Rising Candy Costs Cause Operators to Consider New Merchandising Strategies

It couldn’t have come at a worse time, with gasoline and other costs rising, but changes in a key supplier’s program are forcing vending operators
to rethink plans in one of the most important product segments: candy bars. Vending operators already suffered one round of price increases earlier this year, only to face another one.

Technically speaking, Masterfoods USA has not announced a price increase, but it has changed its rebate program in such a way that many operators view it as such.

Operators reconsider buying plans
That costs are rising in such an important category has caused operators to reconsider their buying plans. Most operators feel they cannot raise prices more than they already have, due to competitive pressure.

The rebate change, which doesn’t take place until the fourth quarter, has caused some operators to consider larger size bars. Larger size products allow operators to provide greater value in exchange for a higher price.

While many operators were unsure of their plans at this writing, many agreed there could be more changes to candy bar offerings in the coming year than at any time since the introduction of the glassfront candy/snack machine.

Masterfoods has stated it is moving away from “one-size-fits-all” rebate programs which it states “sub-otpimizes performance for us, our trade partners and the consumer.”

Some operators view Masterfoods’ move as nothing more than a price increase and have gone as far as minimizing their use of the company’s products.

Some operators resist change
“They keep raising the price when they keep lowering the price at the retail stores,” said Ryan Marsh, co-owner of First Class Vending Inc. in Los Angeles. He claims cocoa and sugar costs have not risen enough to justify these increases, and that other retail channels have not had to pay higher prices.

Other operators have simply opted to reduce candy bars to the top selling standbys in order to reduce costs.

This raises major questions about what to do with the remaining candy slots. Historically, operators bought a variety of candy SKUs (stock keeping units) whereby all the SKUs from a particular manufacturer fell under one rebate program.

Continental Vending Inc., based in Anaheim, Calif., is typical of many operations in having reduced its candy bar offerings to the main core sellers. As for what to do about the other candy facings, the company is relying on marketing data, according to Randy Howell, operations manager.

Some operators have decided not to raise prices on the top sellers, out of fear of being undersold by competitors, and to add more of the larger
size offerings.

The larger size confections (LSCs) have been gaining acceptance slowly in the last two years. Many of these offerings allow operators to make an acceptable profit margin at $1.00. Operators who have found success with these larger size products unanimously agree they use the larger size offering in place of and not in addition to the regular size version. This is the same strategy that has proven effective for large-size snacks.

The nationals (Aramark, Canteen and Sodexho) are all using LSCs.

Some are even using king-size bars, which cost more and usually require a selling price higher than $1.00 to allow an acceptable profit.

Nationals promote larger size candy
Aramark Refreshment Services has seen success with both the LSCs and Masterfoods’ king-size bars, noted Michael Oppenheim, executive vice president. Aramark has as many as five facings in every machine. Oppenheim said these larger versions sustain turns for all core candy bars.

The LSCs have sustained 100
percent of the velocity of the regular size versions, where the king-size bars have delivered at 85 percent, Oppenheim said.

“We truly believe we’re increasing our value not only to our customers, but to the consumers who are using the machines,” Oppenheim said. “It mirrors the c-stores. It increases the value, not just passing along price increases.”

The fact that candy prices are rising is reason enough to try some of the larger size products, said Hugh O’Neill, general manager at Hagerstown Canteen Service in Hagerstown, Md. He has had good luck with the LSC bars, and is getting ready to test king-size bars.

It is uncertain at present how much momentum there is behind the push to larger size candy. Some operators pointed out that this movement is contrary to the consumer demand for healthier offerings in vending machines; larger size candy means more sugar and calories. Some operators think moving to larger size candy is incompatible with their current emphasis on healthier eating.

Operators watch price points carefully Others are waiting for price points to move up just a little more before offering LSC.

“When everyone else gets to 70 cents, that’s when we’re going to make the dollar bar that much more attractive,” said Dan Sheehan, owner of Sheehan Brothers Vending Service Inc., a 15-route operation in Springfield, Ohio, a rural market.

In the meantime, Sheehan plans to decrease his candy facings from two shelves to one and a half. “Twenty columns is not needed and candy is the least profitable thing I sell, and I want to sell less of it,” he said. “You don’t need 20 rows when six or seven are all you need to have.”

Sheehan recognizes there will be a cost involved in changing his candy spirals to larger snack spirals. But he’s already found snack companies willing to offer him incentives in exchange for guaranteed placements.

Bag size candy improves for some
Some of the wider slots might still go to candy, as Sheehan has recently experienced some success with large-size bag candy in his wide slots. This came about by accident. The company didn’t do well when it first tried bagged candy for $1.00, he noted. But when they tried it again in response to a customer request, the response was much better.

“It’s pretty location specific,” Sheehan said of the large bagged candy.

