2006 confectionery opportunities research

Expanding the Dimensions of Confectionery

A $10 Billion Opportunity

Place Retailer’s Logo Here

A $10 Billion Opportunity For Growth

Source: Dechert-Hampe & Co.

Confectionery is already big business … but it could be much bigger!

$10 Billion

Opportunity

NCA enlisted major national retailers Food/Drug/Mass/Dollar outlets Representing over 20,000 stores Accounting for over 15% ACV

NCA sponsored comprehensive research Consumer & category learning Benchmarks & Best Practices Opportunities & solutions for growth

Partnership For Confectionery Growth

NCA Research Conducted

Individual interviews with numerous retailers, manufacturers & brokers

Audits of over 1000 stores across multiple channels

In-store interviews with over 900 Confectionery shoppers

In-depth interviews with Confectionery consumers

Analysis of store sales data & planograms from major retailers

Analysis of IRI syndicated data & secondary data

Confectionery Category Opportunity

Dimensions of the Confectionery Category

Huge category One of the largest Profitable Strong margins Frequently purchased Key to shopping trips Incremental Builds the shopping basket Promotable Responds to activity Expandable Consumption leads to growth

Confectionery Is A Huge & Growing Category

$28.90$26.30$25.80

$24.30$24.00$23.80

2000 2001 2002 2003 2004 2005

Source: US Dept. Commerce

Annual growth 4% Over $ 1 Billion added every year

Confectionery Retail Sales ($ Billions)

14%11%

Supermarkets

C-Stores

Mass Merch.

Club Stores

Drug Stores

Vending

Dollar Stores

Confectionery Sold In Many Different Outlets

Source: IRI,NCA Estimates, 2005

Major measured outlets (Food/Drug/Mass/C-store) represent just over half of all Confectionery sales

ConfectioneryRetail Sales $27.9 Billion

Confectionery Sales $ Billions

Potential For Improved PerformanceProjects To A $10 Billion Opportunity

Potential growth based on top performing retailers

A $10 Billion Opportunity

Confectionery Is Among Largest Food Categories In Store

$ Billions

Source: IRI, Food/Drug/Mass, 2005

In total, snacks represent the largest category of sales in many stores

Confectionery Delivers High Profitability Driven By High Gross Margin

27%30%

Confectionery Grocery Average

Confectionery margins are 3-5% points higher

Source: DHC Analysis of Retailer Data

% Gross Margin

Confectionery Is Among Most Frequently Purchased Categories In Stores

Source: ACNielsen HomeScan

Frequent purchases make it key to retailers

Annual Purchases

Confectionery is Expandable – Not a Zero Sum Game

Fixed Consumption Expandable Consumption

Consumption

PurchasingConsumption

Purchasing

Consumption at fixed rate

Soap, Detergent, Toilet Paper

Promotion Loads Pantry

Consumption Driven by Purchase

Candy, Snacks, Beverages

Promotion Builds Consumption

Consumers Often Have A Special Relationship With Confectionery

“It makes me happy, when I’m feeling blue”

“It’s a little pick-me-up when I need some energy”

“I feel I’m a better person when I have my candy”

“I hide candy. I keep my own stash – the good stuff”

“The holidays wouldn’t be the same without the candy”

Consumers Today Buy Confectionery Everywhere They Shop

Confectionery is important to build market baskets

Top Performing Retailers Sell Confectionery At A Higher Rate

Top performers have a rate 35% greater than average

Confectionery Sales Index Per $MM ACV

Top Performing Retailers Generate Higher Growth In Confectionery

Some of the top retailers are growing by double digits

Confectionery % Sales Growth

-2.4%Low

Performance

ModeratePerformance

TopPerformingRetailers

Top Performing Retailers Have Greater Confectionery Section Productivity

What is the secret of this performance advantage?

