In the 1990s when the U.S. food industry was falling all over itself to capitalize on the fat-reduction craze, a surprising thing hap-pened. While many consumers were snatching up SnackWell's fat-free cookies and TCBY frozen yogurt as if fat were evil, sales of Ben & Jerry's superpremium ice cream and Pizza Hut stuffed crust pizza were soaring. Consumers began pursuing two seemingly contradictory paths, simultaneously seeking to reduce fat while indulging in more high-fat foods.

A similar dichotomy characterizes the state of the candy industry right now. It's not a fat issue, and it's not even a carbohydrate issue (although carb mania is having its own huge impact on the business). The issue is more one of price and quality. Shifting consumer tastes, the economics of manufacturing and a changing candy retail sector have spawned an industry growing at both ends of the spectrum.

"From my perspective, mainstream consumers are moving in two opposite directions," says Jim Reynolds Jr., vice president, sales and marketing, Gray & Co., Portland, Ore. "On the one hand, a significant group is moving toward more premium, higher-value products, just as they did with ice cream, beer, coffee. On the other, for more traditional candy products that haven't changed over time, a good segment is willing to purchase those products in less expensive form."

The proof is on the shelves — and in what's flying off the shelves. Five years ago, finding Lindt or Perugina required going to a specialty store — or overseas. Buying a Ghirardelli chocolate bar meant shopping at a Ghirardelli outlet. Now, walk into any Walgreen's or CVS store, and these kinds of premium offerings can be found alongside mainstream candy bars.

"Products that people might have associated with trips to Western Europe are widely available here. One reason is that consumers are becoming more discerning in what we sometimes call everyday luxuries," says Reynolds. "A larger consumer segment, not just rich people, is making that [upscale] choice."

Reynolds and others point to a string of food products that consumers have taken upscale — gourmet vinegars, olive oils and the aforementioned coffee, ice cream and beer. Chocolate is next in line.

Candy’s Ups and Downs (U.S. per capita consumption,chocolate and non-chocolate confectionery products, not including gum)
Year	Per Capita Consumption (in pounds)
1984	18.9
1985	19.1
1986	18.4
1987	18.3
1988	19.2
1989	20.4
1990	20.1
1991	20.3
1992	21.5
1993	21.9
1994	22.5
1995	23.8
1996	24.6
1997	25.4
1998	25.3
1999	24.3
2000	23.4
2001	21.8
2002	21.9*
2003	22.3*
* Candy Industry/Confectioner estimate. Source: U.S. Census Bureau, U.S. Department of Agriculture’s Foreign Agricultural Service

"For the category, it's a positive thing, potentially bringing in new customers — not just carving off a piece of the existing pie," says Elek Schneider, director of marketing, World's Finest Chocolate Inc., Chicago. Schneider cited the example of Hershey's Pot of Gold boxed chocolate as an example of a premium-positioned product from the nation's leading mainstream candy player.

For the 52 weeks ending Dec. 28, 2003, Hershey's Pot of Gold boxed chocolate sales at supermarkets, drug stores and mass merchandisers rose 12.4 percent to $45.1 million, according to Chicago-based Information Resources Inc. (IRI). Lindt chocolate bar sales jumped31 percent to $25.6 million.

It's not just supermarket, drug and mass merchandiser shelf-space on which upscale products are beginning to encroach. Specialty stores like Cost Plus carry imports and high-end chocolates almost exclusively. Alternative grocery retailers like Trader Joe's and Whole Foods emphasize, respectively, the out-of-the-ordinary and the "natural" and organic.

Looking to capitalize on candy as an impulse item, a growing list of nonfood specialty retailers like Bed, Bath & Beyond, The Gap and Banana Republic are joining the expanding list of outlets for higher-end and non-mainstream products, says Joan Steuer, president of Chocolate Marketing, a Los-Angeles-based consulting firm and trends forecaster. And then there's the booming artisanal chocolate sector.

The artisanal movement has been around for several years but pretty much confined to the East and West Coasts with a couple of Midwest exceptions, says Steuer. A "slew" of pastry chefs-turned-chocolatiers over the past two years has really expanded its reach.

