Outside the Numbers
By PAUL ROGERS
The data may not be crystal clear, but the U.S.
confectionery industry had a pretty good year.
Ask any exit pollster in
Ohio: There’s danger in putting too much faith in incomplete numbers.
What appears to be an accurate representation of results may be exactly the
opposite of reality.
It’s a good principle to keep in mind when
examining the state of the U.S. candy industry in light of food, drug and
mass merchandiser sales data. The data is not wrong; it’s just
incomplete. Non-traditional and untracked retail outlets are not only
responsible for an increasingly larger percentage of candy sales,
they’re accounting for an ever-increasing percentage of all food
sales.
“Dollar stores are the fastest growing [retail]
segment in the United States. And the minute you don’t track the
fastest growing segment, you miss a tremendous amount of revenue,”
says Pierson Clair, president and chief executive officer, Brown &
Haley, Tacoma, Wash. “My experience looking at dollar stores, is that
most candy brands are showing up there.”
“As we see monthly figures reported for Wal-Mart,
they continue to grow and outperform retailers in general, and when
you’re not receiving those numbers it is difficult to get an accurate
portrayal of any industry,” he says.
The translation: The U.S. candy industry had a better
year than the available sales data would indicate.
Confectionery sales through food, drug and mass
merchandisers eked out a 1.6 percent gain to $10.4 billion for the 52 weeks
ending Dec. 26, 2004, according to Information Resources Inc. In
dollar terms, that comes out to an increase of $166 million. Nothing to
shout about. And when you factor out the outstanding performances of diet
candy (+36 percent to $258 million), sugarless gum (+13 percent to $710
million) and greater-than-3.5-ounce bags/bars/boxes of chocolate (+11.3
percent to $1.49 billion), sales actually declined 1.3 percent.
“That data doesn’t include a lot of
accounts we sell. We do significant amounts of business selling to
Jack’s Rexall in Twin Falls, Idaho, and Bessie’s Hallmark in ‘Small
Town, U.S.A.’ It doesn’t even pick up a whole variety of small
food stores,” says Tom Ward, co-president, Russell Stover Candies
Inc., Kansas City, Mo.
Factoring in convenience store candy sales, a channel
IRI began tracking in 2003, demonstrates how traditional sales numbers
don’t tell the whole story. Chocolate sales through food, drug and
mass outlets rose 1.9 percent to $4.2 billion for the 52 weeks ending Dec.
26, 2004, while non-chocolate declined 4.4 percent to $1.81 billion,
according to IRI. But on the convenience side, chocolate sales jumped 6.5
percent to $1.43 billion, and even non-chocolate mustered a 1.8 percent
gain to $955 million. Food, drug and mass nutrition/health bar sales rose
2.1 percent to $656 million (after years of high double-digit growth), but
c-store sales in the same category showed no sign of slowing, jumping 18.8
percent to $167 million.
Ward believes to get a better gauge of the candy
business’s performance you need to look at the general economy.
Confectionery fared better than the food, drug and mass numbers indicate,
but the level of success varied throughout the year, depending on economic
trends that month.
“Our business is highly discretionary and
affected by things like the stock market, interest rates and gas prices.
When you have a fairly mature category like candy, those little inputs can
affect the performance of whatever you’re selling,” says Ward.
“People don’t stop buying candy but they certainly change their
purchasing habits if the economy is not where they want it to be. They may
trade down or drop people off of their gift lists if it looks like they are
running out of money.”
In 2004, sales started strong (“from February
through May, the economy was great,” says Ward). Gas prices spiked in
June and July, slowing overall candy buying. Conditions improved from a gas
standpoint in late summer, but then economic uncertainty set in with the
presidential elections on the horizon.
Overall, Ward says understatedly, “I think it
was kind of OK.”
On the plus side
Despite depicting only part of the statistical picture,
certain trends are evident in the food, drug and mass numbers. First,
weight concerns are neither scaring consumers
off chocolate nor keeping manufacturers from developing indulgent new
chocolate products. After all, greater-than 3.5-ounce bags/bars/boxes of
chocolate led all confectionery gainers in 2004.
