Hershey’s to Buy Fast Growing Pretzel Brand Dot’s

The Hershey company announced today that it had entered into an agreement to buy pretzel brands Dot’s Homestyle Pretzels (which includes the company’s four pretzel seasoning facilities) as well as its copacker, Pretzels Inc.

The total purchase price for both companies is $1.2 billion. Combined, the two businesses had an estimated aggregate net sales of roughly $275 million for the 12 months ending September 2021.

Who is Being Acquired?

Founded in 2007 by founder Dot Henke as a retirement project, North Dakota-based Dot’s claims to use a proprietary “secret recipe” for its line of pretzel twists. Available in a variety of pack sizes ranging from single serve to family size, the brand has only three flavors: Original, Southwest and Honey Mustard, the latter of which was added this past June.

According to a press release this summer, Dot’s has seen “significant growth” over the past year, becoming the third-largest pretzel brand nationally in sales volume over the last 12 monts. This growth comes despite the fact that Dot’s has only recently begun expanding into national distribution beyond its Midwest roots. Hershey’s, meanwhile, reported today that Dot’s is the fastest growing “scale” pretzel brand, which the company defines as having greater than $10 million in sales over the last 12 months. Dot’s accounted for “55% of the pretzel category’s growth during the past year,” Hershey’s said, and reported net sales of $160 million.

In tandem with the Dot’s deal, Hershey’s has also acquired manufacturer Pretzels Inc. from an affiliate of investment firm Peak Rock Capital. The company currently produces Dot’s pretzels, along with several other undisclosed brands, Hershey’s said. Along with its headquarters in Bluffton, Indiana, Pretzels Inc. has three manufacturing locations in Indiana and Kansas. The manufacturer had previously been acquired by Peak Rock in 2018.

What’s the Goal?

Hershey’s has been increasingly trying to grow its portfolio, moving beyond confection into snacking. According to a press release, the acquisition of Dot’s is an “opportunity to reach new consumers in new occasions, advancing Hershey’s snacking powerhouse vision.”

“Dot’s Pretzels would further accelerate our success in the permissible salty snack category, along with our successful SkinnyPop and Pirate’s Booty brands,” said Michele Buck, president and CEO of The Hershey Company. “Pretzels Inc. will help us expand Hershey’s snacking and production capabilities while keeping the special connection to Dot’s…It will be important as we continue to grow this already fast-growing brand and create new products in the broader pretzel category.”

Although not directly mentioned by the company, the acquisition of a co-packer by the brand would also potentially shore up supply chain and operational issues that many snack providers have faced over the last year. Rather than fighting for line time alongside other brands, the acquisition of Pretzels Inc, could better insulate the company from labor and production issues, as well as give Hershey’s better control over their pricing during a time when many global brands are concerned with inflation.

How does This Fit Into Hershey’s Strategy?

Since Buck joined in 2017, Hershey’s has increasingly focused on its snack segment, acquiring brands like Pirate’s Booty and ONE Bar and divesting from confection brands such as Dagoba and Scharffenberger Chocolate. Not every snack acquisition has been successful thorough, with Hershey’s selling off its KRAVE jerky brand last year after the line failed to put up the sales numbers Hershey’s had hoped for and the company experienced difficulties with manufacturing.

Where Hershey’s seems to have found success is in integrating brands that are incrementally more healthy (such as Skinny Pop) but still fit into an impulse driven purchasing mindset. Production also has become key, with Hershey’s looking for acquisitions where the path to scaling a product quickly and the benefits from Hershey’s existing expertise is clear. Ideally, many of these brands also bring something unique to Hershey’s in addition to simply adding new products.

Hershey’s today noted it planned to provide assistance to Dot’s on business elements such as omni-channel strategy, packaging, marketing and distribution. Meanwhile, the company said, Dot’s will offer Hershey’s an independent DSD distribution network and manufacturing capacity.

In a presentation to analysts, Hershey’s also conveyed that Dot’s has a higher cost per pound — coming in at $6.36 versus other pretzels’ cost of $4.06 — for a 60% price premium. While consumers have expressed a willingness to purchase the more premium priced line, if scaling the brand results in lower costs, the company can either choose to have even better margins (currently reporting a 37% adjusted EBITA margin) or drop the price and hopefully attract even more customers.

Dot’s is not Hershey’s first foray into pretzels. Almost exactly a year ago the company announced it had made an investment into snack brand Quinn, which produces popcorn and pretzels. At the time, however, the focus seemed to be less on the product mix and more about mission with a press release about the investment noting Quinn was an appealing brand because of its “sustainable business practices, inclusivity, listening to consumers, and being transparent about how their products are made and what goes into them.”

Quinn did not respond to an email asking if Pretzels, Inc. produces its gluten-free pretzels.

What Questions Remain?

While Dot’s has seen incredible growth over the last year, it is unclear if part of that was essentially in response to customers switching brands after their favorite options were out of stock. Though some shoppers may stick with Dot’s moving forward, still others may churn. According to Buck, Hershey’s is carefully monitoring which Covid-19 trends are permanent and which are more temporary.

“We’ve learned in to places on brands where we have clearly seen sustained growth over time and there’s a lot of proof points that capacity will pay off,” Buck said on the company’s third quarter earnings call last month. “Frankly, there are a couple of other places where we had elevated demand that we held for a bit before leaning into that capacity until we really thought we were at a point where we could guarantee the ROI.”

Hershey’s did not detail where in the portfolio Dot’s would reside and if it would be integrated into its Amplified portfolio of brands.