netrashetty
Netra Shetty
Hershey Foods (NYSE HSY) is North America's largest chocolate producer. With 42.5% of the US chocolate market,[1] Hershey sells products in 50 countries under 60 brand names including, Hershey's, Reese's, and Kisses.[2] In 2009, the company's net revenues were nearly $5.30 billion with net income of $436 million.[3] Additionally, Hershey maintains the right to manufacture and sell competitors' products, such as Kit-Kat bars, through licensing agreements with foreign Nestle (NSRGY) and Cadbury Schweppes (CSG).[4] Although Hershey must pay for these rights, the company insulates itself from foreign competition through the agreements. With over 90% of its revenues coming from the United States, Hershey is one of the most geographically concentrated major food and beverage companies.[2] However, the company has taken steps to expand internationally, including the acquisitions of Godrej Beverages and Foods in India and Van Houten in Singapore, as well as an agreement with Lotte Confectionery Co. to manufacture and sell chocolate products in China.[5][6]
Contents
1 Company Overview
1.1 Business Financials
1.1.1 Quarterly Earnings
1.2 Products
2 Trends and Forces
2.1 Rising Commodity Costs Pressuring Margins
2.2 Growing Global Demand Makes International Expansion Attractive
2.3 Premium and Dark Chocolates are Fast Growing Segments
2.4 Restructuring Initiative Promises Increased Savings
3 Competition
4 References
Rising costs are a particularly difficult challenge for Hershey. The company is particularly vulnerable to market prices of key ingredients like cocoa, milk, sugar and peanuts, all of which saw price increases in 2009.[7] In order to combat rising costs, the company has both lowered product weight and raised domestic wholesale prices. With the recent turmoil in the Ivory Coast, which produces 40% of the world's raw cocoa[8], prices for this vital chocolate ingredient have risen more than 15% since November 2010. Most recently, the president-elect issued a largely symbolic ban on the export of cocoa until March, however his power currently doesn't extend beyond the confines of his barricaded hotel.[9] The long-term effect of the conflict on chocolate prices remains to be seen but it closely follows crop plagues in both Ghana and Indonesia which threatened the cocoa supply in mid-2010.[10]
On January 19, 2010, Kraft Foods (KFT) bought Cadbury for $19.5 billion, outbidding Hershey to create the largest chocolate and confectionary company in the world.
Company Overview
Hershey is a manufacturer of chocolate and other candy items, selling its products in over two million retail outlets in 50 different countries.[2] Although Hershey has global reach, more than 90% of its revenue and profits come from the United States.[2]
Business Financials
HSY Supply Chain Transformation Expenses by Category[11]
Hershey's sales have stagnated since 2005 as competitor Mars has eaten into Hershey's share of the US chocolate market.[1] In 2009, the company posted $5.3 billion in revenue, a 3.2% increase from 2008.[12] After implementing a cost-saving initiative in 2007, Hershey expects annual savings of $190 million by the time the project is completed in 2010.[13]
The restructuring program has had a large impact on Hershey's net income, sending it up 47% in 2008 to $311 million.[14] The increase is due to the success of the restructuring plan, increased advertising for the company's core brands, and higher prices introduced late in 2008. Hershey's income was also increased by the fact that the company recorded most of the restructuring costs in 2007 and therefore had fewer charges on its 2008 income statement.
Quarterly Earnings
Q1 2009
In the first quarter of 2009, Hershey posted revenues of $1.236 billion, a 6.5% increase over Q1 2008 figures; net income grew 20% to $75.9 million.[15] The majority of the increase in revenue is attributable to an 11% price increase across chocolate and sugar confectionery lines initiated in August 2008. Stronger international sales muted foreign currency exchange losses. Total charges associated with the 2007 business realignment initiative shrank to $18 million from $30 million in Q1 2008 as the program nears completion.[16]
Q2 2009
In the second quarter of 2009, Hershey posted revenues of $1.17 billion, a 5.9% increase over Q2 2008 figures; net income grew by 72% to $71.3 million.[17] As in Q1 2009, the increase in revenue was due to the net pricing increase from August 2008. Although volumes fell slightly, a 46% boost in advertising from the first quarter helped stem any significant decreases. Unlike other international candy makers such as Nestle (NSRGY) and Mars, Hershey makes most of its sales in the US, so it was relatively unaffected by adverse currency fluctuations and the strengthening of the US dollar. Business realignment charges were $42.7 million in the quarter. From the initiation of the program to Q2 2009, the company has spent $591.7 on the initiative, and expects to end the program in late 2009 or early 2010 for a grand total of $640-665 million. The majority of remaining charges involve non-cash pension settlements.
