The Hershey Company - Introducing the World of Chocolate
Thu, May 22, 2008 Business, Politics
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. Copyright © 2007 by the authors of this book Michael Ellis, Markesha McCants, Nicole Frye, Jessica Miller, Manon Polk, and George Rogers. The book authors retain sole copyright to his or her contributions to this book. ISBN 978-1-60585-999-6 This report is in association to the capstone project issued by The University of Tennessee¶s MBA program satisfying credit for the Management/Accounting 790, Strategic Management & Business Policy course.The Hershey Company - Introducing the World of Chocolate Table of Contents Introduction History Microenvironment Macroenvironment SWOT Bullet Industry Analysis Strategy Social Responsibility Ethics Culture Leadership Financial Analysis Recommendations References Student Biographies Appendices A-E 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. Goodbar * Rolo * Skor * Whatchamacallit * Whoppers * Krackle Bar
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: ³Undisputed Marketplace Leadership´ (www.hersheys.com). They strive 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. 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. ³In a long and useful life, Milton S. Hershey proved himself to be a courageous entrepreneur, a determined builder and a compassionate humanitarian´ (www.hersheys.com). 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 (www.answers.com). There were 995 establishments that produced chocolate in 2000 (www.answers.com). 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 (www.answers.com). During the mid 1990¶s, the industry catered toward new consumer trends. The development of lite chocolate and lite desserts increased drastically with the creation of fat-free chocolate items. 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. ³Exports of chocolate products consist of confectionery items rather than semi-processed chocolate´(www.answers.com). Hershey¶s Mission Company Mission Statement/ Corporate Philosophy: The Hershey Company¶s mission statement reads as follows, ³Our 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 goal is to enhance our
#1 position in the North American confectionery market, be the leader in U.S. chocolate-related grocery products, and to build leadership positions in selected international markets´ (www.answers.com). The company further breaks this statement down into five categories that will ensure leadership in the marketplace. Hershey would like to have value creation from the top tier throughout the entire business system. The company also strives to have organizational capabilities that not only compete in the present but are also able to build on in the future. The Hershey Company also encourages and promotes healthy living. Keeping a diverse portfolio of brands that delight and deliver superior growth worldwide is also important in sustaining leadership. Hershey must also continuously transform consumer desires into a product that they would want to purchase time and time again. Corporately, The Hershey Company strives to maintain a high level of ethics and conduct. It is also important that the company develops a strong ³people´ orientation and has employees genuinely care about each other. Hershey will also advance only if they are able to attract customers and consumers with products of high quality and excellence. Lastly, Hershey has pledged to, ³Sustain a strong µresults¶ orientation coupled with a prudent approach to business´ (www.hersheys.com). Hershey¶s Expansion Sales and Acquisitions: In 1968, the company was renamed Hershey Foods Corporation. At this time, the company expanded its confectionery product lines, acquired related companies and even diversified into other food products (www.hersheys.com). Some of the several acquisitions included: San Giorgio Macaroni and Delmonico Foods (1966); manufacturing and marketing rights to English candy company Rowntree MacKintosh¶s products (1970); Y&S Candies, makers of Twizzlers licorice (1977); Dietrich Corp.¶s confectionery operations (1986); Peter Paul/Cadbury¶s U.S. confectionery operations (1988); and Ronzoni Foods (1990) (www.hersheys.com). Hershey Foods was the industry leader at the end of the twentieth century. The company continued to expand and diversify. In 1986, Hershey acquired Luden¶s cough drop brand. In 2001, Hershey sold this brand to Pharmacia. Remaining in the same industry, Hershey acquired Cadbury-branded products in the United States in 1988. Hershey acquired Scharffen Berger out of Berkeley, California in July of 2005. In November of the same year, Hershey acquired Joseph Schmidt Confections. One year later in November of 2006, Hershey acquired Dagoba Organic Chocolate. Hershey¶s Timeline Hershey¶s Timeline: (Information retrieved