Hershey to Boost Ad Spending to Stem Share Losses

Pledges 'Brand-Building Support' but Analysts Remain Skeptical of Turnaround

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CHICAGO (AdAge.com) -- Beleaguered Hershey Co. today promised to raise its marketing game in an effort to halt continuing share loss to rival Mars -- but many analysts aren't buying it.

The chocolatier reported a 65% drop in net profit for the fourth quarter, citing high dairy costs, among other factors.

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"Our primary goal in 2008 is to stabilize U.S. business marketplace performance," said President-CEO David J. West. Mr. West succeeded Richard Lenny, who retired suddenly as CEO in October, precipitating a boardroom shake-up. "Markedly higher brand-building support, including advertising, quality merchandising, enhanced retail coverage and new chocolate products within the premium and trade-up segments will enable us to achieve this goal."

65% drop in profit
The remarks came during an investors call in which the iconic chocolatier reported a 65% drop in net profit for the fourth quarter, citing high dairy costs, among other factors. Mr. West deflected tough questions and said that more information about the company's prospects would be available in the second quarter.

Analysts didn't bite. "Why should we believe management now has regained its marketing touch and can revitalize its innovation pipeline beyond just cannibalistic line extensions?" asked Robert Moskow, analyst at Credit Suisse. "Competitor Mars is doing a better job of meeting retailer and consumer needs and Hershey is struggling." He said Hershey's share price has fallen 30% in the last year.

Recently, Hershey's track record hasn't been great. The company's upscale Cacao Reserve product line failed to excite consumers last year and its dark-chocolate products haven't been a big success.

Among its planned new products are upscale lines under the Starbucks and Hershey's Bliss brands, planned for introduction in March. "These additions enhance our premium and trade-up portfolio and will broaden Hershey's participation in faster-growing segments of the category," Mr. West said.

Carmen Electra Super Bowl spot
Hershey's agencies are Havas' Arnold and North Castle Partners, neither of which would comment for this story. In addition, the company tapped Tracey Locke to create an ad for this year's Super Bowl featuring Carmen Electra for Ice Breakers gum.

The new lines will have to work hard to restore flagging share at Hershey. "U.S. retail takeaway in the fourth quarter and full year, in channels that account for over 80% of our retail business, was up 0.9% and 1.3%." Mr. West said.

But "retail takeaway was not as strong in the channels measured by syndicated data, thus market share declined by about 1.3 points in both the fourth quarter and full year in these channels," he added, indicating that in an effort to make its numbers Hershey had heaped more inventory on retailers than they could immediately sell, an industry practice called trade loading. But now, he said, the imbalance is correcting itself. "As anticipated, inventory levels at key distributors declined in the fourth quarter. This should lead to shipments and retail takeaway patterns that are more closely aligned in 2008."

According to Information Resources Inc., in food, drug and mass merchandisers, sales of Mars' M&Ms last year outpaced that of Hershey's great American chocolate bar. M&M's notched $155 million in sales vs. the Hershey bar's $152 million. In larger snacking sizes, the Hershey bar fell to third place, behind M&Ms and its own Reese's line.

Ad support for Reese's
Reese's was one brand cited in today's conference call by Hershey Chief Financial Officer Bert Alfonso as getting strong ad support. He said spending was up 21% in the fourth quarter, mainly to support for Reese's and other core brands. For the full year, advertising spending was up 18% and total brand spending up 9%, he said. During the fourth quarter, total brand spending, including advertising, trade promotion and consumer promotion, rose 10%, Mr. Alfonso said, noting that Hershey shifted its spending from consumer promotion to coupons.

The share slide follows bitter battles at the sweetest place on earth since last fall. Not only has there been dissension with the trust that controls the company over sale of the company, but there were six board ousters and two board resignations, as well as Mr. Lenny's retirement. A number of company executives followed Mr. Lenny out the door, among the departure of a top marketing executive, Thomas Hernquist.

"Is this the end of the bad news for Hershey?" asked JP Morgan analyst Pablo Zuanic in a research note, and then went on to answer his own question. He suggested the company's projection for 3% to 4% sales growth in 2008 seemed overly ambitious, "particularly keeping in mind a still very aggressive Mars and the fact that a lot of the new marketing initiatives may take some time to make an impact."
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