Q3 2009
In the third quarter of 2009, Hershey posted revenues of $1.48 billion, a decrease of 0.4% from Q3 2008 (which had increased 6.4% from the previous year); net income grew by 30.1% to $162 million.[18] The price increases instituted in 2008 increased revenues by 10%, however this was offset by a significant decline in volume. As discussed in Q2 2009 above, Hershey has a relatively small international presence, but adverse foreign currency exchange rates decreased revenues by 1.1%.[19] Sales at retail increased 4.8% from the previous year and Hershey's market share remained the same.[20] The company attributed the decline in sales to its decision to discontinue high-end Starbuck's Chocolates and Cacao Reserve bars; excluding these items, revenues would have increased approximately 4.8%.[21] Compared to Q3 2008, lower dairy costs and the decreased volume led to a 9.4% decrease in costs. Charges related to the company's business realignment initiative totaled $8 million for the quarter, primarily the result of pension settlement losses and plant closure costs.[22] Negotiations are continuing in Hershey's bid for Cadbury (CBY) however Kraft Foods (KFT) currently is the largest bidder and Cadbury (CBY) has said that any credible bid would have to be worth at least $19 billion. With a current market value of $8.25 billion (compared to Cadbury's value of $17.7 billion), Hershey may have trouble making a large enough bid.[23]
Q4 2009
In the fourth quarter of 2009, Hershey's posted revenues of $1.407 billion, an increase of 2.2% from Q4 2008; net income grew 54% to $126.8 million.[24] Higher selling prices and increased efficiency drove the revenue increases, which were partially offset by higher raw material costs and increased advertising spending. Total revenue growth was hurt by delaying the shipment of Valentine's and Easter candy to Q1 2010, but this will help to improve first quarter results.[25] The biggest news of the quarter, following on the heels of their failed bid for Cadbury (CBY), was their stated willingness to pursue other merger/acquisition opportunities and the back story behind the failed bid. Reports emerged that the bid failed, more so than because of Kraft's extensive resources, but primarily as a result of conflicting visions for the company's future between CEO David West and Robert Reese, President of the Hershey Trust.[26] The company still maintains a 45% market share in the domestic chocolate market and 20% annual growth outside of the US and Canada over the past five years. The drug store retail channel continues to perform poorly, with Hershey's market share declining nearly 2% during the quarter, but the total confections category retail consumer take away increased 6% despite the poor drug channel performance.[27]
Q1 2010
In the first quarter of 2010, Hershey's posted revenues of $1.41 billion, an increase of nearly 14% from Q1 2009; net income nearly doubled to $147 million.[28] Higher core brand sales volume and improved pricing were the major forces pushing the substantial increase in net sales for the quarter, however the quarter also benefited from a seasonal volume shift from Q4 2009 to Q1 2010. Excluding sales at Wal-Mart (WMT), Hershey's market share increased 0.5% for the quarter with the company's consumer take away (including Wal-Mart) increasing 7.5% or 5.5% if you discount the increase that resulted from an early Easter season that atypically fell into Q1 this year.[29] In particular, the core brands that the company spent money advertising saw their takeaway increase 10%.[30] Valentine's Day, usually the largest holiday of the quarter, was difficult for the entire candy industry this year with consumer spending and gifting down; Hershey's Valentine's season sales decreased by less than 10% and accounted for a 1% decline in market share for the quarter.[31] The company has completely cycled through its August 2008 price increases and is still seeing base volume growth; feeding off the company's better-than-expected revenues for the quarter, advertising expenditures are expected to increase 35%-40% in 2010. Internationally but excluding Canada, sales increased 14% for the quarter with strong earnings growth in Mexico, China, Brazil, and Canada.[32] In contrast, India saw a decline in sales which offset some of the gains realized in these other countries.[33]
Q2 2010
