Finding the sweetest spot: feeding America's sweet tooth is big business. Here's a look into the $24 billion industry with three financial executives of popular-brand companies.

For the approximately 1,000 manufacturers of some 12,000 brands in the snacks/confectionery industry--whether a giant multinational manufacturer, a regional or a mom-and-pop boutique candymaker--pressing business issues are strikingly similar. Differentiation comes in the scale, scope and breadth each brings to the task. And, while most share similar customers--the giant Wal-Marts, Costcos, Sam's, convenience stores, newsstands, drugstores and other chains and distributors of all sizes--each delivers its own unique style of product and focus.

It's an old industry, steeped in traditions and family and community values. With the exception of about 15 or 20 big players (such as a Hershey, Mars or Nestle), most are smaller regional or local boutique firms. Many are older than a century, started by an individual with a single idea built around a community--which either grew with, or away from, its origins. Hershey made chocolate affordable; Just Born (owner of the Marshmallow Peeps[R] brand) began as a chocolate-maker; and The Topps Co., began as a bubble-gum company, adding major-league sports trading cards as a marketing tactic.

Continuing their founders' ideas to perpetuate product lines and grow the business through the years, candy manufacturers/marketers grapple with a host of issues that mirror those in other manufacturing industries: modernization, production (in the U.S. or abroad), customers, profits, revenues, distribution, pricing, employees, G&A, technology, sourcing, R&D and innovation, competitors, marketing, dietary and health issues, shareholders (for public companies), boards of directors and more.

Financial Executive is taking a look at the industry and some of its key concerns through the eyes of three financial executives representing popular U.S. and global brands.

* Frank Cerminara, senior vice president and CFO of Hershey Foods Corp., is concerned with leveraging his brands by constantly introducing new products and new versions of popular brands to maintain customer and retailer interest--although his company already has some of the industry's most recognizable brands (such as Hershey's Kisses[R], Reese's[R], Hershey's[R] chocolate bars), as well as its highest revenues.

With a new CEO, the first from outside the Hershey family, and a new focus, the 100-plus year-old company--incorporated in 1927 as successor to a business founded in 1894 by Milton S. Hershey)--has more than 40 brands in the U.S. alone. It's a leader in all the candy categories and has over 2 million points of distribution domestically, and has revitalized its new product program as one step in making a good business better. It's also focused on growing gross margins.

* Ronald J. Izewski is CFO of Just Born Inc., the manufacturer of Mike and Ike[R], Hot Tamales@ and other well-known brands including the Marshmallow Peeps brand, touted as the number one nonchocolate Easter candy. While competitors enjoy certain offshore cost advantages, he is concerned with controlling costs while also preserving the family-owned business traditions of commitment to its employees and community.

In its first acquisition in 50 years, the 80-year-old firm sought a partner with similar values--making the integration process relatively easy, and bringing it back to its roots as a chocolate maker (in 1923, founder Sam Born introduced "French Chocolates" to New York City, marketing his brand's freshness as "just born") and in line with its strategy to move from a manufacturing-driven to a market-driven approach.

* Stuart D. Barlow is controller of The Topps Co. Inc., a confectionery and entertainment and sports-trading card company. He notes that trading card profits have slid sharply in recent years, making its confectionery products--Push Pops[R], Ring Pops[R], Baby Bottle Pops[R] (mostly manufactured offshore in Taiwan, Shanghai and Thailand and shipped in refrigerated containers back to the U.S. market)--the most profitable and the fastest growing segment of the business. Topps is managing distribution costs through sharing a Scranton, Pa., warehouse and trucks with an industry peer with common customers and non-competing products.

Begun as a bubble-gum company 65 years ago (it manufactures the Bazooka[R] brand, in its 50th year, under contract in a Hershey-owned facility in Memphis), the family roots are evident in the publicly-traded company, which is looking to add to its product mix by making its first confectionery acquisition outside the lollipop area (a deal is now pending) and creating new versions of its brands, for example, by combing two already-popular products.

