as I said, welcome.
We are so delighted that all of you took the time to take a day out of your very busy schedules to come here to what is the sweetest place on earth. So delighted to have you here. I want to set the stage a little bit. The primary purpose and real this space. There have been a lot of articles written.
And we thought it was really important, A, to share with you our knowledge and how we're thinking about that space, how it works, and hopefully, a little bit of education. I don't know, everybody may be in different spots in terms of their knowledge base. And then secondly and most importantly, what is it that we are doing to win in that space and really walk you through the key capabilities, the business model, etcetera, so that you have a really good understanding of that. However, while you're here, we will also take advantage of a little bit of a broader agenda. So first of all, I will do a little bit of a recap just to reground everybody and our strategic priorities.
Doug Stratton, who will take us through the digital commerce piece, which is a big chunk of our day. We then have Phil Stanley, our Chief Sales Officer here, and he'll walk you through our global customer innovation and insight center and talk you through a little bit how we work with customers here both to build our bricks and mortar business, but how we are also working with them to build the future relative to digital commerce. We'll then have a little bit of Q and A with Patricia and I because I figured that many of you may have just broader questions and it's a great opportunity for you guys to have the chance to ask us those. And then lastly, you'll have a manufacturing facilities in chocolate, our West Hershey plant that manufacturing facilities in chocolate, our West Hershey plant that we put a lot of investment in over the past several years. So I hope you find it a really informative and action packed day.
So let me start a little bit by re grounding you. March 1, a year ago, I talked to you about my vision for Hershey to be an innovative snacking powerhouse. And I focused you on these as the key strategies that we are employing to deliver that. First of all, we know the importance of top line growth. It is the gift that keeps on giving, in a very high gross margin business like ours, critically important, the best way for us to hit our profit is to have a very healthy top line and we're very focused on that.
Secondly, we need to constantly look at where we have our resources to ensure that we are getting the absolute best return and the highest commercial value for every use of resources. I think the days of setting resources and expecting they're going to be set for a while and then moving on are really gone. We've got to be much more fluid in this dynamic environment and we've done a lot of work to reallocate resources. And then lastly, one of the keys to winning in the marketplace is to have differentiated capabilities. How do we make sure we've got top notch capabilities that allow us to win?
So that's really our blueprint. Let me walk you through where I think we've made progress against that. Let me start with core CMG growth. If we look back at the past several years, we had set a goal to be a top quartile within our peer set relative to net sales growth. And we have pretty consistently been able to deliver that.
Maybe not every year, but almost every year we've hit that aspiration. We've also talked to
you about the fact that there
are certain areas we're pleased with where our growth is on core CMG. And also there are some areas that we need to continue to evolve to respond to this ever changing dynamic marketplace. And we're going to share some of those with you today in terms of the work that we are doing against digital commerce. As we look at portfolio evolution, I think that we have made some really nice strides in expanding our portfolio, leveraging a lot of lessons learned from our early day acquisitions into our most recent acquisitions like Barkfins and Amplify, where we are seeing very strong growth and very strong profitable growth. As we look at expanding margins, we did a lot of work and made the right tough decisions to get our international business to profitability.
And I think you've seen that in the numbers that we've shared, especially as we've gotten into this year, and we have line of sight to that 8% to 10% kind of margin perspective on the international business. We also did a lot of work to reduce our foundational cost structure to look at our SG and A and again to say is every dollar driving the maximum commercial value, where it is let's keep it there. But you know what, there were some places that we could make different decisions, and we did. And we shifted a significant number of dollars in order to be able to invest in that bottom bucket that you see, which is core capabilities. So the first core capability that I'd tell you we've made some significant investments in is when it comes to core capacity.
You know that there have been some times where we were capacity constrained and it really put a lid on what we were able to deliver in terms of servicing some of our consumers' desires and needs. I'm happy that we invested in a new Reiss line that came online earlier this year, and we really started getting the benefit of that closer into the Q2 and really Halloween season is when we got full benefit. We have a Kit Kat line coming online end of year into the beginning of next year. That will enable us to unlock some demand as well on that franchise. And then we've continued to see really strong growth on our icebreakers bottled gum business where we have a proprietary product.
We invested additional capacity about 2 years ago. And going forward, we'll be additional investing in additional capacity behind that business. So those have been great investments. And as Patricia always likes to say, there's no better investment than in core capacity capacity behind your core products because the margins on those things are great and there's a steady payback since steady growth. The other area that we've really prioritized for investment and you've heard us talk a lot about this is with ERP.
You know that we had an ERP system, a system that was about 20 years old and we really needed to update that. And one of our big focuses today is around ERP and digital transformation and specifically data, If I look at what's possible today with technology, with data, it's very different than what was possible many years ago. And I think there's a huge opportunity for us to continue to take our data technology to the next level. So we're really engaged in a company wide digital transformation. And the best way that I would explain that to you is, I would say that in the past IT was a little bit more of a backbone of But our vision going forward is that they're really at the backbone of how we run this business in a bigger way than they've ever been before because the capabilities exist for that to be true.
Our ERP system is really the central kind of spine or nervous cord system within that. And we've spent a lot of time acquiring and building the right data, the right data lakes. And then importantly also building and fostering a culture that is grounded in data technology because if you have all that, but you don't have people who are used to operating in an environment like that, the right folks to take us to the next level, it's really going to hold us back. So right now, we have a digital transformation and it is really focused on powering our entire organization. If you look at our ERP system, ERP system, we've made great progress in where we are in evolving and building our new system.
The financial kind of central finance reporting piece of our system level, at a much higher frequency level than we were ever able to get previously. And that really has just started happening over the past couple of months. So we're just starting to unlock the potential of how that gives us better insights and will enable us to make even better decisions. We have just completed building a trade promotion, a new trade promotion system that we believe gives us leading edge capabilities that again was powered by the work that we are doing in this area. And if I look at each functional area, there is an initiative or a project like that, that we are in the process of building that new commercial application to enable and take us to the next level and create competitive advantage.
As I mentioned earlier, our real focus today within that digital transformation, and we can talk more about the broader transformation at another later date, is going to be on digital commerce. If we think about the keys to success in winning in digital commerce, we believe that this wheel, and Doug is going to take you through this in much more detail, is a pretty simple framework to help understand what it takes to win. And the key thing I'd like you to focus on is there's a big piece of winning here that is us taking the core capabilities that have created advantage for us in the marketplace to date and being able to leverage and translate them into the digital world. So let me give you a couple of examples. You know that we spend a pretty high percent advertising as a percent of net sales.
We have very sophisticated marketing mix, media models that let us make very strong precise decisions around media, and we continue to see the return on investment in our media go up. Media is a key element to winning in this digital space. Winning in search is a key area. Having the right product placements and the knowledge that we have around media really enable us and can translate into this space. Think about customer partnerships and category management, something we have long been known for in a very strong way.
If you think about this space, many of those things are applicable. There is a shelf to be managed. It's not a physical shelf like you would see in the physical world, but it's a digital shelf of what you see when you look at the screen. There are decisions to be made about what are the right portfolios to grow both the customer business, the category and our own business. And a lot of those category management skills that we have, those customer relationships continue to be really relevant in the new digital space.
Think about click collect and the expertise that we have in merchandising where we've always partnered with retailers to reinvent front ends, to reinvent different areas of the store, to understand traffic patterns. Those come in very handy and are very relevant as you think about how we partner with retailers to continue to drive purchase relative to a click and collect type of purchase. So what we'll walk you through today a little bit is thinking through some of those capabilities that we have that are very translatable to this space. And we are absolutely focused on that. That's one of the beginning places of how we win.
Our consumer insights understanding consumers, understanding their shopper journey relevant to understanding the shopper journey in this space. If there's one slide out of my presentation that I could leave you with to be the most focused on, it would be this one. Because to me, this in a nutshell tells you how I believe we can win in this space. I talked to you on my previous slide about how we can leverage our competitively advantaged translatable capabilities. So that's one thing that we are doing that I think is a real leg up for us in this space.
The second piece is not only do we look at what can transfer, we also look and say, how can we think differently about this digital commerce space and what are some of the opportunities by thinking differently? So you can certainly go into the space and say, I need to just look at my current portfolio and figure out how do I sell those exact same things in the same quantities in the digital world. Or you can say, how do I sell those things, but how do I think differently about how the space in digital works? And what new opportunity does that create to have a unique portfolio where consumers are thinking differently. And one example I'll give you on that is think about when consumers buy online dog food or paper products or many other categories because they don't have to walk it into their house, they're buying larger quantities.
Where is there an opportunity for us? And you're going to see that with some of the products we'll show you to sell some larger quantities, get a higher basket ring. And that's an opportunity to think differently. We know in this space we need to win in search. Winning in search is everything.
And there are many different ways to win in search. And Doug will give you a great example of how we have done that. One thing we've heard retailers really ask for is retailers are really figuring out the digital commerce space. If you've seen it's really unfolded in the past 3 or 4 or 5 years, it's at an accelerated rate. So just as they've always wanted a partner for category captaincy in the physical world, they really are looking for someone to provide holistic captaincy.
Help me to figure out how I went across all channels of commerce, right? Whether it's home delivery, it's click and collect, it's bricks and mortar, how do you think holistically about Because the consumer shopper journey is not one of offline or online, it is interwoven. And so that's a place that we're very much focused. And then lastly, I know a lot of folks have said, can you make money in e commerce or is this a margin dilutive channel? And I'm happy to tell you that you would be surprised to know that our gross margins in this space are quite comparable to our overall gross margins.
I think that we have done a couple of things really well here. Number 1, we had the opportunity to be a category that didn't go first in digital, right? We all know some of the paper products, some of the others went first. And we've been able to learn, frankly, from how some players went into that space and perhaps got them into some issues where they weren't maximizing margin. And so, hey, I'm happy to take that learning as we've built as the food business is now expanding more broadly in this space.
We've taken advantage of really looking at those opportunities, I mentioned earlier, where purchase patterns are different and we can drive a higher average selling price. And you'll see that in some of the data that Doug will share with you. We're driving bigger baskets. We're doing a lot of the right smart things to get those margins and we are laser focused on margins. As you know, that is part of our business model.
We run a business that is about highly branded products, high gross margin, high investment back in the business. And that's the way the same way that we're thinking about this business. And therefore, if you combine leveraging those capabilities, building the right new capabilities and having an attractive financial business model, we believe that this commerce opportunity is a really important financial opportunity for us today and an even bigger one going forward. If you think about it, I would tell you while retail is evolving, consumers' desires for our brands and our products is still the same. It's just how we look at meeting them is different.
And one of the great analogies that I would give you that I think a lot about because it's one I've lived through recently. I've lived through many years ago when Big Box came into the market. But more recently about what 12 years ago or so when dollar stores were really not a big factor in the marketplace. Then they started to come into the marketplace. They were a little bit more of a closed out.
People sent closed out product there. Then they were focused more on general merchandise. They really weren't focused on food initially. And then they became focused on food. And what we had to think about was, okay, it's a different business model.
It's a different channel, different consumers. It all operates on the dollar price point. It's a whole different business model. And I liken digital commerce to that and that we're approaching it in a similar way saying, okay, who are the consumers? What are their needs?
What are the keys to make it a profitable business model for us? So there's going to be retail evolution. There always has been. If I go back 30 years ago, as I said, when Big Box came on, and what we always have to do is adapt to that. But no, our brands have endured and our brand desire is still there.
We will continue to focus on really leveraging the capabilities we have into this space, but then also building the right new ones. And we've created the right financial model, which makes it easy for us to then say, boy, we want to invest in this space with the right capabilities, the right talent to win. So with that, I am going to turn it over to Doug.
Thank you, Michelle.
And I wish I had the coolness factor that I didn't have to dress up in my job.
I actually took flak for this because I'm usually a bit flashier, but I didn't have it in me this morning. My wife said, you're doing a presentation from a bunch of analysts, so I'm sure that you're cool, but not too cool. So, good morning, everybody. My name is Doug Straton. I am the Chief Digital Commerce Officer of The Hershey Company.
Just as part of my remit, I run the day to day digital commerce P and L as well as the enterprise digital operations team and also digital transformation strategy. If you want a shorter version of what I've just said, I take care of everything that's related to digital with the exception of paid media and social, right. So prior to this, I worked for Unilever where I held 2 roles. So I was the Head of Global Digital Strategy and Innovation and also the Vice President of Digital E Commerce and Data for the North American business. So I both wrote the global strategy and then had to bring it to life from an operational perspective.
So I have good knowledge of both sides of that coin. And then I came into Unilever through acquisition actually. So I helped build, run and then sell a small startup to Unilever in 2,009. And prior to that, I had roles in sales and marketing and successive responsibilities at Bristol Myers, L'Oreal and Louis Vuitton. So a pretty interesting career.
Just one little thing here. I'm a little bit different. So I have a purpose in life. My purpose is to build bridges to mysterious islands. So let me just kind of yes, I did have to go through a corporate course to come up with that pithy one sentence statement.
But the reason it's important is what I like to do and what I'm really good at is I like to go into the places that other people kind of fear to tread, figure those places out and then bring organizations along with me. I do this or people in general, I do this both in my personal life and also in my corporate life. And it's kind of how I'm built and it's how I work. So when you can match that kind of purposeful mission with the right kind of role within a company, good things typically happen. So the next thing I wanted to talk about a little bit is why did I choose Hershey?
So there's a couple of reasons. So I think the first thing was, I think Hershey can win. And the reason I think Hershey can win in this space is what I found is that big, big companies when it comes to digital, they have a hard time kind of like moving that ship,
right? And then
you've got a lot of smaller upstarts that are a little bit more nimble, kind of nibbling around the edges. And Hershey to me was a company, after I explored a couple of options that had, I thought, the just the right size and scale to obviously be really meaningful in the marketplace, but not too big and that they couldn't move very quickly. Obviously, fantastic iconic brands, which is a big leg up. And then the other thing is purpose driven companies and working for a purpose driven company is really important to me. And obviously, there's a long legacy of purpose here at the company.
