FUSE by Infusive

FIRST EDITION | FUSE by Infusive Magazine

Also in this edition:

Is Happiness anInvestable Asset

Chocolate acrossthe centuries

Talking Shop:Dr. Dieter Weisskopf

On the SpotSpun Candy

On the Spot

Charles Spence

F u s e N e w s l e t t e r | F i r s t E d i t i o n | I n f u s i v e 2 0 1 4

We are Infusive.This month we launch a new and exciting venture, a venture that draws on decades more experience than the typical start-up.

nfusive is, to put it simply, a company focused entirely on the con-sumer sector. The consumer sector is an outstanding space for in-vestment. That is why we have sidelined other pursuits – as profes-sional investors, as economists, as corporate executives – to build a company dedicated to finding the best consumer sector opportu-nities.

If only it were that simple! The consumer sector is a universe encom-passing everything from wine to digital appliances to hand creams to e-commerce sites. It is an industry present in every country in the world, and it is the domain of start-ups founded in 2014, multina-tional corporations founded in 1856, and everything in between.

To make sense out of such a large and varied space we take a holis-tic approach. Infusive is a business in four parts. One part invests in established, listed consumer companies. Another invests in small, up-and-coming consumer brands. These are the sides of Infusive that deploy capital: fund management and direct investments.

The other half of our business deals with knowledge. One part gathers intelligence about consumers from data – by using pow-erful quantitative tools available to us only in the age of Big Data. The other part gathers insight about consumers from people – by convening events, building communities and interacting with con-sumer-sector leaders. Why such a complex structure? Because the edge in this sector (as in so many others, but especially this one) is information. And all parts of Infusive interact to give us information about the consumer universe: big and small companies, public and private companies, from chocolate bars to hand bags, from Nigeria to the United States.

That is why we are publishing the first edition of Fuse, Infusive’s dig-ital newsletter. It is one small part of the information we are col-lecting. We are happy to share it with you, because much of this information is shared only indirectly, when it guides our investment strategy and inspires themes for our events. Infusive’s goal with Fuse is to publish our insights about the global consumer sector and share our enthusiasm about its potential.

In this edition we focus on chocolate and confectionary, one of our favorite consumer segments. Chocolate demonstrates why we like the consumer goods sector as a whole. So many products are in constant demand, because they – unlike airlines, insurance, or gas-oline – actually make people happy. Consumers keep coming back again and again for their dose of happiness contained in a bar of chocolate.

From a consumer’s point of view this is great, and from an investor’s point of view it is even better. When a product’s appeal is rooted in desires to be more attractive, more successful, happier, these prod-ucts’ margins are often quite high. Demand is inelastic and consum-ers are relatively price-insensitive. All of this means consistent earn-ings for major producers. And we love consistency of earnings even more than we love chocolate.

We look forward to sharing our insights – and some of our favorite confectionary and other products– with you, when we meet in per-son. Some of us are older than others, and we are all energized at the chance to build a company that harnesses the power of four billion active consumers.

Arturo FrancoStefan Jansen

Luca PadulliNic Poole

Infusive is a research and investment company for the global consumer sector. We produce sound and timely knowledge, identifying compelling growth opportunities, and connecting in-spiring products to new markets and decision makers.

Unleashing the Consumer ClassEngel, Wedgwood, beer, and Why Relative Income Matters.

B y M a t t h e w B i r d .

Open an introductory economics textbook, flip to the section on the theory of con-sumer choice and demand, and you will find a curve – the Engel Curve – well known to economists and, at least for a few months or so, students. It depicts the relationship between income and consumption. The vertical axis is labeled income, the horizontal is the name of a consumable good, and together they describe a direct relationship between the two. The more (or less) income you have the more (or less) you demand that good.

Consider the special case of food, otherwise known as Engel’s Law. As income rises, the proportion of income spent on food will fall. The same insight was generalized to other goods and gave birth to the economic notion of elasticity.

Ernst Engel – not to be confused with Friedrich Engels – was born in a separate Ger-man state a year after his revolutionary counterpart. He experienced firsthand the revolu-tions sweeping Europe in 1848, the last and one of the most violent of which took place in 1849 in his hometown of Dresden. After the turmoil he accepted a position in the Kingdom of Saxony’s statistical bureau with the goal of uncovering quantitative social laws – some-thing the government desperately needed to understand.

The bureau asked Engel to examine the relationship between business and labor. While reviewing the budget data of Belgian working class families he noticed something interesting. The less income a family has the higher the proportion spent on food. The more money a family has, the less they spent on nourishment. The conclusion still stands a century and a half later. Indeed it is used to define poverty.

When economists debate poverty, they speak of poverty traps and S curves. The lat-ter measures the income someone may expect to have in the future given the income that person has in the present. If they fall below some absolute income threshold – say $1 to $2 per day – their future income will likely fall, or at least they are unlikely to ever pass above the income threshold. But if they are on the other side of that threshold – at the middle of the “S”– then the S-curve begins to look more like an L-curve. Over time, they will progres-sively move up the curve, earning more and more income. And at some point, they will have enough money that it becomes disposable, meaning the proportion of income spent on ne-cessities such as food decreases and they shift spending to wants, including other consumer goods.

