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Thursday, December 28, 2006

It's the Price, Not the Thought, That Counts?

Market failure in everything: The boxed chocolates edition.

This is a good example of what can happen to consumers when they use price to determine the quality of a differentiated product (via Boing Boing, "I can't speak to the veracity of the claims in this ... investigative series, but I couldn't stop reading it.").

This chocolatier uses blocks of chocolate obtained from a chocolate maker, melts them, puts the melted chocolate into rectangular forms, and sells it for mark-ups of several thousand percent.

Here is the series of ten short reports entitled "What's Noka Worth?" They are  interesting for the economics and for what you'll learn about making chocolate:

Part 1; Part 2; Part 3; Part 4; Part 5; Part 6; Part 7; Part 8; Part 9; Part 10

Part 1: Four years ago, while standing on a mountaintop in Switzerland, a pair of Canadian accountants, Katrina Merrem and Noah Houghton, decided to leave the ledgers behind and enter the world of gourmet chocolate. Two years later, they founded Noka Chocolate in Plano, Texas. ...

Instead of the usual array of elaborate molded and filled chocolates seen in most chocolatiers' shops, Noka opened with a spartan lineup of small, rectangular molded chocolates (the "Vintages Collection") and simple, unflavored ganache truffles (the "Grand Cru Collection"). The idea driving this minimalism is summed up in the following line from the company's FAQ: "Our passion is tasting real chocolate, in its rarest and purest form, unadulterated by vanilla and any other flavorings."

Noka's molded chocolates and truffles are made with single-origin chocolate--chocolate that is made from beans grown and harvested in a single country of origin, rather than a blend of beans from different countries. The company takes great pride in the quality and purity of the chocolate. ...

Since its opening two years ago, Noka has gained greater visibility, winning distribution through Neiman Marcus and Dean & DeLuca, landing sponsorships for the Golden Globe and Emmy Awards, and being named the #1 luxury chocolate in the world by Taste... [Clarification: Dean & DeLuca recently stopped carrying Noka's products.]

The one constant in all coverage of Noka is mention of their high prices. A Forbes featurette from Susan Yara earlier this year even identified Noka's chocolates as the second most expensive in the world. A strong argument can be made, however, that Noka's are the most expensive...

I'll admit that the first time I visited Noka's web site two years ago, I experienced sticker shock, even though I was no stranger to pricey gourmet chocolates. I figured I'd let some time pass, see if they survived, and maybe take a closer look at the company and its product later.

The time has come for that closer look.

In the coming days, we'll search for the answer to one simple question: Are Noka's chocolates worth the money?

Part 2: Let's take a look at what Noka chocolates cost.

Noka's prices vary based on three factors: (i) the box; (ii) the chocolate type; and (iii) the number of pieces in the package.

Noka sells its chocolates in two box styles--their stainless steel "Signature Box" and a less costly black cardboard "Encore Box." ... As mentioned in Part 1, Noka offers two styles of chocolates. Their "Grand Cru Collection" consists of thimble-shaped truffles from four countries of origin. Their "Vintages Collection" consists of rectangular-shaped tablets of simple chocolate from the same four countries of origin. ...

In a nutshell: (i) chocolates in the stainless steel boxes are more expensive than those in the cardboard boxes; (ii) the truffles are more expensive than the simple tablets on a per unit basis, but less expensive by weight; and (iii) the more pieces you buy, the lower the price per piece.

With that said, the least charitable approach in assessing the value of Noka's chocolates would be to focus on the 4-piece "Vintages Collection" in the "Signature Box." For those who are curious, the price for that is $39. That's $9.75 per piece. Each chocolate tablet weighs approximately seventy-five one-thousandths of an ounce. (They're no longer than a quarter's diameter and no wider than a nickel's, as you can see here.) So, at that rate, one pound of Noka's chocolate tablets would cost about $2,080.

The most charitable approach would be to look solely at the 96-piece "Vintages Collection" in the "Encore Box." That'll run you $139, or $1.45 per piece. Each piece weighs approximately seventy-five one-thousandths of an ounce. So the cheapest retail rate you're going to get for Noka chocolates is about $309 per pound. ...