from www.hersheys.com) 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. MICROENVIRONMENT Strengths The Hershey Company has many positive attributes that solidify the company as a powerhouse among chocolate producing companies in the world. Hershey has a rich history full of tradition, philanthropic service, brand innovation, mass-production technology, customer service, and strategic alliances. Hershey¶s organizational capabilities and passion for premier chocolates enables the company to offer top-tier value creation and undisputed marketplace leadership (www.thehersheycompany.com). These superior traits combine to give The Hershey Company a winning edge and provide a strong tradition for the company to grow and expand well into the future. The Hershey Tradition The Hershey Company is one of the oldest chocolate companies in the United States and has become an American icon. The company, which was founded in 1894, has been in business for over a hundred years and has built its base
and following in a place once known as Derry Church, Pennsylvania. In 1906, it was renamed Hershey, Pennsylvania, after the growing popularity of Hershey¶s Chocolate. Today, it is popularly called Chocolatetown, USA. Because of Milton Hershey¶s strong philosophy, ³One is only happy in proportion as he makes others feel happy,´ the foundation was laid for Chocolatetown, USA. Further, the chocolate philanthropist opened HERSHEYPARK picnic and pleasure grounds in 1907 (www.hersheypa.com). HERSHEYPARK has recently celebrated its 100th anniversary and features such amusements as twisting steel coasters, interactive live entertainment, and mouthwatering food selections. This long standing tradition in the community reverberates in every person that works and lives in Hershey, Pennsylvania, as well as the numerous visitors and tourists who embrace the American Dream that is Milton S. Hershey. (D¶Antonio, 4) The Hershey Tradition was even further solidified during World War II when The Hershey Company produced ³Field Ration D´ bars as well as Hershey¶s ³Tropical Chocolate´ bars for the troops engaged in the global war. The new government-approved chocolate bars were so successful that by the end of 1945, approximately 24 million bars were being produced every week (www.hersheys.com). This strong support of the U.S. soldiers in combat helped paint and shape what American ³ideals´ were and branded The Hershey Company forever in the minds of GI¶s and further defined what the Hershey tradition came to be known as today. This support and unwavering loyalty to improve the lives of U.S. soldiers carried over into the ³baby boomer´ generation. The soldiers and their families readily supported The Hershey Company in the purchasing of their chocolate candies. They further supported the newly manufactured pantry items line that included items such as Hershey¶s Syrup and their newly acquired pasta manufacturing line (www.hersheys.com). The Chocolate Manufacturing Renaissance In 1905, Milton S. Hershey completed the world¶s largest chocolate manufacturing plant in the world, manufacturing chocolate using the latest mass production techniques (www.hersheys.com). Hershey¶s milk chocolate quickly became the first nationally marketed product of its kind. Because he had chosen to erect his factory on 40,000 acres near dairy farmland at his birthplace of Derry Church, Pennsylvania, Hershey could readily obtain large quantities of fresh milk needed to perfect and produce fine milk chocolate. This novel approach of producing chocolate, which was once only reserved as a Swiss luxury product, enabled the company to deliver top-quality and exciting products to the market place. Today, the Hershey Company is the largest North American manufacturer of quality chocolate, holding forty-four percent of the chocolate market (www.hersheys.com). They have also become a leader in the growth of dark and premium chocolate (www.hersheys.com). One reason for climbing to the top was Hershey¶s opening of the largest chocolate factory in the world. On May 22, 1965, The Hershey Company opened a factory that covered two million square feet of manufacturing space in Oakdale, California. With the added space and the Hershey technology, growth was imminent. Still today, Hershey¶s relies on their high grade of chocolate experience in chocolate manufacturing industry to help propel their chocolate businesses to the next level. Strong Brand Name and Brand Image Hershey¶s products have long been well known and well respected. With over one hundred years of experience in the chocolate industry, the company has their two original goals. First, the company strives to bring a high-grade product to its customers. Secondly, Hershey¶s wants its products to be available everywhere. Both of these goals began with Milton Hershey¶s idea to provide the delicacy