Moonstruck Chocolate Co., Portland, Ore., posted annual growth of more than 40 percent in each of the past two years, marketing gourmet truffles at $42 for a 24-piece box and hot chocolate, shakes and coffee at its Moonstruck Cafés in Oregon and Illinois. Moonstruck runs six cafes, four opened in the past two years, and is one of a multitude of boutique chocolatiers gaining a loyal following around the nation.

Chicago's Vosges Haut-Chocolates, New York's Art of Chocolate, and Ft. Myers, Fla.-based Norman Love Confections were all founded by trained pastry chefs who believed consumers would shell out $70 and above for a pound of high-end truffles and ganache-filled delicacies.

A renaissance in high-end chocolates is in full bloom. That's one side of the story. One glance at the statistics demonstrates that while customers are splurging on chocolate indulgences, they are simultaneously counting their pennies with private label products and low-priced commodity candies. In part prompted by a tight economy, private label brands outperformed their big name neighbors in virtually every category in which they had a major presence.

2003 Industry Overview VIEW TABLE

Private label hard candy sales at supermarkets, drug stores and mass merchandisers rose 15.8 percent for the 52 weeks ending Dec. 28, 2003, according IRI, while total hard candy sales declined 5.5 percent. Private label non-chocolate chewy candy rose 13 percent, the category 1.4 percent. Private label chocolate candy (greater than 3.5 ounce) jumped 23.1 percent, the category 8.3 percent. Private label mints rose1.5 percent, while the category declined 8.9 percent.

Holiday Blues (52 weeks ending 12/28/03; food, drug and mass merchandisers, excluding Wal-Mart)
	Dollar Sales	% Change	Unit Sales	% Change
	(in millions)	(vs. prior year)	(in millions)	(vs. prior year)
Easter	$572.8	-1.0%	396.6	-4.2%
Christmas	$429.1	-1.1%	248.3	-3.3%
Valentine's Day	$368.6	-5.9%	196.0	-5.7%
Halloween	$145.2	-4.1%	85.4	-2.7%
Total*	$1,540.8	-2.7%	938.2	-4.1%
*Includes all other holidays.
Source: Information Resources Inc.

The less expensive stuff has its equivalent of the chocolate boutique as well: the dollar store. A recent presentation from Schaumburg, Ill.-based ACNielsen found that dollar stores are both growing in number and in customer traffic. Two of the top three retailers in the country (by number of outlets) are dollar stores: Dollar General and Family Dollar, with 6,525 and 5,160 stores, respectively. 7-Eleven is second at 5,365; Dollar Tree is poised to break the top 10 with 2,352 stores.

Shopping frequency per household has risen from 10 times per year in 2000 to 13 times last year, ahead of warehouse stores at 11 times per year and gaining on c-stores and drug stores at 15 each. For the 52 weeks ending June 28, 2003, candy sales at dollar stores jumped 23 percent over the previous year.

In the year ahead, industry experts expect consumer interest to again be drawn to both ends of the price scale. On the high end, they might go even higher.

The upscale-downscale dichotomy is amplifying existing trends in manufacturing. Servicing the mid-level and lower end candy sectors is getting harder and harder with sugar prices, labor costs and a tough economy.

"The candy industry needs to continue to look at automation and modernization to affect the bottom line," says Bob Boutin, executive vice president, Knechtel Laboratories, a Skokie, Ill.-based confectionery consulting firm. "One reason Fannie May went down the tubes, was that the plants didn't spend money to automate packaging [and other systems]. When you're selling in the mid-price range in a commodity marketplace, you have to maintain automation, otherwise labor costs will kill you."

Offshore manufacturing is waiting to step in, especially Far Eastern companies marketing hard candy and novelty candy/toy products.

"We continue to see other areas of the world looking to the U.S. market as an opportunity, particularly countries that have access sugar so to speak," says Dick Spencer, president and chief executive officer, Sunrise Confections, El Paso, Texas.

Even companies like Sunrise, manufacturing in Mexico, see the East as a rising force in the candy industry.