In other words, they become middle class. So when international consulting compa-nies or development banks laud the rise of the middle class, or the 3 billion new consumers, they refer to the people sitting on the right side of an absolute income threshold

and who are moving up the curve. They are implicitly saying that that there will be less pov-erty. Why? Because economists implicitly relate consumption to living standards and living standards to per capita income, a path (or curve) that Engel originally blazed.

The poverty S curve represents the traditional economic theory of consumer be-havior found in introductory textbooks. People who fall below some absolute (purchasing power parity adjusted) income level may be considered poor. Those above it move into that golden zone of the new global consumers.

Such a perspective implies that consumption – or at least discretionary consumption – does not exist for a certain percentage of the global population. Below the line, they are poor. They don’t consume, or at least not in the way that makes consumer goods companies view them as potential buyers of their products.

Such a perspective implies that consumption – or at least discretionary con-sumption – does not exist for a certain percentage of the global population.

Yet we know that this is not the case. After all, poor Charlie Bucket in Roald Dahl’s tale still ate the Willy Wonka chocolate bar. The poor in the Philippines don’t eat just eggs and ba-nanas. Economics textbooks might lead us to think that people only indulge in discretionary consumption once they have satisfied their basic needs – for food, shelter, clothing, fuel.

The consumption or use of material goods has existed since our species roamed the plains. Hunter-gatherers ate, drank, wore items and groomed. The accumulation of materi-als goods – and the explosion in private property – began with the advent of farming and human settlements, roughly 11,000 years ago. We know of the existence of trade since the earliest times, and this shows exchange of wanted, not just needed, material goods. Artifacts lying in Greek shipwrecks at the bottom of the Mediterranean testify to the existence of household goods, of trade and accumulation.

But modern consumption is quite different to how it was in Homer’s time. Modern consumption begins when masses of individuals and households enter more fully into cash economies, when they begin to rely on earning a wage that they then must use to buy a bas-ket of goods that they can afford. When life becomes so much about earning money, then absolute income becomes a hugely relevant concept, and it becomes possible to draw clean economic curves that describe modern consumption.


Status predates money and the purchase of market goods, but not con-sumption.

Josiah Wedgwood was among the first to learn this lesson at the dawn of the Indus-trial Revolution. Born in 1730 into a family of potters from the village of Burslem, outside Birmingham, Wedgwood learned his trade through work in his father’s then his brother’s then in an independent potter’s workshops. Having suffered from a childhood illness that left him with a pockmarked face and a gimpy leg – prompting amputation below his knee in adulthood – Wedgwood’s apprenticeship focused more on the mastery of de-sign. Not until his late 20s did he start his own workshop and hire a handful of employees.

On the eve of the Industrial Revolution, an industrious revolution was already well underway. Household consumption of tea, sugar and even chocolate (then just a drink) as well as linens, cutlery, furniture and clocks grew steadily. It was only natural that these new consumers wanted to serve their tea and sugar in porcelain earthenware and place them on a table covered with a linen cloth, and sit in chairs beneath a clock. A new mid-dle class (or middling class) was forming. And with the purchase of these new goods, consumers sought novelty. People even wanted to be hung in new ways, Samuel John-son quipped.

Wedgwood studied these trends, detailing his thoughts in personal logbooks. He thought about manufacturing innovations: how to improve the colors and prints, strengthen the pottery, reduce distribution costs. He eventually learned how to print intricate scenes onto a creamware surface, resembling porcelain but hardier. By the early 1760s he recorded ideas for how to improve his workshop’s productivity, since he lacked the capacity to keep up with demand for his goods. He expanded to six workshops with 16 employees. But it was not enough.

After investing in a 350-acre estate where Wedgwood built a home and a factory, he soon found himself in a reverse dilemma. He had lowered the costs of production and had excess capacity, while competition in the marketplace became ever more fierce. The sale of china grew in England’s new and growing urban centers – Newcastle, Liverpool, Bristol, Birmingham, and, most of all, London. He needed to find a way to better market his goods, to distinguish his products and make them desirable for a larger percentage of the population. At first he opened showrooms. But Wedgwood needed something more. His answer: appeal to status and, given social mobility, exploit the notion of relative in-come.

His answer: appeal to status and, given social mobility, exploit the notion of relative in-come.

First, Wedgwood created a brand. With the exception of luxury brands like Chip-pendale furniture or Meissen porcelain, household goods weren’t known by their man-ufacturer’s name at the time. And even though the middling class may have known the name Chippendale, they lacked the absolute income to buy such goods. This didn’t mean that they didn’t aspire to owning them. There was a “perpetual restless ambition in each of the inferior ranks to raise themselves to the level of those immediately above them,” said one Englishman at the time. Wedgwood understood the consumer’s motivations. He needed to imprint his product with prestige. So he put a name – his name – all over it.

But Wedgwood also needed to define the status of the brand. He manufactured a special breakfast set and in 1763 gave it to Queen Charlotte, wife of King George III. A couple of years later she purchased a tea set and he was named “Potter to Her Majes-ty.” Wedgwood creamware became known as Queensware. Orders from aristocrats fol-lowed. In Wedgwood’s own words, they were the “legislators of taste.” He even came to name lines after his aristocratic clients.

