New Realities at Retail Checkout: Challenges and Opportunities for Instant Consumable Candy and Snacks

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1 New Realities at Retail Checkout: Challenges and Opportunities for Instant Consumable Candy and Snacks Hank Cardello, Senior Fellow & Director, Obesity Solutions Initiative May 2016 Support for this report was provided by the National Confectioners Association

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3 2016 Hudson Institute, Inc. All rights reserved. For more information about obtaining additional copies of this or other Hudson Institute publications, please visit Hudson s website, ABOUT HUDSON INSTITUTE Hudson Institute is a research organization promoting American leadership and global engagement for a secure, free, and prosperous future. Founded in 1961 by strategist Herman Kahn, Hudson Institute challenges conventional thinking and helps manage strategic transitions to the future through interdisciplinary studies in defense, international relations, economics, health care, technology, culture, and law. Hudson seeks to guide public policy makers and global leaders in government and business through a vigorous program of publications, conferences, policy briefings and recommendations. Visit for more information. Hudson Institute 1201 Pennsylvania Avenue, N.W. Suite 400 Washington, D.C P: info@hudson.org

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5 New Realities at Retail Checkout: Challenges and Opportunities for Instant Consumable Candy and Snacks KEY HIGHLIGHTS Overall, instant consumable (IC) candy and snacks (< 3.5 ounces) have broad consumer appeal. Unlike other indulgent food and beverage categories examined by Hudson Institute, chocolate and non-chocolate candy sized for instant consumption appeal across all consumer segments. Those consumers most concerned about health ( Well Beings ) are driving the growth of Better-for-you/Alternative Snacks at checkout. Fence Sitters, with the highest concentration of children in the household, exhibit a very low purchase index for Instant Consumables, suggesting that the child pester power argument may not hold for this product category. Since alternative snacks, meat snacks and nuts & seeds are growing rapidly, retailers should consider incorporating them more into their front end model; however, since household penetration remains low (< 35% vs. 83% for chocolate candy), consideration must be given to their impact on total front end sales. Providing a continuum of choice at retail front end is an important strategy to adopt given the broad appeal of instant consumables (particularly chocolate and nonchocolate candy) and the specific needs of those consumers seeking healthier versions. Education at checkout is important to emphasize balance and moderation. Retailers and manufacturers should strongly consider a commitment to improve the calorie and nutritional profile of products at the front end to capitalize on the growth potential of healthier products while helping to address high customer obesity rates. INTRODUCTION The food and beverage industry continues to come under fire for its role in the obesity crisis. Studies, books and the media have scrutinized factors such as large portion sizes; the amount of fat, sugar and salt in packaged foods; and the placement of less healthy items in highly visible supermarket locations. More recently, products displayed at grocery checkout lanes have come under attack as evidenced by the Center for Science in the Public Interest (CSPI) report titled Temptation at Checkout: The Food Industry s Sneaky Strategy for Selling More, 1 calls for the removal of sodas and candy at the cash register by the former health commissioner of New York, 2 and recent guidelines issued by the World Health Organization and the US Department of Agriculture that added sugars should be limited to 10% of daily calories. 3,4 Sweets and snacks combined were identified by the USDA as the largest contributor of added sugars to our diet (31%). This definition now incorporates confections which account for 6% of added sugars and slightly less than 2% of daily calories. 2 P a g e

