case study of The Hershey Company

The Hershey Company Introducing the World of Chocolate The Hershey Company Introducing the World of Chocolate examines the remarkable successes and failures of The Hershey Company, the largest North American manufacturer of chocolate and sugar confectionery products, in its constant pursuit to maintain growth and profitability in a competitive industry dominated by only a few giant confectionery corporations. Through careful analysis and thorough research, The Hershey Company Introducing the World of Chocolate will provide a clear and concise assessment of how The Hershey Company came to be a global corporate giant, how it has maintained its dominant position in the industry, and where the company is going in the near future.

INTRODUCTION The Hershey Company prides itself as being the largest manufacturer of chocolate and confectionery products in North America. Hershey employs over 15,000 employees worldwide. Hershey also exports to ninety different countries. Below are some of the company’s popular brands. * Hershey’s Chocolate Bar * Almond Joy * Kit Kat * Hershey’s Kisses * Mounds * Reese’s * Payday * York Peppermint Pattie * Milk Duds * Mr. Good bar * Rolo * Skor * Whatchamacallit * Whoppers * Crackle Bar

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These legendary brands have contributed to the success of having sales that reach well over four billion dollars. The Hershey Company also enjoys being the leader of the dark and premium chocolate segment. The top brands in this category include Hershey’s Special Dark, Hershey’s Extra Dark, and Cacao Reserve. Expansion has also lead to the development of different snacks. Hershey’s chocolate has been used to enhance cookies, brownies, and cakes. The Hershey Company lives by their mission statement: “Undisputed Marketplace Leadership” .They strives to maintain a superior standing by having continual creation of value, developing a diverse portfolio of brands, and by successfully transforming consumer and customer desires into reality. Today, the Hershey Company remains committed to fulfilling the mission of Milton Hershey, the founder who started it all.

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HISTORY Founder History: Milton Hershey grew up in rural Pennsylvania and left his legacy as Hershey’s chocolate. Milton was an entrepreneur who completed a four-year apprenticeship with a candy maker prior to venturing out to start his own business. Hershey made three attempts at starting his own company before successfully starting the Lancaster Caramel Company. It wasn’t until 1893 that Milton Hershey became interested in the art of chocolate making. While attending the World’s Columbian Exposition, Hershey purchased machinery and thus began producing chocolate that covered his caramel creations. Soon after this discovery, Hershey started the Hershey Chocolate Company in 1894. After many trials and errors, he finally stumbled upon the famous recipe that would become his legacy. In 1900, Milton Hershey sold his caramel business for one million dollars. He then focused solely on making chocolate. In 1903, Hershey decided to build his company at a new location in Derry Township. This location had a larger population, easy access to port cities that would supply sugar and cocoa beans, and plenty of dairy farms. Milton Hershey sought not only to build a company, but also to build a community. He believed that workers worked better under pleasant working conditions and pleasant surroundings. For this reason, Hershey built an infrastructure to take care of his workers. This infrastructure was accompanied with a department store, convention hall, and lots of schools. “In a long and useful life, Milton S. Hershey proved himself to be a courageous entrepreneur, a determined builder and a compassionate humanitarian” Chocolate and Cocoa Industry History / Development: The chocolate industry relies heavily on fluctuations in demand. The demand for these products increases drastically during the holiday season. For this reason, sales increase during the third and fourth quarters of the calendar year. Several consumer trends such as the rising sales of premium-priced chocolates and the growing concern about the health risks associated with the consumption of such high-fat foods affect the chocolate industry. There were 995 establishments that produced chocolate in 2000. California and Pennsylvania were the two states that had the majority of these establishments. The total consumption of chocolate in a year is about 3.1 billion pounds with a total of retails sales reaching about $13 billion. The chocolate industry dates back to 1765. At that time, growers in the West Indies supplied cocoa. The first chocolate factory was established in England. During the First World War, chocolate was used as a morale booster and for nourishment. From 1989 to 1991 the chocolate/cocoa industry experienced 50 acquisitions, mergers, licensing agreements, or joint ventures. During the mid 1990’s, the industry catered toward new consumer trends. The development of light chocolate and light desserts increased drastically with the creation of fat-free chocolate items.

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Manufacturing Process: In order for U.S. manufacturers to use cocoa beans, the beans must be imported by direct purchase or through a broker. The growers of these beans are paid market price. Once the beans are obtained, they are then processed to make chocolate liquor. This liquor is then used to manufacture cocoa, syrup, and solid chocolate chips. It can also be used to enhance confections, bakery items, and other dairy products. The manufacturing process includes roasting, shelling, and grinding of the beans to produce the unsweetened chocolate liquor. Additional processing will yield one of two products, cocoa or chocolate. Cocoa is produced by extracting fat from the liquor. The remaining cocoa cake is crushed to form a powder and may be sweetened or left unsweetened. The fat that is extracted is known as cocoa butter which can be used in sweetened chocolate or as moisturizers. The production of chocolate requires the addition of sugar and cocoa butter to the liquor. Milk solids are also needed when manufacturing milk chocolate. Chocolate manufacturers typically sell the semi-processed products to other firms that use them when producing confectionery goods. “Exports of chocolate products consist of confectionery items rather than semi-processed chocolate”. Hershey’s Timeline: 1887: Milton Hershey establishes the Lancaster Caramel Company. 1895: The Company begins to sell chocolate. 1900: Hershey sells his caramel company to focus on chocolate 1905: Milton Hershey established an independent trust company to provide the town’s financial services and manage the assets that were to fund his many philanthropic endeavors. 1906: The Village of Derry Church is renamed Hershey 1907: Hershey Kiss was introduced. 1927: The firm incorporates as Hershey Chocolate Company and is listed on the New York Stock Exchange. 1940: Hershey’s chocolate plant is unionized. 1963: H.B. Reese Candy Company is acquired. 1968: The firm adopts the name Hershey Foods Corporation. 1970: Hershey’s first consumer advertisement appears in 114 newspapers. 1988: Hershey Purchases the operating assets and manufacturing assets of Peter Paul/ Cadbury brands. 1996: Hershey launches its first hard candy line, TasteTations, and the reduced-fat Sweet Escapes Line. 1999: The firm sells its pasta business to New World Pasta, LLC. 2002: The Milton Hershey Trust School announces plans to sell Hershey, but withdraws offer.

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HERSHEY’S CODE OF CONDUCT: Hershey created the “Ethical Business Practices Committee to accomplish and the following: 1. Implementing or communicating to directors, officers and employees the Code and the Company’s overall ethics program. 2. Providing direction to directors, officers and employees, including managers, regarding questions or issues concerning the Code. 3. Being available to officers and employees for any reporting of potential conflict of interest, any other potential violation under the Code or other potential violation of law or other Company policy. 4. Providing advice and guidance to the various departments and personnel throughout the Company responsible for legal compliance and education efforts. 5. Making reports to the Chief Executive Officer and the Audit Committee of the Board of Directors relating to key issues or investigations and any changes in overall compliance and education with respect to the Code.

