Hershey Hikes Ad Spend For New Consumer-Centric Strategy

Hershey chocolate barThe Hershey Company will increase advertising by at least 20% in both 2008 and 2009 to support its new strategy of a significantly more targeted focus on the core brands that generate about 60% of its U.S. sales, president and CEO David J. West announced in a presentation to the investment community Tuesday.

The 20% spend increase this year will take Hershey's overall ad spend up to between $155 and $160 million, and the company will bump spend by another 20%+ in 2009, with the spend heavily focused on core brands within the U.S., West reported.

West said that extensive consumer research had validated a strategy of "increasing advertising and consumer investment behind the core U.S. brands that offer the greatest potential for growth." Hershey will combine this more focused, demand-driven approach with "consumer-centric innovation" and continued international expansion in emerging markets to achieve "predictable, sustainable" long-term net sales growth of 3% to 5%, he said.



The company is also projecting long-term earnings-per-share growth of 6% to 8%. The projection is based on an "aggressive" approach to cost structure (including an ongoing global supply chain transformation initiative expected to yield cumulative savings of $80 million to $90 million in 2008, and up to $160 million in 2009 and $190 million in 2010), plus productivity and price realization pushes, operational best practices, self-funding consumer investment, and brand-building and international growth investment, West reported.

Hershey will move away from "pushing variety" into the marketplace, and instead focus on sharpening brand positioning and messaging for core brands, portfolio management, sustainable innovation (addressing areas where Hershey is "under-shared" and areas of emerging consumer needs), investment in selling capabilities, and improving marketing and other spending ROI, West summed up.

Acknowledging that Hershey has not delivered on projections in recent years, West said the company is now confident about these longer-term projections, as well as its projections of full-year 2008 net sales growth of 3% to 4% percent and earnings per share--diluted from operations of $1.85 to $1.90.

Noting that Nielsen research has shown that candy is among the most recession-proof categories, West also said that Hershey does not expect economic pressures on consumers to impact the company's performance.

West offered a look at the in-depth consumer research behind Hershey's revamped strategy. "We needed to drive growth through better understanding" of consumer demographics; why they buy ("need states" ranging from emotional motivators such as "reward me" to physical/functional concerns such as oral care); what they buy (brands, packs, tastes, textures); where/how they buy (channel dynamics), and when they consume (usage occasions), he said.

Research efforts included probing shopper insights and segmentation, seasonal ethnography, chocolate segmentation, controlled store tests and purchase-driver dynamics.

Hershey emerged with six, clearly defined consumer segment profiles, West revealed:

* Loyal Indulgers: Tend to be older, and while not a large part of the population, account for up to one-third of sales for some Hershey brands.

* Engaged, Exploring Munchers: Consume a broad menu of brands and are the least price-sensitive and most profitable segment. Hershey is repositioning some brands to appeal specifically to this group.

* Practical Value-Seekers: The largest segment. These consumers are not seeking discounting, but instead seeking benefits at a reasonable price.

* Confection-Loving Moderators: Indulge in confections, but with moderation.

* Controllers: A small segment that limits confections consumption due to health concerns or lack of interest.

* Detached Occasionalists: Another small segment, who consume confections when an occasion is presented to them.

The "intersection" between consumer demographics and purchasing behaviors and the consumer profiles "creates the total confection demand landscape," West said.

Hershey has been rolling out its new strategy on Reese's, its largest brand, and is already seeing positive results, according to West. The efforts have included a focus on targeting 18- to-34-year-old adults within the three largest profile segments, creating new products specifically geared to unique users (as opposed to the company's previous, "cannibalistic" approach to new products), and increasing ad spend 20% this year to support the brand's new "Perfect" campaign. Post-media sales volumes for key Reese's items have jumped significantly, he said.

Hershey is now looking to repeat the Reese's success with other brands, starting with Hershey's. That brand's new "Pure" campaign is scoring high with its revised target audience of younger adults, and will receive heavy on-air support, he said.

The company is also looking to leverage its new insights about how consumers purchase confections--such as the finding that 25% of consumers walk away without purchasing after being unable to make a decision in under one minute. Hershey is "reinventing' the candy aisle by arranging products according to purchasing occasions, for instance, and is seeing double-digit sales increases in tests, West reported.

Packaging improvements for appearance and functionality, aimed at increasing the price/value equation, are also in the works across the portfolio, according to the CEO.

West stressed that Hershey will also seek to capitalize on key macro consumer trends, including globalization, on-demand lifestyle, customization/personalization, health and well-being, increased social consciousness, connectedness, "premiumization" (60% of total chocolate category growth came from premium last year) and convenience.

The recent Hershey's Bliss introduction--which employed "rigorous consumer validation from concept to commercialization," closely targeting 25- to 49-year-old female "Engaged Exploring Munchers"--will provide a model for future product innovation, he said.

The introduction, with Starbucks, of coffee-house-flavored chocolate products, is also being driven by from-the-ground-up consumer research, combined with leveraging of each brand's category strengths and marketplace advantages, West added.

As for the global picture, Hershey generated 14% of its sales outside the U.S. last year, compared to 9% in 2002. The new strategy calls for "organic" growth in the emerging markets that represent critical growth opportunities, in part through joint ventures with existing confections players in markets such as India, China, Philippines, Brazil and Mexico. Hershey, which already has a significant presence in Mexico, is seeking to expand there and use its Mexican strategy as a model for other markets.

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