No Easter Basket? Chocolate Santa?

Consumers' increasing focus on health has sunk candy sales, particularly for holidays other than Halloween, when candymakers count on a sales bump

Halloween is just around the corner, so the candy industry should be gearing up for trick-or-treating. Instead, it's experiencing one of the scariest periods in its history. The largest U.S. candymaker, Hershey (HSY), producer of such classics as Kisses and Reese's peanut butter cups, just lost its chief executive, Richard Lenny. He announced his retirement effective at yearend after the charitable trust that controls Hershey explored a possible merger with candy giant Cadbury Schweppes (CSG) and declined to involve him in the talks. Cadbury, under pressure from activist investor Nelson Peltz, has also decided to spin off its U.S. beverage division and focus on confections. Two months ago, Campbell Soup (CPB) decided to exit the chocolate field and put its premium brand Godiva up for sale.

Confused? Such is the current state of the candy world. For years, you could count on the sweets business to produce steady growth. Even as the industry matured, it continued to post healthy profits. Today, however, candy manufacturers are confronting the dilemma of healthy-minded consumers not interested in gorging on candy at snack time—or in seeing their children do so. In a time of intense focus on obesity and the rise of type 2 diabetes among children, candy sales have declined 14% between 2001 and 2006, according to Chicago-based research firm Mintel International.

Candy purveyors are also being hit with high prices for high-fructose corn syrup, which have risen more than 40% in the last year because of the ethanol industry's demand for corn. "With so many forces against them, it's hardly any wonder that candymakers are scrambling to keep their heads above water," says Marcia Mogelonsky, a senior research analyst at Mintel.

Shifting U.S. Snack Habits

The public is increasingly viewing candy as harmful, so the industry is in crisis and consolidation seems to be in order. Tom Vierhile, director of Productscan Online, a research firm that tracks new consumer products, says in the early 1990s the candy industry had a goal it called "25/95," aiming to sell 25 lb. of candy per person by 1995. "Imagine how that kind of a mantra would sound today," Vierhile says.

The candy industry didn't achieve its 25-lb.-per-person goal by 1995—it took another five years to do that. Yet for all the guilt and wariness, Americans still each scarf 25 lb. annually—more than any other country in the world, according to data compiled by the U.S. Commerce Dept. By comparison, Belgians eat 23 lb. per person in a year, more than any other nation in the European Union.

But Americans are clearly shifting their tastes, and candy faces heavy competition. Although the U.S. is a nation of snackers, Mintel's surveys found that even when people want to eat something sweet, they prefer food they can chew and relish. The No. 1 choice during snack time is baked goods, followed by ice cream or frozen yogurt. Candy ranked fourth. Mogelonsky points out that new product development in the snacks arena is putting greater pressure on candy suppliers because some manufacturers are taking key candy attributes to create new snack foods. Consider Kellogg's (K) new Yogos, which have a "creamy outside" with yogurt and a "fruit chewy inside." Even chocolate bars have competition from nutrition and energy bars, a category that has seen sales increase 35% between 2001 and 2006.

Healthy Holidays

With health at the forefront, dark chocolate sales have risen substantially in the last few years. Hershey, which bought premium chocolate makers Scharffen Berger and Joseph Schmidt Confections, barely has its corporate toe in this market. Dark chocolate's cardiac-healthy antioxidant properties have fired up sales 129% in the past five years. If you're indulging in chocolate, the thinking goes, it might as well be something potentially good for you. "Dark chocolate is the new red wine," says Vierhile.

A few years ago, Hershey tried to revitalize its business by introducing limited-edition items such as Reese's Inside Out and extended its popular Kisses brand with such items as mint Kisses. The problem is, when people don't want to buy candy, it doesn't matter how many brand extensions a company conjures up. For example, for decades candymakers could always count on holidays to goose sales. But even that annual yearend bright spot has dimmed in recent years. October still continues to be a respectable month for candy sales. Between 2005 and 2006, sales of candy rose a whopping 21.4% for Halloween.

The wrinkle? Consumers are buying less candy for almost every other holiday. Candy sales for Christmas plunged 23.6% between 2005 and 2006, while Valentine's Day sales dipped 5.9%, and Easter was off 3.4%. What's more, even Halloween sales might be in jeopardy. "I hear," says Mogelonsky, "there's a movement afoot by some parents to get rid of candy during Halloween."

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