Food channel proves tricky for Hershey

by Monica Watrous
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Halloween seasonal products and new items exceeded expectations during Hershey's third quarter.

 

HERSHEY, PA. — A tricky retail landscape tempered third-quarter performance for The Hershey Co. Although Halloween sales for Reese’s, Kit Kat and other Hershey brands exceeded the candy maker’s expectations, purchases of non-seasonal, everyday confectionery products fell on irregular traffic and consumer activity in the grocery channel.

“Our market share in the food channel increased to 0.3 points in the third quarter, but category and Hershey growth was less than the historical growth rate of the category,” said J.P. Bilbrey, president and chief executive officer, during an Oct. 29 earnings call with financial analysts.

Previously, the company discussed efforts to improve performance in convenience stores. Behind increased levels of in-store activity during the third quarter, including a promotion of king-size products, Hershey generated 4% retail takeaway in the channel. Now, the company is shifting its focus to supermarkets and grocery stores.

“Similar to what we did in the C-stores, we have food channel-specific activity in the fourth quarter that we believe will improve upon these trends,” Mr. Bilbrey said. “As was the case last quarter, broader snack category growth and in-store activity was present across many channels, although it tempered in Q3 versus the first half of the year increase. Given this backdrop, I was pleased with the Hershey-specific programs by pack type and channel that was executed in the third quarter, enabling us to compete effectively and generate retail takeaway of 3.3%.”

Continued efforts in the convenience channel include more promotions and product launches planned in the coming months.

“In the fourth quarter and into 2015, we have C-store merchandising and programming as well, as innovations such as seasonal-shaped Reese's products and the 2015 launches of Kit Kat White Minis, Reese's Crunchy Cup and Ice Breakers Cool Blast Chews that should enable us to win in the C-store channel,” Mr. Bilbrey said.

Higher pricing announced in July will take effect across all retail channels during the fourth quarter. As a result, Hershey expects an initial price elasticity impact to result in lower volume in both the fourth quarter and 2015.

“We will work with our retail customers to ensure that the implementation of the price increase is supported with greater levels of advertising and the right mix of customer trade promotions and merchandising to reduce the impact of volume elasticity,” Mr. Bilbrey said.

Set to debut during the fourth quarter is Reese’s Spreads, an extension of the Hershey’s Spreads platform that launched earlier in the year.

 

For the third quarter ended Sept. 28, Hershey had net income of $223,741,000, equal to $1 per share on the common stock, down from $232,985,000, or $1.03 per share, in the prior-year period. Continued dairy inflation, unfavorable sales mix and other supply chain costs bore a negative impact on profitability, offsetting Hershey’s productivity and cost-saving initiatives.

“Macroeconomic challenges persist, putting pressure on consumers and retailers,” Mr. Bilbrey said. “Over the remainder of the year and into 2015, we have targeted innovation, advertising, merchandising, and programming to address the needs of consumers by channel and pack type.”

Net sales increased 5.8% to $1,961,578,000 from $1,853,886,000 in the year-ago quarter, driven by volume, with North American sales up 4.2% on strong Halloween seasonal growth and new products.

Another innovation from Hershey set to debut during the fourth quarter is Reese’s Spreads, an extension of the Hershey’s Spreads platform that launched earlier in the year.

“Our entry into chocolate spreads is driving category growth of almost 20% this year,” Mr. Bilbrey said. “As a result, we’re getting good collaboration from our retail partners.”

During the third quarter, Hershey completed the initial closing and acquisition of an 80% stake in Shanghai Golden Monkey, a privately held confectionery company based in Shanghai, China, for approximately $394 million.

“The strength of their portfolio, manufacturing expertise, and overall distribution capabilities, especially within the traditional trade, is an opportunity for us to leverage scale to make the iconic brands of both our companies even more powerful,” Mr. Bilbrey said. “This acquisition will make China Hershey’s second-largest market by the year-end 2015, with anticipated net sales of around $500 million.”
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