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. Delighted to have you here. I want to set the stage a little bit. The primary purpose and real objective of today was really to have a focus on how we are winning in digital commerce. Why? A lot of you have asked questions about this space. There have been a lot of articles written. 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.
Secondly, and most importantly, what is it that we are doing to win in that space? Really walk you through the key capabilities, the business model, et cetera, 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. First of all, I will do a little bit of a recap just to reground everybody in our strategic priorities. Doug Straton, who will take us through the digital commerce piece, which is a big chunk of our day.
We 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 have a little bit of Q&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 to have the chance to ask us those. Lastly, you'll have a chance to tour what is one of the greatest state-of-the-art manufacturing facilities in chocolate, our West Hershey plant, that we put a lot of investment in over the past several years. I hope you find it a really informative and action-packed day.
Let me start a little bit by regrounding you. March 1st, a year ago, I talked to you about my vision for Hershey to be an innovative snacking powerhouse. 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. 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. 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? 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, 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. 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 barkTHINS and Amplify, where we are seeing very strong growth and very strong profitable growth.
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%-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&A, and again, to say, "Is every dollar driving the maximum commercial value? Where it is, let's keep it there." You know what? There were some places that we could make different decisions, and we did. 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.
The first core capability that I 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 Reese's 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. We've continued to see really strong growth on our Ice Breakers bottled gum business, where we have a proprietary product.
We invested additional capacity about two years ago, going forward, we'll be investing in additional capacity behind that business. Those have been great investments, and as Patricia always likes to say, there's no better investment than in core 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. One of our big focuses today is around ERP and digital transformation, specifically focusing on e-commerce, I'm going to lay a little bit more of the land around that digital transformation perspective.
If I look at what's possible today with technology, with data, it's very different than what was possible many years ago. I think there's a huge opportunity for us to continue to take our data technology to the next level. We're really engaged in a company-wide digital transformation. 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 staff function, a little bit less of a commercial function. I think that data and analytics and technology were available to us, 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 core system within that, we've spent a lot of time acquiring and building the right data, the right data lakes, importantly also building and fostering a culture that is grounded in data technology. If you have all that 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. Right now we have a digital transformation, it is really focused on powering our entire organization. If you look at our 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 is complete, it's operational, it's giving us data and analytics at a much more precise level, at a much higher frequency level than we were ever able to get previously. That really has just started happening over the past couple of months. 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 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.
If I look at each functional area, there is an initiative or a project like 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, 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.
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. Let me give you a couple examples. You know that we spend a pretty high % advertising as a % 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. 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 and 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. 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. We are absolutely focused on that. That's one of the beginning places of how we win, in our consumer insights and 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. 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 we 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? 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? How do I think differently about how the space in digital works?
What new opportunity does that create to have a unique portfolio where consumers are thinking differently? 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's 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. 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 three or four or five years. It's at an accelerated rate. 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 win 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 that? Because the consumer shopper journey is not one of offline or online, it is interwoven. That's a place that we're very much focused.
Lastly, I know a lot of folks have said, "Can you make money in e-commerce or is this a margin dilutive channel?" 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 things really well here. Number one, 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. 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. Hey, I'm happy to take that learning as the food business is now expanding more broadly in this space.
We've taken advantage of really looking at those opportunities, as I mentioned earlier, where purchase patterns are different and we can drive a higher average selling price. 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. 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 into business. That's the way, the same way that we're thinking about this business. Therefore, if you combine leveraging those capabilities, building the right new capabilities, 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. 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, more recently about what, 12 years ago or so, when dollar stores were really not a big factor in the marketplace. They started to come into the marketplace. They were a little bit more of a closeout. People sent closeout product there. They were focused more on general merchandise. They really weren't focused on food initially. They became focused on food.
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. 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?" 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, what we always have to do is adapt to that. 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, also building the right new ones.
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." With that, I am going to turn it over to Doug.
Thank you, Michele.
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 for a bunch of analysts, so make sure that you're cool, but not too cool." 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&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. Prior to this, I worked for Unilever, where I held two roles.
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. I both wrote the global strategy and then actually had to bring it to life from an operational perspective. I have good knowledge of both sides of that coin. I came into Unilever through acquisition, actually. I helped build, run, and then sell a small startup to Unilever in 2009. Prior to that, I had roles in sales and marketing of successive responsibilities at Bristol-Myers, L'Oréal, and Louis Vuitton. A pretty interesting career. Just one little thing here. I'm a little bit different. I have a purpose in life. My purpose is to build bridges to mysterious islands.
Let me just kind of Yes, I did have to go through a corporate course to come up with that pithy one-sentence statement. 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 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. It's kind of how I'm built and it's how I work. When you can match that kind of purposeful mission with the right kind of role within a company, good things typically happen. The next thing I wanted to talk about a little bit is, why did I choose Hershey? There's a couple of reasons.
I think the first thing was, I think Hershey can win. The reason I think Hershey can win in this space is what I've found is that big companies, when it comes to digital, they have a harder time kind of like moving that ship, right? You've got a lot of smaller upstarts that are a little bit more nimble, kind of nibbling around the edges. Hershey, to me, was a company, after I explored a couple options, that had, I thought, 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. The other thing is purpose-driven companies and working for a purpose-driven company is really important to me.
Obviously, there's a long legacy of purpose here at the company. That's kind of the 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 had done, particularly in some things in and around digital media over the last couple of years, also social or earned media, it's really been fantastic. Actually upon my conversations with the broader executive team prior to coming on board, a lot of questions were, what are the technological platforms that you have in place? Who are the types of people that you're hiring? I was really impressed, actually, 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've died to have actually in my previous life, were actually here. They just needed to be leveraged to their fullest extent. Here with a lot of confidence, we are going to spend quite a bit of time on the following topics. I don't have a huge amount of time, and I want to make sure that we leave enough time for questions. 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. 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. 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 five years or so.
If it's bigger than that's fine. I think we're going to be well poised to take advantage of it from a capability and talent perspective. If it scales faster, we'll be able to easily scale with it. 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. The online penetration in Europe is about 5.6%. The global penetration, by the way, is 5.8%, and if you look at Asia, it's around 7.3%-7.4%, and that's really driven in large extent by China. A lot of these countries, particularly in Europe, started a lot earlier on than the U.S.
If you look in the U.K. in particular, which is kind of the leading-edge European market, Tesco launched online grocery 18 years ago. 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. It's not something that when you're moving online, you're going to see a big, huge impact of the business. Particularly in Europe, these two things are very important as you start to look at the U.S. market. The first is, when Europe went in, those countries very much smaller, obviously geographically, fewer population, and fewer retailers. If you had a Tesco go in, for example, in the U.K., all the other four big guys had to go in, too. That's part of the reason that it accelerated.
There was the competitive pressure to do so. The densities were really great. If you look at the U.K., again, the population density is about 60% of the folks are located in and around London. 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? 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%-1.9%, is that the real investment in this market did not really begin in terms of online grocery until about right here. Okay? This is about 2015. This is where Kroger and Walmart started to really roll out their Click and Collect.
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. It's really sped up in the last three years. This is important because, a good portion of our portfolio is obviously reliant on temperature. 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? There really wasn't the ability to speed up the growth in digital commerce for The Hershey Company until about this period. We're tracking right along where we need to track in terms of the evolution. It's really dependent on what the retailers want to do as much as it is on our own capabilities.
Okay, hopefully that's clear. The what hasn't changed, the how and the where have. 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. The behaviors and the trips and the pay points obviously have started to evolve. 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. The necessary logic is, well, if there's fewer trips, then you're going to have less ability to have impulse. The thing is that you've got a lot of other opportunities. The first thing is, the last time I checked, I think the global penetration of smartphones is greater actually than the population of the planet.
