They may have started small but are now thinking big.
The last thing the world needs is another chocolate company. That was entrepreneur Timothy Childs’ first thought when, 12 years ago, a former colleague suggested they form a business to create the perfect dark chocolate. As an outsider who had made his name in real-time 3D web graphics, he regarded the chocolate industry as a small, crowded market. Yet, after another project fell through, Childs did some research and was intrigued enough to visit Interpack, the food processing and packing exhibition, in 2005. What he saw blew his mind. As he told Wired magazine: “I had no idea how large an industry chocolate was. A light bulb went off. And I said, ‘OK, we are making chocolate.’”
The company Childs set up with chocolate expert Karl Bittong, and with the interest of Wired founder Louis Rossetto, was called TCHO, a name that would help distinguish their brand, capturing the mix of technology and chocolate. Chocolate is a deceptively simple product. The basic ingredients are straightforward enough – cocoa fat and solids; sugar; some vanilla to accentuate the flavor and sometimes lecithin, which acts as an emulsifier and stops the fats and solids separating. Yet the production process that creates the perfect chocolate is varied and elaborate. The hundreds of interrelated chemical reactions that create flavor are imperfectly understood and depend on incredibly minute changes made during fermentation, roasting and conching (in which the chocolate is warmed and ground).
The supply chain makes the process even more variable. Fermentation, arguably the most critical stage of the journey from bean to bar, is thoroughly unpredictable. After harvesting, the beans are piled together for several days and heat – created by a reaction between the sugar gloop that surrounds them and the yeasts on their surface – raises the temperature and helps create the sugars and acids that define flavor. Even at this stage, when the beans have not been roasted, they will have a crude chocolatey taste. The trouble with this process is that some fermented beans are packed with flavor while others can just taste flat.
With chocolate for the mass market, the industry’s usual modus operandi is tomask such variations in taste by blending in other beans. Yet at the more luxurious end of the market, where TCHO wanted to be, chocolate comes from one source. So they either had to control the fermentation process more effectively or accept that each harvest would produce a slightly different flavor, like grapes in winemaking. As men of science and technology, TCHO’s founders were perplexed by the industry’s traditional practices and they, like many executivesat some of the industry’s established players, felt it was necessary to change them.
They started with taste. For TCHO, this had become a subjective, even capricious, business which the industry had obscured by adopting the descriptive jargon popularized by winemakers. The company’s founders wanted to replace this with transparency – it still hosts tours of its premises for keen tourists and intrigued rivals – and scientific precision.
In place of jargon and percentages, TCHO developed a flavor wheel consisting of six segments – chocolatey, nutty, fruity, citrus, floral and earthy – so the company could talk about taste in a way consumers instinctively understood. Such information, illustrated as a pie chart on bar wrappers, helps alert consumers to the range of flavors they can expect from good chocolate.
That transparency was built into the firm’s R&D. In 2007, with versions of its chocolate ready to market, and Rossetto on board as CEO, TCHO eschewed market research, instead selling beta versions of its bars on its website for US$5 a bar and asking for consumer feedback. The first batch of 4,000 soon sold out and, responding to feedback from eager beta testers, new bars were issued within days. By the end of 2008, after 1,026 iterations, the company launched version 1.0 of its product, TCHO Chocolatey.
To deliver that product, the company didn’t just change the way it interacted with shoppers, it had to redefine its relationship with cocoa farmers. As Rossetto noted: “Cacao farming is a commodity business, with no incentive for farmers to focus on quality, as most chocolate made is milk chocolate. And milk chocolate was sold on the basis of the flavors of milk and caramelized sugar, not the chocolate.”
To ensure that its suppliers use the most flavorful raw material, the company launched a program called TCHOSource, under which it partners with farmers in Ecuador, Ghana, Madagascar, and Peru, to improve the way they ferment and dry beans. Digital technology has rendered distance and time zones irrelevant, with TCHO launching ‘Flavor Labs’, using cloud-based software and laptops to share and discuss data with farmers. By discussing a sample of beans, TCHO and its partners can ensure the harvest meets the company’s specifications and reduce the risk that an order would not be placed. As Rossetto said: “For the first time, these farmers can taste the chocolate made from their own beans and understand how their efforts affect the result.”
In tasting sessions via Skype, chocolate makers at TCHO can evaluate the unsweetened ground cocoa beans with farmers across the world, analyzing such characteristics as acidity, bitterness and nuttiness and compare their scores. The first Flavor Lab – TCHO now has nine – was set up in Peru in 2009. It was a hasty improvisation using hair dryers, a modified coffee roaster, Indian spice grinders and custom temperature control boxes. The labs have become more sophisticated since – though they still use a fair amount of retrofitted off-the-shelf appliances to keep the cost of each installation down to US$10,000 – embracing the cloud and drawing on data from local weather stations, so that such variables as ambient temperature and humidity can be monitored. This collaboration with the cooperatives has enabled farmers to taste their products, calibrate their palate with TCHO’s and make the appropriate corrections. The feedback is very specific but the aim is clear, for example, “Leave that batch of beans for another day” or “Consider adding orange peel to the mix.” What TCHO is trying to do is find ways to quantify subjective experience and replace the subjectivity with replicable systems.
Consumer behavior expert and retail veteran Todd Hale has said that chocolatemakers need to look at other consumer brands and learn how to “win with cool”. With its Silicon Valley savvy, TCHO has done precisely that.
In 10 years, TCHO has established itself as a high-end yet large-scale chocolate maker. The famous flavor wheel remains at the heart of the company’s product range, although it has launched milk, coffee and strawberry rhubarb pie products – and it still runs a program in which consumers beta test new bars at its head office.
The approach seems to be working. TCHO outgrew its 29,000 ft2 space on Pier 17 in San Francisco and has just moved to 49,000 ft2 premises in Berkeley. New CEO Andrew Burke says this will give them scope for expansion, room to experiment and raise awareness of what the company does: “We always felt like Willy Wonka and now we can do that well. People can come to the store, interact better and see how the chocolate is being made.”
Burke’s appointment reflects another stage in the company’s growth. Childs and Rossetto have stepped back (the former is still a shareholder, while the latter remains on the board of directors) but TCHO is well on track. Revenues have soared from US$4.5m to US$6m in the past year. Burke has considerable experience in the food and drink industry with Kraft, Gallo Wines and, most recently, as Executive Vice-President, Chief Marketing Officer and General Manager of Diamond Foods.
TCHO remains, in the words of one executive, “a young, scrappy company” and has succeeded in not being another me-too chocolate maker through its relentless focus on innovation and inventing the future.
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Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.