HERSHEY’S MISSION STATEMENT The Hershey Company’s mission statement reads as follows, “Our mission is to be a focused food company in North America and selected international markets and a leader in every aspect of our business. Our believe is and to build leadership positions in selected international markets”. EVALUATION OF MISSION STATEMENT Customer YES Technology NO Self Concept

Product and Service YES Concern for survival and growth and profitability NO Concern for Image

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Market YES Philosophy YES Concern for Employee

NO

NO

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COMMENT ON EVALUATION Hershey’s should revise their mission statement as there is no concern for their survival, growth, profitability, technology, self concept and there is no concern for their image and for employees. HERSHEY’S PHILOSOPHY In seeking to balance our desire for profitable growth with the obligations which we have to various other constituencies, we shall strive to 1. Protect and enhance the corporation's high level of ethics and conduct. 2. Maintain a strong "people" orientation and demonstrate care for every employee. 3. Attract and hold customers and consumers with products and services of consistently superior quality and value. 4. Sustain a strong result orientation coupled with a prudent approach to business. HERSHEY’S VALUES:

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Hershey's Values, "One Hershey," tell a powerful story: A global and diverse team, operating with integrity, working together, determined to make a difference. Open to Possibilities

Growing Together

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Think Globally Embrace Change

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Build Trusting Relationships Develop Self

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Courage to Innovate

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Help Others

Making a Difference

One Hershey

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Act with Integrity Drive Sustainability

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Align Goals Promote Collaboration

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Commit to Engagement

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Embrace Accountability

Hershey's Values, "One Hershey," tell a powerful story: A global and diverse team, operating with integrity, working together, determined to make a difference. Open to Possibilities We are Opening to Possibilities by embracing diversity, seeking new approaches and striving for continuous improvement. Growing Together We are Growing Together by sharing knowledge and unwrapping human potential in an environment of mutual respect. Making a Difference We are making a Difference by leading with integrity and determination to have a positive impact on everything we do. One Hershey We are One Hershey, winning together while accepting individual responsibility for our results. 7

EXTERNAL ENVIRONMENT OPPORTUNITIES: 

China and India are huge untapped markets. Malaysia, Indonesia, Vietnam, and Thailand also are untapped, So, Hershey has the opportunity to gain a foothold in those Countries.

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There is another opportunity for Hershey to develop environmentally safe products and packages, reducing industrial waste, recycling, and establishing an environmental audit process are strategies that could benefit Hershey.

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Another opportunity is that Hershey diversifies more into non-chocolate candies because that segment is growing most rapidly in foreign countries like U.S & U.K.

THREATS:

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The main competitors of Hershey Foods are Mars and Nestle. Mars is already a threat for Hershey, because Mars has a stronger presence than Hershey in Europe, Asia, Mexico, and Japan.  Unlike Hershey, Mars has historically relied upon extensive marketing and advertising expenditures to gain market share, rather than on product innovation.  25 percent of Nestlé’s revenues and profits come from coffee, and adverse economic occurrences in South America, particularly Brazil, affect the company. Nestle plans to continue to play to its strengths, international markets outside the United States, to combat Hershey.

COMPETITOR’S ANALYSIS The competitive characteristics of an industry are generally considered in the contexts of (1) the structure of competition, (2) marketing resources and skills, (3) production resources and skills, (4) financial resources, (5) managerial resources, and (6) competitive strategies (Thompson & Strickland, 1990). This research, however, is concerned only with the structure of Hershey's competition. The competitive structure of an industry is determined largely by the segmentation of the market, and the targeting of market segments. The identification of Hershey's competitors depends largely on the specific market segments in which the company operates. Hershey Foods operates in several market segments.

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Because of the Hershey candy bar, Hershey Foods, aside from Coca-Cola, is the best known company in the United States (Moskowitz, Katz, & Levering, 1986). In the 1990s, Hershey markets candy under brand names other than Hershey Reese's, Krakel, Kit Kat, Mr. Goodbar, After Eight, Rolo, Skor, and Symphony, to name but a few. The company also markets cooking chocolate, prepared puddings, ice cream, and pasta products. Hershey's pasta products are marketed under the brand names San Giorgio, Delmonico, Skinner, and Procino-Rossi, or P&R (Dagnolin, 1990).

INDUSTRY ANALYSIS Introduction: Porter’s “five forces” model of industry competition is used to inspect a competitive environment and establish a firm’s possible profits. The model uses five competitive forces that determine a particular firm’s capability to compete. The chocolate and cocoa industry can use the “five forces” model as an analytical tool to determine the competitive market. The Threat of New Entrants It is a competitive force that determines how easily a firm’s profits can be lowered because of new competitors in the industry. There are six barriers that determine the risk of new entrants. These include economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels and cost disadvantages independent of scale • •

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In addition to economy of scale, product differentiation is another entry barrier in the chocolate and cocoa industry. Another entry barrier is the presence of large capital requirements that are required in the chocolate and cocoa industry. Large capital requirements create an entry barrier for new entrants because it requires the company to have a significant source of capital to get started Switching cost create a barrier to entry for new companies entering the chocolate and cocoa industry. Switching the supplier of chocolate’s raw materials such as cocoa beans, sugar, and milk create additional testing and research that must be completed by the company to ensure correct quality, safety and taste.

Bargaining Power of Buyers •

The bargaining power of buyers is a competitive force that can result in lower prices for a product and increase the quality of service, which decreases profits and increases costs for the industry. Buyer’s power increases if large volumes of the product are purchased, the product is undifferentiated, few switching costs exist, low profits are earned, backward integration is possible, and the quality of the buyer’s product is not affected by the supplier’s product.

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Another condition that affects the power of buyers is product differentiation. If the product is undifferentiated, the buyer has the power to play competitors against each other and reduce the cost. The chocolate and cocoa industry has a differentiated product, which reduces the power of buyers. The industry has several large players that have brand identification and customer loyalty, which makes it hard for buyers not to use a particular supplier. The bargaining power of buyers is increased by two factors: a number of large volume buyers and the buyers’ relatively low profits from the product.

Bargaining Power of Suppliers •

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The bargaining power of suppliers is a competitive force that can diminish a firm’s profitability by raising prices or reducing the quality of the supplier’s product. The six conditions that increase a supplier’s power are a concentrated supplier group, no substitute products available, industry is an unimportant customer to the supplier, supplier’s product is essential to the industry’s business, supplier’s product is differentiated, and justifiable threat of forward integration. The suppliers of the chocolate and cocoa industry have significant bargaining power over the industry because of the limited number of these suppliers. Because the cacao tree is grown in areas that have a tropical climate, many players in the industry are forced to import the product. Tropical climates are often at risk for natural disasters, such as hurricanes, which can dramatically reduce the number of suppliers. The chocolate and cocoa industry is an extremely important customer of its supplier group. The cocoa bean is an important export of the countries that produce the cocoa bean. The bargaining power of the suppliers is reduced because of the importance of the chocolate and cocoa industry as a customer. Another condition that enhances the bargaining power of the supplier group is the dependency of the industry’s product on the suppliers’ product. The chocolate and cocoa industry relies on suppliers to deliver high quality products that meet food regulations and consumer taste tests. If the suppliers’ product is not available or does not meet the quality expected, the industry will suffer greatly. This dependency on the suppliers’ product increases the suppliers’ bargaining power.

