Under Pressure

Candy faces price, packaging shifts in a post-recession world.

Abbie Westra, Director, Editorial, CSP

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Sales up big, units up barely. It’s a common refrain in the candy category this year as the market adjusts to last year’s price increases.

In 2011, c-store dollar sales increased more than 9% for chocolate and more than 7% for no chocolate, according to SymphonyIRI Group data. Yet unit sales rose less than 2%.

Lance Smith, category manager for candy for McLane Co., Temple, Texas, estimates prices inflated about 8% for chocolate and no chocolate. If that’s the case, if a retailer didn’t see an 8% jump in dollars sales, “then certainly they’re not outpacing inflation,” says Smith.

How did we get to this place of discordance? And what’s in store for sales—unitsand dollars—for the rest of the year?

The commodity crush and subsequent price spike of 2011 is not repeating itself this year. But other factors are putting pressure on manufacturers to switch up both pricing and packaging. How will it affect customer habits? That’s the question to chase in this second half of the year.

The Year of the Increase

In 2011, the rubber met the road. Manufacturers, feeling the continued pressures of commodity pricing, finally served recession-whipped consumers a price increase.

“Everyone had their prices increase last year, and that was mainly due to commodity increases—cocoa prices going through the roof, and milk and sugar, too,” says John Haley, national accounts, convenience, for Lindt & Sprungli,Stratham, N.H. “Historically, you would always try to see how you could maintain your current prices, but eventually those costs increase so much that you have to take pricing [up].

”Many major manufacturers made sizable increases in 2011 in the hopes of projecting what their costs were going to be down the road. Hence, dollar-sales increases at the checkout greatly exceeded how many units were actually moving.

Meanwhile, many commodities loosened their hold in the first part of this year, putting industry experts at ease.

“Based on current data and market conditions, we do not foresee another confectionary price increase in 2012,” says Smith. For the 52 weeks ending June 10, 2012, total chocolate candy dollar sales rose nearly 10%, according to Symphony IRIGroup, a Chicago-based market research firm. Unit sales dropped 0.5%. Total dollar sales of no chocolate candy were up more than 12%, while unit sales were up a little more than 3%. It’s not quite copacetic, but Smith advises retailers to think of June as the beginning of a clean slate: “Generally speaking, in review of confectionary data, it’s important to note that once you pass the month of May, for the most part the 2011 price increases have been lapped; therefore, one should start to see true dollar demand at that point and beyond.”

Bill Lapp, president of consulting firm Advanced Economic Solutions, Omaha, Neb., isn’t quite ready to say we won’t see any increases, but he believes the pressure to increase prices should go away by the end of 2013. “Some [manufacturers]have never fully recouped the costs they incurred,” Lapp says. “So we could still have some increases, but the pressure on commodities, if weather cooperates, should abate, especially the closer you get to calendar 2013. That’s the good news.

“All these different commodities are like toys in a bathtub,” he continues.“Some are bouncing up and some are sinking a little bit, but when the overall level of the bathtub goes down, everything in the bathtub declines as well.”

With a belief that there has been some commodity relief in the supply chain in 2012, Smith says manufacturers might put some of that commodity relief toward promotional dollars. “Were this to occur, it is a safe assumption that one would see some type of lift in unit movement,” he says.

The difficulty with following commodities as they pertain to packaged goods is the number of components involved. “For salty snacks it’s not just wheat, and for chocolate it’s not just the cocoa. It’s energy costs and all the components that go into making a product,” says Marcia Mogelonsky, director of insights for Mintel Food & Drink.

“I am not a commodities broker, and I’m really glad I’m not, because I think I would die of a heart attack every other week.”

Still, the analysts at Mintel are watching sugar, and Mogelonsky is keeping her eye on cocoa. “The majority of the cocoa we get for food in the U.S. is from the Ivory Coast,” she says. Political strife in that country has settled recently, “but now there are hints that things have started to heat up again.”

Stateside, how corn will fare depends on the weather of the 2012 growing season.“If we have some good weather, we’ll have good relief on corn and other crops as well,” says Lapp.

The record-breaking warmth for the first half of this year has J&J Snack Foods watching commodities, especially wheat.“If adequate and timely rain doesn’t occur during the summer, grain production will be negatively impacted,” says Melinda L. Champion, vice president of marketing for the Pennsauken, N.J.-based company. “Additionally, the volatility of world markets, namely the European debt crisis, has contributed to commodity volatility. But we hope a strengthening U.S. dollar should help stabilize prices.”