In the first quarter of 2010, Hershey's posted revenues of $1.23 billion, an increase of 5.3% from Q2 2009; net income decreased by more than 34% to $46.7 million.[34] The fall in net income was primarily attributable to business realignment and impairment charges. Without these charges, net income would have increased nearly 18%.[35] The increased revenues were driven by a 3% increase in sales volume for the company's core US brands. Hershey's market share (excluding sales at Wal-Mart increased by 0.3% and the consumer takeaway (including Wal-Mart) increased by 4%. Lower supply chain costs more than offset a slight increase in the cost of raw materials. The business realignment charges that affected the company's net income stemmed from a $44.7 million devaluation of the Godrej Hershey joint venture in India.[36] Hershey's bought Godrej and started the joint venture in 2007, but it has not grown at the rate originally expected. Delays with rolling out nation-wide distribution, failing to implement higher pricing, and a poor Indian sugar crop have all affected the company's business in India to date. Although the company did not release specific figures for its various international operations, business in Mexico, Brazil, China and India all grew during the quarter, though the company admits that India is not growing as quickly as they had planned.[37]
Q3 2010
In the third quarter of 2010, Hershey's posted revenues of $1.5 billion, an increase of 4.2% from Q3 2010; net income for the quarter increased 11.2% to $180.2 million. Operating income for the quarter grew 11.2% to $655.2 million.[38] Sales of core brands increased by 2.5%, international sales volume increased, and improved pricing contributed 1% to revenues for the quarter. Consumer takeaway increased more than 3.5% during the quarter and the company's market share grew slightly by 0.1%.[39] The company's performance in America steadily built on last quarter's progress but there were no major increases in any segment, except for a slight increase in advertising which is now expected to be 50-60% more for the year than in FY 2009. Internationally, sales outside the US grew by more than 10% concurrent with an increase in advertising spending outside North America that was 65% higher than in Q3 2009. The company is launching two new products in Q4 (Hershey's Drops and Reese's Minis) and since Halloween fell near the end of the quarter, a certain portion of sales from the holiday will be accounted for in Q4.[40]
Products
Hershey’s primarily makes cocoa for the production of chocolates, candies and other confectioneries. With 90% of its sales in North America[41], Hershey's production facilities are primarily located in the U.S., Mexico and Canada. Beyond production, Hershey's offers its products through a variety of distribution channels including wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, convenience stores, dollar stores and department stores[42]. The McLane Company, distributor to Wal-Mart (WMT), is Hershey's largest customer, accounting for 27% of sales in 2009.[43]. Hershey's offers products in several categories:
Chocolates:
Hershey’s
Reese’s'
Hershey’s Kisses
Milk Dud
U.S. licensing of Nestle's Kit Kat
Premium Chocolates:
Cacao Reserve
Joseph Schmidt
Dagoba
Refreshment products:
Ice Breakers
Breath Savers
Bubble Yum
Trends and Forces
Rising Commodity Costs Pressuring Margins
Rising commodity costs are putting negative pressure on Hershey's operating margins. Hershey's is particularly sensitive to the prices of commodities like cocoa, milk and sugar which are all key ingredients in Chocolate making. Since the beginning of 2008, prices for key ingredients like cocoa, milk, sugar and peanuts are all up 20% to 40%[44]. These rapid price increases show no signs of abating as Hershey's predicts commodity prices will increase twice as fast in 2009 compared to 2008[45]. Much of this rise comes increases in sugar, which almost doubled between January and August 2009.[46] Hershey's combats increasing input costs with a combination of price increases and various hedging strategies. In 2008 alone, the company has twice raised wholesale prices[47].
The election conflict in the Ivory Coast, the world's largest cocoa producer, has resulted in a cocoa price increase of more than 15% since November 2010. The Ivory Coast produces approximately 40% of the world's total cocoa supply.[48], The president-elect Alassane Outtara issued a largely symbolic ban on the export of cocoa until March 2011, however his power currently doesn't extend beyond the confines of his barricaded hotel.[49] The long-term effect of the conflict on chocolate prices remains to be seen but it closely follows crop plagues in both Ghana and Indonesia which threatened the cocoa supply in mid-2010.[50] Following the announcement of the export ban, cocoa prices immediately rose an additional 7%.[51]
Growing Global Demand Makes International Expansion Attractive
Huge markets in China, India and other developing countries also present a big opportunity for Hershey's. Chocolate sales in China have doubled to $813 million over the last five years while India's chocolate sales have risen 64% over the same period[52] Hershey's has tried to move into these markets with through joint ventures with Lotte Confectionery of South Korea and Godrej in India. Still, with 90% of sales within North America, international expansion remains a big opportunity.