There's literally billions of pay points that are literally in your pocket. Every retailer you can think of, their best assortment, 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. 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, we talk about the physical trips like they're the only trips that are actually happening. 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. 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. 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, Michele Buck referenced this. This is reality. Okay. 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. The fact of the matter is that it's a continuum across online and offline.
It's happening 24 hours a day, seven days a week. Again, it really boils down to this thing and the laptops and tablets. Everything is connected all the time. You're really not ever not shopping. Once you kind of get your head around that, you can start to build out, well, where are the best places I can touch my consumer and wring the most amount of return out of the journey and make sure that they purchase? Okay, hopefully this is clear. Specifically, we're going to talk a little bit about this spot right here. 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.
That was a great model, believe it or not, people were worried when that model was actually introduced, whether it was actually going to work. Obviously, it did. Now you have at least 4 other big buckets of fulfillment that are largely controlled by the retailers, obviously, that can serve consumers. Those actually become opportunities, okay? They become opportunities because of data. Let's run through a little bit here and talk about our keys to success. We are going to go 1 level lower. We start with the landscape and the consumer, now we want to talk about why we have a right to win. As Michele Buck 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 are actually tied for number 1 with Google. There has been some other work around millennials as well, we are in the top 10 there, we resonate quite well as a brand with that demographic. We have deep customer relationships. I can tell you coming from my previous life, The Hershey Company teams were held in very high regard for both their analytical prowess and their executional ability. Obviously, we are 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. Strength in paid and earned media, I referenced that before, from an innovation standpoint, upon launch, we have the ability to generate 3 billion earned impressions.
What that means is people interacting with your brand in a social setting like Facebook or Twitter or whatever it might be. Finally, we are important to our retailers. Our profitability amongst categories is among the highest, there is a real willingness and need for us to perform well in the individual retailers. That is why, combined with the other things that I have just mentioned, they are so eager to partner with us. We are winning. If you look at our share year to date, 250 bps. Trips are increasing. Online visits are greater than offline trips at this point. We will talk about that in a minute. Driving higher average selling price. What we see in the online world is 1.2x-3.5x in terms of basket size, depending on the model, or on average selling price, sorry.
Bigger baskets, 1x-3.5x in our brick-and-mortar averages. We are maintaining our margin profile just a little bit below, that is based on early estimates or early investments in terms of getting the capabilities up to speed. Rob, I see you looking.
I'm just wondering how you get a selling price at three and a half times.
I will show you. Okay, let's talk about the circle of life. Okay?
References to you? Like how does that work?
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. Michele hit this a little bit, but I'm going to hit it in a little bit more detail. The first most important piece in terms of digital commerce that you need to think about is being found, okay? This is what we call our connections pillar. This would include paid media, TV, paid digital. When we think about it in the digital commerce sense, what we typically think about is winning at search, okay? Whenever I say the word search here, what I want you guys to think about is the physical shelf, okay? Search is shelf. Second 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 fourth is convert. This is about being on the list. For Rob, this will speak a little bit to how do you get those basket 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 as opposed to just trying to hit them at impulse. The fourth is community, which is about CRM. 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 wring the most out of the business. We're going to start with consumer. I'm going to spend a minute here and just really underline how important this is.
If you understand the mission that that shopper is on, whether it's a fill-in trip or whether it's a 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. Let's just talk about this a little bit. The big thing is shoppers have options beyond just filling up their own carts. If you take a look at this, we break them down like this. 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 would all be ship-to-home models as well as what we would call third-party marketplaces, which is when you're buying through an Amazon, but not necessarily buying from them. 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 work. The key thing here is-
Get the multi-pack.
Yeah. If you take a look at this, what we can do in this model is instead of selling them one single candy bar, and maybe they buy that candy bar three or four times a year on average, is that we sell them a pack, okay? 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? 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.
Average selling price can.
This is how. Yeah, that's exactly right.
Impulse purchased, impulse consumption.
Not for the same product.
Okay.
Right.
Yeah.
If you think about it.
Portfolio
If you have trouble believing that people are going to put a single bar of chocolate into a basket, you're probably right. You can do that in certain models. It will work for certain models, but in other models, it won't. We don't concentrate on it. What we typically do is we're upselling you, okay? If you go to the next model, you've got family snacking refill. Family snacking refill, it's actually two 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 ware room in the back. Those assortments basically match the actual physical store, okay?
You're basically pulling from the same assortment, and because the basket sizes are so much bigger, in this model, you're talking three, four items, depending on the model. Some models can be 20-30, but let's just say three or four items. We're in a situation here, the baskets are 35-55 items. They're full basket shops. Because they're pulling that many items and they're pulling out of the assortment, you can just use your regular assortment. There's not really much you have to do from a portfolio perspective. 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. Anything that we basically sell in our national portfolio can work in those models. The other one is sudden craving. 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-$45. Their highest traffic period is around between midnight and 2:00 A.M., if that gives you a sense for who their target market has been thus far. The final piece is special purpose, D2C. 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. In this case, what we would do is we would service them through D2C models. This is where the average price and basket come into play. Over here, there's a sweet spot for selling in these models. What we do is we build a portfolio to hit that sweet spot. That's what you see is the average price is three and a half 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 1.2 and 1.2. The reason this happens, in large part, is through algorithms. Okay? Most people shopping, I think the last stat that I heard was about 38% of people actually write a physical shopping list. 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? When you do that, behaviors 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?
That's why what you get is these effects of, it's moving it from an impulse consumption behavior 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. Obvious in D2C, it's a very, very different proposition, and so therefore the basket sizes and average price are much different. Okay. 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, et cetera.
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. Let's talk about connections. I mentioned search is the shelf. When we think about the actual physical shelf, eye level, what we call the strike zone at Hershey, is the most important piece. Okay. If you're an item and you want to get the most kind of off-take from the shelves, being at eye level is really, really key. 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 second page of search results. Okay. Every nerd that does this type of work knows that. This is really, really key. I told you it'd get a laugh.
I actually knew the answer, but sorry, I'm like, "Oh.
Here's the key thing. Hershey has deep expertise. They have category captaincy or advisorships with most of our major retailers. What we're pushing is, you think about the science of the shelf and the physical world, of which we are acknowledged experts, ranked number one by the Advantage Survey, which is a ranking done by our retailers. 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. Here's an example. First of all, the one thing that might be interesting to all of you is that the second most popular keyword in terms of a grocery shop is actually chocolate.
Okay? That's good for us. This we pulled about a week and a half ago. It's a decomposition of a search page. 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 that Hershey bar, which is an instant consumable format, but is actually a 36 count, we're making sure that that's at eye level. 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, mostly through sales, drives you to the top of search results. When I pulled this, and it would be different for everybody and it's going to be different on different days, but six of the nine top organic search results were Hershey. Okay? We basically have a playbook around this, so I wanted to give an example of this Hershey variety pack. 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. It's a variety pack, and it's delicious.
All right, you can take a look at that. 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. Prior to a big high traffic event on a retailer, the product was not faring so well. This is in 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, also post-event, it was ranked number one in three of the subcategories, so chocolate being one of them.
I think chocolate and fudge and peanut butter were the other two, where actually if you were searching within those kind of sub-segments of grocery, it was the number one result. It was at eye level. You were basically in the candy aisle and it was there. Does that make sense? Great. Let's move on to content. Content's 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. What they mean by that is that the digital visits are preceding the physical visits. I can give you a couple 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. 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. These things are converging together, so it makes sense to plan them that way.