6 Implicit in such assaults is the assumption that merchandising single-serve confections, snacks and other food items at the front end of grocery stores prompts frequent and unplanned purchases. Thus, retailers are confronted with a conundrum: How to grow their front end business while addressing increasing public health and customer demands for better-for-you versions and smaller portions. Hudson Institute was commissioned by the National Confectioners Association to a) evaluate actual consumer attitudes and behaviors at the front end; b) examine the impact of health and wellness on the purchase of confection and snack products; and c) provide direction on how retailers may re-think their front end merchandising strategies to provide responsible choice. The insights presented in this report are gathered from the proprietary Health & Wellness Trends Database managed by the Natural Marketing Institute (NMI) and overlaid with IRI shopper panel data reflecting actual daily purchases in retail outlets. For the past five years, Hudson Institute, a nonpartisan policy research organization, has performed landmark business case studies examining the links between industry growth and increasing consumer demand for better-for-you products, covering consumer packaged goods (CPG) food companies, restaurant chains, convenience stores and supermarkets. As part of Hudson s mandate to deliver objective analyses and workable solutions for both the food industry and the public health community, funding for these studies has come from such diverse groups as the Robert Wood Johnson Foundation (RWJF) and the Healthy Weight Commitment Foundation (HWCF). METHODOLOGY Since 1999, NMI has conducted a comprehensive, quantitative health and wellness consumer research study focused on key attitudes, behaviors and motivations across a representative U.S. general population sample. As part of the annual research, NMI has developed a unique consumer segmentation model, utilizing a k-means clustering method based on attitudinal and behavioral variables, and conducting both exploratory factor analysis (EFA) and confirmatory factor analysis (CFA). Over 200 different variables (among 80,000+ consumer surveys analyzed since 2001) were explored and narrowed to approximately 20 variables and a five-cluster segment solution. The reproducibility (i.e., ability to consistently replicate the same segments through the use of a typing tool algorithm) of the segmentation is high at an (over) eighty percent confidence interval. IRI household panel data covering 65,000 active panel members among IRI s 100,000 households who shop supermarket, drug, mass merchandise, club, and dollar outlets (accounting for 78 % ACV for the 52 week period ending December 27, 2015) was acquired to track total sales across 9 instant consumable (IC) candy and snack categories. This data was overlaid with the NMI health & wellness consumer segments to identify purchase patterns by consumer segment for each of the 9 instant consumable confection and snack product categories, which totaled $9.4 billion in annual sales. Instant consumables were defined as all items sold in packages of less than 3.5 ounces. Categories examined included chocolate and non-chocolate candy; gum & mints; salty snacks; alternative/ better-for-you snacks; meat snacks; cookies; crackers; and nuts & seeds. For each of these product categories, key purchase metrics were calculated for each consumer segment, including household buying rate, dollars spent per year per buyer, units purchased per year per buyer, and the number of buying trips per year per buyer. Results of these analyses were subsequently aggregated to obtain a macro level perspective. 3 P a g e

7 The combination of NMI and IRI data enabled a real-life snapshot of instant consumable buying behavior to answer the following key questions: Who is the instant consumable buyer based on health & wellness lifestyle segmentation? What is each lifestyle segment actually buying and how frequently? What are the actual performance metrics by lifestyle segmentation? There is a wide range of diversity among the population within the health and wellness landscape. NMI s Health & Wellness consumer segmentation provides a unique lens into the different groups in the U.S. population, and their defining attitudes, behaviors, motivations and purchase patterns. NMI has identified five distinct consumer groups, ranging from those who are very engaged in their health ( Well Beings ) to those who have little motivation or interest in maintaining a healthy lifestyle ( Eat, Drink & Be Merrys ). A description of the five health & wellness consumer segments utilized in this report is depicted in Figure 1. Figure 1 KEY INSIGHTS PURCHASING BEHAVIOR SHOWS THAT INSTANT CONSUMABLES HAVE BROAD CONSUMER APPEAL It is commonly believed that shoppers who pay little attention to their diets buy the bulk of instant consumable candy and snacks. This study, however, found several inconsistencies with that assumption. Specifically, we noted similarities across all health & wellness consumer segments in the percentage of households buying these items and the number of annual buying trips (Figure 2). All Well Beings Food Actives Fence Sitters Magic Bullets Eat, Drink & Be Merrys Households Buying 95% 94% 95% 96% 95% 95% Buying Trips/year Figure 2 4 P a g e