Total sales: Chocolate posts biggest gains | ||||
(Total confectionery sales for 52 weeks ending 12/26/04; food, drug and massmerchandisers, excluding Wal-Mart) | ||||
Product | Dollar Sales (in mil.) | % Change (vs. prior year) | Unit Sales (in mil.) | % Change (vs. prior year) |
Chocolate candy (less than 3.5 oz.) | $788.8 | +2.0 | 1,613.6 | +0.3 |
Chocolate candy (boxes and bags greater than 3.5 oz.) | 1,493.5 | +11.3 | 692.5 | +11.7 |
Chocolate candy (snack size) | 576.1 | -5.1 | 293.8 | -7.7 |
Chocolate gift boxes | 237.4 | -1.5 | 55.3 | -1.4 |
Novelty chocolate | 12.2 | -25.8 | 5.2 | -21.2 |
Seasonal chocolate | 1,099.8 | -4.3 | 611.1 | -5.7 |
Total Chocolate | $4,207.8 | +1.9 | 3,271.5 | +0.4 |
Non-chocolate hard candy | $285.9 | -9.0 | 210.0 | -10.4 |
Non-chocolate chewy candy | 700.0 | -3.9 | 603.1 | -5.2 |
Novelty | 237.3 | -7.8 | 248.3 | -4.6 |
Licorice | 153.3 | +2.1 | 105.6 | +1.6 |
Nut/coconut candy | 73.2 | -1.5 | 77.6 | -4.9 |
Seasonal | 349.2 | -2.3 | 280.2 | -4.0 |
Total Non-Chocolate | $1,808.9 | -4.4 | 1,524.8 | -5.2 |
Regular gum | $298.4 | -2.9 | 341.6 | -8.9 |
Sugarless gum | 710.1 | +13.0 | 662.0 | +9.3 |
Total Gum | $1,008.5 | +7.8 | 1,003.6 | +2.4 |
Plain mints | $118.2 | -2.1 | 90.3 | -8.4 |
Breath fresheners | 227.0 | -2.9 | 192.2 | -5.4 |
Breath drops/sprays | 13.3 | -18.6 | 6.3 | -23.8 |
Total Mints/Breath Fresheners | $358.5 | -3.3 | 288.8 | -6.8 |
Diet candy | $257.5 | +35.8 | 160.2 | +37.7 |
Cough drops | 352.7 | -5.3 | 198.6 | -10.7 |
Marshmallows | 127.1 | +1.3 | 107.3 | -0.3 |
Chocolate-covered salted snacks | 17.0 | -12.9 | 8.8 | -2.2 |
Yogurt- and carob-covered salted snacks | 18.3 | +12.9 | 7.8 | +4.3 |
Nutrition/health bars | 656.3 | +2.1 | 392.2 | -0.9 |
Granola bars and other snack bars* | 1,059.3 | +0.9 | 418.9 | +0.5 |
Fruit rolls and snacks | 535.5 | +4.3 | 283.4 | +11.6 |
Total Miscellaneous** | $3,023.7 | +3.8 | 1,577.2 | +3.6 |
Total (all candy) | $10,407.4 | +1.6 | 7,665.9 | +0.2 |
* Cereal, breakfast and all other snack granola bars added to granola bar category in 2004. ** The “Portable oral care” category (which contains dental care gums and breath strips) is not included in this year’s numbers because Information Resources Inc. is in the process of redefining the sector. Source: Information Resources Inc. |
One of the biggest non-diet success stories of the
past year is Hershey, Pa.-based Hershey Foods Corp.’s “limited
edition” strategy that jolted sales of the Reese’s brand and
led to the permanent addition of the White Chocolate variety to the line.
This year, limited edition Reese’s Fudge, Peanut Butter Lovers,
Chocolate Lovers and Big Cup (in regular and white chocolate) are hitting
the shelves. Hershey is doing the same with the Kit Kat brand (Mint, Inside
Out and Triple Chocolate) and Hershey’s Bars (Double Chocolate,
Cookie ‘n’ Chocolate and Nut Lovers).
The strategy propelled Reese’s brand sales
(greater than 3.5-ounce) nearly 40 percent to $124 million and nearly
quadrupled Kit Kat sales to $33 million. In the less-than-3.5-ounce
category, Kit Kat’s gains were more modest (+3.2 percent to $36
million), but Reese’s managed a 16.9 percent rise to $76 million.
Brown & Haley is following a similar strategy,
capitalizing on its established brand equity by tweaking the formula. It
has the business “growing aggressively,” says Clair.
“What we’ve been doing is redefining our
brand. For years, we thought the brand was ‘Almond Roca.’
That’s not true. The brand is ‘Roca,’ which allows us to
put any one of 50 high-quality flavor systems in front of the word
Roca—Mocha Roca, Cashew Roca, Rich Chocolate Roca,” says Clair.
“That is how we’re growing.”
Cashew Rocha debuted in 2004 as the first new
Roca in the 81-year history of Brown & Haley.
While larger packages of chocolate posted the biggest
absolute dollar gain, “diet” candy posted the highest
percentage gain: +36 percent. Diet includes both chocolate and
non-chocolate, sugar-free and low-carb. This time last year, judging by
media reports, you would have thought low-carb was going to take over the
world. This year, judging by media reports, you’d think low-carb
products are rotting in a warehouse due to lack of interest.
