Cookies in the U.S

Chapter 1: Executive Summary Cookies in the U.S.

Chapter 1 Executive Summary

Report Scope

his report presents a detailed performance analysis of the U.S. market for cookies. The report identifies major players and brands and analyzes their performance in terms of sales and market share. Based on data available at the end of 2005, Tprojections for the period 2006-2010 have been provided. The report also analyzes key issues and trends affecting the overall market and discusses current and future implications.

Methodology

The information contained in this report was obtained from both primary and secondary research. Primary research entailed consultation with industry participants and an examination of the retail milieu. Secondary research entailed data gathering from relevant trade, business, and government sources, including company promotional literature and annual reports.

In developing our market sales and share estimates, Packaged Facts has relied on Information Resource Inc., (IRI) data for supermarkets, drugstores, and mass merchandisers (excluding Wal-Mart), while also extrapolating for the broader retail universe based on information published in trade and consumer business magazines, and in other Packaged Facts reports.

Figures provided on national consumer advertising expenditures are based on data compiled by TNS Media Intelligence, the leading provider of strategic advertising and marketing communications intelligence. Information on new product introductions is derived from reports in the trade press and online, as well as from Productscan Online. The analysis of consumer demographics primarily derives from the Simmons Market Research Bureau (New York, NY) Fall 2005 consumer survey, which is based on 28,724 respondents, who represent a statistically accurate cross-section of the U.S. adult population. The SMRB consumer survey includes demography on consumer brand preference.

Note: This report covers the sale of products through channels covered by Information Resource Inc., (IRI) only and hence, market and brand share figures reflect the position of the

August 2006 © MarketResearch.com, Inc. 1 Cookies in the U.S. Chapter 1: Executive Summary marketers/brands in those channels. However, in arriving at the estimate for the overall market and for market trends and competitive analysis, all major channels have been covered.

2 © MarketResearch.com, Inc. August 2006 Chapter 1: Executive Summary Cookies in the U.S.

Market Size and Growth

Overall Sales Decline to $5.56 Billion

After peaking in 2001 at just over $6 billion in sales, the U.S. cookie market has seen steady declines through 2005, due to higher ingredient costs leading to increased prices, a growing market for alternative snack options, and increased consumer interest in healthy eating.

Packaged Facts estimates that total cookie sales declined by 8.25% to $5.56 billion in 2005, from its peak of $6.06 billion in 2001.

Figure 1-1 U.S. Retail Sales of Cookies, 2001 - 2005 (in billion $)

7 1 0.5 6.06 0 5.85 -0.23 6 5.73 5.57 5.56 -0.5 -1 5 -1.5

-1.99 -2 % Growth (in Billion $) -2.5 4 -2.81 -3 -3.46 -3.5 3 -4 2001 2002 2003 2004 2005

Sales % Growth

Source: Packaged Facts

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Top Marketers and Brands

Market leader Nabisco (Kraft Foods) market share remained essentially flat, falling just .04% to 35.79%, though its flagship Oreo and Oreo Double Stuf brand saw marked improvement in sales over recent years. Keebler Food Co. lost substantial market share falling below the 10% barrier to 9.91%. Since 2002 the company has lost nearly 3 percentage points. Pepperidge Farm registered a marked increase in market share gaining 40 basis points to 7.54%. Sales of the many Milano varieties continue to be favorites among consumers, while its Distinctive and Pirouette lines have realized significant gains over the past few years. Smaller players Masterfoods USA and Grupo Gamesa both registered sizable gains.

Table 1-1 IRI-Tracked Retail Sales of Top Cookie Marketers, 2005 (in million $)