The Environment

The candy/gum segment (39 percent) of the $62 billion U.S. snack market has issues that range from seasonality to discounting to strategic planning to its position on dealing with the nation's health problems related to obesity. Candy sales in the U.S. totaled $24.3 billion at retail in 2002 (up slightly from $24 billion in 2001) according to industry figures, with chocolate accounting for over 50 percent, at $13.2 billion. Much of the sales are seasonally-related, with the leading holidays Halloween/back-to-school, Easter and winter holidays (Christmas, Hanukkah, Kwanzaa and Valentine's Day), in that order.

A challenge for candy makers is to extend everyday business by adding line extensions of popular brands, promotions and marketing programs, and to even acquire businesses to fill in missing areas to smooth out seasonal earnings.

When Just Born acquired the Rodda Candy Co. in 1953 for its jelly-bean technology, Marshmallow Peeps came with the deal--at that time, hardly a blockbuster product. Just Born has grown the franchise of the brand, which is now celebrating its 50th year. Originally, Peeps were individually hand-squeezed through pastry tubes; Just Born mechanized the marshmallow-forming process and it now produces more than 4.2 million per day and over 1 billion a year. At first, Peeps were just available at Easter. No more, Izewski says, as the company continually does more product introductions and line extensions.

The marshmallow treats are available as trees, snowmen and, most recently, gingerbread men in winter and pumpkins, ghosts and spooky cats at Halloween time. Going further into seasons, patriotic (red, white and blue) stars appear around July 4th. "We've been able to take a seasonal marshmallow have it at retail in about 8 or 9 month of the year," says Izewski, who has been with Just Born since 1995, having worked for Donruss Inc., a tradingcard division of Leaf Inc., a Finish-owned confectionery products-subsidiary at Huhtamaki Oy, after starting his career with Coopers & Lybrand. While Peeps have a seasonal connotation, he adds, "We talk about an 'everyday marshmallow product;' it could be another consideration for us."

For the past four years, Topps has been creating geared towards holidays--Christmas, Easter and Valentine's Day--such as Push Pops, with trees and Santas or bunnies or hearts. Hershey has long been packaging one of its largest-selling brands Hershey's Kisses (producing 33 million daily) wrapped in red, green and the traditional silver foil for the winter holidays, pastel colors for Easter and brown and orange foil during the fall season.

Filling Pipelines with New Products

While the industry is full of familiar brands, it needs to constantly develop new and different products. "Consumers like a lot of variety, and they like new things which bring excitement to the category," says Cerminara, who spent five years of his career in Hershey's marketing division. In 2002, over 1,400 new confectionery products were introduced via big promotions at industry trade shows and directly to consumers, via multimedia advertising campaigns that include retail/point-of-sale promotions.

Barlow says while important to keep core products, it's also important to focus on line extensions and new products. Topps' Ring Pops and Push Pops are now available in multi-colors instead of solid colors. Also, a new product, Flip-N-Dip Push Pop[R], combines a Push Pop with a container of flavored sugar, like a Baby Bottle Pop. "In creative ways, we are adding to our mix of products. It's a continual process of building upon existing products," Barlow says.

Supplying product is a challenge, albeit a sweet one--Just Born says it uses approximately 40 million pounds of sugar a year--except, perhaps, not for its Zours[R], the popular sour-tasting sweet treats it introduced in 1999.

With their tried-and-true brands, companies compete with their own best-sellers to bolster consumer and retailer excitement. One major goal: to drive impulse point-of purchase sales for candy items. Even Hershey, the manufacturer of over one billion pounds of chocolate a year, and undeniable leader in chocolate and nonchocolate--two of the four confectionery categories (gum and mints are the others)--recognizes the challenge.