The truth about
low-carb
“We’ve had people say low-carb is dead. We
tell them, ‘Go back and look at the numbers and see how much you did
[with low-carb] and what you’re doing now. And then tell me if
it’s really dead or not,’” says Ward.
The low-carb confectionery market is somewhat
seasonal, Ward says. It declined in November and December because people
are least concerned about watching their weight during the holidays.
A February survey by Cambridge, Mass.-based market
research firm Opinion Dynamics Corp. showed that the number of consumers
who said they were on a low-carb diet dropped to 6 percent in December
2004, down from 11 percent in December 2003. But in January, that number
jumped back up to 15 percent.
“By the second week of January, we had some
retailers up 2.5 times what they were in December,” says Ward.
In February, according to Opinion Dynamics, the number
of people on a low-carb diet fell again to 12 percent, but that is on par
with the numbers at the height of low-carb madness from December 2003
through August 2004.
“Low-carb is not dead. I can assure you of that.
What you are seeing is that the irrational exuberance is over—the
time where anybody making low-carb candy in the backyard can sell
it—is definitely gone,” says Ward. “What is going on is a
continued level of velocity in low-carb that is very attractive. Is it
going to be what it was last year in terms of people buying anything and
everything? Probably not.”
The category is contracting, Ward says, and four or
five major manufacturers will probably end up doing the majority of the
business. “Having said that, it is a high-margin category for
everybody involved. Retailers are not going to want to get out of it
because margins are better than regular candy.”
Help wanted
Retailers wouldn’t want to get out of seasonal
confectionery either, of course, since it accounted for 26 percent of food,
drug and mass chocolate sales and 19 percent of non-chocolate sales for the
52 weeks ending Dec. 26, 2004, according to IRI. Retailers would, however,
like to see seasonal sales improve.
Candy Sales and Promotion Lift | |||||
(Sales are in millions) | |||||
2000 | 2001 | 2002 | 2003 | 2004 | |
Dollar Volume | $6,948.9 | $7,192.9 | $7,174.8 | $7,256.9 | $7,274.7 |
% Change vs. Year Ago | N/A | 3.5% | -0.3% | 1.1% | 0.2% |
% Dollars, Any Merchandising | 21.6% | 22.2% | 23.5% | 24.7.% | 26.62% |
% Change vs. Year Ago | N/A | 6.2% | 5.4% | 6.3% | 4.1% |
% Dollars, Feature Only | 7.6% | 8.5% | 9.2% | 10.1% | 10.4% |
% Change vs. Year Ago | N/A | 14.5% | 8.3% | 10.9% | 4.2% |
% Dollars, Display Only | 11.2% | 10.9% | 11.2% | 11.4% | 11.5% |
% Change vs. Year Ago | N/A | 0.7% | 2.0% | 2.9% | 1.6% |
% Dollars, Feature and Display | 2.8% | 2.8% | 3.1% | 3.2% | 3.6% |
% Change vs. Year Ago | N/A | 5.7% | 10.3% | 5.3% | 12.6% |
Source: ACNielsen |
Seasonal chocolate dropped 4.3 percent and seasonal
non-chocolate fell 2.3 percent last year. Gains through alternate channels
likely mitigated supermarket seasonal declines, but Ward also thinks timing
is a big part of the equation—one that should improve in the year
ahead.
“We live life in our category according to the
dates of the holidays,” says Ward. This year, Valentine’s Day
fell on a Monday, better than a Sunday when many city shops are closed.
Christmas falling on a Sunday this year is also a plus. And the 2006
Valentine’s-Easter spread bodes even better. Not only does
Valentine’s Day fall on a weekday again, a Tuesday, but the time from
Feb. 14 to Easter in 2006 affords 18 more days of marketing than 2005.
“That gives us almost three weeks extra selling
time, which is just huge,” Ward says. “That can’t be a
negative for anybody, including us.”
Confectionery manufacturers hope to boost holiday
volume with new products as well. Brown & Haley is rolling out Candy
Cane Roca in the fourth quarter this year. Wrapped in red foil, the product
contains not nuts but candy cane pieces in the center. Clair expects it to
appeal not only to traditional Roca consumers but children as well.
Brach’s Confections Inc., Dallas, was one of the
few to grow its holiday volume last year. Brach’s 2004
Valentine’s Day, Easter, Halloween and Christmas sales jumped 14
percent to $58.4 million, due in part to new packaging and quality
improvements, but also to crossover sales between its seasonal products and
its new line of better-for-you candies introduced at the start of the
fourth quarter. The Splenda-sweetened line
features eight of the company’s top-selling traditional candies,
including Milk Maid caramels and Star Brite peppermints.
