Private label confectionery looks to chocolate

The share of private label sales in confectionery is one of the lowest across all packaged food sectors, especially compared to sectors such as ready meals or dairy products.

This is partly a consequence of the large number of impulse sales which take place outside supermarkets and hypermarkets. In addition, confectionery is largely regarded as a treat, rather than a necessity, and consumers are consequently more prepared to pay a premium on branded products, especially for gifts.

As a result the market is dominated by advertising aiming to guide and focus impulse decisions. Innovations, limited editions and brand extensions including flavour and texture developments such as Snickers Cruncher (Mars) or KitKat Orange (Nestlé) are constantly being launched to sustain consumer interest.

It is difficult for retailers to maintain the same degree of innovation as multinational manufacturers, tending to opt instead for copy-cat products of successful brands and formats instead. This is in contrast to sectors such as ready meals, where retailers are successfully introducing a very varied range of private label products.

Mixed picture in major markets

Globally private label confectionery sales decreased 2.5% in 2001. This was the consequence of a dramatic decline in the large UK market. Downward price pressure imposed by retailers on branded confectionery mean that profit margins, especially on chocolate, have become so tight that private labels no longer necessarily represent better value for money than many branded items.

By contrast in Germany, the second largest market for private label confectionery products, sales increased nearly 4%. Private label was particularly successful in chocolate tablets with retailers offering the same exotic flavours at a lower price than branded products. Indeed some private label brands, such as Knusperkrone from Aldi, have reached brand status in their own right.

However, developing markets are typified by lower private label sales and penetration, and lower levels of retail development. Chocolate confectionery in particular is considered a luxury product in these markets, and price is less of an issue for those who can afford it.

Penetration is highest in sugar

Private label penetration is highest in sugar confectionery at 3.4%. The most significant sector in terms of actual sales is pastilles, gums, jellies and chews, where penetration of private label accounts for 4% of sales. In terms of penetration, liquorice is highest at 8%, although actual sales are small. This situation is partly the result of the product’s popularity in Western Europe, where private label is traditionally stronger, particularly in Germany and the Netherlands.

Other products with high levels of penetration include toffees, caramels and nougat, as well as boiled sweets. In general private label penetration is highest in countries with a developed retail structure, with Western Europe being particularly significant.

Conversely, in developing regions where sugar confectionery enjoys strong demand, particularly the fast growing Asia Pacific market, private label sales are negligible. Sugar confectionery is extremely cheap in developing regions and manufacturers themselves often sell unbranded or generic products. This leaves little margin for the expanding retail network to simultaneously compete on price and achieve profits.

Gum sales remain low

Private label has made little impact in gum, with negligible sales in functional gum, and very low penetration in bubble gum in particular. The functional gum sector is still very new and is characterised by big brand names such as Aquafresh or Orbit leveraging consumer trust to encourage confidence in functional products, which often contain proprietary technology. Even leading retailers cannot yet achieve the same measure of trust required to sell functional gums.

Moreover, gum production in general requires sophisticated technology and many gum manufacturers are unwilling to dilute the power of their brands by producing own labels for retailers. As a consequence Wrigley only makes minimal third party sales of gum base, while companies such as Gumlink (the only part of Dandy not sold to Cadbury Schweppes) are unlikely to produce enough to have a significant impact on the market.

Potential greatest for chocolate

Although the proportion of private label sales in confectionery remains small, nonetheless actual value sales are more significant than those in a number of other markets, including soup, spreads and pasta. Chocolate represents 51% of total private label value sales in confectionery and there is significant potential for this sector in developed markets, with developing markets likely to catch up in the long term.

The key for retailers is to apply the fantasy brand model to confectionery. In the UK retailers have already started applying their premium and gourmet brand ranges to chocolate. Tesco’s ‘Finest’ range which covers everything from ready meals, cheeses and biscuits also offers luxury ‘Belgian’ boxed chocolates and after dinner mints, as does Sainsbury’s ‘Taste the Difference’ range.

In Canada, where private label penetration in chocolate is highest globally at over 13%, sales jumped in 2001 following an increase in premium and luxury private label products available with a number of retailers importing Belgian luxury chocolates under their own brands.

Thus for private label sales to be profitable, retailers need to further develop products along the premium model, a strategy ideally suited to chocolate.

This type of activity differentiates typically economy private label ranges from gourmet offerings and enables retailers to set higher prices for these products and increase profits. As such they can compete with premium brands like Lindt and still appear favourably priced without being seen as ‘cheap’.

Organic and fair trade

Retailers could further enhance the premium image of their products by offering organic and/or fair trade products. For example, in the UK in November 2002 the Co-op announced it would be the first retailer to make all its own brand chocolate fair-trade. This move has generated significant interest, with the media specifically querying the supply strategies of major manufacturers as a consequence. This has raised the profile of the retailer and allows it to charge higher prices for its fair trade products, with a reasonable assurance that they will sell successfully.

In addition, in many developed markets food scares and concerns over GM food have prompted an increasing interest in organic products and the number of organic food and drink brands is rapidly increasing. Because of a preoccupation with health and ‘natural’ products, organic chocolates meet the needs of consumers increasingly prepared to pay more for the privilege of eating organic.

Thus while sugar confectionery remains the province of economy labels, and gum is too technically demanding for significant private label activity, the picture for chocolate is very different and offers significant potential for luxury products with higher margins.