The Hershey Company

Overview

The Hershey Company was founded by Milton S. Hershey in 1894. It is headquartered in Hershey, Pennsylvania. The company aims to “bringing sweet moments of Hershey happiness to the world every day.” The Hershey company was the first American candy company to produce affordable milk chocolate, which before was a luxury only affordable to the rich. In addition to developing different candy brands and improving his chocolate formula, Milton Hershey set out to build a strong infrastructure for his company. The Hershey factory was built in the Derry Township, Pennsylvania. But Milton Hershey continued to expand and built a company town, which came to be known as Hershey, Pennsylvania.  Today Hershey Inc., operates in 90 countries, though its presence is largest in United States. A list of Hershey’s manufacturing sites can be found here.

The Hershey Company manufactures, markets, sells, and distributes chocolate and sugar confectionery products, pantry items, toppings and beverages, and gum and mint refreshment products. These products are sold under more than 80 brand names, such as the well-known ones like Hershey’s, Reese’s, Hershey’s Kisses, Hershey’s Bliss, Hershey’s special Dark, Kit Kat, Twizzlers, Jolly Rancher, and Ice Breakers, in approximately 70 countries around the world. These are only a few of the hundreds of products Hershey’s makes. A full list can be found in Hershey’s Factbook (pg 46-47).

For a glimpse into how all of these products are made, consumers can go on a  Hershey Factory Tour.

Sales, Distribution, and Diversification

Hershey sells their products through retail. The company’s main customers include wholesaler distributors, chain grocery stores, mass merchandisers, vending companies, supermarkets, and convenience stores, wholesaler clubs, department stores and dollar stores. (Fact Book pg 45) McLane Company, Inc. is one of Hershey’s distributors whose vast network of distribution account for 22.2 percent of Hershey’s net sales. Hershey change or make adjustments to its system of operations in different countries. For example, Hershey manufactures, markets, sells, and distributes sugar confectionery, beverages and cooking oil products in India while the company only markets, sells, and distributes chocolate products in China. (Fact Book pg 47)

After succeeding so well in the candy market, in the mid 1900s, Hershey’s began to diversify. Among Hershey’s many acquisitions are San Giorgio Macaroni, Delmonico Foods, Ronzoni Foods, and Friendly Ice Cream Corporation. Hershey also purchased the rights to manufacture and distribute Cadbury products in the United States. In addition to confections, Hershey trades in the commodities of sugar and cocoa products, since they are the main ingredients of Hershey’s chocolate.

Another way Hershey has diversified is in where its products are sold. Hershey products are sold in over ninety countries, distributed in vending machines, as ingredients for the food service industry, for fundraising, concession stands, convenience stores, and large retailers, and online.  Hershey owns manufacturing operations in Mexico, and has acquired he assets and brands of Grupo Lorena, one of the leading confectionery businesses in Mexico that also has a presence in the US Hispanic community. To expand into more international markets, Hershey branded products are manufactured by joint-venture organizations in Brazil, India, and China. Hershey branded products are also manufactured by licenses in Japan and South Korea, and by co-manufacturers.

Aside from all of its food products, Hershey has also developed and maintained its own town – Hershey Pennsylvania. The town is home to the first Hershey’s chocolate factory, which is still operating today. The town was developed for the workers of Hershey, so it also contains a community center, a K-12 school, residences, a hospital, a hotel, and a sports arena. But the biggest attraction in Hershey, Pennsylvania is Hershey Park. The park consists of camping and picnic grounds, a pool, a band shell with daily concerts, and amusement rides such as a model railroad and roller coasters and a carousel. Today Hershey Park and the Hershey Factory attract thousands of tourists and families a year.

 

The Confections Industry

Concerns

One decision Hershey needs to make is what kind of foreign direct investment (FDI) strategy to pursue. While deciding between a wholly owned subsidiary, a joint-venture or another form of FDI, Hershey must look at a myriad of factors.

