Hershey To Focus On Core Brands

After warning investors in December The Hershey Co. would not meet its sales and earnings projections for 2006 and reducing its earnings forecast for 2007, CEO Richard H. Lenny aims to reverse those trends quickly with an increased emphasis on advertising Hershey's Kisses, core Reese's and Hershey brands, and fast-growing new dark chocolate and Ice Breakers products, according to a report in The Patriot-News.

"We are increasing our advertising year over year, full stop," Lenny told the newspaper. While unwilling to disclose how much more money the company will spend, he said it would be a "healthy amount."

The advertising commitment is a reversal of Hershey's spending habits over the past few years. Advertising spending in 2005 totaled about 2.6 percent of sales, compared with 4 percent in 2002. Figures for 2006 have not been disclosed. The money is spent on television, radio, Internet and print ads.

Some analysts who follow Hershey are concerned about the company's advertising trends, the newspaper reported. When John McMillin lowered his rating on Hershey to "underweight" a few days before Hershey's December warning, the Prudential Securities analyst said he "remained concerned with [Hershey's] marketing mix, which has shifted meaningfully away from advertising."

Last August, Wachovia Securities analyst Jonathan P. Feeney wrote: "Rare is the consumer company that can accelerate revenue, while simultaneously decreasing the relative pace of advertising investment. Yet, Hershey has done that since 2001."

Still, Hershey's sales and earnings increased from 2001 to mid-2006, as it gobbled up market share in the process. Generally, Hershey's sales surpassed the industry average, the newspaper noted.

For the 12 months that ended Dec. 3, retail sales of confectionery products industry-wide, excluding Wal-Mart, were up 1.8 percent, according to the National Confectioners Association. Sales of chocolate candy increased 2.3 percent during that period. Those figures do not include sales at convenience stores, where confectionery sales have trended higher than at supermarkets or mass merchandisers. Since joining Hershey, Lenny has put a great emphasis on sales of single-serve products at convenience stores.

Hershey reported slower-than-expected sales in the third quarter of 2006, with some declines in market share to competitors such as Mars. It warned in December that its 2006 sales would not meet its 3 percent to 4 percent growth target. Full-year results will be reported Jan. 24.

In part, Hershey's year-end disappointment is the result of a three-week plant shutdown in Canada because of salmonella issues with an ingredient that Hershey received from outside sources. But Lenny also said the performance was affected by its decision to reduce the number of limited-edition products, shifting its focus to new areas such as dark chocolate, refreshments and snacks.

The "scaling back" of the limited editions and line extensions "comes more quickly than the ramping up of the platforms," he told the newspaper.

Lenny said Hershey has seen some softness in its core brands, and restoring growth in the core brands is the top priority for 2007. "You will see a lot more investment, both from a consumer and a customer standpoint, in our core brands," he vowed.

Hershey remains the U.S. leader in confectionery products, with an overall 30 percent share of the candy market. It has 45 percent of the chocolate market, Lenny said. About 90 percent of Hershey sales are in the U.S., Lenny said.

With Reese's, Hershey will focus its marketing efforts on the new Crispy Crunchy bar and a limited-edition Elvis bar that features peanut butter and banana creme to mark the 30th anniversary of Elvis Presley's death this summer.

"You're talking about a brand that's almost $1 billion at retail," Lenny said. "Reese's has to grow at a rate equal to, if not greater than, the total company. And it hasn't done that."

Hershey will increase its advertising of Kisses to tie in with the 100th anniversary of that product, the newspaper reported. The company expects to have a series of promotions throughout the year to mark the milestone.

Lenny added that there will be some "very iconic new advertising" for Kisses that will air later this year, and custom Kiss flavors will be distributed to specific retail customers. "Target could have a custom Kiss flavor that might be different" from what other retailers are offering, he said.

The marketing of Hershey's candy bars will focus on the "explosive growth" of dark chocolate, Lenny said. He said the company started with Hershey's Special Dark, introduced Extra Dark about a year ago, and has now advanced into premium offerings with the Cacao Reserve line that started to reach store shelves over the past few months.

Lenny said dark chocolate experienced double-digit sales growth in 2006, and it was probably the company's fastest-growing category.

Arnold Worldwide of Boston will lead Hershey's advertising effort. Internet advertising is important for Hershey's fast-growing Ice Breakers products that appeal to a much younger audience, Lenny told the newspaper.

He said Arnold understands the need for what Lenny calls "locally activated, in-store support" at the retail level with sampling and special promotions. He noted that many Hershey's products are impulse buys, and 40 percent of its products are priced below $1.

"We have to be very well represented at point of sale," he said.

Snack products will be getting less promotional attention, even though Lenny said new products such as brownies, layered cookies and "valued added" snack nuts are off to a good start.

"Three years ago, when we started talking about snacks, dark chocolate and refreshment were not even glimmers in our eye," he told the newspaper. "And that's what happens to marketplaces over time."

He said dark chocolate and refreshment products now represent more "sustainable, long-term opportunities for growth. All we're seeing is a continued evolution of where consumers and customers are going, and we have to be responsive, and even more so, than we have in the past."