Hershey Foods Analysis

Case 1: Hershey Foods Company

Morgan La Femina MBA 710

Introduction of the Company: Hershey Foods is the number one producer of chocolate in America. During 2009, Hershey Foods generated strong second quarter sales up 5.9 percent to 1.17 billion while overall profits were up to 71.3 million dollars. That was the fourth strong quarter in a row for the company. Milton Hershey founded Hershey Foods in 1908. Milton Hershey originally began his career as a candy maker. He originally opened up his own candy business and later in 1886 the Lancaster Caramel Company. In 1883, he began producing chocolate bars under Hershey Chocolate Company a division under the Lancaster Caramel Company. Milton Hershey met Bill Murrie in Pittsburgh in 1895 to help sell his candy bars. In 1896, Hershey hired Murrie as a sales representative for his chocolate business. By 1900, Hershey decided to focus on chocolate and subsequently sold the Lancaster Caramel Company for $1 million. Hershey later used the sale of the Lancaster Caramel Company to fund a new factory for the Hershey Chocolate Company. In 1963, the company purchased the H. B. Reese Candy Company and in 1966 they moved into food with the purchase of San Giorgio and Delmonico Foods. Because of these purchases in 1968, the company changed its name to the Hershey Foods Corporation. Finally in 1988 Hershey Foods purchased the U.S. interests of British candy maker Cadbury Schweppes PLC.

Mission Statement Analysis: Bringing sweet moments of Hershey happiness to the world every day

Hershey Foods mission statement is a brief explanation of what they seek to accomplish as a company, which is to bring their quality products to as many people as possible each day while providing them with a positive experience. However, the mission statement itself does not define the technology they use, their concern for survival and growth, their self-concept, their concern for their public image or any concern for their employees. Qualifiers below their Mission Statement later address this lack of definition in the above statement. The above Hershey Foods mission statement does include the worlds populace as their customers, the products they provide as moments of pleasure, their market as being the world and their philosophy as producing consistently excellent products to customers every day. The qualifiers the company lists are: To our stakeholders, this means: 2

Consumers: Delivering quality consumer driven confectionery experiences for all occasions Employees: Winning with an aligned and empowered organization while having fun Business Partners: Building collaborative relationships for profitable growth with our customers, suppliers, and partners Shareholders: Creating sustainable value Communities: Honoring our heritage through continued commitment to making a positive difference With these qualifiers provided by Hershey Foods, their self-concept is defined, the company’s philosophy is expanded, concern for their public image is included, the company’s attitudes towards their employees are expressed and technology is touched upon. Hershey Foods views itself as a quality producer of confectionaries that partners with its suppliers to maintain a strong business in line with their heritage of making a positive difference in the communities they serve. Hershey Foods strives to empower its employees, giving them the freedom to make choices that would benefit the company while maintaining a relaxed atmosphere. Finally, although the use of technology is not expressly stated, employment practices such as team empowerment, feedback with suppliers and supplying quality products require modern manufacturing practices.

External Analysis: Industry Analysis: The External Factor Evaluation (EFE) Matrix for Hershey

Key External Factors Opportunities

Weight

Rating

Weighted Score

1

Increased demand from emerging markets

0.12

3

0.36

2

Ethical labor and environmental brand exposure

0.07

2

0.14

3

New opportunities for marketing in a varied media

0.1

3

0.3

0.09

3

0.27

environment 4

Diversity among consumer tastes spurring new

3

products 5

Increase in global market space for products

0.12

3

0.36

1

Continued slow economic growth

0.06

2

0.12

2

Increased price on main ingredients

0.13

4

0.52

3

An increase in Health conscious consumer

0.12

3

0.36

Threats

purchasing 4

Further fragmentation of the industry

0.07

2

0.14

5

Increase in conversion of sugar to ethanol

0.12

3

0.36

Total

1

2.93

The average total weighted score is 2.93

The average total weighted score is above average at 2.93. Hershey is well suited to maintain profitability, increase sales and expand globally. They are selling a majority of their products at mass merchant establishments as well as supermarkets. They are number two in America for confectionery sales, number one for chocolate sales in the US, number two in non-chocolate sales in the US and number one in the US for breath freshener sales. They operate in over 70 countries including India, China, Brazil, South Korea, the Philippines, Canada and all of Europe. The only weak spot is in gum sales controlling only 2.8 percent of the US market share and the continued increase in the cost of the raw commodities they use to produce their products.