8 This across-the-board behavior was particularly evident among those purchasing singleserve chocolate and non-chocolate candy. Hudson analysts had theorized that these items would skew heavily to those segments which tend to purchase more indulgent products, (the Magic Bullets and the Eat, Drink & Be Merrys ) as evidenced by previous category analyses. Instead, the IC consumption index was within a very narrow range across all consumer cohorts (Figure 3). Figure 3 WELL BEINGS ARE IMPORTANT TO BOTH BETTER-FOR-YOU ALTERNATIVE SNACKS AND TRADITIONAL CANDY & CHOCOLATE Over one-third of Well Being households now purchase IC better-for-you alternative snacks and spend the most per year by far on these items than any other consumer segment. Those less concerned with health ( Magic Bullets and Eat Drink & Be Merrys ) spend the least on these products (Figure 4). All Well Beings Food Actives Fence Sitters Magic Bullets Eat, Drink & Be Merrys Households Buying 29% 34% 31% 29% 26% 24% Annual Spend $23 $34 $21 $24 $20 $17 Figure 4 5 P a g e

9 To further underscore the importance of Well Beings to OVERALL instant consumable candy and snack sales, analyses identified that segment (i.e., the one most concerned about their health and the foods they purchase) as spending the most annually compared to the less nutritionally concerned Eat, Drink & Be Merrys which spent the least (Figure 5). All Well Beings Food Actives Fence Sitters Magic Bullets Eat, Drink & Be Merrys Annual Spend $67 $75 $65 $70 $66 $60 Figure 5 HOUSEHOLDS WITH THE MOST CHILDREN EXHIBIT LOW PURCHASE LEVELS OF INSTANT CONSUMABLES Fence Sitters have the highest concentration of children in their household and represent the largest NMI segment at 25% of the general population. However, they only consume 14% of instant consumable products (a very low purchase index of 56, where 100 = average purchase rate). This evidence suggests that the notion of child pester power at checkout may not hold as it relates to single-serve candy and snack products (Figure 6). Figure 6 6 P a g e

10 This finding appears consistent with previous Hudson and NMI studies which highlighted that Fence Sitters, who are described as health strivers, are more and more choosing to purchase a wide array of better-for-you foods and beverages throughout the store (Figure 7). Figure 7 IMPLICATIONS FOR RETAILERS AND MANUFACTURERS 1 Retailers should re-think their traditional merchandising strategies There is significant opportunity for growth at checkout by applying these consumer insights for both broad audience demand for instant consumables and the Well Beings demand for healthier alternatives. It is critical that retailers re-think their traditional merchandising strategies to not only meet the broad demand for instant consumable candy and snacks, but to better align with evolving trends toward better-for-you foods, beverages and snacks. Retailers must consider four key factors that are affecting their business models: (1) public health and activist pressures to eliminate indulgent sweets and snacks at checkout are intensifying; (2) more and more consumers are demanding better-for-you options and smaller portions; (3) the most health-conscious segment ( Well Beings ) is driving the growth of alternative snacks; yet (4) unique to instant consumables (particularly chocolate and non-chocolate candy), a broad array of consumers continue to demand such products. 7 P a g e

11 To address this complex and fluid situation, retailers (with the help of manufacturers) should consider adopting the following merchandising strategies: Offer a continuum of choice at checkout to meet both traditional across the board consumer demand for instant consumable candy and snacks along with the Well Beings desire for better-for-you alternative snacks. Retailers should consider providing offerings and choices for traditional candy and snack items that incorporate different and smaller package sizes to not only meet shifting consumer prefrences, but to avoid more draconian consequences resulting from public health and activist attacks on checkout merchandising practices. Retailers must balance their transition to better-for-you items in a way that does not damage their business. For example, the nuts & seeds category is growing robustly at a 2-year compound rate of +22.3% and, on the surface, appears to be a good candidate to incorporate into checkout displays. However, the low current household penetration of 18% (compared to 83% for chocolate candy) signifies that a more gradual inclusion versus any kind of swap-out is merited for these items. Figure 8 highlights an approach to merchandising that can help retailers evolve their front end approach in a way that meets changing consumer demands, addresses public health concerns, and best serves their business growth needs: Household Penetration Sales growth 2-year CAGR TRADITIONAL CATEGORIES Chocolate candy 83% 5.2% Gum and breath 63% 3.6% fresheners Non-chocolate 71% 7.8% candy Traditional 56% 8.3% snacks EMERGING CATEGORIES Non-traditional 29% 13.4% snacks Meat snacks 25% 19.5% Cookies 32% 13.9% Crackers 30% 23.5% Nuts and seeds 18% 22.3% Figure 8 } } MAINTAIN Meets broad demand More sharing size/ smaller portions/ calorie containment needed GROWTH OPPORTUNITIES High growth rates/ low HH penetration Too small for direct 1:1 swap-outs with Traditional categories Smaller portions for cookies/ crackers 8 P a g e