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. Again, content is the equivalent of packaging. This is like you're in front of the shelf and you pick up the product and you put it in your hand and you're interacting with it. What we talk about in digital is we talk about from foot stopping to thumb stopping.
When we think about merchandising in a physical world, what we do is we're like, you're in front of the shelf, or rather, something catches your eye. You're in front of the shelf. Person picks up your product, they interact with it. For us, it's a little bit different because you're on a smaller screen. We think about thumb-stopping visuals. Visuals that demonstrate what exactly this pack is. 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, et cetera. We seek to simplify that.
The way we think about it is the packaging needs to be seen on a 5-inch screen, but it also needs to be able to be easily identifiable in the same way from about 20 feet. I'm guessing most of you are between 20 and 30 feet from this pack right here. If Melissa picked it up and showed it to you could say, "I know that that pack is exactly what I'm seeing on the screen." We're starting to think about what's the digital impact to what happens with folks when they visit in the physical sense. 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. Whatever you're going to do when you pick that product off the shelf.
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. Subscribe now, getting them on the list. 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. We talk about one of the biggest purchase barriers, which is summer ship. We offer cold ship on this item so that the product arrives at the consumer's doorstep in the best possible way. Conversion. This is where it gets fun. We're imperfect. Humans are imperfect. Machines are less so, if programmed correctly. Purchase history is a gift that keeps giving.
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 pre-populate a list for you online. When you make your first online shop, if the retailer's 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. The interesting thing is that people continue to search. 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. It's a really interesting dynamic. The balance happen through paid ads and a couple other techniques.
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 a computer's going to capture everything. Algorithm adds it to your purchase. Shopper purchases from the previous list. The shopper repurchases it, obviously. The thing 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 one bar at checkout. 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 rate's about four weeks. We think you should buy some more. 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. We'll just send it to you automatically. You don't even have to think about it. The one that we just spent the most time in is shopping from your list. Here's what you bought previously, click on it'll go into the basket. The beauty about this is that at the retailers that have enabled it, you have what's called a basket to recipe and recipe to basket. It might say, "Hey, you've got three of the four items that you need to create a wonderful Hershey chocolate cake.
Just add this item of Hershey's. You can bake that cake for your family." It's a pretty cool functionality that I think most of you have encountered in some way, shape, or form. This is how it brings it to life in terms of our category online. We talked about this a little bit. Impulse consumption is an opportunity. We want to go from you pick up one bar and maybe you eat it on the way home, to we're going to send you this 30-pack. It's an expandable consumption category. I, last night, said I was only going to have two of the four little sticks of my Kit Kat. It's dark chocolate Kit Kat. It's my favorite. Of course, I ate all four. My wife yelled at me, and she went and got her own.
It is one of those things where if it's in the house, it's in the pantry, it's going to get eaten. That's a good thing for us. Okay? Just to be really clear, we're not ignoring impulse. The key thing is you can't think of impulse in an online way, the way you think about it in the store. People are like, "What's the analogy for the checkout in a digital world?" I would say to that, it's nonsense, because the behaviors are different. You still need to interrupt. You need to interrupt in a way that simplifies things or is not so in your face. Okay? We do have things in checkout line.
If you've ordered through Click and Collect, 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?" 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. You have another opportunity to interact with them from an impulse perspective.
Post-order add-on, this is like, "Hey, did you forget this?" Again, this won't work for every single model, but it will work for some models where you can get one or two of the individual items. Make the minimum, add a bag of chocolate, add a variety pack, whatever, to get you up to your free shipping threshold. This is also a really good tactic. Then we talked about auto add to recipe. Okay. 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. Gopuff is a convenience store through an app. As you go into the app, this is literally the landing page. You've got drinks, pints, munchies. You click on munchies, you get this scroll bar on the top here.
One of the picks from a category perspective is chocolate, you can see Hershey absolutely dominates that page. We also play, obviously, in broader snacking, with SkinnyPop, under a popcorn heading. 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 grocery has started to invest. There's 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, and particularly in instant consumables. Okay. Then just magnifying seasonal opportunities. This kind of brings that ecosystem to life. 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 you, 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. 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," et cetera. Digital gives you some additional opportunities that you didn't have before. Finally, in terms of convert, drop ship. 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? That had impact on sales, obviously.
We've solved for that. 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 with 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. 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. Building relationships through data acquisition. 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.
I think CPG, in general, was a little bit slow to adopt. It really started in beauty first about 10 years ago, and it has been slowly migrating into the categories as they evolve and they start to migrate online. From this standpoint, we think we can really, really win. We have, number one, iconic brands. We have the ability to touch people in a 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.
As we are bringing this information in and we are interacting with these consumers, we are just going to ask a few questions and fill in these profiles so that we can understand who is 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 to purchase our goods. Okay. 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 is a very detailed subject, 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's brand, okay.
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," it gives you a map as to where the product is and can be found. "I am not so sure. Let me learn more." 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. As you go down that funnel, obviously, interesting things happen, but it just goes to show you, in the moment of your crave, we can actually serve a message that is bespoke just to you. Over time, what we will be able to do is actually personalize that content very specifically to you. Okay. I am going to take a pause and a little drink because I feel like I am talking extremely fast.
Is everybody getting all this? He is writing down every word. Every word. Every word. I am going to give you this presentation. Okay. The first thing I really, really want to land is that our fundamentals in place. We have both a broader enterprise digital framework, which you saw, that is the wheel, 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, 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.
From process change at the R&D and innovation level, all the way 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? 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, through 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, we also want to make sure that they talk to our retailer platforms as well. This allows us to share information back and forth in an easy way.
Again, it's all in service of driving the sale. We have a fit to compete structure, and really good talent. You take the fundamentals, and then you think about what are we going to magnify. The intense focus on snacking and snackfection, our customer relationships, obviously our category management capability, our strength in media, and then our early lead in data and data science. That was another nice thing upon coming here is 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. The team. Again, our team is not downstream, which I just mentioned. 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. Also interacting with our broader sales teams with Phil. We have enterprise digital operations. We'll talk a little bit about what that enables. That's essentially taking all the core digital marketing capabilities that we have and running them in the best possible way for the organization. The last piece, obviously, that Michele Buck referred to, digital transformation and best practice. We're doing a lot of work, process change, looking at different roles, redefining them, making sure that everything's focused to the consumer, and is fit to compete in a new world. The team, I think, that we put together is really impressive. Google, Microsoft, Unilever, Amazon, QVC, P&G, Accenture, and obviously Hershey.
What we're trying to do is balance these outside perspectives with internal, so it's about a 50/50 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. It's a good model that I've used before, and we're already seeing great results there. Then, don't believe me, believe what the external benchmarks say. We're really performing. This is L2. If you're not familiar with L2, they were just purchased by Gartner. The guy that founded it 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 bestseller list.
This is his consulting group, and what they do is across basically those five Cs, they measure 1,250 attributes. This is specifically for food. You can see that we're outperforming just about everybody except for Mills here, and you've got Reese's up here, nearing the genius level. 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 six 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. Fundamentals, structure, and team. Now we're going to talk about the growth. Okay. The most important thing, obviously, is we want to get growth out of this and profit. I just wanted to pause.
This is a busy slide, but an important one. Okay. 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. 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 new world.
Real strength and social media strength, obviously, we've got scalable logistics. The big piece is around that five C wheel. We've got 27 KPIs that we're tracking across those five Cs that allow us to know whether or not we're doing a good job or a bad job. Across that entire ecosystem, we are fine-tuning how we think about it, and again, it's all underpinned by the data, the technology, and the team. 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. You get those accelerators combined with the investments that retailers are making, and real magic will come out of that.
