Masterfoods Axes Brands, Ups Ad Spending

In Wake of Sales Decline, Food Giant Makes Big Changes

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NEW YORK ( -- Reeling from sales declines, Masterfoods USA is yanking underperforming "hobby" brands, slashing its estimated $300 million in promotion spending to retailers, and putting the savings into advertising.
Masterfoods USA is making big changes following sales declines.
Masterfoods USA is making big changes following sales declines.

The architects of the strategy are Mars CEO Paul Michaels and Masterfoods USA President Bob Gamgort, whose idea is to use new metrics to determine which retail partners merit trade spending. It also wants to eliminate brands that are a drag on earnings.

The notion to cut promotional spending and funnel more into advertising is one many marketers have embraced in theory but find tough to carry out in practice.

"This is a big change for the company," said Mr. Gamgort. "Paul and I really want to invest in long-term growth and get out of some of our 'hobbies' that are a drain on resources."

Currently, Masterfoods is pulling the plug on Aquadrops mints, cookie line Cookies & and bite-size Pop'ables candy.

Now that sales fell 4.7% to $1 billion in food, drug and mass outlets excluding Wal-Mart for the 52 weeks ended March 19, according to Information Resources Inc., Masterfoods can no longer afford to support rapidly declining brands.

Mr. Gamgort said by cutting trade spending and what he called "the dogs in our portfolio" Masterfoods can afford a 20% increase in advertising for its brands as well as fund acquisitions. The first acquisition is expected to be announced in the next two weeks, he said. "If we were public, analysts would be applauding us."

According to TNS Media Intelligence figures, Masterfoods spent $408 million last year compared to $332 million in 2004.

Retailers, however, warn a cutback in promotional spending could hasten Masterfoods' rising share losses to rivals Hershey Co. and Nestle.

"Our Masterfoods candy business is down at least 20% from the $1.6 million we did with them last year because of their cutbacks in promotional spending," said one Northeast wholesale buyer, who noted that Hershey and Nestle are reaping the benefits.

Another East Coast retail buyer predicted a big sales tumble due to the cutbacks, which a Masterfoods executive told him were undertaken to drive profits. "You've got to spend money to make money," said the retail executive.

Mr. Gamgort responded that the company isn't cutting off its promotional spending for its more profit-driving customers. "We're being more selective about where we spend our money," he said.

Masterfoods laid out a total of $38 million in measured media for the trio in 2004, yet sales continued to plummet. By last year, Masterfoods had thrown in the towel, spending less than $1 million on all three.

Pop'ables sales fell 38% in 2004 to $22 million and bottomed out at $13 million for the March 19 period. (Hershey's comparable product, Bites, has also suffered big declines, leading to speculation it, too, may be pulled.) Cookies & likewise plunged double digits in '04 to $35 million and has continued to fall. Aquadrops never took off; its sales zenith was $4.6 million.

Pop'ables advertising was handled by Omnicom Group's BBDO, New York, while Aquadrops and Cookies & were handled by holding company sibling TBWA/Chiat/Day, Playa del Rey, Calif.

Mr. Gamgort has been loudly proclaiming plans to innovate rather than follow the line extension strategy waged by competitor Hershey (AA, Oct. 31, 2005). Yet many of the launches slated for this year don't necessarily move beyond the line extension realm.

Among the launches are a Dark Chocolate version of M&M's and a variety of new Dove offerings.
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