So that's kind of a magical mixture for me. The final piece is if you look at the technological platforms that Hershey had kind of set forth and some of the early work they've done, particularly in some things in and around digital media over the last couple of years and also social or earned media. It's really been fantastic. So actually upon my conversations with the broader executive team prior to coming on board, a lot of questions are like, what are the technological platforms that you have in place? Who are the types of people that you're hiring?
And I was really impressed actually a lot in a lot of cases with the technologies that we have on hand here are really what I would call gold plated, things that I would have died to have actually in my previous life were actually here. They just needed to be leveraged to their fullest extent. So here with a lot of confidence, we are going to spend quite a bit of time on the following topics. And I don't have a huge amount of time, and I want to make sure that we leave enough time for questions. So I'm just going to run through pretty quickly, and we're going to start with understanding what's going on in terms of the retail ecosystem.
So the first thing is there's a lot of noise out there around how big is this business going to be and you hear some really wild projections in my mind. But I think what we'll expect to see here in the U. S. Is we're going to see mid single digits over the next 5 years or so. If it's bigger than that, that's fine.
I think we're going to be well poised to take advantage of it from a capability and talent perspective. So if it scales faster, we'll be able to easily scale with it. But I think the thing to keep in mind here is that if you look at other markets that have been in the business a lot longer, and by that I really mean online grocery, they track in an interesting way. So the online penetration in Europe is about 5.6 percent. The global penetration by the way is 5.8 percent.
And if you look at Asia, it's around 7.3% to 7.4% and that's really driven at large extent by China. And a lot of these countries, particularly in Europe, started a lot earlier on than the U. S. So if you look in the UK in particular, which is kind of the leading edge European market, Tesco launched online grocery 18 years ago. So a big head start.
The other thing that we see when we look at other markets is that snacking penetration online tracks with about the overall, the differences are negligible. And so it's not something that when you're moving online, you're going to see a big huge impact to the business. And particularly in Europe, these two things are very, very important as you start to look at the U. S. Market.
So the first is, when Europe went in, those countries very much smaller, obviously, geographically, fewer population, and fewer retailers. So if you had a Tesco go in, for example, in the UK, all the other 4 big guys had to go in too. And that's part of the reason that accelerated. There was the competitive pressure to do so. And the densities were really great.
So if you look at the UK, again, the population density is about 60% of the folks are located in and around London. So if you want to do things like online grocery delivery or click and collect, it's fairly easy or relatively easy to do it in that kind of environment because you have what's called drop density, okay? And this is important as you think about the U. S. Market, where we depending on what category you're in is between 1% 2%, it's actually 0.9% to 1.9%, is that the real investment in this market did not really begin in terms of online grocery until about right here, okay?
So this is about 2015. This is where Kroger and Walmart started to really roll out their click and collect, so they finally got out of pilot. The last couple of months, you've seen a lot of announcements around Kroger investments in Ocado, Walmart rolling out delivery. So it's really sped up in the last 3 years. And this is important because a good portion of our portfolio is obviously relying on temperature.
And so what's really been solved over the last couple of years is the ability to either deliver or serve in some way from a digital perspective goods that need temperature control in some way, shape or form, okay? So there really wasn't the ability to speed up the growth in digital commerce for The Hershey Company until about this period. And so we're tracking right along where we need to track in terms of the evolution, But it's really dependent on what the retailers want to do as much as is on our own capabilities. Okay. Hopefully that's clear.
The what hasn't changed, the how and the where have. So the consumer wants, the consumer shops and the consumer buys. One constant is there is a shelf, there is a basket and there's a checkout, okay. But the behaviors and the trips and the pay points obviously have started to evolve. And when you look at the dynamics, fewer physical trips, fewer to flat, actually we're seeing nicer trends over the last half year or so in terms of traffic.
And then the necessary logic as well, if there's fewer trips, then you're going to have less ability to have impulse. But the thing is, is that you've got a lot of other opportunities. So the first thing is, is the last time I checked, I think the global penetration of smartphones is greater actually than the population of the planet. So there's literally billions of pay points that are literally in your pocket. So every retailer you can think of, their best assortment delivered and the ability to deliver those products to you in any way, shape or form that you want is literally in your pocket 24 hours a day.
So when you start thinking about what's happening from a checkout perspective, what's happening to those pay points, I want you to pull out your phone and think about what you do on a daily basis in regards to shopping, okay? The other thing is, as we talk about the physical trips like they're the only trips that are actually happening, but in fact, there's an equal amount of digital trips that are taking place and most of those precede the physical trips. We'll talk about that in a few minutes. Data and algorithms are our friend, okay. Price basket dynamics, you'll see some work around that in a few minutes.
Obviously, many, many more engagement points. And then the other big thing that is being unlocked for digital, particularly for the Hershey Company and a lot of the bigger retailers that we work with is metro areas, okay. So the ability to penetrate because you can actually deliver into those markets as opposed to having a large format store, which really obviously have not really taken place or evolved into the metro areas. Okay. So Michelle referenced this.
This is reality, okay? So we must play along the entire shopper journey. There is no online and there is no offline. If you think about these businesses as binary choices, then you've completely missed the point in regards to digital. So the fact of the matter is, is that it's a continuum across online and offline.
It's happening 24 hours a day, 7 days a week. Again, it really boils down to this thing in the laptops and tablets. Everything is connected all the time. You're really not ever not shopping. And once you kind of get your head around that, you can start to build out where are the best places I can touch my consumer and ring the most amount of return out of the journey and make sure that they purchase, okay?
So hopefully, this is clear. And specifically, we're going to talk a little bit about this spot right here. So in the past, what you had was people would go to the store, they would fill up their basket, they'd check it out and they'd go home. They did all the work themselves. And that was a great model.
But believe it or not, people were worried when that model was actually introduced, whether it was actually going to work. Obviously, it did. But now you've got at least 4 other big buckets of fulfillment that are largely controlled by the retailers, obviously, that can serve consumers. And those actually become opportunities, okay? And they become opportunities because of data.
So let's run through a little bit here and talk about our keys to success. We're going to go one level lower. So we start with the landscape and the consumer. Now we want to talk about why we have a right to win. So as Michelle said, we have leverageable, translatable capabilities to win in digital.
If you take a look here, what you have is Morning Consult, just rated us 1 of the country's most loved brands. We're actually tied for number 1 with Google. There's been some other work around millennials as well and we're in the top 10 there. So we resonate quite well as a brand with that demographic. We have deep, deep customer relationships.
I can tell you coming from my previous life, the Hershey teams were held in very high regard for both their analytical prowess and their executional ability. So obviously, we're ranked very highly amongst CPGs in that, number 5 from an Advantage survey. Advantage also recognizes us as number 1 in category management. By the way, this is being ranked by the retailers. Strengthen paid and earned media, I referenced that before.
But from an innovation standpoint, upon launch, we have the ability to generate 3,000,000,000 earned impressions. So what that means is people interacting with your brand in a social setting like Facebook or Twitter or whatever it might be. And then finally, we're important to our retailers. So our profitability amongst categories is among the highest. And so there's a real willingness and need for us to perform well in the individual retailers.
And so that's why combined with the other things that I just mentioned, they're so eager to partner with us. And we're winning. So if you look at our share year to date, 2 50 bps. Trips are increasing, online visits are greater than offline trips at this point. We'll talk about that in a minute.
Driving higher average selling price, what we see in the online world is 1.2x to 3.5x in terms of basket size depending on the model or on average selling price, sorry. Bigger baskets 1x to 3.5x are brick and mortar averages and we're maintaining our margin profile just a little bit below, and that's based on early estimates or early investments in terms of getting the capabilities up to speed. Rob, I see you looking.
I will show you.
Okay. So let's talk about the circle of life.
What
Let me run through the whole thing because most of your questions, I think, are going to be answered, and then you can hit me at the end, okay? Okay. So Michelle hit this a little bit, but I'm going to hear it in a little bit more detail. So the first most important piece in terms of digital commerce you need to think about is being found, okay? So this is our what we call our connections pillar.
This would include paid media, so TV, paid digital. But when we think about it in the digital commerce sense, what we typically think about is winning at search, okay? And whenever I say the word search here, what I want you guys to think about is the physical shelf, okay? So search is shelf. 2nd is content being brilliant, digital content.
Whenever I talk about digital content, I want you to think about the physical pack, the thing that you would actually pull off that shelf and interact with. The 4th is convert. So this is about being on the list. For Rob, this will speak a little bit to how do you get those back in sizes and average selling prices higher. Because what we can do is we can take what's imperfect in a human concept and just make the work being done for us by the actual retailers themselves in terms of building up lists that you shop from over and over and over as opposed to just trying to hit a met impulse, okay?
And then the 4th is community, which is about CRM. So CRM is consumer relationship management. This is actually us having a direct relationship with the consumer, not necessarily superseding the relationship that the retailers have with that consumer, but adding to that and making sure that we can communicate to them and then listen to them and give them what they want in the way they want. This is all grounded in the middle, of course, by the consumer, which is the most important piece. If you understand the consumer, you understand the journey across online and offline, that sine wave that we talked about, and you understand the missions, then you have the ability to ring the most out of the business.
Okay. So we're going to start with consumer. I'm going to spend a minute here and just really underline how important this is. So if you understand the mission that, that shopper is on, whether it's a fill in trip or whether it's a basket full basket trip, And then you understand how you can fulfill that mission through the different models in e commerce or digital commerce as we like to call it. And then you match that with the appropriate portfolio, then you can get a good financial model, all right?
So let's just talk about this a little bit. So the big thing is shoppers have options, okay, beyond just filling up their own carts. And if you take a look at this, we break them down like this. So mission, the primary mission wouldn't be the only mission for these models, but the primary would be deal hunting and family snacking refill. Examples of this would be Amazon, Staples, the traditional walmart.com, not the grocery piece, but walmart.com, traditional, target.com.
Those will all be shipped to home models as well as what we would call 3rd party marketplaces, which is when you're buying through an Amazon, but not necessarily buying from them, okay? And the thing here is that large bags, which you can see a giant version over there, multi packs of single serve bars as well as our take home really, really work. So the key thing here is If you take a look at this, what we can do in this model is instead of selling them 1 single candy bar and maybe they buy that candy bar 3 or 4 times a year on average is that we sell them a pack, okay? And we'll get into this a little bit differently. But when you have a pack in your house, in your pantry, you're going to gobble it up because it's there, okay?
So you're moving from a single serve type environment into an environment where you can sell them the pack, you get that pack in their pantry, they're going to eat more. Okay. It's an expand And this is how yes,
that's correct. In post consumption.
Not for the same product.
Right. So if you think about it, if you have trouble believing that people are going to put a single bar of chocolate into a basket, you're probably right. And you can do that in certain models. It will work for certain models, but in other models, it won't. So we don't concentrate on it.
So what we typically do is we're upselling you, okay? So if you go to the next model, you've got family snacking refill, family snacking refill. It's actually 2 models, grocery delivery, grocery pickup. The beauty with these is that whether it's delivery in some cases delivery can happen where the inventory for the delivery is coming from either the store itself or what they would call a wear room in the back. And those assortments basically match the actual physical store, okay?
So you're basically pulling from the same assortment. And because the basket sizes are so much bigger, in this model, you're talking 3, 4 items depending on the model. Some items can get some models can be 20 30 votes to save 3 or 4 items. We're in a situation here where the baskets are 35 to 55 items. They're full basket shops.
And so because they're pulling that many items and they're pulling out the assortment, you can just use your regular assortment. There's not really much you have to do from a portfolio perspective. And in fact, the retailers wouldn't want you to do that because they're pulling from their stores, right? You'd be creating complexity that they don't need. So anything that we basically sell in our national portfolio can work in those models.
Now the other one is sudden craving. So there is now models in place. Amazon Prime Now is a good example. I'm highlighting GoPuff here. These are items that are found in C store.
These are instant consumable items. If you guys are not familiar with this model, this is basically an app based impulse convenience retailer and you go in, you tap what you want. They have a very limited assortment just like a C store would and they deliver it to you within 30 minutes. They're really big on college campuses. It's called GoPuff.
Their average order size is around $40 to $45 and their highest traffic period is around between midnight and 2 a. M, if that gives you a sense for who their target market has been thus far. Okay. And then the final piece is special purpose, D2C. So this would be Hershey themselves selling products.
And what we focus on here is unique propositions and differentiated portfolio. This is more around occasions, gifting, that type of thing. This is not a situation where we want to compete with our retailers, but there are people that love our brands, want to interact with our brands and buy our brands in a different setting. And in this case, we would do is we would service them through D2C models. Okay.
So this is where the basket average price and basket come into play. So over here, there's a sweet spot for selling in these models. And what we do is we build a portfolio to hit that sweet spot. That's what you see is the average price is 3.5% what our national average would be and why our average basket follows in line with that, okay? It's playing to the strength of the model and the mission that I described previously, okay?
In terms of delivery and pickup, it's 1.21.2. The reason this happens in large part is through algorithms, okay? So most people shopping, I think the last stat that I heard was about 38% of people actually write a physical shopping list. And the rest, maybe they do a little bit of digital, but a lot of people just kind of like they know what they want and they go in. The beauty with digital is that your purchase history and your loyalty card history is all captured and then the retailers are going to serve that up to you.
And then you just buy from your previous list, okay? And when you do that, that behavior is like in a lot of cases, it just makes it really, really easy to buy what you bought before. You just click the button and you're done, okay? And that's why what you get is these effects of it's moving it from an impulse consumption right at the checkout to impulsive consumption in the pantry with larger pack sizes. Okay.
