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Industry Analysis: The US Candy Industry Union University 1

Executive Summary Industry analysis helps in analyzing the different forces and factors that influences the candy business in the US. In order to gain in depth understanding about the candy industry of the US the Porter’s Five Forces model was implemented which helped in understanding about the perspectives of the suppliers and buyers in the industry. In addition, the factors influencing the new entrants and the long-term threats of the industry have been identified. It was noted that that are strong barriers to new entry because in order to compete with leading brands new entrants will require huge capital investment and will have to invest heavily in marketing. Furthermore, due to a low switching cost buyer have a high control on portion, private and advertisement of the candy sector. Suppliers do not possess much bargaining power a therefore, the candy industry in he us has a monopolistically competitive market. 2

Table of Contents Industry Definition and Strategic Groups ........................................................................................ 4 The Industry Environment ............................................................................................................... 5 Summary of Industry Environment ................................................................................................. 9 References ...................................................................................................................................... 11 3

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Industry Definition and Strategic Groups Industry Definition It is acknowledged that the candy industry of the US is the one that takes multiple ingredients such as dairy, corn syrup, sugar, and cornstarch combined with myriad of other flavored ingredients in order to create a variety of chocolates and candies (Nachay & Malochleb, 2018). The Commerce Department of the US has further broken down candies in to two different categories namely: chocolate and non-chocolate (candies). Then these two primary categories are subdivided into different product segmentations based on the ingredients, texture and comprehensive manufacturing process of the product. The manufactured packs candies and sent it to wholesaler who is responsible for selling them to the hypermarkets, convenient stores and the local grocery market from where public can purchase the final product. Strategic Group The US candy industry consists of various strategic groups, which can be divided into four segments. These categories are selected based on their breadth of their geographic locations such as national, multiregional, regional and local (usalovelist.com, 2022). These different strategic groups have different goals and they implement different business approaches in order to achieve their goals. The Hershey Co and Mars Wrigley Confectionary are identifies as the leading organizations in the US candy sector (Bartley, 2020). These organizations have a strong and dominant market presence on national as well as international levels. Apart from leading brands there ae many other brands that fall under the national, regional and local category and they have their own role in the candy industry of the US. 4

The Industry Environment In order to analyze the industry environment of the US candy sector Porter Five Forces model will be implemented. Porter’s Five Forces framework is a popular method that helps in analyzing the operating environment of the competition of an organization. Threat of New Entrants (Low) The threat of new entrant in the candy market of US is low because the new business require a lot of capital investment (Lauritsen, 2021). The new entrant will be required to build warehouses, manufacturing sites, and will have to invest heavily in marketing initiative in order to create awareness about its presence. Furthermore, the new firm will have to compete with the experience and knowledge of leading firms and other players in the existing market, which is challenging. Many leading players have been in the market for years, have built strong brand image ad name, and has a loyal customer base therefore, competing with well-established brand is significantly challenging. Switching cost of customers: The costumers do not have much witching cost and can easy switch between brands. The average cost of a candy in the US is between $0.19 to around $3. This difference occurs due to a wide variation in the package size of the candy. Therefore, if size of the candy is similar the gap can shrink dramatically. For instance, Skittles 4 oz. box costs around $1.79 whereas a Tootsie Rolls pack of 4oz costs around $1.50 therefore, the transition cost is low so customers can easily focus on product design, texture, and taste rather than price. Therefore, new entrants will have a disadvantage, as differentiation will be difficult. Demand side benefit of scale: there is presently no need of any new entrant in this sector. The regional, national and level manufacturers are effectively meeting the candy demand In the 5

US. Any new business will experience challenge in developing market share for their business because the market has reached saturation. It is expected that any new entrant will struggle in differentiating its products from rivals because there is a limited number of unexplored combinations in the industry’s production. Advantage of Incumbent firm irrespective of size: Incumbent organizations are observe to have benefit over new firms entering the market because these organizations have R&D strategies and market knowledge, which allows them to advance their business (Belderbos, Kazimierczak & Goedhuys, 2022). For instance, many leading candy brands are experimenting with unique three-dimensional printing options, which will draw the attention of the consumers towards their products more. In addition, incumbent firms have a strong brand image and recognition, which plays a vital role in differentiation in the candy sector. Capital investment: New business will have to heavily invest in infrastructure, equipment’s and other costs in order to compete in the industry. This expenditure will require a huge capital investment, which is not possible for every new firm. In addition, to create awareness and increase market share and presence the company will further have to invest in marketing which will further increase investment. In the year 2021, Hershey spent around 51 million US dollars in its promotional activities (statista.com, 2022). For any new business, this number is expected to be high because they need to invest in packaging, marketing, distribution, manufacturing and more. Government policy: There are many governmental policy associated with candy making process such as labeling, packaging, manufacturing, advertising and distribution. As new firm will lack market knowledge, they will face difficulty in navigating through these rules. 6

