Good Sales in Sweet Packages?

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Good Sales in Sweet Packages?

By Renee M. Covino

It's been revealed that candy sales are still pretty dandy during these hard economic times -- but are other sugary snacks just as sweet? Cookies, snack cakes, cupcakes, buns, muffins, bars, pastry tarts and cereal treats make up the majority of packaged sweet snacks, and so far they seem fairly recession-proof for c-stores -- apparently cash-strapped customers are still reaching for the small, affordable daily treats.

In c-stores, packaged sweet snacks rang up $485 million in sales for 2007, up nearly 6.6 percent from $455 million in 2006, according to recently released data from Convenience Store News 2008 Industry Report. Average sales per store showed similar gains of 5.7 percent, up from $3,210 in 2006 to $3,394 in 2007.

"The category seems recession-proof -- in fact, snacks overall are up over this time last year," said Mallory Nimocks, president and general buyer of nine-unit Nimocks Oil Co. in Forrest City, Ark.

There is one catch, though. Like many other grocery items, pricing is creeping up for packaged snacks -- and that could potentially change the sweet sales scene.

"We're just starting to see a shift in this category -- I see my unit sales are holding fair or decreasing slightly, while my dollars sales are flat even to increasing slightly," maintained Henry Jones, vice president of retail operations for Sprint Food Stores Inc., operator of 11 locations based in Augusta, Ga. "That means there's been an increase in retail prices."

Nimocks agreed he has observed the category inch up in price recently. "Most of our stuff's gone over the $1 retail in the neighborhood of $1.19," he stated. "We still have some Little Debbie items under a dollar -- 99-cent snack cakes and such -- but most have passed that mark."

The trend has been reported in all areas of the country. Operating in the state of Washington, Brent Howard, general buyer for 27-unit Sun Pacific Energy, stated "99 cents doesn't exist [in the category] anymore. And now that we've broken that bubble -- there's no predicting what it will mean to the customer -- $1.19, $1.49 -- what's the difference? Only time will tell."

Mixed Margins
The upside is higher prices have the potential to bring higher margins in the category, providing customers continue to purchase their sweet packaged snacks.

"Once we broke 99 cents, that took up Hostess cakes as well as other [regional] items like McFarley's, Fran's and Mrs. Freshley's to $1.45, giving us margins of 35 percent up to 38 percent," Howard said.

Achieving profit margins higher than 30 percent is where many c-stores say they should be in the category.

Jones tries "to make 40 percent in this category, but the problem is pre-packaged and pre-priced keeps [margins] more in line of 35 percent," he said.

"The big manufacturers set the standard. For instance, Chips Ahoy! are pre-priced, same as the potato chips."

Nimocks revealed his dictated margins from brands like Hostess and Frito Lay are more like 25 percent.

Other brands, such as Kellogg's Pop Tarts, which holds all 10 of the top SKUs in the snack cakes/pastries/desserts category for the channel, according to Convenience Store News market research, can yield better margins, according to Jones.

"Pop Tarts have no prices pre-printed on them and grocery stores don't sell the single packages, so that's where we can make 40 percent," he said.

But again, that's providing customers buy into the price increases that recently went into effect -- for Jones, much of those took place the first week of May. Ultimately, he predicted another shift will take place to offset the price increases through packaging reductions -- a tact currently receiving much publicity in other grocery categories such as ice cream and salty snacks.

"Manufacturers have already raised the prices slightly, and then I think they'll cut the ounces back a little too, simultaneously giving customers a small price reduction at that time," Jones stated. "They'll make it so retailers will have smaller gross profit margins. This goes on with candy, beer and salty snacks. The big players have already figured it out. They know customers will not eat all of the cost increases."

What it really comes down to is the differences between direct-store delivery (DSD) and wholesaler-supplied packaged sweet snacks. DSD snacks are more controlled and limited in gross margins, but offer popular and typically well-advertised name brands. DSDs will also pick up any past-dated items that don't sell.

Wholesaler-supplied snacks offer c-stores just the opposite -- better margins, but retailers have to "eat" any waste in out-dated product. Still, it's the way some are turning for future category profit.

"We're doing more with Mrs. Freshley's and Nemo's. Those are supplied by our wholesaler," Nimocks stated. "That's where we've broadened our offerings. They offer cakes and higher-end items that we don't get from DSDs. They're not easier to manage, they're certainly not a guaranteed sale, but they seem to be more unique, and we're trying to keep a variety near the coffee dispensed area as well as at the checkout."

Sun Pacific also ramped up a wholesaler-supplied offering for a "fresher" concept. "The best thing going for us was a fresh doughnut program we had delivered a year ago, but fuel costs killed that," Howard explained. "So now we replaced that with an option from Prairie City. It's a five-variety cinnamon roll program that has more of a fresh concept for our customers."

Frozen rolls come in four-packs, and are thawed and displayed in a case. "We're doing those at $1.49 making about 42 percent gross profit," Howard said. "You have to watch the spoilage, but that's why the four-pack is nice. Stores only have to thaw out four at a time. You have to get creative and keep looking for your niche in this business."

Smart Cookies
C-stores that want to be savvy when it comes to merchandising the cookie category -- listen up. Sales for cookies and cookie bars through all channels including Wal-Mart are estimated to reach more than $5.9 billion, up 14 percent during 2002-2007 in current dollars, but flat after adjustments for inflation, according to Mintel, a market research firm in Chicago. Total U.S. sales of cookies and cookie bars are forecast to remain virtually unchanged at an inflation-adjusted annual rate through 2012.

Mintel reports that one reason cookies are holding their own in a difficult climate is their "unusual flexibility" or versatility in adapting to timely positioning claims, including:

-- Trans Fat-Free Options: It's true c-stores are not big on selling overall "better-for-you" cookie options, but more customers are becoming educated to see a "no trans fats" highlight on all their consumables packaging, including that of sweet treats. In fact, Mintel research showed 53 percent of overall respondents from all channels would be willing to pay more for products produced without trans fats.

-- Convenience Marketing: In cookies, convenience is marketed through mini-size cookies, portion-controlled packaging and re-sealable or stay-fresh packaging innovations. Mintel highlighted Kraft's big success with its Chips Ahoy! Snack 'n Seal product.

-- Intense Flavors: Unequivocally, chocolate is the single-most-used flavor for new cookie launches, according to Mintel. Additionally, the more indulgent dark chocolate is often used in premium cookies. Beyond chocolate, trends suggest consumers want "more" of whatever the signature flavor is, be it peanut butter, fudge or chocolate.

-- "Manly" Munching: Women are often aligned with having a stronger sweet tooth, but men in Mintel's survey revealed they consume cookies with slightly greater frequency than females. Therefore, opportunities to further stimulate use among men exist by marketing more "manly" cookies, which have been recently identified as oversized cookies with large chunks of chocolate or nuts.