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Hershey Co. is tapping the brakes on ad spending for the second straight quarter, following two years of rapid increases.
The candymaker slashed advertising and related consumer marketing expenses by about 5% in the second quarter ending June 29, which comes after a 3% cut in the first quarter, the company reported Thursday.
The second-quarter decrease was the "result of decisions to delay new production costs and shift some funding to coupons and trade merchandising to better reflect today's consumer environment," Chief Financial Officer David Tacka said on an earnings call.
Hershey has been enjoying stellar growth in recent years, but has begun battling some headwinds of late brought on in part by escalating ingredient inflation. The marketer in mid-July announced that it was increasing wholesale prices by an average of 8% across its portfolio to deal with the commodity-price pressures, including rising dairy costs. Competitor Mars Inc. is also raising prices.
On Thursday Hershey reported net sales growth of 4.6% in the second quarter ending June 29. Consolidated net sales were $1.58 billion. "Our first half [of the year] results have been below our expectations," CEO John P. Bilbrey said on the earnings call. Hershey for the full-year expects net sales growth at the low end of its long-term 5% to 7% target.
For 2014, company expects ad and marketing expenses will increase "low-single digits" on a percentage basis, compared with last year. That would mark a significant drop from the 21% increase in ad spending the company reported for the full year last year. The marketer in 2013 was the nation's 63rd-largest ad spender at $668 million, putting it ahead of marketing powerhouses such as Progressive Corp. (No. 70), Coca-Cola Co. (No. 75), according to the Ad Age DataCenter.
Hershey's ad spending cuts this year led some analysts to question the strategy during Thursday's earnings call. Hershey's leadership has "had a really strong commitment to advertising for a long time. It's worked, and I guess that's what makes his year's lower ad spending in terms of growth a bit confusing," said Ken Goldman, of JP Morgan Securities. He suggested that even though more spending could affect earnings, "why not take that hit this year [and] keep brand-building high, especially in its competitive environment, and really stick to your long-term philosophy?"
Mr. Bilbrey responded that "I do believe we're sticking to our long-term philosophy." But he added that the company has "gotten a number of our brands more towards the top of the curve of our advertising efficiency. So it doesn't require necessarily the same levels of increase. It's really much more around the mix of where you apply some of that advertising."
In April, executives stated that they had cut ad support on secondary, smaller brands, such as Hershey's Bliss and Hershey's Simple Pleasures. Also, on Thursday the company suggested it has gotten more efficient with its ad buys. "Advertising GRPs [gross rating points] are available to increase greater than advertising dollars this year due to a new global media planning and buying process that is leveraging our scale," Mr. Bilbrey said.
Last year, Hershey selected Interpublic's UM as its global media-buying and planning agency after previously using multiple media shops across the globe. The change allowed the company to implement a globally integrated media planning and buying process, executives said.
The company's lead creative agency is Arnold Worldwide.
The move to put more money into merchandising comes as Hershey faces more in-store competition from snack brands that are outside of the candy category. This increased storewide merchandising activity is not being led by deep discounts and is "really more of a competitive environment in the range of choice that the consumer has," Mr. Bilbrey said. "There's more on the floor and it's more competitive across total snacking, so the choice the consumer has is broader versus absolute price being a driver."
As a result, Hershey's is increasing its in-store marketing activities, including launching a "King of Summer" program that Mr. Bilbrey described as "a major effort" in convenience stores that will increase king-sized displays.