The latest figures from Euromonitor International suggest that competition to be the leading confectionery producer is heating up between Mars and Mondelez. Both companies are expected to achieve sales of around US$25 billion in 2015, with the former company possibly edging ahead to become market leader. While it could be argued that this is a result of exchange rate differences, the implications remain disturbing for the future of the confectionery market in Western Europe.
So, what are the main points the data tell us?
1) Confectionery environment toughens as volume consumption growth slows around the world
2) Companies with strong European presence experience weakest performance
3) Sugar confectionery continues its terminal decline
Geographic differences help Mars close the gap
Euromonitor International data indicate that Western Europe saw the biggest absolute sales decline of any region, with an expected US$8.2 billion decrease in sales. The region has seen a slump as a result of the strengthening of the US dollar against the euro. Although emerging market currencies have also suffered - Asia Pacific recording just 3% value growth over 2014 and 2015 - they have not been hit as hard as the European market.
As a result, the two companies are not alone in seeing sales decline in 2015. However, Mondelez has almost certainly been more affected than Mars, because its confectionery division is focused almost entirely outside the US. Indeed, as the graph below demonstrates, Western Europe is the company’s largest market, with 34% of its sales coming from the region. While Mars also has a large market share here - representing a quarter of its total confectionery sales - it gains the largest proportion of its sales from North America. This reduces its exposure to exchange rate volatility. Conversely, Mondelez achieves just 11% of its confectionery sales in the region.
Share of Sales of Top Six Confectionery Companies by Region 2015
Other manufacturers with a large focus on Europe have also suffered. Ferrero saw a 10% decline in US dollar terms, with over half of its business focused on Western Europe, and with very few sales occurring in North America. Its main rival in the premium market, Lindt, was less affected as a result of its recent acquisition of US confectioner Russell Stover. Given its extreme over reliance on North America, Hershey has unsurprisingly achieved the best result out of the top 10 confectionery companies, with 4% growth in 2015. Hershey achieves over 80% of its sales in the US alone.
Movements away from Europe are only likely to increase
The trading environment in Western Europe is unlikely to pick up any time soon, with economic uncertainty and market saturation combining to ensure continued sclerosis. Solid profit margins may become more difficult to achieve in Western Europe. Along with North America, there is a growing demand for high-quality products without a similar increase in unit prices. This comes at a time when retailers are looking to cap unit prices, further exacerbating profit margin growth.
It is important to remember that Western Europe remains by far the largest region for confectionery sales in the world, and so there are still significant revenues to be made. However, the region has peaked in volume terms, having achieved negligible growth over the last five years. The outlook is particularly bleak for sugar confectionery, with value sales expected to fall by 2% by 2020. Sweets, which largely appeal to children, will fall victim to the continent’s ageing population and a continuing switch in preferences to chocolate.
Sclerosis in the region is expected to continue over the next five years, with value and volume sales of confectionery achieving less than 1% CAGR. This suggests that companies will even struggle to make Western Europe an effective cash cow - good for achieving value sales, but not one where manufacturers can easily sell in higher volumes. Consequently, strategies will be more geared towards increasing both value and volume consumption in faster-growing markets. While this decline in the performance of Western Europe has been known for several years, it is the scale of the decline revealed by the new data that is most arresting. Given that uncertainty around the euro may continue, the poor performance of the euro against the US dollar could further accelerate.