In April 2010, Hershey's announced plans to open its first store in Singapore; it hopes to open six additional stores in the country within three years. The company is also investigating expansion opportunities in Indonesia, Malaysia, and Thailand, with each country eventually supporting four to six stores. In the Middle East, the company is looking to UAE, Kuwait, and Qatar as possible store locations with four to six stores in the UAE and two or three in the other two countries eventually.[53] Although Hershey's bid for Cadbury was unsuccessful, the company is still looking to international markets for its growth prospects; the company has said they are interested in acquiring foreign candy companies in order to expand their global footprint.[54]
Premium and Dark Chocolates are Fast Growing Segments
U.S. premium chocolate grew 129% from 2001 to 2006[55]
As the U.S. chocolate market matures, Hershey's is seeking out new avenues for growth. Premium and dark chocolate are two rapidly growing segments of the chocolate market. U.K. premium chocolate sales grew 129% from 2001 to 2006 while dark chocolate sales increased 49 percent to $1.88 billion between 2003 and 2006[56], much faster than the overall chocolate market. By 2011, premium chocolate is expected to make up 25% of the US chocolate market, amounting to more than $4.5 billion in sales.[57] Dark chocolates are gaining popularity due to their newly perceived healthiness; studies have shown that dark chocolate has antioxidant properties and may provide cardiovascular benefits[58]. Hershey's has taken advantage of this trend by introducing it's own dark chocolate products, Extra Dark and Cacao Reserve, as well as acquiring smaller premium chocolate companies such as Dagoba and Joseph Schmidt[59].
Restructuring Initiative Promises Increased Savings
Hershey's lags behind its competitors in terms of operating margins. While traditional margins in the packaged food and Chocolate industry have been around 25 percent, Hershey's margins are below 20 percent.
In order to expand margins, in 2007 Hershey's began a $525-$575 million supply-chain restructuring plan. As part of its "Global Supply Chain Transformations" the company will reduce production lines, outsource the production of many of it's low value-added products and build a new cost effective facility in Mexico. The company expects to save $180 million annually by 2010 if this plan is implemented properly. Hershey's has indicated that this initiative would lead to greater manufacturing flexibility and allow the company to support its strategy to penetrate into new markets[60].
Competition
Hershey’s enjoys the largest share of the US Chocolate market and is the leader in both single-serve and bulk (boxes/large bars/bags) Chocolate products. Mars is Hershey's closest rival, owning well-known brands such as Mars, Snickers, M&M's, Milky Way and Twix. In April 2008, Mars announced the $23B acquisition of Wrigley. The deal creates a confectionery giant combining many stable brands with global distribution[61]. The new Mars-Wrigley could pose a serious threat in Hershey's core North American business.
The threat of competition in North America from powerful global confectionary companies such as Nestle (NSRGY) and Cadbury Schweppes (CSG) is effectively mitigated through Hershey’s licensing agreements. In the case of Néstle, Hershey's owns exclusive US licensing rights to Kit Kat – one of Nestle's strongest brands. Without the Kit Kat platform it will be difficult for Nestle (NSRGY) to gain a competitive edge in the US market. Hershey’s also owns the US licensing rights to all the Cadbury Schweppes (CSG) brands, thus preventing Cadbury Schweppes (CSG) from entering the US market.