Rational: External Opportunities: 1. Increased demand from emerging markets Although Hershey sales are still predominantly America based, they now have operating segments in Canada, Mexico, Brazil, India, Japan and China. These countries now have sizable middle class

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communities with access to Hershey products and the potential sustained demand for Hershey products. 2. Ethical labor and environmental brand exposure Hershey is actively working with the International Cocoa Initiative Foundation, the World Cocoa Foundation, the Roundtable on Sustainable Oil and encourages sustainable farming practices. These organizations seek to eliminate child labor, facilitate the purchase of supplies that have less of an impact on the environment and are produced with fewer chemicals. 3. New opportunities for marketing in a varied media environment New opportunities for Hershey to market its products include, movie tie-ins, online, on television, through their interactive website and through social media sites. Although television advertising is not new to Hershey the large increase in channels and the ability to record shows 4. Diversity among consumer tastes spurring new products Consumers desire a variety of chocolate candies and are also seeking alternative treats that are healthier than traditional sweets. There is an increased desire for different types of chocolate products such that the market can support those types; people will buy new and varied products if they are offered to the public. Consumers are also more health conscious wanting to snack healthier than they had in the past. These factors create and opportunity for Hershey to gain market share by creating new chocolate products as well as diverge from chocolate into healthy snacks. 5. Increase in global market space for products Hershey’s products are sold in millions of retail outlets as well as a variety of national chain stores. These chain stores are themselves expanding globally, which can offer new shelf space for Hershey products in these new countries. External Threats: 1. Continued slow economic growth Continued slow economic growth here in the US and globally may slow their sales, and lower expected profits from Hershey Food Investments. This could in turn put pressure on the company to

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decrease costs by cutting personnel, investments in manufacturing, research, development and marketing of their products. 2. Increased price of main ingredients Cocoa and Sugar both commodities needed to produce Hershey products suffer from price fluctuations, which can only be partly mitigated by futures contracts. The price of both of these commodities has increased from 2007 to 2009 necessitating an increase in the final cost of Hershey confectionaries paid at consumer outlets. 3. An increase in Health conscious consumer purchasing Nationally Americans are more health conscious. This is in part due to a significant increase in diabetes but also the aging of Americans, who as they become older are required to increase their healthy activities in order to decrease their statistical chances of chronic disease. Health conscious Americans are purchasing healthier foods and snacks while decreasing their purchasing of high fat, high calorie foods. Hershey must invest in new healthier foods if they are to maintain profitability. 4. Further fragmentation of the industry American consumer tastes are varied and so too are their food buying habits. As the variety of consumer products has increased, so too has the consumer’s desire for new and varied products has increased. This cycle is reflected in most consumer industries but no more so than in the processed food industry. Hershey’s market share can in part increase or decrease with the number of successful brand extensions they create in the next several years. 5. Increase in conversion of sugar to ethanol Sugar is produced from sugar cane and alternately high fructose corn syrup. Hershey products by their nature require large amounts of sugar or alternate forms of sugar making the cost of manufacturing these products vulnerable to conversion to ethanol. If more ethanol is produced from sugar cane and corn then there is less available for food products increasing the scarcity of these commodities increasing their costs on the market. If the costs of these commodities rise because Brazil is converting more of its sugar cane into ethanol, the result will be an increase in the cost of manufacturing food products for Hershey.