Confectionery Sales Per Linear Foot

$15.57

$13.91

LowPerformance

ModeratePerformance

Confectionery Growth & Performance Solutions Are Consumer Driven

Consumer

Seasonal Merchandising

Occasion-Based Marketing

Impulse Merchandising

New Product Innovation

Shopping Interruption

Best Practices in Aisle Management

Aisle Management

New Patterns Of Consumer Shopping Behavior Change the Game

Consumer shopping patterns changed toward more shorter trips

Retailers competing with multiple outlets for shopping occasions

Majority of shopping trips today are convenience oriented

Shoppers must be drawn into the aisle

Perimeter displays must compensate for reduced traffic

Dairy Deli MeatMeat

Bakery

Produce

Confectionery is Located In Middle Of Most Shopping Trips

Studies show middle of trip is least productive Consumers tend to buy more at beginning & end

Confectionery

Locate Confectionery Section Earlier In Shopping Trip

18% 10%

All Retailers Top Performers

End of Trip

Middle of Trip

Beginning of Trip

Top performing retailers locate Confectionery near beginning of trip

Confectionery Location In Store

Key Objective: Bring More Shoppers Down Confectionery Aisle

Only 20-25% of shoppers go down Candy aisle on a shopping trip

Conversion is high - when consumers shop candy aisle, they usually buy

Over 35 % of shoppers pick up a candy or snack during shopping trip

Locating candy in a higher traffic location results in significant improvements

Source: DHC Shopper Observations

Confectionery Performs Best When Adjacent to Snacks

Adjacent Category

Top Performing

RetailersOthers

Salty Snacks 18% 12%

Nuts 18 8

Cookies 10 12

Fruit Snacks 12 6

Snack Bars 6 4

Total Snacks 64% 42%

Baking Needs 9 7

Bottled Juice/Water 3 9

RTE Cereal 0 6

Other 23% 36%

Top performing retailers offer a total snack solution

Drive Sales By Allocating More Space To Confectionery Gondola

29.428.0

Grocery Drug Mass

All Retailers

Top Performers

Top performing retailers devote more space & generate more Candy sales

Gondola CandySection Size In Feet

Confectionery Outperforms Many Other Food Categories In Store

Categories that tend to be over-spaced relative to performance Baby Food Baking Mixes Cat Food Cookies Crackers Dog Food Packaged Desserts Pasta/Noodles Powdered Drink Mixes Rice/Beans

Category performance must be evaluated at individual retailers

Adjacencies must be considered

Provide More Variety to Maximize Sales

Top performing retailers generate more sales with increased Candy assortments

Candy is not often a need – consumers may walk away if their choice is unavailable

Retailers risk lost sales & reduced consumer shopping satisfaction

Sections must allow for new product introductions

Increased Item Assortment Can Drive Confectionery Sales

Top performing retailers stock more itemsSource: DHC Analysis of Retailer Data

Non-Seasonal Gondola CandyGrocery Dollar Sales Per MM ACV Index

Less Than250 Items

250-350 Items Over 350Items

Retailers Risk Lost Sales If They Don’t Stock Candy Items Consumers Want

Source: DHC Consumer Interviews

Consumers always have the options of buying nothing or going to another store

If you were shopping & could not locate the particular product you wanted to buy, which would you do?

Many Consumers Are Unhappy With Retail Merchandising Of Confectionery

Consumer interviews reveal some of the shopper frustration at the shelf

“The candy section is confusing. It’s difficult to find what you want”

“The products are all clumped up. They run into each other”

“It would help if they stood them up so you see the packages”

“They need to separate the different kinds of candy better”

“It’s overwhelming. There’s no organization to help you shop”

Presentation of Candy Gondola Is Key to Shopping Behavior

Shoppers spend only about 30 seconds shopping section

Many consumers are overwhelmed by lack of organization at shelf

70% of purchase decisions made at shelf

Bring Attention To Candy Section BestPractice

Block Section Into Key Confectionery Segments

Top performing retailers make the section easier to shop by blocking out segments

BestPractice

Double-Face Top Selling Items In Center Of Department

Top 25-50 items usually represent a third of all sales Double facing highlights these key items & eliminates out-of-stocks

BestPractice

Merchandise Candy Peg Bags Spanning Across Section

Spanning presents more variety & consumers are more likely to make multiple purchases

Set peg candy section to about 20% of total space to maximize productivity

BestPractice

Make A Statement In Premium Candy

Carry an assortment of Premium Candy to build sales & image

Devote 10% of space to Premium & merchandise it as a block

BestPractice

Create A Section For Dark Chocolate

Dark Chocolate has high growth potential based on health benefits

Carry at least 20 items or 5% of space

BestPractice

Create A Section For Sugar-Free Candy

Diabetics & borderline consumers represent a huge potential growth opportunity

Carry an assortment of Sugar-Free items to provide variety to this consumer group