Endorsements in hand, he then advertised in papers, promising the chance to possess a piece of noble prestige at more affordable prices. Wedgwood knew that from business perspective, his profits lay not in expensive and time-consuming commissions for the nobility. “The Great People have had their Vases in their Palaces long enough for them to be seen and admired by the Middling Class of People, which Class we know are vastly, I had almost said, infinitely superior in number to the Great,” he wrote.

Consumers were willing to pay premium prices and Wedgwood knew this. His prices were on average double that of his competitors. He was careful to manage the difference, and he intuited the Law of Demand still being worked out by political econo-mists. Lower prices will increase the quantity demanded. This is the influence of absolute income. People have limited budgets, and the lower the prices the larger the number of goods they can buy.

But Wedgwood also understood the law of Relative Income, which mainstream economics has yet to fully integrate into its theoretical apparatus. “Low prices … must beget a low quality in the manufacture, which will beget contempt, which will beget neglect, & disuse, and there is an end of the trade,” he said.


The price of a good signals quality and prestige. Given their aspiration and yearning to emulate those above them in absolute income terms, people are willing to spend just a little bit more to access those goods. The Law of Demand is thus reversed in relative-income terms. In some cases, higher prices increase demand.

Centuries later, Wedgwood’s mass-produced goods for the middle classes would become antiques. They would be found in American garages and fetch tens of thousands of dollars. This was not the last time that the power of status and the influence of relative income would apply, even in absolute terms, to the middling or the poor.

Diageo, the British multinational drinks company and owner of Guinness, launched a bottom-of-the-pyramid beer in Kenya. The company intended to make a cheap beer that cut into the market for homemade and illicit brews. Diageo differentiated the product by tapping into consumer aspirations and thirst for status. They named the beer “Senator.” It launched at a price point just above that of illicit brews in late 2004, when a little-known American politician, the son of a Kenyan native, won a US Senate seat. Senator was an im-mediate success. The poor, the many consumers of Kenya, were willing to pay the premium. Soon the beer became known as Obama beer, and sales continued to soar. After Obama won the presidency in 2008, the brewery relaunched the brand: President.

Workers in Kenya in 2008, just like ones from Bristol in 1760, desire these everyday luxuries because despite their limited absolute income they still have a need for a pleasant life. They want these consumer goods because despite their limited absolute income they still compare themselves to others - to those whose income braket is immediately above theirs - and aspire to more. This consumption is not something that comes when they sur-pass an absolute income threshold. They were already consumers.

When considering the consumption boom associated with the globe’s bourgeoning middle classes, it is tempting to think about it as billions of people crossing an economic threshold. For the first time they have the disposable income to buy discretionary goods. We’re told: Consumption is born. But that is not accurate. Consumption is unleashed. In-stead of passing an absolute income threshold, people express their relative income on a new scale. Instead of moving from needs to wants, they act out their lifelong needs and wants in new ways.


Matthew Bird is a Professor in the Graduate School of Business at 9RMZIVWMHEH�HIP�4EGuÁGS��,I�[EW�JSVQIVP]�E�6IWIEVGL�(MVIGXSV�JSV�XLI�%HZERGIH�0IEHIVWLMT�-RMXMEXMZI�EX�,EVZEVH�9RMZIVWMX]�ERH�E�6IWIEVGL�%WWSGMEXI�EX�,EVZEVH�&YWMRIWW�7GLSSP��,I�VIGIMZIH�LMW�4L�(��JVSQ�XLI�University of Chicago.

I S H A P P I N E S S A N I N V E S TA B L E A S S E T ?

B Y A R T U R O F R A N C O


e all know that feeling. You buy something in a spree, then a few hours, days or weeks later. You look at it and say: what was I thinking? In fact, there is a name for this. It’s called Buyers Remorse.

But what is the opposite of buyer’s remorse? it could have many names. Consumer companies call this customer satisfaction. Marketing agencies refer to MX�EW�XLI�JYPÁPPQIRX�SJ�XLI�FVERH�TVSQMWI��7SGMEP�TW]GLSPSKMWXW�WE]�MX�MW�ER�EGXYEPM^IH�RIIH��)GSRSQMWXW�GEPP�MX�YXMPMX]�SV�WYFNIGXMZI�[IPPFIMRK�

We, as investors, call it material happiness.

More often than not, the most sophisticated and successful investment ideas are based on simple, almost obvious observations. In fact, the word obvious itself stems from the Latin – obviam – meaning the most accessible, the most evident. Yet, as a Har-vard professor once wrote, it takes many years of training in abstract thinking to miss the obvious.

I was recently reminded of this when Luca Padulli, my partner in Infusive, was asked to speak at an investment conference in Sun Valley. A man of great intellectual discipline, Luca has decades of business experience behind him, investing across many sectors and geographies. Moreover, his approach to wealth management is grounded in a centuries-old family tradition.

However, instead of delving into specific episodes of his career, or discussing re-cent global monetary policy shifts and their potential effects on asset prices (after all, he does have a PhD on the subject matter) Luca decided to focus on one of his favorite insights for the very long run: the pursuit of happiness.