One such factor is the economic viability of each option. Though prices or sugar and cocoa no longer fluctuate as extremely as they once did, the prices are kept artificially high because of speculators trading in the commodities market, since prices are no longer set based on pure supply and demand. The transportation of goods also falls into this category, as oil is a commodity and is affected by the same phenomenon as sugar and cocoa. Hershey needs to evaluate what kind of investments would actually pay off in the future, as well as what the company can afford to do.

Another factor is the legal environment of the country Hershey wants to do business with. Hershey must take into account import and export tariffs and quotas when finding suppliers of sugar and cocoa, among other ingredients frequently used. Labor laws regarding wages, age, and working conditions also have to be complied with, in addition to food and safety regulations with regards to ingredients and production – all of which may vary greatly from country to country. In trying to comply with the laws of many nations, Hershey has to decide whether to tailor its operations to each locale, or to adopt the same policies through out the company as much as possible.

Political factors will also influence what kind of FDI Hershey is allowed to make. For example, India currently does not make it easy for foreign businesses to set up wholly owned subsidiaries since they are trying to grow the domestic market, but that policy may change with the next election. Also, the political stability of countries where Hershey does business, and especially where Hershey sources its supplies, is important to the expectation of profits. If the West African region were to have major political conflict, Hershey might not be able to procure enough cocoa beans to maintain operations for long.

 

Competitors

Hershey’s top three competitors in the confections industry are Mars, Inc. Nestle, and Mondelez International (what used to be Nabisco, Kraft, Cadbury, Christie, Adams, and LU). In addition, Hershey has to research local competitors in different countries and tailor their marketing strategy. For example, in the United States Hershey is known for being quality chocolate at a lower price that most other chocolates, and consumers respond to that. However, in a country known for artisan chocolates like Belgium or Sweden, consumers may not be willing to sacrifice quality for a lower price.

The confections industry can be looked at as a whole, but it also can be broken down into more specific categories. Some examples are the chocolate, non-chocolate, gum, and breath freshener mint markets, all of which Hershey is involved in. Hershey’s main focus is on the chocolate market, though it does have products that fall into the non-chocolate, gum & refreshments categories. Hershey Park would also place Hershey in entertainment, but the company’s strong point is chocolate.  In the US chocolate market, Hershey has 43% market-share, placing it ahead of Mars Inc., though Mars Inc. has a greater market share than Hershey in the US total Confectionery market.

In order to remain relevant in the confections industry, Hershey has to find ways to differentiate itself and its brands from the rest of the market. There are hundreds of types of candy, and many recipes for milk chocolate. Hershey sells chocolate and peanut butter cups, and so do many other, smaller candy makers. So, Hershey builds up strong brands. Hershey’s Reese’s Peanut Butter cups are immediately recognizable by their orange wrapper, yellow writing, and flat, round shape. Hershey also spent many years perfecting their recipe for milk chocolate, and the many other varieties of chocolate they produce.

In a market that is replete with substitutes, Hershey has to develop strong brand recognition and loyalty. To do this Hershey has to find the right balance of quality and price for each market they enter. Some markets may only allow for the sale of artisan chocolates, while a lower priced but tasty chocolate would succeed in others. Hershey has managed to grow so far by creating variations of successful products (like adding almonds to their milk chocolate bars, or creating York peppermint Pieces) or by creating completely new products.

 

Influences

Some trends that are likely to affect the confectionary industry in the next decade are the green or sustainable trend, as well as the fitness or health conscious trend. The green trend will have an effect with regards to packaging and sourcing ingredients. Using recyclable material for and removing excess packaging can become a selling point for Hershey products, emphasizing the idea that Hershey is trying to be environmentally friendly. Using ingredients that are grown/produced in a sustainable manner can also become a selling point for Hershey products, especially as environmental protection becomes a bigger issue.