Let's compare that with the products of some commonly known chocolatiers. Godiva chocolates range from about $30 to $65 per pound. Joseph Schmidt chocolates range from around $30 to $55 per pound. Fran's chocolates cost around $55 to $70 per pound. Michael Recchiuti's chocolates run from $58 to $85 per pound. And La Maison du Chocolat ranges from about $65 to $85 per pound.

Noka's pricing soars over that of most gourmet chocolatiers by a factor of five, ten, even twenty times or more. ...

Part 3: The first apologia I read for Noka's pricing came in a Dallas Morning News article from February of 2005. Noah Houghton, Noka co-founder and Katrina Merrem's partner, told the paper, "This is the very best chocolate you can buy -- and you couldn't buy the world's best wine or the world's best anything else for this price."

At first blush, this seems like a flimsy defense, since the pricing of one category of goods is irrelevant to the pricing of another. (Is the "world's best carrot cake" a bargain at any price, as long it's lower than that of the world's best wristwatch or sports car?) But the meat of the claim is that Noka's chocolates are the best in the world.

But hold up a second. Note that Houghton did not say, "These are the very best chocolates you can buy." He said, "This is the very best chocolate you can buy." The emphasis is on the materials--not the workmanship. ...

Now for a brief but necessary digression. Not all consumers may recognize the distinction between a "chocolate maker" and a "chocolatier" (or "confectioner").

A chocolate maker starts with cacao beans and transforms them into what we know as chocolate. There are many steps to the chocolate making process. Cacao pods are harvested and fermented, after which the beans are dried. The beans are shipped to a factory, where they are roasted, then cracked and winnowed, leaving cacao nibs. The nibs are milled to produce thick, pasty cacao liquor (or cacao mass). In fine chocolate operations, the cacao liquor is usually combined with additional ingredients (e.g., extra cocoa butter, sugar, milk solids, vanilla, and/or emulsifiers) and further milled to produce a smoother paste. (In industrial operations, the cacao liquor is pressed, causing a separation of liquids and solids--cocoa butter and cocoa presscake, which is then ground to make cocoa powder.) The paste is transferred to a device called a conche where it is refined (up to three days, for some makers) to obtain a silky smooth texture. The chocolate is then tempered to produce a proper crystalline structure (resulting in a glossy finish and crisp snap to the finished product) and molded (into bars, blocks, or individual pieces).

Chocolatiers, on the other hand, typically have no involvement in the actual making of chocolate. They purchase finished chocolate, usually in blocks or chips (aka couverture) such as those you may have seen on display locally at Whole Foods or Central Market (pictured above). The chocolate is then melted, molded, used for ganaches, for enrobing truffles, etc.

With that distinction made, let's be clear about what Noka does. Noka is a chocolatier. They work with bulk chocolate purchased from a chocolate maker. They play no role in the transformation of cacao beans into chocolate.

This should be fairly obvious. But it's not obvious--not from a perusal of Noka's web site...

To date, I've only found one pseudo-candid public acknowledgement from Noka's founders that they're chocolatiers, rather than chocolate makers. ...

Though they would have you believe otherwise, Noka does not make chocolate.

Part 4: So Noka doesn't make chocolate. There's no shame in that, since the same can be said of the vast majority of chocolatiers. However, the vast majority of chocolatiers are not giving the public the impression that they are chocolate makers, nor are they charging hundreds or even thousands of dollars per pound for their product. Knowing what Noka actually does (and doesn't do) is a necessary prerequisite to evaluating the value of the product.

And what does Noka do? In the case of their chocolate tablets (or "Vintages"), they buy blocks of chocolate from Europe, melt it, temper it, and pour it into small rectangular molds. It's as simple as that.... Despite the limited ambition of their molded chocolates, the quality of their work is frustratingly inconsistent. In the boxes I've purchased (all locally, so no shipping was involved), I've occasionally found an unacceptably dull finish or even bloom on their molded chocolates (as pictured at the top of this article).

