Chocolate Tempts India’s Sweet Tooth

October 8, 2013, 5:12 p.m. ET

Chocolate Tempts India’s Sweet Tooth

NEENA RAI And DEBIPRASAD NAYAK

When Deepti Ranjan was a child, a box of Cadbury’s candy-coated chocolate Gems or a caramel-chocolate 5-Star bar was a luxury. Now Ms. Ranjan, a 32-year-old software developer from Bangalore, is a chocoholic. She says she tries two or three chocolate varieties a month. Among her favorites are honey-sweet Swiss Toblerone and Cadbury’s Bournville, a dark-chocolate bar marketed with the tagline “You don’t buy a Bournville, you earn it.” “With my earnings,” says Ms. Ranjan, “I am discovering my secret passion.” India’s vast, growing middle class has the world’s chocolate purveyors on a sugar high. Rising demand in Asia is a important reason that cocoa futures have been the best-performing commodity so far this year—up 19%, even as other agricultural commodities have slumped.“The demand is there,” says Marcia Mogelonsky, chocolate analyst at market-research firm Mintel. “India has a huge and growing population and a strong interest in chocolate.”

To be sure, there are other reasons for surging prices. Global cocoa supplies remain tight. Cocoa futures climbed to multiyear highs Tuesday amid fears surrounding supplies of the chocolate-making ingredient out of top producer region, West Africa.

Cocoa for delivery in December on ICE Futures U.S. rose to $2,731 a metric ton, the highest intraday level since November 2011. December NYSE Liffe cocoa hit £1,765 ($2,841) a ton—the highest since Sept. 22, 2011.

Moreover, the International Cocoa Organization expect demand in Asia to grow about 10% this year—a trend some investors see leading prices to climb even further.

“If you can get Indians eating higher amounts of chocolate—and that is already happening—that will really alter the supply-and-demand picture for the cocoa market over the next few years,” says Matt Bradbard, vice president of managed futures and alternatives at RCM Asset Management, with $80 million under management. “Cocoa prices will continue to rise.”

To chocolate producers, India is especially attractive. For one thing, fancy chocolate is an affordable luxury for India’s new consumers. For another, the country has a sweet tooth; Indian cuisine has a rich menu of sugary concoctions.

Sales have more than doubled to $857 million in 2011 from $418 million in 2008, according to Mintel. That makes India the fastest-growing market for chocolate in the world, ahead of China. Mintel forecasts that retail sales of chocolate in India will grow more than 20% annually through 2017.

Mondelez International, MDLZ -0.23% which owns the Cadbury brand, said in August it will invest 10 billion rupees ($163 million) to build a manufacturing plant in the southern Indian state of Andhra Pradesh. Mars Inc. in June launched an eggless Snickers bar to court India’s large vegan population. And Nestle SA NESN.VX -0.81%recently brought its nutty, foil-wrapped Alpino chocolate to India to compete with Ferrero SpA’s Ferrero Rocher, which is already popular there.

“India is an important market as far as chocolates are concerned and has a lot of potential,” said MV Natarajan, the head of Mars’s chocolate business in India.

Hershey Co., HSY +0.49% the largest U.S. candy company by sales, is aiming for about a quarter of its sales to come from business outside the U.S. and Canada by 2017. A year ago, the maker of Reese’s Peanut Butter Cups said it was buying outGodrej Industries Ltd. 500164.BY +0.46% and another minority partner in a joint venture in India.

After expanding with country-specific product lines for the Chinese and Brazilian markets, the company says it is studying how to translate its products to the Indian market.

“We are at the very early stages of our assessment,” said Max Rangel, senior vice president of global chocolate at Hershey. He said that India is one of the company’s “priority markets” but that Hershey hasn’t yet worked up a product line that could address issues such as India’s high temperatures. “Chocolate does melt,” he said.

India’s per-capita consumption is only about 76 grams per year, according to the London-based International Cocoa Organization. By comparison, Germans eat 100 times as much.

But India’s middle class of 300 million to 400 million is an enticing, expanding target. Companies have made strides persuading Indians that chocolate is an acceptable holiday gift in place of traditional sweets. And even changes like the advent of air-conditioned stores and malls—which address the melting issue—are helping chocolate gain acceptance.

Mondelez said its chocolate sales in India grew by a double-digit percentage in the second quarter, despite constraints on its production ability. Michael Mitchell, a spokesman for Mondelez, said new production lines have started operating to address that. “We expect revenue to accelerate in the second half,” he said.

As consumption rises, India is trying to boost its own domestic production of cocoa, the principal ingredient in chocolate. The government is subsidizing expansion of the country’s cocoa plantations.

Venkatesh Hubballi, the director of India’s state-run directorate of cashew-nut and cocoa development, said by 2020 domestic cocoa production could rise to 30,000 tons. Last year, India produced 13,600 tons of cocoa beans.

Mr. Hubballi said cocoa production would grow in southern Indian states, but in the near-term consumption will outstrip local supply, and India will continue importing from countries such as Malaysia, Ghana and Ivory Coast.