BestPractice

Stock An Assortment Of Children’s Candy

Children are a key consumption group

Set the assortment to about 25 items or 7% of the space

Merchandise children’s items on lower shelves

BestPractice

Create A Section For Theater Boxes

Theatre Boxes represent another Candy purchase decision

Stock an assortment of at least 12-20 items

Merchandise as a block with signage calling out the occasion

BestPractice

Create A Licorice Section

Licorice is a key growth segment

Stock an assortment of brands & items

BestPractice

Create A Section For Jelly Beans

Jelly Beans have a unique consumer appeal

Carry an assortment of flavors to appeal to this loyal consumer group

BestPractice

Use Best Practices in Aisle Management To Maximize Confectionery Sales

Improve shopability & consumer satisfaction by blocking Confectionery section into key segments

Double face top selling items to highlight most popular brands & eliminate potential out-of-stocks

Organize peg bags spanning section to showcase variety & encourage multiple purchases

Provide assortment of premium candy to build sales & enhance image of candy department

Take advantage of health trends with an assortment of dark chocolate & functional candy/gum

BestPractice

Use Best Practices in Aisle Management To Maximize Confectionery Sales

Appeal to growing diabetic & weight conscious market with a selection of sugar-free items in key types

Stock theater boxes of candy in a blocked section & use signage to highlight this key usage occasion

Merchandise an assortment of kids candy products on a low shelf to appeal to this key consumption group

Create a section for jelly beans & carry popular flavors to take advantage of their unique appeal

Create a licorice section & carry popular brands to leverage this key growth opportunity

BestPractice

NON-CHOCOLATEPEG BAGS

NON-CHOCOLATELAYDOWN BAGS

KIDSNOVELTIES

LICORICE FUN SIZE BAGS

BOXCHOC

PREMCHOC

DARKCHOC

CHOCOLATELAYDOWN BAGS

MULTI- PACKS

BLOCKCHOC

KING SIZE

THEATER BOXESJELLY

BEANSMINTS

SUGARFREE

CHOCPEG

Confectionery Schematic With Segment Blocking

BestPractice

Reinvent Confectionery Section To Increase Appeal to Consumers

Utilize headers & signage to attract attention & create a fun atmosphere for shopping

Provide better shelf organization by blocking defined segments

Use shelf dividers & section breaks to improve appearance & shopability

Enhance shelf presentation with more stand-up & facing products or colorful signage

Use call-outs to highlight new items & bring attention to special offers

BestPractice

Shopping Interruption

Dairy Deli MeatMeat

Bakery

Produce

Confectionery

Perimeter DisplaysPerimeter Displays

In-Aisle DisplayIn-Aisle Display

Impulse at Checkout

Seasonal & Occasional

Candy Sales Are Improved By More Points Of Shopping Interruption

BestPractice

Increase Confectionery Display On Perimeter & High Traffic Locations

Majority of shopping trips today are convenience

Shopping is focused on the perimeter of the store

Impulse buying is driven by more points of interruption in shopping trip

Develop new merchandising vehicles to enable more perimeter display

BestPractice

Candy Is The Most Responsive Category For Display Treatment

Source: IRI, Food, 2005

% Increase On Display Only

Candy Is Under-Displayed Relative To Response It Generates

% Grocery Store Displays

Top Performing Retailers Provide More Merchandising Support

Confectionery Gondola

% Volume

Low PerformersMedium

PerformersTop Performers

Feature & Display 5 8 10

Display Only 16 20 24

Feature Only 5 7 7

Price Reduction 14 17 18

Any Merchandising 40 52 59

Top performers display much more

Make Confectionery Available At Key Shopping LocationsWhat Areas Of The Store Did You Shop Today?