"It is a great business, and there is a lot of competition in it," says Cerminara. "We are leaders, we are very focused, and it's important that we continually refresh the lines. So, yes, everybody's familiar with Hershey's Kisses, but [we still] introduce different varieties to gain merchandising and create excitement for consumers."

For example, from time to time Hershey introduces limited editions (lasting four to eight weeks) to garner special placement, thus giving retailers the ability to display and move product. "We are not trying to get permanent placement in those items on the usual shelves, but in locations where people see them," he explains. With such specially packaged and promoted products, he adds, "We're getting merchandising where impulse purchasing is most likely."

In fact, he says, Hershey has radically changed how it grows markets for individual products. It used to rely on having a blockbuster new product, maybe every year or two. The revitalized new product program takes advantage of Hershey's sizable platform brands by trying to maximize those, through flavor variations, new eating occasions, portability, packaging, displays and a variety of activities to engage both retailer and consumer interest. "Our goal," Cerminara says, "is to change the mix of our products to make them much more profitable, helping us create affordability by expanding margins, partly through the product line and partly through the supply chain."

And, while the snacks business, in general, has been growing, the pace of that growth depends on the time frame that you look at. This year at retail, Cerminara says, Hershey Foods has been growing 5 to 6 percent, higher than the category norm of 3 percent year-to-date (YTD). For Hershey, he says, "As leaders, we ought to grow faster than the market; and, you do that by leading." Every segment has good competitors in it, he says, "and we have to keep doing things better, [and] more dynamically introducing things that consumers want."

Topps knows about adjusting the product mix to drive sales. Begun as a bubble gum company in 1938 in Brooklyn, N.Y., by four brothers named Shorin, it added sports cards as a way to market more gum. By 1951, baseball cards (as they became known) were begun, and according to the company's Web site, "have become a part of pop culture." Topps then expanded into other sports cards and entertainment areas.

The current chairman of the board and CEO since 1980, Arthur T. Shorin, is the son of the one of the founders. Privately owned until 1984, Topps was acquired in a leveraged buyout by a group led by Forstmann Little & Co. and Topps management. The company went public in 1987.

Besides its Bazooka brand and the Joe Bazooka character it created, it is sports cards that the company became best known for--first major league baseball, then other major leagues, including basketball, football, hockey, and most recently Nascar; as well as entertainment cards such as Pokemon and Star Wars. However, as Barlow explains, "The [sports] trading card business has become extremely competitive for a smaller piece of the pie as buyers have shifted from children to adults--primarily adult collectors," yet the company's management maintains ties to the sports franchises and sports teams.

Also, entertainment card sales have ups and downs, along with fads peaking and fading, which is reflected in the company's profits. For example, while Pokemon products were very strong in the year ended Mar. 1, 2001 (Pokemon peaked in 2000), the trend was not repeated in subsequent years, and the company's profit picture reflects this challenging market. It has now combined sports and other trading cards under one "entertainment" division.

Topps is looking to drive growth by focusing on confectionery and the most profitable entertainment products. "We have deliberately reduced a number of the less-profitable sports products," says Barlow, who joined Topps four years ago, his first position in the confectionery industry. After receiving his MBA from Columbia, he began his career with RCA's corporate controller's staff, then worked with General Instrument Co., a private real estate developer and then in the consumer electronics industry.

In another effort to boost earnings, Topps has recently signed a letter of intent to purchase certain assets related to specific brands of The Foreign Candy Co. Inc., a Hull, Iowa closely held marketer of confectionery products. No other details are being disclosed, but Topps doesn't expect the acquisition to have a material impact on the current fiscal year.

Additionally, Topps has enhanced its Web site, and offers certain of its entertainment products online; it's building an interactive Web presence with its new "etopps[R]" brand of cards, sold exclusively over the Internet via "Initial Player Offerings" (IPOs). For overseas markets, instead of cards, it markets items for children, such as stickers, and also the books in which to paste the stickers.