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Growth rate of the Industry: Since the year 2012, the candy industry of the US has witnessed a strong growth rate despite the declining birth rate. From the year 2007 to 2019, the birth rate has shrunk in a dramatic manner from 14.3 children per 1000 people to around 12.012 in 2022 (macrotrends.net, 2022). Despite the shrinking of target market the candy industry of the country has revealed a strong growth of around 24.95 percent from 2012 to 2017. Expected Retaliation: New business must prepare themselves for a strong retaliation from leading business. The business in the candy industry make use of some common retaliation tactics such as price war, because big firms can sustain loss for long period. Apart from price war negative advertisement where brands show consumers that they must purchase from brands they have known for longest. Lastly, if any new business provides a new product large business will start producing similar product. The Bargaining power of Suppliers (Low) The bargaining power of the suppliers in the candy industry is relatively low because there are numerous suppliers available in the market. In addition, with the ease of international trade companies can easily approach to international suppliers who provide services and raw materials at lower cost. Dependency of the suppliers on building industry: suppliers are observed to be evidently depend on the buying industry. If the consumer decides that they want to witch from a particular brand, that brand will be decimated. Similarly, if the intermediaries star start purchasing product of a company will find difficulty in reaching to customers and sales will decline. The Bargaining Power of the Buyers (High) 7

The customers have a high bargaining power due to low switching cost, high concentration of buyers, numerous substitutes and low availability of new products. This power has allowed the customers to set the prices of candy product lines. Switching cost: The switching cost between the products of different brand is low. Every brand in the candy industry is offering similar products at similar prices. Product differentiation: As compared to other industries, the product differentiation in the candy sector is relatively high. However, it must be noted that developing new combination is becoming challenging. In addition, if few brands produce unique products competitors have similar or identical products. This has forced many brands to rely on other factors like market share and brand recognition. Threat of backward integration: It is analyzed that nowadays majority of the supermarkets are implementing backward integration. Numerous supermarkets or stores are selling their own branded products. For example, Sam’s Club, Target, Walmart and more have their individual brands of candy which are often less cheaper and they easily eat away a huge market share of the branded organization. The threat of substitution (High) The threat of substitution is high in the candy industry because there are many different brands in the US selling similar process so consumer can switch between brands. Consumers can also switch between differ categories of the products for example they can switch from candy to chocolate. 8

Alternatives: The threat of substitution is high because consumers can switch to products such as biscuits, chocolates, crisps, pops and more, which help in satisfying similar needs and match the price. Healthy eating: In the past few years, the concept of healthy eating is increasing among the citizens in the US (Kaye, Sohn & Garcia, 2020). Furthermore, there are many campaigns regarding obesity, which often bring a change in the consumption habits of the consumers, and they might avoid candies. Rivalry in the Industry (High) The rivalry in the candy sector of the US is significantly high because majority of the payers are producing similar products at similar prices. These familiar products are putting the organizations in direct competing with each other. Balance of organizations: The candy industry of the US is highly dominated by Mars, Hershey, and Ferrero, which contributes to 69 percent of the total market share of the candy sector (candyindustry.com, 2022). These top organizations do not leave any room for smaller companies to grow in this industry. Price wars: The price of candies within the industry quite stable. The consumers have a low switching cost therefore, companies are required to keep their product price within a specific range in order to maintain market share. Summary of Industry Environment From the above discussion, it can be concluded that the US candy industry is a huge industry, which is growing at a rapid rate. The buyers in the sector has high concentration and low switching cost due to which they hold majority of bargaining power furthermore, the 9

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suppliers do not have much power in the industry. The threat of new entrant is also low because high capital investment is needed whereas the threat of substitution is high due to availability of a wide variety of products. 10

References Nachay, K., & Malochleb, M. (2018). Ingredients Take a Simpler Turn. FOOD TECHNOLOGY , 72 (6), 55-91. Belderbos, R. A., Kazimierczak, M., & Goedhuys, M. (2022). Trademarks, patents and the appropriation strategies of incumbents: the scope of new firm formation in European regions. Regional Studies , 56 (2), 210-226. Lauritsen, S. (2021). A Sweet Future for Sugar Makery: A Deeper Dive into Small Business Consulting. Bartley, G. (2020). The Chocolate Industry: Blood, Sweat, and Tears is What Makes Chocolate Sweet. Hershey's advertising expenditure 2020 | Statista. (2022). Retrieved 10 November 2022, from https://www.statista.com/statistics/294536/hershey-company-advertising-expenditure/ Kaye, E. A., Sohn, W., & Garcia, R. I. (2020). The Healthy Eating Index and coronal dental caries in US adults: National Health and Nutrition Examination Survey 2011-2014. The Journal of the American Dental Association , 151 (2), 78-86. Candy Made in the USA: The Ultimate Source Guide. (2022, November 10). Retrieved from https://www.usalovelist.com/candy-made-in-the-usa/ | Candy Industry. (2022). Retrieved 10 November 2022, from https://www.candyindustry.com/articles/90139-how-hershey-mars-and-ferrero-fared-on- the-2021-american-customer-satisfaction-index 11

U.S. Birth Rate 1950-2022. (2022). Retrieved 10 November 2022, from https://www.macrotrends.net/countries/USA/united-states/birth-rate 12

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