Threat of Substitute Products and Services • • •

The threat of substitute products is a competitive force that can set a ceiling on the price the industry can charge for their product. If there are substitutes available to the consumer, an industry’s potential returns are limited. One ratio that can be used to measure the threat of substitute products is the priceperformance ratio. The chocolate and cocoa industry must compete with numerous substitute products that can threaten the industry’s profitability. Alternate cooking flavors are a substitute product to chocolate and cocoa. These flavors include vanilla, lemon, butter, or mint flavoring. These flavors can be used by the industry’s customers that use chocolate and cocoa products for industrial and cooking use.

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Another significant category of substitutes is snacks. Many non-chocolate snacks are available, such as peanut butter, fruits, potato chips, ice cream, etc. In addition to flavor and snack substitute products, the chocolate and cocoa industry must compete with substitute products in the retail arena. Specialty chocolate and cocoa products are used as gifts during numerous seasons and celebrations including Christmas, Easter, Halloween, Valentine’s Day, anniversaries and birthdays. Other types of gifts during these seasons are viewed as substitute products. These products are flowers, fruit, jewelry and stuffed animals All of these products can be purchased instead of chocolate and cocoa products. Many different cooking flavors, a hugely diverse selection of alternate snacks, and a wide variety of seasonal gifts make the threat of substitute products high in the chocolate and cocoa industry.

Intensity of Rivalry among Competitors in an Industry The final competitive force of Porter’s “five forces” model is the intensity of rivalry among competitors in an industry. This competitive force can create price wars, advertising battles, new product lines, and higher quality of customer service. • •

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An industry’s competitor rivalry is increased if there are numerous competitors or if the competitors are equally balanced. This condition can create a strain on raw materials and consumer groups. The chocolate and cocoa industry has numerous industry leaders that are similar in size and product offerings. Many of the leaders create new product lines and actively participate in advertising wars. Because there are numerous competitors that are equally balanced, competitor rivalry is increased. In addition to numerous competitors, slow industry growth increases the intensity of rivalry among competitors. The chocolate and cocoa industry is a mature market that is growing slowly. This slow growth increases the rivalry among competitors in the chocolate and cocoa industry. Another condition that increases the intensity of rivalry among competitors is if the industry has high fixed or storage costs. If fixed costs are high, firms in an industry are under pressure to increase capacity. The chocolate and cocoa industry has both high fixed costs and high storage costs. The industry’s fixed costs consist of large amounts of equipment and huge facilities to house manufacturing operations. Although the industry consists of perishable foods and ingredients, which typically have a short shelf-life, the storage costs are high due to the precise storage environment needed. For example, both milk and chocolate must be kept at a proper temperature and humidity.

All of these conditions create price wars, advertising battles, new product lines and higher quality of customer service in the chocolate and cocoa industry.

INTERNAL ENVIRONMENT 11

This section of the strategic environment is a realistic analysis of Hershey’s internal resources. The following internal traits portray a resource-based view of Hershey’s core strengths: STRENGTHS: 

Hershey Foods has grown from a one-product, one plant operation to a $4 billion company with many U.S. and international plants providing an array of quality chocolate and confectionery products and services.

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Hershey entered 1996 as the largest candy maker in the United States with 30.7 percent market share.

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Hershey is the largest pasta manufacturer in the United States with 28.4 percent market share.

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Hershey Foods Corporation is committed to the values of its founder Milton S. Hershey—the highest standard of quality, honesty, fairness, integrity, and respect. The firm makes annual distribution of cash, products, and services to a variety of national and local charitable organizations. The corporation operates the Milton Hershey School for socially disadvantaged children and is the sole sponsor of the Hershey National Track and Field Youth Program. Hershey also makes contributions to the Children’s Miracle Network, a national program benefiting children’s hospitals across the United States.

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Hershey’s main chocolate factory, for example, occupies more than 2 million square feet, is highly automated, and contains much heavy equipment, vats, and containers. It is the largest chocolate plant in the world.

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Hershey is an exemplary organization in terms of business ethics and social responsibility; a significant part of Hershey Food’s profits go toward operating the Milton Hershey School for Orphaned Children.

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Hershey is very cooperative with students and professors; Hershey has a toll-free number (1-800-468-1714) that students or professors can call to obtain additional information about the company.

WEAKNESSES:

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Hershey’s global market share in the chocolate confectionary industry in only 10 percent, lowest among its competitors.

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Concern for the natural environment is an issue Hershey should address before competitors seize the initiative.

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The average price of Cocoa beans rose 25.8 percent in 1995, following a 28.9 percent rise in 1994. World production is not keeping pace with increased consumption. The price per pound in 1995 was $0.72 and is expected to continue increasing. This is a major problem for Hershey because even a small price increase at the retail level severely restricts consumer buying.

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Some analysts contend that Hershey International as a separate division producing and selling diverse products is an ineffective organizational design. FINANCIAL ANALYSIS OF RECOMMENDED STRATEGY

FINANCIAL ANALYSIS: In the following sections, the company’s performance over the past two fiscal years will be analyzed. A ratio analysis for Hershey will be provided giving profitability, liquidity, activity, and leverage information. Further several ratios will be compared to the industry standard. RATIO ANALYSIS: PROFITABILITY MEASURES From an accounting standpoint, profitability is defined as business gain in an activity. The measures used in this section detail how profitable the firm’s operations are and how well the firm generates a return on capital. The ratios for profitability analysis are return on assets, sales margin, return on equity, and the dividend payout ratio. Return on Assets: Return on assets (ROA) measures a company’s efficiency in generating profits from its available assets. This is calculated by dividing net income by total assets. An increasing ratio indicates higher efficiency. Hershey’s ROA improved from 11.5% in 2005 to 13.4% in 2006 indicating that Hershey became more efficient over the 2006 fiscal year. Sales Margin: Sales margin is a measure of how much net income is attained from each dollar of sales. It is measured by diving net income by total revenue or sales. As sales margin increases, it indicates that sales are increasing at a faster rate than expenses. Hershey’s sales margin improved from 10.1% in 2005 to 11.3% in 2006, indicating an increase in efficiency.

