The Annual Industry Review
April 1, 2006
The Annual Industry Review
By Renee M. Covino
What’s Up — And Down In the Candy Universe
Sure, there are new challenges in the candy industry — especially now that it competes against all snacks — but there’s still opportunity to address new consumer needs with the sweetest products of all.
The investor community loves the confectionery category — but what’s not to love?
At the recent National Confectioners Association (NCA) State of the Industry conference, Andrew Lazar, managing director at Lehman Brothers, named more than a handful of reasons why the confectionery category is attractive — from both a retail and investor perspective. They include the following.
Inspires impulse consumption. The percentage of consumers purchasing front-end display products in any given month is highest for confectionery.
Expandable snacking occasions. This is vs. items with finite, definable usage occasions such as toothpaste or shampoo. While this was always the case, “the difference is, retailers now get it,” says Lazar.
Affordability. A whopping 79 percent of snacks sold in the food/drug/mass/convenience channels cost less than $1, and 35 percent are single-serve products.
Superior pricing power. Candy is not locked in only to supermarkets; in fact, traditional grocery stores represented just 20 percent of confectionery sales in 2005. Also, private label has a low-single digit share of the confectionery category, compared to 16 percent on average for packaged food overall.
Customers and consumers responsive to innovation. Limited editions are just one recent example of innovation.
Concentrated and rational competitive dynamics. “Though many companies compete in the confectionery category, the combined share of about 45 percent for the two largest players (Hershey and Masterfoods) suggests that competitive behavior is likely to be more rational,” says Lazar.
While this is all positive, viewing confectionery as an advantaged category is not new news. Other influences, both good and bad, have put new dynamics into place for the market, which is still predicted to come out on top.
Sugar-free candy still dandy
By all superficial appearances, the sugar-free candy segment is waning. Data from IRI and ACNielsen show the category reached record highs in 2004, thanks mostly to the short-lived success of low-carb chocolate confections, but that does not mean it is on a downward spiral now.
|2005 Confectionery Retail Sales|
|Segment||$ Retail Value (in billions)||$ Manufacturer Sales (in billions)||% Change|
|Source: National Confectioners Association estimates based on 2005 U.S. Dept. of Commerce 311D report and NCA Monthly Shipment Reports|
“If you look at the latest 52-week numbers from IRI through Feb. 19, 2006, diet chocolate candy is down 43.6 percent,” maintains Jim Corcoran, vice president of trade relations for the NCA. “But non-chocolate is up 13.9 percent, and sugarless gum is up 6.1 percent. So basically, we’re seeing a shift,” he says.
While no one argues that sugar-free and low-carb chocolate items declined rapidly after their first year of introduction, the sugar-free non-chocolate sector continues to grow. “It’s not growing at the same pace as it did a year ago, but it’s coming off a bigger base now,” reasons Corcoran. “But much of the action in sugar-free continues in the non-chocolate arena, and, what’s more, the target audience for that is growing tremendously,” he adds.
Prized premium chocolate
It didn’t exactly take confectionery by surprise thanks to all the health-related news, but premium chocolate, defined loosely by the industry as that which is more than $8 a pound, has risen to the top of chocolate demand, even, or should it be said, especially, in the mass channel.
|Mixed Bag for Chocolate Sales|
|(Total confectionery sales for 52 weeks ending Dec. 25, 2005; supermarkets, drugstores and mass merchandisers, excluding Wal-Mart)|
|Product category||$ Sales (in mil.)||% Change (vs. prior year)||Unit Sales (in mil.)||% Change (vs. prior year)|
|Chocolate candy (less than 3.5 oz.)||819.0||3.30||1,598.3||-1.52|
|Chocolate candy (boxes and bags equal to or greater than 3.5 oz.)||1,634.7||11.30||798.6||17.26|
|Chocolate candy (snack size)||527.5||-12.42||248.6||-18.87|
|Chocolate gift boxes||238.9||-1.69||57.6||1.59|
|Sugar-free diet chocolate||139.9||-41.74||85.5||-44.14|
|Hard sugar candy/package & roll||260.9||-8.27||192.6||-8.78|
|TOTAL NON-CHOCOLATE CANDY||2,291.0||-1.17||1,851.4||-3.30|
|All other snack bars||20.4||8.04||7.79||12.58|
|TOTAL SNACK/GRANOLA BARS||1,827.8||3.52||843.0||3.47|
|Cough/sore throat drops||393.1||11.17||210.2||5.49|
|Chocolate-covered salted snack||22.8||37.54||9.7||38.12|
|Source: Information Resources, Inc.|
Combined, Dove, Ferrero, Ghirardelli, Hershey Dark, Lindt, Mon Cheri and Perugina grew 32.2 percent for the period ending Dec. 25, 2005, according to NCA and IRI data.
“Some might make an argument that Hershey Dark and Dove don’t constitute gourmet chocolate, but if we took them out, that percentage would be even higher,” maintains Corcoran. The top three reason why gourmet chocolate sales are growing, according to the NCA — “all the good news surrounding dark chocolate and antioxidants, they’re sexy, and the big commitment at retail,” Corcoran explains.
Good seasonal dates
Generally speaking, “Halloween and Christmas candy did well in 2005, Valentine’s Day and Easter did not,” according to Corcoran. But that was last year — when seasonal dates were not as favorable overall as they are for 2006. Thus, the NCA is predicting a 2.3 percent increase in seasonal confectionery sales this year.
Valentine’s Day this year fell on a Tuesday, which is classified as good in seasonal candy terms, and “early indications are that Valentine’s Day got off to a positive start,” Corcoran maintains. It appears that for the four weeks ending Feb. 19, 2006, chocolate candy sales were up 3.1 percent.
