Boost in Ad Spending Pays Off for Hershey

Fourth-Quarter Income Up 51%, Also Thanks to Price Increases, Consumers Trading Down

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CHICAGO ( -- Hershey continues to defy gravity, reporting fourth-quarter and full-year earnings today that topped analyst expectations, thanks to price increases, increased advertising and consumers trading down from premium chocolate.

"We exit 2008 with reasonable momentum and decent takeaway in share performance," said Hershey CEO David J. West during this morning's earnings call. "As we look to 2009, we will continue to focus on core brand growth."

Hershey's fourth-quarter net income was up 51%, to $82 million. The company boosted marketing 23% during the quarter, and 26% last year, to $161 million. Mr. West projected a 20% to 25% marketing increase in 2009.

He underscored the company's marketing strategy to date, focusing on core brands such as Hershey's and Reese's, and attributed the strategy for some of its share gains. In 2009, the confectioner is expanding its focus to include Twizzlers and Kisses. Mr. West described the Kisses business, which has been on the decline, as "moderating," but added, "this is not acceptable."

Capping a strong year
Still, for Hershey, the quarter caps a strong year in which it has defied expectations and boosted ad spending, despite overwhelming cost pressures and very wary investors. It's particularly striking for a company that Wall Street had all but written it off as a takeover target following the Mars-Wrigley merger announcement last April. The company had been in a multi-year slump that resulted in the abrupt retirement of Mr. West's predecessor and a massive board walkout.

Stifel Nicolaus analyst Chris Growe noted that Hershey is benefiting from consumers trading down from premium-priced chocolates. At the same time, its relatively new Bliss brand fits the bill for female consumers seeking extra indulgence and smaller packaging.

"We saw good gains in trade-up packaged chocolates where Hershey Bliss is positioned," Mr. West said. "We'll support Bliss throughout 2009 with strong year-two advertising, year-long sampling and merchandising and continued promotion to further drive trial generation. This investment will ensure the brand grows in 2009 and beyond."

But the trend to greater price sensitivity has been a hindrance for Hershey's Starbucks chocolates. Mr. West described those sales as "mixed," but added that Hershey will need products such as Starbucks truffles to be ready for prime time when consumers start looking to trade up again.

Consumers loyal to category
"We can complain about the lack of growth, but the truth is that this is a high-involvement category that consumers won't abandon during tough economic times, despite higher pricing," Credit Suisse analyst Robert Moskow wrote in a research note. "The bulk of Hershey's portfolio is concentrated in mass chocolate at low-end price points."

Mr. Moskow applauded the company for "pulling in the reins on its forays into premium chocolate while increasing marketing for core Reese's and Hershey brands." Meanwhile, he added, "the 'trade-up' brand Bliss has exceeded all of their expectations -- and ours."

Mr. West also outlined a number of upcoming marketing programs. Much of it focused on the flagging Kisses brand as Hershey sails forth into the critical Valentine's and Easter seasons. The company recently began airing new TV spots that will continue throughout 2009, he said. During the second quarter, Hershey is sponsoring a March Madness program, featuring Hershey Payday and Kisses brands. He added that Kisses is the "lead brand anchoring" Hershey's promotion of "Night at the Museum 2: Battle of the Smithsonian." This summer, Hershey has planned a promotion with the pop country act Rascal Flatts. And in the fourth quarter, the company will once again attempt to inspire holiday bakers to use its products as ingredients.

Hershey's agencies are Arnold, TPN and Dieste.*

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CORRECTION: An earlier version of this story incorrectly named Hershey's agencies.
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