On January 19, 2010, Kraft Foods (KFT) bought Cadbury for $19.5 billion, outbidding Hershey to create the largest chocolate and confectionary company in the world. The merger hurts Hershey's international growth prospects as the company had been hoping Cadbury would greatly expand Hershey's brands beyond their current domestic marketplace. In the wake of the merger, rumors have circulated that Nestle (NSRGY) is looking to buy a smaller competitor such as H.J. Heinz Company (HNZ) or General Mills (GIS), and Hershey's name has also been mentioned. However, a spokesman for the Hershey Trust has categorically denied any possibility of a takeover.[62] Despite the Trust's denial, rumors are still circulating about a possible takeover by Nestle, especially since the company's recent sale of Alcon to Novartis for $28.1 billion. With the new cash, Nestle could buy almost any food or confectionery business with cash; Hershey's shares are currently valued around $10 billion.[63]
Hershey's has a leading share in the U.S. chocolate market
Contents
1 Company Overview
1.1 Business Financials
1.1.1 Quarterly Earnings
1.2 Products
2 Trends and Forces
2.1 Rising Commodity Costs Pressuring Margins
2.2 Growing Global Demand Makes International Expansion Attractive
2.3 Premium and Dark Chocolates are Fast Growing Segments
2.4 Restructuring Initiative Promises Increased Savings
3 Competition
4 References
Rising costs are a particularly difficult challenge for Hershey. The company is particularly vulnerable to market prices of key ingredients like cocoa, milk, sugar and peanuts, all of which saw price increases in 2009.[7] In order to combat rising costs, the company has both lowered product weight and raised domestic wholesale prices. With the recent turmoil in the Ivory Coast, which produces 40% of the world's raw cocoa[8], prices for this vital chocolate ingredient have risen more than 15% since November 2010. Most recently, the president-elect issued a largely symbolic ban on the export of cocoa until March, however his power currently doesn't extend beyond the confines of his barricaded hotel.[9] The long-term effect of the conflict on chocolate prices remains to be seen but it closely follows crop plagues in both Ghana and Indonesia which threatened the cocoa supply in mid-2010.[10]
On January 19, 2010, Kraft Foods (KFT) bought Cadbury for $19.5 billion, outbidding Hershey to create the largest chocolate and confectionary company in the world.
Company Overview
Hershey is a manufacturer of chocolate and other candy items, selling its products in over two million retail outlets in 50 different countries.[2] Although Hershey has global reach, more than 90% of its revenue and profits come from the United States.[2]
Business Financials
HSY Supply Chain Transformation Expenses by Category[11]
Hershey's sales have stagnated since 2005 as competitor Mars has eaten into Hershey's share of the US chocolate market.[1] In 2009, the company posted $5.3 billion in revenue, a 3.2% increase from 2008.[12] After implementing a cost-saving initiative in 2007, Hershey expects annual savings of $190 million by the time the project is completed in 2010.[13]
The restructuring program has had a large impact on Hershey's net income, sending it up 47% in 2008 to $311 million.[14] The increase is due to the success of the restructuring plan, increased advertising for the company's core brands, and higher prices introduced late in 2008. Hershey's income was also increased by the fact that the company recorded most of the restructuring costs in 2007 and therefore had fewer charges on its 2008 income statement.
Quarterly Earnings
Q1 2009
In the first quarter of 2009, Hershey posted revenues of $1.236 billion, a 6.5% increase over Q1 2008 figures; net income grew 20% to $75.9 million.[15] The majority of the increase in revenue is attributable to an 11% price increase across chocolate and sugar confectionery lines initiated in August 2008. Stronger international sales muted foreign currency exchange losses. Total charges associated with the 2007 business realignment initiative shrank to $18 million from $30 million in Q1 2008 as the program nears completion.[16]
Q2 2009
In the second quarter of 2009, Hershey posted revenues of $1.17 billion, a 5.9% increase over Q2 2008 figures; net income grew by 72% to $71.3 million.[17] As in Q1 2009, the increase in revenue was due to the net pricing increase from August 2008. Although volumes fell slightly, a 46% boost in advertising from the first quarter helped stem any significant decreases. Unlike other international candy makers such as Nestle (NSRGY) and Mars, Hershey makes most of its sales in the US, so it was relatively unaffected by adverse currency fluctuations and the strengthening of the US dollar. Business realignment charges were $42.7 million in the quarter. From the initiation of the program to Q2 2009, the company has spent $591.7 on the initiative, and expects to end the program in late 2009 or early 2010 for a grand total of $640-665 million. The majority of remaining charges involve non-cash pension settlements.