“The pursuit of happiness that unites us all is almost as old as our species and, quite un-derstandably, has a major influence on our actions. It also turns out to be one of the most reliable sources of investment success,” he said to an unsuspecting audience.

“All creatures consume, but it is not that simple. They have preferences, and they prefer to consume what they want, like, and above all need in order to live. The more the need for survival is satisfied, the more affluent man becomes and the more demanding man is in terms of personal satisfaction,” he asserted. “Today, more and more people are given a choice to consume exactly what they like, and they will pay for it, if it gives them happiness.”

And sure enough, we’ve all heard this in some way or form. Last December, in a report called Tough choices for consumer-goods companies, McKinsey projected that by 2025 the global consuming class would include 4.2 billion people. This will also mark the first time in modern history that more than half of humanity has discretionary income. These trends, according to the report, could represent the biggest opportunity in the history of capitalism.

Similarly, according to the World Bank, the number of middle-class consumers is projected to rise dramatically over the next 15 years, especially in Asia. Some projections show that by 2030, 80% of middle-class consumers will live outside the US and Europe. This means some 700 million new emerging market consumers will appear across all income levels. With such statistics at hand, it is hard to deny that happiness - or more precisely, material happiness - could be a powerful force for business and investment success in the future.

But, how do we know what these billions of consumers want exactly? And how can we predict what will make them happy? Fortunately, there is a rich collection of re-search from many fields of knowledge that can help us find our way.

First, we see the achievement of material happiness as a short-term phenomenon. We are not referring to sustained, long-term happiness throughout a human lifespan.

Studies have found that due to psychological mechanisms (otherwise referred to as the Hedonistic Treadmill, or what Dan Gilbert calls the ability to synthesize happiness) human beings have the ability to adapt to almost any life-changing circumstance, and revert back to their “natural” level of reported happiness. In other words, over the long term, lottery winners are no happier than quadriplegics.

Rather, we are interested in accessible, recurring and predictable bursts of materi-al happiness. Specifically, we are interested in the (by definition) temporary physiological phenomenon that is generated by internal hormone and neural reactions, triggered by external stimuli. As Sigmund Freud put it in Civilization and its Discontents:

What is called happiness in its narrowest sense comes from the satisfaction—most often instantaneous—of pent-up needs, that have reached great intensity, and by its very nature can only be a transitory experience.

W


7IGSRHP]��VIPEXMZI�QEGVSIGSRSQMG�ERH�WSGMEP�GSRHMXMSRW�TPE]�ER�MQTSVXERX�VSPI�MR�QEOMRK�material happiness possible.

Can money buy happiness? Yes, to a certain point. Research clearly shows that initial in-creases in GDP per capita can cause strong increases in happiness, but further increases have progressively smaller influences. Once a person achieves a fairly basic standard of living, it takes a lot of additional money to bring about even a small increase in the level of reported happiness.

In fact, aggregate data shows that while Americans became twice as wealthy as they were in the 1950s, the levels of reported happiness have remained static during the last half-century. Yet, while a society’s level of happiness seems to have diminishing returns relative to increases in absolute income, there is a lot to be said about the effects of both relative income and relative consumption at the individual level on human satisfaction (as we explore in the following article).

“High disposable income was, for centuries, limited to a tiny number of elites,” Luca said. “Still, people across the economic ladder have always indulged in something that gave them pleasure: the little jewel, the celebratory supper. The more people with disposable income we have out there, the more there is an unsatisfied demand that needs to be reached, and quickly. Delivery is essential because the marginal value of time also in-creases when income goes up.”

A lot of evidence supports this statement. As both countries and individuals move up the income scale, the average hours devoted to work also tends to rise. The level of material happiness that can be achieved through consumption is highest when the opportunity cost (in both income but more importantly, time) is the lowest. Some products give the consumer a dose of material happiness every time they are bought or consumed: habit-ual treats, affordable luxuries, and product’s whose cost to both the producer and con-sumer is miniscule in comparison to the intangible satisfaction gained with each dose.

7S�[LEX�HSIW�EPP�SJ�XLMW�LEZI�XS�HS�[MXL�MRZIWXMRK#�

Well, according to Luca, quite a lot. “Companies that master products rooted in perennial needs, wants and desires can render the drivers of human nature as an investable asset and convert consumer habits into resilient returns,” he said to the audience. He then pro-ceeded to give a few examples from his own personal investment experience.

Stripping away disposals and one-off items, Nestlé’s sales have grown in a range be-tween 4 and 9 per cent annually from 2006 onward. Nestlé’s stock price has grown at a compounding rate of 13.65% in dollars for the last 20 years assuming dividend reinvest-ment – “something to make any hedge fund manager in the world turn pale in shame.” Now think about Hershey’s, with almost the same total shareholder return of 13.25%.

Another example can be found in Berkshire Hathaway’s 2007 Chairman’s letter to share-holders. Warren Buffet discusses the performance of what, by his own admission, was one of his first high quality investments dating to 1972: a chocolate manufacturer from Los Angeles called See’s Candies:

;I�FSYKLX�7II W̧�JSV��QMPPMSR�[LIR�MXW�WEPIW�[IVI��QMPPMSR�ERH�TVI�XE\�IEVRMRKW�[IVI�PIWW�XLER��QMPPMSR��8LI�GETMXEP�XLIR�VIUYMVIH�XS�GSRHYGX�XLI�FYWMRIWW�[EW��QMP-lion.