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Return on Equity: The return on equity (ROE) is a measure of how well a company is able to return a profit using the shareholder’s investment. It is calculated by dividing net income by the shareholder’s equity. A higher number indicates a better return from shareholder’s investments. Hershey’s return on equity improved from 48.1% in 2005 to 81.8% in 2006, indicating a higher efficiency and better return from shareholder’s investment. Dividend Payout Ratio: The dividend payout ratio measures the percentage of net income that is paid out in dividends to its shareholder’s. This is calculated by dividing dividends per share by earnings per share. Hershey’s dividend payout ratio slightly deteriorated from 45.4% in 2005 to 42.2% in 2006, resulting in a lower efficiency. This could be the result of decisions to invest in other endeavors due to Hershey’s desire to grow its business. One would also draw this conclusion by noting the large amount of cash borrowed by Hershey’s in 2006. Summary of Profitability Measures Improvements were noted for Hershey’s ROA, sales margin, and ROE. Revenues, cost of goods sold, interest expenses, and tax expenses increased proportionally, therefore not affecting profitability measures. These improvements can be attributed to a decrease in selling, marketing and administrative (SM&A) costs, and a decrease in business realignment and asset impairment costs between 2005 and 2006. The dividend payout ratio was the only ratio to deteriorate in this group. This could be attributed to a higher reinvestment of income to other aspects of Hershey’s in order to promote company growth. LIQUIDITY MEASURES: When talking of liquidity, typically a person thinks of how much cash he or she has readily available to pay off unforeseen short-term expenses. A company’s liquidity can be described similarly, but on a larger scale with more line items. It is defined by how easily a company can pay off short-term debts, in specific those due in the fiscal year. Current Ratio: The current ratio gives a strong measure of a company’s liquidity. It compares the cash and cash equivalents plus any current assets that will be turned into cash within a year to current liabilities that must be paid within the year. This ratio indicates how well a company can pay its current debts. It is calculated by dividing current assets by current liabilities. Hershey’s current ratio improved from 0.924 in 2005 to 0.975 in 2006. Although this is an improvement, a ratio of 1 or better is desired in order to show the ability to pay of all current debts with current assets. Quick Ratio: The quick ratio is similar to the current ratio. The difference, however, lies in the numerator. Instead of using all current assets, the quick ratio only uses cash, market securities, and accounts receivables to compare against current liabilities. This is done to further narrow the assets to those that can more quickly be turn into cash. Hershey’s quick ratio improved from 0.385 to 0.426. Although an improvement can be seen, a more desirable ratio would be closer to 1 so that debts could be paid with current cash and cash equivalents. 14

Cash Flow Adequacy: This ratio measures how well a company can pay its annual obligations with cash flows from operations. It is calculated by dividing cash flow from operations by the sum of long term debts, capital expenditures, and paid dividends. The ratio improved greatly from -15.329 in 2005 to 7.162 in 2006. This is due to the large amount of money generated from operations and a reduction in borrowings. This shows that operations are much more able to pay yearly debts than they were in the previous year. Reinvestment Ratio: The reinvestment ratio is a measure of how much a company reinvests its operating cash flows into capital expenditures. In Hershey’s case, this includes investment into property, plant, and equipment as well as capital software additions. It is calculated by dividing capital expenditures by the cash flow from operations. A decrease in this ratio is seen as good because a lower ratio typically indicates more money being distributed to shareholders. Hershey’s reinvestment ratio improved from 0.421 in 2005 to 0.274 in 2006. This is due to a large increase in cash flow from operations while keeping the investment in capital expenditures relatively constant. Therefore, Hershey’s had more funds available to distribute to its stockholders. Debt Coverage: The debt coverage ratio determines the ability of the company to generate cash from operations in order to pay off its liabilities. The ratio is calculated by dividing total liabilities by cash flows from operations. A decrease in this ratio is deemed an improvement and indicates that the company is able to cover a larger amount of its debt with operating cash. Hershey’s debt coverage ratio improved from 7.030 in 2005 to 4.804 in 2006. This is due to a substantial increase in cash flow from operations between 2005 and 2006. This improves Hershey’s standings and indicates that it is more able to cover its debts with operations cash. Cash Flows Return on Assets The cash flows return on assets is a measure of how much operating cash flows a company is generating from its assets. It is calculated by dividing cash flows from operations by total assets. Hershey’s cash flows return on assets improved from 0.108 in 2005 to 0.174 in 2006. The improvement is a result of a substantial increase in operating cash flows with assets remaining relatively constant. This indicates that Hershey’s is generating more cash from its investments than in the prior year.

Summary of Liquidity Measures All measures of liquidity showed improvements for Hershey between 2005 and 2006. This is largely due to Hershey’s ability to generate a greater amount of operational cash flows between the two years, as seen in the cash flow adequacy. The improvement in current ratio and quick ratio shows an improved ability to pay off short term debts with current assets, which is also indicative that future payments of the long term debt will be possible. Further, the debt ratio shows improvements, meaning Hershey is in a better position to pay a greater portion of all liabilities with operating cash flows. And to further strengthen Hershey’s liquidity, the reinvestment ratio shows that Hershey has improved 15

its ability to distribute earnings to stockholders, thus strengthening investor relations and Hershey’s position in the industry.

ACTIVITY MEASURES Activity in a firm is typically categorized as creation of product and moving product out the door for sales. Activity measures focus on these actions and evaluate how a firm uses its assets to generate revenues. If a company is able to utilize its assets efficiently, fewer funds from financing are needed. The ratios analyzed in this section are asset turnover, accounts receivable turnover, day’s sales in accounts receivable, inventory turnover, and day’s sales in inventory. Asset Turnover: Asset turnover takes an overall focus on how the company uses all of its assets to generate revenues. A higher number is desired because it indicates that each dollar of asset is producing a greater amount of revenue. It is calculated by dividing the company’s revenue by the total amount of assets for the current year. Hershey’s asset turnover ratio improved from 1.131 in 2005 to 1.189 in 2006. This is due to Hershey’s increase in revenues and decrease in assets between 2005 and 2006. This shows that Hershey’s was more efficient in using its assets between evaluation periods. •

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Accounts Receivable Turnover: Accounts receivable turnover is similar to assets turnover; however it focuses a more specifically on accounts receivable and its effect on revenue. This ratio shows how effective a company is with extending credit for credit sales as well as collecting these debts from customers. It is calculated by dividing revenues by accounts receivable. A higher turnover ratio indicates the company is efficient. Hershey’s accounts receivable turnover ratio deteriorated slightly from 9.504 in 2005 to 9.480 in 2006. Although revenue and accounts receivable both increased over this period, accounts receivable increased at a slightly higher rate causing the deterioration of this ratio.

Day’s Sales in Accounts Receivable: Day’s sales in accounts receivable is linked closely to accounts receivable turnover. It indicates the average time in days that it takes to make a collection on a credit sale. The fewer days needed to collect, the better the efficiency. It is calculated by dividing 365 by the accounts receivable turnover ratio. Hershey’s ratio deteriorated slightly from 38.4 days in 2005 to 38.6 days in 2006. This can be attributed to the slightly higher percentage increase in accounts receivable when compared to revenue that was noted as a source for the accounts receivable ratio. Inventory Turnover: Inventory turnover is a measure of how often within a year that inventory is sold and replaced. It is calculated by dividing cost of goods sold by inventory. A high ratio indicates efficiency and a high rate of sales. Hershey’s inventory turnover slightly improved from 4.657 in 2005 to 4.742 in 2006. Although both cost of goods sold and inventory increased over this period, average inventory increased at a lower rate resulting in a quicker turn around of inventory.

