Outside the Numbers
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.”