• by Sarah Mahoney  @mahoney_sarah, January 25, 2008

The Hershey Co., maker of humble Hershey's Kisses, Reese's and Kit Kat, says it is continuing to lose market share to fancy-pants brands.

In announcing its earnings, Hershey says it is beefing up its higher-end offerings but still struggling. While fourth-quarter sales gained a bit to $1.34 billion, net income from operations fell to $124.1 million, compared to $157 million in the same period a year ago. And market share declined by about 1.3 points in both the fourth quarter and full year.

While the results were somewhat expected, given increased competition and higher costs, marketing spending is clearly part of the problem. "Flat sales growth continues to demonstrate the huge need for additional consumer spending," commented Wachovia Bank, adding that the company is struggling with marketing share and faces "an uphill battle to reach industry average advertising expenditures."

Hershey says that in order to stabilize its U.S sales in 2008, it will have "markedly higher brand-building support, including advertising, quality merchandising, enhanced retail coverage and new chocolate products within the premium and trade-up segments."

But it's certainly not like the company hasn't been trying to expand its premium offerings. In March, it will launch its Starbucks and Hershey's Bliss product lines, enhancing its premium portfolio. Yet its Cacao Reserves by Hershey's--about as different from a Kit Kat as possibl--haven't exactly caught fire, nor has Hershey's Extra Dark.

"The bigger problem for Hershey is finding a way for consumers to understand the relationship between Hershey's reputation as a children's and mass market chocolate company," says a recent Mintel report, "and its desire to be a purveyor of premium products."

While its Dagoba organic chocolates, Joseph Schmidt, and Scharffen Berger products are already recognized as premium--and therefore continue to do well--it seems that consumers are having problems making the connection between the Hershey name and a premium product."

But success in this premium segment is key: While it accounted for $2.7 billion in sales in 2006, Packaged Facts say the segment is growing at four times the rate of conventional chocolate products. Total chocolate sales are projected to hit $18 billion in 2011, but Packaged Facts expects "conventional chocolate sales to stagnate or decline, while sales of gourmet chocolate, led by continuing success the dark, organic and fair trade chocolate niches, to surge."

Premium brands now account for 16.9% of the total chocolate market, and Packaged Facts predicts they will command 25% of the total market by 2011. The total U.S. confectionery industry racked up $27.9 billion in sales in 2006, and chocolate accounts for 57.1% market share. (Non-chocolate candy (32.6%) and gum (10.3%) follow.)

And while those shares have been relatively constant for the last decade, "the current burgeoning interest in dark chocolate seems to be stealing from milk and white chocolate rather than from the non-chocolate and gum categories."

As of 2006, Packaged Facts says that in terms of U.S. sales, Hershey accounted for 43% of sales. Mars followed with a 24.8% market share, followed by Nestle (8%), Russell Stover, including Whitman's and Pangburn, (7.3%), and Lindt (3.4%.)