Charles Giaconoa, administrative services manager at Metro Vending Services Inc. in Roseville, Mich., has been happy with the LSC offerings priced at $1.00 from Hershey Co. The company, which has 14 routes in the Greater Detroit area, keeps two candy shelves in its machines and has been using four LSC versions of Hershey’s top selling items for the past six months after testing it with select customers.

Company representatives sat down with location managers and explained they were providing more value for their money. “We didn’t just put it in and not tell them,” Giacona explained.

Metro Vending Services also placed point-of-sale material about the new products on the machines and gave away merchandise.

King-size bars are more challenging
The company has offered king-sized versions of some of the top selling candy bars, but only on request, Giacona said. The king-size bars are costlier than the LSCs, he said, and there is less consumer acceptance.

Giacona claimed that the LSCs are well received in all types of accounts.

Metro Vending Services also offers sugarless candy to accounts on a request only basis. He said there is a strong demand from location managers, but not from end users.

PGI Services Inc., based in Shaumburg, Ill., experienced success with both LSC and king-size bars, said Jim Covington, vice president of operations. LSC and king size candy bars have boosted his candy sales by 15 percent. “A lot of times we’re our own worst enemy,” he said, concerning operator reluctance to use higher priced offerings. “You’re not going to know until you do it.”

Operator finds consumer acceptance
Covington noted his company monitors margins carefully, and the higher priced items have not compromised his profitability.

He claims only one out of 400 customers complained about the higher prices. “I think the days of super sensitivity about prices are behind us,” he said.
LSC and king-size bars also create a better price environment for large size candy bags, Covington said. He said he has seen some improvement in the performance of these items.

Not everyone is convinced the time is right to charge $1.00 for candy bars.

Some operators not ready to upsize
Bill Russell, president of Canteen Service of Steel Valley Inc. in Youngstown, Ohio, is not following the corporate Canteen planogram. The hourly employees in the industrial market he serves have not gotten big enough pay increases to support such prices. He said other Canteen franchises have reported mixed results.

“The higher the price, the less people are going to buy,” said George Yost, owner of Premier Services Inc., a vending and honor box operator in Phoenix, Ariz. He has eliminated Masterfoods products from his honor boxes altogether. In his vending machines, he plans to reduce candy facings from seven to five.

Yost thinks he will end up carrying the top selling items at 85 cents, but his profitability will suffer. “It’s not about what the consumer is prepared to pay (providing it’s under $1.00); it’s about what the other vending company will charge to keep the location,” he said. “You’re better off charging 85 cents and putting them in than charging 75 cents and taking them out,” he said.

When candy companies raised
prices earlier this year, Yost took a novel approach. Instead of offering king-size candy bars, he bought small size Masterfoods bars at Wal-Mart and wrapped four bars together using a shrink wrap machine and priced it at $1.00. Turns dropped 30 percent, he said, but profits were acceptable enough.
He later went back to using the regular vend bar at 80 or 85 cents, depending on the account. When he returned to the regular vend bars, there was less price resistance due to the fact that the previous candy selections were $1.00.

Yost has not had success with the king-size bar at $1.00. “They (consumers) do not want giant candy bars,” he said.

Several operators noted that $1.00 is the ceiling they can charge for candy. For this reason, some say the LSC works, but the king-size doesn’t.
“The dollar seems to be the right price,” said Eric Cardonick, owner of Advanced Services in Bensalem, Pa. “I’d like to see more items in that size.” Cardonick has not found success with large-size bag candy.

Test identifies successful approach
Bachtelle & Associates Inc., the Tustin, Calif.-based vending consulting firm, conducted LSC tests on behalf of Hershey Co. and found that the number of LSC products priced at $1.00 makes a difference in customer acceptance.

When only one LSC item was offered in a machine, sales did poorly. When there was a group of candy bars with price points of $1.00, $1.25 and $1.50, sales did better for all the items. “It’s because of the reduction of the sticker shock,” said Brad Bachtelle, president of the consultancy.

Candy follows salted snacks
Bachtelle observed that LSC is simply following the same pattern of LSS salted snacks; the larger size products fared poorly when they accounted for only one or two facings in the machine.

Bachtelle said turns held steady for all the LSC products. “We consistently see units hold, but the revenue jumps,” he said. “The old procedure of pricing all products in a category the same doesn’t make a lot of sense from the consumers’ standpoint. The value doesn’t align with the products.”

Tommy Elliott Jr., purchasing manager at Tomdra Inc., a 16-route operation in Tucson, Ariz., confirmed Bachtelle’s observation. “The more
that you have in there, the more it’s going to sell,” he noted. When LSC was first introduced with just a few SKUs, response was slow. But when there were more SKUs, the prices didn’t look as out of place.

A way to offer added value
Elliott also noted that LSC provided a way to circumvent a price increase.

“It took a lot of heat off of us,” he said.

Elliott said he hasn’t ventured into the king-size bars, but he is thinking about it.