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Day’s Sales in Inventory: The day’s sale in inventory ratio is closely related to inventory turnover. It quantifies how long your inventory remains in storage. Lower numbers indicate higher turnover and therefore are considered more efficient. It is calculated by dividing 365 by the inventory turnover ratio. The ratio slightly decreased and improved from 78.4 days in 2005 to 77.0 days in 2006. This shows that inventory hold times have improved over this time period. Summary of Activity Measures •

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Both improvements and deteriorations were seen in Hershey’s activity ratios over the evaluation period. Deterioration was seen in the accounts receivable ratios, which also affected the day’s in accounts receivable. This was due to a larger percentage increase in accounts receivable when compared to revenue. Improvements were seen in inventory and asset turnover ratios. Hershey’s assets decreased in value while revenues increased, resulting in a more efficient use of assets. And although average inventory increased, it increased at a lower rate when compared to cost of goods sold, thus indicating a higher turnover of inventory.

LEVERAGE MEASURES A company’s leverage defines how a company handles its debt. Companies that have a high leverage can have difficulty paying back debts, securing new debts from creditors, and are usually higher risk. But, these companies can also attain tax advantages and gain large returns from investing. The ratios analyzed in this section include the debt ratio, debt to equity ratio, leverage ratio, times interest earned ratio, times interest cash flow from operating activities coverage. Debt Ratio: The debt ratio indicates how much debt a company has relative to its assets. This ratio is calculated by dividing total liabilities by total assets. This ratio is one of the components typically used by investors to determine the risk level of a company. A lower number is favored because it shows the company has a larger percentage of assets when compared to liabilities. Hershey’s debt ratio increased and deteriorated from 0.762 in 2005 to 0.836 in 2006. This is due to a decrease in company assets while liabilities increased. The increase in liabilities can be noted most in the long-term liabilities. This adds risk to Hershey’s from an investment standpoint. Debt to Equity Ratio: The debt to equity ratio is a measure of what proportions of debt and equity are used in its financing. It is also a measure of a company’s financial leverage. The ratio is calculated by dividing total liabilities by stockholder’s equity. A lower number is favored because it indicates a higher amount of shareholder’s equity when compared to liabilities. Hershey’s debt to equity ratio increased and deteriorated from 3.194 in 2005 to 5.083 in 2006. This is largely a result in Hershey’s large decrease in shareholder’s equity. Although the increase in Hershey’s debt was not very high, the company used a higher proportion of debt for financing activities thus increasing its leverage.

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Leverage Ratio: The leverage ratio indicates the extent of asset financing from the shareholder’s. •

A lower ratio is positive because it indicates less risk. This ratio is calculated by dividing total assets by shareholder’s equity. Hershey’s leverage ratio deteriorated from 4.194 in 2005 to 6.083 in 2006.

Times Interest Earned Ratio: The times interest earned ratio gives shows how well a company is able to pay its interest expenses with earnings before taxes. The number represents how many times over the interest expense can be paid with the earnings before interest. A higher number is favored. The ratio is calculated by dividing earning before interest and taxes (EBIT) by net interest expense. The times interest earned ratio for Hershey’s deteriorated from 9.702 in 2005 to 8.552 in 2006. Although the EBIT increased over the period, the interest expenses increased at a higher rate resulting in a lower ratio. This increases the firms risk in the eyes of the investors. TIE ratio, is largely due to a significant decrease in shareholder’s equity over the period. It further indicates that Hershey’s has increased its risk. Times Interest Cash Flow from Operating Activities Coverage Ratio: Times interest cash flow is similar to the times interest earned ratio. However, instead of comparing the company’s ability to pay interest with EBIT, this ratio compares how well the company can pay interest with operating cash flows. A larger number is preferred because it shows the ability of a company to use operating cash flows to pay interest. This ratio is calculated by dividing cash flow from operations by the interest expense. Hershey’s ratio improved from 5.248 in 2005 to 6.231 in 2006. This is primarily due to a larger amount of cash flows generated from operations in 2006 when compared to 2005. This reduces risk and shows that the company can pay its interest more times over with operating cash flows than it could in the past. Summary of Leverage Measures All leverage ratios for Hershey’s deteriorated over the evaluation period with one exception. This indicates that Hershey’s risk has increased overall. Several reasons exist for this increased risk. The shareholder’s equity decreased, interest expenses increased, and long-term liabilities increased. The one thing that did improve Hershey’s risk factor was the increase in operating cash flows, which is noted in the increase of the times interest cash flow from operating activities coverage leverage ratio. These reasons prove to the investor that Hershey’s overall leverage has increased between 2005 and 2006. SUMMARY OF ALL FINANCIAL MEASURES •

Between 2005 and 2006, Hershey showed improvements in many areas. Their overall profitability improved due to a reduction of expenses, specifically the SM&A and business realignment costs. Liquidity also improved in all areas. This can be attributed to their ability to generate a greater amount of operational cash flows.

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Because of their increased liquidity, Hershey shows that they are in a better position to pay off their debts and is able to distribute their earnings to stockholders more readily.

Hershey achieved many improvements in their financial ratios, some deterioration should be noted. In the profitability category, the dividend payout ratio deteriorated, which indicates the company is less willing to pay regular dividends to their stockholders. Accounts receivable ratios from the activity category also deteriorated, which is a result of an increase in accounts receivable. This means that there are more lines of credit out to customers, which increases the company’s risk. Common-Size Income Statement Analysis Overall, Hershey’s bottom line, its net income, increased by 12.6% between 2005 and 2006. This can largely be attributed to two factors. First, the selling, general, and administrative expenses decreased by 6.1%. Second, the other operating expenses, which were net business realignment and asset impairment costs, had an enormous decrease of 562.3%! This one expense was cut to less than one-fifth of its previous year’s numbers! Even though the company’s gross margin had a negligible 0.2% increase between years, and the interest and income tax expenses increased by 24.1% and 12.2% respectively, the reduction of the SG&A and other expenses resulted in a substantial increase in net income for Hershey’s. INDUSTRY COMPARISON Return on Assets: Hershey’s ROA of 13.45% is higher than the industry standard of 6.90%. This is a favorable statistic since a high ROA represents that a company can generate revenue from its assets efficiently. Sales Margin: Hershey’s sales margin of 11.31% is higher than the industry standard of 6.78%. This is favorable since a high sales margin indicates that the company is making more net income for every dollar of revenue attained. Return on Equity: Hershey’s return on equity of 81.80% is much higher than the industry standard of 22.10%. This shows that Hershey is able to profit from shareholder’s investments at a higher rate than most companies in the industry. This is a favorable statistic. Current Ratio: Hershey’s current ratio of 0.975 is lower than the industry standard of 1.27. This is an unfavorable statistic. The current ratio indicates liquidity and indicates how easily a company can pay current debts. A higher ratio indicates better liquidity. In order to be more liquid, Hershey’s should make efforts to reduce its current liabilities. Quick Ratio: Hershey’s quick ratio of 0.426 is significantly lower than the industry standard of 0.61. This is an unfavorable statistic. The quick ratio is similar to the current ratio as it compares a narrower group of current assets (cash, market securities, and accounts receivable) to current liabilities. A higher ratio indicates better liquidity.