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 nine months. I think we're on a really good trajectory. With that, I'm going to pause, take a sip of water, and then I'll field any questions you might have.
Thank you, Doug. Go around the table.
Sure.
Please into the mic so people on the web can hear you.
Thank you. Doug, you threw a lot at us, a lot of really interesting stuff. If you had to. 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 one or two 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?
Yeah. I think at a very high level, you think. I mentioned it, I think, three or four times, the three-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 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. We think we can continue to wring more ROI out of those broader media investments through data. I do think in terms of how we're approaching search holistically. I own search for the organization, and we didn't talk really about a couple of interesting facts around search.
The first is when people search for products, 76% of the time they start at a retailer. They don't start on Google. Okay. Getting retailer search, and therefore being really sharp about holistic captaincy, which nobody's really doing, is fundamental. I think that is going to be a key area. 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 three evolutions before we kind of landed on a model that really works. 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.
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 nine months than maybe in two and a half 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 walls are being built that you have to kind of crash through. I think that ultimately that would be a big advantage to us as well. Does that answer your question?
It does. Thank you.
Okay. Rob. Then we'll go to the other Rob, then we'll go to the other side of the room.
Thanks. Just a couple of stats that I was curious about. One was, I think you said when consumers go through the Walmart kind of click and collect path-
Yeah
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.
Yeah.
Maybe you can help me reconcile those two.
Yeah, sure.
When people go through Click and Collect, do they buy less impulse snacks or not? If not, why the 1.2 times? I'll have a follow-up.
Yeah. The context around that research is, number one, it was self-reported behavior. It was not necessarily based on data.
Which one? The 1.2 or the 25?
The 25.
Okay.
The 1.2, 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, then obviously doing the analytics on it to see where we stand versus our national averages. That is solid data. Just to be really, really clear, that is not peculiar data. My experience seven, eight years ago in talking to retailers in the U.K. was basket sizes for online grocery were bigger than the physical. Folks that were shopping the entire ecosystem had a larger lifetime value than folks that either shopped in either or, okay?
You can ask any of the retailers here, all the big guys in mass, all of drug, anybody that's being really, really serious, 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. That is solid information. Now to the 25%, that was contextual. The piece that you're referring to is the power of search in a retail world.
That was really geared towards retailers, that was kind of a push to say, we can't ignore this space. Here's a possible outcome, 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. The fact of it is that algorithmically, what ends up happening is you can mitigate anything that would be a potential loss. If you look at other research, it'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 demonstrate.
Are you saying that they're buying 1.2 times more candy or just 1.2 times more stuff?
No, 1.2 times more candy.
More candy.
Yeah.
Okay. 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 these are retailers kind of governing their own retail space.
Yeah.
Do you have to custom design your marketing kind of effort for each of those retailers? Because I saw 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. Is there a high cost to kind of adapting to each of the retailer apps?
No, not really. Remember when I was talking about the different platforms and the modularity?
What you need to do is, you basically can, if you pick the right partners, they'll have what's called an API, which is just an interface-
which allows your data to speak to somebody else's data. 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? That you get very good consistency for the most part within those retailers. 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, et cetera. You can get consistency through automation.
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? Yeah, to a degree, you have to rely on their ability to, well, number one, whether they want to work with you or not based on the priorities that they have. 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 one or two lines of code. It's not a big deal at all to actually stand up. Of those that we showed, we've actually had three pilots. One that's finished and we're doing a second iteration. It showed good results. The other two that we're just standing up right now.
Yeah, you do need the retailer's ability to be open to the solutions, they want them. They're asking for them. We've been told specifically, I've sat in meetings, they're like, "If you can help us crack this, we will work with you." We're like, okay, two things. We've got concepts over here that we can test right away, and we've got a team now focused on holistic captaincy 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.
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? I thought I heard it was like 1%-2% of the company sales. Is that about right?
Yeah, in terms of retail, it's about 1.4, 1.5.
In terms of share, you've got a couple of dynamics going on. In the brick-and-mortar world, we're either equivalent share or over-indexing on share, in some cases quite dramatically. 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 the search strategies correct, we took some business decisions to ensure that we had the appropriate profitability within that sub channel of e-commerce. That was setting us up basically to level set and then grow from here. 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.
Similar to what you see in the physical store sometimes
Great. Thanks. Just kind of one larger question around kind of the shift in the digital world, better RSPs, trying to trade consumers up, I guess, in terms of just increased purchase and consumption, relative to, let's call it margin accretive, more attractive single serve business, that I'd say a lot of food companies are envious of, right? If you can serve more single serve in confection, good RSPs, you get good margin, et cetera, and that's kind of part of the larger financial framework of Hershey and why returns are good and why margins are good.
If I look at everything you just said, it would seem as if, is the future of Hershey now completely changed because of the digital transformation such that, if you can get 3.5 times 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, well, we're losing impulse, but aren't you gaining price and the whole strategy is to sell a lot more volume? I don't know if there's a lot in there, but just kind of general thoughts.
Yeah. I'll take the digital piece, and then for the more holistic pieces, we can pass it off to Michele and Patricia. The first thing is you have to believe, what's the penetration rate going to be? I think we clearly articulated at the beginning of the presentation where we feel it'll be within the next five 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 yeah, we're going to do what we need to do to grow the business. 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 impulse as we think about it in terms of you're at checkout and you grab a single serve or a king size, and then you eat it on the way home. Impulse purchase behavior manifests itself online. It's just in a different way. 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? There is impulsivity in online. We just can't think of it as an analogy. That's the fallacy. 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, then you're in a much better place than if they just pick up a couple bars, single serves a couple times a year as they're running through the checkout.
There's a balance there, obviously. We have modeled out worst case scenarios, mid-level scenarios. Traffic right now is kind of steady state. 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? 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. 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. Things look good based on those models. Hopefully that answers it from a digital perspective.
Yeah, I think that was pretty-
Well said. 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 one. Instead of buying one four times, buying 30 less frequently. I think that's key, and then impulse purchase, we will still drive as well. It's almost like how people are doing their purchase will change. Their behavior will continue to-
Evolve
Their eating behaviors will remain, but we may service them in different ways. 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. I really think about it as a different commerce model and us adapting our 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 you just gave us on gross margins was helpful. Thank you for that. You also referenced in terms of winning at point of shelf, the importance of paid display, paid search, et cetera. What line item of the P&L is that expense coming out of? Is that an SG&A line item or does that fall into sort of a trade spend above the line type line?
SG&A.
If you were to fully stack the P&L online and allocate those, which seem like they're pretty channel specific, would you still say that the margins are comparable online or close to comparable versus offline?
Yeah, absolutely. Yeah.
What bridges that 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&A.
Actually, I'll respectfully correct Doug a little bit. There is a good portion of that that actually hits in trade because it's going directly to retailers.
Yeah, that's right. I'm sorry about that. In digital, you have merch placements just like you would have-
Got it
media placements. Yeah, there's a bit of trade in there, and there is SG&A. Yeah.
Okay. That's helpful. Now I kind of understand-
Yeah
how we can get closer to parity.
Yeah. I'll touch on that.
Some of it's trade spend kind of equivalent, some of it's kind of marketing spend equivalent.
Sure
If you think about it.
I understand that.
Yeah.
Got it. 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? That sounds expensive. Where is that cost carried?
Here's the beautiful thing about what's happening in online. The beautiful thing is, the first thing you're like, "Oh my God," this was 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. The thing is, in my previous life, we actually had ice cream. Interestingly enough, ice cream over-indexes online. 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. We have a drop ship capability, and when we need it, we have cold ship. The expenses related to the cold ship are not always going to be built into that. Okay. 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, the fact of the matter is, the models themselves are addressing the issue. The penetration of cold ship will remain relatively small. In fact, might over time, the need for it might disappear. 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 Gopuff and the Amazon Prime Now, they're delivering that product within 30 minutes.