2005 % Marketers ($ million) Share Kraft & Nabisco 1392.94 35.79 Keebler Company 385.88 9.91 Pepperidge Farm 293.49 7.54 Mckee Foods Corporation 236.52 6.08 Archway & Mothers Cookies 188.60 4.85 Murray Biscuit Company 159.53 4.10 Lofthouse Cookies *(Ralcorp Inc) 90.25 2.32 W & H Voortman Inc 58.86 1.51 Masterfoods USA 40.17 1.03 Grupo Gamesa S.A. 30.06 0.77 Note: Ralcorp Inc acquires Lofthouse Cookies. Archway & Mothers Cookies merged. Source: Packaged Facts Information Resources, Inc. InfoScan Review; Packaged Facts. The information supplied by IRI is based on data believed to be reliable but is neither all-inclusive nor guaranteed by IRI. Without limiting the generality of the foregoing, specific data points may vary considerably from other information sources. Any opinions expressed herein reflect the judgment of MarketResearch.com, Inc., at this date and are subject to change. Reproduction, resale, or other distribution of this document is expressly prohibited without the written permission of MarketResearch.com or IRI. This material is reprinted with permission. Oreo racked up sales of more than $250 million while Oreo Double Stuf up from $102 million to $$124 million. However, Chips Ahoy! suffered falling 5% to $168 million. Number four Little Debbie increased sales 2% to nearly 117 million but Archway suffered, losing 10% and earning less than $100 million in 2005.

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Table 1-2 IRI-Tracked Retail Sales of Top Cookie Brands, 2005 (in million $)

Brands Sales 2005 ($ million) Oreo Cookies 250.47 Chips Ahoy Cookies 168.11 Oreo Double Stuf Cookies 124.16 Little Debbie Cookies 116.64 Archway Cookies 99.80 Pepperidge Farm Milano Cookies 89.53 Pepperidge Farm Cookies 83.88 Lofthouse Cookies 80.66 Nabisco Nilla Cookies 76.40 Fig Newton Cookies 76.18 Note: 2005 sales through chain supermarkets, drugstores, and mass merchandisers other than Wal-Mart. Source: Information Resources, Inc. InfoScan Review; Packaged Facts. This material is reprinted with permission.

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Trends and Factors to Growth

Go Premium and Gourmet

Though the total cookie market has been in decline, there are some sweet spots, particularly in premium, upscale, and gourmet cookie products. Marketers of so-called premium adult cookies have seen modest growth. For example, Pepperidge Farm was able to realize a CAGR of 3.3% during the 2001-2005 period, due in large part to the growth of its Distinctive and Pirouette lines, as well as the continued success of its popular Milano brand. Boutique marketers, such as Brent & Sam’s, have been successful as well due to increased consumer demand for gourmet foods. Though sales figures are not available, evidence of Brent and Sam’s success and growth is apparent through new product introductions and its increased presence on store shelves on gourmet food stores as well as mass-market retailers.

Natural and Organic No Longer Niche

As more and more consumers look to add natural and organic foods as key parts of their diet, organic food producers and marketers and retailers will seek to capitalize on a growing segment. Though overall sales of organic cookies were not available, the “health” of this product market is apparent by the sales growth of individual marketers. Newman’s Own Organics Cookies saw a 27.7% rise in sales from 2005-2005 and four-year compound annual growth rate (CAGR) of 36.7%. American Cereal Corp’s Country Choice Organic Cookies rose 22.1% in the same period and had a CAGR of 36.3%.

Is a Truly Healthy Cookie Possible?

Recent publicity surrounding trans fats — a key ingredient found in many cookies — has been something of a headache for cookie makers, but also an opportunity for innovation. The FDA’s mandate requiring all food packages to disclose trans fat information, had marketers scrambling to reformulate recipes to significantly lower if not eliminate the ingredient and to reintroduce it to consumers. With the transition to zero trans fats more or less complete, marketers must now turn their sights on the most recent public health focus, a focus with staying power, whole grains.

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Line Extensions

To find new sources of growth and fight declining sales in flagship brands, many marketers play it safe by turning to line extensions to prop up sales. In the last few years, Nabisco has introduced numerous, successful iterations of its popular cookie, the Oreo, while Pepperidge Farm has been very successful extending its Milano line into various forms and flavors.

Targeting Key Consumer Groups

It will be important for cookies marketers to target alternate demographic groups, such as Hispanics and Baby Boomers, as these two groups in particular are growing and especially as it becomes less politically correct to target children.

The Evolution of Snacking

According to IRI, one-third of Americans say they do not have time to eat as well as they would like to. Further, only two-thirds of the U.S. population regularly eats three meals daily, and more than one third regularly skip meals and instead eat convenience foods or snacks.