GoPuff falls right in line with our national averages because essentially it mimics C store. And obviously in D2C, it's a very, very different proposition. And so therefore, the basket sizes and average price are much different. Okay. And here's the interesting thing is retailers are fielding multiple models.
So here's a take home example. This is actually Target, but they have store availability, order pickup and delivery, all accessible through their app. So when you look at those different models that I presented with you, Amazon is playing across all those models. Walmart is now playing across all of those models for the most part, Target, etcetera, etcetera. That's what you're going to see is everybody's going to play across those different models in different ways.
Now they're going to focus their efforts on certain models that are most economically feasible, but everybody's going to play, okay, because they want to keep people in their walled gardens, their ecosystems, not somebody else's. So let's talk about connections. So I mentioned search is the shelf. So when we think about the actual physical shelf, eye level, what we call the strike zone at Hershey, is the most important piece, okay? So if you're an item and you want to get the most kind of offtake from the shelves, being at eye level is really, really key.
And when you think about this, you need to think about it from a device perspective as the first page of search, okay? Quick joke here. It's a nerd joke, but I'm going to give it to you anyway. What's the best place to hide a dead body? The 2nd page of search results, okay?
So every nerd that does this type of work knows that. So this is really, really key. I told you to
get a
laugh. And then here's the key thing. Hershey has deep expertise. They have category captaincy or advisorships with most of our major retailers. And so what we're pushing is you think about the science of the shelf in the physical world of which we are acknowledged experts ranked number 1 by the Advantage survey, which is a ranking done by our retailers.
And then we also have the digital prowess to start to connect the environment, that retail ecosystem between the digital and the physical. That is a new capability. There's not many people talking about it. We've actually stood up a team that's going to be driving this for us over the next couple of years. And here's an example.
This is first of all, the one thing that might be interesting to all of you is that the 2nd most popular keyword in terms of a grocery shop is actually chocolate, okay? So and that's good for us. This we pulled about a week, week and a half ago. It's a decomposition of a search page. But up top here, what you have is you have a paid display ad for Hershey products, and we're seeding these Halloween products up at the top of which you can see, the big bag over there as well as the variety pack.
This is what we would call a paid search placement. So we want to make sure that Hershey bar, which is an instant consumable format, but is actually a 36 count, is we're making sure that that's at eye level. And then down here is what we would call organic search results. These are the search results that come from having your content really great, which we'll talk about in a minute, but also what people are searching for, clicking on and then buying. All those things get put into a math formula and the better you are at kind of manipulating that math formula, the mostly through sales drives you to the top of search results.
So when I pulled this and everybody it would be different for everybody and it's going to be different on different days, but 6 of the 9 top organic search results were Hershey, okay? And we basically have a playbook around this. So I wanted to give an example of this Hershey variety pack. So this is an e commerce only pack that we've developed. If you take a look in here, it's all instant consumable items, again.
And it's a variety pack and it's delicious. All right. So you can take a look at that. And what we do is we were just launching that and we needed to get traction. We needed to get that on the first page.
We needed to get it at eye level in terms of search results. So prior to a big high traffic event on a retailer, product was not faring so well. This isn't broader grocery and gourmet food. It was ranked 4,893. During the event, because of some of the tactics that I showed you on the previous page, we moved it up to number 20.
In terms of the gourmet and grocery and then also post event, it was ranked number 1 in 3 of the subcategories. So chocolate being one of them. I think chocolate and fudge and peanut butter were the other 2 where we actually if you were searching within those kind of like sub segments of grocery, it was the number one result, okay? So it was at eye level. You were basically in the candy aisle and it was there, Does that make sense?
Great. Okay. Let's move on to content. So content is really key to search. I'm not going to go into the deep, dark secrets around here.
You're going to have to trust me a little bit. But the thing that I want to land here is that these digital shelves and the visits to these digital shelves precede the physical shelves. If you talk to Walmart, if you talk to Target, if you talk to any of the big retailers, any of the retailers period that are getting deep into digital, what they will say to you is that digital is the front door to their store. Stats, but one big retailer, I believe 50% of the people that visit one of their digital properties, their next step is visiting the store. And while in store, 58% of the people are actually using a device to shop both the digital shelf for that retailer while being in the environment of the physical.
So these things are emerging and it makes sense to plan them that way. And then the other thing is, as you can see, here's the shelf space, a lot of competition, there's the product page. Making sure that this environment matches this environment is really, really, really key. Visually, that's been a challenge, I think, for CPGs, as they don't necessarily think about the fact that digital actually comes first before the physical. We'll get into a little bit more about that in a minute.
Okay. Again, content is the equivalent of packaging. This is like you're in front of the shelf, okay, and you pick up the product and you put it in your hand and you're interacting with it. So what we talk about in digital is we talk about from foot stopping to thumb stopping. So when we think about merchandising in a physical world, what we do is we're like, okay, you're in front of the shelf or rather something catches your eye, you're in front of the shelf, person picks up your products, they interact with it.
So for us, it's a little bit different because you're on a smaller screen. So we think about thumb stopping visuals, visuals that demonstrate what exactly this pack is. And as you can tell, it's very, very clear what this pack contains and how many pieces it contains. As opposed to say something like this, which is a really bad example on purpose, but you would be surprised at how poor a lot of the imagery is online. Sometimes you can't tell how big the things are, how many products are in there, etcetera, etcetera.
So we seek to simplify that. And the way we think about it is the packaging needs to be seen on a 5 inches screen, but it also needs to be able to be easily identifiable in the same way from about 20 feet. So I'm guessing most of you are between 20 30 feet from this pack right here. And if Melissa picked it up and showed it to you, you could say, I know that that pack is exactly what I'm seeing on the screen, okay? So we're starting to think about what's the digital impact to what happens with folks when they visit in the physical sense.
So I just want to deconstruct. When you pick up a product off a physical shelf, you might look at it, you turn it around, you might look at the ingredient decks, you might whatever you're going to do when you pick that product off the shelf. But in this case, what you have is more information as you start to swipe on what exactly the format is of the product itself within the pack. So subscribe now, getting them on the list, okay. We want them to buy this thing over and over again.
We don't just want them to buy it once. Different occasions in terms of usage, ratings and reviews, always ready to party again, occasions. And then we talk about one of the biggest purchase barriers, which is summer ship, okay? So we offer cold ship on this item so that the product arrives at the consumer's doorstep in the best possible way, okay? Conversion, this is where it gets fun.
We're imperfect, okay? Humans are imperfect, but machines are less so, okay, if programmed correctly. So purchase history is a gift that keeps giving. So whether you've bought through your credit card or through your loyalty card, all of those purchases at the major retailers or any retailer really is stored somewhere and they can use that to prepopulate a list for you online, okay? So when you make your first online shop, if the retailers are doing their job correctly, you basically can make that a very, very quick trip.
You just take a look at what you've purchased before and you basically click yes and it goes into your basket. And the interesting thing is that people continue to search. So your add to baskets, particularly in an online grocery environment, about 75% of your add to baskets happen either from pre purchasing from the list or through search, okay? So it's a really interesting dynamic. And then the balance happened through paid ads and a couple of other techniques, okay?
But most of it's coming from that previous list and from search. For us, if you think about it, purchase online or offline, it doesn't matter because the computer is going to capture everything. Algorithm adds it to your purchase. Shopper purchases from the previous list. The shopper repurchases it, obviously.
And then the thing is, is if we focus on getting this into the basket and getting this to buy this once and then recommending it over and over and over again, then what you're doing is you're putting a 30 pack in their pantry as opposed to them maybe buying 1 bar at checkout, okay? Here's a couple of tactical things. You've seen this, I'm sure, in your own lives in some way, shape or form. This is just reorder reminder, hey, you haven't ordered this thing in a while. Use up rates about 4 weeks and we think you should buy some more.
So they're going to remind you of the product. Subscriptions, if you like this, your family enjoys it on a regular basis, put it on the list, keep it on the list and we'll just send it to you automatically. You don't even have to think about it. And then the one that we just spent the most time in is shopping from your list. So here's what you bought previously, click on it, it'll go into the basket.
And then the beauty about this is that sometimes, well, not sometimes, but at the retailers that have enabled it, you have what's called a recipe or basket to recipe and recipe to basket. So it might say, hey, you've got 3 of the 4 items that you need to create a wonderful Hershey chocolate cake. Just add this item of Hershey's and you can bake that cake for your family. So it's pretty cool functionality that most I think most of you have encountered in some way, shape or form, but this is how it brings it to life in terms of our category online. So we talked about this a little bit.
Impulse consumption is an opportunity. So we want to go from you pick up 1 bar and maybe you eat it on the way home to we're going to send you this 30 pack and then it's an expandable consumption category. I last night said I was only going to have 2 of the 4 little sticks of my Kit Kat. It's dark chocolate Kit Kat, it's my favorite. Of course, I ate all 4.
And then my wife yelled at me and she went and got her own. So it is one of those things where if it's in the house, it's in the pantry, it's going to get eaten and that's a good thing for us, okay? But just to be really, really clear, we're not ignoring impulse. But the key thing is you can't think of impulse in an online way the way you think about it in the store. So people are like, what's the analogy for the checkout in a digital world?
And I would say to that, it's nonsense because the behaviors are different. So you still need to interrupt, but you need to interrupt in a way that simplifies things or it's not so kind of in your face, okay? So we do have things in checkout line. So if you're ordering your if you've ordered through Click and Collect and you're driving to the store during your time slot, the retailer or the brand can message you and say, hey, you're picking up your order. Do you want to add a Reese's or a Kit Kat or a Hershey bar to the order?
And a lot of times you'd be surprised. We're testing these things out. That works, okay? The other thing that you need to know about Click and Collect is a lot of people after they pick up their groceries, they actually run inside. It's between 40% 70% depending on the retailer to pick up additional items that are unplanned.
So you have another opportunity to interact with them from an impulse perspective. Post order add on, this is like, hey, did you forget this? And again, this won't work for every single model, but it will work for some models where you can get 1 or 2 of the individual items. Make the minimum, add a bag of chocolate, add a variety pack or whatever to get you up to your free shipping threshold. This is also a really good tactic.
And then we talked about auto add to recipe, okay? So we're adding additional items to your basket so you can complete a recipe and bring joy to your family. Really quick, impulse focused digital convenience stores. So GoPuff is a convenience store through an app. And as you go into the app, this is literally the landing page.
So you got drinks, pints, munchies, you click on munchies, you get the scroll bar on the top here. 1 of the picks from a category perspective is chocolate and you can see Hershey absolutely dominates that page. And we also play obviously in broader snacking with SkinnyPop under a popcorn heading, okay. So that's literally a convenience store on an app, okay? One thing I didn't mention is that convenience as a sector has not yet started to invest like groceries started to invest.
So a lot of PR noise around what's going on in terms of convenience, but they are yet to go in and so that'll be another growth driver for us particularly in Instant Consumables. Okay. And then just magnifying seasonal opportunities. This kind of brings that ecosystem to life. So you've got app, desktop and in store.
It's just to show you actually that we tie these things together. So when the shopper is shopping, whether it's on their phone or when they're in store, they know what they can expect and the visual cues are there for like, okay, that's what I wanted, that's on my list, right? This also gives us the ability through digital to cross shop related adjacent categories. So for example, through digital, it's very easy to say, hey, if you buy this costume, don't forget your candy or if you're buying candy, don't forget a costume, etcetera, etcetera, etcetera. So digital gives you some additional opportunities that you didn't have before.
Finally, in terms of convert, drop ship. So this is important. Up until about a year ago, basically what would happen is your summers would go dark for one portion of our portfolio, okay, and that impact on sales obviously. And so we've solved for that and it's a fully scalable capability that we have. It unlocks summer.
In the non summer months, you don't necessarily have to add the chill packs, but we still have the capability. This gives us the ability to if you've got inventory issues, some of the retailers that you're working with, you can fill in very easily and seamlessly, so the consumer gets the best possible experience. And then obviously, this enables more scale in our direct to consumer efforts. Okay. We're going to move briskly through this and then we'll talk about how all of this kind of comes together.
So building relationships through data acquisition. So over the past couple of years, I would say from a direct to consumer model perspective and some of the online only players, data acquisition and developing relationships with people is really the lifeblood of the businesses. And I think CPG in general was a little bit slow to adopt. It really started in beauty first about 10 years ago and it's been slowly migrating into categories as they evolve and they start to migrate online. So from this standpoint, we think we can really, really win.
So we have, number 1, iconic brands. We have the ability to touch people in the physical sense through our chocolate world and Hershey experience, retail outlets and a number of other options to collect data. We get fairly robust traffic to our owned websites. A lot of that is driven by recipe. And so as we're bringing this information in and we're interacting with these consumers, we're just going to ask a few questions and fill in these profiles so that we can understand who's interacting with us and then we can use that data to either make much more efficient media buys or to directly communicate with those folks to drive them either in store or online purchase our goods, okay?
So again, targeting, personalized messaging, deeper insights around these folks all enabled through digital, You get ever smarter campaigns, you get sales lift and you get ROI, okay? It's a very detailed subject, so let me bring it to life with a simple example. If we collect this data in a robust way, we can make sure that we know who you are or someone like you has had a previous interaction with the Reese brand, okay? And we can serve you an ad and say, hey, this Reese's peanut butter cup is only 1.47 miles away. If you want to find some, just click and it gives you a map as to where the product is and can be found.
I'm not so sure. Let me learn more. And then we have the ability to actually send them into a digital commerce environment where they can pick their Reese's and buy it, okay? So as you go down that funnel, obviously, interesting things happen, but it just shows to show you we can in the moment of your crave, we can actually serve a message that's bespoke just to you. And over time, what we'll be able to do is actually personalize that content very specifically to you.