Juices

Milk/D

velties

inePotato Chip

Rack2 Liter Carbonated Beverages

rocery

Meat Snacks

sSalty

Donuts Display

Hot Dog Grill

HBCBatteries/

FilmMagazines/ Newspapers

Single Serve Frozen

Novelties

Restrooms

Outdoor Display Outdoor DisplayEntrance

Coffee BarN

utritio

Bars C

sBaked

nfectio

Drinks

Microwave/ Supply Station C

Food Service

Carbonated/Non Carbonated Drinks Waters

Beverage Coolers

Source: DHC C-Store Shopper Observations

BestPractice

Research Demonstrates Value Of Additional Candy Locations In Store

Retailers should add more points of shopping interruption

Candy Store Sales IndexBy Number Of Permanent Locations

101105

1 or 2 3 4 or More

Product Innovation

Candy Is The Leading Category For New Product Introductions

Source: ProductScan

Together, Candy & Snacks represent nearly 30% of all new Food & Beverage SKUs

New SKUs By Category

13.5% New Items

Items One Year Old

Items Two YearsOld

Items More ThanTwo Years Old

Nearly A Third Of Candy Sales Are Produced By New Items

Source: IRI, FDMX, 2004

New products are truly the lifeblood of Confectionery

% Category Sales

Product Innovation To Meet Emerging Consumer Needs

Diabetes is growing 18 million in U.S. 1.3 million new cases per year

Why is market not responding Sugar-free candy down in 2005 Declines primarily in chocolate

Sugar-free Candy to show you care Grandma & Grandpa Expectant mothers

Premium & Dark Chocolate Offer Health & Profits

Functional foods becoming a reality Antioxidants in chocolate Dark chocolate sales up 24%

Premium candy products Similar to gourmet coffee, fine wines, artisan breads 18% of consumers buy Premium Candy Premium Candy sales $ 1.0 – 1.5 Billion Less than 50% in FDM outlets

Source: IRI, Mintel, 2005

Bring Innovation To Category By Tapping Into Snacking Trends

Adapt new flavor profiles from popular international cuisines to Confectionery

Challenge existing definitions of snack categories with new combinations

Expand the role of candy into more snacking need states

Leverage health benefits of cocoa to challenge existing perception of candy

BestPractice

Seasonal Merchandising

Valentine's

Easter

Halloween

Christmas

Seasonal Candy Represents About A Quarter Of All Confectionery Sales

Source: NCA, 2005

Halloween & Easter are large Valentines Day the smallest

Seasonal Candy$6.2 Billion

Confectionery Sales Are Heavily Influenced By Traditional Holidays

867 849

572594

460435433458

1/30 2/27 3/27 4/24 5/22 6/19 7/17 8/14 9/11 10/9 11/6 12/4 1/1

Valentine’s Easter Halloween Christmas

4 Week Period Ending

Source: IRI, FDM, 2005

Top Performing Retailers Have A Greater Seasonal Candy Sales Rate

The top performers have a rate 35% greater than average

Sales Index Per $MM ACV

LowPerformance

ModeratePerformance

There Are Top Retailers That Have Greater Sales Rates at Each Season

The greatest variance is seen at Christmas

Top Performer % Advantage

22Halloween

Valentines

Easter

Christmas

Most Consumers Buy Seasonal Candy at Traditional Holidays

Increased buying at traditional holidays is still an opportunity

Holidays/Occasions% Consumers Buying Candy

Easter

Valentines

Christmas

Halloween

Manage Seasonal Candy To Meet Consumer Needs

Recognize important role Seasonal Candy plays in consumer’s life

Consumers often view Seasonal Candy as a planned purchase

Retailers must stock extensive variety to appeal to specific consumer preferences

Balance inventory cost against risk of lost sales opportunities

Christmas Candy Is An Important Feature In Holiday Celebrations

Christmas Candy

Gifts 95 %

Snacking 90

Guests/Party 85

Stocking Stuffer 86

Decorations 71

Baking 64

Consumers include Christmas candy in their holiday celebrations in a variety of ways

77% of consumers agree:

“Christmas candy is an important part of the holiday

celebration”

Consumers Buy Christmas Candy On Multiple Shopping Occasions

% Agree

Buy Christmas Candy during regular shopping trips 53%

Buy Christmas Candy when I see it on display 43%

Make a special trip to buy Christmas Candy 37%

Consumers reported an average of 2.6 purchase occasions for Christmas Candy

Consumers Buy Christmas Candy Over The Entire Season

1st PurchaseAdditional Purchase

Before Thanksgiving 21% 9%

2-3 Weeks Before Christmas 47% 32%

1 Week Before Christmas 23% 45%

Christmas Week 8% 34%

After Christmas 1% 32%

None 0% 7%

Some people make a first purchase before Thanksgiving A large number of people continue to buy after Christmas

