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

Hank Cardello, Senior Fellow & Director,Obesity Solutions InitiativeMay 2016

Support for this report was provided by the National Confectioners Association

© 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, www.hudson.org

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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.

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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 non-chocolate 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,1calls 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.

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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.

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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 21.8 21.5 22.1 22.1 22.0 21.3

Figure 2

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This “across-the-board” behavior was particularly evident among those purchasing single-serve 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

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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

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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.

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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 fresheners

63% 3.6%

Non-chocolate candy

71% 7.8%

Traditional snacks

56% 8.3%

EMERGING CATEGORIES

Non-traditional snacks

29% 13.4%

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

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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 better-

for-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.

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A McKinsey report5 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 portion-

controlled 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)

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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

(www.stuffednation.com) published by HarperCollins/Ecco and the landmark reports “Better-for-

you 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, market-

oriented 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―corpora-

tions, 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 www.obesity-solutions.org.

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,

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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 www.NMISolutions.com.

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 on-

demand, 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 www.iriworldwide.com.

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 www.impulsemarketingco.com.

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

www.210analytics.com.

REFERENCES

1 Temptation at Checkout: The Food Industry’s Sneaky Strategy for Selling More, Center for

Science in the Public Interest, August, 2015

http://cspinet.org/temptationatcheckout/report.pdf

2 The Problem With Focusing on Childhood Obesity, The New York Times Opinion Pages,

December 18, 2015 http://www.nytimes.com/2015/12/18/opinion/the-problem-with-

focusing-on-childhood-obesity.html

3 Sugars intake for adults and children Guideline, World Health Organization, 2015

http://www.who.int/nutrition/publications/guidelines/sugars_intake/en/

4 2015-2020 Dietary Guidelines for Americans, United States Department of Agriculture

Center for Nutrition Policy and Promotion, http://www.cnpp.usda.gov/2015-2020-dietary-

guidelines-americans

5 Overcoming obesity: An initial economic analysis, McKinsey Global Institute, November,

2014 http://www.mckinsey.com/industries/healthcare-systems-and-services/our-

insights/how-the-world-could-better-fight-obesity

6 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 www.obesity-solutions.org

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: 202.974.2400

Suite 400 info@hudson.org

Washington, D.C. 20004 www.hudson.org