KANSAS CITY, Kan. (CN) – Hershey conspired with the world’s largest chocolatiers to fix prices in the United States, Associated Wholesale Grocers claims in Federal Court.
The 44-page complaint names Hershey’s alleged co-conspirators as the U.S. companies that make up the rest of the chocolate market: Mars, Nestle and Cadbury, the formerly British confectionary that Kraft Foods acquired in 2010.
Together, the companies control 76 percent of the America’s chocolate market, which is the largest such market in the world, according to the complaint. Nestle and Cadbury also license their products to Hershey, allowing the candy giant to sell items such as York Peppermint Patties and the No. 2 chocolate bar: the Kit Kat. It falls second to Snickers, a Mars product.
Associated says the quartet fixed chocolate prices beginning at least from Jan. 1, 2002, through at least 2008.
“In the early 2000’s, growth in the chocolate candy products business slowed significantly,” the complaint states. “In the United States, for example, the business experienced a growth rate of approximately 9.10% in 2000, but only 0.80% in 2001. Further, as a result of factors such as growing concerns over health issues, the chocolate candy products business was projected to experience steadily declining growth rates through at least 2008.
“In the face of this drop in demand and the prospect of declining revenue, defendants colluded in order to increase their prices, revenues and profits. Starting in late 2002, pursuant to an unlawful agreement to fix prices, defendants engaged in a series of coordinated price increases on their chocolate candy products in the United States.
“Defendants sell their chocolate candy products primarily on the basis of price. Despite brand loyalty, each defendant’s chocolate candy products are substitutable for one another. Price is the most important competitive factor in the sale of chocolate candy products, and the standardized nature of chocolate candy products hinders substantial and material non-price competition.”
Mars allegedly kicked things off on Dec. 6, 2002, when it jacked up the price of regular-sized candy bars and multipacks by 10.7 percent and 22 percent, respectively. Three days later, Hershey announced a 10.7 percent price increase to regular-sized bars, 13.6 percent for king-sized bars, 7.6 percent for six-packs of bars and 15.4 percent on 10-packs, according to the complaint. Another three days later, Nestle allegedly raised the price of its regular-sized bars by 10.3 percent, king-sized bars by 14.5 percent and multi-count packs by 16.8 percent.
All three publicly attributed the price increases to raw-material costs, and Mars and Nestle also blamed raising transportation costs.
Similar pricing bumps occurred between Dec. 17, 2004, and Dec. 22, 2004, and they initiated a third round of hikes in March and April 2007, Associated claims.
“Defendants’ repeated public assertions that the price increases resulted from increased input costs were false and pretextual,” the complaint states. “The price increases resulted from an express agreement among defendants and their co-conspirators to fix, raise, stabilize, and maintain prices on chocolate candy products in the United States.
“Cocoa beans account for more than 25% of the cost of the inputs for defendants’ chocolate candy products. The price of cocoa beans either decreased or remained stable from 2003 through 2007. Although there were sporadic increases in the price of cocoa, they were short-lived and offset by futures contracts and/or forward purchasing. Defendants use these forward purchasing and futures contracts to cover future manufacturing requirements and to take advantage of downward market fluctuations when possible and to reduce risks associated with upward fluctuations in input costs.
“Sugar accounts for approximately 16% of the cost of the inputs for defendants’ chocolate candy products. Sugar prices were stable during the relevant period, with the exception of a brief spike in late 2005 following the 2005 hurricane season. Sugar prices fell in 2006 as sugar crops recovered.
“No other input accounts for more than 15% of defendants’ total input costs for chocolate candy products. And no other input, labor, or other cost levels explain defendants’ price increases.”
Canadian and United States authorities investigated the four companies for price-fixing in 2007, and Cadbury has already effectively admitted guilt in the Canadian investigation, Associated says.
The conspiracy has caused grocers like Associated to pay “supracompetitive prices” for chocolate.
Associated Wholesale seeks an injunction and damages for violations of the Sherman Act and the Kansas Restraint of Trade Act. It is represented by Patrick Stueve of Stueve Siegel Hanson.