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Porters Analysis:

Rivalry among competitors: High- Rivalry among Hershey’s competitors is high and includes very large conglomerates such as Mars, Nestle, Cadbury and Tootsie Roll Industries Inc. These companies compete through very well-known brands and globally. They compete not only for space right next to Hershey products on the store shelf but also in most every place Hershey products can be found. These companies are well established and can compete both on price and product variety. Potential entry of new competitors: Medium- Although a few major companies, because of the products involved, dominate the industry the cost of entry is low. Smaller companies can gain a hold regionally through price or quality and then expand nationally. Potential Substitute of products: High- The potential to for substitution is high. Smaller companies can produce a variety of candies and if economies of scale are reached, meet the price point of Hershey products. What may not be easily substituted is Hershey’s more sophisticated products which require more manufacturing expertise such as with their energy bars or sugar free products. Bargaining power of suppliers: Medium- The confectionery industry is dominated by large commodity producers in countries such as Brazil and India. They control a large segment of sugar and cocoa production in these countries from the planting of crops, to harvesting them and delivery to distributors. Internal state issues in these countries as well as within these commodity producers would easily increase the price of both sugar and cocoa negatively affecting the profitability of Hershey. Bargaining power of consumers: High- The products Hershey produces are foodstuffs and as such are easily substituted. In addition, they are not staple food products. These factors make it easy for customers to switch to lower cost substitutes, other brands or simply do without the product entirely. With prices for stable food, 7

products increasing there will be less demand for snack type foods, or higher priced snack foods. Customers can simply withhold buying Hershey products.

Target Scope

Broad

Low Cost

Product Uniqueness

Cost Leadership Strategy

Differentiated Strategy

X Narrow

Focused Strategy (low cost)

Focused Strategy (Differentiation)

Porter rational: Hershey will need to be a cost leader with a variety of both old and new food products for them to maintain or gain market share as well as maintain profitability. They will need to expand their core brand lines of Hershey Bar, Hershey Kisses, Reeses, and Twizzler, as well as build up new brands such as Special Dark, Dagoba, Ice Breakers and Breath Savers. Hershey should also expand non-sugar based products because of the rising cost of the ingredients that make up these products. This may help mitigate any negative impact on their profitability should sugar and cocoa costs continue to rise.

The Competitive Factor Evaluations Matrix: Hershey

Nestle

Mars

Critical Success Factors

Weight

Rating

Score

Rating

Score

Rating

Score

Brand recognition

0.13

4

0.52

3

0.39

3

0.39

Product Quality

0.13

4

0.52

3

0.39

3

0.39

Price Competitiveness's

0.14

3

0.42

3

0.42

4

0.56 8

Management

0.13

3

0.39

4

0.52

3

0.39

Financial Position

0.12

3

0.36

4

0.48

3

0.36

Customer Loyalty

0.11

4

0.44

3

0.33

3

0.33

Global Expansion

0.17

3

0.51

4

0.68

3

0.51

Market Share

0.07

2

0.14

4

0.28

3

0.21

Total

1.00

3.30

3.49

3.14

The Competitive Factor Evaluations Matrix shows that Hershey is well positioned against Mars but slightly behind Nestle, in part because of Nestle’s financial position, their market share and their global footprint. However, Hershey is well positioned in terms of brand recognition, customer loyalty and the quality of their products. The Hershey Trust Company controls the Hershey Company. At the time of the case, the chairperson of the board had been replaced. Hershey’s management position may be weaker than its competitors because the trust has the right to cast over two thirds on any matter that requires common stockholders to vote upon. The result may be biased decisions regarding the company since the trust can make decisions without common stock holder’s approval. Their financial position is weaker than Nestle because a majority of its sales are US based and because cocoa costs have climbed from 40 cents a pound in 1990 to 135 cents a pound in 2009. Internal Factor Evaluation Matrix: Industry Analysis: The Internal Factor Evaluation (IFEM) Matrix for Hershey

