Estimating a sector sales fall of 1.4% to £340m in 2010, in its April 2011 report ‘Confectionery’, Key Note noted Cadbury’s recent delisting of five out of 10 Trident gum flavours in an “overly saturated” market, following a myriad of flavour and variety launches in 2009/10.
In the five years covered by its report from 2006-2010, Keynote said, confectionery sales rose to year-on-year to hit £5,029bn last year, with confectionery expenditure accounting for 10.4% of all UK food bought, and chocolate (£3.732bn sales in 2010) the fastest growing sector by far (up 17% over five years).
Quick action at the onset of the recession in late 2008 also saw producers escape “relatively unscathed”, Key Note said, where they introduced budget items, and increased the number of promotions and discounts to attract cash-strapped consumers.
Cocoa woe
However, Key Note predicts rising input costs will dominate future market movements, with cocoa and sugar prices surging “dramatically” over the firm’s five year review period, with an “adverse affect” likely on chocolate confectionery.
“Although some companies maintained a good level of ingredient stocks in 2010, the rising cost of commodities, coupled with the increase in VAT ... is likely to have a more noticeable effect on the industry in 2011,” said Key Note.
It noted that the cost of cocoa peaked in July 2010 at levels not seen since 1977: according to the International Cocoa Organisation (ICCO), prices rose 369.9% from $774 p/t in 2000/1 to $3,637 p/t in December 2009.
Cocoa, sugar and palm oil price hikes will “inevitably be passed down to the consumer”, said Keynote, although it cites Cadbury’s delay in doing so by cutting its 140g Dairy Milk bar to 120g.
NPD sluggish
Price hikes and the recession have also hit NPD in recent years, said Key Note, with brands instead making existing products in different formats: with modified recipes to retain consumer interest, or in pouches and tubs for sharing, which have been “particularly successful in recent years”.
But confectionery growth potential is limited, said Key Note, citing the UK’s large market size, abundant products and brand dominance; however, growth trends include ‘staying in and sharing’ (home sharing packs) or different size formats such as Crunchie Rocks (launched in May 2010).
The ‘Healthier eating’ trend is also shaking up confectionery, said Key Note, with Cadbury acquiring the Natural Confectionery Company (sweets without artificial colours or flavours), while gum brands are also using healthier ingredients: products include Cadbury’s Stride (vitamins B6 and B12) and Trident (Vitamin C, ginseng, tea).
Meanwhile premium offerings with higher cocoa content or better quality ingredients have established a “more dominant market presence”.
Looking forward, Key Note said brand-dominance ensures widespread customer choice, with brand extensions under recognised names “likely to perform well,” amidst a market “still relatively receptive to NPD”.
However, Key Note warns that substantial investment is necessary in order to retain a “strong brand presence and encourage impulse purchases”, while NPD can be financially risky for smaller firms in particular given the muscle of major branded players.