Opting for a bigger bite: R.M. Palmer probably produces more chocolate bunnies than anyone in the United States. But just like its famed rabbits, it's not sitting on its haunches. President Rich Palmer understands the need to sniff out new opportunities in today's competitive landscape.

Rich Palmer broke into an easy laugh when quizzed about changes and similarities since Candy Industry's last visit to R.M. Palmer Co. in 1991, the year he won the magazine's prestigious Kettle Award.

"Well, my blood pressure's higher, my hairline's lower, but the weight's about the

A youngish 58, it's obvious Palmer hasn't lost his sense of humor. That doesn't mean he can't be serious about running the leading chocolate novelty and the fifth largest chocolate company in the United States.

As he points out, even with 50% less customers than in 1991, the company is doing twice the business (Candy Industry estimate--$150 million annually). And while there are fewer customers with larger orders, that hasn't translated into a simpler business formula.

"I'm more involved now than ever," Palmer points out. "The business is more demanding. I'm sure all my cohorts would agree that it's harder." Fortunately, Palmer isn't the sort of fellow to rest on tradition and history, although there's plenty of that at R.M. Palmer, dating back to when R.M. Palmer Sr. founded the company in 1948.

Just as his father realized that there was a market for more expressive chocolate late moulded Easter rabbits in the industry back then, Rich Palmer also understands the need to bring excitement into the marketplace.

He also comprehends that the seasonal confections niche isn't growing by leaps and bounds anymore.

"In 1991, the big guys [read Hershey, Nestle and Masterfoods] were just getting into the business," Palmer explains. Hershey moved beyond its silver Kisses to red and green Kisses. Mars opted for red and green M&M's. Those products begot others. Their involvement actually proved to be a good thing. The category was exploding and our seasonal confections pie began to get bigger.

"But just as a rising tide lifts all boats, an ebbing tide can leave many high and dry. Since the year 2000, the seasonal confections segment hasn't grown very much."

Nevertheless, the competition has. Each year there's more players hunting for seasonal sales, Palmer adds.

2005 proved even more difficult with an early Easter, he points out.

"Our large customers wanted product within two to three weeks, Palmer says. "That meant we had to ship twice, work more overtime and fulfill back orders."

All of which pushed costs up.

Such setbacks haven't deterred Palmer from looking at the bright side. He quickly details how 2006 could be the year that seasonal sales make a comeback.

"It looks very good for 2006," he says. "Halloween falls on a Monday [which translates into more consumption periods because of weekend parties as well as Halloween itself]. Christmas, by falling on a Sunday, extends the shopping period a day or two. Valentine's Day is also on a Tuesday [additional purchasing opportunities] and Easter will be on April 16th [a later Easter extends the buying period for confections]. The industry should be able to take advantage of this."

But with 33 years of confectionery experience under I his belt, Palmer knows that the movements of the moon can only go so far in boosting sales.

In electing to keep R.M. Palmer in the value side of the business, thus refusing to go "head-to-head with Hershey, Mars and Nestle," Palmer foresaw the necessity of simultaneously controlling costs while upping quality.

Thus, 10-15 years ago the company invested in a Bauermeister/Weiner system to create its own compound coatings. It also upgraded its kitchen, expanding formulation and production of all of its centers. Those investments alone approached $10 million.

"The move allowed us to increase our quality while keeping our costs in line," Palmer says. "The average consumer can't tell the difference

between our compound coatings and chocolate. As a result we are offering a tremendous value to our customers and the consumer. It allows the customer to make a nice margin on a good tasting product.

"There's essentially three segments in chocolate: the gourmet market, the mainstream side and the value side," Palmer continues. "We chose the value side because that's something we can handle."

Appropriately, the company's investment into making its own compounds and centers dovetailed with the growth of the dollar stores, and their requirements for value confections. And while supermarkets and mass merchandisers have essentially been flat, the drug store chains have started to make a nice comeback following three years of decline, the company's president points out.

"There's more business than ever in the value side," Palmer adds.