The company's popular lollipop brands, Push Pops and Baby Bottle Pops, are mostly hand-assembled, and require a large amount of labor. Thus, these products are manufactured and assembled offshore, while Ring Pops are manufactured and assembled in Scranton, Pa. Barlow says lower labor costs are a key reason for offshoring production for products, which are then shipped in refrigerated containers to Elizabeth, N.J., and trucked to the Scranton warehouse it shares with another confectionery manufacturer for sorting and distribution. The trading and entertainment cards, marketed under several brand names, are manufactured by a variety of printers and co-packers located around the U.S.

The Good and Bad: Health Aspects

What is the effect of media attention on studies exploring the dietary and health aspects of candy or chocolate consumption? Many point to the good side of chocolate and the bad effects of sugar. How is the industry affected by today's health-conscious consumers?

Izewski suggests that companies need to respond to prevailing trends. "Certainly, one [item] at the top of the list in our industry is dietary concerns; also significant on our radar is the concern for obesity," he says. He says that Just Born is working with the National Confectioners Association (NCA), an industry trade group, in trying to educate consumers that candy is fine and permissible, in moderation, as part of a balanced (he stresses "balanced") diet--as a treat, reward, a pick-me-up.

"We want to make sure we are not seen as an industry that is not compassionate and not supportive, [and] we believe the way to do that is through consumer awareness, by providing education. We already have nutritional labeling," he adds. Izewski says his company's R&D organization is continually exploring sugar-free products. But, bottom line, he concedes, "confections are a sweet-treat item."

Further, he says, the industry at large is concerned with obesity. He notes that certain local government regulations are beginning to ban vending machines in schools--and that may ultimately result in a tax on confectionery products.

Hershey's Cerminara says that consumers seem to be at both ends of the spectrum these days--both healthy and indulgent--and obviously, when looking at growth strategies, "we need to be looking at better-for-you aspects, as well as all parts of the market."

Sugar-Free--Why Now?

While Topps and Just Born are still studying this market, Hershey--with three-quarters of its business in chocolate--has introduced for the first time in its history some of its most popular chocolate brands as sugar-free products. The company press release announcing Hershey's, Reese's[R] peanut butter cup, Hershey's with almonds and dark chocolate says the new line has "the same high quality and great taste, but without the sugar and about 19 percent fewer calories."

Cerminara observes that while Hershey has other sugar-free products, these are now indeed its first chocolate products. "We've talked about [it] for a long time, but said, 'We are not going to bring out a product that doesn't taste [like] Hershey's should.' So, until we got it right, we didn't want to bring it out.

"And, obviously, consumers are looking at different alternatives. So [introducing it now] certainly fits the current trends in the market and the business." As for the timing, he says, "Maybe [it was] a little bit of both."

Growth Strategies

Growth for any business always involves a combination of initiatives: organic growth, partnerships and alliances or mergers/acquisitions or divestitures are strategies to fill a void, enhance an already-popular area or dispose of something that does not align with a company's strategic direction.

Hershey has completed numerous acquisitions and divestitures in its long history. After a flurry of activity early in its history, Just Born last April completed its first merger in 50 years--the first for its second and third generation of ownership; and Topps is seeking its first confectionery acquisition outside the lollipop area.

For the Bethlehem, Pa.-based Just Born, its recent acquisition of Goldenberg Peanut Chews brings it back to its roots as a chocolate-maker, and is part of its strategic plan. Izewski, who says he "loves a challenge," applauds his co-presidents for looking at the business and recognizing that it needed to grow.

A big part of Izewski's job is helping lead the strategic plan, and he was heavily involved in all phases of the recent acquisition: the planning, execution and integration. He says the deal was viewed as "an opportunity to broaden the organization through a new product line," since it already covers two business segments (starch jellies, or jelly beans and marshmallow). "The chemistry is right," he says, "and we did our due diligence."