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Reducing current liabilities, as mentioned in the current ratio analysis, would make the company more liquid. Asset Turnover: Hershey’s asset turnover ratio of 1.189 is slightly higher than the industry average of 1.18. This is a favorable statistic because Hershey’s is generating revenue from its assets more efficiently than the average company in the industry. Day’s Sales in Accounts Receivable: Hershey’s day’s sales in accounts receivable of 38.59 days is higher than the industry standard of 32.33. This is an unfavorable statistic since this reflects that Hershey’s takes longer to collect its debts from its customers on credit sales. This statistic could be improved by converting more of its accounts receivable to cash. Debt to Equity Ratio: Hershey’s debt to equity ratio of 5.08 is significantly higher than the industry standard of 1.19. This is an unfavorable statistic because it shows that Hershey’s has less financial leverage than the average company in the food processing industry. This also shows that Hershey’s has more dollars of debt for every dollar of its equity when compared with the industry. Summary of Industry Comparisons When compared to the food processing industry, Hershey’s performs well on most statistics. However, there are three statistics where Hershey’s falls short. The current ratio and quick ratio could both be improved by a reduction in current liabilities. Further, more sales could be converted to cash sales from accounts receivable in order to improve the day’s sales in accounts receivable. By focusing on these items, Hershey’s could see improvements in liquidity and leverage.

STRENGTH-WEAKNESSES-OPPORTUNITIES-THREATS (SWOT) MATRIX

Strengths The Hershey tradition the chocolate manufacturing renaissance 20

Strong name and brand image Diversified Products Powerful partnerships Strong customer relationships making a difference The Hershey family Efficient Use of Resources Strong Growth Prospects Research and Development Capabilities License Agreements Opportunities Socio-cultural/Demographic Desire for richer products/changing tastes Joint ventures (i.e. coffee) Dark chocolate health benefits Increased importance of holidays Expansion into Emerging market Growing Organic Foods Market Strategic Acquisitions Political/Legal *Child labor laws for African countries *Sales tax reduction on food items Technological *Technological improvements to milking machines *Efficiency improvements for distribution (i.e. RFID, etc.) *Telecommunications Economic *Production of cocoa in new areas (i.e. Jamaica) *Price decline of sugar *Bio-fuel production from chocolate by-product

Global *Increase in global trade *New countries becoming industrialized *Outsourcing of labor to cheaper areas Weaknesses Borrowing Poor international performance 21

Decision making Company control Declining Market Share in Sector Limited Operating Margin Limited Liquidity Position Dependence on Single Customer Limited Geographical presence Threats Socio-cultural/Demographic *Peanut allergies *Increasing obesity *Greater environmental concern Changing Consumer Preferences Increasing Raw material prices Intense Competition Rising Counterfeit Goods Market Political/Legal *FDA requirement to post nutritional *information *Price floor legislation for chocolate *ingredients Technological *Lack of government support to developing countries (poor education of new technologies) *Increased cost to “keep up” with manufacturing technological progress Economic *Steady increase of minimum wage for future years *Steady price increase of milk *Steady price increase of gasoline Global *Farming areas being used for residential, commercial, industrial developments *Natural disasters (i.e. hurricanes) disrupting growth of chocolate ingredients *Fluctuation of exchange rates COMPETITIVE ADVANTAGE: The market share is increasing globally. Customer loyalty is very low. Websites are increasing in quality and ease for all users. HERSHEY’S offers many unique products and services to many different kinds of customers. By offering so many distinct products and services, HERSHEY’S is able to achieve a competitive advantage. 22

STRATEGIC ANALYSIS CORPORATE LEVEL STRATEGY ANALYSIS: • •

Hershey’s corporate level strategy is focused intently on growth and capitalizing on the diversification of its brand in the global market. Hershey’s has had a continuous problem with management and possible sale of the company to bigger industry rivals. So far for the 2007 fiscal year, Hershey’s profits have been on a downward spiral with a 66 percent plunge delivered in the third-quarter earnings report. Hershey’s share of the candy market fell 1.1 percentage points in the third quarter as its big competitors Nestlé S.A. and Mars Inc. gained ground on it. The Hershey Company is loosing market share in a marketplace and be a competitive industry player, The Hershey Company has set forth a strategy that streamlines their operations, closing six North American plants, and relying heavily on strategic alliances in emerging markets to grow and capitalize on future market opportunities.

INTERNAL GROWTH ANALYSIS: STRATEGY # 1: To reduce production costs and improve efficiency MEASURES: To reduce production costs and improve efficiency, the company has launched a major restructuring effort with plans to close plants, eliminate jobs, build a factory in Mexico, and outsource some chocolate production to Barry Callebaut AG, a Swiss company that recently agreed to buy a plant in Delaware County. This restructuring effort will reduce the number of production lines by more than one-third. STRATEGY # 2: The Company also hopes to reduce operating costs MEASURES: The Company also hopes to reduce operating costs through their new global supply chain transformation. The supply chain transformation program will take three years to complete and upon completion will enhance their manufacturing, sourcing and customer service capabilities, and generate resources to invest in the company’s growth initiatives. The supply chain transformation will eliminate about 1,500 suppliers. STRATEGY # 3: To transform the company’s IT infrastructure and supply chain MEASURES: Hershey had a massive failure with their investment in the restructuring of their supply chain technology. Hershey spent more than $100 million on a new order management, supply chain planning, and CRM system to transform the company’s IT infrastructure and supply chain EXTERNAL GROWTH ANALYSIS:

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STRATEGY # 1: To restore momentum within the U.S MEASURES: Our top priority has been to restore momentum within the U.S. “Product focus will be shifted more on Hershey’s “iconic” brands, as well as expanding the range of premium and dark chocolate products, such as the Cacao Reserve, Scharffen Berger and Starbucks bars, with its new Hershey’s Bliss bar. STRATEGY # 2: To achieve success MEASURES: To achieve success, The Company is now focused on improving margins in the long term, which they hope to achieve by investing in consumer marketing, greater retail coverage, and broadening its range of premium brands. •

The Hershey Company has intently focused on being a major competitor in the global market and recent strategic alliances and joint ventures may be the first step.

STRATEGY # 3: To increase in market share MEASURES: Hershey has announced deals with Swiss chocolate company Barry Callebaut, Korean confectioner Lotte, and Godrej Beverages & Foods in India. These three recent alliances will help propel The Hershey Company in their pursuit for global market share. • • •

Hershey continued its push into Asia with a deal to buy 51 percent of Godrej Beverages & Foods in India. Hershey is leveraging their R&D expertise and go-to-market capabilities as they focus on business growth and profitability. The Hershey Company’s investment in manufacturing is on schedule and more than adequate to support the upcoming launch of the Hershey branded products in India.