As for the health conscious trend that seems to be gaining momentum, candy makers have been looking for ways to market themselves as healthy candy for years now. With the concerns about obesity and the popularity of yoga, zumba and other workouts (at least in the US) health and nutrition are becoming more important to consumers. Sugar-free versions of candy, gum, and chocolate have been available for decades, but they didn’t always taste good. Sugar-free candies have improved in taste, and now candy makers are trying to make candy less bad for consumers. One method is replacing high-fructose corn syrup and highly processed sugars with natural fruit juices and raw sugar. This reduces calorie content, and makes candy easier for the body to process. Some candy makers are creating organic candy, like organic lollipops from Yummy Earth.

Company Analysis

Strengths

Being the first company to produce and sell a more affordable milk chocolate, Hershey was launched with a strong presence in the U.S. market. This advantage, along with its quality products, has allowed Hershey to gain its position as a global leader in the chocolate market.  Within the market, Hershey’s shares in the chocolate and mint categories exceeded those of its top competitors by 10 percent or higher. Many of Hershey’s brands are also leaders in their categories. Kisses, for example, has been ranked as the best American chocolate in 2012 according to the 2012 Harris Poll. Hershey also made many investments on research and development (R&D) to innovate their products. The Hershey Center for Health and Nutrition, established in 2006, aimed to create products and technologies that are beneficial to consumers. As a consumer-driven based company, Hershey also develops products according to consumer insights. Hershey’s Simple Pleasures chocolates were developed and launched in 2012 as the result of a survey indicating the strong need in low-fat chocolates by a significant number of women in the United States. Along side with its large market share, broad range of products, commitment in R&D is Hershey’s strong reputation. It has been in business for over 100 years and its products are being sold and marketed in 70 countries around the world. These strengths are the competitive advantages that help Hershey succeed in the confectionery industry (SWOT Analysis).

Weaknesses

The Hershey Company’s leadership in the confectionery market and its strong reputation have given Hershey the competitive advantage in the United States and Canada. However, Hershey’s over-dependence on the U.S. market and a small number of distributors as sources of revenue are what limit the company from growing in international markets. Revenues from Hershey’s international operations represent less than 10 percent of the company’s total revenue (Fact book, pg 41). As previously mentioned, McLane Company, Inc. was responsible for 22.2 percent of the company’s revenue in the fiscal year of 2011. Moreover, McLane is Hershey’s primary distributor to Wal-Mart Stores, which accounted for about 17.2 percent of Hershey’s account receivables. Hershey’s Canadian operations also focus on a small number of costumers, who control about 70 percent of the grocery sales in Canada (Fact book, pg 50). The over reliance on the U.S. market and the limited distributors for revenue generation put Hershey at great risk because sales would be greatly impacted if there were loss of costumers during situations such as economic downturns.

Opportunities

United Sates is a mature market, a market that no longer promises significant business growth, for Hershey. In order to expand its business and generate more revenues, Hershey should shift more of its focus to emerging markets such as India and China, countries with the world’s the two largest populations. The Indian chocolate market, with a value of $550 million, has great potential. Hershey’s latest acquisition of Godrej Industries Limited. enhanced Hershey’s position in the Indian market. Moreover, with the increasing demand of healthy and low-fat chocolates, Hershey could look forward to expand its dark chocolates and organic chocolates as the lines have been experiencing growing sales with the increasing preference for healthier chocolates. In today’s society where smart phones, laptops, and other electronic devices are ample and where internet is widely available, more and more businesses have moved their operation from the traditional brick and mortar stores to virtual online stores. The increaseing popularity of social media also enables businesses to market and sell their products in creative ways. Operating businesses online will not only help the company to reach the younger population faster but also save money that would have gone into advertising and marketing.