Easter this year is late (April 16), allowing for more shopping days; Thanksgiving is early, giving more shopping days to Christmas (32). Halloween, falling on a Tuesday, is the only “downer” date, but “the trend on Halloween candy is so good, it makes the Tuesday date really neutral to sales,” believes Corcoran.
Besides the day/date of the holiday, other factors affecting seasonal candy sales include the economy, consumer confidence, consumer mood, shopping patterns, and merchandising strength/visibility.
Retail landscape changing
When last year’s prime Christmas selling season is studied, the convenience and drug sector did “extremely well” in candy sales, according to Corcoran, while the mass and food sectors “struggled.”
|Changing U.S. Population by Age|
|Segment||Shift 2000 - 2010|
|5 - 9||-2.1%|
|10 - 14||Even|
|15 - 24||+6.5%|
|25 - 49||-2.0%|
|50 - 64||+39.0%|
|65 - 74||+16.0%|
|Changing U.S. Population by Race|
|Segment||Shift 2000 - 2010|
|SOURCE: U.S. CENSUS BUREAU|
Most likely, this and other candy sales fluctuations are due to the extreme blurring of the channels and the fact that the “value channels” are grabbing more shopping trips at the expense of the food and mass sectors, according to a March, 2006 report by ACNielsen, “Channel Blurring and Consumer Trends.”
“The grocery channel has a significant advantage over other channels in terms of shopping frequency. However, as seen in prior years, shopping frequency within this channel is on the decline; in 2005, the average household made 64 trips to the grocery channel — eight fewer trips vs. 2001,” states Todd Hale, senior vice president of consumer and shopper insights.
“With conversion of some mass stores to supercenters and the closure of certain mass chains, shopping frequency within the mass channel is also on the decline,” Hale continues. “Although new store openings may be holding down shopping frequency in supercenters, average shopping frequency within this channel is relatively low, but growing nicely. This may also be driven by the distance with which rural shoppers must travel to shop in Wal-Mart supercenters.”
Shopping frequency in the other channels (drug, convenience) remained fairly stable over the past three years, but dollar stores are showing trip growth, according to the report.
U.S. population shifting
Currently the “baby boomlet” generation is in the 15-24 age range, which is swelling, according to the U.S. Census Bureau. But below that, kids ages 0-14 are in decline, as compared to years’ past. How will this affect candy sales?
“Non-chocolate novelty candy won’t be what it once was,” says Corcoran. “When I first joined the NCA 10 years ago, that was an automatic growth category because the baby boomlet kids were 10-15, which is the prime target for novelty. Now, its target audience is not growing, so times will be more difficult for that category,” he says.
Meanwhile, the population will become more ethnically diverse, giving way to even “spicier,” more “ethnic-oriented” treats.
Business costs up
Even without considering the domestic sugar shortages, “the structural cost of doing business is rising, which puts a premium on productivity efforts and value-added innovation,” says Lazar. Thus, CPG manufacturers from all walks, including candy, are now facing increased margin pressure from rising costs, both transitory (cost for inputs which include commodities and energy/packaging) and structural (with the fragmentation of media and a more demanding consumer, costs of R&D and marketing are also rising). “Such costs are likely to remain at elevated levels,” maintains Lazar. n
Sugar Situation STAYS SOUR
Despite periodic modest increases in sugar import quotas, the impact of last year's hurricanes and several other factors are expected to keep sugar in short supply for U.S. candy makers in the months ahead.
Domestic sugar supplies took a major hit as a result of last fall's hurricanes, which devastated cane crops in Louisiana and resulted in sugar refinery closings. Also contributing to the shortage was increased demand for sugar as the low-carb craze faded and earlier adverse weather conditions that compromised beet sugar production.
Current sugar prices are about 50 percent higher than normal, reports Thomas Earley, executive vice president of Promar International, Alexandria, Va., and an economist for the National Confectioners Association. Earley estimates that confectionery manufacturers' sugar costs will be up in the range of $200 million to $300 million, reaching a total of $1 billion for 2006.
The increases are "cutting into [candy manufacturers'] operations budgets tremendously," says Melane Rose, NCA vice president of government affairs. "With an ingredient this key, and a price increase this great, of course, you will see bottom lines affected," she adds.
Although it varies from category to category, sugar represents approximately one-seventh of materials and packaging costs for confectionery products, according to Earley.
"USDA is now estimating that ending stocks [of sugar] this year will be 1.5 million tons, which is a stock/use ratio of 14.4 percent, which is below where it needs to be to have reasonable prices," says Earley. Current sugar prices are the highest in 25 years, Earley adds.
Don’t let the fact that this map shows a mere 17 states with pending nutrition/obesity bills this year — affecting the sale of candy in schools — fool you. “We’re still relatively early in the legislative sessions, so it may be misleading; it doesn’t look that bad now, but we expect it to get a lot worse in the coming months,” says Stephen Lodge, vice president of state government affairs for the NCA.
Last year, 232 bills in 44 states were proposed, according to Lodge. While most of them did not get passed, some of them did (such as one signed by Governor Schwarzenegger in California), and Lodge expects that more legislators will propose them again this year. “It’s not a way to solve the obesity problem, but a lot of them want to try and do something,” he says.
In California, for instance, there is now a ban on any food item sold in schools with 35 percent or more of saturated fat and 30 percent or more of sugar by weight. “That pretty much takes candy out of the equation,” says Lodge.
North Carolina and Louisiana also passed “candy/school vend” bills last year — but only 50 percent of food items had to meet the standards. “That’s a lot better than a total restriction or ban,” states Lodge. “It gives more flexibility to the school, especially those with higher grades that make money on the sale of candy for band and sports.” It’s not that the NCA actually supports such “percentage” bills, but “we don’t oppose them the way we oppose California,” Lodge adds.