Key Strengths

Weight Rating Weighted Score

1

Brand Recognition

0.12

4

0.48

2

Consumer good will

0.09

3

0.27

3

Strategic acquisitions and joint ventures

0.1

3

0.3

4

Research and development

0.09

3

0.27

9

5

Employee empowerment

0.1

3

0.3

1

Independent board members needed

0.11

4

0.44

2

Hedged futures contracts necessary

0.1

4

0.4

3

Diversity among suppliers and shippers

0.11

4

0.44

4

Lower manufacturing costs

0.08

3

0.24

5

Increase in healthy snacks subdivisions

0.1

3

0.3

Key Opportunities

Total

1

3.44

The average total weighted score is 3.44

Rational: The average total weighted score is 3.44, which is well above average for companies in this industry. They are well positioned in terms of research and growth, have made strategic acquisitions and continue to shore up weaker product lines through these acquisitions or through partnerships. However, again weakness is shown by their lack of a truly independent board, which is voted in by common stock holders.

Key Strengths: 1. Brand Recognition: They have iconic brands such as Hershey, Reeses, Kisses, Kit Kat, York and many others. These brands have been available and heavily marketed for many years and so have inherent value spanning

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multiple generations. Any new company or major competitor has to compete against such long standing brand names that are extremely familiar to most individuals. 2. Consumer Good Will: The Hershey Company has existed since the early 20th century and has developed positive good will for more than one hundred years. The company has collaborated with many organizations helping to prevent child labor, end adverse farming practices and promote environmental responsibility. They also have established a school and a theme park in Pennsylvania. 3. Strategic Joint Ventures: Hershey Foods has acquired over forty other companies since its establishment. Some of the more notable acquisitions were H.B Reese, Delmonico Foods, San Giorgio, Y.S Brands, Nabisco, Leaf North America, Dagoba Organic Chocolate, LLC and Van Houten. These do not include their partnerships with organizations in various countries throughout the world. These ventures expand both their knowledge and product base. 4. Research and Development: Hershey’s acquisitions expand its patent base, its knowledge of other products along with the employees who can create those products, the equipment to produce new products and help foster creativity with the products it has now. 5. Employee Empowerment: Hershey foods employees operate in a team environment where new ideas are fostered as well as creativity. This allows dynamic innovation to develop among its employees and then to be cultivated by managers into profitable results.

Key Opportunities: 1. Independent board members needed: Hershey Foods board members are appointed by those who own the Hershey Trust company, that is the Milton Hershey School Trust, as such they are also the controlling stockholders for the Hershey 11

Company. Therefore, their board is independent of any outside stockholders. This makes independent decisions difficult for those who have shares outside of those owned by the trust. 2. Hedged futures contracts necessary Hershey Foods has and will continue to need to hedge their commodity purchases because of increased prices. Unfortunately, they will only be able to insulate themselves from only a portion of the price increases if there is a steep rise in costs because hedging only removes some of the risk associated with commodities purchasing. 3. Diversity among suppliers and shippers Heresy Foods should attempt to increase their access to a variety of suppliers and shippers instead of relying on a few major suppliers. This is because of the inherent instability that having only one or two suppliers from one country creates. They may not need other suppliers at this time but instability in other parts of the world is increasing and so too may the risk of having only one or two suppliers in a country should that country eventually be afflicted with internal issues. 4. Lower manufacturing costs As cocoa and sugar prices rise, the need for Hershey to decrease the cost in their manufacturing to offset those costs will increase. The competition for snack food purchase dollars is intense and snack foods are price sensitive, therefore they will need to reduce costs in other areas of food production if they are to keep shelf prices of their candies down to reasonable competitive levels. 5. Increase in healthy snacks subdivisions As consumers desire for healthier snacks increase so too Hershey must increase their creation of healthy snacks. The market for snack foods, candies are driven by customer demands, and as such, they need to align their business model to fit that demand. If they do not fit their production with what the consumer demands, they risk losing market share and profits. Summary of Operating Results For the year ending December 31st