He lists a few of the reasons why the fit seemed right: Goldenberg has similar values; it's a family-owned regional firm--the families are friends--that has been in business for 113 years, with customers mostly within a 250-mile radius from its Philadelphia base (except for its Korean distribution). The company was geographically desirable (a 60-70-mile drive), and since it uses peanuts in the manufacturing process, it is a separate stand-alone facility, meaning there would be no cross-contamination (allergens) concerns with existing product lines, a big issue in the industry.

Izewski says the companies have already integrated some of the processes and feel confident that by next July that systems will be fully integrated, offering customers the ease of one order, one shipment, one invoice-type process, making it seamless.

"Our biggest challenge is staying true to our strategic plan and driving against the plan--on the business side, guiding the actions that we do in line with the vision and philosophies that guide the culture we work in," says Izewski. The plan, he says, "is aggressive, and we're achieving it."

For example, it includes acquiring another business, "which we've executed, earlier than anticipated." Also, he adds, that the company--now represented in about 35 countries--is looking at continued growth. "We are aggressively growing our products, recently putting more significant investment in marketing programs--investing behind the brands to realign and reallocate trade deals provided to customers and more support for advertising and promotion."

A number of competitors have moved or are moving manufacturing operations offshore and taking advantage of lower costs, but, Izewski notes, Just Born is committed to remaining in its Bethlehem "world headquarters," because it is committed to its workforce. He notes the company's strong vision and philosophy statements posted on walls around the building, and proudly indicates its extensive community involvement. Some employees are second- and third-generation, he says, and employee turnover is less than 2 percent.

New CEO, New Direction

Often a new direction is a byproduct of new leadership. Richard H. Lenny was appointed chairman, president and CEO by Hershey's board of directors about 2-1/2 years ago. He was brought in from Kraft after Kraft bought Nabisco, and Cerminara says that since Lenny's arrival, the Hershey, Pa.-based company has been going through a period of repositioning and change.

Soon after his arrival, Lenny and senior management were directed by the Hershey Trust Co., as trustee for the Milton Hershey School, to explore selling the company. A plan was put together to market the company, which received an attractive offer; the Trust then changed its mind. As Cerminara explained, the Hershey Trust Co. owns 31 percent of the shares, including 99.9 percent of a premium stock class representing 10 votes per share--giving it roughly 77 percent of the votes.

Subsequently free to focus on growing the company, one change Lenny drove was to have management look at how it was supporting its brands. "We probably weren't maximizing the use of our major brands; we proliferated the product line and so we went through the 1990s essentially not growing--or improving--our gross margins," said Cerminara. "You have to look at the business and determine how to create the affordability to support your brands. If you're not expanding your gross margins, you're not really creating the affordability to do that," he says.

After studying the business and deciding which way to grow strategically, Cerminara explains, financial parameters were put in place "which made sense, and would make us a very highly performing company." For example, he notes, "We set a goal of 70 to 90 basis-point improvement [in gross margins] a year. The actual results over the past two years show margins actually improved 140 basis points, and 130, respectively, each year."

Cerminara is a "Hershey-lifer," having begun his career in 1972 as a budget analyst, fresh out of The Wharton School of the University of Pennsylvania, with an MBA in finance. Recruited over 30 years ago by the CEO who just left, prior to Lenny's arrival, Cerminara's career has been spent in accounting, finance, treasury, marketing (to learn more about the company), procurement and M&A. For most of the 1980s, he was involved with commodities, first with cocoa and then responsible for all commodities; it's an area that still reports to him--understandably, as cocoa is a key product to Hershey. He's been CFO for just over three years, and says, "I'm exactly where I want to be, working with a leader who is taking the company to new levels of achievement.

"In addition, we encourage our people to take part in community activities--not just work 24 hours a day. You need balance in life," he says. "That's what attracted me, and what has kept me here," says Cerminara, who has a smile so large it's often hard to see his eyes.

Yes, it's a tough job, feeding America's sweet tooth. Like other manufacturing industries, it is experiencing enormous change and challenge. Yet, as portrayed by those profiled here, it can offer some very sweet rewards.

