Opening Shots: Raising prices stirs backlash fears
September 19, 2008
When news reached my office regarding the Hershey price increase, subsequently followed by reports that Mars was going to bump up their prices as well, I could virtually see all the midsized wholesalers as well as mom-and-pop retailers cheering.
As those of you involved in producing sweet treats know, it’s been rather hellish during the past two years dealing with ongoing price hikes in cocoa, corn sweeteners, sugar and nuts, not to mention the accompanying hikes in packaging, transportation and labor.
Many confectioners, including the big boys, have had to swallow those costs. In turn, management has turned to operations to squeeze out savings in order to maintain at least a livable margin on their products.
Just recently, Lindt & Sprüngli, the Swiss chocolate maker that most would say has helped establish the premium chocolate market in the United States, warned analysts and shareholders alike that challenging times lay ahead as a result of slower economic growth coupled with inflation.
Keep in mind that these warning are coming from a company that posted a 5% rise in first half net profits on 8% organic sales growth. In North and Latin America, Lindt’s sales topped 12% growth.
Still, the company expressed caution that if a sluggish economy continues, particularly in the United States and Europe where the bulk of the Lindt’s sales originate, consumer spending will be affected.
And although the premium chocolate sector tends to be more “recession-proof” than other segments, it is not inelastic, as evidenced by declines in seasonal sales. Even the organic food sector, which has been growing exponentially during the past years, has experienced a slow down based on pricing.
And while the drop-off in organic sales is not astronomical – say a few percentage points off on double-digit gains – what’s troublesome is that the price hikes are preventing newcomers from purchasing organic foods.
The silver lining within the organic segment, however, is that operational costs are coming down, which – once commodity prices stabilize – should open up the segment to new consumers once again.
How does this trend impact confections? Well, every category and sub-category is slightly different; the only commonality being higher costs, and thus higher prices. This month’s cover story on Primrose details how one company, seemingly pinned in by foreign competition and government sugar subsidies, has managed to not only survive but prosper.
Their formula involved a combination of risk-taking (in this case electing to produce some products in China and then eventually building a plant there), exploiting emerging niches, such as gift pack, sugar-free and nutraceutical segments and ongoing product innovation (such as the recently introduced caramel swirls in multiple flavor combinations).
None of this has been easy for Mark and Jeff Puch, the brothers heading up Primrose. As both can attest, this is not their grandfather’s nor their father’s marketplace. But as Mark Puch pointed out, it’s an exciting environment, one that definitely keeps you on your toes.
Consequently, the company has also had to put in price increases to contend with their increased operational costs. And their customers will pass those along to consumers accordingly. Will this impact sales?
It’s different in every category, but at the risk of sounding overly optimistic, I don’t think so. I’m relatively confident that consumers will pay more for their confections, be they in everyday mainstream or super premium items. First, when surveyed against other higher costs that consumers must deal with, confections represent a relative minor blip in total expenditures.
Also, it’s apparent to me that the bar has been raised in the United States regarding variety and quality in food. Yes, all of us occasionally settle for less, but we do appreciate best. This also applies to confections.
Maintaining product standards, even at the risk of rising prices, is paramount. Whatever options confectioners have, shortchanging on quality cannot ever be a consideration. As one of Chicagoland’s clothing chain proclaims, their store is where the “educated consumer shops.”
It also applies to candy; people know their treats. Give them what they deserve and more.