Okay. I'm going to take a pause and a little drink, because I feel like I'm talking extremely fast. Is everybody getting all this? He's writing down every word. Every word.
Every word. Okay. So the first thing I really, really want to land is that our fundamentals in place. So we have both a broader enterprise digital framework, which you saw, that's the wheel. And then within the wheel, how we express it through digital commerce specifically, which I just spent the last 20 minutes or so going through.
A full enterprise approach around digital transformation. So we do not think of digital commerce as an end of value chain function that kind of receives everything from everybody in the organization and then recreates things and goes to market. We are literally changing the way Hershey does business. So from process change at the R and D and innovation level all the way through down through sales and marketing, we're making the fine tune tweaks that we need to be to basically make everything that we do digital. Does that make sense?
So it just it basically just drops out the outputs at the end of the value chain in a way that you can go to market very quickly whether through your marketing efforts or your sales efforts in a holistic digital way. The other thing, the technology stack here is actually fantastic. We're doing a lot more work in terms of making sure that the individual
platforms talk to each other
a little bit better. And then we also want to make sure that they talk to our in in an easy way. And again, it's all in service of driving the sale. And then we have a fit to compete structure and really good talent. So you take the fundamentals and then you think about what are we going to magnify.
So the intense focus on snacking and snack faction, our customer relationships, obviously our category management capability, our strength in media and then our early lead in data and data science. So that was another nice thing upon coming here as we actually have a lot of the stuff in place where a lot of companies are still really working on it and talking about it. Okay. The team. So again, our team is not downstream, which I just mentioned.
So we have a cross functional business unit, that runs the day to day digital commerce business. Both the business with the customers, which are what we would call pure play, they're solely focused digital commerce players, but also interacting with our broader sales teams with Phil. We have enterprise digital operations. We'll talk a little bit about what that enables. But that's essentially taking all the core digital marketing capabilities that we have, and running them in the best possible way for the organization.
And then the last piece, obviously, that Michelle referred to, digital transformation and best looking at different roles, redefining them, making sure that everything's focused to the consumer and is fit to compete in a new world. And the team I think that we put together is really impressive. So Google, Microsoft, Unilever, Amazon, QVC, P and G, Accenture and obviously Hershey. What we're trying to do is balance these outside perspectives with internal. So it's about a fifty-fifty mix.
The Hershey folks have the deep expertise in the category. They know how to network the system and the folks from the other teams are being used for their individual kind of subject matter expertise. So it's a good model that I've used before and we're already seeing great results there. And then don't believe me, believe what the external benchmarks say. So we're really performing.
So this is L2. If you're not familiar with L2, they were just purchased by Gartner. The guy that founded is a guy named Scott Galloway. He's a professor of marketing from NYU Stern. Some of you are nodding your heads, so you probably know who he is.
He just published a book called Before, which is on the New York Times Best Seller list. And this is his consulting group. And what they do is across basically those 5 Cs, they measure 12 50 attributes. And this is specifically for food. And you can see that, we're outperforming just about everybody except for Mills here.
And you've got Reiss up here nearing the Genius level. So we've got a playbook for how to be great in digital. We focus obviously in on our biggest most iconic brand and what you'll see over the next 6 months to a year is all boats will rise as we start to run through a lot of what I shared with you brand by brand by brand. Okay. Fundamental structure and theme.
Now we're going to talk about the growth, okay. So the most important thing obviously is we want to get growth out of this and profit. And I just wanted to pause. This is a busy slide, but an important one, okay? So we talked about the retail ecosystems and being able to interact with consumers in a real fundamental way and then being able to sell to them and make money.
So if you think about what we've just discussed, I talked about price pack architecture, making sure that we get that right by model, optimized retailer brand and D2C websites. This is really about the content, making sure that we understand all the individual models and can be profitable within them, data and CRM driving efficient dynamic media, having the ability to deliver messaging to any device and still make it coherent. Large scale content management, which we're going to be standing up over the next year. We didn't talk too much about the management piece of content, but it is fundamental to be successful in the Real strength in social media strength and obviously we've got scalable logistics. The big pieces is around that 5 C wheel.
We've got 27 KPIs that we're tracking across those 5Cs that allow us to know whether or not we're doing a good job or a bad job. So across an entire ecosystem, So accelerators for us, holistic captaincy and media optimization, dynamic and modular content ecosystem. I don't expect you to know what that means, but it's important. Robust data acquisition, application analytics, full digital measurement and performance tracking and then a fit to win organization. So you get those accelerators combined with the investments that retailers are making and real magic will come out of that.
So we think we are well poised because of those factors. And to hit, we talked about our brands being loved, the relationships, the category expertise, the strength in broader digital and paid and earned and then the profitability piece, and the fact that we're very demonstrably winning in the space, particularly over the last 9 months, I think we're on a really good trajectory. So with that, I'm going to pause, take a sip of water and then I'll field any questions you might have.
Doug, you threw a lot at us, a lot of really interesting stuff. What if you had to point you're very familiar with the competition, it seems to me, not just within food, but outside of it. When you look at this organization, where are the 1 or 2 areas you think you're most winning or where you're winning relative to peers or will win relative to peers across this digital ecosystem?
Yes. So I think at a very high level, you think about I mentioned it, I think, 3 or 4 times, the 3 year track record of ever improving ROIs in broader media and particularly within digital media, which we actually over indexed in our spend on digital because we've proven that it's very, very effective. You're going to continue to see that be a strength of ours. And particularly as we have the ability to ramp up data acquisition, you can see CPMs and cost of acquisition fall when you get sharper and sharper with data. So we think we can continue to bring more ROI out of those broader media investments through data.
I do think in terms of how we're approaching search holistically. So I own search for the organization and we didn't talk really about a couple of interesting facts around search. So the first is, when people search for products, 76% of the time they start at a retailer. They don't start on Google, okay? And so getting retailer search and therefore being really sharp about holistic captaincy, which nobody's really doing is fundamental.
So I think that is
to be
a key area. And then I think the final piece is, as near as I can tell, if you take a look at the different companies within broader CPG, everybody's structured a little bit differently and some I would rank as less effective or more effective. I went through many permutations in my previous life, probably 3 evolutions before we kind of landed on a model that really works. And it really what it comes down to is the entire organization has to be digital. It can't just be this one team of subject matter experts.
So to the degree that we can influence Hershey through our best practice that we're creating that will be an advantage. And I'm really encouraged. I'll just be completely honest with you. I've done more here in 9 months than it maybe in 2, 2.5 years in my previous life because it's easier to navigate. There's the single category focus.
People want to transform. People are very open to it. It's not something where like walls are being built that you have to kind of crash through. So I think that ultimately that would be a big advantage to us as well. Does that answer your question?
It does.
Okay.
Rob. And then we'll go to the other Rob, and then we'll go to the other side of the room.
Thanks. Just a couple of stats that I was curious about. Like one was, I think you said that when consumers go through the Walmart kind of click and collect path that the dollar size could be 1.2 times the normal dollar size. I think from your own marketing materials, at least the one I saw at the candy show, I think it says that consumers 25% of the time that they're using click and collect reduce their impulse purchases and that's from your own marketing materials. So maybe you can help
me reconcile those 2. Yes, sure. When people go through click and
collect, do they buy 2x, times? Then I'll have a follow-up.
Yes, yes. So the context around that research is number 1, it was self reported behavior. It was not necessarily based on data. And so there's a Which one, the 1.2 or the 20? The 25.
Okay. Okay. The 1.2, that we're getting that data. All those basket sizes that you saw on the average selling prices, that is direct retailer data. That is not something that we're triangulating.
We are using data that we are being given and then obviously doing the analytics on it to see where we stand versus our national averages. So that is solid data. And just to be really, really clear, that is not peculiar data. So my experience 7, 8 years ago in talking to retailers in the U. K.
Was basket sizes for online grocery were bigger than the physical. And folks that were shopping the entire ecosystem had a larger lifetime value than folks that either shopped in either or or, okay? And you can ask any of the retailers here, all the big guys in mass, all of drug, anybody that's being really, really serious, and they will tell you that if they can get those people in the ecosystem, the lifetime value goes up and the basket sizes go up. So that is solid information. Now to the 25%, that was contextual.
So that the piece that you're referring to is the power of search in the retail world. And that was really geared towards retailers. And that was kind of a push to say, we can't ignore this space. Here's a possible outcome, but it's self reported behavior. What it doesn't show you is that within the same research, there was almost an equivalent amount of people that said they would buy more.
And the fact of this is that algorithmically, what ends up happening is you can mitigate anything that would be a potential loss. And if you look at other research, you'll say people are no less impulsive online than they are offline. It just manifests itself in a different way, which is what we were trying to And
are you saying that they're buying 1.2x more candy or just 1.2x more stuff?
No, 1.2x more candy. More candy,
okay.
And then my next question is, you put a lot of materials in there about how you can influence the search and influence the consumer, but it seemed like a lot of it has to go through the retailer. Like it these are retailers kind of governing their own retail space. Do you have to custom design your marketing kind of effort for each of those retailers? Because I saw some like some apps and things like that that seemed like they were from you, but it seems like it's the retailer's apps, it's not your app. So is there a high cost to kind of adapting to each of the retailer apps?
No, not really. And this is so remember when I was talking about the different platforms and the modularity? So what you need to do is if you basically can if you pick the right partners, they'll have what's called an API, which is a it's just an interface, which allows your data to speak to somebody else's data. And a lot of the content that we're already serving to our retailers right now in the form of product description pages is actually going through a machine, okay, so that you get real very good consistency for the most part within those retailers. So you're going to get the same product image, you're going to get the same bullet points, you're going to get the same visuals if they accept the visuals, etcetera, etcetera.
So you can get consistency through automation. So that's actually not that much of an issue. In terms of, say, for example, checkout language, like is that code that you're doing or they're doing? Yes, to a degree, you have to rely on their ability to well, number 1, whether they want to work with you or not based on the priorities that they have. And then can they accept what you've done from a concept perspective and put it into production?
Virtually everything that I showed you that is Hershey specific is 1 or 2 lines of code. It's not a big deal at all to actually stand up. And of those that we showed, we've actually had 3 pilots. One that's finished and we're doing a second iteration, it showed good results and the other 2 that we're just standing up right now. So yes, you do need the retailer's ability to be open to the solutions, but they want them.
They're asking for them. We've been told specifically, I've sat in meetings and like, if you can help us crack this, we will work with you. And so we're like, okay, 2 things. We've got concepts over here that we can test right away and we've got a team now focused on holistic competency, so we can help you with your taxonomy and search and that whole consumer journey through the digital ecosystem, as
well as provide, the linkage to the physical world. And just the last question. You said that you're gaining share, I think it was 250 basis points ahead of your competition. How big is your sales right now in digital selling? And how do you measure it?
Do you bring in the whole click and collect and home delivery together? And I thought I heard it was like 1% to 2% of the company sales. Is that about right? So,
yes, in terms of retail, it's about 1.4, 1.5. And in terms of share, you've got a couple dynamics going on. In the brick and mortar world, we're either equivalent share or over indexing on share, in some cases quite dramatically. And then in the pure play, we are a little bit under shared, to be completely honest. Now the reason we're under shared is that last year in preparation to getting the price pack architecture right, getting the marketing strategy correct, getting your search strategies correct, we took some business decisions to ensure that we have the appropriate profitability within that sub channel of e commerce.
And that was setting us up basically to level set and then grow from here. So that's why you're seeing the big jump in share is that we basically kind of level setted everything and made decisions based on profitability and frankly strategic necessity.
Great. Thanks.
So just kind of one larger question around the shift in the digital world, better RSPs, trying to trade consumers up, I guess, in terms of just increased purchasing consumption relative to, let's call it, margin accretive, more attractive single serve business that I'd say a lot of food companies are heavier, right? If you can serve more single serve, in confectionery, good RSPs, you get good margin, etcetera. And that's kind of part of the larger financial framework of Hershey and why returns are good and why margins are good. But if I look at everything you just said, right, like, I mean, it would seem as if is the future of Hershey now completely changed because of the digital transformation such that if you can get 3.5x RSP and more volume and you can sell the variety pack through the direct or through the ship to home through Amazon, then even though your penetration would still remain low online versus brick and mortar that it's margin neutral, but it seems like it's a great substitute and kind of a better way to look forward in the business relative to, oh, we're losing impulse, but aren't you gaining price and the whole strategy is to sell a lot more volume?
So I don't know if there's a lot in there, but just kind of thoughts.
I'll take the digital piece and then for the more holistic pieces we can pass off to Michelle and Patricia. So the first thing is you have to believe like what's the penetration rate going to be and I think we clearly articulated at the beginning of the presentation where we feel it will be within the next 5 years mid single digits, right? Yes, it seems like it's a good trade off and would we put more emphasis there? To the degree that the consumers are going to go there and shop, then yes, we're going to do what we need to do to grow the business and we're going to do it in a responsible way. I think the thing that I heard there though that I would correct a little bit is that impulse doesn't go away.
There's just there's impulse as we think about it in terms of like you're at checkout and you grab a single serve or a king-size and then you eat it on the way home. But impulse purchase behavior manifests itself online. It's just in a different way. Like how many times have we all clicked on something that's been recommended to us even though we didn't have an intention to buy it, right? So there is impulsivity in online.
We just can't think of it as an analogy. That's the fallacy. So if you can get them into the same format, which is highly profitable and get it in the pantry and then they eat more and then they buy it again, you're in a much better place than if they just pick up a couple of bars, single serves a couple of times a year as they're running through the checkout. So there's a balance there obviously. We have modeled out like worst case scenarios and mid level scenarios like traffic right now is kind of steady state.