0EWX�]IEV�7II W̧�WEPIW�[IVI��QMPPMSR��ERH�TVI�XE\�TVSÁXW�[IVI��QMPPMSR��8LI�GETMXEP�RS[�VIUYMVIH�XS�VYR�XLI�FYWMRIWW�MW��QMPPMSR��8LMW�QIERW�[I�LEZI�LEH�XS�VIMRZIWX�SRP]��QMPPMSR�WMRGI��XS�LERHPI�XLI�QSHIWX�TL]WMGEP�KVS[XL�³�ERH�WSQI[LEX�MQQSHIWX�ÁRERGMEP�KVS[XL�³�SJ�XLI�FYWMRIWW��-R�XLI�QIERXMQI�TVI�XE\�IEVRMRKW�LEZI�XSXEPIH��billion.

8LIVI�EVIR¸X�QER]�7II W̧�MR�'SVTSVEXI�%QIVMGE��8]TMGEPP]��GSQTERMIW�XLEX�MRGVIEWI�XLIMV�IEVRMRKW� JVSQ��QMPPMSR� XS��QMPPMSR� VIUYMVI�� WE]��QMPPMSR�SV� WS�SJ� GETMXEP� MR-ZIWXQIRX�XS�ÁRERGI�XLIMV�KVS[XL��8LEX W̧�FIGEYWI�KVS[MRK�FYWMRIWWIW�LEZI�FSXL�[SVOMRK�GETMXEP�RIIHW�XLEX�MRGVIEWI�MR�TVSTSVXMSR�XS�WEPIW�KVS[XL�ERH�WMKRMÁGERX�VIUYMVIQIRXW�JSV�Á\IH�EWWIX�MRZIWXQIRXW�


See’s phenomenal returns on investment had muwch to do with Berkshire’s man-agement of the company and the loyalty of American customers to the long-established See’s brand. But more broadly, See’s returns come from the fact that it is selling choco-late. In our view, this is a company that was “directly” selling material happiness to con-sumers in the environment that we described before. In other words, with the right mix of conducive macroeconomic and social elements, and a core set of ingredients, product attributes and delivery methods, a company can consistently command premium pric-ing and elicit recurrent purchases across key segments.

Companies like See’s and Nestlé have an innate ability to repeatedly attract the spendable dollars of consumers and -even more important- capture the imagination of would be consumers. They do well because of the inelasticity of demand. Their earn-ings grow during recessions, stock market crashes and political crisis precisely the time when people need happiness most. In our view, examples of this kind of material hap-piness-driven stratospheric growth companies and brands include RedBull, Chobani Yo-gurt and VitaCoco.

“In sum, a quest for long-term success settles on the simple insight that my hap-piness as an investor truly hinges on backing products that ensure happiness to most consumers through mechanisms we are all too familiar with,” said Luca to conclude his presentation.

“Companies and products that make it their mission to deliver material happiness, I think, is the hot spot of investing for the long term. This is the sector where management can do the least harm. This is the sector that has the most inelastic of demands. This is the sector where the returns are generated by selling a small fraction of happiness every minute. Happiness is itself the most addictive of products, a product that we all seek, and this will hardly change.”

The value of Luca’s insights, and in general of understanding the perpetual and universal drivers of consumer demand, will only increase as we witness a global transfor-mation in the scale, diversity and attitudes of new and old consumers. Total consumer spending in the developing world will nearly double over the next eight years, from $14 trillion to $22 trillion, according to Roland Berger. In other words, worldwide yearly per capita consumer expenditure is forecast to surpass the three thousand dollar threshold by 2020.

So here’s a simple observation: as people on average become wealthier, their desires will multiply. More products will meet those desires. More money will be spent on material happiness, whether that happiness is delivered in a bag, a cup, a cream, an aluminum chassis, or a refrigerated bottle. This is why, at Infusive, we stake our future on the simple belief that rising disposable incomes will allow more people around the world to enjoy products that make them happier.


I N T E R V I E W

Prof. Charles SpenceP r o f e s s o r o f E x p e r i m e n t a l P s y c h o l o g y / C r o s s m o d a l R e s e a r c h L a b o r a t o r y

Professor Charles SpenceO x f o r d U n i v e r s i t y

Oxford psychology professor Charles Spence researches how the senses -- touch, sight, sound, smell -- determine consumer behaviour. The Crossmodal Research Laboratory specialises in how all of the senses interact to make impressions that are more complex and subconscious than the consumer realises. When coffee is drunk in a dark room, does is the taste more bitter than if it is drunk in the sun-shine? One energy drink is packaged in a tall and thin can and coloured red, and another is packaged in a short and squat Tetrapak and coloured blue: which is more attractive to the average consumer, and why? These are the types of ques-tions that the Laboratory has been investigating for 15 years. Some of the big-gest consumer companies in the world are naturally interested in the answers, and Professor Spence’s research has indirectly influenced the products we see on the shop shelf.