Confectionery facts

* Retail sales: $24.3 billion

* Chocolate: $13 billion

* Non-chocolate: $7.4 billion

* U.S. consumption: 7 billion pounds

* World's highest percapita candy consumption: Denmark, 29.5 pounds per person; U.S. is 10th

* Americans over 18 consume 65% of candy produced each year.

* Categories of 1,401 new confectionery products introduced in 2002:

chocolate items: 639 non-chocolate: 640 gum: 72 other: 50

* Diet candy grew nearly 23% over past year

* Gum: 3.4% sales growth over past year was led by sugar-free varieties

* Everyday candy sales increased slightly

* Individuals eat 12 lbs. of chocolate a year, on average

* Chocolate manufacturers use:

40% of the world's almonds 20% of the world's peanuts 8% of the world's sugar

2002 Data gathered from published industry sources.

Hershey Foods Corporation

Based: Hershey, Pa.

Founder: Milton S. Hershey

Founded: Incorporated in 1927, successor to a business founded in 1894

Current Chairman, President, CEO: Richard H. Lenny

Employees: Approximately 14,500 worldwide

2002 net sales: $4.1 billion 2001 net sales: $4.1 billion 2000 net sales: $3.8 billion

NYSE-listed: HSY 

Manufacturing space: 17 principal plants in 14 cities

Brands: over 40 U.S. brands

Distribution: 8-10 domestic channels; exports, markets, sells and distributes selected products to over countries; branded products also manufactured and sold in markets through licensing arrangements

Major brands: Hershey's, Reese's, Kit Kat, Kisses, Twizzlers, Jolly Rancher, Ice Breakers, Carefree Koolerz, Breath Savers, Bubble Yum; Hershey's Sugar Free; Hershey's Cocoa, Hershey's Syrup

Fun Facts: Over 33 million kisses produced daily

Just Born

Based: Bethlehem, Pa.

Founder: Sam Born

Founded: 1923 in New York City Named because candy is so fresh, it's "just born" (playing on founder's name)

2nd and 3rd generation Co-Presidents: Ross Born and David Shaffer 

Employees: 469 worldwide Privately held company (no financials)

Manufacturing space: 450,000-500,000 square feet

Distribution: Domestic, international, in 35 markets reaching 1.5 billion people worldwide through a variety of channels and brokers

Major brands: Marshmallow Peeps, Mike and Ike, Teenee Beanees, Hot Tamales, Zours, Peanut Chews

Fun Facts: Manufactures 4.2 million Peeps (and other shapes) a day; over 1 billion a year

* In 1953 it took 27 hours to create a Peep; now it's 6 minutes

* Manufactures 225,000 pounds of jelly beans daily

* Uses approximately 40 million pounds of sugar per year

Topps

Based: New York City; operations center Duryea, (Scranton) Pa.

Founder: Four brothers named Shorin (Joseph, Phillip, Ira and A.J.)

Founded: 1938 as Topps Chewing Gum 

Subsidiaries: United Kingdom, Ireland, Canada, Argentina, Italy and Brazil

Chairman, CEO and President: Arthur T. Shorin

Employees: over 420 people worldwide

Mar. 1, 2003 net sales: $290,079 Mar. 2, 2002 net sales: $300,180 Mar. 1, 2001 net sales: $437.440 NASDAQ-listed: TOPP 

Manufacturing: 41,000 sq. ft. in Scranton; production is mostly outsourced

Distribution: Supermarkets, drug and convenience stores, mass merchandisers, warehouse clubs, dollar stores and hobby stores and distributors

Major Brands: Ring Pop, Push Pop, Baby Bottle Pop, Juicy Drop Pop, Bazooka bubble gum, other novelty confections, major league sports trading cards and sticker album products.

Fun Facts: Manufacturers 160 million Ring Pops a year

* Manufactures 6 million pounds of bubble gum a year