BUSINESS LEVEL STRATEGY STRATEGY # 1: To increase in market share •

The business level strategy for The Hershey Company focuses on a combined strategy integrating overall low cost and differentiation. Hershey is in the midst of an overhaul of their supply chain, reducing the number of production lines, outsourcing production of some of their products, and building a manufacturing plant in Mexico to offset the rising costs of production and inevitably pass the savings on to the consumer.

STRATEGY # 3: To increase the company’s global footprint.

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• • • •

The company’s strategy is a bid to cut costs by making its supply chain more efficient, further increase the company’s global footprint, and allow them to outsource production of their low value-added products To achieve that aim, Hershey said it will outsource operations and reduce its number of production lines. The plan aims to boost use of the company’s production capacity to 85 percent by 2010 from the current 65 percent. Hershey is positioned for phenomenal success for years down the road. By integrating low-cost and differentiation strategies they have made it harder for competitors to duplicate their successful model. The goal of focusing on this integrated strategy is to provide two types of premium value to customers, differentiated attributes and lower prices. The Hershey Company’s main goal becomes one of providing unique value to customers in an efficient manner.

FUNCTIONAL-LEVEL STRATEGIES Hershey’s functional level strategy focuses on five main components: Production, marketing, finance, Information systems and R&D. 1) PRODUCTION The past few years for Hershey have been tumultuous. They have yet to recover from their stumble in the fall of 2005 while shifting from one product platform to the next. In February of 2007, Hershey announced a major restructuring designed to cut costs and excess production capacity in the United States and Canada, while expanding in Mexico, China and India, where labor is cheaper and Hershey hopes to sell more candy Since then, Hershey has announced they will close six U.S. and Canadian plants and cut more than 3,000 workers in the two countries, including up to 900 at their hometown plants as well as reduce the number of production lines it operates by more than a third as they spend up to $575 million to overhaul manufacturing. 2) MARKETING •

• •

Increased marketplace competition has significantly impacted Hershey’s business and as a result, The Hershey Company has been required to increase expenditures for promotions and advertising and continue to introduce and establish new products. The foundation of the Hershey marketing strategy is their strong brand equities, product innovation, and superior quality of the products, manufacturing expertise, and mass distribution capabilities. Hershey stimulates sales of certain products with promotional programs at various times throughout the year. As of recent, Hershey’s advertising has flopped, leaving stores backed up with their older products. The new product focus will be on Hershey’s iconic brands, as well as expanding the range of premium and dark chocolate products, such as the Cacao Reserve, Scharffen Berger and Starbucks bars, with their new Hershey’s Bliss bar. 25

•

Hershey will increase marketing and promotional spending on these products, compared to the third quarter 2007 as well as the same period in 2006. As The Hershey Company plans to reinvigorate sales in core products such as Kisses and Reese’s, the company plans to double ad spending and continue using Wal-Mart TV.

3) INFORMATION SYSTEMS •

•

The Hershey Company has implemented a three-year plan for the development and execution of a revolutionary global supply chain technology. This supply chain transformation will utilize a number of data gathering centers and implement a core realignment that will create a more efficient and flexible global supply chain network. The transformation program will result in a flexible, global supply chain capable of delivering Hershey’s iconic brands, in a wide range of affordable items and assortments, across retail channels in the company’s priority markets. Finished products will be sourced from fewer facilities, each one a center of excellence specializing in Hershey’s proprietary product technologies. Increased access to borderless sourcing will further leverage the company’s manufacturing scale within a lower overall cost structure. The program will result in a total net reduction of approximately 1,500 positions across Hershey’s supply chain over the next three years. The supply chain will create stronger margin structure, increase manufacturing utilization through consolidation, and improve asset utilization.

4) RESEARCH AND DEVELOPMENT •

•

The Hershey Company has a strong tradition of creating quality products and successfully extending these products into new lines and new ventures. “Our goal is to redefine the future of snacking by offering consumers products that provide proven health benefits and the superior taste they expect from Hershey The companies said they will partner on a wide range of research and development activities with a focus on driving innovation in new chocolate taste experiences, premium chocolate, health and wellness, ingredient research and optimization. Hershey has also recently introduced Hershey’s Wellness. The Hershey’s Wellness line is an attempt to capitalize on the health benefits of chocolate.

GLOBAL-LEVEL STRATEGY: •

•

Hershey’s emphasis is on accelerated growth and on lowering costs, which both are main tenets that follow a global strategy. The Hershey Company strives to offer standardized products and services with centralization in a few locations. With the implementation of their new global supply chain technology. Hershey is prepared to create a standard level of quality throughout the world. Hershey’s has steadily acquired strategic alliances and joint venture partnerships with Barry Callebaut, Lotte, and Godrej Beverages and Foods. These three 26

•

strategic alliances that were formed in the past year are part of Hershey’s global level strategy to exploit the existing relations these companies possess and help brand Hershey’s in these new emerging economies. The Hershey Company has spent nearly $100 million alone in investing their global strategy with joint ventures associated with Lotte and Godrej and near $500 million for their global supply chain technology. Hershey’s strategy is increasingly cost prohibitive with profits not being projected for years to come and the possibility of rejection in new foreign markets might be more than Hershey’s can chew in one sitting.

RECOMMENDED ANNUAL OBJECTIVES: Even in mature confectionery markets such as Europe and North America there is room for new product introductions. Consumers will continue to buy chocolate and confectioners who introduce new premium products with ingredients that support good health will see higher sales growth and net earnings. Hershey Foods Corporation has announced number of steps in support of a value-enhancing strategy. • These include a proposed change in the company's name to "The Hershey Company," the formation of two new business groups to capitalize on growth opportunities, and a proposed increase in the company's authorized stock. • They should built a foundation that is profitable organic growth with significantly improved margins and return on investment has enabled us to achieve superior performance on behalf of our stockholders and employees. • The steps are designed to further support this value-enhancing strategy as well as to build upon the marketplace strength we've achieved over the past three years." • Asking our stockholders to adopt the new name, as this is how our consumers and customer’s best know us. The new name conveys our long-term focus on Hershey being a leading confectionery and snack company. • In order to strengthen its position within the confectionery segment and expand its presence in the broader snacks market. Thomas K. Hernquist, the company's current senior vice president, chief marketing officer, has been named senior vice president, president U.S. Confectionery. A search currently is underway for a president of the U.S. Snacks business group. • Hershey's superior performance and to extend our reach within core confectionery and the broader $65 billion snacks market. With the creation of these new business groups, we'll bring sharper focus and energy to Hershey's unique, longterm growth opportunities in each of these markets. • The company announced that its board of directors has voted to recommend that stockholders approve an increase in the number of authorized shares of Common Stock and Class B Common Stock. While there are no current plans to issue additional shares, stockholder approval of this proposal would enable the company to consider and implement a stock split as well as respond quickly as opportunities arise to achieve its strategic growth objectives. This proposed increase in the number of authorized shares will ensure that we have the financial resources to support the long-term growth of our company."

