Hershey's second time around

by Josh Sosland
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Sweet news for Hershey.

HERSHEY, PA. — It was almost exactly 10 years ago when Hershey last made a flashy foray into the snack market from the company’s heritage stronghold in confectionery.

Initially an expansion into the single-serve cookie market, the effort grew more serious a few months later when Hershey hired Michele Buck to serve as president of the company’s new U.S. Snacks Group. She came to Hershey from Kraft, where she had management experience with the company’s confection and nuts product portfolios.

Hershey had high hopes for its move into snacks. Richard H. Lenny, then chairman, president and chief executive officer of Hershey Foods Corp., said of Ms. Buck at the time, “Her extensive experience across multiple snack categories and her strong track record will enable us to quickly and successfully execute our snack market strategy as we extend our reach into this growing market.”

Within months, though, the company appeared to be limiting its ambitions in the snack market. Before 2005 was over, Ms. Buck was moved to the position of chief marketing officer of the U.S. Commercial Group. Ultimately, the entry into the highly competitive cookie market proved unsuccessful. Disappointing results beginning in 2006 prompted a management change in 2007 and a renewed focus on the company’s core chocolate business.

A decade later Hershey is serious about snacks again, and it will be the battle-tested Ms. Buck, now president of Hershey North America, who will lead the charge again.

In its latest move into snacks, Hershey drew attention with the acquisition late in 2014 of Krave Pure Foods, Inc., a maker of premium meat snacks. Afterward, Wall Street analysts asked whether the move would not prove a repeat of what one analyst described as a poorly executed and unsustainable move into snacks.

At the 2015 annual conference of the Consumer Analyst Group of New York, Ms. Buck took to the podium to explain both its new snacking strategy and, perhaps more importantly, what she described as the company’s unparalleled capacity to successfully execute with retailers.

“As consumers are snacking even more, we have an opportunity to further broaden our portfolio across the snacking continuum,” she said. “We will leverage new and existing brands to expand beyond treats into wholesome sweet snacks and protein-based portable nutrition, both on trend and high-growth areas. Snacking is a natural extension that allows us to leverage our advanced capabilities, from sourcing, manufacturing, and food science, to our channel ubiquity and brand marketing expertise. We will drive incremental growth by fulfilling consumer needs in adjacent high-growth categories.”

Brookside, a confectionery business acquired by Hershey in 2012 specializing in chocolate covered fruit pieces, will be a vehicle for the company’s expansion into snacks. Fruit and nut bars will be launched under the Brookside brand later this year, “leveraging consumer passion for this powerful equity and consumers’ desires for wholesome sweet snacks,” Ms. Buck said. The bars are being formulated in a manner consistent with the company’s move toward simpler ingredients and will “deliver an impressive nutritional profile and be non-G.M.,” she said.

While meat snacks may not seem like the most natural fit for a confectionery company, Ms. Buck cited numerous aspects of the Krave business that made it highly appealing to Hershey. As a starting point, the brand is most popular with millennials. Additionally, within the nicely growing snack business, meat snacks have been especially strong.

“Krave is on trend and driving growth in the exploding premium meat snacks market, which expanded 27% last year, more than double the impressive 12% pace of the total meat snacks category,” she said.

Ms. Buck described Krave as bridging the meat snack category with the broader “better-for-you functional snack” category, which includes brands such as Kind, Sabra, Kashi, Chobani, Clif and Larabar.

“While a star performer in meat snacks, Krave also uniquely straddles the high-growth better-for-you and functional snacks space, thanks to its simple ingredients focus and excellent protein-based nutritional profile,” she said.

She estimated the meat snack category as a $3 billion U.S. market and the better-for-you snack market at $4 billion. She also emphasized the importance execution will play.

“As we grow our portfolio, we are committed to winning,” she said. “We are more disciplined than ever, relying on vetted consumer-centric insights, rigorous testing, and advanced analytics. We also are fully activating our products with our scale retail team and sustained marketing support.”

Mixed with Ms. Buck’s descriptions of new product introductions in the confectionery categories were items that could fit under the snack banner. For example, Brookside Crunchy Clusters are aimed at fans of the brand but feature what she called a “multi-textural eating experience.”

“Our brands are loved by consumers and can stretch across snacking need states,” she said. “Snack Mix and Snack Bites combine our brands with the satiating benefit of sweet and salty to source more consumer snacking occasions and drive incremental growth. In some retail locations, these items will be available in the snack set.”

Ms. Buck also touched upon a Hershey move into the spreads category where she said the company “will leverage our brand strengths and instant consumable capabilities by bringing our powerhouse reach to the marketplace.”

Showcasing Hershey’s ability to execute, Ms. Buck began her presentation highlighting the company’s success in the marketplace in recent years. She said the company’s sales in North America grew in 2014 to $6.4 billion with a “healthy operating margin of over 30%.” The company’s sales growth of 2.7% compared with an industry average of 1.8%. Growth is balanced at the company with an eye toward improved profitability on an ongoing basis.

“We outperformed our category, reinforcing my confidence in our business model and our ability to continue succeeding in our advantaged category,” she said.