This relatively unhealthy consumer behavior runs parallel with a contrary consumer interest in healthier eating, as more and more Americans see the effects of poor nutrition and rampant obesity. These two trends together represent major opportunities for cookie marketers who consider broadening the scope of what a cookie can offer, such as high protein, high fiber, natural/organic, fortified, lower-fat, lower-sugar, and lower-salt.

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Market Forecast

Although cookie sales fell in 2005, continuing a five-year sales decline, sales appear to be stabilizing. There was some growth in the sector, driven largely by premium, line extensions of existing products, and select new product innovations. Though the market has contracted during this five-year period, Packaged Facts believes that the market declines may be at an end and that the U.S. market for cookies is set to grow at a modest rate.

Initially, expect sales to remain essentially flat to slightly higher as consumers begin to come back to tried and true cookie brands of the past and marketers continue to work on more healthful reformulations of recipes.

Expect growth in the market over the next few years to be in the 1-3% range and fueled by two continuing trends: Increased demand for premium and indulgent products; and healthier versions of mass-market brands — including the use of whole grains.

Table 1-3 Projected U.S. Retail Sales of Cookies, 2005-2010 (in billion $)

Year Sales (in $ million) % Change 2010 $6.10 3.64 2009 $5.88 2.75 2008 $5.72 1.87 2007 $5.62 0.98 2006 $5.57 0.09 2005 $5.56 — Source: Packaged Facts

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Marketing Dynamics

Ad Spend of Top Four Marketers

The top four U.S. marketers spent in excess of $133 million on advertising in 2005 with Nabisco spending more than $84 million, more than four times that of its nearest competitor Keebler ($21.1 million), and almost five times that of Pepperidge Farm ($18.7 million).

Table 1–4 Top U.S. Cookie Marketers by Ad Spend, 2005

Marketers Ad Spend (in millions $)* Medium

Nabisco 84.1 WMPNSYCRD Keebler 21.1 MNSYC Pepperidge Farm 18.7 MNSYC Mckee Foods Corporation 9.9 NSYC Note: Ad spend Numbers are not comprehensive and don’t reflect the total ad spend by a marketer for cookies or may include some non-cookie ad spending. M-Magazine, P-Sunday Magazine, W-Newspapers, A-All, O-Outdoor, N-Network TV, S-Spot TV, Y-Syndicated TV, C-Cable TV Networks, R-Network Radio, D-National Spot Radio Source: TNS Media Intelligence

Licensed Cookies and Promotional Packaging

Licensing remains a useful and reliable marketing tool for reaching the kid’s market. Marketers continue to pursue tie-ins with movies, television shows, comics, and other properties. Licensed snack products often tie into broader advertising and promotional campaigns, and can add a uniquely themed interactive component to the treat.

Innovative Promotions

In 2006, Nabisco continued an Oreo promotional campaign with Randy Jackson. Nabisco also teamed up with Apple Computer for summer 2006 in anticipation of the back to school season with “A Laptop a Day Plus an iPod to Play” promotion. Keebler launched a promotion with PGA Tour golf pro Peter Jacobsen on selected specially marked packages of crackers and selected cookies including Sandies and Vienna Fingers. Pepperidge Farm uses its Art of the Cookie website (artofthecookie.com) to promote its cookies including the new Chocolate Delights to adult women.

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Indulgence and Health Drive New Products

Between July 1, 2005, and June 30 2006, the cookie category saw approximately 268 new product introductions and a whopping 831 stock keeping units. Following the hot trends and factors affecting the marketplace, upscale, no trans fat, and natural were the most popular selling points in the period.

Premium and upscale cookies are becoming increasingly popular with adults looking for an indulgent snack option as there were 104 introductions that used the tag Upscale, and 28 new products tagged as gourmet. Part of what is driving these new product introductions is a consumer with a split personality: Those who want indulgence; and those who demand healthier products.

Many new products included higher amounts of chocolate to appeal to the indulgent consumer while whole grains, fruit, nuts, were used in new healthier cookies. In addition, the idea of portion control was common for many new products.

The Consumer

Cookie Consumption Widespread, But Down

Simmons estimates that 78% of the U.S. adult population consumed cookies in 2005. However, this does represent a decline from 2003 Simmons findings which indicated that 79% and 2001 findings of 82%, and supports the drop in cookie sales and share in these periods.

