Hershey's Push Into High-End Chocolate Is Bittersweet

Hershey Co. (HSY) is dropping some newer lines of premium chocolate, but the company may have to find new ways to compete in the high-end candy business when the economy rebounds.

Hershey said Thursday that it will no longer be marketing the Starbucks Corp. (SBUX) brand of premium chocolate and is also winding down its high-end Cacao Reserve line. Sales of pricier chocolate have slowed as consumers have tightened their belts and retailers have been reluctant to give up shelf space to lower- performing products.

Before the recession began, Hershey's sales suffered because consumers had been turning toward pricier chocolates, an area that Hershey had been slow to get into. Privately held Mars Inc. and specialty chocolate brands gained share. That pushed Hershey to begin marketing more expensive chocolates. In mid-2007 it announced a pact with Starbucks to develop and market a premium line.

But that new line was badly timed because the economy started slowing soon after. Consumers slashed spending last year and early this year, turning away from most extravagances, including pricey chocolate. "The timing of the launch of the Starbucks proposition, frankly, we just missed the window," said Hershey Chief Executive David West during a Thursday conference call. "Our partner obviously had some other business challenges and the consumer at that price point wasn't sustainable."

A Starbucks spokesman, Alan Hilowitz, said the two companies made the decision mutually and it was part of Starbucks' effort to focus on its core businesses in supermarkets: packaged coffee, ready-to-drink coffee and ice cream.

For Hershey, the moves on the Starbucks line and the Cacao Reserve line probably made business sense since the company likely found the brands not profitable enough, said Chris Growe, an analyst at Stifel Nicolaus. The company didn't disclose sales on these brands.

Hershey said that for now it will focus on its existing Scharffen Berger and Dagoba lines to grow in the premium chocolate space. The company is also hoping to get consumers to trade up to its Bliss line of chocolates.

Still, these brands alone aren't likely to give Hershey a major role in the premium chocolate segment, which is likely to pick up steam again as consumer spending rebounds.

Growe thinks the super premium chocolate category will pick up with the economy, but is unlikely to reach the growth rates of two years ago. Still, he says, if the high-end category grows faster, Hershey "may not be able to fully participate in that given their current portfolio."

CEO West said Thursday that the company had "strategic work" underway to study the premium segment and its brands there. "While premium has slowed, we do believe it will have a role in the category in the years to come," he said. A Hershey spokesman declined further comment.

Meanwhile, the recession has been kind to the maker of the namesake Kisses and Twizzlers. Many of its brands are at the lower end of the price spectrum, helping earnings and sales, and even allowing the company to gain market share.

On Thursday, the company reported a 72% jump in second-quarter earnings from a year ago, beating Wall Street's view on rising sales. Earnings were $71.3 million, or 31 cents a share, up from $41.5 million, or 18 cents a share, a year ago.