Multisensory food

perceptionF u s e N e w s l e t t e r | F i r s t E d i t i o n | I n f u s i v e 2 0 1 4

Chocolate across the centuries.“At no other time has nature concentrated such a wealth of valuable nourishment into such a small space as in the cocoa bean.”- Alexander Von Humboldt (1769–1859)

Chocolate is more than a confection, more than a desert, more than a delightful treat. When eaten, or drunk, people share a common connection through history. Over hundreds of years, chocolate –– once a rare, bitter-tasting delicacy for only the very wealthy –– has become common, affordable, and widely available for all to enjoy.

The Discovery of Cocoa (1500-400 BC)

Cocoa originates in pre-Hispanic Mesoamerica, where recent research suggests that the Olmec people began cultivating cocoa on the Mexican Gulf as early as 1500 BC. The ancient Mayans carried cocoa with them using the beans to brew a bitter drink sea-soned with pepper and chili. The upper echelons of Mayan society consumed the frothy drink at sacred rituals. The Aztecs also adopted the sacred drink into their culture, which served as an essential element of their rites. Ancient Central American civilizations be-lieved the seeds were a gift from the god Quetzalcaotl, the feathered serpent.

This so-called “Food of the Gods” was presented to the divinities as a sacrificial offering and was also used as a form of payment. “For instance, according to a price list dated 1545, a turkey cost 200 cocoa beans and a rabbit 100.” Historical evidence suggests that certain taxes were also collected in this “currency.” It took the Spanish to conquer the Aztec empire for the precious brown gold to be replaced by the Peso. The ancient Mes-oamericans considered the bitter spicy drink to be a source of wisdom and energy as well as an aphrodisiac and smoothing balsam. The last ruler of the Aztecs, Moctezuma II regularly consumed the beverage out of gold goblets with his warriors believing the cocoa to be a source of great strength.


Chocolate Arrives in Europe (1544)

Although Christopher Columbus was the first European to encounter cocoa, he did not bring it back to Europe due to his disdain for its bitter taste. Cortez brought the precious beans back to Eu-rope where sugar, honey, and other ingredients were added to make it more suitable for European taste. “Chocolate” as it now became called became an exotic luxury beverage for the highest levels of nobility. They managed to keep their delicious drink a Spanish secret for almost a century before the rest of Europe discovered what they were missing. For centuries, famous authors, composers, painters and other figures enjoyed chocolate.

The Industrial Revolution (1760-1840)

During the 18th and 19th centuries, Europeans innovated the chocolate manufacturing pro-cess improving the quality and speed at which chocolate could be produced. To keep up with tech-nological developments and consumer demand, European nations established colonial plantations to harvest the labor-intensive agricultural raw materials necessary. The factory era gave rise to inven-tions such as the cocoa press and Lindt’s conch machine which enabled smooth, creamy forms of chocolate to diversify the product’s industry. For centuries, chocolate remained a handmade luxury sipped only by society’s wealthiest citizens. Thanks to mass production, chocolate candy became affordable and accessible to a much broader public. Chocolate also became an economic factor dur-ing this period, helping to positively build Switzerland’s image throughout the world. The reputation of Swiss chocolate was so renowned that it enjoyed significant economic growth in the early 20th century, mostly attributed to Switzerland’s fast-growing export industry.

A Modern World of Pleasure.

Modern consumption of chocolate has led to higher expectations on the part of well-in-formed and increasingly demanding consumers. “The art of the balanced blend and careful process-ing of different cocoa varieties and other premium quality ingredients also determines the tastiness of a chocolate type. However, how chocolate should taste depends on cultural factors and varies from country to country. In Switzerland, where it was invented, milk chocolate still accounts for 80% of total chocolate consumption. Firms that have succeeded over generations have successfully.” Western demand for top-notch dark chocolate varieties with high cocoa content set new standards for the chocolate tablet sector enabling a whole new taste experience. Consumer habits in the luxury food sector indicate a transformational shift from quantity to quality. While chocolate as a sheer commodity is no longer a symbol of status and power, true choc-olate lovers expect the full sensatory effects chocolate can incite. These higher-end consumers are often willing to splurge for the premium varieties, not only consuming chocolate but also celebrat-ing it.


Fun Facts: + In the first performance of his opera “Così fan tutte” at the Burgtheater in Vienna in 1790, Mozart had the maid Despina come on stage with a cup of chocolate.

+ Goethe is said to have always taken his personal supply of chocolate with him on his numerous travels, together with special crockery for preparation.

+ Chocolate consumption has been scientifically linked to longer life. A few pieces of chocolate every month may make your life both sweeter and longer, according to the Harvard School of Public Health.

+ Europeans alone consume around 40% of the world’s cocoa per year, 85% of which is imported from West Africa (primarly Ghana). The average Brit, Swiss or German will each eat around 11 kilograms (24 pounds) of chocolate a year.

+ In contrast, Indians eat only 165 grams (less than 6 ounces) of chocolate a year. The Chinese eat only 99 grams (3.5 ounces). And Ghanaians don’t really eat any significant amount of chocolate.

+ Japan’s consumption is only 2 tonnes annually, versus 5 tons in Sweden.