Consumption Flat and Evenly Spread Among Demographic Segments

This mature and saturated market will not show dramatic differences in consumer demographic usage. While cookie consumption may be down, their popularity is fairly consistent with most segments of the U.S. population.

Kids’ Presence Influences Consumption

Households with more than five people (which usually indicates families with children) are heavily skewed towards cookie consumption, with an index of 115. Similarly, households with children 2–17 years old have a strong propensity towards cookie consumption. These household groups all have an index of more than 110. This holds true for most types of cookies and most brands of cookies.

Sandwich Cookies Rate #1

Sandwich cookies have emerged as the most-popular cookie type, with 24% of the U.S. adult population having consumed a sandwich cookie in the period. But sandwich cookies are losing their hold on consumers, with usage rates falling dramatically from the fall 2003 number of nearly 30%.

Soft and regular chocolate chip follow sandwich cookies with 22% and 18%, respectively, showing little change since 2003. Vanilla wafers however, have seen a dramatic increase in usage, from 7% in 2003 to 15% in 2005.

Oreos Reign Supreme, Followed By Chips Ahoy!

Nabisco’s Oreo continues to reign as the nation’s best-loved cookie; 18% of the population consumed an Oreo in 2005 though this is down from a better than 20% consumption rate for 2003 — in part due to the trans fat controversy. Nabisco’s Chips Ahoy! brand was the second-best-selling cookie brand, at 13.6% but fell nearly 3 percentage points from a 16.3% consumption rate in 2003. Note that store brands, actually rank second in pure terms but these are aggregates of many brands. These were the only three to reach double digits. (Table 6-11)

Usage: Teens and Kids

Overall, cookie usage rates begin to decline in the teen years. For kids under 12, nearly 98% reported cookie consumption, while teens reported only a little better than 76%. Cookie usage tends to decline more rapidly among teenage males than females (72% versus 81%). Generally speaking, cookie preferences by teens tend to be much more fragmented than preferences of kids 12 and under.

Top Brand Usage Rates for Kids

For kids 12 and under, Nabisco Oreos, Chips Ahoy!, and Teddy Grahams are the clear favorites with usage rates of 59%, 54%, and 44%, respectively. Little Debbie come in fourth with a 30% usage rate though “Other Brands” was higher in the aggregate at 31%. Keebler’s Vanilla Wafers take the fifth spot at 29% while Nabisco’s Nilla Wafer (9th) captures a 22% usage rate. Keebler’s Chips Deluxe also captured the sixth spot at just under 29% Sunshine’s Animal Crackers had a more than 25% usage rate — higher than Nabisco’s Animal Crackers at 20% (Keebler’s Animal Crackers were not measured). Keebler’s Fudge Stripes ranked eighth at 23% and Nabisco’s Nutter Butter rounded out the top ten at almost 21%.

Top Brand Usage Rates for Teens

For teens, Nabisco is again the top marketer, capturing five of the top 10 including spots one, two, and three, though at lower usage rates. Oreos and Chips Ahoy! remain favorites grabbing 20% and 19%. However, the marketer’s Chewy Chips Ahoy! has the third highest user rate at nearly 14% while Chunky Chips Ahoy! grabs the fifth spot at just over 9%. Little Debbie remains the fourth favorite brand for teens (11%) as well as kids under twelve. Store brands captured a 9% usage rate and ranked 6th in the aggregate (“other brands” were actually 3rd in the aggregate.) Keebler’s Fudge Shoppe also grabbed a 9% usage rate for the 7th spot

12 © MarketResearch.com, Inc. August 2006 Chapter 1: Executive Summary Cookies in the U.S. while Chips Deluxe came in at 9th with just over 8%. Double Stuf Oreos were 8th at better than 8% and Famous Amos rounded out the top ten with less than 8%.

Though many brands tracked for teens were not tracked for kids under twelve, it appears that the teen years tend to be a time for experimenting with other brands and brand extensions. In addition, a higher demand for variety over repetitive consumption tends to start taking shape.

Pester Power

Though their parents may disagree, kids twelve and under claim to have influence over purchase decisions of cookies. More than 70% said they made purchase decisions “Some of the Time” or “Most of the Time”. Teens, on the other hand, claimed to make purchase decisions at a much lower rate. Less than 51% said they made decisions “Some of the Time” or “Most of the Time”.