Hershey gained market share in every category in the fourth quarter but admits it is still struggling to excite US consumers with Air Delight - the aerated chocolate range it launched in 2011.
Speaking on Hershey's Q4 earnings call this morning, chief executive John Bilbrey was asked how well Air Delight and Simple Pleasures - both relatively new additions to its stable - were performing.
While Simple Pleasures - Hershey chocolate with 30% less fat - was doing well, with solid distribution gains and a strong advertising and marketing package behind it, Air Delight needed more work, he said.
“We think it was probably a little bit harder to compete with indulgent 100% milk chocolate with the aerated product, and so we weren't really talking enough about the indulgence of the experience and so we've adjusted for that."
We’ve adjusted our advertising approach…
While consumers in the UK and other markets are very familiar with aerated chocolate, US consumers are only just getting their heads around it, he said: “You know it takes a little bit more work… [but] we continue to feel really good about the product and it continues to make progress.
“With Air Delight we’re building a new concept, and that can be hard work, but we’d like that brand to succeed.”
Bilbrey, who told analysts at the Q3, 2012 earnings call last fall that Air Delight was “going to continue to take some work for us”, hinted as early as late 2011 that the brand might not be an overnight success.
He added: “Anytime you have something new… you're really building a platform that the consumer has to learn what it is, so trial is important and… repeat is fundamental.”
Brookside Foods: Trade reaction has been very positive
However, he had much more positive news about recent acquisition Brookside Foods, a British Columbia-based company specializing in chocolate-covered fruits, nuts and exotic fruit-juice-pieces.
“The trade reaction as we’ve expanded [distribution] in the US has been very positive and the consumer response has been really positive.
"I'm excited about the broader launch of Brookside products into the food drug and mass channels. Brookside has increased sales at a compound annual growth rate of about 20% over the last several years. With our additional manufacturing capacity now online, Brookside 2013 net sales growth will exceed this historical compound annual growth rate."
He added: "Our research indicates strong appeal among many of the consumers identified within our confectionery demand landscape. Therefore, we believe Brookside will attract new consumers to the confectionery category by focusing on unmet consumer needs.
"We would expect it to really be in all the channels where our products are today with the exception early on of convenience where we haven't yet built up the packaging that we think will be appropriate for convenience, although we certainly plan to do that because we think it's a great on-the-go product."
North America is still a growth market for us
While much of today’s call was devoted to fast-growing markets in China, Brazil and Mexico, with Bilbrey noting that 32% of sales of Hershey’s Kisses products are now generated outside the US, there is still significant potential to grow at home, he said.
“We believe that the North American market, and the US in particular, is a growth market, and we will continue to invest in our brands here. As you know we didn’t always do that.”
US candy, mint and gum retail sales for the 12 weeks ended December 29, were up 7%, he said (expanded all outlet combined plus convenience store channels (xAOC+C-store), account for 90% of Hershey’s U.S. retail business).
Group net sales rose 11.7% to $1.75bn in the fourth quarter of 2012, while net income rose 5.45% to $149.9m, said Bilbrey.
“We gained market share in every category: Chocolate, non-chocolate, mint and gum.”
The Company expects 2013 net sales growth of 5-7%, including the impact of foreign currency exchange rates.
Net sales will be driven primarily by core brand volume growth, the U.S. launch of the Brookside product line in the food, drug and mass channels, plus Kit Kat mini’s, Twizzlers Bites, Jolly Rancher Bites and yet to be announced new products, he said.
“We anticipate adjusted earnings per share-diluted growth for the full year to be in the 10-12% range. This is greater than the previous estimate of an 8-10% increase.”
“In 2012 we opened one of the most technologically advanced chocolate manufacturing facilities in our hometown of Hershey, PA, initiated and completed construction of a new innovation center in Shanghai, successfully integrated the Brookside business and increased market share in key geographies as well as across all channels in our U.S. business.”
The best known aerated milk chocolate bars are Nestlé’s Aero bars and Cadbury’s (now Mondelez’s) Wispa bars, which both have loyal followings in the UK market.
Wispa, which was launched in the early 1980s, was relaunched in 2003 as Dairy Milk Bubbly, but re-introduced as Wispa in 2007 following a social media campaign calling for it to be brought back.
Aero, which has larger bubbles, was first developed in the UK in the 1930s by Rowntree's, which was acquired by Nestlé in 1988.