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RECOMMENDATIONS Culture today is heavily focused on personnel health. In the past few decades, people have become much more aware of the various factors that negatively affect their health and work hard to avoid them. As a general rule, chocolate and other candy are viewed as an unhealthy snack. Therefore, Hershey needs to continue to expand and market healthy products in order to gain a greater market share. Low-calorie and low-fat chocolates are continuing to gain popularity, similar to the way that diet sodas integrated into society in the 1980s and 1990s. Also, studies are bringing new light on the dark chocolate products. Dark chocolate is beginning to exhibit many health benefits in studies ranging from improved cardiovascular performance to endorphin production to cancer prevention. If Hershey continues to market the products they already have in these categories and continues to develop new products that address the health craze of the public, then their revenues will increase throughout the years. •

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•

•

Hershey needs to continue to focus on the global market. Hershey currently has a limited presence in many areas of the world. They have, however, begun to expand into many new areas. Countries such as China and India are gold mines for revenue. These countries have just become industrialized and have incredibly large populations. Even a limited presence in these countries would provide a substantial increase in revenue. But, these gold mines come with their own unique set of challenges. Hershey cannot duplicate their domestic strategy and expect to be successful. They must integrate into each country’s culture and develop a strategy to immerse their brand name into these areas. The Hershey Company needs to find alternate locations such as Jamaica or different methods for obtaining the cocoa bean from the cacao tree. The West African regions are very volatile. This would allow Hershey to have more control over their raw materials and reduce their dependency on an area where political unrest is high. Hershey should continue to provide new chocolate flavored coffee products in supermarkets and coffee stores (i.e., Starbucks, Joe Mugs). Consumers’ have grown to appreciate specialty coffees and the overall “coffee shop experience” in recent years. Further, Hershey’s name holds a great deal of clout with many consumers. This allows Hershey to market to new segments, more consumers, and participate in new trends. Further, it provides Hershey the opportunity to collaborate with the coffee manufacturing industry and other food industries. The commercialization of many holidays is continuing to expand and the popularity of gifts for these holidays is also increasing. Hershey can provide holiday products in outlets other than their website (i.e., Hallmark, Barnes and Noble). The increase in the importance of commercialized non-traditional holidays (i.e., sweetie days, grandparents’ day, and boss’s day) and traditional holidays (i.e., Christmas, Valentine’s Day, Mother’s Day, Halloween) allows Hershey to optimize the importance of their specialty gift products. By providing

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their gifts using retail channels, Hershey has an opportunity to increase the sale of their specialized gift products.

RECOMMENDAIONS FOR FINANCE: To overcome from the problem means to increase the sales Hershey should adopt certain strategies like, • • • •

Hershey should go globally. They have to take experience of outside market (untapped market). they have to come up with new candies like fat less candies because consumers are going to be health, nutrition and weight conscious. Hershey should adopt the “Global Channels of Distribution” to increase the sales worldwide.

RECOMMENDAIONS FOR MARKETING: •

They have to invest in advertisement, if they have to have to maintain the market share/increase the market share.

•

They have to find out the new channels of distribution and adopt the new channels to increase the sales.

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Go international advertisement to promote the product.

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Use Multinational channel to increase the sales.

RECOMMENDAIONS FOR PRODUCTION: • •

Increase the production capacity of Chocolate and Candy. Come up with different types of candies and chocolate because people rarely select the same candy bar twice in a row; consequently, product variety is crucial to success.

•

Should increase the production of candies to be the market leader.

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Company can come up with variety of Gum product to increase the market share.

RECOMMENDAIONS FOR ORGANIZATION STRUCTURE: 29

We are suggesting the new organization structure to Hershey Food Corporation. In this structure, we have suggested continental president, which will help to complete globally or to increase the market share globally because they will have the experience of the particular continents and they will work according to market conditions. Referred in appendix.

CONCLUSION •

Hershey’s improved all ratios except for the leverage ratio. If one looks further into this ratio, he or she can see that Hershey’s has made some substantial investments in long-term borrowing. This introduces an element of risk for 30

•

•

•

•

•

Hershey’s. But, Hershey’s has been improving its profitability and is performing well in many areas when compared to the industry The return on equity has improved significantly for Hershey’s. So from an investor’s standpoint, this is promising because Hershey’s is improving the way it handles its investor’s money. Therefore, investors should welcome the increased borrowing because Hershey’s is showing competency in its investing strategies by providing additional returns from its shareholder’s investments. Hershey’s has some notable competitors, such as Cadbury Schweppes, Mars, and Nestlé. Second, culture worldwide is changing to where healthier foods are much more appealing. This poses a huge challenge to Hershey’s market. Although they can create more health conscious products, the fact remains that chocolate is never going to be as healthy as many other snacks. Overall, Hershey’s appears to be in good standing in its market and is continuing to make improvements. Profitability is increasing from increased revenues, reduction in extraneous costs, and better utilization of assets. Further, liquidity is increasing from increased operational cash flows. Although its leverage has deteriorated recently, future years should see improvements if Hershey’s continues its current profitability and liquidity trends. This will make Hershey’s, which is already a good performer in the industry, a more competitive company in its market. Hershey market share is less than 10 percent, lowest among its competitor. So, Hershey should come up with new strategies in finance, marketing, production department and in organization structure to increase the market share and compete globally. This study used Hershey Food Corporation as a case to demonstrate how to formulate global product strategy to penetrate growing international markets. The results from the SWOT analysis indicate that Hershey Foods Corporation has great strengths and opportunities but also has significant weaknesses and faces potential threats. This study focused on the formulation of global product strategies for Hershey’s future expansion.

REFERENCES

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Answers.com website: www.answers.com

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Buffa, Andrea. “Human Rights Group Submits Shareholder Resolution to Hershey: Requesting Report on the Company’s Cocoa Supply Global Exchange is concerned about the rampant use of illegal child labor on cocoa farms.” GlobalExchange.org. October 24th, 2005. November 1st, 2007. “Chocolate and Child Slavery: Unfulfilled Promises of the Cocoa Industry International Labor Rights Fund.” LaborRights.org. June 30th, 2004 “Chocolate and Cocoa Products (SIC 2066).” Gale Encyclopedia of American Industries. The Gale Group, Inc, 2005. “Chocolate Is Good For You.” Chocolate Trading Co. July 13th, 2005. November 1st, 2007. Dess, Gregory G., G.T. Lumpkin, and Marilyn L. Taylor. 2005. Strategic Management, 2nd ed. New York, NY.:McGraw-Hill. “Hershey Announces Third Quarter Results.”(www.thehersheycompany.com)

WEBLIOGRAPHY • •

www.nytimes.com www.foodproductiondaily-usa.com

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www.dairyreporter.com www.christopherspenn.com www.reuters.com www.confectionerynews.com Www. publications.mediapost.com www.thehersheycompany.com www.thehersheycompanyproducts.com www.hersheys.com

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