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 the kind of revenge of the milkman. I think people are going to have basically cold containers built into their house, you open it up on the outside, you drop stuff in, then everything's fine. 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, that most of that growth is within temperature controlled environments, we're not that worried that it becomes a big down elevator.
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.
Correct
the selling price higher in that.
Yeah
home delivery helps to offset it. If you saw, that was the three and a half times selling price.
Yeah, that's right.
I have a question a little bit in relation to economics here. What happens on the back end at Hershey in terms of fulfillment? I've heard some very inefficient stories of companies making stuff, packing it, selling it, bringing it back, repacking it, and then finally sending it on to Amazon or whatever it may be. I'm curious from that standpoint, how is Hershey aligned well and efficiently producing the stuff and then sending it to the online fulfillment center, if you will?
Yeah. There's two ways to answer that question. 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 and 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's going to come from. A lot of the specialty items comes for it if you have to service just that ship to home model in a certain way.
That's smart for us to do because that drives average selling price. The economics stay sweet for the retailer as well as for us. Hopefully that answers your question.
Yes.
Yeah.
Maybe related to that, are there capital needs related to online fulfillment, I guess is the way to ask it?
Possibly.
Okay.
Depending on the model that you pick. 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.
Yeah.
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. 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.
Sure.
Just two related questions on the consumer behavior. First, back on the slide where it has the higher volumes and ring, where's that kind of sourcing from? We've talked about the share, I think probably within candy, but are you seeing online growth ahead? Are you growing the category more? What other snacking or where else would that be coming from? Do you know what shift the consumer's making? 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 a history suggestion or search.
Search.
Clearly, there's an apples and oranges element, how do you feel like that compares 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?
The first part of your question was around the behaviors and where is it sourcing from, right? The second is around. Okay, I got it. Yeah, I just want to make sure because there's a lot in there. The first piece is the consumer behavior piece is actually, it's ongoing. 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. 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, that's the first piece. 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 brick-and-mortar retail comparison for basically the.
Oh, the list, yeah.
Do you have a way to kind of quantify the impulse percentage purchases or the list behavior online and brick-and-mortar?
Yeah. The best data that we have, literally this is recent data that talked about the impulsivity online versus offline, which I think I mentioned in the presentation. Essentially what it says is that people are no less impulsive in an online environment than they are in an offline environment. That unplanned component is still there, and that's where the search piece comes in. 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. They're running around and they're typing in the search bar, running through the menus and whatnot. From an online, offline 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?
Yeah. Thank you.
Okay. All right. I think, Andrew. Yeah.
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. 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? 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, first-mover advantage that could have some structural, maybe, stickiness to it?
Yeah. 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. Really, I would say in the case of a Mars, I think they've got some examples of some very good digital work. It doesn't seem to translate across all of their brands. From the independents, much, much, much further behind. For us, I think the key competitive advantage is, and I can't speak for the competitors because 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 in seven or eight years across four big categories that had very different dynamics. 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. I have a deep network of folks that are experts in some of these areas. For us, I think some of the advantage is in the thinking. We gave you a hint of what that thinking was. Obviously, we can't give everything away. 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. 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. This is just like our first iteration of digital pack combined with physical, those insights and whatnot. 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, a few years ago, Hershey was partnering with Chef'd in terms of, I guess, distributing their offerings through those recipes and that meal kit offering. Were there any learnings from that that can be applied into this? What were kind of the takeaways with that relationship and how that kind of evolved over time?
Yeah, that's a really good question. I can't speak to that partnership specifically because I was not here. 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. The capabilities needed to pull them off are easily repeatable by other folks, right? You've seen consolidation in terms of people buying them out, Safeway, Albertsons being one with one of the competitors. I think Chef'd is now defunct. There's a lot of those other players that are kind of on the ropes, I think. Do I think that those types of things, a different type of thinking is an opportunity for us? Yeah, absolutely.
I think if you look at companies that are doing really interesting things in broader digital, the pizza chains, some of the coffee companies, obviously Starbucks being a big example. Do you know Starbucks actually processes more mobile payments than either Apple or Samsung? Through their app. 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 thinking about it for sure, we're going to explore. We will get more juice, let me assure you, out of getting the basics super brilliant than any one other initiative. We're being very choice in terms of how we approach it and time it.
That pack, one of the packs Melissa showed us, that 30-pack, I've bought that at Costco before. I think the one behind it, but either way. Club seems to me to be similar in certain ways to this impulse argument you're making.
Yeah.
Did it play out? 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?
My understanding through.
BJ's users care?
Actually, I'll let Phil answer that question.
It's a great question. We talked a lot about Club in this model because if you think about it in Club today, we don't sell a single bar.
Nope.
We never have. This really was built for that Club shopper and this is one of our biggest selling items within the Club today. 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.
Eat candy.
getting in there is really critical.
Now stop waving that in front of me.
Sorry.
I'm getting really hungry.
Do you have any data that suggests that or compares reported consumption by consumers at club versus 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 one, yet 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 consumption.
There is a component in terms of, number one, in an online sense, the club models do really, really well. We lump them into the ship-to-home. The dynamics that you're talking about are there. It mimics the physical. You have the expandable consumption piece from the consumer, but a lot of clubs, you also have businesses buying, smaller businesses buying.
Okay.
Those end up actually being, they could be retailed, or they could end up in an office environment.
It's hard to say.
It's hard to say, but either way, 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. The same dynamic, regardless of what type of customer you have, the same dynamic is happening from a consumption perspective.
Thanks.
Yeah, I would say in Club, because we talk about a third instant consumable, a third take home, a third seasons. We over-index in instant consumables in Club. It's not a perfect analogy, but we do sell between variety packs and our traditional packs, we do over index.
Thank you.
I'd love to come back to the similar topic, sort of proof points that the category, even with the shift online and the loss of maybe these checkout impulses, that the category can still thrive. What have you seen in some of the international markets? 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, and share of stomach, which had been growing, took a step back. Should we look at that as proof point that the category is vulnerable from a shift online? 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. I think, I can't go into huge detail around the whys and what fors, but they're basically skipping an entire generation of retail, it's had some really, really interesting effects on broader FMCG. I don't think it's a proxy for the U.S. business. For example, if you're skipping a generation of retail, you're actually skipping all the purchase histories, et cetera, et cetera, that have been built up behind that traditional retail environment, right? That's why we look at more at in terms of what happened in Europe. I can tell you, one of the first questions I asked myself was, well, from a snacking perspective, what happened in Europe? Did it disappear? Was there a big issue here? It didn't seem like the issue was there.
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. I wouldn't say it's a magic bullet because there's a lot of other things you have to do, but that was a way you would mitigate and continue to drive the category penetration and consumption.
Dan?
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 the content, clearly there's some relevance there. Is there still an ability to have a close partnership? Like how-
Oh, yeah
do you kind of-
Yeah, absolutely. How it works is, we have a broader digital transformation body that I chair, we have cross-functional partners from across the business in there. From a governance perspective and a ways of working perspective, the biggest decisions in how we're going to interact take place there. It's a big company, but it's not a big company. In terms of coordinating it, my team is very much linked in with both the media team and the social team that manages earned. 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. My team's going to focus on data acquisition and retention. 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. My team has the pipes that can push it out. 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. Yeah, Rob.
