Seasonal growth from Valentine’s Day and Easter, despite limited consumer spending, indicated candy and snacks are still an affordable luxury. While commodity costs, sugar and cocoa in particular, coupled with increased logistics and freight costs contributed to Hershey’s lower gross margin, which fell to 46.3% in the first quarter of 2023 compared to 46.7% in the first quarter of 2022.
However, the company was able to offset these higher inputs -- allowing it to improve its adjusted gross margin.
“Adjusted gross margin increased 80 basis points in the first quarter as price realization, volume growth, improved supply chain performance, and increased productivity offset higher commodity, wage and overhead costs. As a result of this Q1 strength, we now expect full year adjusted gross margin to expand 70 to 80 basis points,” explained Steve Voskuil, SVP and CFO.
SkinnyPop drives salty snacks segment with pretzels not too far behind
A closer look at the salty snacks segment saw net sales of $270 million, a 19.4% increase compared to same period LY. Most notably, SkinnyPop retail saw 23% growth, contributing to a 220-basis point share gain in RTD popcorn. The company also integrated Dot’s Pretzels, Inc., into the salty snacks division to be “one unified commercial and supply chain team.”
Last week, the company announced its acquisition of two facilities from Weaver Popcorn Manufacturing to expand its salty snacks capabilities. The purchase price was $164 million and the deal is expected to close in Q2. Weaver Popcorn, a co-manufacturer of SkinnyPop, is expected to “enable more flexibility, agility and resiliency” across salty snacks supply chain network, Michele Buck, CEO and chairman, explained.
Dot’s Pretzel saw a 25% retail gain in the quarter, with a share gain of 100 basis points in pretzel category. Buck explained the company will focus on “growing buy rates in existing markets while driving household penetration in opportunity areas like the Northeast.”
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Confectionery sees modest growth while mint and gum rebound after Omicron
The company is investing in promotions and media for summer, including retail displays for s'mores and Twizzlers and its new Reese’s Creamy & Crunchy promotion. The company reported overall advertising and related consumer spending increased by 9% in Q1.
The North American confectionery segment experienced modest net sales growth of $2.4 million in Q1, a 10.6% increase versus the same period last year. Candy, mint and gum retail sales rebound after Omicron, from 20 to 25% now ahead of pre-pandemic levels. Specifically retail sales in multi-outlet and convenience store channels saw an increase of 12.3% due to sustained consumer demand despite higher marketplace prices.
The company expanded its presence in non-chocolate candy, namely gummy candy. Most notably, Q1 sales saw 19% growth for Twizzlers and over 15% growth for Jolly Rancher brands.
New facility constructions and ERP platforms to expand commercial capabilities
The company reported investing in more commercial capabilities to enhance planning and analytics across the organization with its retail partners.
In addition to the Weaver acquisition, Hershey continues to expand its supply chain with its new construction on chocolate production facility in Hershey, Pa. On track to increase production capacity by 5% over the course of the year. The facility includes installation and start-up of three new Reese lines and a new Hershey line.
Other expansion projects, Voskuil explained, include capital additions like software and the salty snacks ERP platform, with $176 million spent in Q1.
“These capacity, capability and talent investments are critical for us to sustain our differentiated performance for years to come,” Buck concluded.