods, such as pharmaceuticals. Bulky foam coolers are less effective and still too expensive to use for mass e-commerce, said Mr. Tavakoli said.
“It’s price. That’s the only limiting factor,” he added.
Insulated Products entered the Hershey competition, but Mr. Takavoli declined to describe its submission, citing competitive concerns.
Cold Chain Technologies Inc., the Massachusetts-based company that makes Hershey’s coolers and frozen gel packs, says its research is focused on developing new shipping methods for drugmakers because they spend more on packaging to keep high-price shipments of vaccines and other medicines cool.
“For pharma…they sometimes have $100,000 of product in a shipment. For them, a loss is very painful,” said T.J. Rizzo, a CCT vice president. “If you lose a candy bar, the loss is less painful.”
Barring a technological breakthrough, chocolate makers must choose whether to buy special packaging to insulate their products, or pay for overnight shipping, which would reduce the time that chocolate is exposed to high temperatures.
“The Holy Grail is small and inexpensive [packaging],” Mr. Rizzo said.