Confectionery brands - Mars, Mondelez, Hershey
Hershey, Mars and Mondelez are struggling to find growth as new snacking options emerge.

KANSAS CITY — Some of the largest confectionery companies are finding growth to be elusive both domestically and internationally. Consumers continue to demand the core products in such categories as chocolate, sugar confectionery and gum, but the explosion of healthy snacking options is having an impact.

The market research company Technavio, Elmhurst, Ill., estimates the U.S. confectionery market will reach $35.86 billion in sales during 2016 and sales will rise to $38.19 billion by 2020. From a volume perspective, Technavio said confectionery companies sold 7.31 billion lbs in 2015 and that volume will increase to 7.61 billion lbs by 2020, growing at a compound annual growth rate of 0.81%.

In response to the tepid growth forecast, large manufacturers are taking a number of steps to adjust to the new market realities, including peer-to-peer acquisitions, portfolio diversification through acquisitions, the alignment of indulgences with current consumer trends and international expansion.

Chart: U.S. confectionery market share
U.S. confectionery market share

Growth through acquisition was behind Deerfield, Ill.-based Mondelez International’s bid to acquire the Hershey Co., Hershey, Pa., for $107 per share this past June. The combination would have created a global confectionery powerhouse, but Hershey’s board of directors rebuffed the offer and by late August Mondelez said it was no longer pursuing a merger with Hershey.

“Following additional discussions, and taking into account recent shareholder developments at Hershey, we determined that there is no actionable path forward toward an agreement.”

With that option off the table, both companies must consider other options to improve the profitability of their confectionery businesses.

In 2015, The Hershey Co. held 31% of the confectionery market in the United States, according to Nielsen data (see table, Page 48). The company has embraced a variety of initiatives to improve performance, including acquiring such companies as Krave meat snacks and barkTHINS for diversification, seeking to establish a greater foothold in China and relying on consumer insights in a greater fashion to drive new product innovation.

J.P. Bilbrey, Hershey
John P. Bilbrey, chairman, president and c.e.o. of Hershey

“Over the last four to five years, we had good confectionery success,” said John P. Bilbrey, chairman, president and chief executive officer of Hershey Co., during a July 28 conference call to discuss the company’s second-quarter results. “Some products over-delivered versus our expectations and are still doing well today. And some of the new items from last year have under-delivered with lower volumes than we modeled. While innovation is hard work, our best innovation has been tied to consumer insights coming from our demand landscape work and leveraged across big brands and platforms and driven by our go-to-market capability.”

Confectionery success stories from Hershey include KitKat BigKat, Reese’s Snack Mix and Hershey’s Snack Bites, Mr. Bilbrey said, adding “and we’re also excited about the Reese’s Pieces Cup, which will only be available as an instant consumable item. Demand from retailers has been double our planning. Product began shipping earlier this month and is available in stores now.”

Hershey innovation
Confectionery success stories from Hershey include KitKat BigKat, Hershey’s Snack Bites, Reese’s Snack Mix and Reese's Pieces Cup.

Yet it is also clear Hershey is hedging its bets through diversification, shifting the company’s focus away from confectionery and toward the much larger snack category with the introduction of Krave meat bars. “’Snackfection” is a term coined by Hershey to describe products that blur the lines between traditional confectionery and snack items.

Michele Buck, Hershey
Michele Buck, c.o.o. of Hershey

“Think salty snacks and confection, or other categories, cookies, and confection, etc.,” Michele Buck, chief operating officer of Hershey, said during the July 28 call. Examples may include the introduction of fruit and nut bars under the Brookside brand, and a number of snack products featuring plant-based protein and marketed under the SoFit brand.