Q3 2009
In the third quarter of 2009, Hershey posted revenues of $1.48 billion, a decrease of 0.4% from Q3 2008 (which had increased 6.4% from the previous year); net income grew by 30.1% to $162 million.[18] The price increases instituted in 2008 increased revenues by 10%, however this was offset by a significant decline in volume. As discussed in Q2 2009 above, Hershey has a relatively small international presence, but adverse foreign currency exchange rates decreased revenues by 1.1%.[19] Sales at retail increased 4.8% from the previous year and Hershey's market share remained the same.[20] The company attributed the decline in sales to its decision to discontinue high-end Starbuck's Chocolates and Cacao Reserve bars; excluding these items, revenues would have increased approximately 4.8%.[21] Compared to Q3 2008, lower dairy costs and the decreased volume led to a 9.4% decrease in costs. Charges related to the company's business realignment initiative totaled $8 million for the quarter, primarily the result of pension settlement losses and plant closure costs.[22] Negotiations are continuing in Hershey's bid for Cadbury (CBY) however Kraft Foods (KFT) currently is the largest bidder and Cadbury (CBY) has said that any credible bid would have to be worth at least $19 billion. With a current market value of $8.25 billion (compared to Cadbury's value of $17.7 billion), Hershey may have trouble making a large enough bid.[23]
Q4 2009
In the fourth quarter of 2009, Hershey's posted revenues of $1.407 billion, an increase of 2.2% from Q4 2008; net income grew 54% to $126.8 million.[24] Higher selling prices and increased efficiency drove the revenue increases, which were partially offset by higher raw material costs and increased advertising spending. Total revenue growth was hurt by delaying the shipment of Valentine's and Easter candy to Q1 2010, but this will help to improve first quarter results.[25] The biggest news of the quarter, following on the heels of their failed bid for Cadbury (CBY), was their stated willingness to pursue other merger/acquisition opportunities and the back story behind the failed bid. Reports emerged that the bid failed, more so than because of Kraft's extensive resources, but primarily as a result of conflicting visions for the company's future between CEO David West and Robert Reese, President of the Hershey Trust.[26] The company still maintains a 45% market share in the domestic chocolate market and 20% annual growth outside of the US and Canada over the past five years. The drug store retail channel continues to perform poorly, with Hershey's market share declining nearly 2% during the quarter, but the total confections category retail consumer take away increased 6% despite the poor drug channel performance.[27]
Q1 2010
In the first quarter of 2010, Hershey's posted revenues of $1.41 billion, an increase of nearly 14% from Q1 2009; net income nearly doubled to $147 million.[28] Higher core brand sales volume and improved pricing were the major forces pushing the substantial increase in net sales for the quarter, however the quarter also benefited from a seasonal volume shift from Q4 2009 to Q1 2010. Excluding sales at Wal-Mart (WMT), Hershey's market share increased 0.5% for the quarter with the company's consumer take away (including Wal-Mart) increasing 7.5% or 5.5% if you discount the increase that resulted from an early Easter season that atypically fell into Q1 this year.[29] In particular, the core brands that the company spent money advertising saw their takeaway increase 10%.[30] Valentine's Day, usually the largest holiday of the quarter, was difficult for the entire candy industry this year with consumer spending and gifting down; Hershey's Valentine's season sales decreased by less than 10% and accounted for a 1% decline in market share for the quarter.[31] The company has completely cycled through its August 2008 price increases and is still seeing base volume growth; feeding off the company's better-than-expected revenues for the quarter, advertising expenditures are expected to increase 35%-40% in 2010. Internationally but excluding Canada, sales increased 14% for the quarter with strong earnings growth in Mexico, China, Brazil, and Canada.[32] In contrast, India saw a decline in sales which offset some of the gains realized in these other countries.[33]
Q2 2010
