By Bob Gatty, Contributing Editor
If manufacturers, distributors and convenience store retailers would embrace some basic changes and work more closely together, they could realize a potential bonanza of hundreds of millions of dollars in new profit, according to a new joint industry study.
That is the message of the soon-to-be released “Convenience, Candy & Profit,” study developed by industry expert Kit Dietz, of Dietz Consulting in Huron, Ohio, under the joint sponsorship of the American Wholesale Marketers Association (AWMA), the National Association of Convenience Stores (NACS) and the National Confectioners Association (NCA).
According to the year-long study, if the nation’s 146,000 convenience stores and their distributors worked together to make sure the top 50 SKUs in candy, gum and mints—the “core brands”— were always in stock, as much as $358.8 million in new candy sales could be generated. Numerous other steps that could generate even higher sales and profits—in excess of $500 million—are also identified.
“Even though we are struggling with a tough economy with huge problems, consumers are still buying candy,” Dietz said. “Our research shows consumers are still turning to these simple treats and trading partners could capitalize even further on this highly recession-resistant category, if they are willing to adjust some important business practices.”
Dietz pointed out that profit margins on candy products are already strong—often 50% or better. For the first 11 months of 2008, total dollar sales of the top 100 confections SKUs in the convenience channel increased by 3.6% compared to the previous year. Convenience chocolate sales were up 4.6%; non-chocolate, 5.1%; and gum, 4.4%. Only mints showed a decline, down 12.9%.
The study uncovered major opportunities available through improved manufacturer, distributor and retailer collaboration directed at broadening the scope of category management to include:
• Keeping core brands in stock at all times.
• Improving in-store product placement.
• Understanding and responding to consumers’ typical shopping practices to maximize prime selling areas and secondary multi-vendor merchandising opportunities.
• Improving execution of new item strategies.
• Improving exit strategies for poor performing items.
According to the 2009 NACS State of the Industry Report (SOI), the confections category in a typical convenience store contributes $44,820 to sales and $21,336 in gross margin dollars, for an average gross margin of 47.6%. It is the eighth-largest category based on sales, but ranks sixth in gross margin contribution.
The Core Brand Opportunity
According to the study, if all 50 core brand items achieved 90% in distribution and in-stock status, the channel would realize $192.7 million in increased sales. A 95% level would boost sales by $269.2 million, and if the 100% level could be achieved, the result would be increased sales of an extraordinary $358.8 million.
“The focus on core brands and improving distribution levels is a consensus strategy of the manufacturers, distributors and retailers who participated in this study,” Dietz said, noting that manufacturers are becoming “more holistic in their approach to category management, recognizing the importance of making the best brands of all manufacturers more visible and in-stock at retail.”
A prime example is the movement from single-vendor secondary merchandising end caps to a multi-vendor approach. “It provides high visibility secondary placements that emphasize the best brands of all chocolate, non-chocolate, gum and mints,” Dietz said. “This strategy will help fill the distribution gaps that exist today.”
Consumer insights gleaned from a recent in-store traffic and shopping pattern study indicated 67% of shoppers see the available candy products at the sales counter display, but most candy purchases are made from the in-aisle displays. So their placement in the store is crucial. Consumers’ interest may be piqued by the display, which then draws them into the aisle where they can shop the full category before making their purchase.
Having the proper balance of focus on core brands and new items is an important component of effective category management, according to Dietz, who said distributors can help retailers develop and execute the most profitable candy plan-o-gram for their stores instead of relying on manufacturers, whose natural bias is to promote their own brands.
“The retailer is the ultimate decision maker and this process provides a solid basis for developing the optimal planogram for their stores; and to determine how implementation and execution will take place,” said Dietz, pointing out that there exists a significant opportunity to increase candy sales and profit among the growing number of independents.
While many independents do an excellent job of category management, many are unduly influenced by product cost and the search for deals, instead of using a more strategic process provided by the distributor aimed at long-term success.
“Just because a retailer might be able to get a cheaper price at a club store, those products might not be the ones that will generate the most sales and profit,” Dietz said. “At the same time, they will consume space that could be devoted to the best selling core items or exciting new items being heavily promoted.”
Speed to Shelf
Getting new product offerings to the shelf faster to capitalize on the initial sales lift potential from manufacturer marketing and advertising initiatives could generate millions of dollars in new sales and profit, the study says.
However, to capitalize requires changes on the part of manufacturers, distributors and retailers alike.
For example, distributors could help boost candy sales and profits from new products by providing timely information to customers as soon as they are notified of a new product opportunity.
However, manufacturers must provide this information much earlier in the process than is commonly practiced today because of the complexity of serving the vast number of independents throughout the channel, requiring more time to get new items into distribution and onto store shelves. Retailers also must be willing to respond and make the necessary space available.
Unfortunately, new products often reach convenience store shelves after the manufacturer’s sales launch and accompanying marketing campaign has run its course, even as competitive channels, such as supermarkets, drug stores and mass merchandisers, have enjoyed weeks of sales and profits.
The study used the drug channel as a comparison, and analyzed a new chocolate item to compare speed and distribution levels.
In the first 12 weeks, drug stores achieved a distribution level of 75% against 21% in convenience. The drug channel gained a high level of distribution early, and it maintained a significant gap versus convenience, peaking quicker and sustaining a much higher level of distribution throughout the period.
In the critical first 12 weeks of this new item launch, c-store sales were about $900,000, but had they reached a speed of introduction equal to drug and achieved those same distribution levels, convenience sales could have reached $3.5 million in the first 12 weeks, providing $2.9 million of incremental sales.
For the first six months of this item launch, the gap was $4.9 million, with convenience sales of $3.8 million against total potential sales of $8.7 million. Thus, the 12-month incremental opportunity on this single SKU was $7 million, the study says.
Don’t Rely on Credit
Another huge opportunity for retailers would be to stop relying on credits for returns from distributors and, instead, place failed items or slow-movers on a sale rack and get them out of the store, making room for new products.
“Typically, the retailer wants to get credit,” said Dietz. “But that can take a month or even six weeks. And then the retailer only receives the wholesale price that they paid, which could be half of the retail price. A better strategy is to simply mark down the product, as they do in other channels, and sell it out. That allows for some profit and clears space for displaying new items or increasing the presence of core brands that are sure winners.”
“Today, this is a lost opportunity,” Dietz continued. “If we can cut down by four weeks the time these obsolete products sit there, we can generate four weeks of sales on new items in that space, increasing sales and profit.”
The study was commissioned by the participating associations to help retailers, distributors and manufacturers increase their overall share of the confections business.
“Our goal was to enable better understanding of the performance in all segments of the confections category within the convenience channel and identify opportunities to create strategic advantage for channel partners,” Dietz said. “We think we have identified significant opportunities and hope this work will help distributors, retailers and manufacturers alike capitalize on the growth potential that is available.” CSD