As for the truffles, Noka buys the chocolate, melts some of it and mixes it with cream to form a ganache, pipes the ganache in thimble-sized lumps on parchment paper, enrobes the lumps with tempered chocolate, then sprinkles some shaved chocolate on top. They're as basic a truffle as you're likely to find anywhere--well within the capability of amateurs at home. The truffles appear to be either dipped or mechanically enrobed, and show no signs of the hand-rolling one would reasonably expect given the price point. The ganache is often dense and fudgy, sacrificing texture for, I suppose, a darker chocolate flavor.

In an online interview with Lisa Dial of Wisewomen Radio, Merrem made it sound as though there's more to Noka's technique. When asked how she learned her craft, Merrem replied, "A lot of reading in older text books and things, because what we do is a very, very old style approach to chocolate with not having any additives or preservatives; and so most of what's out there today is very geared to modern day chocolate which really wasn't applicable to what we are doing."

If Merrem was unable to find instruction on how to temper and mold chocolates or make basic truffles in contemporary cookbooks, she must not have looked very hard. Sure, it can be found in professional-oriented works such as Bo Friberg's The Professional Pastry Chef or Jean-Pierre Wybauw's Fine Chocolates: Great Experience. But everything you need to know to mold chocolates and make simple truffles (i.e., ingredients: dark chocolate and cream) can be found on pages 849 and 850 of The Joy of Cooking. Not exactly the Grand Arcanum.

To recap, the folks at Noka are not "chocolate makers." Though the quality of the couverture they buy is quite nice ..., their work as chocolatiers is rather rudimental. To get a sense of what I mean by "rudimental," take a look at Noka's chocolates, then compare them with those of, say, Michael Recchiuti, Norman Love, La Maison du Chocolat, Michel Cluizel, or Fritz Knipschildt. Compared with true professionals, Noka's work looks like that of school children.

Part 5: What makes the couverture that Noka buys so special? Houghton and Merrem often point to the following factors: (1) it is dark chocolate, with a minimum of 75% cacao; (2) it is single-origin chocolate; (3) it doesn't contain vanilla or vanillin; (4) it doesn't contain soy lecithin; and (5) it doesn't contain any additives, preservatives, or artificial flavorings or ingredients. As they say in the FAQ on their web page, "Our passion is tasting real chocolate, in its rarest and purest form...."

Before discussing each of these allegedly distinctive factors in turn, I'd like to briefly note some conceptual problems with Noka's goal of offering chocolate in its "purest form." For starters, the ideal of "purity" only makes sense if a purer product tastes better than a less pure product. A chocolate that contains no sugar is obviously purer than one that contains about 25% sugar by weight. But unsweetened chocolate--even from the best makers using the finest beans--is stiff stuff that few tasters would prefer. Noka implicitly recognizes this, since they've chosen to offer chocolates with 75% cacao solids rather than 100%.

But, even beyond that, what sense does it make to speak of "purity" when dealing with a processed food? ...

The ideal of purity is also at odds with the history of chocolate. In the interview with Jennifer Parigi referenced previously, the folks at Noka said, "Ever since the ancient Mayans discovered the exotic flavors of the cacao bean in 250 to 900 AD, mankind has experimented and transformed this marvelous wonder into innumerable chocolate concoctions. But how many of us today have savored the flavor of real chocolate--as pure, rare, and flavorful as the ancient Mayans once relished?"

The question was rhetorical and the expected answer was "none" (or at least not many). But what the ancient Mayans relished was not solid chocolate as we now know it. Rather, it was a thick, gritty, generally unsweetened frothy beverage composed of ground cacao beans, water, and other spices and flavorings, frequently including vanilla, ground mamey pits, ear flower, chiles, and/or nixtamalized maize (i.e., masa). I'll grant that not many of us have savored anything like that. If we did, we'd probably spit it all over the front of our shirts, just like the Spaniards did when they first encountered the concoction.

My point is twofold. First, the idea that Noka is somehow recovering past foodways (e.g., that of the Mayans) is flat out wrong. (By the way, the Coes have argued persuasively that domestication of cacao predated the Early Classic Mayan culture and probably goes back to the Olmec.) Second, from the earliest known use of cacao beans up until today, the dominant and universal practice has been to "adulterate" chocolate with spices, sweeteners, and other flavorings. The Mayans did it, as did the Aztecs, Spaniards, French, Italians, English, and Americans. "Purity" has never been the goal.