But what if it went down? What if it stays the same? What if traffic actually increases in a physical sense? And then combine it with the data that we have around digital trips, what do things look like. And in all scenarios, we end up in a good space because of the basket dynamics.
It doesn't mean all of our business goes online. It still stays in mid single digits, but we've modeled and modeled and modeled based on the information that we are getting from retailers around our share and our average basket size and price, and things look good based on those models. So hopefully that answers it from a digital perspective.
Well said. I mean, what I would say is the piece of the business model that stays the same is impulse consumption remains an important part of the business. Impulse consumption may be somebody buying 30 instead of buying 1. So instead of buying 1, 4 times buying 30 less frequently. So I think that's key.
And then impulse purchase, we will still drive as well. So it's almost like how people are doing their purchase will change. Their behavior will continue to their eating behaviors will remain, but we may service them in different ways. And I think Doug said it well, both in terms of this is impulse consumption. There will still be impulse purchase of single bars.
And then there will be places where we leverage impulsivity online. At the same time, we're looking at how we can capture get on the list and capture planned purchase. So I really think about it as a different commerce model and us adapting kind of portfolio approach to that to make sure we're capturing all the opportunity. Jason?
Yes, Jason.
Hey, thank you for the question. I want to come back to the economics real quick of an online commerce environment. The information disclosed on gross margins was helpful. Thank you for that. You also referenced in terms of winning at point of sale, the importance of paid display, paid search, etcetera.
What line item of the P and L is that expense coming out of? Is that SG and A line item or does that fall into sort of a trade spend above the line type line?
SG and
A. If you were to fully stack the P and L online and allocate those, which seem like they're pretty channel specific, would you still say that the margins are delta? If you've got incremental placement costs that usually would be in sort of the trade spend line in an offline environment that's now being absorbed by SG and A?
Actually, I'll respectfully correct Doug a little bit. There's a good portion of that that actually hits in trade because it's going directly
to the market. Yes, that's right. I'm sorry about that. There's in digital, you have merch placements just like you would have media placements. And so yes, there's a bit of trade in there and there is SG and A.
Okay. That's helpful. Now I
kind of understand how we
can get closer to parity. Yes. Yes.
I'll touch that. It's kind of the marketing spend equivalent, if you think about it.
I understand that. Got it. And the enabler in terms of cold shipment, the enabler of acceleration of online growth for your categories, What's the penetration level of that today? How far penetrated are we in terms of the number of grocery trips that go online that can be shipped via cold? And that sounds expensive.
Where is that cost carried?
Okay. So here's the beautiful thing about what's happening in online. The beautiful thing is the person is like, oh my god, this is my first realization when I came on the job like, oh my god, it melts. What are we going to do? I didn't think about that.
So but the thing is in my previous life, we actually had ice cream and interestingly enough ice cream over indexes online. So, I think the key thing to think about in terms of the cold ship piece is number 1, don't confuse broader drop ship at a higher level with cold ship. So we have a drop ship capability and when we need it we have cold ship. So the expenses related to the cold ship are not always going to be built into that, okay. So that's one piece.
The second piece is we were really fretting about this when we were originally going through the strategy about how do we address it. And the fact of the matter is the models themselves are addressing the issue. So the penetration of cold ship will remain relatively small, and in fact might over time, the need for it might disappear. And the way you need to think about it is, if you're in a grocery delivery model and a grocery pickup model, which I failed to mention are actually where we're going to get the most growth over the next couple of years, if you saw that investment with retailers on that one slide. Those are already temperature controlled environments.
The impulse model, the on demand models, the Go Puffs, Amazon Prime now, they're delivering that product within 30 minutes. So the temperature control component of that type of a business is already mitigated. I also think that there's other things going on in terms of innovation in the broader marketplace, not just with the retailers in terms of like it's kind of Revenge of the Milkman. I think people are going to have basically cold containers built into their house and you open it up on the outside, you drop stuff in and then everything's fine. So I think there's I think drop ship with cold ship capability, we're going to need it for certain times of the year and for certain models.
But by virtue of where the most of the growth is going to be and that most of that growth is within temperature controlled environments, we're not that worried that it becomes a big down elevator.
And you need certain months during the year that you have it, other months when you aren't using it.
Right.
It would be built into cost of goods And in many cases, the selling price higher in that home delivery helps to offset it. If you saw that was the 3.5 times selling price?
Yes, that's right. I have
a question, a little bit in relation to economics here. So what happens on the back end at Hershey in terms of fulfillment? So I've heard some very inefficient stories of companies making stuff, pack it, selling it, bringing it back, repacking it and then finally send it on to Amazon or whatever it may be. So I'm curious from that standpoint, how is Hershey aligned well and efficiently kind of producing the stuff and then sending it to the online fulfillment center, if you will?
Yes. So there's 2 ways to answer that question. So at a higher level, I would say that Hershey deals with complexity from a supply chain perspective really, really well. If you think about the amount of complexity that goes into seasons, the fact that we have bespoke packs in different channels and whatnot, the complexity issue is not necessarily an issue that's an issue really for us. Jason can speak about that a little bit more detail.
I think the second thing is, as you saw through the models is that actually our portfolio as is actually works really well in the majority of the models and where the growth is going to come from. So a lot of the specialty items comes for if you have to service just that shift to home model in a certain way. And that's smart for us to do because that drives average selling price, so the economics stay sweet for the retailer as well as for us. So, hopefully that answers your question to the
And maybe related to that, are there capital needs related to online fulfillment, I guess is the way to ask it?
Possibly, depending on the model that you pick. But what we've decided to do is pick best in class partners in terms of handling the logistics at this point in time.
ERP is giving us some capabilities. And I'd also tell you as we are continually working our supply chain system, there are certain places that we're building in more systemic flexibility to enable some of that. So going from large kind of aircraft carrier approach, which has been an evolution over time, but that is one thing that's in our pipeline.
Yes, Michael, here. I'll get you next, Andrew.
Just two related questions on the consumer behavior. First back on the slide where it has the higher volumes and ring, if that where's that sourcing from? And you talked about the share, I think, probably within candy, but are you seeing online growth ahead? Are you growing the category more and what other snacking or where else would that be coming from? Do you know what shift the consumer is making?
And then a little bit related, also would just be curious when you say how the I think it was 75% or so of the purchases are either from brick and mortar? Obviously, people have lists, they have some against brick and mortar? Obviously, people have lists, they have some impulse purchases. It suggests the 25% online is more comparable to that impulse purchase. Do you have a sense of what that breakdown or number might be on a brick and mortar retail basis?
So the first part of your question was around the behaviors and where is it sourcing from, right? And then the second is around okay, I got it. Yes. So let me I just want to make sure because there's a lot in there. So the first piece is the consumer behavior piece is actually it's ongoing.
So, but what we're finding is in terms of sourcing, I can't tell you specifically in terms of other categories where it may be sourcing from. I can tell you that the sense is that again it goes back to the expandable consumption nature of the category. If the candy is there, it will be eaten. It's just a matter of getting the candy there. So, while it may be sourcing from others in terms of people managing their budget or their basket, for us, it seems to be an up elevator, okay?
So the first piece. And then the second part of your question was, again, one more time. To the extent that
you can measure some of the purchase drivers online, is there any retail brick and mortar retail comparison for basically
the Oh, the list. Is there
a way to kind of quantify the impulse percentage purchases or the list behavior online and brick and mortar?
Yes. The best data that we have, literally, this is a recent data that talked about the impulsivity online versus offline, which I think I mentioned in the presentation. And essentially what it says is that people are no less impulsive in an online environment than they are in an offline environment. So that unplanned component, piece comes in. So they're still going to browse.
They're still going to look around and that might be a function of what's being recommended or it might be there's something on their mind in terms of an occasion. And so they're running around and they're typing in the search bar, running through the menus and whatnot. So from an onlineoffline impulsivity perspective, I hope that answers the question from a second perspective. They still look just like they would be in a shelving environment. They still look around, but the tool they use is search.
Does that make sense? Yes. Thank you. Okay. All right.
So I think, Andrew, yes.
Just in the one slide where you showed various food competitors, your largest competitor was kind of at the very right of the list in terms of capabilities around digital. So I'm trying to get a sense just from all the rankings you've laid out and the thought process seems like you're pretty far ahead of many peers, but specifically within the CMG space. Is there anyone else that's doing these sorts of things? Are you how far ahead are you? Or is Mars or others in a process where you can see that they're hiring and attempting to sort of get on this path much more quickly?
Or do you feel like you've built in a lead here, which gives you some element of, I guess, 1st mover advantage that could have some structural, maybe stickiness to it?
Yes. So I won't go into details, but I'm very familiar with what some of the other competitors are doing. I would say it varies by brand. So really I would say in the case of Amars, I think they've got some examples of some very good digital work. But it doesn't seem to translate across all of their brands.
From the independents, much, much, much further behind. And for us, I think that the key competitive advantage is, and I can't speak for the competitors, I don't know who they're hiring. I know the structure for what they're hiring for and what they're attempting to do, but not necessarily the quality of the talent. I think the difference here is that I've spent many years in general management, so I approach this as a general management business. Obviously, I have deep digital expertise and 7 or 8 years across 4 big categories that had very different dynamics.
And so I'm aware of the kind of thinking you can apply in one category versus the kind of thinking that you can apply in another category. And I have a deep network of folks that are experts in some of these areas. So for us, I think some of the advantages in the thinking. We gave you a hint of what that thinking was. Obviously, we can't give everything away.
But I think we've got an advantage from a platform perspective technologically. I think we've got an advantage in terms of some of the initiatives. We just have to continue to speed up the execution of those initiatives. And I think we'll be in a good place. I'll give you an example.
The big bag over there and this box, we went from concept to market in about 12 weeks, which is incredibly fast. And this is just like first iteration of digital pack combined with physical those insights and whatnot. So I think as long as we continue to work those muscles and work on the process and work at speed, we have a good chance of staying ahead.
I know this is a little bit out of the scope of the presentation today, but a few years ago, Hershey was partnering with Chefs'T in terms of, I guess, distributing their offerings through those recipes and that meal kit offering. Were there any learnings from that can be applied into this? Or what were kind of the takeaways with that relationship and how that kind of evolved over time?
Yes, that's a really good question. So, I can't speak to that partnership specifically because I was not here. So I will give you a basic point of view based on my experience. I think what you're seeing is that the room for those types of companies is very narrow. And the capabilities needed to pull them off are easily repeatable by other folks, right?
And so you've seen consolidation in terms of people buying them out, Safeway, Albertsons being one with one of the competitors. I think Chefs' is now defunct. And there's a lot of those other players that are kind of on the ropes, I think. So, but do I think that those types of things, a different type of thinking is an opportunity for us? Yes, absolutely.
I think if you look at companies that are doing really interesting things in broader digital, so the pizza chains, some of the coffee companies, obviously, Starbucks being a big example. Starbucks actually processes more mobile payments than either Apple or Samsung through their app. So you've got some really, really interesting places to play, I think, in QSRs and other kind of delivery partners that once we have fundamentals in place, we're going we're thinking about it for sure, but we're going to explore. But we will get more juice, let me assure you, out of getting the basics super, super brilliant than any one other initiative. So we're being very choiceful in terms of how we approach it and time it.
That pack, one of the packs Melissa showed us, that 30 pack, that's I bought that at Costco before. That's a yes, I hate the one behind it. But either way, club seems to me to be similar in certain ways to this impulse argument you're making. Did it play out? I mean, maybe that's beyond your purview, maybe it's not, but did it play out that way in club?
Do you have any data
that suggests
So my understanding through my BJ's users. Actually, I'll let Phil answer that question.
It's a great question. We talked a lot about club in this model because we think about it in club today, we don't sell a single bar. We never have. And this really was built for that club shopper and this is one of our biggest selling items within the club today. And so it's that same thing that Doug talked about.
It's getting it into the pantry. And then we say, see candy, buy candy, eat candy. And so getting in there is really critical.
No, stop waving that in front of me. Sorry, really, really, really.
That suggests that or compares reported consumption by consumers at club versus with those who shop in traditional channels? I'd be really interested because it's a very compelling argument for sure. Like you make one fun first decision and you get 30 opportunities to treat yourself as opposed to making one for 1, you have
to make 30 decisions to make up
for that. I'm just curious if you have any before or after data or I should say comparable data if you have households that shop club and shop traditional, if there's any difference in impulse and
such? There is a component in terms of number 1, in an online sense that the club models do really, really well. So we lump them into the ship to home. And the dynamics that you're talking about are there. It just mimics the physical.
So you have the expandable consumption piece from the consumer, but a lot of clubs you also have businesses buying, smaller businesses buying. And those end up actually being they could be retailed or they could end up in an office environment. And so it's hard to say, but either way, whether it's an I can tell you, we have an office full of candy bowls and I lived in an office previously full of candy bowls. If it's there, it gets eaten. So the same dynamic regardless of how what type of customer you have, the same dynamic is happening from a consumption standpoint.
Yes.
And I
would say in club because we talk about a third instant consumable, 3rd take home, 3rd seasons. We over index in instant consumables in club. And so it's not a perfect analogy, but we do sell between variety packs and our traditional packs we do over index.
I'd love to come back to the similar topics that are proof points that the category, even with the shift online and loss of maybe these checkout impulses, the category can still thrive. What have you seen in some of the international markets? And one market in particular stands out and that's China where the shift to online just went exponential, right, rapidly shifted. It's hard not to step back and notice that snack food growth overall kind of stalled out during that shift in share of stomach, which had been growing, kind of took a step back. Should we look at that as proof point that the category is vulnerable from a shift online?
Or and I don't know, maybe it's not a fair question, maybe you haven't studied it or were there other externalities at play there?
