Hershey Pricing Spineometer: 5 of 5 Vertebrae
Hershey, a confectionery and snack company, had a strong Q2 2023. Revenue rose 4.9% to $2.5 billion and earnings before interest and taxes rose 23% to $561 million over the same period last year excluding impairments and amortization costs.
A review of Hershey July 27th earnings call and financial report provided insight regarding the importance of pricing on performance.
Pricing and price management were definitely on the minds of Michele Buck, CEO of Hershey, and Steve Voskuil, CFO of Hershey.
In recent years, Hershey has raised prices by 20%. Management has plans to further raise prices in the high single digits over the remainder of 2023 and the low single digits in 2024. Price increases have been used to offset inflation in the past. In the future, price increases are planned as profitability faces pressures due to rising cocoa and sugar commodity prices.
While in the recent past, Hershey experienced a low price elasticity of demand for their offerings (effectively inelastic), that is not the case today. Michele Buck stated, “Price elasticity increased slightly versus the first quarter.” Comments indicate that Hershey is experiencing near unit elasticity, where every increase in price comes at a cost of volume, in an industry known for rewarding high market shares. Hence further price increases, while likely necessary and appropriate, will be somewhat painful for Hershey.
Given this dynamic, what is Michele Buck doing to improve the likelihood of success?
One, she has been increasing advertising spending. It is well demonstrated in academic research that increases in brand advertising decrease price sensitivity, in contrast with increases in promotional advertising that also increases price sensitivity. Steve Voskuil stated, “Advertising and related consumer marketing increased approximately 15% in the second quarter, with robust investment across segments. Salty Snacks in particular saw a meaningful increase as we launched national campaigns across brands to drive velocity. We continue to expect double-digit increases in brand investment in the second half of the year.” Well done.
Two, she has shifted sales incentives from revenue and market share to one that is based on “sales activity based margins that enable a balance between sales and profitable sales” according to Michele Buck. Deal Quality Score based incentives, as described in my textbook and in a Wiglaf Pricing whitepaper, are a simple and clear way of accomplishing this goal. Experience demonstrates it can improve profits by up to 600 bp with zero loss in volume.
And three, she is building pricing capabilities within Hershey. Michele Buck stated: “We’ve been very focused on strategic revenue management and pack price architecture on both Confection and the Salty categories. I think a few years ago we talked about evolving our pricing approach from just list pricing to how we look more holistically at strategic pricing, and in these categories in particular it’s a big opportunity. We continue to focus there in Confection, and on Salty it’s certainly something that as we acquired these businesses was a real underdeveloped area of opportunity.”
These are three major initiatives to transforming a company’s price management and pricing culture. Given the size of Hershey, we would expect to see 20 to 100 professionals engaged in pricing, revenue management, or profit management. (Consumer packaged goods and food companies sometimes use these terms interchangeably.)
Research into the investment by Hershey in pricing yielded positive results. The number of professionals engaged in pricing is within industry benchmark expectations. Their rank ranged from manager to director; a vice president of pricing, or “Strategic Revenue Growth Management” as Hershey called the role, was not identified. Beyond Strategic Revenue Growth Management, pricing professionals worked in or with customer insights, analytics, and trade promotions. Overall, pricing appeared to be closely associated with strategy professionals at Hershey.
Given the importance and capability of pricing at Hershey as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of September ‘23.
Hershey Pricing Spineometer: 5 out of 5 Vertebrae.
HSY (The Hershey Company) fell from 239 the day prior to their earnings call to 229 one week later. FY 2022 revenue of $10.4 billion with a 22% operating margin and P/E ratio near 24.
For FY 2022, a 1% improvement in price would yield 8.0% improvement in operating profits holding all else constant at Hershey.