When Hershey and Mondelez International announce first quarter earnings this week, investors will be keen to know how the chocolate manufacturers intend to address the recent spike in cocoa and sugar costs.

In the last several quarters, many businesses have already struggled with increased costs, which they have partially transferred to customers by boosting prices.

Their troubles may get worse given the recent spike in cocoa prices and the reduction in supply brought on by droughts, erratic rainfall, and crop disease in the world’s major cocoa-producing countries.

In addition, the cost of sugar has increased recently.

Sean King, an analyst at Columbia Threadneedle Investments, which owns shares of both Hershey and Mondelez, stated that “many investors are waiting to learn about how the consumer is reacting to the current price of chocolate in the market and how that influences the companies’ decisions to take more pricing in the future.”

According to Jefferies, cocoa prices, which have almost quadrupled in value this year, presently account for 10% and 20% of Hershey’s and Mondelez’s cost-of-goods-sold (COGS), respectively.

Arun Sundaram of CFRA Research stated that there may be stronger pricing in the second half. “Typically, these companies incur higher cocoa costs first and then they go to their retail customers and try to increase prices,” Sundaram said.

More price increases are likely when demand begins to wane and businesses attempt to offset the decline by raising prices.

Unit sales of chocolate fell 1.8% in the 13 weeks that ended on March 24 in the United States, according to data from market research firm Circana, while prices increased 6.3%.

Additionally, revenue growth decreased to a level not seen in nearly four years.

“The big question would be whether price-related growth is enough to offset volume declines that we’re likely going to see this year,” Sundaram said.

(Adapted from USNews.com)