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US: Lawsuit makes chocolate firms unhappy bunnies

by Stephen FoleyThe Independent (UK)
April 1st, 2010

While Easter is usually the happiest season of the year for chocolate manufacturers, the industry's leading players have been fed some bitter news in their most lucrative market, North America.

Cadbury, Mars, Hershey and Nestlé have been served with a lawsuit alleging that they conspired to push up the prices of their chocolate bars over most of the last decade, drawing on claims that senior executives shared secret price information in brown envelopes and via distributors.

The suit, served in Hershey's home state of Pennsylvania by a Minnesota grocery chain called Supervalu, adds to a mountain of litigation and regulatory scrutiny over alleged price-fixing.

Hershey, maker of treats beloved of American children, from Reece's peanut butter cups to Hershey's Kisses, has disclosed more than 100 lawsuits, including a class action claim north of the border that, if successful, could force them to compensate every Canadian who bought a chocolate bar between 2002 and 2008.

Canada's Competition Bureau is already investigating allegations of collusion, and the latest private lawsuits rely heavily on the evidence from that case. Thirteen Cadbury executives, which the Supervalu suit describes as "co-operating witnesses", have provided information about contacts between the companies, including how a Nestlé executive handed details of a forthcoming price hike to a Cadbury employee in a brown envelope in 2005.

And Hershey's chief financial officer, Bert Alfonso, wrote an email in 2007 introducing the new Canadian boss of the company to his counterpart at Cadbury, joking: "In keeping with the good advice from The Godfather, keep close to your competition."

UK-based Cadbury, which is being taken over by the US food giant Kraft, paid $5.7m last month to settle the Canadian class action suit, without admitting liability. It declined to comment last night. All the companies have promised to vigorously defend themselves against allegations of collusion.

The companies named as defendants in the Supervalu case together control more than three-quarters of the US chocolate market, and its lawsuit reads as a beginners' economics lesson for a potential jury. The company says weakening chocolate demand should have caused prices to fall; instead, as consumers began to seek out healthier snacks, its suppliers mysteriously managed to impose price rises for the first time in seven years.

"In the face of this waning demand, and the prospect of stagnating revenue, defendants decided to engage in 'collective self-help' – ie, collusion – in order to increase their prices, revenues and profits," according to the suit.

In December 2002, when Mars announced a 10 per cent price increase, first Hershey and then Nestlé followed within six days. The same pattern was repeated over the course of a month in late 2004 and again in spring 2007. Cadbury products are sold in the US under licence by Hershey.

While the manufacturers blamed rising raw materials prices and other costs, Supervalu's suit says that cocoa beans – which account for 25 per cent of the cost of making chocolate – and sugar and milk – which, combined, account for another 28 per cent – were broadly stable in price over the period. 



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