12 2 Retailers should enable those consumers seeking alternative items by educating them on informed choices Those consumers who currently practice or are trending toward healthier eating habits read more labels and want to be educated about what is in the foods they purchase. Figure 9 shows how the most different health & wellness segments view the importance of nutritional information on packaging and at the point of sale: Figure 9 Over 80% of Well Beings clamor for such information. Since those consumers who want betterfor-you items tend to be more interested in reading labels and selecting products based on nutritional information, manufacturers must ensure that they are transparent as it relates to ingredients in products, focusing on information via labeling and point of sales materials. A targeted strategy will be necessary to educate consumers about the importance of balance and moderation in the diet. 3 Retailers and manufacturers should strongly consider making a commitment to provide a wide array of choices for candy and snack items that meet increased consumer demand for transparency and lower-calorie formats. Despite the evidence presented in this report, retailers are likely to face strong headwinds to growth and continuing pressures to reduce the presence of traditional instant consumables at checkout. Since these calls for change are being driven by high obesity rates and concerns for what children and adolescents are consuming, it would behoove retailers and their manufacturing partners to take action and make some serious commitments to address some of the concerns identified by the public health community and activists. 9 P a g e

13 A McKinsey report 5 titled Overcoming obesity: An initial economic analysis spotlighted that three controllable actions (portion control; reformulation; and availability of lower-calorie items) would make the biggest impact on curtailing obesity rates (Figure 10). Figure 10 Deploying these strategies is not only effective from a public health perspective, but also serves the industry s growth needs. The business case is compelling and must not be ignored, as demonstrated by Hudson Institute s previous studies, 6 that shifting to lower-calorie and portioncontrolled versions is tied to higher growth rates. Examples of the kinds of commitments that can be made by retailers and manufacturers to address these concerns at front end include: Full ingredient disclosure on all packaging at checkout Point of sale and/or on-pack education about moderation Pledge to increase the number or % of better-for-you items and formats at front end Limit packages at checkout to smaller-portion packages (< 250 calories) 10 P a g e

