Hershey CEO abandons plan to curb ad spending

In-store emphasis led to stagnant sales; marketer to boost outlay on key brands

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Hershey's turning on the ad spigot again.

Only four months ago, the candy giant insisted to analysts it would stick with its strategy to keep ad spending low and instead favor in-store marketing. But after posting a second quarter of lower-than-expected earnings, Hershey CEO Rick Lenny is reversing course, hiking media expenditures by double digits on core brands and pumping up media outlays for new initiatives.

Although the marketer had already planned to up spending for Kisses around the brand's 100th anniversary this year-largely because it has been the "most responsive" to advertising-Mr. Lenny told analysts during Hershey's recent earnings call that he also plans to more than double ad spending for Reese's and Hershey's flagship chocolate bar. New premium-product introductions, including dark-chocolate Cacao Reserve, Hershey Whole Bean Chocolate, antioxidant milk chocolate, organic chocolate and Ice Breakers Wellness gums, will also get a big push.

The increases are a far cry from Mr. Lenny's defensive response last quarter, when analysts questioned his assertion that "trade [spending] has the highest level of return on investment."

Why the change of heart?

Lehman Bros.' analyst Andrew Lazar said Mr. Lenny still believes trade spending offers the best returns-but to a point. "As of the third quarter, [Hershey's] advertising as a percentage of sales had fallen to 2.6%," the lowest among package-food players, he said. While that may have sat well with Wall Street when Hershey was flying high, sales and share losses to high-spending competitor Mars last quarter prompted another look.

Hershey spent $91 million on its brands during the first nine months of 2006-less than half Mars' $200 million outlay. In 2005, Hershey spent $122 million, down from $147 million in measured media spending in 2004, according to TNS Media Intelligence/CMR.

Mr. Lazar said the decision to up spending also was likely tied to Hershey's about-face on introducing limited-edition extensions of its core brands. When Hershey moved away from those extensions, he said, it wasn't "getting the halo effect of those products, and it likely spurred them to say, 'We actually do need to do more advertising."'

Despite the shift, Mr. Lenny was quick to maintain that in-store efforts were more effective. He pointed to a holiday campaign for Kisses, noting that spots on Wal-Mart TV in close to 3,000 stores had "greater returns" than ads on network TV. That said, Hershey will increase the reach and frequency of both network and in-store TV this year.

Also new on the media roster are upscale magazines including Wine Spectator and Cigar Aficionado to reach higher-end audiences for Hershey's Cacao Reserve truffles and Country of Origin bars.

Hershey also will likely target high-end audiences for its new Ice Breakers gums, which offer perks for workforce wonks. One variety, called Lift, features antioxidants for a quick pick-me-up, and another, dubbed Center, features ginseng and vitamin C. They will launch in May with a hefty price tag of $1.99, roughly $1.00 more than leading pellet gums.
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