2009

2008

2007

In millions of dollars except per share amounts

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Net Sales

5298.7

5132.8

4946.7

Cost of Sales

3245.5

3375.1

3315.1

Gross Profit

2053.2

1757.7

1631.6

Gross Margin

38.70%

34.00%

33.00%

SM&A Expense

1208.7

1073

895.9

761.6

589.9

458.8

EBIT Margin

14.40%

11.50%

9.30%

Interest Expense, Net

90.5

97.9

118.6

Provision for Income Taxes

235.1

180.6

126

Net Income

436

311.4

214.2

Net Income Per Share- Diluted

1.9

1.36

0.93

Hershey financials show an increase in net income from 2007 to 2009, an increase in gross profit from 2007 to 2009, a decrease in interest expenses for those three years and an increase in net income. The increase in gross profit margin from 33% in 2007 to 38.7% in 2009 is attributable to an increase in net sales, a decrease in the cost of those sales and a decrease in interest expenses. Net income has more than doubled from 2007 to 2009 while Hershey’s gross profit margin has increased by 5.7 percent respectively. Sales growth is over 3 percent each year while earnings per share have increased by 45 percent. Accounts payable has grown to 15% while total liabilities have decreased to 79% down from 86%. Hershey Foods cash flow to sales has increased to 20%, which is up from 10% in 2008, and 15% in 2007. SWOT Matrix:

SWOT Strengths – S Brand Recognition Consumer good will Strategic acquisitions and joint ventures

Weaknesses –W Independent board members needed Hedged futures contracts necessary Diversity among suppliers and

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Research and development Employee empowerment

Opportunities – O Increased demand from emerging markets Ethical labor and environmental brand exposure New opportunities for marketing in a varied media environment Diversity among consumer tastes spurring new products Increase in global market space for products

Threats – T Continued slow economic growth Increased price on main ingredients An increase in Health conscious consumer purchasing Further fragmentation of the industry Increase in conversion of sugar to ethanol

SO Strategies Hershey must leverage its brands through marketing the ethical ways they do business Hershey can promote its historical role in helping children and providing for its employees Hershey can create fast track programs for developing new products from employee ideas

shippers Lower manufacturing costs Increase in healthy snacks subdivisions

WO Strategies The trust could divest shares through sale Hershey can lower costs by manufacturing products in countries where they are purchased Hershey should develop a website for feedback on new products

ST Strategies

WT Strategies

Hershey can increase sales through new partnerships with non-profit organization sales The company can create new products based off whole foods, fruits and grains The company should advocate for rational ethanol development

The company should invest in financial instruments which generate sustainable returns above the rate of raw material cost increases Hershey must increase its supplier base while partnering with smaller confectionary companies

Space Matrix: Financial Position Leverage Working capital Cash flow Industry Position Growth potential Profit potential Financial stability Stability Position Price range of competing products Competitive Pressure Price elasticity of demand Competitive Position Market Share Product quality Customer loyalty

Ratings 5 4 4 13 3 3 4 10 -3 -4 -4 -12 -2 -1 -2 -5 14

Conclusions: FP Average = 13/3 = 4.33 IP Average = 10/3 = 3.33 SP Average = -12/3 = -4 CP Average = -5/3 = -1.66 Space Matrix Coordinates: X-axis: CP+IP or (-1.66 + 3.33) = 1.67 Y-axis: FP+SP or (4.33 + -4) = .33

FP 6 5 4 3 2 1 CP

IP -6

-5

-4

-3

-2

-1

1

2

3

4

5

6

-1 -2 -3 -4 -5 -6 SP

Space Matrix analysis: The space matrix of Hershey Foods reveals a financially stable company that has some competitive advantages in the market place in a growing and mostly stable industry. Over time, Hershey Foods should work on increasing its financials as well as increasing its competitive advantage by expanding their product lines, lowering costs and perhaps vertically integrating some suppliers. These measures should increase their profile further into FP territory. BCG Matrix: High

