This is a guest post by John Bradley. John spent 24 years spreading happiness and tooth decay in marketing with Cadbury before switching careers into writing. He is currently working on his third book.
You’d think Halloween is a treat for candy makers. But it’s more like Nightmare on Elm Street that is played out for manufacturers and retailers in the Halloween loot bags being hauled around your neighbourhood.
Why a nightmare? Surely any Candyman in the industry would kill to have their brands being given out to virtually every young consumer in the country in a setting that is replete with fun, excitement and a host of positive emotions? You’d think making money in this situation would be Child’s Play. But a business nightmare it is.
Halloween is a Shining example of the problem of value capture, brought about by an oligolopistic market selling brands of equal value and appeal where prices have fallen over time to little over marginal cost. While Halloween accounts for a staggering 25% of the annual confectionery market volume, it only accounts for 12% of the annual market value. This is a good Omen for you because you are only paying half the market rate for the products you give out, but it takes a Chainsaw Massacre to industry profits due to a Swarm of reasons.
First, it is an intensely competitive market for retailers. Over 70% of households actively participate in the Halloween event, which makes it, in the retailers’ eyes, a destination category to which they devote a huge amount of store acreage. 70% of their shoppers will be looking to buy, and looking to buy as cheaply as they can, so price, or the perception of price, is king. No retailer wants to be seen to be expensive at the best of times, but events like Halloween make it very easy for the shopper to compare and contrast prices. This ultra-competitiveness slashes the retailers’ hopes of profitability.
Second, the event itself is much more important than the brand choice within it. Do you care which brands you give out? Do the kids at the door? Kids care about the category of treat: candy bars are seen as the Gold Standard, unwrapped bits of liquorice as the Zimbabwean Dollar with potato chips somewhere in between. But as to which candy bars they receive, nobody really cares as long as it is a recognised brand, of which there are at least thirty. So the differences in brand appeal effectively disappear making it something akin to a commodity market, which is a major blow to the manufacturers’ hopes of premium pricing their stronger brands.
Third, thanks to the sheer size of the market, manufacturers have a logistical nightmare that drives a further stake into the heart of profitability. The products are small - between 1/3rd and 1/5th the size of the parent brand sku - so while ingredient costs will reduce proportionally, many other costs per unit such as packaging and production efficiency will remain unmoved or even increase. You don’t need a Sixth Sense to realise that lower selling prices and higher costs is not a recipe for high margins.
Another blow to the bottom line comes from buying and selling inefficiencies inherent in a large market that lasts a short period of time. Manufacturers wrestle with the balance between wanting to produce year round to smooth the production efficiency curve and not wanting to warehouse the product for months on end in expensive cold-storage. Outsourcing is problematic as many of the brands employ proprietary manufacturing technologies. Retailers on the other hand have the problem of accurately forecasting demand when 50% of the total volume is sold within the last week and is acutely sensitive to their competitors’ pricing. The larger retailers solve this problem by demanding full sale or return which pushes the costs of residual stock back on the manufacturer.
The final nail in the coffin of realising value is the process adopted by the retailers for ordering. Since they cannot wait to see consumer offtake before committing, retailers order in advance. Manufacturers want them to order as early as possible, preferably on Nov 1st the previous year, but retailers have discovered that the longer they prevaricate, the more power they wield, as manufacturers have been building stock ahead of getting firm orders. With the big retailers, huge volumes can be switched between manufacturer for difference of a fraction of a penny per unit. Manufacturers who find they have made too much too early end up taking a haircut on price rather than risk overstock after the event.
So why do they all go through this torture to make virtually nothing? Retailers justify the huge amounts of space devoted to Halloween that earns margins barely above zero because of store traffic: shoppers will happily switch stores to get the best Halloween deal and, once in the store, will most likely do some other shopping there on which margin will be earned. For manufacturers, the justification is the enormous sampling of their products, even though the benefits have never been quantified. Is it sampling or is it replacing sales of normal-sized bars? Does this ‘sampling’ help solidify brand preference in an impressionable age group? Nobody really knows.
The reality is that both retailers and manufacturers are caught up in an enormous game of chicken. Nobody is happy but everyone worries about being really unhappy if they back out. Fear, not opportunity is the driving motive for all concerned, which is quite appropriate really.
Trick or treat?