Hershey continues its segue into snacks

by Keith Nunes
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Hershey is delving deeper into snacks.

HERSHEY, PA. — The Hershey Co.’s acquisition of Krave Pure Foods, Inc., a Sonoma, Calif.-based meat snack manufacturer, should send a strong signal to the rest of the food and beverage industry — The confectionery company is serious about snacks. Once the acquisition is complete, Hershey’s non-confectionery snack portfolio will include spreads, dips, snack bars (to be sold under the Brookside brand), bean curd (in China) and jerky.

“What we see happening, almost everywhere, and I’m very optimistic about how this plays to our strengths, is that snacking and portable snacking is not just a short-term event — This is really a trend, and it’s becoming a habit,” said J.P. Bilbrey, president and chief executive officer, during a conference call with financial analysts on Jan. 29. “And we just have to be competitive, and we have to be competitive with the brands we have that are within the core of the Hershey Co. Our confectionery products, we’re expanding brands like Brookside, which have a nice halo effect of goodness. And then we also see ourselves, as we’ve talked about, expanding across a broader snacking continuum.”

Michelle Buck, president of North America for Hershey, said the consumer’s snacking needs are evolving and two areas of interest from consumers are portable nutrition and protein-based snacking.

“So as we look at that marketplace, clearly, one of the categories that is really meeting consumers’ needs is meat snacks,” she said. “Meat snacks are a category that is one of the fastest-growing, growing double-digits in the U.S. this past year and over the past several years.”

Krave offers a strong point of differentiation in meat snacks, Hershey executives said.

Ms. Buck added that household penetration of meat snacks stands at 31%, and continues to grow. With Krave, which sells products with such unique flavor profiles as black cherry barbecue pork jerky, basil citrus turkey jerky, and chili lime beef jerky, the company feels it offers a strong point of differentiation.

“It's a culinary inspired kind of profile,” she said. “And we think that there’s a lot of potential. As they continue to bring new consumers into the meat snacks category in the marketplace for us to leverage Hershey’s strengths in the supply chain, consumer insights and retail to really drive the business. So we couldn’t be more excited about how it will continue to help us to meet consumer needs as we stay focused, of course, on winning in our category.”

Several analysts who participated in the call expressed concern that Hershey’s focus on snacks may distract it from its core confectionery portfolio.

“We will always be diligent to not distract ourselves from the core business that we’re in, but we’re also in the consumer products business, and have to make sure that we’re meeting (the needs of) what consumers are always desiring,” Mr. Bilbrey said. “We think that’s definitely within the core businesses that we’re in. And we think because of our go-to-market capabilities, our R.&D., and ability to make things taste great, that there’s opportunities for us in broader snacking.”

The emphasis on snacking beyond confectionery may also be a defensive move by the company. In his prepared remarks, Mr. Bilbrey noted that the growth of the snacking category and the emergence of many smaller, niche applications and brands are having an effect.

“For the full year 2014, Hershey U.S. C.M.G. (confectionery, mind and gum) retail takeaway increased 2.7%, about 1 full percentage point greater than the category growth rate,” he said. “However, throughout the year, retail store traffic and consumer trips were irregular. Additionally, increased levels of distribution and in-store activity of items such as salty, bakery and meat snacks, by both mainstream and newer contemporary niche manufacturers, were prevalent throughout the year and drove broader snacking category growth in 2014.

“This adversely impacted purchases of non-seasonal candy products resulting in net sales and operating profit that were below our expectations. In 2015, we expect marketing and selling efforts to be more precision-based as they are focused on specific consumers and retail channels, which should help mitigate the impact of volume elasticity related to the previously announced price increase and enable us to deliver upon our objectives.”

In addition to its marketing and selling efforts, Mr. Bilbrey said Hershey also is working to make some of its products more clean label friendly.

“We haven’t leveraged what we’ve done, as our plan is to move a large portion of our portfolio in this direction,” he said. “We’re building the capability and have made progress to source non-G.M.O. sugar and r.B.S.T. free milk for products in the United States. We’ve already begun this work with keys sourcing suppliers here in the U.S., and will have more news on this later in the year.”

Other new product introductions scheduled for this year include Brookside dark chocolate fruit and nut snack bars, Kit Kat White Minis, Hershey’s Caramels, Ice Breakers Cool Blast Chews, Reese’s Spreads and Snacksters Graham Dippers.

Hershey recorded positive results during fiscal year 2014, ended Dec. 31. Net income was $846,912,000, equal to $3.91 per share on the common stock, up from fiscal 2013, when net income was $820,470,000, or $3.76 per share.

Sales for the year totaled $7,421,768,000, an increase compared with $7,146,079,000 during fiscal 2013.

During the fourth quarter, the company earned $202,508,000, or 94c per share, up from $186,075,000, or 85c per share, in the same period a year ago.

Sales during the quarter totaled $2,010,027,000, an increase compared with the previous year when sales were $1,956,253,000.
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