I think the market is really, really different. So I think I can't go into like huge detail around the whys and what fors, but they're basically skipping an entire generation of retail. And it's had some really, really interesting effects on broader FMCG. But I don't think it's a proxy for the U. S.
Business. So for example, if you're skipping a generation of retail, you're actually skipping all the purchase histories, etcetera, etcetera that have been built up behind that traditional retail environment, right? So that's why we look at more at in terms of like what happened in Europe. And I can tell you one of the first questions I asked myself was from a snacking perspective, what happened in Europe? Did it disappear?
Was there a big issue here? And it didn't seem like the issue was there. And the obvious reason was, I'd love to say that getting on the list was my brilliant creation, but that's a tried and true tactic that's basically been learned from Europe. That was the I wouldn't say it's a magic bullet because there's a lot of other things you have to do. But that was the way you would mitigate and continue to drive the category penetration of consumption.
Just one quick question about your intro when you mentioned, I think you exclude social media. How does that work as far as just how you're able to interact or when you talk about some of the community and content, clearly, there's some relevance there. Is there still an ability to have a close partnership? Like, can you kind of Yes,
absolutely. So how it works is, so we have a broader digital transformation body that I chair and we have cross function partners from across the business in there. So from a governance perspective and a ways of working perspective, the biggest decisions on how we're going to interact take place there. And then it's a big company, but it's not a big company. So in terms of coordinating it, my team is very much linked in with both the media team and the social team that manages earned.
And quite frankly, they're intertwined in a lot of ways because the one thing that we're all sharing in the future or actually now and in the future is the data piece. So my team is going to focus on data acquisition and retention. Media, the media team is my client, okay? If you think about the social team, content and content management and being able to scale content so that you can personalize it for shoppers no matter where they are means that there needs to be a mechanism for the social team and the content team that's related to that social team to be able to push content out in an interesting way as well. And so my team has the pipes that can push it out.
So all of these things are interlinked and interacted and it's just a matter of ways of working. It's not an issue at all. Yes, Rob?
Kind of a basic question. So most of what we focused on examples today were Reese's, kind of I'm assuming upfront you push on core brands, higher, better margin profile, easier, I would assume to achieve similar economics relative to larger portfolio. I've just kind of thoughts around all the other products, Amplify, Barkfins, what have you, are they if there are different potential subcategories? So how do you think about attacking those areas relative to Risa's, etcetera?
So there'll probably be 2 answers to this question. I'll give you the digital version and then Michelle and Patricia can jump in on the broader construct. So from a digital perspective, what we've been doing is obviously Amplify is running as kind of a standalone business with a number of other emerging brands. What we're doing from a digital perspective is, we're in contact with that team. So I have a relationship with the CEO of Amplify as well as the Vice President of Marketing and we do regular touch bases in and around broader digital.
What we're doing right now is that is a relatively new acquisition. So they're getting their house in order to a certain extent in terms of getting ready to kind of integrate the things that make sense to integrate with the Hershey business and digital would be one of them. So for example, they can take full advantage of the technology platforms, the playbooks and general insights and knowledge around digital commerce and broader digital. Though I would say, I think that's some pretty sharp digital marketeers that are in that business unit already. And to the degree that they need to kind of link in, we're linking them in, but we're doing it a little bit from a hands off approach.
From a go to market perspective with the customer relationships, where it makes sense, my team is in deep connection with their team and we're using kind of our horsepower for example at some of our customers to further penetrate with some of the Amplify brands Skinny Pop being an example, right? So it's again, it's a lot of communication right now.
Portfolio approach, we always start with the biggest brands, right? If we get a 1% lift on Reese, a lot bigger than 1% lift on Almond Joy. However, said, we are looking and applying this across the whole portfolio.
Just given the blurring of the lines between offline and online and all the capabilities that you've talked about that you've built in digital, is that helping you and all the data and the analytics that come with it drive better sales and share in a brick and mortar establishment based on your lead in digital? Because have you seen or are you starting to see that really help you in physical stores as opposed to just the online world?
I'll probably defer a little bit to Phil on this one. I think I've been here, I think 10 months and about 2 more days. So we've implemented, I think, very quickly, a lot of really, really good practice in terms of broader digital. And we're making the linkage to the physical world in a much more robust way, whether it's JVP, where we actually talk about digital first before we talk about the stores, etcetera, etcetera. In terms of how we can affect the share in stores, I do believe that's a proof point that we will continue to prove out over time, because we're going to have the ability to actually direct traffic into physical stores and digital stores quite frankly.
So that's the best I could do on the answer right now. I'll hand it over to Phil.
I think it's a great answer. I mean obviously the retail dynamic is changing so quickly. And Doug showed the example of mobile, desktop and then in store. And so if you think about it, before it was all about the paper flyer. As that paper flyer starts to go away, it starts to become more digital.
So you think about that spend, some of that spend is going to digital that then helps us to influence what a season might look like, what a promotion looks like. So we are starting to see that linked together a lot more tightly than we did probably in the last 2 to 3 years. So I hope that answers your question.
Yes. Just one more build on that. I can't give you specifics because it's proprietary. But in one small format chain, they will see that about 1 in 3 purchases that take place in the store actually starts in their digital store environment. It's just the actual transaction itself takes place in the store.
And then for bigger big box mass, what you see is roughly 1 in 4 purchases start online, but then actually take place in the physical store. And vice versa, actually see 1 in 3 purchases start in the store, but actually get transacted in the online environment. So you see these really, really interesting dynamics. So clearly, if we get better at broader digital and get that digital store right, and just to put things in perspective, the digital store, that one store that you need to merchandise with all that content and get just right, that gets more traffic than the rest of the entire retail network in a physical sense, that one store. And it's really It's a
great new store, if that's
where you've had the structural advantage forever.
Yes. You get the other piece. And the beauty is that we've built all the right pipes and the right processes and we're getting the best practice kind of ramped up. So we get that store really, really well. We'll have influence over that store transaction and that's where a big part of the focus is.
One question I kind of had, not just for Hershey, but for all consumer staples companies. Yes. As consumers shift more and more to an omnichannel kind of environment, I mean their expectations go higher and they expect to have the product available to them in multiple different formats. And it just seemed to me to be like a higher cost of doing business, not just for you, but for your competitors and for the retailers because now you have to meet their demand to get it delivered to them or in a click and collect format. So maybe just help me like how do you and other Staples companies feel comfortable that it's not just a higher cost of doing business, but it's also a way to drive more shopping and more volume?
Isn't that how the economics have to work for everyone at stake?
Yes. So I think the best way is at the highest level, you're going to make investment trade offs within that environment, right? And so and Phil actually alluded to 1, you've got situations where some things that might have been an investment both by the retailer and for ourselves in terms of a as a partner to that retailer simply go away. And then they become digital. So Phil used flyers for example.
But there's no real reason if you think about it to do those now because people are so particularly the people that have the most capability in the digital space from a retail perspective, they can reach those people in interesting ways. It actually changes the way flyers work too. So those kinds of expenses can go away and they can be transferred. So there's not an added expense there. I'll go back to Andrew's question around the digital store.
So the digital store in terms of Fluence is it has huge impact on the overall. But the interesting thing is the ability to actually get the digital store right, or I would say the investment needed to get the digital store right is actually in comparison to getting the physical store right, like really not that much expense at all. So you've got these puts and takes both at the manufacturer level and also at the retailer level combined with the dynamics that you see online. And I do think the folks that get the ecosystems right have a chance a better chance to win versus those who cannot afford to make the change. And so I think they will benefit clearly from the dynamics of getting people with bigger lifetime values into their ecosystems.
And the follow-up is, as
the retailers have made the investments first and then the staples companies have kind of followed along, is there a risk that those retailers then, since they have more control over that point of sale that they have a little more leverage over the staples companies than they had
they're going to they're going
to charge their vendors for that.
Yes. I think it goes back to it's a balance of where you want to put your investment. It's not necessarily like they're just going to come and we're going to invest more and more and more. It's going to be a series of trade offs. The best way I think you need to think about it is there's a number of investments that happened in a physical sense.
And to the degree that you can make analogies in a digital sense, those are the same types of investments. So we talked about the trade impact from merchandising perspective and in terms paid search, in terms of SG and A. That's just as we play with our investments overall, we're just going to make decisions around that. And if those areas, for example, Kroger has been very explicit to your point on ClickList, if they make the most sense from an ROI perspective, then that's a good place to invest. I think it's just a matter of where you're going to put your money.
So for example, we talked about the search dynamic. If 76% of product searches start on a retailer site, then we have a strategy that we have to employ for broader search and broader paid search that we take into consideration. Where are people really going to search and what's the ROI going to be for that? Where should we put our dollars? So again, it's just a balancing of investments that we've been doing forever just in a new environment.
Sorry, just add on a little. No, no. Well, I think too, we're always thinking of that holistic I think Doug answered it well. We're constantly having these negotiations with our customers around how we're building this joint business plan and where we're investing resources in digital, in store, trade, marketing. And so it doesn't really change.
It just broadens the dialogue. And I would tell you, 3 years ago, we'd have meetings here and it would be the buying team and the marketing team. Now when we have meetings here, we have supply chain, we have the whole digital and e commerce team because we're thinking just more holistically about how we manage our whole portfolio with the customer.
Yes. One thing I thought Phil was going to go there, but I'll mention it. For our national sales meeting, we actually had a major retailer's Vice President of Digital Commerce come and speak. A lot of what she talked about to our broader organization was very similar to a lot of the stuff that you've seen here, the same dynamics, a lot of the stats, quite frankly, that I have, I get from partners in the retail environment that I have good relationships with. You can see that there's a change in terms of how people plan and how people think about retail and the more and more of the view is through this ecosystem lens as opposed to here's stores and that's the team you deal with and here's digital and here's another couple of teams that do things on their own.
I believe largely we have common objectives with the retailers and the manufacturers. We both want to make drive the top line profitable top line. And so I think they also understand there's a certain piece they're going to ask us to disproportionately invest, and we have to give up something else. How is that going to impact their business? And I think we have really strong relationships that help to foster those dialogues.
Yes. A great example is
about 2 weeks ago, we were with a large retailer and we're talking supply chain, we're talking digital and their whole push to us was let's make sure that we're really thinking about where the spends go that are going to drive the greatest returns. So let's be clear here, in store is still really important. And so when we're with them, they want to make sure that, hey, we first have in store fully planned and able to execute it, but then also thinking about how can digital really add on to that. So the dialogue is really healthy about how we win sort of in the physical world, but also online.
Awesome questions. Maybe it's time for
one more if anybody has any. Otherwise, we'll take a quick break. Okay, great. Thanks for
joining us. One more question over here. One
more. I'm
so sorry, Alex. Last one. Just for all that
e commerce and digital, how does this maybe impact the financials for over the medium term kind of crystallizing kind of what you've talked about today? Is that margins are going to be unaffected by this e commerce shift and you're going to see revenue growth from this e commerce shift, kind of understand the overall kind of financial impact of the medium term?
Yes. So if I refer back to one of my early slides where it said we're between 101 150 bps away from our overall average from a profile perspective. I think that gap as we model it out shrinks and will eventually be in the not too distant future by the way, basically equivalent to our national average. And the way that happens is, as a business, it hasn't yet scaled. I mean, it's a growing business.
We're doing great. But there's still a few investments that we're making here and there to make sure that we're getting ourselves on the shelf, make sure that we're maintaining share. But as time goes on and as the growth continues and the business gets bigger, those investments don't necessarily get bigger. And so then that's when you're going to see the economics kind of line up with the overall average. So it's just being smart.
I think the price pack work that we did at the beginning of the year was the right thing to do. And you get those foundations right and then you can scale the business without fear of diluting the P and L.
Okay, great. For those on
the webcast, we're going to take a couple of minute break. We'll be back at 11 o'clock with question and answer with Michelle Buck and Patricia Little.
Okay. Thank you. Thank
you.
All right, guys.
All right.
No questions? Okay.
Hi, guys. Jason English.
Thank you
for the opportunity
to answer the question. Clearly, there was a lot of focus on last earnings,
both on the call and then
the follow-up discussions from investors on the pricing dynamics in the market.
And I was hoping you
could give sort of a
check-in on where we stand. From what we're hearing right now, there's very little price movement in chocolate overall. And it sounds like only sort of Ferrero Rocher has moved its balls. You guys are moving sort of some supersized novelty products up higher, but almost all the pricing actions sounds like it's centered on gum today. With you moving on gum, Wrigley moving on gum, Perfetti now moving on gum, Mondelez, it's still at a standstill.
Is this is what we're hearing out of the trade, is that maybe misleading? Is there more to come? Or are we really talking about sort of list prices really just being constrained to predominantly gum today?
Sure. So as we look at our price increase, as we told you, it was about 2.5% weighted across the business, really comprised of 3 different segments. So if you think about those three segments, certainly I'd say, as I look across, there's a significant impact that impacts chocolate across our pricing actions. So while we did make some pricing actions on sweets refreshment gum arena, If you think about a piece of our pricing was in terms, which is really across the entire portfolio, which is about bracket sizes and bracket pricing. A piece of it was optimizing kind of price point and weight, price pack architecture and the bulk of that really is against a piece of the chocolate portfolio.
And then there was a piece of the pricing that was really the list price increases, and those were on the sweets refreshment and then also select larger sizes. So I kind of look across and say, boy, if I was looking at the impact, it's pretty broad in terms of including chocolate as well. Relative to how that has gone, I think that the announcement was received similarly in the marketplace as any time we've done a price increase. We did see competition publicly available knowledge is the competition did also price in the marketplace. So yes, it does cover chocolate.
