Hershey reaches limits of limited-edition candy

INNOVATION: CEO Lenny slashes 25% of portfolio, pledges to seek platforms

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Just last year, Hershey Co. was riding high with what seemed a sweet strategy: a raft of limited-edition versions of its top six candies that President-CEO Rick Lenny credited with boosting quarterly sales as high as 8%. But analysts, consumers and especially retailers have since soured on the plethora of products such as Rich Dark Kisses and White Chocolate Reese's. And the company, realizing it stretched its product portfolio well beyond what proved profitable, is now scrambling to slash it by 25% over the next 18 months. Hershey is also pledging to shift its focus toward growth-driving new platforms rather than short-term line extensions.

"It was too much of a good thing," said a top buying executive for one East Coast convenience store chain. He said that Hershey, heady with success over driving growth for a year or two with limited editions, went too far, doubling its efforts last year and going even further this year, when it introduced a whopping 10 limited editions since January. "The consumer is getting burnt out on the approach," he said, and "from a merchandising standpoint, we have clearly reached the point of diminishing returns."

Masterfoods President Bob Gamgort is almost certainly doing the "I told you so" dance in his office. He declined to comment for this story, but as far back as October (AA, Oct. 31) Mr. Gamgort was defending his company's decision to focus on what he called true new-product innovation vs. the limited-edition varieties others in the marketplace were cranking out. He argued that those items were gimmicks that provided only "new offerings for the same people on the same occasions" and sucked up valuable shelf space at the expense of the more profitable mainstays (central among them Masterfoods' own top Snickers brand).

question of time?

Retailers, however, continued to stock up and Hershey snapped up share by the day. Not any longer.

Hershey's now pledging the kind of innovation that provides longer-term results. Lehman Bros.' analyst Andrew Lazar said he believes the limited-edition strategy was in fact more of a place holder for the kind of platform innovation Hershey is now promising, coming as it did before Mr. Lenny had had time to put bigger ideas in the pipeline. But the place-holder strategy clearly needed to be better policed by Hershey as to what was moving off the shelf and what was maximizing retailers' profitability, he said. The pledge to focus on a core set of 12 products, however, proves that Hershey is "good at course correcting," Mr. Lazar said.

The real question, though, is whether Hershey can successfully balance its short-term growth-spiking ideas with "fewer, bigger, better" new product ideas that will truly provide long-term gains. That's a hard-to-follow path being sought by not just Masterfoods but Kraft Foods, General Mills and almost any food company seeking hard-won growth.

"It's true you can't get to 8% or 10% growth with a line extension, but while every CEO is talking about creating new consumer needs and new platforms, they just can't do it," said Bryan Mattimore, principal of Norwalk, Conn.-based consultancy Growth Engine. "Everybody wants to invent a category because the returns are great when you do, but the reality is company execs tend to be less committed to doing a longer-term stream of innovation."

Instead, most are stuck in the cycle of developing quick hits that help brand teams meet internal pressure from the boss and external pressure from Wall Street, said Gary Fraser, also a principal at Growth Engine.

Allen Adamson, managing director of Landor, New York, agreed that "innovation is really hard for big companies, though every one of our clients is certainly interested in how we can help them become more innovative and break the cycle of similarity in the marketplace." You can always come up with different, Mr. Adamson said, "but if it ends up in the 'who cares' column, it gets dumped off the shelf."

Hershey is adamant that it can drive growth through innovative platforms in new areas, among them gum and mints, cookies and snack nuts. A Hershey spokeswoman shared data that showed the company has increased share in the mints category by seven points to 35% over the past year through new products, but examples of future efforts included mainly extensions with Ice Breakers Tropical sours and two new varieties of its new Ice Breakers Ice Cube gum.

Likewise, in cookies (where Masterfoods failed with its Cookies &), Hershey will extend its new Hershey's cookie lineup with mini Kisses and, later in the year, will enter the $1 billion sandwich cookie segment with products based on its Hershey's chocolate and Reese's peanut butter equities.

Masterfoods, meanwhile, is boasting about its success with new platforms including its supposed cholesterol-lowering CocoaVia and its extension of Snickers into the energy-bar category with Snickers Marathon.

But what exactly is a new platform? Defining it can be difficult. Hershey talks about its filled Kisses as a new platform and Lehman's Mr. Lazar agrees (as the line helped grow the Kisses brand). But others are more particular about what new platforms truly are.

"Adding nuts to a chocolate bar does not give you a new platform," said Steve Gundrum, president-CEO of Foster City, Calif.-based product-development firm Mattson, "but moving from a chocolate bar to chocolate milk does since it moves you into the beverage business."

Those platforms, though, generally require completely new manufacturing systems and new systems of distribution, "so there has to be real strategic purpose for the company to want to extend its brand there," Mr. Gundrum said.

Understandably, retailers are growing more and more cynical about innovation-even the new-platform kind-as more and more marketers beat the drum about it. The East Coast convenience store buyer noted that "to the extent Hershey is getting into other categories and couching it as innovation, we as retailers are being forced to carry an inordinate number of items of theirs at the expense of smaller manufacturers. That strategy is fine if they do well, but 'if' is the biggest two-letter word."
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