In the first quarter of 2010, Hershey's posted revenues of $1.23 billion, an increase of 5.3% from Q2 2009; net income decreased by more than 34% to $46.7 million.[34] The fall in net income was primarily attributable to business realignment and impairment charges. Without these charges, net income would have increased nearly 18%.[35] The increased revenues were driven by a 3% increase in sales volume for the company's core US brands. Hershey's market share (excluding sales at Wal-Mart increased by 0.3% and the consumer takeaway (including Wal-Mart) increased by 4%. Lower supply chain costs more than offset a slight increase in the cost of raw materials. The business realignment charges that affected the company's net income stemmed from a $44.7 million devaluation of the Godrej Hershey joint venture in India.[36] Hershey's bought Godrej and started the joint venture in 2007, but it has not grown at the rate originally expected. Delays with rolling out nation-wide distribution, failing to implement higher pricing, and a poor Indian sugar crop have all affected the company's business in India to date. Although the company did not release specific figures for its various international operations, business in Mexico, Brazil, China and India all grew during the quarter, though the company admits that India is not growing as quickly as they had planned.[37]
Q3 2010
In the third quarter of 2010, Hershey's posted revenues of $1.5 billion, an increase of 4.2% from Q3 2010; net income for the quarter increased 11.2% to $180.2 million. Operating income for the quarter grew 11.2% to $655.2 million.[38] Sales of core brands increased by 2.5%, international sales volume increased, and improved pricing contributed 1% to revenues for the quarter. Consumer takeaway increased more than 3.5% during the quarter and the company's market share grew slightly by 0.1%.[39] The company's performance in America steadily built on last quarter's progress but there were no major increases in any segment, except for a slight increase in advertising which is now expected to be 50-60% more for the year than in FY 2009. Internationally, sales outside the US grew by more than 10% concurrent with an increase in advertising spending outside North America that was 65% higher than in Q3 2009. The company is launching two new products in Q4 (Hershey's Drops and Reese's Minis) and since Halloween fell near the end of the quarter, a certain portion of sales from the holiday will be accounted for in Q4.[40]
Products
Hershey’s primarily makes cocoa for the production of chocolates, candies and other confectioneries. With 90% of its sales in North America[41], Hershey's production facilities are primarily located in the U.S., Mexico and Canada. Beyond production, Hershey's offers its products through a variety of distribution channels including wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, convenience stores, dollar stores and department stores[42]. The McLane Company, distributor to Wal-Mart (WMT), is Hershey's largest customer, accounting for 27% of sales in 2009.[43]. Hershey's offers products in several categories:
Chocolates:
Hershey’s
Reese’s'
Hershey’s Kisses
Milk Dud
U.S. licensing of Nestle's Kit Kat
Premium Chocolates:
Cacao Reserve
Joseph Schmidt
Dagoba
Refreshment products:
Ice Breakers
Breath Savers
Bubble Yum
Trends and Forces
Rising Commodity Costs Pressuring Margins
Rising commodity costs are putting negative pressure on Hershey's operating margins. Hershey's is particularly sensitive to the prices of commodities like cocoa, milk and sugar which are all key ingredients in Chocolate making. Since the beginning of 2008, prices for key ingredients like cocoa, milk, sugar and peanuts are all up 20% to 40%[44]. These rapid price increases show no signs of abating as Hershey's predicts commodity prices will increase twice as fast in 2009 compared to 2008[45]. Much of this rise comes increases in sugar, which almost doubled between January and August 2009.[46] Hershey's combats increasing input costs with a combination of price increases and various hedging strategies. In 2008 alone, the company has twice raised wholesale prices[47].
The election conflict in the Ivory Coast, the world's largest cocoa producer, has resulted in a cocoa price increase of more than 15% since November 2010. The Ivory Coast produces approximately 40% of the world's total cocoa supply.[48], The president-elect Alassane Outtara issued a largely symbolic ban on the export of cocoa until March 2011, however his power currently doesn't extend beyond the confines of his barricaded hotel.[49] The long-term effect of the conflict on chocolate prices remains to be seen but it closely follows crop plagues in both Ghana and Indonesia which threatened the cocoa supply in mid-2010.[50] Following the announcement of the export ban, cocoa prices immediately rose an additional 7%.[51]
Growing Global Demand Makes International Expansion Attractive
Huge markets in China, India and other developing countries also present a big opportunity for Hershey's. Chocolate sales in China have doubled to $813 million over the last five years while India's chocolate sales have risen 64% over the same period[52] Hershey's has tried to move into these markets with through joint ventures with Lotte Confectionery of South Korea and Godrej in India. Still, with 90% of sales within North America, international expansion remains a big opportunity.