+ Eating chocolate makes you feel good, because it increases levels of serotonin in your brain. Serotonin is the neurotransmitter that is responsible for feelings of well being and enhanced mood. Increasing serotonin levels can also lead to significant reductions in anxiety and stress


Interview with

Dr. Dieter WeisskopfCFO Lindt

OYV�FVEMRW�PMKLX�YT�[LIR�[I�GSRWYQI�IPIQIRXW�MR�GSGSE�ERH�WYKEV��WGMIRXMÁG�WXYHMIW�LEZI�WLS[R��7GMIRXMÁG�TVSSJ� MW�LEVHP]�RIIHIH��LS[IZIV�� XS�TVSZI�XLI�IRHYVMRK�ETTIEP�SJ�GLSGSPEXI��.YWX�SFWIVZI�XLI�TVSJYWMSR�SJ�GLSGSPEXI�FEVW�SR�E�WYTIVQEVOIX�WLIPJ�

In the United States and Europe, that supermarket shelf is increasingly packed with Lindt bars in a dozen or more flavors: 70% Cocoa, Touch of Sea Salt, Orange In-tense, Passion Fruit. Thirty years ago few consumers out-side of Switzerland and Germany had heard of Lindt.

That has changed fast. Looking at the 160-year-old Lindt factory on the quiet shore of Lake Zurich, one can hardly guess the energy Lindt has poured in to interna-tional expansion in the past 15 years.

“In the United States and Britain, Lindt is benefit-ting from the fact that consumers are ‘trading up’ to pre-mium chocolate,” said Dieter Weisskopf, Lindt’s CFO. “That is where our company has substantial growth potential in the short and medium term.” Britain and the United States are the two biggest chocolate-consuming countries.

Lindt’s success in the US – now its biggest single source of revenues – is the result of many years of pains-taking market positioning. The company recognized early on that Americans have a cultural and emotional connec-tion to chocolate – a crucial, albeit simple, consideration. Cultural attitudes and taste preferences are powerful and have to be taken into account when entering into new markets, Weisskopf says.

When entering a new market, Lindt typically starts with products that differentiate it from competitors – like the golden Lindt bunny. “Entering markets via ‘niche’ cate-gories with clearly differentiated products helps gain the attention of consumers and persuade them of product quality,” he says.

In the late 1990s dark chocolate accounted for a very low percentage of American consumption. The mar-ket is dominated by milk chocolate bars such as Hershey’s. Lindt entered on the other side of the spectrum with its “70% Cocoa” bar – an intense dark chocolate. This invig-orated the dark chocolate market and helped create a following for all sorts of high-cocoa-content chocolate. Lindt also introduced Lindor, the twist-wrapped choco-late ball with a soft melting center – a market novelty that gradually became a popular gift. And it came in with the now-ubiquitous Easter bunny, capitalizing on the Ameri-can association of Easter with sweets at a time when there were few premium options for Easter chocolate.

Lindt now offers a full range of chocolate in the US, including milk chocolate products that compete directly with the old American brands. Lindt bought Ghirardelli, the storied San Francisco chocolatier, in 1998 to capture the incumbent produer of premium chocolate in America. Through Ghirardelli, the Lindt brand in the US, and Lindt Canada, the company generated 25 per cent of its CHF 363m million in operating profits from North America. Lindt’s annual sales growth in North America has exceed-ed 10 per cent annually for the past three years, in marked contrast to growth rates in Europe which have stagnated in recent years.


Lindt is an example of a consumer company that has positioned its products at the right time and place: when consumer demand is poised to grow rapidly in a large market.

Lindt is also a reminder that demand growth can ignite just as rapidly in the most devel-oped economies – like the United States – as in emerging economies. Lindt’s product is premium Swiss chocolate. And it is riding a premium demand curve: American and Brit-ish chocolate-lovers’ desire for a more refined, Continental European style of chocolate.

“An important differentiator between a cheaper mass-market chocolate recipe and a pre-mium product is the content of sugar versus cocoa,” Weisskopf says. “The present market price for sugar is circa $800 per ton whereas cocoa beans trade at over $2,800 per ton and cocoa butter is reaching levels of $7,000 per ton. The consumer realizes the differ-ence easily, as a premium chocolate is high on cocoa butter, and therefore melts softly in the mouth, releasing the taste of the precious cocoa.”

“Not least thanks to our efforts, we have seen substantially stronger growth of the pre-mium chocolate market segment, as compared to the total chocolate market, over the past 20 years. Consumers discover the difference between mass-market and premium chocolate products and ‘trade up.’”

Other factors may support the trend to premium, he says, such as health concerns. Many consumers are eating less of their favorite foods, but making sure that what they do eat is of higher quality. There is also a demographic effect. Chocolate-eating children become adults and replace the sugary chocolate of their childhood with sweets that are less, well, sweet.

But how many people can afford to trade up to fancy Swiss chocolate? Many, if one goes in to a shop and compares the sticker prices of a Lindt bar and a mid-market chocolate brand.