Kind of a basic question. Most of what we focused on examples today were Reese's. I'm assuming upfront, you pushed on core brands, higher, better margin profile, easier, I would assume, to achieve similar economics relative to larger portfolio. Just kind of thoughts around all the other products, Amplify, barkTHINS, what have you. There are different potential subcategories, how do you think about attacking those areas relative to Reese's, et cetera?
There'll probably be two answers to this question. I'll give you the digital version, then Michele and Patricia can jump in on the broader construct. From a digital perspective, what we've been doing is obviously Amplify is running as kind of a standalone business with a number of our other emerging brands. What we're doing from a digital perspective is we're in contact with that team. 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, 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.
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 they've got some pretty sharp digital marketeers that are in that business unit already. 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, SkinnyPop being an example. Right? Again, it's a lot of communication right now.
I think for a portfolio approach, we always start with the biggest brands, right? If we get a 1% lift on Reese's, a lot bigger than the 1% lift on Almond Joy. However, that 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? 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've been here, I think, 10 months and about two more days. We've implemented, I think, very quickly a lot of 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 JBP, where we actually talk about digital first before we talk about the stores, et cetera. 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. That's the best I can do on the answer right now, but I'll hand it over to Phil.
I think it's a great answer. Obviously, the retail dynamic is changing so quickly. Doug showed the example of mobile, desktop, and then in store. 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. You think about that spend. Some of that spend is going to digital. That helps us to influence what a season might look like, what a promotion looks like. We are starting to see that link together a lot more tightly than we did probably in the last two to three years. Hope that answers your question.
Yeah. Just one more build on that. I cannot give you specifics because it is proprietary, but in one small format chain, they will see that about one in three purchases that take place in the store actually starts in their digital store environment. It is just the actual transaction itself takes place in the store. For bigger big box mass, what you see is roughly one in four purchases start online, but then actually take place in the physical store. Vice versa, actually see one in three purchases start in the store, but actually get transacted in the online environment. You see these really, really interesting dynamics.
Clearly, if we get better at broader digital and get that digital store right. 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.
Great in store. That's where you've had this structural advantage forever.
Yeah.
You get the other piece of it.
You get the other piece. 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. 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 had, not just for Hershey, but for all consumer staples companies.
Yeah
is as consumer shift more and more to an omni-channel kind of environment, their expectations go higher, and they expect to have the product available to them in multiple different formats.
Yeah.
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. Maybe just help me, 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?
I think the best way is at the highest level, you're going to make investment trade-offs within that environment, right? Phil actually alluded to one. You've got situations where some things that might have been an investment, both by the retailer and for ourselves in terms of as a partner to that retailer, simply go away. Then they become digital. Phil used flyers, for example. There's no real reason, if you think about it, to do those now because people are 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. Those kinds of expenses can go away, and they can be transferred. There's not an added expense there. I'll go back to Andrew's question around the digital store.
The digital store in terms of fluence has huge impact on the overall. 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, really not that much expense at all. 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. I do think the folks that get the ecosystems right have a better chance to win versus those who cannot afford to make the change. I think they will benefit clearly from the dynamics of getting people with bigger lifetime values into their ecosystems.
The follow-up is, as the retailers have made the investments first, 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 before? They can charge you for participating in those click lists. For example, I think Kroger has said that flat out that they're going to charge their vendors for that.
Yeah. 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 happen in a physical sense. To the degree that you can make analogies in a digital sense, those are the same types of investments. We talked about the trade impact from merchandising perspective and in terms of paid search, in terms of SG&A. That's just as we play with our investments overall, we're just going to make decisions around that. If those areas, for example, Kroger's 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. 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? 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.
That's okay. Yeah.
I think too, we're always thinking of that holistic investment, right? Our retail coverage, category management, and holistic captaincy. 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. It doesn't really change. It just broadens the dialogue. I would tell you, three 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.
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. More and more the view is through the 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 drive the top line profitable top line. 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? I think we have really strong relationships that help to foster those dialogues.
Counterparts.
Yeah.
A great example is about two 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. Let's be clear, in-store is still really important. 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 also thinking about how can digital really add on to that. The dialogue is really healthy about how we win sort of in the physical world, but also online.
Awesome questions. Maybe we have time for one more if anybody has any. Otherwise, we'll take a quick break. Okay, great. Thanks for joining.
Wait, there's one over here.
One more. I'm so sorry. Last one.
Hi.
Hi.
Just for all this e-commerce and digital, how does this maybe impact the financials for Hershey 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 over the medium term.
If I refer back to one of my early slides where it said we're between 100 and 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. The way that happens is that as a business, it hasn't yet scaled. It's a growing business. We're doing great. 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. As time goes on and as the growth continues and the business gets bigger, those investments don't necessarily get bigger. That's when you're going to see the economics kind of line up with the overall average.
It's just being smart. I think the Price Pack Architecture work that we did at the beginning of the year was the right thing to do. You get those foundations right, you can scale the business without fear of diluting the P&L.
Great. For those on the webcast, we're going to take a couple-minute break. We'll be back at 11 o'clock with question and answer with Michele Buck and Patricia Little.
Thank you.
Thank you.
All right, guys. All right. No questions? Okay.
Hey, guys. Jason English.
Hi.
Thank you for the opportunity to ask a question. Clearly, there was a lot of focus on last earnings, both on the call and in the follow-up discussions with investors on the pricing dynamics in the market.
Yeah.
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. It sounds like only sort of Ferrero Rocher's moved its balls. You guys are moving sort of some super-sized novelty products up higher. Almost all the pricing action sounds like it's centered on gum today, with you moving on gum, Wrigley moving on gum, Perfetti now moving on gum. Mondelez is kind of still at a standstill. Is what we're hearing out of the trade, is that maybe misleading? Is there more to come, or are we really talking about list prices really just being constrained to predominantly gum today?
Sure. As we look at our price increases, we told you it was about 2.5% weighted across the business, really comprised of three different segments. 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. 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 price point and weight, price pack architecture, and the bulk of that really is against a piece of the chocolate portfolio. 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.
I 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 that competition did also price in the marketplace. Yeah, it does cover chocolate. If I look at it, I would say, without mentally doing the math, I'm going to say two-thirds of what we would get would be from chocolate on that price increase, the benefit of the price increase. 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.
I would say it's not like this is the one and done in terms of for the next several years. Yes, Rob. Oh, I'm sorry.
Hi, Rob.
Morgan?
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. Will the return needed to stay on your algorithm, or will it accelerate it? Going forward, what kind of level of reinvestment can we expect? Thank you.
Do you want to talk a little bit about return on our investments, Patricia?
Yeah. 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 similar to what we get in our overall business. We really see it primarily as, first of all, and I think this is an important part of the message that we wanted to get across, it's not margin dilutive. 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 Michele referenced at the very beginning, we do have some large investments going in, like with our ERP platform, 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. What we did do is we pulled forward in that journey the things that had the largest commercial advantage. 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. Frankly, we're already seeing them as we're rolling them out this summer.
Hi. I guess a couple questions. One was on the pricing. bracket pricing, price points and weight changes on chocolate, list prices. I guess I'm more confused than I was a couple of weeks ago on what exactly is going up. bracket pricing, is that just another word for list price? Because I don't think I get what bracket pricing is.
The bracket pricing or the terms-
It's in terms
terms is we have certain order quantities and certain price points according to what those order quantities are.
Right.
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. 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. 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.
A high volume ship.
That's what we call terms. Yeah.
Right.
Okay.
That's the one piece, and then the one bucket relative to looking at price points and weight outs is, okay, if we're going to reinvent a 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? That was a piece of the pricing action around. That's Price Pack Architecture.
You'll see that when we walk. You'll actually be able to see it.