If I look at it, I would say without like mentally doing the math, I'm going to say 2 thirds of what we get would be from chocolate on that price increase, the benefit of price increase. And then as we go forward, as we said, we're going to be much more fluid in our pricing and we are going to be strategically pricing on a more frequent basis, but selectively. And so I would say it's not like this is the one and done in terms of for the next several years. Yes, Rob?
Hi, Rob. I'm sorry.
Hi, Rob. Morgan.
Hi, thank you. Just talking about expanding capabilities a little bit more. What is the expected return off of all these investments? I know tax reform helped accelerate them.
Would the return
needed to stay on your algorithm? Or will it accelerate it? And then going forward, what kind of level of reinvestment can we expect?
Do you want
to talk
a little bit about return on your investments, Patricia? Yes.
So clearly, if you're just talking about the piece that Doug talked so much about with the digital e commerce world and selling our product through those channels, we would look for a return to be very, very similar to what we get in our overall business. And we really see it primarily as, 1st of all, and I think this is an important part of the message that we wanted to get across, it's not margin dilutive. And second of all, it's a source of opportunity for us. It's not simply a down elevator, but there are up elevators as well. If you talk about the overall digital transformation that Michelle referenced at the very beginning, we do have some large investments going in like with our ERP platform, and I consider those to be frankly foundational.
It's very hard to put a literal return on those. You just need a modern ERP system. But what we did do is we pulled forward in that journey the things that have the largest commercial advantage. So we very deliberately chose to start with things like our trade promotion management or our advertising and marketing management because those are the ones that we can see immediate and clear commercial advantage for. And frankly, we're already seeing them as we're rolling them out this summer.
Hi. I guess a couple of questions. One was on the pricing, bracket pricing, price points and weight changes on chocolate, list prices like I guess I'm more confused than I was a couple of weeks ago on what exactly is going up. Like bracket pricing, is that just another word for list price? So I don't think I get what the
bracket pricing is. So the bracket pricing or the terms is we have certain order quantities and certain price points according to what those order quantities are. And what we took a look at was, especially with freight increases, are those the right price points for those order quantities because there have been increases in freight. So we adjusted some of those brackets such that we can get the same kind of profit margin that we need according to some of the increases there and that we could allow customers to order whatever they want to but then pay the appropriate amount based on what it costs us to ship them.
So a high
volume, yes.
So that's what we call term, right? So that's the one piece. And then the one bucket relative to looking at price points and wait outs is, okay, if we're going to reinvent package, significantly invest in the structural components, the packaging graphics, the usability with consumers, can we realize price there and bring weight down a little bit? So that was a piece of the pricing action around that's kind of price pack architecture.
And you'll see that when we walk. You'll actually be able to see it in
Yes, you'll see the actual movement of this package to this package to this package. And then the other third where there's just the straight list price is on about 30% of the portfolio.
Now on the 30%, like I was just noticing anecdotally at drugstores, like all the deals are gone. I used to be able to get 2 for ones and $0.50 off. It seemed like every single serve chocolate bar, which is a big part of your business, was on deal and now it isn't. Is that a seasonal thing just because it's summer? Or is it related to these price increases?
Or has anything changed to single serve chocolate bars?
Nothing would be changing this quickly because we just announced our price increase in late mid July, July 15, and we price protect deals that are underway. So most customers are planned at least 3 months out. I mean, it depends on the customer. And then obviously, seasons are planned even further. So we are price protected on those things.
So anything you'd be seeing show up at a drugstore like that would not be related to that.
Serge, can you keep that one up here for them?
I mean, we're actually to Michelle's point, we protect. So we're just seeing retail start to move on the everyday price on the shelf. But our plans are out so far that on the promotional pieces, no changes really to the end of the year. And I'm not sure which drug stores you're shopping in, but we're still heavily Only the finest. Maybe like an old Duane Reade or something like that.
Well, whatever. But we're I mean, we still are our strategy around into consumable hasn't changed. And if you go into some of the retailers right now, we have item of the month around our outrageous launch. And so there's a lot of activity out there right now on into consumable.
Last question. Like you reaffirmed guidance for the back half of the year. There's a lot of confidence in the room. But the Nielsen data just it does not look great and it seems to be going in the opposite direction that your forecasts are. Should we be looking at something else?
Is it not capturing really what's going on?
So as we talk to you a little bit about some of our performance in the 1st part of the year, certainly, I'd say we are seeing, as we talked about earlier, some shifts to non measured channels, and we are seeing a little bit more in non measured channel growth than we have historically seen, and it's a bigger piece of the portfolio. So I would say that's part of it. As we look at the back half and the things that we talked to you about relative to visibility around seasons, relative to incremental space and distribution that we know is coming and also outrageous. We continue to believe those will be the drivers. If I look at the timing of those drivers, while those drivers are in the back half, if I really think about the month to month timing, it's a little bit on the early side for those to really be kicking in.
Outrageous is really getting distribution in convenience stores, Halloween soon, but we have a little bit of time to come. And some of those distribution ads are really more in the 4th quarter.
Okay, great.
Just in terms of a comment you just made, and I think you've said this in your prior call, but just confidence around gaining some incremental shelf through the back half. Just given the, let's call it, heightened category comparative environment and just where we are in retail in general with the larger planogram allocations, let's say, why do you get more shelf? And I respect you can't give probably too much detail, but just any color on that would be great. Yes.
I'd say so two things. So one thing I would say is retailers look at their total box and they look at their space allocation and the return they're getting on every category. And as you know, if we look across the TotalBox, there's some pretty wide variations. Now obviously, those are big decisions for a retailer to make because frequently they take some kind of capital to change the category allocation. But I can say that one of the one area of incremental distribution is coming from that from a retailer saying, you know what, this category really hasn't been performing for me and we're going to be taking some space here.
And then the other piece is just as we look at the power and velocity of some pieces of that we'll be getting incremental distribution on as part of a normal planogram reset. Planogram resets typically happen twice a year. Sometimes you win on those, sometimes you don't. And this is one where we have visibility to some increased space there.
And I think the one good example tied to that is we had talked about reactivating some of our brands around your Mounds, Almond Joy, your York's and that velocity being the gift that on giving. And so we had been losing some distribution for those. We had activated them towards the end of last year and the second half of last year and have gotten the velocities up. So it was a good selling story for us to be able to go back and get some of that space. So we'll start seeing some of that flow in, in the second half of this year and then hopefully continuing for some of the planograms in the spring as well.
Michael?
Can you touch on freight and just the latest that you're seeing? It looks like rates are still going higher. What's the contract timing? Is that set? Do those reset calendar year?
Are they floating? How's your mix evolving? Just kind of the latest figure on that pool.
Patricia, would you like to handle that? Yes. We can have Jason jump in.
So yes, we continue we talked about we've been talking about freight for about a year and a lot of people have. And there was some early freight movement that I think was very just not driven structurally, but we would view that the latest increases that we've been seeing over the past several months are structural around driver availability and technology changing and just hours in the cab going down. So we see that as a long term trend, which is one of the reasons that we looked at bracket pricing when we took our pricing. So we think that there are things that we can control on that outside of that. So Jason and his team spend a lot of time working very far ahead.
What we want to avoid is spot buys, especially because we often need refrigerated capability. So they'll work very far ahead. I don't know exactly when the contracts turnover. We also use some 3rd party providers to help us optimize freight. And then another opportunity that we have to mitigate some of this inflationary pressure is to really look at the complexity inside of our own environment.
So we want to reduce the number of touches inside. I mean, you're always going to have the freight from the factory to the distribution center. But inside the network before it gets to the factory, whether we're in our own plants or in co man operations, we think there's a big opportunity to reduce those touches. And that's one of the areas that Jason is super focused on. Did I miss anything, Jason?
Nothing else. I'd just add that next week, we
have our largest carriers in Hershey for
a meeting where we'll talk about what we see going forward and how we work with them to make sure that we can get our freight covered.
I'm sorry, because we didn't get to Jason yet. Jason has our U. S. Supply chain. You'll hear from him later.
Thank you. And then just one more on, how to think about strategy with Amplify. They are doing some acquisitions of their own. Is that something that they still have their own ability to do? Do you still have an interest in maybe some of the smaller, more niche growth type brands?
How could we expect that to evolve?
So we have a holistic and focused strategy against expanding into new into more snacking occasions. As we laid out our vision of snacking leadership, we said, hey, one of the key ways we'll grow is by participating in more occasions with more consumers. Part of that is with our better for you snacking as an opportunity that we have interest in, and we will continue to focus on expanding our portfolio there as we have. I think importantly, we've gained really significant lessons learned from some of our early acquisitions. I think we're seeing great success on Barkfins.
We feel great about SkinnyPop, the fact that it's a scale brand with profit margins comparable to our base business. It's our 6th largest brand. The fact that we now have organized the Amplify business is our hub to run these smaller emerging brand models. So yes, we do think they're an important part of participating in snacking. Many of you who cover the sector know that if you look at the growth, there has been significant growth in the marketplace from some of these smaller emerging brands.
So we do see that being a piece of how we will grow. But we think it's really important that we have our big brand model that's located here in Hershey and we have the Austin team who is filled with leaders and capabilities about managing smaller brands that are about more precision distribution, precision marketing, digital marketing, not mass media, growing the core brands versus innovation. And they will selectively we will either build, invest in or acquire other brands, and it will be a mix of all of those. But they will not be having a separate snacking strategy all their own. It is one holistic kind of strategy.
So we have M and A the M and A team here in Hershey, we work very closely with the Austin team to determine what the next steps are that we should take. Yes.
Doug mentioned in his presentation something like thinking planning for something like mid single digit online penetration in the next 5 years.
It's yet it strikes me, I think
you referenced 5.6% in Europe, for food. It strikes me that, 6% in Europe for food. It strikes me that the seasonal business, particularly where you're in the enviable position, particularly in Halloween, of really big must have for retailers. If there's some way and you also have consumers that need a certain quantity of it. And if you get it into their house, they'll probably eat more of it.
We hear about that 10 years starting in August, whatever, for Halloween display. You could probably do that significantly more with So I wonder maybe it's more of a Michelle question, like bigger picture, is there a time when your business is more than mid single digit percentage online where you have a particularly in the seasonal business where you absolutely are must have and maybe have more must have and maybe have more leverage over retailers, less concern about pushback they might have about interaction in that one particular place.
Yes. No, I mean, I agree. I think as we discussed this morning, I think the purchase model is different in commerce. I mean, there are certain things that are the same, but there are different opportunities. We can't just like exactly look at it the same as physical.
And I do think it creates an opportunity in seasonal because I do think there's an opportunity for an early buy. There's an opportunity for connection to everything else that you're buying to celebrate the season, right, whether it's Halloween parties or Halloween costumes, etcetera. So I agree that I think it could shake out that certain pieces of the portfolio, and I think certainly I mean, I look at every season in that way, which is we're a must have during Easter for Easter baskets maximization, I think that there could be a further opportunity there.
And I think the really nice thing is and the way Doug's building the model is we'd
love to see it
bigger. We're all in favor of that. So it works at all different sizes. It's working today. It will work when it's in mid single digits.
And to the extent it penetrates even higher, it will work there as well.
Yes. Just to circle back, actually, Jason had asked me a question around, we've been talking about the context in terms of the migration online. Most of the conversation was centered around the current retailer environment, right? But we didn't talk about was what are the other opportunities in terms of driving our business higher and the growth higher. So certainly, we don't think that I don't think personally that it will hold at the mid single digits.
I think it will continue grow. The point that we were trying to make was that there's a lot of noise out there in the marketplace in terms of like by 2025, it's going to be this astronomical figure.
Like a third of the total business. Oh my gosh, like what
happened? And based on what we see in other markets, that hasn't been the case. The only big difference that we have versus the other markets that went sooner is smartphones. We're kind of in the middle of the evolution. So they're going to accelerate things a little bit, but it relies on so much other infrastructure like the train tracks being laid that we think that, that 5 year projection is good.
Now back over to what Michelle was talking about and what you're alluding to is part of the reason data and data acquisition is so incredibly powerful is because we can become not only a manufacturer of really great chocolate and other snacks, but we can become somewhat of a service provider in the way that we can remind you that holidays are coming up. We can remind you that you have a wedding anniversary coming because we'll over time, we'll establish a relationship with you. And with that, we'll be able to message you, in certain ways. And we can either, in certain cases, service that business ourselves like your D2C when we're talking about gifting occasions or we can push you into the store or we can sign you up to a subscription like don't worry about candy at Halloween, we've got you covered. We'll send it to you or you sign up for a seasonal offering in some sort and we send you Easter, Halloween, Thanksgiving, Christmas, whatever.
So there are ways to build business that way. Folks and whether it's some folks and whether it's some of the delivery services or whatnot, you could do some really interesting executions with them. So there is definitely room for beyond just our current retail environment the way we define it.
Okay. There's
a question in the back.
Thanks. Just a general question in terms of what drives innovation in chocolate, right? And from my perspective, it sounds like the last 2 big innovations outrageous now and cookie layer crunch last year, I associate that with indulgence mostly, right? But the bigger question is that it seems to me that chocolate remains under that Hershey remains under indexed in key categories within chocolate, like gifting, premium,
I'm not
going to say natural organic, maybe instant consumables, right, since you're over indexing seasonal in what we call bagged on the shelf, which maybe it's a lower margin product. So can you talk about try to triangulate in terms of are there a lot of segments within chocolate where you're under indexed that represent an opportunity? And then why the last two pieces of innovation we've seen don't seem to be so related to those opportunities and more going after indulgence. I have to say I'm not the best example, but outrageous and it's just too sweet for me and I have a sweet tooth. But that data will be great result.
And I
have a couple of follow ups.
Sure. So as we look at the category, I'd say people are coming to the category for indulgence. So they are coming for a treat. So I would say as we look at our innovation pipeline though, we do look at how we I'm going to say have something for everyone. I would tell you right now, I think the some of the single biggest innovations we can do still do live in the indulgence space because that's where our consumer is in this category.