Now let's take a look at each of the supposedly distinctive aspects of the couverture that Noka buys.

...[detailed explanation of why there is nothing unique about the couverture Noka buys]...

So, going back to the original question, what makes the couverture that Noka buys so special? The answer, as far as I can tell, is "nothing." There's little that can be said of the couverture Noka buys that isn't equally true of chocolates from a number of premium makers.

Part 6: Identifying Noka's couverture source shouldn't be too hard, right? All we'd have to do is ask Katrina Merrem. ...

In the end, Katrina Merrem refused to reveal who supplies the couverture to Noka.

Was that unfair of me, putting her on the spot with such a blunt question? Hardly. As Doutre-Roussel has written, "A good chocolatier is proud of his work, and will not hesitate to share with you which couvertures he uses...."

So what about other chocolatiers? Are they evasive on this question?

They sure don't appear to be. When I started gathering phone numbers from chocolatiers' web sites to ask them the same question--just to see if they'd dodge, as Merrem had done--my efforts were repeatedly cut short, since many of their web sites openly identify their couvertures. ...

Each of the more than twenty gourmet chocolatiers I called, e-mailed, or visited provided an answer to the question quickly and directly, without evasion or defensiveness.

Every last one of them...except Noka.

After encouraging sophisticated chocolate buyers to ask chocolatiers about their couverture, Doutre-Roussel went on to say that the frankness of a chocolatier's answers to such questions "should give you an indicator of whether he is a businessman or an artist."

I leave it to readers to draw their own conclusions from Noka's response.

Part 7: My initial approach to discovering Noka's couverture source was simple process of elimination. There are a finite number of players in chocolate-making. The more one examines the qualities of a particular chocolate, the narrower the field of possible makers becomes. All we need to do is identify makers whose chocolate: (a) is single-origin; (b) consists of 75% cacao solids; (c) does not contain vanilla; and (d) does not contain soy lecithin. ...

...[after much detective work, he concludes]...

Either Noka is buying couvertures made by Bonnat, or Bonnat has a mysterious, chocolate-making doppelgänger that mimics its product line down to the smallest detail.

Part 8: When I began preparing a spreadsheet of single-origin chocolates months ago, I never would have guessed that the process of elimination would be so effective in determining Noka's chocolate supplier. ...

...[he does blind taste testing to confirm the supplier is Bonnat - and he's convinced. Knowing that, he can now determine the input costs]...

The blind tasting consistently confirmed what was already clear from the process of elimination analysis. Noka is using Bonnat's chocolates.

Katrina Merrem's statement to me (in Part 6) that Noka's couverture supplier is making its chocolate to her specifications appears to be a lie. Bonnat has been making single-origin chocolates from Venezuela, Ecuador, Ivory Coast, and Trinidad with 75% cacao solids (including additional cocoa butter), no vanilla, and no soy lecithin for many years--long before Noka came onto the scene.

Part 9: Bonnat is a small, fourth-generation family-owned business that began in Voiron, France, in 1884. They were pioneers in single-origin dark chocolates as far back as 1902 and the first chocolate maker to commercially produce a plantation bar (with Hacienda El Rosario in 1994).

The company isn't particularly well known in the US because it remains small (compared with other prominent French chocolate makers, such as Valrhona, Cluizel, and Pralus) and has been significantly eclipsed by more aggressive and, frankly, more talented latecomers. ...

Though Bonnat may not make the very best chocolate in the world, they're definitely a top tier chocolate maker with an illustrious history and solid reputation.

A chocolatier should feel no shame in using Bonnat's couverture. On the contrary, it's an ingredient of such quality that most chocolatiers would be telling customers about it at every opportunity. Why is Katrina Merrem so reluctant to admit that Noka uses Bonnat? For two simple reasons.

