Investmentsdirect - Investment Articles and Advice

February 15, 2007

The candy business continues to churn out sweet profits. The countining growth of super chain stores like Wal-mart and Target is putting small manufacturers out of business and keeping profits strong for those that partner with large retailers.

The candy business today is made up of just a handful of large companies, M&M Mars, Hershey, Nestle, Tootsie Roll, and Wrigleys.

These companies dominate the store shelves at major grocery store chains, drug stores, and retail stores throughout the US. A look on the candy aisle at your local Wal-Mart shows mostly products from these companies and very little else.

Most of the top selling candy is stuff that has been available for 20yrs or more. Brands like Snickers, M&M's and Tootsie Rolls are all top sellers. New candy products rarely come out and stay on the market for long.

The R&D spent on new products is low. The products that do come out are usually variations of successful products such as adding peanut butter to Snickers, almonds or a different type of chocolate.

Most of the R&D most likely goes to lowering the cost of production. This type of R&D can lower costs of production and increase profits. Not many other types of businesses can be successful selling the same products year after year and still remain profitable.

Imagine if software companies such as Microsoft or Adobe stopped changing their products; sales would fall. Software companies don't need to spend much money after the product is created. The rest of the expenses are costs to distribute and market the software.

What is even worse than software is a business that has high production costs and has to continuously improve products. Automobile manufacturers are such an example. They have to keep improving their products and if they fail to keep up, their sales fall and they have huge production costs which often leads to huge financial losses.

It is hard to guess who will be the dominant automobile companies in the next 30yrs. Will it be Honda and Toyota or some other company? It is just too hard to figure out. However, ask the same thing about the top candy companies and the answer looks much more clear. It is a lot more certain that M&M/Mars and Hershey will continue to be top players in the future as compared to guessing another business such as software or the automobile industry.

What has made the candy business even better today is that it is consolidating as a result of the growing popularity of huge retail stores such as Wal-mart. These companies can only do business with companies that produce huge quantities of candy. Small retail stores that sell candy are hard to find which makes it hard for small manufacturers to compete.

The selling price for candy stays low as a result of the large candy companies. In order to compete in the candy business today, companies have to have a lot of money for production facilities, marketing and negotiating power with large stores. Would Wal-Mart want to deal with a tiny candy company or a large one?

Some retail stores such as Target and Trader Joes offer a bit more diversity by selling premium candy or their own store brand of candy. Trader Joes sells chocolate bars under it's own label. Target has lots of single serving premium chocolate bars that it sells. However, the sales from these items is tiny compared to what the big candy companies such as Hersheys and M&M Mars produce.

Other specialty makers have their own stores such as Sees Candies, Godiva, Ethel M. These companies produce their own product line and sell it exclusively in the store sometimes with other merchandise as well.

Like most of the candy companies most of the sales come during the holidays, Christmas primarily as well as Valentines day, Easter and Halloween.

The sustainability of such a business model seems almost endless. Every year many people are going to give chocolates for Christmas and for Valentines day. This isn't going to change for a long time until someone comes up with something better than chocolate which seems unlikely.

Some other candy companies have more of a stable revenue stream. Wrigley's chewing gum is a staple item for many people to carry in their cars, for chewing at work, after quick meals and while relaxing at home. If you go to your local convenient or grocery store a quick search for gum shows that Wrigley is still a top leader in this group.

Many of these leaders in the candy business are producing ROE (return on equity) of 20% + every year with little or no debt. Wrigleys has been paying a dividend for a long time and currently has a 2.3% payout.

http://www.findarticles.com/p/articles/mi_m3092/is_n20_v27/ai_6733546