Medium

Low

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Medium

Stars Breath freshener market share 33.6%

?’s Non chocolates market share 14.8%

Low

Cash Cows Chocolate market share 34.3% Confectionary market share 28.7%

Dogs Gum market share 2.5%

From the BCG matrix, we can see that Hershey Foods cash cows are their chocolate products and their confectionery products. They generate the most revenue from their chocolate brands and their non-chocolate confectionery products. These brands also control a sizable market share in their respective categories. Hershey Foods star product is their breath freshener divisions that controls the most market share in that division ahead of any other competitor. Although it does not produce as much revenue as their cash cows, with very little overhead it can turn into a cash cow for the company. The company’s question marks are in their non-chocolate non-confectionery division. This division consists mainly of salty snack products, with investment these products could become stars or cash cows. As for the moment, they control an average market level in their product category and generate some revenue. Hershey Foods dog division is their gum division. It ranks last in market share at 2.5%, although 16

still generating 2 billion dollars in revenue for the company. It is a dog in the sense of controlling market share. Should Hershey find a means to increase their market share in the gum category, those products will generate much more revenue than it had in the past.

Strategy Recommendations: I recommend that Hershey Food’s expand their marketing to alternate consumer channels, increase the number of suppliers they have contracts with, enter into more partnerships with smaller firms, acquire suppliers, increase non-cocoa and non-sugar based products and increase the variety of healthy snack foods they produce as well as gum products they produce. I believe this will increase their market share, their revenue, decrease their reliance on suppliers, reduce their susceptibility to external environmental factors and increase their desirability among consumers or potential consumers of their products.

Epilogue Section: Since the case was written net sales have increased, earnings per share has increased from 2.18 dollars to 2.82 dollars, long term debt has decreased by over 400 million dollars and cash flow has decreased from 1474.6 million dollars in 2009 to 1231.8 million dollars in 2011. In addition, capital expenditures have increased from 145 million dollars in 2009 to 348 million dollars in 2011 and common stock prices for Hershey Foods have increased from around 38 dollars in 2009 to 62 dollars in 2011. The increase in capital expenditures is due to facility upgrades as well as acquisitions. Cocoa prices continued fluctuate but overall rise with cocoa at 1.34 dollars per pound in 2009, 1.50 dollars per pound in 2010 but then dropping back to 1.00 dollars per pound in 2010. Finally, sugar prices continue to rise with 15 cents per pound in 2009, 27 cents per pound in 2010 and 28 cents per pound in 2011. Since the case was written it seems that Hershey has indeed expanded its product line while shoring up its finances and increasing their marketing with expenditures almost up 200,000 thousand dollars since 2009.

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References

David, F. R. (2011). Strategic management: concepts and cases (13th ed.). Upper Saddle River, N.J.: Prentice Hall. HSY Annual Income Statement - Hershey Co. Annual Financials. (n.d.). MarketWatch - Stock Market Quotes, Business News, Financial News. Retrieved July 2, 2012, from http://www.marketwatch.com/investing/stock/hsy/financials Hershey 10k. (n.d.). The Hershey Company. Retrieved July 2, 2012, from www.hersheys.com/assets/pdfs/hersheycompany/TheHersheyCompany_10K_20120217.pdf Hershey Foods Corporation - From Caramel to Chocolate, Chocolate for Everyone. (n.d.). Reference For Business - Encyclopedia of Small Business, Business Biographies, Business Plans, and Encyclopedia of American Industries. Retrieved July 3, 2012, from http://www.referenceforbusiness.com/businesses/G-L/Hershey-Foods-Corporation.html Hersheys. (n.d.). The Hershey Company. Fact Book. Retrieved July 3, 2012, from www.thehersheycompany.com/assets/pdfs/hersheycompany/FactBook-October-2011.pdf The Hershey Company. (n.d.). The Hershey Company. Retrieved July 2, 2012, from www.thehersheycompany.com/

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