Today, the company's sales break out evenly among discounters, supermarkets, drug stores and dollar stores. Growth has averaged within the middle single-digit range for the past several years.

Given the current competitive landscape as well as rising transportation and ingredient costs, Palmer believes it's commendable, although improvable.

He envisions continued growth in licensing, what he calls "everyday sales," and several new niches still under discussion.

"We were one of the first to get involved in licensing in 1991," Palmer recalls. "At the time we were doing Warner Brothers and Thomas the Tank."

Although Palmer admits that those initial forays didn't quite work as well as expected, the learnings proved valuable. Today, licensing comprises one-third of the company's novelty sales.

About two years ago, members of the Candy Alliance and R.M. Palmer formed Imagination Confections, an organization dedicated to producing licensed confectionery products for Disney.

Having had only a year's worth of projects with Disney, Palmer admits that the company has its share of successes as well as disappointments.

"We learned lots of lessons. We're still trying to figure out what products do the best, and what organizational structure works best," he says.

Interestingly, the seasonal confections executive noted that some expensive offerings didn't work as well as lower-priced (99 cents) pieces. Palmer remains confident, however, that the first year's lessons will transfer into a much-improved scorecard for 2005/6.

It was a similar scenario with the company's licensing deal with NASCAR (National Association for Stock Car Auto Racing). In fact, Palmer didn't really expect the licensing agreement--forged in 2001--to deliver the sales it has.

Currently (52 weeks ending March 20, 2005), as reported by Chicago-based Information Resources, Inc., R.M. Palmer's NASCAR novelty chocolate candies lead the segment with $4.247 million, about a 36% share of market. NASCAR licensed chocolates and candies by R.M. Palmer account for half of all the company's licensed sales.

"In the beginning, we stumbled quite a bit before we understood what works and what doesn't," he says. "But the 'NASCAR dads' are willing to spend generous amounts of money on their sport. They are really loyal to their favorite drivers. Even though it's a small crowd, they're very devoted."

As lucrative as the NASCAR license is, it's also very demanding. Each year the company has to redo car designs, be it for tins, foils, plastic cars, etc.

Palmer also looks toward the company's Marvel license agreement as having the potential for expanded sales. At the same time, he notes it's also been a learning curve.

"In general, I think the licensing craze has crested; it probably peaked about two years ago," he says. "We're beginning to see the licensing phenomenon start to slip downward. Nevertheless, even though it's crested, it remains at a very high level."

What hasn't remained at a high level, however, is shelf space for confections. Again, that's another change Palmer points out that's evident since 1991.

"There's just less space for candy," he asserts. "We've seen the consolidation of retailers, which has had an impact. It's something the NCA [National Confectioners Association] is looking into with a major research project. Still, it's a major hurdle for manufacturers like us to jump over. Everyone's telling us to reduce SKU's [stock keeping units]. At the same time, everyone wants a different pack, presentation."

It's no surprise that the company is--along with many other mid-sized manufacturers--seeking alternative retail channels.

As Palmer mentioned earlier, the dollar stores have proved to be an excellent outlet for the company. "There's still more upside potential there," he adds.

Palmer cites such non-traditional candy retail outlets as Bed, Bath and Beyond as well as Party City as new confectionery retail niches.

Yet, the only way to combat the real dilemma of shrinking space for confections is to focus on new product development.

R.M. Palmer's product development, while focused on seasonal items, has also segued into everyday products, essentially non-seasonal sales of bagged chocolate and compound chocolate confections. Thus, 7.5-oz. bags of peanut-butter or caramel pouched cups that sell for 99 cents; or 7-oz. Double Crisp Mega Gold bars featuring a crispy rice inclusion, which also sell for 99 cents, provide value for consumers looking for a quick and inexpensive sweet treat.

Palmer believes the convenience store sector could well provide a new retail venue for such items. "I'd love to see us do more business in convenience stores, which would give us additional diversification." Chuckling, Palmer says he hopes his sales department reads the article and takes the hint.

And while there's bound to be some levity in discussing new markets and opportunities, particularly in a confectionery company, new product development at R.M. Palmer demands serious attention.