µ4VIQMYQ�GLSGSPEXI� MW�RSX�SYX�SJ� VIEGL� XS�GSRWYQIVW�¶�;IMWWOSTJ�WE]W��µ8LI�TVMGI�HMJJIVIRGI�TIV�KVEQ�FIX[IIR�E�0MRHX�FEV�ERH�GSQ-

petitors’ products ranges between 20 and 100 per cent, depending SR�XLI�QEVOIX�ERH�XVEHI�GLERRIP�¶�

Lindt’s entry in to the US shows how much time and effort is needed to establish a quality brand in a new market – “to persuade, and win the consumer’s heart,” as Weisskopf says. But once established, “the brand becomes an invaluable asset for the future,” he says.

“From an investor’s perspective, a premium consumer brand in the food sector has huge value and advantages over brands in other businesses, for instance in the technology sector. When the management of a tech company misses a consumer mega-trend or a new technology, the whole business could suffer a lot in a period of two to three years, as recent examples in the mobile phone sector show.”

But once all the work has gone in to establishing a brand in the food sector, it tends to be more resilient. Such brands “have aspects of an internal yield that keep paying in per-petuity.”

In the UK Lindt basically is following the same strategy as in the US, taking advantage of British consumers trading up from mass-market, old-favorite brands.

“At the same time it is important that Lindt positions itself in emerging markets, which presently have low chocolate consumption per capita, but long term good prospects in line with rising per capita income.”

He admits that Lindt only has a niche presence so far in emerging markets like Brazil, Russia, China, and India. When entering emerging markets, logistics are a critical factor. Lindt products melt and need temperature-controlled distribution from the factory gate to the shop shelf. This is not always possible in China. High duties and tariffs are an addi-tional barrier to entry.

“In our view, Lindt’s focus for the forseeable future are the developed nations where con-sumers are continuously trading up, willing to spend a relatively small surcharge for pre-mium chocolate. Nevertheless a presence will be built up in emerging markets which will in the longer run will pay back.”


I N F U S I V ERecommends

Books, Articles, Videos, From our desk to yours.

The Surprising Science of Happiness TED Talk, 2004

Harvard psychologist Dan Gilbert, is the author of “Stumbling on Happiness,” a very accessible and unexpectedly funny book where he challenges the idea that we’ll be miserable if we don’t get what we want. While a bit outdated, this Ted Talk is worth watching in the context of our reflec-tions on the emerging consumer class and material happiness.

Our take: As more and more people around the world face true choice for the first time, the prod-ucts that can deliver the most satisfaction, without remorse or ambiguity, will surely deliver une-quivocal (and non-synthetic!) happiness.

http://www.ted.com/talks/dan_gilbert_asks_why_are_we_happy

Salt, Sugar, Fat: How the Food Giants Hooked Us (Printed Book)Random House, 2014

Michael Moss, a Pulitzer Prize-winning New York Times reporter, has been investigating the in-ner-workings of some of the world’s largest food companies for half a decade. While brilliantly de-tailing how these companies have scientifically designed products that encourage cravings and over-consumption despite knowledge of proven and potential health risks, some of the books shortcomings include: failing to distinguish between processed and natural sources, and having a very limited appreciation of the role that consumer choices play in shaping the food landscape.

Our take: While Moss’ summary of salt, sugar and fat content in mass-market consumer products is highly valuable, particularly when discussing some harmful effects, one must not overlook the book’s most gullible character: the fascinating science of taste.


Craft Beer RevolutionJoe WiebePalgrave MacMillan

Pubgoers may wonder: how is it that your cute “hometown” beer – made a few miles away from you – often costs 50 per cent more than a premium beer imported from a different continent? The Craft Beer Revolution recounts the phenomenal rise of American craft breweries starting in the 1980s and exploding thereafter, such that there were 537 craft breweries in 1994 (Sierra Nevada, Samuel Adams, Rogue Ale) and 2,700 in 2013. The writer is Steve Hindy, founder of New York’s Brooklyn Brewery – and now a millionaire with time on his hands to write a book. Hindy believes that the producers, rather than the consumers, are responsible for the craft beer revolution. Americans never lost a taste for rich, European-style beer, Hindy says. The problem was that brands like Budweiser dominated the market, and very few breweries made anything that challenged American taste buds – until the late 1970s. “Because of the tremendous growth of imports, a number of entrepreneurs began asking themselves if the traits that made foreign beers sell couldn’t be replicated here in the United States,” Hindy quotes one distributor saying. “In asking that question, they—overnight, it seemed—redefined the beer business. No longer was the equation domestic/imported; now it would be mainstream/sophisticated.”

Our take: As the book makes clear, there was nothing inevitable about the rise of authentic local beers – and more generally, the rise of authentic local brands, whose appeal is now taken for granted in cities like New York, San Francisco, and London. “They couldn’t comprehend the idea of a small brewery. It was like I was from Mars and speaking Martian,” Hindy quotes one pioneer, the founder of New Albion Brewery, saying in the early 1980s, after his business failed. Now the craft beer “movement” is firmly consumer-driven. Over 1,500 new craft breweries were in the planning stages last year.

SINGAPORE

54A Amoy St069880Singapore, SG

NEW YORK

132 Mulberry St Suite 501New York, NY 10013, USA

LONDON

50 Liverpool St Suite 307EC2M 7PYLondon, UK

www.infusive.com

FUSE by Infusive

Documents

Transcript of FUSE by Infusive