Last year, we observed that while Temu had disrupted Halloween sales—particularly for costumes and decorations—it was a novel disruption, something retailers hadn’t experienced before. As a result, we anticipated that the impact would be less pronounced this year. We also suggested that the same pattern would hold true for the Christmas holiday season.
In our previous analysis, we noted that Halloween is the largest seasonal event for secondhand thrift stores. As shown in the figures below, October accounts for 10% of annual visits, and the Halloween week shows a significant spike in traffic for stores like Savers, Goodwill, Buffalo Exchange, and Plato’s Closet.
The chart below shows that visits per location to Savers and Goodwill were up approximately 7.5% year-over-year this Halloween. (In Q3 2024, Savers’ U.S. sales increased by 6.2%, roughly in line with the traffic growth of 7.8%.) Notably, this 7.5% increase occurred on a larger base of visits, with 25% more visits than in the first half of the month.
Another sign that Temu had less influence this year came from Alphabet’s Q3 2024 update, where it was noted that Chinese-based retailers like Temu and Shein would be a headwind to revenue growth in Q4. Similarly, Etsy did not mention Temu in its earnings call this quarter, after having highlighted them consistently over the past year. Etsy also significantly increased its year-over-year marketing spend to drive Q4 2024 sales, as Temu and Shein were not aggressively purchasing every available ad impression at any cost. This increased spending is expected to boost sales for Etsy and its community of “crafters,” who have been affected by declining sales and volumes. Lower sales volumes for these crafters have reduced the need for supplies, which, in turn, has impacted the craft retail industry—particularly Michaels, Hobby Lobby, and JOANN. This trend was one of the key factors contributing to JOANN’s bankruptcy. Given the reduced impact of Temu this year compared to last, we are also seeing an improvement in growth for Michaels and Hobby Lobby. (We’ve excluded Joann here due to substantial changes in their store portfolio.)
While Temu was less of a "trick" this Halloween, cocoa prices and the state of the retail drugstore industry are concerning. Cocoa prices have doubled this year and tripled since early 2023, leading to significantly higher prices for chocolate treats. The Hershey Co.'s entire product portfolio, which is heavily cocoa-based, saw a 9% year-over-year increase in price according to Nielsen data for October. As a result, the cost of Hershey chocolate bars and other cocoa-based snacks has risen as well.
So how did these inflationary pressures affect two of the largest treat destinations—Walmart and Target? Unfortunately, the impact appears to have been negative. The chart below shows each retailer’s traffic in their home states and in California (no hurricane effects). As evident, traffic slowed after October 19. On its Thursday earnings call, Hershey reported Halloween results were in line with their low single-digit growth forecast; however, the comparison base in terms of volume was already low at -5% for the quarter. Moreover, Hershey revised its outlook for the year to "flat net sales growth,” down from +2%.
Another headwind for Hershey is the shift in consumer purchasing from conventional retail to club and value stores, with a notable decline in convenience and drug channels, where Hershey has a strong presence. Other CPG categories, such as beauty (L’Oréal, Estée Lauder, Procter & Gamble, etc.), have also reported that declining sales in drugstores pose a significant challenge to their businesses. A visit to any Rite Aid store, for example, often reveals alarmingly high out-of-stock levels, as the company conserves cash and faces constraints on working capital. Convenience and drug channels historically allowed branded manufacturers to achieve higher realized prices.
In Q3, Hershey’s gross margin fell by 460 basis points, impacted by unfavorable channel mix (more mass and club, less convenience and drug), an adverse product mix (with more value packs and fewer “full-sized” candy bars and premium products/SKUs), as well as rising input costs (especially cocoa) and fixed-cost underutilization due to lower volumes. This continued shift toward mass, club, and value channels is also fueled by retailers' strong private brand offerings, which Hershey identified as another headwind. (Earlier this year, we noted that the growth of the food-at-home industry would increasingly rely on retailer brands, with leaders like Costco, Sam’s Club, Aldi, and Trader Joe’s excelling in this area.)