Griesedieck Vending Services in St. Louis, Mo. also has sustained its turns using LSC and has since increased to four mandatory LSC facings in all machines, noted David Griesedieck, owner. He has two candy shelves.

In the meantime, many operators are removing secondary name brand candy bars in response to higher costs. “I don’t know if it’s a wise move,”
said Greg Sidwell, president of G&J Marketing, the Palm Harbor, Fla.-based product broker.

Sidwell said Nestlé Brands USA has taken advantage of the situation with a generous rebate program, and other candy manufacturers are developing products to fit the need for less expensive offerings.

Nestlé Brands USA has offered a user-friendly rebate program for the last year, noted Jess Nepstad, divisional vice president for alternate channels for foodservice. Nepstad noted that the company has gained market share recently and has seen excellent success with Butterfinger Crisp, which was introduced less than two years ago.

An opening for new candy players?
Tom DiLoreto, a former vending operator now involved in product development, thinks there is an opportunity for other candy manufacturers to take on the big sellers. He has formed a company, Top Marketing Group Inc., based in Alva, Fla., to market new items with product quality similar to the top sellers but at a lower cost to the operator.

While operators experiment with new products, many are finding better pricing on the core Masterfoods USA items at membership warehouse clubs than in traditional vend product distributors.

Several vend product distributors said they are losing sales to club stores.

Tom Bergstrom, owner of Bergstrom-Daywood Co. in Austin, Texas, said the Masterfoods bars cost 4 cents less at Sam’s Club than a vend product distributor, but he isn’t sure he is going to buy it there. Going out of the way to buy a few SKUs is costly.

Bob Minaglia, president of Rainbow Refreshments Inc. in Wheeling, Ill., agreed that the inconvenience of buying at the warehouse club isn’t worth the savings.

The bigger question for most operators is not where they will source candy, but what they will carry. Higher costs for certain national name brand products has forced many to consider upsizing to larger products, which will allow them to offer a greater value for a higher price point.

Will higher prices create place for premium candy?
With vending prices rising, some operators think there is more opportunity for machines to offer more premium priced products. In the candy sector, such a move could support a growing consumer demand for gourmet and premium candy. Premium candy remains a small part of the overall candy business.
According to some industry reports, premium chocolates posted double-digit growth last year. General chocolate sales remained flat in comparison. Much of that growth was driven by dark chocolate, which emphasizes cocoa flavor over sweetness.

Perhaps most importantly, premium chocolate is no longer stuck in the gift box. Even with increased health concerns, consumers are demanding casual, single-serving products. In short, premium chocolates seem poised to become the next everyday luxury.

Some vending operators have reported excellent results with Toblerone from Kraft Vending & OCS this past year.

Bertsch Food Service Inc., based in Warsaw, Ind., charged a nickel more for Toblerone than other chocolate candy items, and the product held its own, according to Larry Richardson, purchasing manager. “We didn’t miss a beat,” he said.

And because the product costs less than other core candy items, the sales were among the most profitable in the snack machine. “For us, it was a double win,” Richardson said.

Bertsch Food Service also did well in the past with Nestlé Turtles, which the company priced 5 cents higher than other candy items, Richardson said.
Toblerone performed better than other candy items the company has tried in the past that could be considered premium or gourmet, Richardson said. The company didn’t do as well with the PBJ Cup from Russell Stover.

Superior Office Snacks Inc., based in Olathe, Kan., experienced similar results with Toblerone, noted Mike Maddock, company owner. “Customers knew it was an upscale product,” he said. His company priced the product at the same level as other candy items, and it turned at the same rate as all but the top five candy items.

Maddock also found positive response to Nestlé Turtles, although some customers didn’t feel there was as much value, due to the product’s size.
Maddock first tested a premium candy 10 years ago when Dove candy items became available in vending. The products were not well received,
he said. He attributed this to the small size of bar.

Interest in premium candy is far from widespread. Vending operators have less real estate to work with than other retail formats, and most operators believe the demand for premium products has a long way to go to justify placement on even a rotational basis.

Vend distributors: Some operators abuse rebates
Several vending product distributors said Masterfoods USA needed to change its rebate program because many operators were abusing the program. Distributors said they have long realized that vending operators purchase large quantities of products to qualify for rebates, then simply sell the product to buyers outside of the vending industry.

One distributor, who did not want to be identified in print, said he is aware of one vending operator who was buying large quantities of product and shipping it overseas.

Arora Singh, owner of Vend Mart Inc., a vend product distributor based in San Leandro, Calif., said diverting occurs in the industry, but that suppliers could find other ways to correct it besides changing rebate programs. “There were better opportunities to control that,” Singh said. “The technology is available today. They could track SKUs out of the machine and do a realistic projection of usage per machine.”

Shawn Finnerty, owner of Vend Source, based in Phoenix, Ariz., agreed diverting has been a problem, but that manufacturers have other ways to address it. “This (type of program) alone will not resolve those issues,” Finnerty said.