Threats

If Hershey continues to depend on the U.S. Market for sales, it will eventually lose market share to its rivals and new entrants in the confectionery market. One of Hershey’s key competitors is Nestle. Founded in 1866, Nestle has expanded over more than 80 countries around the world. It is ranked 57 out of the 100 best global brands by Interbrand. In addition to that, Nestle also shifts its focus from food manufacturing to nutritional healthcare in response in consumers’ rising need for healthy products. Nestle’s acquisition of Pfizer’s Nutrition Unit in 2012 is one example that illustrates this move. Hershey would start and continue to lose market share to competitors like Nestle if Hershey does not change now. Another threat in the market is the increasing penetration of private labels, whose products emphasis greater customization at a lower price. Hershey has to be prepared for adopting competitive pricing strategies as the private labels continue to gain a hold in the market. A confectionery manufacturer, Hershey relied heavily on commodities such as cocoa products, sugar, dairy products, and peanuts. Most of these raw materials have experienced significant price increases during recent year. For example, dairy products were traded between $.17 to $.21 per pound in 2011 while they were only traded for $.14 to $.18 before the rise. The price increases in these commodities give more pressure to Hershey’s operating object (SWOT Analysis).

Financial Analysis

As a well-established brand, Hershey has always shown positive financial performance throughout the years. Above is a snapshot of the financial statement of the Hershey Company. As shown in the table, from 2007 to 2012, Hershey has experienced increases in both of its net sales and net income from year to year. The net sales and net income were still increasing, although not greatly, even during the economic recession that started in 2007, following the housing crisis, into 2009 in the United States. One reason why Hershey was still earning revenues during the recession is the successful initiation of its 3 year restructuring plan, which included cutting 1500 jobs, taking away one third of Hershey’s product lines, outsourcing low value-added items, and building a plant in Monterrey, Mexico (Moore).

Starting in 2009, prices of key commodities such as cocoa, sugar, milk, and peanuts, which Hershey depends on to produce its chocolates and other products, were experiencing high inflation. The turmoil in the Ivory Coast, which accounts for the production of approximately 40% of the world’s raw cocoa, and the following crop plagues in Ghana and Indonesia have caused the prices of commodities to increase dramatically. This forced businesses to change their recipes and product weight and to increase domestic wholesale prices (Gregory). The inflation of commodities’ prices have impacted revenues and slowed the growth of the Hershey Company. When the inflation stopped in 2011, there was a significant 9.3 percent increase in the net sales in 2012 ($6.64 billions) compared to that of 2011 ($6.08 billion). This demonstrates direct and great impact commodities could have on businesses in the confectionery market.

While the income statement shows solid financial performance of the Hershey Company over the last five years, Hershey’s stock performance from 2008 to 2013 also shows a positive trend. Although there were some drops throughout the period, the price per stock is still gradually increasing overtime. The lowest price per stock was $32.78 as of June 30^th 2008. Just like others in retail, Hershey’s stock prices suffered gradual decreases during the recession. However, things turned around as the restructuring plan began to take place after mid-2010. This shows that Hershey’s has a strong management team that made effective recovery plans during crisis. Hershey’s stock has been experiencing an increase after the company’s release of its fourth-quarter profit of $150 million compared with $142 million, a 5.6% increase. The highest price per stock was $87.53 as of March 29^th, 2013.

International Strategy

As for now, Hershey’s international plan is to increase its market share in the international market. Their goal is to increase their revenue 54 percent to $10 billion by 2017, and to increase its sales growth from the international market to 50 percent. Hershey’s priority is to expand immediately in China, Mexico, and Canada, because they can provide rapid sales growth. While expanding in these markets, Hershey’s strategy is to create partners though strategies like mergers, acquisitions or joint ventures with foreign companies that better known local markets around the globe. Within these markets, they want to focus on five of its’ brands: Hershey’s, Reese’s, Ice Breakers, Kisses, and Jolly Ranchers. Besides the markets Hershey’s primary focus is on, they also want to expand presence in the Middle East, North Africa, Brazil, and Southeast Asia. As for West and South Africa, India and Eastern Europe, they have long-term growth goals with short-term market participation.

In December 2004, Hershey added some backward integration with the purchase of the Mauna Macadamia Nut Corporation, and their forward integration seems to end at the Hershey store located in Hershey, PA. Since Hershey did not outsource its production, almost all the chocolates are manufactured in the factories located in PA. In February 2007, Hershey decided to outsource the production of their block chocolate bars (main ingredient in many of Hershey’s products) to Barry Callebaut. No further information indicates that Hershey is outsourcing its manufacturing, which is one potential weakness in the global market, because Hershey does not have the competitive advantages of cheap labor and lower material cost or many other things that its competitors have.

