Masterfoods shapes up for fight with Hershey

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With rival hershey stealing share from his company's candy business, Masterfoods North America President Bob Gamgort is pushing hard for real innovation.

Masterfoods-the largest business unit of Mars, the change-resistant, family-owned food company -has made sweeping management and organizational changes in an attempt to more speedily get to the next big ideas.

The decentralization of Masterfoods puts decision-making power on everything from marketing to manufacturing into the hands of five business unit presidents. It's the work of Mr. Gamgort and Mars CEO Paul Michaels, tapped in July as the first non-Mars-family leader in the company's history.

Success will be measured most of all by innovation, Mr. Gamgort said, especially in the company's key snacks unit, where mature brands like M&M's and Snickers are facing off with products from Wall Street darling Hershey.

"If you take a look at the marketplace, there are a lot of new products, but I would argue that most are variety-that is, new choices to the same people for the same occasion," Mr. Gamgort said. Masterfoods plans to focus on innovations-such as its Ethel's Chocolate Lounge concept and heart-healthy CocoaVia chocolates-that bring in new users or drive new occasions.

By having all the functional areas report into the business units-Snackfood, Food, Petcare, Ethel M and Mars Nutrition for Health & Well-Being-development will be streamlined and Masterfoods will "have better success at commercializing ideas," Mr. Gamgort added.

Shrinking share

Innovation is much needed. In the 52 weeks ended Oct. 2, Hershey managed to gain nearly two share points in sales on Masterfoods in the $4.4 billion chocolate category, giving Hershey a commanding 43% share compared with Masterfoods' 25%, according to Information Resources Inc. figures for food, drug and mass outlets excluding Wal-Mart.

Hershey has made similar share gains in the smaller non-chocolate segment, IRI data shows, and in recent earnings calls it has bragged of share gains in the higher-profit convenience channel.

Hershey's success has been driven in part by a strategy of selling new, limited-edition varieties of its core brands, winning it incremental shelf space, said Andrew Lazar, an analyst at Lehman Bros. Mr. Gamgort and Martyn Wilks, the newly named president of snacks, are out to prove to retailers that this strategy is short-sighted and gimmicky. "Balance needs to be restored," Mr. Gamgort said.

Mr. Wilks said the downside of the Hershey strategy is that more shelf space is given to products that don't make up the bulk of sales. He pointed to IRI data that showed how 40 limited-edition candy items in convenience stores created $74 million in sales for the 52 weeks ended Sept. 11, while the top 10 core items represented $412 million. "We want to make sure we get our fair share of the retail environment," Mr. Wilks said.

While Masterfoods is not walking away from limited-edition items-White Chocolate Twix and Ice Burst Starburst are due early next year-its focus will be on fewer, bigger variations such as the successful M&M's Dark.

Mr. Wilks' ad budget for snack brands, which commanded roughly $220 million of Masterfoods' total $395 spending on measured media in 2004, will grow by double digits next year as Masterfoods pushes on new and existing products.

Fresh ideas

M&M's is expected to get a bigger push when Hershey launches its own candy-coated chocolate line, called Kissables, later this year. My M&M's, a retail and Web program that offers customizable colors and messages on the iconic candies, will get more attention, and Masterfoods will expand its interactive retail concept, M&M's World, beyond Las Vegas to Orlando.

Dove, too, will continue to be a priority as Masterfoods, like Hershey and others, looks to "dial up the premium chocolate marketplace that is dramatically underdeveloped in the U.S. versus other parts of the world," Mr. Wilks said. Masterfoods is also testing an upscale retail concept, Ethel's Chocolate Lounges, with 10 locations in Chicago.

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