14 SUMMARY To ensure robust sales at the front end and to gain alignment with the evolving consumer and public health environment, retailers must look beyond the historical way they have managed that section and adopt a continuum of choice strategy that meet the needs of a broad group of consumers for instant consumables but in a way that addresses excess consumption. This means that traditional confections are important to retailers and must continue to be offered, but with an increasing emphasis on lower-calorie/portion-control versions. Additionally, the growing but low penetration better-for-you/alternative snacks must be integrated into that space, but not at the expense of traditional items given that consumer segments spanning from the most indulgent to the most healthy demand these products. Hudson Institute recommends that retailers and manufacturers of single-serve candy and snacks take action on a commitment to improve their products and choices at the front end in order to capitalize on the growth potential of these items and to address the very public concerns of activists and the public health community. AUTHOR AND ACKNOWLEDGEMENTS Hank Cardello is a Senior Fellow and the Director of Hudson Institute s Obesity Solutions Initiative. Hank is the author of Stuffed: An Insider s Look at Who s (Really) Making America Fat ( published by HarperCollins/Ecco and the landmark reports Better-foryou Foods: It s Just Good Business and Lower-Calorie Foods: It s Just Good Business. He is a former food company executive with Coca-Cola, General Mills, Anheuser-Busch and Cadbury- Schweppes and has been a frequent contributor to The Atlantic and Forbes on food industry and obesity policy matters. His perspectives have been shared in numerous publications, including the Wall Street Journal, The New York Times and the Washington Post, as well as in major broadcast media, such as CNN, NPR, Good Morning America, CNBC, the BBC and the major television networks. Hudson Institute Obesity Solutions Initiative The mission of Hudson Institute s Obesity Solutions Initiative is to bring about practical, marketoriented solutions to food industry issues and the world s obesity epidemic. The Initiative devises policies and offers market-based solutions by aligning the needs of all vested parties corporations, the public health community, consumers and regulators. Emphasis is placed on performing sound quantitative analysis and incorporating pragmatic principles to enhance adoption. The undertaking is currently focused on building the business case for better-for-you foods and beverages by quantitatively demonstrating the sales, financial, shareholder and reputational benefits from selling better-for-you products. The Initiative is directed by Hudson Institute Senior Fellow Hank Cardello. For more information, visit Natural Marketing Institute Natural Marketing Institute (NMI) is an international strategic consulting firm that assists clients with opportunity identification, trend predictions, innovation and building marketing strategies. As the leading business consulting and market research firm in health and wellness, NMI assists a range of Fortune 500 and start-up companies across many types of industries. By utilizing a diverse mix of proprietary custom and primary methodologies and comprehensive syndicated data, 11 P a g e

15 NMI provides its clients with insightful market analysis and strategic planning surrounding new product opportunities, branding, communications, consumer target identification, sales strategy and strategic planning. For more information, visit IRI IRI is a leading provider of big data, predictive analytics and forward-looking insights that help CPG, OTC health care organizations, retailers and media companies grow their businesses. With the largest repository of purchase, media, social, causal and loyalty data, all integrated on an ondemand, cloud-based technology platform, IRI helps guide its more than 5,000 clients around the world in their quests to remain relentlessly relevant, capture market share, connect with consumers and deliver market-leading growth. For more information, visit Special thanks to Cam Cloeter, Founder and President of Impulse Marketing Company (IMC), for bringing his industry-recognized insights and three decades of in-depth experience with retail executives, retailing, store operations, and an understanding of the complex dynamics of the checkout environment. IMC is a leading provider of retail merchandising solutions and in-store execution. For more information, visit Special thanks to Anne-Marie Roerink, Founder and Principal of 210 Analytics, a research firm dedicated to generating common sense, research-based, and actionable consumer insights supporting retailer and manufacturer collaboration for common solutions to meet emerging consumer needs. The company has performed custom research supporting the entire food industry with groups such as the Food Marketing Institute, The National Grocers Association, The Meat Institute, and the National Confectioners Association. For more information, visit REFERENCES 1 Temptation at Checkout: The Food Industry s Sneaky Strategy for Selling More, Center for Science in the Public Interest, August, The Problem With Focusing on Childhood Obesity, The New York Times Opinion Pages, December 18, Sugars intake for adults and children Guideline, World Health Organization, Dietary Guidelines for Americans, United States Department of Agriculture Center for Nutrition Policy and Promotion, 5 Overcoming obesity: An initial economic analysis, McKinsey Global Institute, November, Better-for-you Foods: It s Just Good Business; How Supermarkets Are Shaping Up and Growing Their Lower-Calorie Products; and Lower-Calorie Foods and Beverages Fuel Growth at Healthy Weight Commitment Foundation Companies, Hudson Institute Obesity Solutions Initiative 12 P a g e

16 Hudson Institute is a research organization promoting American leadership and global engagement for a secure, free, and prosperous future. Founded in 1961 by strategist Herman Kahn, Hudson Institute challenges conventional thinking and helps manage strategic transitions to the future through interdisciplinary studies in defense, international relations, economics, health care, technology, culture, and law. Hudson seeks to guide public policy makers and global leaders in government and business through a vigorous program of publications, conferences, policy briefings and recommendations. Hudson Institute 1201 Pennsylvania Avenue, N.W. P: Suite 400 info@hudson.org Washington, D.C