In April 2010, Hershey's announced plans to open its first store in Singapore; it hopes to open six additional stores in the country within three years. The company is also investigating expansion opportunities in Indonesia, Malaysia, and Thailand, with each country eventually supporting four to six stores. In the Middle East, the company is looking to UAE, Kuwait, and Qatar as possible store locations with four to six stores in the UAE and two or three in the other two countries eventually.[53] Although Hershey's bid for Cadbury was unsuccessful, the company is still looking to international markets for its growth prospects; the company has said they are interested in acquiring foreign candy companies in order to expand their global footprint.[54]
Premium and Dark Chocolates are Fast Growing Segments
U.S. premium chocolate grew 129% from 2001 to 2006[55]
As the U.S. chocolate market matures, Hershey's is seeking out new avenues for growth. Premium and dark chocolate are two rapidly growing segments of the chocolate market. U.K. premium chocolate sales grew 129% from 2001 to 2006 while dark chocolate sales increased 49 percent to $1.88 billion between 2003 and 2006[56], much faster than the overall chocolate market. By 2011, premium chocolate is expected to make up 25% of the US chocolate market, amounting to more than $4.5 billion in sales.[57] Dark chocolates are gaining popularity due to their newly perceived healthiness; studies have shown that dark chocolate has antioxidant properties and may provide cardiovascular benefits[58]. Hershey's has taken advantage of this trend by introducing it's own dark chocolate products, Extra Dark and Cacao Reserve, as well as acquiring smaller premium chocolate companies such as Dagoba and Joseph Schmidt[59].
Restructuring Initiative Promises Increased Savings
Hershey's lags behind its competitors in terms of operating margins. While traditional margins in the packaged food and Chocolate industry have been around 25 percent, Hershey's margins are below 20 percent.
In order to expand margins, in 2007 Hershey's began a $525-$575 million supply-chain restructuring plan. As part of its "Global Supply Chain Transformations" the company will reduce production lines, outsource the production of many of it's low value-added products and build a new cost effective facility in Mexico. The company expects to save $180 million annually by 2010 if this plan is implemented properly. Hershey's has indicated that this initiative would lead to greater manufacturing flexibility and allow the company to support its strategy to penetrate into new markets[60].
Competition
Hershey’s enjoys the largest share of the US Chocolate market and is the leader in both single-serve and bulk (boxes/large bars/bags) Chocolate products. Mars is Hershey's closest rival, owning well-known brands such as Mars, Snickers, M&M's, Milky Way and Twix. In April 2008, Mars announced the $23B acquisition of Wrigley. The deal creates a confectionery giant combining many stable brands with global distribution[61]. The new Mars-Wrigley could pose a serious threat in Hershey's core North American business.
The threat of competition in North America from powerful global confectionary companies such as Nestle (NSRGY) and Cadbury Schweppes (CSG) is effectively mitigated through Hershey’s licensing agreements. In the case of Néstle, Hershey's owns exclusive US licensing rights to Kit Kat – one of Nestle's strongest brands. Without the Kit Kat platform it will be difficult for Nestle (NSRGY) to gain a competitive edge in the US market. Hershey’s also owns the US licensing rights to all the Cadbury Schweppes (CSG) brands, thus preventing Cadbury Schweppes (CSG) from entering the US market.
On January 19, 2010, Kraft Foods (KFT) bought Cadbury for $19.5 billion, outbidding Hershey to create the largest chocolate and confectionary company in the world. The merger hurts Hershey's international growth prospects as the company had been hoping Cadbury would greatly expand Hershey's brands beyond their current domestic marketplace. In the wake of the merger, rumors have circulated that Nestle (NSRGY) is looking to buy a smaller competitor such as H.J. Heinz Company (HNZ) or General Mills (GIS), and Hershey's name has also been mentioned. However, a spokesman for the Hershey Trust has categorically denied any possibility of a takeover.[62] Despite the Trust's denial, rumors are still circulating about a possible takeover by Nestle, especially since the company's recent sale of Alcon to Novartis for $28.1 billion. With the new cash, Nestle could buy almost any food or confectionery business with cash; Hershey's shares are currently valued around $10 billion.[63]
Hershey's has a leading share in the U.S. chocolate market