Hershey Hurt by Sales Slide but Sticks to In-Store Tack

Despite Q3 Downturn, Won't Give in to Analysts' Demand to Up Ad Spend

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NEW YORK (AdAge.com) -- Wall Street be damned, Hershey Co. is sticking by its theory that in-store marketing and promotion works better than advertising.

Despite a slew of questions from analysts suggesting a link between the chocolate giant's recent decrease in ad spending and its lower-than-expected third-quarter sales, Hershey President-CEO Rick Lenny was adamant that Hershey's increase in consumer marketing next year will happen "closest to the point of consumption." Translation: in store.

Hershey's measured media spending fell from $147 million in 2004 to $122 million in 2005 and was $76 million for the first half of this year, according to TNS Media Intelligence/CMR. And, according to Mr. Lenny, those numbers are unlikely to go up in 2007 aside from a lift in spending on the Kisses brand to celebrate its 100th anniversary. Hershey spent $8 million on Kisses during January through June of this year, TNS reported.

"Marketing-mix modeling still reinforces that trade [spending] has the highest level of return on investment, and then within consumer support ... those [efforts] closer to the point of consumption and point-of-sale tend to have the higher return," Mr. Lenny said in a conference call with analysts. In general, he said, Hershey uses advertising to create awareness for new brands and new platforms but views in-store support-whether through sampling or through activities tied in with retailers' own strategies-as the best way to capitalize on those high-return investments.

Analysts are concerned that Hershey might be trapped in the food industry's "cycle of doom," in which ad spending is cut to make the numbers, then restored when sales fall, and then cut again. Analysts also worry that the marketer's lack of advertising might be hurting the category overall. Mr. Lenny defended his strategy by pointing to the success Hershey has had gaining share over many previous quarters.

But he didn't quite persuade investors. Though Prudential Securities analyst John McMillin said it's "hard to overly criticize Hershey given they've had such a good 3- to 4-year record," he said ad reductions may have contributed to the company's recent slowdown. "Clearly chocolate is an impulse item but at the end of the day, if you don't advertise, you die," he said.

Though far from "dying," Hershey's overall sales for the third quarter grew only 3.3% compared to the 6% growth Hershey had led Wall Street analysts to expect. And its share of the chocolate market declined, a problem some analysts attribute to Hershey's decision to back away from its limited-edition strategy earlier this year.

Hershey is putting little emphasis on advertising to build existing brands. While new Kissables got $18 million for the first half of this year and new Reese's Cookies got $7 million, the base Hershey bar received only $2.5 million in spending and base brand Reese's got only $200,000, according to TNS. Contrast that with rival Mars, which outspent Hershey by roughly $120 million in 2005. Despite outlays on newer brands and brand extensions, the company continued to support its bread-and-butter brands, spending more than $30 million on M&M's and $31 million on Snickers.

Hershey's agencies are Havas' Arnold, New York, and North Castle Partners, Stamford, Conn.

Spending only on new products, however, can be dangerous, especially if the innovation doesn't catch on with consumers. While Credit Suisse analyst David Nelson pointed out that "Hershey does have a strong track record of innovation," he added that many of the initiatives Hershey outlined to analysts last December "just didn't seem to pan out this year."
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