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May 30, 2013

BRICs and beyond: Hershey wisely goes local in China

Hershey, long criticised for the slow speed with which it entered faster-growing confectionery markets, has seen sales jump in China in recent years on the back of its homegrown chocolate brands. However, chocolate is not China's largest confectionery sector and competition is fierce. Hershey has wisely launched a candy brand targeted at Chinese consumers. Candy is crowded, too, but as, Dean Best writes, the move demonstrates the company knows products tailored to local needs could help it gain ground faster.

By Dean Best

Hershey, long criticised for the slow speed with which it entered faster-growing confectionery markets, has seen sales jump in China in recent years on the back of its homegrown chocolate brands. However, chocolate is not China’s largest confectionery sector and competition is fierce. Hershey has wisely launched a candy brand targeted at Chinese consumers. Candy is crowded, too, but as, Dean Best writes, the move demonstrates the company knows products tailored to local needs could help it gain ground faster.

Hershey has been behind its international competitors in expanding into the world’s faster-growing confectionery markets. And, for some, for all the US group’s recent efforts in investing in markets from Mexico to China, there is the feeling the Reese’s maker is still struggling to keep pace with the leading pack.

However, Hershey’s latest moves in China – the opening of an R&D centre in Shanghai and, notably, the launch of its first-ever overseas brand in the country demonstrates how serious it is about its business in select international markets – and how the historically US-centric company is adapting its strategy to meet local consumer demand.

Hershey is not a newcomer to China’s confectionery market. It first entered the country in 1995. Hershey failed to make any significant inroads in China in its first decade there but, in recent years, sales in the country have leapt as the company upped its level of investment in the market.  And in the last three to five years, the language Hershey has used about China has demonstrated its determination to carve out a position the market – and its confidence in its prospects. Hershey’s management has recently spoken about the “big bet” it was placing on China and about how, by 2018, the country could be its second-biggest market. Hershey has poured money into distribution and marketing, with advertising campaigns behind its namesake chocolate and its Kisses brand. Between 2007 and 2012, Hershey’s sales in China jumped at a compound annual growth rate of 84%, driven, it says, by Kisses.

However, tapping into local needs is key to building a significant and lasting business in overseas markets. And Hershey’s two announcements last week show the company is working on developing products to meet demand in China. “Our innovation centre will enable us to translate our insights and knowledge of consumer tastes and preferences into relevant products,” Michael Wege, Hershey’s chief growth and marketing officer, said after the Shanghai site was opened.

Hershey has already developed a product it believes is tailored to Chinese consumers. The team in place at the Shanghai centre worked at Hershey’s R&D site in its home town in the US to come up with Lancaster milk candies, which will be launched in three Chinese cities next month. Until now, Hershey’s portfolio of products on sale in China included Ice Breakers mints but focused largely on chocolate, a category is not the largest in the country’s confectionery market. That spot goes to candy.

The launch of Lancaster has been welcomed by industry experts in China. “I think launching a milk candy brand makes sense from a number of perspectives,” Torsten Stocker, partner at Monitor Deloitte’s Greater China office, says. Despite chocolate’s strong growth in the past few years, it is still a relatively new category to many consumers, with all the attendant educational challenges. The new product makes Hershey’s portfolio more attractive for retailers, allowing them to tell a broader story, and providing more front-of-store impulse products, alongside Ice Breakers mints.”

Hershey’s Lancaster will be up against some formidable brands in China’s candy segment. Bright Food’s White Rabbit brand is a strong local brand and Stocker also points to Perfetti van Melle’s Alpenliebe and Mars Inc’s Sugus candies. Success is not guaranteed with any new product, particularly in a competitive category. Stocker says Hershey will have to be prepared to support the launch strongly. “Introducing a new product is expensive in China, in terms of media and trade spend and launching a new brand is even more so,” he says.

Hershey insists Lancaster will stand apart from its competitors. The company says the product, which is made under licence by a local manufacturer, Zhongyi, uses a “slow roasting process” that gives the product “a rich and creamy taste that is premium for the milk candy segment”. Jane Xu, vice president and general manager for Hershey’s operations in Greater China, claims Lancaster “provides consumers with a milk candy experience that is unlike any other product available in the China market”. Marketing talk, perhaps, that Hershey will have to work hard to convince Chinese consumers has substance.

James Roy, senior analyst at China Market Research Group, says thinks Hershey is correct to target the premium segment of the candy category and believes if Lancaster can win over consumers, the launch could be a success. “The fact that the new product is a condensed-milk candy would seem at first to make it a competitor of White Rabbit, one of China’s oldest and most famous sweet brands, however Hershey’s is making the wise move to position itself in the premium segment, where there is more growth and Hershey’s can extend its brand,” Roy says. “The real test will be how Chinese consumers respond to the taste. If Hershey’s can deliver on its proposition of offering a product with both a high-quality feel that justifies the price premium and a taste that Chinese people like, then they really have something.”

There will always be those sceptical about whether Hershey can make up lost ground in markets like China. Countries like China, Mexico and Brazil have still-buoyant confectionery markets and there is growth there to be captured; however, competition is fierce and those into markets like China earlier are not resting on their laurels. China’s chocolate market is a case in point. It is a growing category but where, as Roy points out, there is “a lot of competition for shelf space”. And where Mars is said to account for 40-50% of the category.

Nevertheless, Hershey’s investment in recent years in China has given it a base upon which to build. Its recent sales growth in China has been rapid. Questions about profitability are answered with statements that Hershey is in “investment mode” in China, has “acceptable” gross margins there and the company is for now focused on market and category growth. Like in chocolate, competition in China’s candy sector is fierce but Hershey is wisel to branching into new categories with local products. And, with the development of the R&D centre in Shanghai, it is putting in place a framework for more new products in the market and elsewhere in Asia.

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