Meanwhile, drops in energy costs and the subsequent fuel surcharges are what Robert Perkins, vice president of marketing for Rutter’s Farm Stores, York, Pa., is waiting for. “Oil is going down, which in turn should relate to lower cost of goods, especially from the DSD,” he says. “I’m not sure that we’ve actually been able to relate that.”

Shape Up or Ship Out

Commodities may be settling down, but other factors are challenging packaging and pricing in the candy category. Sugar has been named Public Enemy No. 1 as first lady Michelle Obama and prominent local politicians such as New York City Mayor Michael Bloomberg press on with their campaign against childhood obesity. In response, says Mogelonsky, many major manufacturers are making moves to “get on the bandwagon before they get pushed onto it.”

J&J Snack Foods continues to rollout better-for-you products such as baked pretzels and all-natural Whole Fruit Bars—an initiative propelled by its involvement in school foodservice and the USDA’s updates to its child nutrition meal requirements, says Champion. This year it is launching a no-sodium whole-grain gourmet pretzel roll and a 51% whole-grain cinnamon roll.

Mars in February made a major commitment “not to ship any chocolate products that exceed 250 calories per portion by the end of 2013,” according to a company release. It also switched from the king-sized bars to multiplies packaging meant for portioning or sharing, labeled2toGo, 4toGo and Sharing Size.

The move away from king-sized bars surprised some because of the subcategory’s ongoing surge in sales. Last year unit sales of king-sized chocolate rose more than 11%, according to Nielsen data, while standard-sized bars dropped nearly 3%.

But it’s all about perception, says Smith of McLane. “They know that king is what’s driving the category,” he says.“What they’re doing is admirable, but what they’re not doing is getting out of the king-sized business. Rather, as a company Mars is choosing to call it something different.”

Perkins of Rutter’s has seen some big growth in sales of king-sized candy. “It’s increasing much more than standard sized bars, but in ratio we still sell quite a bit more standard-sized than we do kingsized,” he says. “A lot of manufacturers are looking at size and packaging as a way to deter retail increases. They always fear retail increases.”Which points to perhaps the most contentious category in the candy aisle: gum. Unit sales continue to slump, because gum’s price point at c-stores is increasingly difficult for the consumer to swallow.

Dollar sales for the total gum category declined 1.75% in the year ending June 10, 2012, according to SymphonyIRI Group. Unit sales declined 2.7%. The sugarless-gum subcategory is what dragged numbers down: Dollar sales for regular gum increased 2.8%, while unit sales increased 0.7%. Dollar sales of sugarless gum, meanwhile, decreased 2.6%, and unit sales declined nearly 4%.

“When a consumer walks in and sees that they can buy a king-sized chocolate bar for less than the price of gum, crisp data clearly points to what purchase decision many consumers are currently making, and the numbers aren’t lying,” says Smith.

Neither Cadbury nor Wrigley took any pricing increases last year. Instead, the companies are launching Prepriced gum packs to try to induce trial.

“With the launch of Wrigley’s 5 brand as well as Cadbury’s Stride brand into a prepriced format and size, one would expect that you’d see greater trial, and subsequently that trial should lead to an increase in unit sales,” Smith says. “With that said, it’s going to take a large amount of unit sales to compensate for the retail price trade-down or perception of such.”

Dave Lau, merchandising manager for Rutter’s, probably wouldn’t argue with that. “When they want to downsize the package and control the retail … that starts to make you a little fidgety,” Lau says. “You have to sell a lot of units to make the kind of profit you make on a non-prepriced pack of gum. It’s a difficult decision.”

For the retailer, it hurts to take something that’s marked at $1.99 to 59 cents. But to the manufacturer’s point, it’s a stagnant category that needs some serious trial.

“Many retailers are already buying Wrigley’s prepriced gum, and it’s one of their best unit-moving SKUs. If you look at it from that standpoint, prepriced gum purchases [are] already occurring,” says Smith. By putting top brands and flavors at that price point, “I think you’re going to see a positive impact to the gum subcategory.”

Don’t Look Back

As the remainder of 2012 unfolds, Smith advises retailers to not focus on dollar growth. “You have to be focused on unit growth in a year coming off inflation,” he says.

Retailers who focus on category management, secondary merchandising, promoting the category and speed-to-market on new items will do just fine, he says. “Our best-in-class retailers that do each of those things right have consistent year-over-year unit growth. If you focus on those principles, your probability or success rate of having solid growth is significantly greater.”That, and pray for good crops.up data. 

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