You'll see the actual movement of this package to this package, to this package. The other third, where there's just the straight list prices on about 30% of the portfolio.
In the 30%, I was just noticing anecdotally at drugstores, all the deals are gone. I used to be able to get two 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, now it isn't. Is that a seasonal thing just because it's summer, or is it related to these price increases? Has anything changed to single-serve chocolate bars?
Nothing would be changing this quickly because we just announced our price increase.
July
mid-July, July 15th. We price protect deals that are underway. Most customers are planned at least three months out. It depends on the customer. Obviously seasons are planned even further. We are price protected on those things. Anything you'd be seeing show up at a drugstore like that would not be related to that.
Right. We're just.
Mike, can you keep that one up here for them?
Yeah.
Yeah.
We're actually, to Michele's point, we protect, so we're just seeing retail start to move on the everyday price on the shelf.
Our plans are out so far that on the promotional pieces, no changes really till the end of the year. I'm not sure which drugstores you're shopping in, but we're still heavily-
Only the finest.
Maybe like an old-
I listen to yours
Duane Reade or something like that?
No, much cheaper. Well, whatever.
We still Our strategy around instant consumable hasn't changed.
Okay
If you go into some of the retailers right now, we have item of the month around our Outrageous launch. There's a lot of activity out there right now on instant consumable.
Last question. You've reaffirmed guidance for the back half of the year. There's a lot of confidence in the room. The Nielsen data, 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?
As we talk to you a little bit about some of our performance in the first part of the year, certainly I'd say, we are seeing, as we talked about earlier, some shifts to unmeasured channels, and we are seeing a little bit more unmeasured channel growth than we have historically seen, and it's a bigger piece of the portfolio. 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 adds are really more in the fourth quarter.
Okay, great. Just in terms of a comment you just made, I think you said this in your prior call, just the confidence around gaining some incremental shelf through the back half. Just given the, let's call it heightened category competitive environment, just where we are in retail in general with the larger planogram allocations, let's say, why do you get more shelf? I respect you can't give probably-
Right
too much detail, just any color on that would be great.
Yep. I'd say two things. One thing I would say is, retailers look at their total box, they look at their space allocation and the return they're getting on every category. As you know, if we look across the total box, there's some pretty wide variations. Obviously those are big decisions for a retailer to make because frequently they take some kind of capital to change the category allocation. I can say that 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, we're going to be taking some space here." The other piece is just as we look at the power and velocity of some pieces of our portfolio, some opportunities where we're going to be actually gaining some share of shelf with some SKUs 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, this is one where we have visibility to some increased space there.
I think the one good example tied to that is we had talked about reactivating some of our brands around your Mounds and Almond Joy, your Yorks, and that velocity being the gift that keeps on giving. We had been losing some distribution for those. We had activated them towards the end of last year, in the second half of last year, and have gotten the velocities up. It was a good selling story for us to be able to go back and get some of that space. 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 of that set? Do those reset calendar year? Are they floating? How's your mix evolving? Just the latest figure on that pool.
Patricia, would you like to handle that?
Yeah.
We can have Jason jump in from here.
Yeah, we've been talking about freight for about 1 year, and a lot of people have. 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. We see that as a long-term trend, which is 1 of the reasons that we looked at bracket pricing when we took our pricing. We think that there are things that we can control on that outside of that. 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. They'll work very far ahead.
I don't know exactly when the contracts turn over. We also use some third-party providers to help us optimize freight. Another opportunity that we have to mitigate some of this inflationary pressure is to really look at the complexity inside of our own environment. We want to reduce the number of touches inside. 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. That's 1 of the areas that Jason's super focused on. Did I miss anything, Jason?
Nothing else. I'd just add that next week we have our largest carriers in Hershey.
Thanks
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 heads our U.S. supply chain. You'll hear from him later.
Thank you. Just one more on how to think about strategy with Amplify. They have been 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?
We have a holistic and focused strategy against expanding 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 confection portfolio, the other part is through looking at other snacking opportunities. As you've seen in the recent years, we have seen certainly 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 barkTHINS. We feel great about SkinnyPop, the fact that it's a scale brand with profit margins comparable to our base business. It's our sixth-largest brand.
The fact that we now have organized the Amplify business is our hub to run these smaller emerging brand models. 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. We do see that being a piece of how we will grow. 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.
They will selectively, we will either build, invest in, or acquire other brands, and it'll be a mix of all of those. They will not be having a separate snacking strategy all their own. It is one holistic kind of strategy. We have the M&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 five years. Yet it strikes me, I think you referenced 5.6% in Europe for food. It strikes me that the seasonal business, particularly where you're in the enviable position, particularly in Halloween, of really being must-have for retailers. If there's some way, and you also have consumers that need a certain quantity of it.
Yes
If you get it into their house, they'll probably eat more of it. We've been hearing about that for 10 years.
Starting in August, whatever.
That really good bathroom pass.
for Halloween display.
Yep.
You could probably do that significantly more with shipments. I wonder maybe, it's more of a Michele 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 to have and maybe have more leverage over retailers, less concerned about the pushback they might have about interaction-
Yeah
in that one particular place?
I agree. I think as we discussed this morning, I think the purchase model is different in commerce. There are certain things that are the same, but there are different opportunities. We can't just 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, et cetera. I agree that I think it could shake out that certain pieces of the portfolio, and I think certainly, I look at every season in that way, which is, we're a must-have during Easter for Easter baskets as well.
If there's a way that we can really capitalize on that from a true planned purchase maximization, I think that there could be a further opportunity there.
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. It works at all different sizes. It's working today. It'll work when it's in mid-single digits, and to the extent it penetrates even higher, it'll work there as well.
Yeah, 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? What we didn't talk about was, what are the other opportunities in terms of driving our business higher and the growth higher. Certainly we don't think that I don't think personally that it will hold at the mid-single digits. I think it'll continue to 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 by 2025, it's going to be this astronomical figure.
Like a third of the total business. Oh my gosh, like what happened?
Yeah, 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 five-year projection is good. Now, back over to what Michele 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.
Over time, we'll establish a relationship with you, and with that, we'll be able to message you in certain ways. We can either, in certain cases, service that business ourselves, like through D2C, when we're talking about gifting occasions, or we can push you into the store. 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." You sign up for a seasonal offering of some sort, and we send you Easter, Halloween, Thanksgiving, Christmas, whatever. There are ways to build business that way. I think actually, in terms of partnerships with other interesting folks, and whether it's some of the delivery services or whatnot, you could do some really interesting executions with them.
There is definitely room for beyond just our current retail environment, the way we define it.
Great. Ooh, there's a question in the back. Oh, okay.
Thanks. Just a general question in terms of what drives innovation in chocolate, right? From my perspective, it sounds like the last big innovations, Reese's Outrageous! now and Hershey's Cookie Layer Crunch last year, I associate that with indulgence mostly, right? The bigger question is that it seems to me that Hershey remains under-index in key categories within chocolate, like gifting, premium. I don't want 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. Can you talk about, try to triangulate in terms of, are there a lot of segments within chocolate where you're under index 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. That Reese's Outrageous! is just too sweet for me, and I have a sweet tooth, but they're really great and so on. I have a couple of follow-ups.
Sure. As we look at the category, I'd say people are coming to the category for indulgence. They're coming for a treat. 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 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. 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 barkTHINS.
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 is the barkTHINS. We have absolutely looked at acquisition as a key way to build our premium business. As we look at better for you, we've had a long history relative to using portion size, which we continue to do, different Price Pack Architecture to provide options for people relative to how much indulgence they want. 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. I think when you see it, you will agree that that is a good one that delivers indulgence, with some permissibility benefits. I think they all are opportunities and important.