Being the largest chocolate manufacturer and non-chocolate confectionery producer, the Hershey Company has gone through many corporate synergies such as acquisitions and licensing agreements, which allowed them to develop a wide network of distribution.  The first acquisition started with the peanut butter cups by REESE’S. Hershey had been providing Reese’s Candy Company the supplies for chocolate coating since 1928 and finally bought the company in 1963 after H.B. Reese’s death. After this event, Hershey started to grow by acquiring related companies and diversify by spreading out to other food products like pasta. Here’s a complete list of acquisition/divestitures (FactBook page 4). Additionally, the company also went through merges and entered foreign markets using Agent-Importer and licensing agreement such as joint-venture methods to enter the markets penetrating strategies. Along with the synergies, the company also expanded geographically by building new chocolate factories in other states and globally. To maximize it’s net income, Hershey also got rid of its low-return asset. For instance, it sold its aseptic packaging plants and entered contracts with other companies to manufacture the aseptic drinks.

Hershey breaks down its market into three geographic regions: the US, the Americas, and Asia, Europe, the Middle East and Africa (AEMEA). Business unit wise, it is divided into the chocolate business unit and the sweet and refreshment unit with a supply-driven business model. In the United States, Hershey’s customers are mainly the middlemen in the supply chain (wholesales, vending companies, dollar stores, etc.), not the everyday customers we see in the stores. In North America especially Canada, Hershey sold assets, removed manufacturing to existing sites, and divested the gum and freezer snack businesses in early 2000s in order to fit into their business operating and distribution model strategically. To stay competitive as the leading company in the industry besides Mars and Nestle, Hershey often acquired or allied with other companies in the region to decrease the competition and obtain more products type. Top five customers in Canada that has contributed 70% of the net sales are wholesalers. Hershey also adapted some of its product formula to better satisfy the people from different regions of the world. In other foreign markets such as India, China, and Brazil, Hershey usually penetrated the market starting with manufacturing or formation joint ventures. According to the Global Retail Confectionery Markets in the Fact Book (Figure 1), which includes China, Brazil, Japan, Mexico, India, South Korea, and Philippines (ranged from the highest to lowest in terms of retail sales). Moreover, even with only $1.9 billion sales in India in 2011, its growth, about 23% is the highest among those countries compare to China and Brazil (both around $11 billion sales) with 7.4% and 12.5% respectively. On the other hands, more developed Japan demonstrates a slightly decreasing at sales.

Long-term Objectives

In the upcoming future, Hershey is expected to have a rapid growing market in India especially with recent acquisition of Godrej Group in India a private conglomerate. Not only India, Hershey will continue to leverage through more investment and joint ventures. Overall, Hershey aims to boost revenue to $10-billion in five years along with more leveraging and innovation. Whether or not they can accomplish this ambitious goal, Hershey is aiming something big. Hershey has devoted a lot of resources into D&R for health and wellness trends to provide healthier options for both the US and worldwide. Sales for organic and dark chocolate have generated more sales than other snacks. According to Michele Buck (Chief Growth Officer) in the Forbes article, Hershey’s top strategic plan is to penetrate more into the market in China due to increasing population and GDP growth. It is Hershey’s Number one market in global retail markets. Recently, Hershey gradually changed its business model from supply-driven to consumer-driven global approach for brand investment and product development purposes. Hershey tries to incorporate end-user feedback to improve existing products, such as its packaging, or create something new that customers would love. To support its growth and reputation (especially in the emerging markets), Hershey is expected to develop a bigger infrastructure and thus more employees. It also needs to ensure the sustainability and affordability of its raw materials such as cocoa and sugar so that Hershey can maintain its strong portfolio of over 80 brands. Moreover, Hershey will face a lot low-priced competition from the private labels, who have demonstrated a greater growth in the industry along with a increasing price in commodities.

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