"No one can compete with China with respect to labor," says Spencer. "To ignore China as a competitor in this industry would be a mistake."

Those that want to compete on the high end have a separate set of challenges, a major one being product development.

"We are much more adventurous in our desire for new taste sensations because the world is closing in through technology like the Internet. We're traveling to new destinations through the foods we eat rather than getting on planes and going there," says Steuer.

That will play out in a number of ways, one of which is flavor. Expect wider use of the herbs and spices that have become the signature of many high-end choco-latiers: chili pepper, cumin, thyme, black pepper and the like.

"I also think a blend of hot and cool flavors will be hot — ginger and honey, cinnamon and mint, for warmth and coolness together," says Steuer.

Chocolate origin will become more important than ever as consumers begin to appreciate the flavor nuances from bean to bean. Ultimately, though maybe not this year, the typical chocolate lover will be able to discern the differences between chocolate made with beans grown in Indonesia vs. Venezuela vs. Ivory Coast.

Upscale boutiques are facilitating that education process. Moonstruck offers a chocolate sourced from the Ocumare region of Venezuela.

"We add chili pepper to it and it becomes a conversation piece for the sales person. 'Have you tried this particular chocolate? It has these flavors because it's grown in this region.' People learn where in the world it came from, the variety and taste characteristics," says Sally Bany, Moonstruck co-owner and brand manager.

Chocolate candy market leaders (52 weeks ending 12/28/03; food, drug and mass merchandisers, excluding Wal-Mart)
	Dollar Sales	% Change	Market
	(in millions)	(vs. year ago)	Share
Hershey	$1,843.8	3.2%	42.8%
Masterfoods	$1,174.5	7.0%	27.3%
Nestlé	$383.1	3.1%	8.9%
Russell Stover	$273.9	-8.0%	6.4%
R.M. Palmer	$60.6	-9.1%	1.4%
Ferrero	$47.5	-8.0%	1.1%
Tootsie Roll	$41.1	0.1%	1.0%
Total (including companies not shown)	$4,306.3	3.0%	100.0%
Source: Information Resources Inc.

But don't expect Hershey or Masterfoods to deliver a chili pepper chocolate bar or an Ocumarian-only product. The flavor and regional trend is not yet mainstream enough for the biggest manufacturers, the experts say. The mainstream response will likely be in one sector the artisanal chocolatiers won't touch and commodity manufacturers can't afford: nutrition.

There is no question what consumers want these days: low-carb. From McDonald's Corp. to Unilever plc, practically every food manufacturer and foodservice company is rolling out products to target low-carb dieters. Low-carb is the magic descriptor that has foods selling like hotcakes — if hotcakes could be made without carbs. There is even a new series of specialty food stores carrying only low-carb items. Las Vegas-based Totally Low Carb Stores Inc. plans on having 150 locations in 2005.

"America is obese. That's for sure," says Susan Rosenthal Jay, director of marketing at Hillside Candy, Hillside, N.J. "You can't pick up a magazine without seeing talk about it. So people are more and more aware, even if they don't know about the Atkins Diet or the South Beach Diet per se. They hear all this commotion about low-carb so they pick up low-carb foods."

Sugar candy market leaders (52 weeks ending 12/28/03; food, drug and mass merchandisers, excluding Wal-Mart)
	Dollar Sales	% Change	Market
	(in millions)	(vs. year ago)	Share
Hershey	$240.1	-4.1%	13.0%
Kraft Foods	$222.9	7.0%	12.1%
Masterfoods	$169.9	5.7%	9.2%
Tootsie Roll	$131.7	-5.4%	7.2%
Nestlé	$117.2	0.6%	6.4%
Barry Callebaut	$95.8	-10.6%	5.2%
Private Label	$89.6	8.4%	4.9%
Total (including companies not shown)	$1,840.8	-1.4%	100.0%
Source: Information Resources Inc.

In the confectionery industry, the impact is evident in the nutrition bar and sugar-free candy categories. After posting an 18 percent gain in 2002, "diet" candy exploded with a 65 percent gain in 2003, according to IRI. Sugar-based candy sales declined 1.4 percent after falling half a percentage point in 2002.