Thanks. Then just a quick follow-up. Am I right in saying that you're over-indexing seasonal? Is seasonal a lower margin category because it's just more promotional than the other ones?
Yeah. 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 instant consumable presence, although we certainly have our Reese's seasonal shapes, our Cadbury eggs. The margin differential is not that large. I don't know if there's anything else either would you would add to that?
No, I think you're right. Yeah.
I have a question for you. Just in the context of a slower overall category growth rate, how does the M&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. Is this one of the ways you'll look to kind of solve for the weaker category growth that currently exists in confectionery?
I would say our number 1 priority will always be growing confectionery because it's our biggest business, highly profitable, great margin structure. We've got huge brands. Let me start by saying really clearly, that is the number 1 objective. Now, that said, and thus you see the focus on 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 habits around perhaps better for you or less processed food. I do think M&A can help us in that regard, relevant to filling in that piece.
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 realization as a driver of category growth, and obviously, we announced our pricing increase. With that said, I'd say, yes, growth has slowed down in the CPG sector overall. We will continue to focus on CMG. M&A will be an important lever. You can see that it has been a lever for us over the past five 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.
It will play a lever, but I don't ever want to send the 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. M&A should be on top of that.
That M&A lever would be more of a U.S. comment. You've pulled back a bit internationally.
Yes.
I just want to be clear on that.
Yes.
Okay.
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 were to do something more transformational.
Right.
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. Just to understand the phasing of the savings, just to understand the reinvestment, I should say, of those savings and the degree which that's more front-end loaded this next year, then have more of a incremental or call it net benefit from those savings that could help margins.
Yeah
Growth.
Patricia, do you want to address that one?
Yeah. 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. It's really too early for us to talk about 2019 and how those investment net will play out against the cost. You can expect us to continue, as Michele said at the very beginning, to be really focused on reallocating our resources to the places of highest commercial growth. 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. That investment's going to be comparable in 2019 as it was in 2018.
Yeah. Thanks.
I'd say Hershey over the years has kind of stated that the desire to move into Western Europe was never really there, just given potential consumer taste and also high level of competition, et cetera. In the past three years, we've seen a number of larger European companies make a move into the U.S., right? Don't want to go there, but then maybe they come here, and push in different parts of the portfolio. Seasonal, non-seasonal chocolate. Gummy has done well in Europe. Just want to get a kind of general sense of, given that's the case and Europe is obviously a very large market, maybe it's not a priority up front, but do you think about how to potentially capture some share in markets like the U.K. with a product like Reese's, the profitability's there.
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.
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's 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, then really with the placement of bets to capture long-term growth trends in China and India by building sustainable business model there. 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.
To answer your second question, we absolutely stay on top of the trends in Europe. For a good example of that is Hershey's Gold, which actually was something that gained a little bit more traction in Europe before we introduced it here. We keep all over any chocolate trend or candy trend anywhere in the world.
This is a 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? 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?
We haven't put out 2019 numbers, I'd say that I always like it when there are really good places to invest. As you know from our cash, which we throw off a lot of cash, our first priority is always against growth. 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. 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.
Yeah. Really neither of those laps get better-
No, they don't.
Because we're continuing to invest in more core capacity next year. If you think about ERP, it's really a multi-year-
It's a five-year
very large dollar investment. We timed it over the multi-years so that we could execute flawlessly.
Yep.
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 offerings, 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&D perspective in terms of adjusting those pack sizes? Or do you feel like the bigger bags, the bigger boxes is where probably the biggest opportunity is in the digital channel?
I think we believe that we have perhaps under-leveraged 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. I would say going forward, we will have significant resources against constantly evaluating Price Pack Architecture, both within bricks and mortar to adjust to consumers' changing desires and needs. Also as we look at the channel expansion, packaging, as you can see, is playing a really key role, and I think it's going to continue to accelerate in its importance. A lot of times packaging is also a good enabler to being able to capture price realization better than a product innovation.
I realize it might not just be captured within the examples that we're seeing today, but one of the benefits loosely with regard to some of those resealable bags is it does appeal to more of a health-conscious consumer.
It does. Mm-hmm.
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 that portion control piece that you're talking about that hand-to-mouth had, either with resealability or smaller individual pieces.
Right
that have some of those benefits. It's going to be some of both.
Can I just chime in real quick? Remember we ran through the models and all the different models have different Price Pack Architecture realities, right? In some cases, Michele's absolutely right, yeah. If you're thinking through the e-commerce lens of pure play or ship-
Ship to home
to home model, then yeah, 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're thinking about like resealables. 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. In the other models where the order is being placed online, but you're picking up in physical or it's being delivered, again, you don't need to really change that packaging. If you're doing resealable there, or there's some other permutation that makes sense for the shopper, it's available. 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's playing across all those different models now, whether digital, physical.
Just keep that in mind as you formulate questions.
Yeah. To be clear, my comment is much about at bricks and mortar, we also need to continue to offer those portion control options for consumers. Yeah.
Continuing the thread 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?
I'd say a couple things. 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 laydowns and stood them up, we're going to show you an evolution that went from the laydown to our first attempt at a stand-up bag to the attempt that we think is really the great one. I think part of the learning on that was, yeah, how do we build into that pack a format that allows us to cover the incremental cost and really get that to be margin neutral. 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.
With this, we had the chance to step back and say, "We're going to build that in," and I think that's appropriate. 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 will be asking for more in order to make some of those investments. 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." 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.
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 laydown package. I think you'll be pretty impressed with what that looks like. 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. To steal Rob Moskow's question of why here, because I think you answered that question a lot from a cash flow perspective.
Yes.
On the P&L line with these types of investments, are you at a point now where that headwind's gone behind you? It's up to where to comp? 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&L tailwind as we think about next year?
The way I think about it, you correct me if I'm wrong.
Yeah.
I'm thinking the headwind has gone away, it's more flat than a benefit.
That's the way I think about it too, 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 Michele said, let's sometimes really work hard with our retail partners to get to the right answer. If something's adding a lot of cost, let's take some complexity out of the system. I think that continuous improvement mindset will, in this world of some inflation, keep us more in the flat world.
Okay, one or two more. You guys are good. Okay.
Can I ask a-
Yeah.
Just going back to the M&A question in terms of better for 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? I can expand on that, right? If I'm Kellogg and I buy RXBAR, I have different product categories, different shelves. If you can touch on that.
Yeah. I haven't seen that be a disadvantage. In fact, I 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. 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. Some of the competitors who have slower velocities had more shelf space than they did. That's unacceptable, right? That's just not justified. What they're looking for is what we bring. It's less about bringing better for you expertise.
They already have that. 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. We've got a buyer relationship. I haven't found that to be the case. I've found that exactly the capabilities we have are the complementary category capabilities that many of these companies are looking for.
All right.
Nope, there's another one.
Is there another one?
No, right here.
I missed. Oh, I'm so sorry, James.
That's all right. I had a question just going back to freight. Clearly, it's inflationary year-over-year still, but if you look at the spot rate, it has ticked down, like 10% sequentially in the last two months. We've seen Class 8 orders pick up a lot, which normally signals the end of the cycle. If you look at the precedent that the guys that put ELD, electronic logging devices, in voluntarily a few years ago, after a year, they kind of figured it out and capacity loosened up and pricing came down. I'm wondering what you would need to see to get a little bit more constructive than the kind of this is structural.
I'll actually throw that over to Jason, who's really
Yeah. I think there's two main issues that are driving some of the capacity. One is the driver availability, second is the productivity loss from the e-log devices. 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. 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. Thanks to everybody here. We'll take a tour of the center we're in next.