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The Fourth Quarter Caps off a Year to Forget for Confectionery Giant Hershey

2/3/2016
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From a competitive point of view, the fourth quarter capped off what has been a poor year for Hershey. Whilst investors and analysts will not mind the fact that Hershey’s has managed to once again improve operating profit, net sales actually decreased slightly over the 12 month period and 5% in Q4. Particularly damaging was the exceptionally poor performance in China, down 13% in Q4, and the company will be hoping this is a one off.

Are snack bars and premium the way forward?

Over the next five years, there will be an increased focus on establishing Hershey’s non-confectionery portfolio as an important segment of the business in its own right. The company announced that it expects to achieve much wider distribution with Krave Jerky meat snacks as well as Brookside Snack Bars in 2016. Amongst globally confectionery manufacturers, Hershey’s is arguably unique in its continued focus on non-confectionery items. Whilst ambitious, it remains far from certain whether Hershey’s decision to focus on these snacks will pay off, given the company’s lack of experience in the market compared to players such as Pepsi and Kellogg’s. This snacking enterprise is nascent, and will remain far from lucrative for some time.

There will also be a shift in confectionery, Hershey’s bread and butter, with an increased focus on premium brands and raising the value of its Hershey’s Kisses and eponymous countlines via its natural ingredients push. The aim will be to push value sales up as a result of volume consumption slowdown in the market. For too long, Hershey has feasted on the sizeable banquet that is US confectionery and, as such, was bound to hit problems when demand weakened. With per capita volume growth slowing in the US, consumers are now turning to higher quality brands, such as Lindt, when they do buy chocolate. The aim in the US will now be to push value sales as volume consumption stalls.

Internationally, Hershey still has a long way to go

Internationally, the company has yielded to temptation all too quickly, and it has resulted in rash business decisions.  The general strategy has been to target fast growing emerging markets. Over the course of the year, however, Hershey reports that it lost market share in China – given the still-fragmented nature of the country’s confectionery landscape, this is somewhat embarrassing. The company will be fighting to consolidate its market share. Whilst still in an embryonic phase, e-commerce sales have performed well, and this could be one way of restoring lost share.

Hershey % Market Share versus Chocolate Confectionery Forecast Growth 2015-2020 (US$ million)

Hershey-market-share-vs-chocolate-confectionery-forecast-growth-2015-2020

Source: Euromonitor International

Hershey has admirably tried to transition from a North American business to a global one. This brings with it more competition with Mars. However, whilst Hershey has struggled to impose itself in international markets, Mars already has significant presence in the likes of India, China and Mexico. It also appears to have a savvier strategy for these markets, targeting affordable chocolate and attempting to attract a new generation of chocolate consumers in India.  In Mexico, Mars’ recent acquisition of Grupo Turin should help increase distribution in the country. Whilst Mars’ weakness – and an advantage for Hershey - is its lack of premium brand, the company may be able to develop Grupo Turin’s premium portfolio for sale in North America.

There are real challenges for Hershey. Whilst it has boosted profitability, it is struggling to keep up with competitors globally. At the same time, the core North American market appears to be struggling somewhat, again due to increased competitive activity from the likes of Lindt and Ferrero. Rumours have recently circulated that the company may merge with Ferrero. However, given Ferrero’s intensely private business and far broader international presence, this seems unlikely. At present, then, Hershey’s decision to end its splendid isolation has been far from that.

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