But I'd give you some examples that we have really been focused on to capture some of the space. If you look at the premium market, that was really what drove the purchase of both Brookside as well as Barkfins. Those brands really appeal to a younger, more premium consumer, and I'm reminded of that every single time I do any kind of investor meeting with a lot
of folks in this room, and I
see what people are picking up as the bark fence. So we have absolutely looked at acquisition as a key way to build our premium business. And as we look at Better For You, we've had a long history relative to using portion size, which we continue to do, different pack price pack architecture to provide options for people relative to whether how much indulgence they want. And then also within our innovation pipeline, we do have a stream of work against what I would call more choice around permissibility. In fact, one of our innovations next year is going to be focused on that.
We aren't going to talk about it yet. But I think when you see it, you will agree that, that is a good one that delivers indulgence but with some permissibility benefits. So I think they all are opportunities and important.
Thanks. And then just a quick follow-up. So am I right in saying that you're over indexing seasonal? And is seasonal a lower margin category because it's just more promotional? Can you comment on that?
Yes. So a little bit we have a
higher share of Seasons than otherwise. I would say as you think about the margins, probably not as much as you think if you line it up, there are a lot of take home items. Take home to take home, it lines up exactly with our existing portfolio. There's not quite as much of the consumable presence, although we certainly have our reseasonal shapes our Cadbury eggs. So the margin differential is not that large.
Don't know if there's anything else either with you with that? I think you're right.
I have a question for you. And just in the context of a slower overall category growth rate, how does the M and A lever play into that? Has that risen in importance? You obviously have a lot going on. You have a lot of inward focus with digital, obviously, integrating Amplify.
But there is this one of the ways you'll look to kind of solve for the weaker category growth that currently exists in confectionery?
So I would say our number one priority will always be growing confectionery because it's our biggest business, highly profitable, great margin structure. We've got huge brands. And so let me start by saying really clearly that is the number one objective. E commerce. We know consumer shopping patterns have changed.
We think that's
a great way
to build against that.
I think as I look at some of consumers changing eating I think as I look at some of consumers changing eating habits around perhaps better for you or less processed food, I do think M and A can help us in that regard relative filling in that piece. And then the other piece I'd say that has been a lever in the past in the category that hasn't been pulled as much recently, either in our category or frankly in the broader CPG, is around the importance of price, price realization as a driver of category growth. And obviously, we announced our pricing increase. So with that said, I'd say, yes, growth has slowed down in the CPG sector overall. We will continue to focus on CMG.
M and A will be an important lever. So you can see that it has been a lever for us over the past 5 years. I think it needs to be a lever as we try to meet our goal of Innovative Snacking Powerhouse and broaden the number of occasions that we are appropriate for. So it will play a lever, but I don't ever want to send a message that all of a sudden that's going to be what we rely on in growth. Organic growth on our base business is critically important, and M and A should be on top of that.
And that M and A
lever would be more of a U. S. Comment? You've pulled back a bit internationally. I just want to
At this point in time, very much focused on U. S. I think our progress in international, frankly, has been better at many times when we're on our own unless we do something really unless we were to do something more transformational. But I think buying bolt ons there hasn't been as good a strategy for us.
Okay. I had just a separate question, if I could, on the margin for growth program. And just to understand the phasing of the savings, the degree how the is just to understand the reinvestment, I should say, of those savings and the degree which that's more front end loaded, does next year then have more of a incremental or call it net benefit from those savings that could help margins and growth?
Patricia, do you want to address that one?
Yes. The phasing for the cost savings are really on track. If anything, they're a little bit ahead, and I think we're going to end up exceeding our goals there, which I think we've been sort of saying as we go along. In terms of the investment, that's something next year that we'll figure out as we work through our annual plan and look at the best opportunities for that investment. So it's really too early for us to talk about 2019 and how those investments net will play out against the cost.
But you can expect us to consider continue, as Michelle said at the very beginning, to be really focused on reallocating our resources to the places of highest commercial growth. And actually, I think you can see that absolutely in today's session.
The only thing I would add, just based on some
other questions we've gotten, is around ERP, and that's one that, that investment is definitely multi years. And so that investment is going to be comparable in 2019 as it was
in 2018. Yes.
Thanks. I'd say Pershey over the years has has kind of stated that the desire to move into Western Europe was never really there just given potential consumer taste and also high competition, etcetera. In the past 3 years, we've seen a number of larger European companies make a move into the U. S, right. So don't want to go there, but then maybe they come here and push in different parts of portfolio, seasonal, non seasonal chocolate, gummy has done well in Europe.
So just kind of getting just want to get a general sense of given that's the case and Europe is obviously very large market, maybe it's not a priority upfront, but do you think about how to potentially capture some share in markets like the UK with the products like Rhesus, the profitability is there? And then also are there areas of learning from those European companies potentially in Gummy as they push that into the U. S. That you think about as well? Thanks.
So I'd say we believe that we are in Europe in the best way possible, which is via an export approach, which is highly profitable for us. We invest very little money relative to brand awareness and yet brands like Reese are actually fairly available and doing pretty well growing at a nice pace. I just think given the retailer consolidation in that marketplace and the competitive intensity, I don't want to add another front. I think we're very focused with very scale profitable businesses in Canada and Mexico and then really with the placement of bets to capture long term growth trends in China and India by building sustainable business model there. And I think we're better with the density approach of going deeper where we are and then capturing some of those other developed markets via our export model approach.
And to answer your second question, we absolutely stay on top of the trends in Europe. So for a good example of that is gold Hershey's Gold, which actually was something that gained a little bit more traction in Europe before we introduced it here. So we keep all over any chocolate trend or candy trend anywhere in the world.
Just follow-up to another question, I think. But you mentioned ERP investments will be similar in 2019 as they have been in 2018. Are there any of these investments though that are kind of finally lapping because the last few years have been kind of investment years I think for the company. Do you get any easier comparisons as you head into next year?
Again, we haven't put out 2019 numbers, but I'd say that I think that there are some I always like it when there
are really good places to invest.
And as you know from our cash, which we throw off a lot of cash, our first priority is always against growth. So when I see us investing in ERP and I see us investing in core capacity here in the U. S, I think that we're really lucky to have great places to invest. So I'm not sure when the laps will get easier, and I'm not here to say that. I just think it's a good thing that we have places to put our money.
Yes. And really, neither of those laps get better because we're going to need to invest in more core capacity year. And if you think about ERP, it's really multiyear, very large dollar investment. And we timed it over the multi years so that we could execute flawlessly.
In terms of some of the product innovation that you've brought to market over the last few years in the brick and mortar channel, some of that has been those resealable bags, the hand to mouth offering, that sort of thing. I guess, as you're thinking about the product innovation for the digital channel, the extent to which now you've brought through larger pack sizes, that sort of thing, is that something that's going to continue to evolve in terms of where your focus and emphasis is from an R and D perspective in
terms of adjusting those pack sizes? Or do you
feel like the bigger bags, the
channel? I
think we believe that we have perhaps underleveraged packaging as an innovation lever. It's more difficult to do because a lot of times you need capital to do it. But if you can capture the right package, it really can help you nail a usage occasion or serve a channel. And so I would say going forward, we are going to have we will have significant resources against constantly evaluating price pack architecture, both within bricks and mortar to adjust to consumers' changing desires and needs. And then also as we look at the channel expansion, continue to accelerate in its importance.
And a lot of times, packaging is also a good enabler to being able to capture price realization better than a product innovation.
And I realize it might not just be captured within the examples that we're seeing today. But one of the, I guess, the benefits loosely with regards to some of those resealable bags is it does appeal to more of a health conscious consumer. And so do you risk alienating that consumer if you're not offering a similar package format online?
I think you're going to see us offering additional pieces of our portfolio that have kind of that portion control piece that you're talking about that hand to mouth had either with resealability or smaller individual pieces that have some of those benefits. So it's going to be some of both.
So can I just jump it over? So you just need to be remember, we ran through the models and all the different models have different price pack architecture realities, right? So in some cases, Michelle is absolutely right. Yes. And if you're thinking through the e commerce lens of pure play or home model, then yes, there's certain things that we need to keep an eye on to make sure that we are offering folks what they want, if you think about like receivables.
And by the way, we do sell that stuff on those models. We just concentrate on some of the other packs for, I think, obvious reasons. But in the other models that where the order is being placed online, but you're picking up in physical or being delivered, again, you don't need to really change that packaging. So if you're doing resealable there or there's some other permutation that makes sense for the shopper, it's available. So I just want to make sure that we don't because there is a tendency to think of e commerce monolithically as like anything that looks like Amazon.
And even Amazon is playing across all those different models now, whether digital or physical. So just keep that in mind as you formulate questions.
Yes.
And to be clear, my comment is much about bricks and mortar. We also need to continue to offer those portion control options for consumer. Yes.
Continuing the threat of packaging investment, I know you guys have made a fair amount of investment in the last couple of years, a couple of things jump out, the stand up pouches, the retail ready case configurations. Those came with a pretty heavy cost burden that I think was a fairly sizable drive to your gross margins. What have you learned from those? And how does it change the way you're thinking about the forward with all the various packaging innovations you're now referencing?
So I'd say
a couple
of things. So first of all, as you go through the tour in the Global Innovation Center, as you look at our new stand up bag, not the hand to mouth, but the new take home bag where we took our lay downs and stood them up, we're going to show you an evolution that went from the lay down to our first attempt at a stand up Ag 2B attempt that we think is really the great one. And I think part of the learning on that was, yes, how do we build into that pack a format that allows us to cover the incremental costs and really get that to be margin neutral. And so thus, the price realization that we're getting there, I think that was an important learning. At a time when growth is slow, sometimes you rush to get something out there.
And with this, we had the chance to step back and say we're going to build that in, and I think that's appropriate. I think as I look at some of the other investments, I think we are focused a bit more now on there may be requirements that we need to meet in the marketplace, but we need we will be asking for more in order to make some of those investments. And we will in some cases, we will partner to do them. And in some, we will scale back a little bit and say, okay, we're going to meet you halfway and we're going to make some of the investments that you'd like us to make. And in some areas, if we don't think we have a return, we're going to be pushing back harder or looking for a different approach to achieve the same goal.
So I think we've learned a lot relative to where the market has been going on both of these fronts. And I'm excited for you to see in particular where we're taking the lay down package. I think you'll be pretty impressed with what that looks like. But the margin piece of that was the biggest learning single biggest learning there. We've got to stay really true to being very careful anytime we invest more in any of those packs.
That's helpful. So to steal Rob Mosco's question of why here because I think you answered that question a lot from a cash
flow perspective.
On the P and L line, with these types of investments, are you at a point now where that headwind has kind of gone behind you and something where to comp? Or with the initiatives you now have in place to actually improve the efficiency of these products, could that prior headwind actually flip into a modest P and L tailwind as we think about next year?
The way I think about it, and you correct me if I'm wrong, I'm thinking the headwind has gone away, but it's more flat than a benefit.
That's the way I
think about it, too.
And I think, though, that you've hit exactly on the levers we need to pull around being more efficient. Given that we've made some changes, again, let's get the pricing. Let's optimize what we're doing. As Michelle said, let's sometimes really work hard with our retail partners to get to the right answer if something is adding a lot of cost. Let's take some complexity out of the system.
So I think that continuous improvement mindset will keep us in this world of some inflation, keep us more in the flat world.
Okay. 1 or 2 more.
Just going back to the M and A question, it sounds better for you. Can you if I try to compare Hershey with other food companies, you are more of a single category company, one part of a store. Is that a disadvantage when you're buying Amplify or future better for you brands? And I can expand on that, right? If I'm Kellogg and I buy or expire, I have different product categories, different shelves.
If you can touch on that.
Yes. I haven't seen that be a disadvantage. In fact, I'd tell you, as we've been in discussion with some of these better for you companies, many of them have wanted us as a buyer. And I think what they see that we can bring to them is a lot of those companies who are selling are at a point where they need expertise in marketing that they don't have. They particularly need expertise in customer relationships and category management.
I'll take Amplify, for example. There were some major retailers that they were having trouble getting into. They have the best velocities on shelf, but they were under shelved. There were some of the competitors who have slower velocities had more shelf space than they did. That's like unacceptable, right?
That's just not justified. So what we're looking for is what we bring. It's less than we have that. So they're more looking for the strength of somebody. We have the same buyers who are buying candy, who are buying almost every other snack category.
So we've got a buyer relationship. So I haven't found that to be the case. I've found that exactly the capabilities we have is are the complementary category capabilities that many of these companies are looking for.
All right. Is there another one?
No, right here.
I
missed oh, sorry, James. So I had a question So, I had a question just going back to freight. If you look at the like clearly, it's inflationary year over year. So, but if you look at the spot rate, it has ticked down like 10% sequentially in the last 2 months. We've seen Class A orders pick up a lot, which normally signals the end of the cycle.
And if you look at the press and the guys that put ELD electronic logging devices in voluntarily a few years ago, after a year they kind of figured out capacity loosened up and price came down. So I'm wondering what you would need to see to get a little bit more constructive and that kind of this is structural.
I'll actually throw that over to Jason, who's really
Yes. So I think there's 2 main issues that are driving some of the capacity. 1 is the driver availability and then second is the productivity loss from the e log devices. So when you look at and talk to the carriers right now, what they would tell you is that their biggest issue is around driver availability and the turnover of that driver set. And until that gets fundamentally fixed, I think you still have some of the capacity issues within the transportation market, and you'll see some pressure from those on a rate basis.
Okay, great. All right. Thank you for everyone joining us on the webcast this morning. That's going
to end our time with you. And thanks, everybody here. We'll take a tour of the center we're in next.