Low-carb health bars decimated standard diet bars last year, according to IRI. While Slim-Fast bar sales declined 28 percent to $62 million, Atkins Advantage jumped 91 percent to $64 million, Zone Perfect, was up 80 percent to $46 million and Carb Solutions climbed 28 percent to $42 million.

Seemingly everybody is directing R&D dollars toward low-carb products to cash in on the trend. Whether the products will stick around is another question. Some believe that, like the zero-fat craze of the 1990s, consumers will place less importance on carb counts once they find out that the calories in low-carb products can be greater than standard versions. Some believe potential government regulation may limit how much manufacturers will be able to take advantage.

As of now, though, most say they expect it to last a while. "It's a fad but . . . it's going to have some longevity because it's based on the Atkins and South Beach Diets. It's going to have a life of a number of years. It doesn't seem to fit the typical fad criteria of six months in and out," says Boutin.

The broader movement is one toward general health. Low-carb or not, the obesity issue is helping sugar-free candies become mainstream. The perceived wholesomeness of fruits and nuts is raising their profile in confectionery, and could bring about a renewed interest in products like nut barks and brittles, says Steuer. Plus, industry efforts to tout the health aspects of chocolate are taking root.

Mint market leaders (52 weeks ending 12/28/03; food, drug and mass merchandisers, excluding Wal-Mart)
	Dollar Sales	% Change	Market
	(in millions)	(vs. year ago)	Share
Kraft Foods	$116.9	-12.0%	31.0%
Ferrero	$64.1	-3.7%	17.0%
Hershey	$54.9	-10.3%	14.5%
Cadbury Adams	$22.5	0.2%	6.0%
Private Label	$22.3	-32.5%	5.9%
Perfetti Van Melle	$21.9	0.6%	5.8%
Barry Callebaut	$12.2	-13.3%	3.2%
Masterfoods	$116.9	-12.0%	31.0%
Total (including companies not shown)	$377.7	-12.2%	100.0%
Source: Information Resources Inc.

Gum market leaders (52 weeks ending 12/28/03; food, drug and mass merchandisers, excluding Wal-Mart)
	Dollar Sales	% Change	Market
	(in millions)	(vs. year ago)	Share
Wrigley	$535.2	5.9%	60.3%
Cadbury Adams	$200.3	-0.8%	22.6%
Hershey	$118.8	1.5%	13.4%
Topps	$7.2	-8.9%	0.8%
Private Label	$6.4	34.8%	0.7%
Concord Confections	$4.1	-15.7%	0.5%
Total (including companies not shown)	$887.8	3.5%	100.0%
Source: Information Resources Inc.

"Dark chocolate will continue to draw people. Heart-healthy people are more interested in dark chocolate and cocoa content than low carbs," says Steuer.

The emphasis on health and nutrition is one that the candy industry may have been slow to embrace, but it is clearly necessary to meet one major aspect of consumer demands. Archibald Candy Corp. went belly-up this year for many reasons, including failure to upgrade its manufacturing facility or facelift its stores, and overextending itself with acquisitions. But primarily it did not respond to consumer needs.

"[Archibald] made no effort to make the brand relevant to a younger consumer group. Shoppers have an affinity for things from their own childhood, and while they remembered Fannie May, they never got in tune with buying it for themselves," says Schneider.

Young professionals with disposable income opted for brands like Godiva and Ghirardelli that projected a more modern and a little classier image.

"You have to be in touch with every consumer group in every demographic profile — certainly age and income level," says Schneider. "Look at other brands like Coca-Cola. They've been in business 100 years or so because they make themselves relevant to every generation."

Successful candy companies these days must do the same. Shrewsbury, Mass.-based Hebert Candies is expanding its dark chocolate line and developing low-carb products.

Says Jeannie Hebert, vice president of retail franchise and marketing, "Finally, a lot of retailers are realizing that they've got some pretty smart cookies out there in customers and better be on their toes — better realize that and cater to them."