First, if Merrem were to admit that Noka uses Bonnat, it would undermine the company's remarkably successful campaign to mislead consumers and the press into believing that Noka is a chocolate maker, rather than a mere chocolatier (as discussed in Part 3).

Second, if Merrem were to admit that Noka uses Bonnat, it would immediately give consumers a price reference--a way of estimating Noka's obscene markup.

How much does Bonnat cost? The bars I used for the taste-testing in this report were purchased from Chocosphere for $33.99 per pound. Keep in mind that this is retail pricing... By purchasing blocks of couverture (rather than individual portioned bars) and cutting out the middleman, I'd be very surprised if Noka is paying more than $11-12 per pound.

So, if you buy Noka's 48-piece Vintages Encore box for $100, you're getting about the same amount of chocolate you would have gotten by buying one 100-gram Bonnat bar at a retail price of $7.50. That's a markup of more than 1,300% over the retail price.

Looking at it another way, you can spend your hundred dollar bill on 3.6 ounces of Noka's re-branded Bonnat chocolate or on 2.8 pounds of Bonnat's individually wrapped bars. (And, as you can see in the photo above, Bonnat does a much better job of tempering and molding its chocolate, resulting in a glossy finish and nice snap.)

That's just the markup from retail prices. Let's assume that Noka pays $12 per pound to buy blocks of couverture directly from Bonnat. If you buy Noka's dainty 4-piece Vintages Encore box for $16, you're getting three-tenths of an ounce of chocolate. Noka's cost for the chocolate in that box would be twenty three cents (for a markup of 6,956%). Their cost for the chocolate in the $60 24-piece Vintages Encore box would be $1.35 (for a markup of 4,444%). Their cost for the chocolate in the $140 96-piece Vintages Encore box would be $5.40 (for a markup of 2,592%). Nice margins. ...

It wasn't shame about the quality of Bonnat's chocolate that kept Katrina Merrem from identifying her supplier. It was shame about Noka's prices.

Part 10: In conclusion, we return to the original question. Are Noka's chocolates worth the prices they charge?

They are not.

Noka's prices cannot be justified by the underlying ingredients. Bonnat is good chocolate that can warrant a premium, but not a markup of more than 1,300% of retail...

1,300% of retail. Think about that for a second. If you bought a gallon of milk with that markup, it would cost you more than forty bucks. If you bought a Honda Civic with that markup, it would cost you more than $200,000 (or over $300,000 if you opted for the Hybrid).


Noka's prices cannot be justified through supposed intensive labor or specialized skill. Despite Noka's obfuscation, they are not chocolate makers ..., but simply chocolatiers--and not very creative, ambitious, or talented ones, at that... In artistry and level of imagination, Noka's truffles and molded chocolates are exactly what one might expect from a pair of accountants with limited experience and no formal training.

What does that leave? The boxes? Noka's cardboard boxes are nice looking (though the lids often fit too tightly, requiring some effort to wrestle them loose). But they're no nicer than the boxes and packaging of a number of other chocolatiers whose prices are much, much lower.

I'll grant that the stainless steel boxes are interesting (if a bit unromantic and impractical). I'm not sure exactly how much it costs Noka to have them made and shipped in from Taiwan, but ... the retail price differential between Noka's cardboard and stainless steel boxes (of the same size) typically ranges between $60 and $80. That's a lot of money for a plain metal box.

Noka's prices cannot be justified. ...

Katrina Merrem has often spoken of the epiphany she had on a Swiss mountaintop--the moment in which her career goals turned from accounting to the world of chocolate. What must that inner monologue have sounded like?

You know, accounting's a drag. It's time to pursue something genuine and fulfilling.

Maybe I could buy some French-made chocolate, trick people into believing I made it myself, melt it down and mold it into tiny rectangular tablets, stick them in over-sized boxes, slap on a ridiculously high price tag, and sell to that segment of the population who fallaciously believe that price is necessarily commensurate with value.

Or I could join the Peace Corps.

Nah, the chocolate thing sounds way more fulfilling.

I don't see passion or talent in Noka. Just hollow opportunism and Sneetchcraft.

    Posted by on Thursday, December 28, 2006 at 12:33 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (31)


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