Sweets go sour at Hershey
HERSHEY, Pa. —You could say that Hershey, the nation’s largest candy-maker, is in dire need of a chocolate fix. Plummeting profits, rising dairy and cocoa—not to mention fuel—prices, disappointing product launches, corporate shakeups, massive job cuts; all of it is leaving investors and market watchers alike with a really bad taste in their mouths.
Fresh off a disappointing fourth quarter, in which profits nosedived a whopping 65 percent, Hershey executives announced that the company would need to raise wholesale prices on about one-third of its domestic product line, including its standard bar, king-size bar and six-pack lines. For some retailers that will mean an increase in actual retail prices of anywhere from 5 cents more for the standard bar size, to 10 cents more for a king-size bar.
With consumers themselves wrestling with higher fuel costs and showing all the signs of a long period of belt-tightening as the nation braces for what most economists believe is an inevitable recession, the question of whether customers will spend 5 cents more for a candy bar is a legitimate one. Especially considering that Hershey’s biggest competitors, Mars and Nestlé, have yet to announce any price changes.
Certainly, it would appear as though many consumers already have begun to vote with their palates and purses; Mars continues to grow share at the expense of Hershey. In announcing results for the year, Hershey executives noted the company had dropped 1.3 percentage points worth of market share to its competitors.
“Hershey’s share losses to Mars show no signs of abating,” Sanford C Bernstein & Co. analyst Alexia Howard wrote in a Jan. 17 research note. Hershey’s 2007 retail sales rose just 0.4 percent in stark contrast with Mars’ 9.2 percent increase.
The next logical question, of course, is how long it will be before Hershey’s troubles are reflected in lost space at the checkstand—certainly, that question, too, would be a legitimate one in light of the company’s ongoing troubles.
While Mars has been rewarded for its product innovation, particularly, extensions of such signature brands as M&Ms—which has been expanded in recent years to include, almond, peanut butter and, most recently, dark chocolate—Hershey’s newest items, most notably Cacao Reserve by Hershey, have underperformed.
In addition, Hershey faces intense competition in gum and mints, and news that it will discontinue one of its newest items, Ice Breakers Pacs. Perhaps a strong reflection of just how out of touch the candy maker has grown from a product-development standpoint, the nickel-sized, dissolving pouches of powdered Xylitol were panned by community and law-enforcement leaders for looking too much like little bags of cocaine. Hershey executives have maintained that Ice Breakers Pacs were not intentionally designed to mimic street drugs, and the company plans to sell through existing stocks. However, critics would have preferred a complete recall.
Given its list of problems, Hershey can hardly afford to alienate any of its customers. Indeed, these are trying times for the candy maker.
In November, the Hershey’s controlling shareholder, the Hershey Trust, asked six of the company’s directors to resign, while two other directors stepped down of their own accord. And in October, the company announced a new chief executive officer would replace Richard H. Lenny by the new year. Lenny was replaced by David West, who previously had been the company’s chief operating officer.
In addition, the Hershey Trust sought out the company’s former chief executive officer, Kenneth Wolfe, to be the company’s non-executive chairman, perhaps in a bid to capture some of the company’s lost magic. During Wolfe’s tenure, who retired as Hershey’s chief executive officer in 2001, the company’s stock never traded below $42 a share and hit a high of $80 a share—a far cry from its January 30 closing price of $36.17 a share.
Since Hershey announced Lenny’s pending departure from the company Oct. 1, the company’s share price has come crashing down almost 24 percent, losing $11.24 a share by the end of January.
Clearly, someone had to pay for Hershey’s sins. Fourth-quarter earnings of $54.3 million were a far cry from the $153.6 million Hershey recorded in the comparable year-ago period; and it’s not like 2006 was a banner year for the company either, coming well short of its previously stated earnings forecasts last year, too.
The Hershey Trust board told investors that the executive changes and dismissals were necessary.
“The Hershey Trust, which is obligated to manage its assets solely for the benefit of Milton Hershey School, a school for children in need, has made clear it has not been satisfied with the company’s recent results,” said LeRoy S. Zimmerman, chairman of the Hershey Trust board, in a written statement. “We determined to elect new directors to aggressively pursue addressing the company’s business challenges.”
In addition to the executive changes, investors also are getting a bitter after-taste from Hershey’s use of outsourcing, as the company looks to move its production lines in the United States to plants in Mexico, which will result in the loss of some 1,500 jobs.
Indeed, critics argue the company has lost touch with the culture and values that once made it great. Company founder Milton Hershey emphasized the importance of family both in and outside of the workplace, and worked hard to make Hershey, Pa., a company town.
Others have questioned if the move south of the border will have an impact on product quality. Hershey spokesman Kirk Saville said the quality of Hershey’s products will be up to par in Mexico, since its Guadalajara facility has been a crucial part of the company’s network.
In the meantime, the confectioner is trying to conjure up a recipe for success, and hoping that such new products as Bliss and a new line it developed for Starbucks, both of which are expected to launch in March, will help turn things around. However, critics again note that Hershey is showing up late to the “premium” dance.