Christmas Candy Segments Should Be Merchandised To Meet Seasonal Needs

Decorating & snacking candy should be available early

Gifts are concentrated in the 3 weeks before Christmas

Stocking stuffers in the weeks just prior to the Holiday

Continue to display snacking candy after Christmas

Weeks prior to Christmas

6 5 4 3 2 1

BestPractice

Retailers Must Stock Christmas Candy Consumers Want

Retailers risk lost purchases if they don’t carry a variety of Christmas Candy

If Desired Christmas Candy Were Unavailable …

Go To Another Store

Buy Nothing Or Don't Know

Buy Non-Seasonal Candy

Buy Another Type of Candy

Buy Another Brand

Buy Another Variety of Brand

Stores Dressed For The Holidays Create A Candy Buying Environment

Display Only

Feature & Display

Feature Only

Price Reduction Only

No Merch.

Seasonal Candy Is Highly Dependent Upon Merchandising Support

Source: IRI, 2005

More than half sells on display

Seasonal Candy% Volume

Top Performing Retailers Do More Feature & Display Of Seasonal Candy

Seasonal Candy

% Volume

Low PerformersMedium

PerformersTop Performers

Feature & Display 9 11 16

Feature 4 5 6

Display 47 45 46

Price Reduction 24 26 20

Source: IRI, 2005

Seasonal Candy responds to quality support

Manage Holidays As Seasons Instead of Events

Recognize the patterns of consumer buying for each of the seasons Celebration / Decoration Gift (Family, male/female, child) Snack / treat

Consumer attitudes & buying patterns show the potential for increased seasonal purchases

Develop new solutions to maximize seasonal growth opportunities

Occasion Based Marketing

Other Major Holidays & Seasons Represent Key Opportunity For Candy Growth

Thanksgiving is the biggest food holiday of the year & Candy should be a part of it

Holidays/Occasions% Consumers Buying Candy

July 4th

Back-To-School

Thanksgiving

Grow Confectionery With Additional Holiday Buying Occasions

867 849

572594

460435433458

1/30 2/27 3/27 4/24 5/22 6/19 7/17 8/14 9/11 10/9 11/6 12/4 1/1

Valentine’s Easter Halloween Christmas

4 Week Period Ending

SuperBowl

Mother’sDay

School’sOut

SummerDays

Back-To-School

Thanks-giving

Expanded Holiday Buying Occasions

Holiday/Event Rationale Merchandising FocusSuper Bowl Major Social Event Bowl candy for parties

Mother’s Day Every Family Gift candy near cards

School’s Out Kids Home Piece candy for treats

Summer Days Picnics/Ballgames Hard candy won’t melt

Back to School Lunchboxes Candy bars

Thanksgiving Family Food Holiday Bowl candy / dessert candy / dinner mints

Other Potential Candy Buying Occasions

Consumers also mention birthdays & going to the theater as candy buying occasions

Occasions% Consumers Buying Candy

Ball Games

Going toTheater

Birthdays

Create New Consumer Buying Occasions For Confectionery

Need to address new occasions Birthdays/parties/anniversaries/graduations Alternative holidays (Thanksgiving, 4th of July) Events (Super Bowl, Academy Awards, etc.) Hallmark holidays (Sweetest Day, Mother’s Day, Father’s day,

Grandparent’s day, etc.)

Cross category solution sales Candy & greeting cards Cigarettes & mints Boxed chocolate & wine

BestPractice

Leverage Holidays & Events With Cross Category Merchandising

Merchandise gift candy with greeting cards as well as in the aisle

BestPractice

Solutions For Confectionery Growth

Recognize the importance of Confectionery to the store & the retail growth opportunity

Drive shoppers to the section with better location, signage, & merchandising

Increase shelf space & assortment for more sales & enhanced consumer satisfaction

Reinvent the section with better shelf organization & a more appealing product presentation

Solutions for Confectionery Growth

Drive sales with “points of shopping interruption” on perimeter & other high traffic locations

Create demand by leveraging secondary holidays & developing new consumer buying occasions

Embrace product innovation to meet new consumer needs

Harness the total power of snacking to expand the role & sales of Confectionery

2006 confectionery opportunities research

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