While a major merger in 2008 resulted temporarily in a loss of share for Hershey, the market share deficit of 4.5 percentage points was narrowed in the years that followed and erased in 2013. With Hershey’s further market share gain in 2014, Ms. Buck said the company now has a two point share advantage above its nearest competitor.

The favored position of confectionery in the food business in the CAGNY presentation, and the levers Hershey has at its disposal to boost the business also are reasons for confidence, Ms. Buck said.

“Our category is highly advantaged and is the most responsive to advertising across all of food and beverage,” she said. “Few categories are as ubiquitous across retail formats nor have the same level of seasonal relevance as confections, with 37 weeks of seasonal display every year. In addition, the category enjoys planned purchases while also being highly impulsive. Hershey is the leader in this advantaged category, with a host of iconic brands with which consumers have strong emotional connections.”

Beyond the strength of its brands, ranging from Almond Joy to Reese’s, Twizzler and York, Ms. Buck said much of Hershey’s success in recent years may be attributed to the execution of the company’s dedicated sales force. Dividends have been paid by the company’s 2012 Insights Driven Performance initiative in partnership with the company’s customers.

“We have developed unique capabilities through I.D.P., which facilitate powerful collaboration with our retailers to grow both our business and the category,” Ms. Buck said. “Given the responsiveness of our category and our portfolio of iconic brands, advertising is one of our most powerful growth levers. In 2015, we will increase G.R.P.s (gross rating point — a measure of the size of an advertising campaign) by 7%. Consumers increasingly view more of their video digitally. In line with this shift, we are tripling our digital investment, with 40% allocated to mobile, the highest growth area.”

To grow the company’s presence in convenience stores, plans have been put in place to incrementally add hours its retail sales force will devote to c-stores, increasing the number of locations covered.

“This will mean stronger merchandising execution and increased sell-through, as we have the capacity to touch more distribution points and robustly support our programming,” she said. “Our merchandising will bring core chocolate front and center, leveraging the strength of our core and the excitement of innovation to drive takeaway.

“Our brand-building model extends beyond advertising as we find opportunities to expand usage. This includes cross-merchandising complementary products, like beverages and snacks, or our own unique confectionery combinations to help expand consumption and build baskets with retailers, all while developing deeper consumer brand connections.”

As evidence of the company’s high-level of performance with retailers, Ms. Buck updated the analysts on Hershey advances in its Advantage Program ratings — a business tool used to continuously evaluate a company’s performance relative to their competition and peers. The program allows both retailers and manufacturers the opportunity to confidentially rate one another on different performance metrics.

In the Fast Moving Consumer Goods category, Hershey has moved up the ratings ladder rapidly — from No. 13 in 2009 to No. 8 in 2011, No. 4 in 2013 and No. 2 in 2014.

Importantly, the ratings have lifted Hershey above companies that are much larger. Hershey’s $7.4 billion in annual sales are far smaller than the $30 billion to $35 billion of the No. 3 Advantage company, $65 billion to $70 billion for No. 4 and $45 billion to $50 billion for No. 5. The No. 1 ranked company has annual sales of $15 billion to $20 billion. The capabilities that earned Hershey the higher rating include an ability to help optimize the sales potential for each individual retail outlet.

“We have the ability to augment store-level assortments, customize shipper displays, deliver targeted media, and tailor innovation based on the intersect between a store’s diverse consumer set and geographically varied product demand,” Ms. Buck said. “The opportunity for precision is still very much ahead of us, but in 2014, we worked with several national retailers to prove the impact. In one, we leveraged precision insights to introduce varied front end planograms with a national retailer. And over 32 weeks, measured a 20% lift to Hershey. In another, we developed custom shipper assortments to better meet varied demands at store level with strong results.

“In 2015, we are activating precision-targeted media and innovations. For example, we will launch new Brookside products and an expanded permanent set within one retailer, whose consumer is a perfect match with the Brookside
consumer.”

Efforts to grow the business have not been free from marketplace challenges, Ms. Buck said.

She said competitive activity in advertising and merchandising expanded in 2014, which is what triggered the Hershey 2015 plans with its own increase in media investment and retail coverage and focus on merchandising activities.

Changing consumer shopping patterns also required adjustments by Hershey, including moves that ultimately could affect its snack business.

“We also saw a continued decline in trips to stores, which was accelerated due to pressure on low and middle-income consumers and a reduction in SNAP benefits,” she said. “We are addressing these fundamental shifts through productivity-enhancing I.D.P. initiative, including actively acquiring new and unused space at self checkout and c- store checkout counters, capturing untapped localized demand via precision executions, and accelerating our e-commerce initiatives.”

Hershey also is looking at ways to maintain sales to consumers who are migrating on-line with their buying.

“In addition to our efforts to drive takeaway at traditional purchase points, we are developing new impulse conversion solutions as more transactions move on-line,” Ms. Buck said. “We are at the forefront of several initiatives, including placing our products where shoppers go to pick up their on-line purchases, such as curbside pickup locations and other click-and-collect points found at brick-and-mortar stores. And we are developing an e-commerce specific portfolio. So you can see that our I.D.P. and retail capabilities allow us to continue to deliver growth by meeting ever-changing shopper needs.”

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