Each year the company turns out about 50 new items, with five to six targeted for each season. In addition to Palmer, several key managers are involved in the search for new concepts, line extensions, packaging options, etc.

Mark Schlott, v.p. of operations, together with Palmer, Joanne Trois, product development director, Steve Terroni, v.p. of sales; Jim Tucker, v.p. of sales & marketing, Rich Halliwell, director of corporate planning & development, and Gail Youse, product line manager--sales & marketing, get together once a month to brainstorm about seasonal and non-seasonal launches.

"Often times we stumble onto ideas," says Schlott. "We may be working in one direction and then the light bulb goes off and we find ourselves with a different approach."

He cites the fishing tackle box; a collection of gummies, jellies and chocolates packed in a see-through facsimile tackle box as a "dynamite" idea that took retailers by storm.

Schlott also touts the fact that the company has its own art department capable of making up sample packages mirroring images of the real bags or boxes. It also quickens the company's ability to roll out new items.

Schlott proudly points out that the bulk of the company's product line is still made in the United States, a statement fewer and fewer confectionery companies can make these days.

"We're looking to brag about it more and more," he adds. "Still, it's no secret that we feel the competitive forces breathing down our necks."

Thus, investments in automation and technology--during the past five years R.M. Palmer has spent $25 million in capital expenditures--allows the company to squeeze costs out of the production process.

"We're always looking at efficiencies," Schlott says. Noting that labor always plays a factor in costing, the operations executive has set his sight on reducing those costs by 10% this year.

Of course, such investments simultaneously expand capacity and capability while boosting quality, he adds. Thus, recent additions such as the new Aasted moulding line Carle & Montanari as well as Bosch Sapal foilers, go a long way to keeping the company competitive.

"It gives us the ability to meet price points," Schlott says. That can be critical when facing retailers as the v.p. of operations can relate.

Unlike many production professionals, Schlott occasionally teams up with Tucker and Terroni on sales calls. Earlier in the year he traveled to Bentonville, Ark., to pay a visit to Wal-Mart, R.M. Palmer's largest customer.

"It enabled me to listen to them [Wal-Mart] and understand what their needs are," he says. "You also get to see what pressures the sales department faces. Whenever sales and marketing partners with operations, that only makes us stronger."

It also allows the two departments to make better decisions regarding concepts and new products on a timelier basis, again another competitive advantage.

But, as every confectionery manufacturer knows, retailer demands don't end on the production floor. On-time delivery often ranks as high as quality manufacturing.

Richard Halliwell, director of corporate planning and development, who works together with Ronald Leeper, senior v.p.--logistics, on ensuring a smooth supply chain, points out that R.M. Palmer does the bulk of its shipping from Aug. 15 through Feb. 15.

"That's when we move 80% to 90% of our products," he says. Hence the need for a 300,000 sq.-ft, distribution center in Exeter Township, Pa., that holds 44,000 pallets.

Fortunately, the company invested in an extensive computerized tracking system five years ago, one that has become indispensable today.

"We've implemented our own MRP [Materials Resource Planning] system, which allows us to forecast our requirements through purchasing, scheduling, raw material inventories and into finished goods and work-in-progress inventories," Halliwell explains.

Still, challenges loom, such as the rising cost of oil.

"When you look at the cost of oil upon raw materials, it's significant," he says. "Your plastic trays are oil-based; your film is oil-based, then your transportation costs. Currently we're paying a fuel surcharge of 21%, which, of course, affects our margins."

In the end, it comes down to controlling costs. Everywhere.

"That's why we are always looking at new technology, at different ways of doing things."

That's evident in the company's 200-plus page Strategic Planning binder that Halliwell displayed. The tome looks at the company's internal structure as well as external environment, its capabilities and competencies, marketplace assumptions and finally, strategies for both the short- and long-term.

And while it's not a blueprint for success, the binder does come in handy as a roadmap for growth. Although it won't lower Palmer's blood pressure nor restore his hairline, it's likely to keep him smiling.