Hershey in search of 'sticky' innovation

by Keith Nunes
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Reese's Pieces Cup, Kit Kat Big Kat, Hershey
Recent Hershey innovations Big Kat and Reese's Pieces Cup have done well.

HERSHEY, PA. — Current and future innovation efforts for The Hershey Co. include a focus on “sticky” innovation, projects that have a longer lifecycle and may cross a variety of platforms.

Michele Buck, Hershey
Michele Buck, c.o.o. of Hershey

“Scale platform innovation has proven to be one of the greatest drivers for our category,” said Michele Buck, chief operating officer, on Oct. 28 during a conference call to discuss third-quarter 2016 results. “I’m encouraged about some of the innovation that we had this past year, and I think that we’ve seen the results of that in the marketplace. A lot of that didn’t launch until the second half, but Big Kat, Reese’s Pieces Cup has done incredibly well. And Snack Mix was also a great innovation that drove ‘incrementality.’ Of course it wasn’t shared to the confection category; it’s actually housed in salty snacks.

“So, it is a key lever. And having that sustainable big platform innovation gives us sustaining innovation over a multi-year period of time. And that’s one of the biggest focuses for us; is making sure that we have sticky innovation so that it doesn’t just launch and come out.”

Hershey snack mixes
Hershey snack mixes have driven growth, and the company plans to launch two more varieties.

Successful innovation efforts and productivity initiatives helped the company report positive earnings during the third quarter of fiscal 2016, ended Oct. 2. Net income for the quarter reached $227,403,000, equal to $1.09 per share on the common stock, and an improvement compared with the same period of the previous year when the company earned $154,771,000, or 73c per share.

Sales for the quarter rose to $2,003,454,000 compared with $1,960,779,000 the previous year.

Despite the improved earnings, The Hershey Co. faced margin pressure during the quarter.

Patricia Little, Hershey
Patricia Little, c.f.o. of Hershey

“ … adjusted gross margin declined by 40 basis points in the third quarter, as productivity and cost savings were offset by unfavorable sales mix, some excess packaging, and higher supply chain costs, driven by initial year absorption of overhead related to the Malaysia manufacturing facility,” said Patricia Little, chief financial officer. “For the full year, we continue to expect that gross margin will be slightly down versus a year ago.”

Ms. Little added that the company remains focused on its cost structure, and productivity initiatives are on track to deliver approximately $135 million in cost savings this year and at least $100 million per year from 2017 through 2019.

Looking ahead, management has high expectations for the Hershey’s Cookie Layer Crunch introduction this December.

Hershey Cookie Layer Crunch
Management has high expectations for the Hershey’s Cookie Layer Crunch introduction this December.

“Based on pre-launch testing, Hershey’s Cookie Layer Crunch earned some of the highest consumer scores of any product ever launched by the company …,”said John P. Bilbrey, president and chief executive officer of Hershey.

He added that he believes The Hershey Co. is set up to deliver “top-quartile performance versus (Hershey’s) peer group” in 2017.

“A longer Easter season and planned innovation, driven by Hershey’s Cookie Layer Crunch and barkTHINS acceleration should benefit top-line growth,” he said. “We have visibility into our input cost structure and $100 million in productivity savings that we discussed earlier in the year that should lead to EBIT margin expansion in 2017.”

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