Products like Brach’s Splenda-sweetened line are
what some believe is needed to boost the fortunes of the non-chocolate
sector as a whole. Even factoring in estimates from dollar stores and
Wal-Mart, most industry observers believe non-chocolate struggled in 2004
as it did in 2003. The most optimistic estimate comes from the Department
of Agriculture’s Foreign Agricultural Service (FAS) in the October
2004 report, “U.S. Market Profile for Confectionery Products.”
FAS projected a gain between 1 percent and 2 percent for non-chocolate
confectionery sales.
“The U.S. Market for Non-Chocolate Candy,”
a report from New York-based Packaged Facts, a division of
MartketResearch.com, sees a bleaker vision: a negative 2 percent compound
annual growth rate from 2004-2009 for the sector.
Like it or not, sugar is seen as a villain, especially
when stories of rising obesity and diabetes rates pepper the news.
Deteriorating demographics aren’t helping. The 5-24 year old age
group—the prime consumers of non-chocolate products—will grow
by only 10 percent from 2005-2010, according to Packaged Facts. The 10-14
age bracket will actually post a decline, as population growth centers on
the baby boomer-heavy 50-69 bracket.
Brown & Haley’s Clair believes consumers are
learning the value of a balanced diet, and are getting better at parceling
out indulgence in the form of gourmet chocolate or sugary sweets.
Acknowledging the role of medical advances and improved living standards,
he points to the ever-growing life expectancy number (a new high of 77.8,
as reported in February) as one reason to believe people are making
incremental dietary improvements. And as life expectancy grows, it will
also foster demand for sugar-free products.
The longer people live, the more naturally occurring,
medically treatable ailments they are going to have, including diabetes,
says Clair. “Therefore, sugar-free candy makes all the sense in the
world. Higher grade, higher quality sugar-free candy will have an
ever-expanding niche.”
Hurdles ahead
Sugar content is not the only challenge ahead to candy
companies in the coming year. Raw material costs are rising. The
ever-present problem of sugar pricing appears not to be going away anytime
soon, continuing to put pressure on
non-chocolate manufacturers.
Chocolate makers are facing their own dilemma in cocoa
prices. Political uncertainty in the Ivory Coast—which grows more
than 40 percent of the world’s cocoa crop—threatens not only
the U.S. confectionery market but also the global market. Two years of
division between the rebel-held north and the government-controlled south
is coming to a head with elections slated for October 2005. New violence
erupted in late February, sending cocoa prices soaring. No resolution is in
sight.
Nutmeat prices, with the exception of peanuts, are
escalating as well. Strong overseas demand fueled by favorable exchange
rates (the low value of the dollar), and weather stunted crops in some
areas, making pecans, almonds and macadamias a bigger drain on the bottom
line.
Other hurdles ahead are more basic and under the
control of manufacturers. “The other challenge we have is to offer
new things that the customer wants,” says Ward.
Clair, for one, is upbeat about the industry’s
activities and the year ahead. “Hershey buying Mauna Loa Macadamia
Nut talks about the health of this industry. It says that a major
corporation believes that in our industry there is growth where there is
quality.
“I think both the consumer’s and the
retailer’s perception of confectionery products is very bright and
very positive. Manufacturers have been delivering innovative products and
packaging and the consumer continues to find a great deal of joy in
confections,” Clair adds. “The category is very healthy, very
vibrant.”
In response to the growing premium market, Russell
Stover is rolling out a new line called Private Reserve in September. The
line will follow the lead of high-end chocolate shops, with unusual shapes
(a departure from Russell Stover’s non-molded chocolates) and flavors
(lemon soufflé, hazelnut paste, mocha creams).
“The line is designed to really reach core
customers first and then new customers, including younger buyers who may
not have purchased Russell Stover before. This allows the core customer,
who may have already bought three or four regular boxes, the opportunity to
match a different gift-giving profile, like the boss at work who they may
not want to buy a regular box for,” says Ward.
Russell Stover will market six SKUs of Private
Reserve, priced between 99 cents and $9.99. The key with premium is
pricing, says Ward. “You can call it premium or gourmet or whatever
you want, but unless it’s at the right price point, people
won’t buy it. The bulk of the premium business is done right now at
the $2.99 price point.”
Clair, for one, is upbeat about the industry’s
activities and the year ahead. “Hershey buying Mauna Loa Macadamia
Nut talks about health of this industry. It says that a major corporation
believes that in our industry there is growth where there is quality.
“I think both the consumer’s and the
retailer’s perception of confectionery products is very bright and
very positive. Manufacturers have been delivering innovative products and
packaging and the consumer continues to find a great deal of joy in
confections,” Clair adds. “The category is very healthy, very
vibrant.”