What’s in store for 2017?
While last year was a somewhat turbulent year, with unforeseen political issues including the UK’s decision to leave the European Union and Donald Trump’s election as president of the US, 2017 could be the year the industry feels the true impact of these events.
Indeed, confectionery consultant Graham Godfrey believes the events will “start to affect things in a definable manner, rather than the to-date speculation.”
He explains, “Continuing uncertainty in local and international politics will make investment decisions risky as there will be a lot of medium to long-term uncertainty on trade, tariffs, etc. This will be the case particularly for large scale manufacturers who rely on global sourcing.”
This uncertainty, Godfrey says, may well make the costs of some key, large volume ingredients such as sugar and milk more uncertain in the longer term. This is because their cost is largely defined by factors other than simple supply and demand, such as tariffs and quotas. The supply of raw ingredients, including their quality and performance, could also be impacted in an unpredictable manner by climate fluctuations, he warns. “While large scale manufacturers may be able to protect themselves by commercial agreements and forward pricing, small and medium scale manufacturers could see sudden vulnerabilities.”
He adds, “Media led and often ill-informed pressures on residuals, sourcing, etc, will spread even more rapidly through social media where reinforcement and outrage replace logic and debate.”
What’s more, he notes, consolidations, forcing cost savings to justify them will continue to distort the offerings of larger companies and “mean that true product innovation will continue to be extremely scarce as resources are devoted entirely to cost savings.”
Highlighting Mintel’s Global Annual Review of the Confectionery Industry, which is due to publication later this month, Marcia Mogelonsky, global food and drink analyst at Mintel, says in both chocolate and sugar/gum confectionery, two significant trends have influenced the category in the past year, and both are likely to have an impact going forward. “Permissibility will continue to be a justification for consumers to indulge in their confectionery habit, especially in chocolate confectionery,” she says. “But, the slowing of both markets suggest that permissibility may not be enough to keep chocolate, sugar, and gum confectionery growing, at least in developed markets.”
What may help, however, is the blurring of lines between food categories and confectionery may continue to grow because consumers do not think of the products as candy but as snacks, she says. “Coupling the indulgent feeling of chocolate or sugar confectionery with ‘better for you’ ingredients such as fruit or grain can make the products more permissible because consumers balance the ‘good’ (grains, superfruits) with the ‘bad’ (confectionery).”
In the chocolate confectionery category, Mogelonsky says another area that will continue to have an impact on the market is sustainability, which includes growing consumer demand for more organic cocoa. “Until more crops can be converted to organic, which is a lengthy and costly procedure, however, there is likely to be a dearth of organic chocolate,” she explains. “The demand for organic also comes at a time when prices for conventional cocoa are falling, and it is not clear if the market will have room for organic going forward.”
In sugar and gum confectionery, major flashpoints have been the so-called war on sugar that has affected some markets, and the tedium of gum, which has made that product difficult to invigorate, as sales of gum continue to slide in most markets, according to Mogelonsky.
“In general, sugar confectionery is still finding a way to generate the same excitement seen in the chocolate confectionery industry,” she notes. “While so much to do with chocolate confectionery has a backstory and the product is given a range of powers in the minds of consumers – as a treat, a reward, or an emotional booster, to name a few – sugar confectionery has not yet successfully shaken its image as a product for children, and candy for children has come under endless scrutiny over the past year.”
A saturated market
Meanwhile, Jack Skelly, food analyst at Euromonitor International, believes premium chocolate will continue to perform well in Western countries as the UK confectionery market has become saturated.
But, he says, “I do believe this trend may be starting to slow down as, in the past year we’ve seen companies such as Lindt experience a slowdown in their previously excellent growth.”
In China, however, growth is expected after a couple of slow years, but demand will still be weaker than what it was five or six years ago. “This is a difficult time for the confectionery industry, as with other industries,” Skelly notes, adding, “Demand is weak and will be so for some time.”
But, it’s not all doom and gloom for the confectionery sector. According to Godfrey, well thought out and executed investment and procurement strategies, which override short-term headline issues, may well put companies in strong positions in the medium term. But, he warns, “Prevarication over decision making could lead to longer term weakness.”
Having a genuine understanding and rapid execution of the consumer’s interests offers the opportunity to “gain competitive advantage in a rather static marketplace,” he adds.
Last year, consumers responded negatively to Mondelēz International’s decision to change the shape of its Toblerone bars to have a bigger gap in between the triangles. With that, Godfrey tells companies, “Resist the temptation to reduce quality to reduce costs and make fewer changes, which anger and confuse the consumer while obviously reducing value. If the consumer values a product, they will accept well presented and properly justified changes.”
In addition, he says, consider how product and usage innovation can push back the perception that confectionery alone is responsible for obesity.
Adapting to demands
From smaller to larger manufacturers and every company in between, there’s no denying 2017 will be challenging. Godfrey forecasts that from the large businesses, the industry will see “little innovation, value reduction and cost savings protected by distribution strength.” In addition, he says, “Retailers will be taking the initiative through their distribution, purchasing power and consumer trust to reduce the strength of branded products.”
From alert medium sized producers, the industry can expect growth to be driven by being adaptable and responding to consumer and major retailer needs.
For smaller producers, there may be an “over-reliance on niche products rather than realising they can actually compete in the total market, all be it locally, by harnessing social media and local good will and producing good mainstream products.”
Focusing on individual countries, Skelly says, “I think we’ll continue to see the problems that have permeated the industry for a number of years now, perhaps accentuated by a slowdown in Brazil and Russia which were once very strong performers. Demand is weak in the West but there is some growth in Asia, especially as China will see a recovery.”
Mondelēz International, he says, will be an interesting player to watch this year as it juggles entering the US and China with its confectionery products. “It will also be interesting to see if premium chocolate growth continues to slow down – I believe we may start to see a return to ‘standard’ chocolate brands,” he concludes.