of chocolate to the common consumer (www.thehersheycompany.com). Today, Hershey¶s continues to uphold Mr. Hershey¶s mission with quality consistency and diversity. Diversified Products Over the years, The Hershey Company has strived to provide innovative and designer chocolate choices for the avid consumer. Some of these innovative choices have turned into premiere products known worldwide. Examples of these products include Hershey¶s Kisses, Hershey¶s Milk Duds, Hershey¶s Mr. Goodbar, Reese¶s Peanut Butter Cups, YORK Peppermint Patties and Hershey¶s 5th Avenue candy bar (www.thehersheycompany.com). In addition to having a successful launch of in-house products, Hershey Foods holds a license to manufacture Cadbury chocolates, Rolo Chewy caramels in milk chocolate, and the KitKat wafer bar. Hershey enjoys strong brand recognition for each of their product line divisions. Recently, The Hershey Company has addressed the health conscious consumer and has added a number of products to aid in theassistance of a weight aware populace. The introduction of the 100 Calorie Chocolate, Pretzel, and Wafer Bars are a first step in the direction to combat the adverse effects of weight gain associated with chocolate candies. Hershey¶s has addressed the health benefits of chocolate and has issued a new product line that addresses the healthy aspects of whole bean chocolate and new cacao additives that have more antioxidant capacity to ward off heart disease and slow the degeneration of the brain and eyes. Hershey has established itself as the world leader in the fast-growing dark and premium chocolate segment. With its foundation firmly in place, Hershey can offer a great breadth of products that enables the company to reach a large customer segment (www.hersheys.com).
Powerful Partnerships Another one of Hershey¶s strengths is their recent alliance with Starbucks. Starbucks, a well known beverage company known for its unique experience, provides coffees, teas, fruits, herbs and spices to be paired with premium chocolates from Artisan Confections Company, a wholly owned subsidiary of Hershey, to create ³delicious and distinct´ chocolate products. Hershey¶s senior vice president, president of North American commercial group, Christopher J. Baldwin, explains the pairing as: ³Starbucks is one of the world¶s leading brands among consumers. Hershey¶s chocolate expertise, distribution and selling capabilities combined with the strength of the Starbucks brand will help transform the high-growth premium chocolate segment´ (www.thehersheycompany.com). In the July 19, 2007, press release announcing the agreement, Baldwin goes on to explain that both Starbucks and Hershey will continue to maintain and share their sustainable growth and farmer¶s equity practices. Other partnerships that have allowed Hershey to advertise and market products together have been the Nabisco, Kraft and Coca-Cola companies. Nabisco Honey Maid Graham Crackers and Kraft Jet-Puffed Marshmallows each allow Hershey to market their products with the classic Hershey Chocolate Bar to make the ever-popular S¶more campfire dessert (www.hersheys.com). Coca-Cola has also teamed up with the Hershey¶s product Reese¶s Peanut Butter Cup to market their products together as a buy one get one free deal (www.hersheys.com). Strong Customer Relationships The main customers of Hershey are wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, department stores and natural food stores. The relationship that Hershey maintains with these customers has been essential to the growing success of the company. Hershey strives to provide great customer service and inventory in a timely manner with efficient and effective inventory controls. What makes The Hershey Company successful with their customers is the strong customer service department. Over the years, the company continues to make progress in implementing improvements to customer service. These improvements add value to the fulfillment of orders placed and shipped throughout the world. In addition to the ever-improving customer service department, Hershey is currently revamping their supply chain technology to be more competitive in a world of high demand and quick access. Making a Difference Hershey is devoted to helping make a difference in the lives of others. One way that Hershey illustrates this commitment is by supporting a wide variety of community organizations. Corporate financial donations as well as employee time and talents are given wholeheartedly. Such organizations include the American Red Cross, UNICEF, the YMCA , Habitat for Humanity, the Partnership for a Drug-Free America, Children¶s Miracle Network, the United Way, various AIDS funds, a number of environmental conservation and protection groups and the Young Survivor Coalition; an international, non-profit network of breast cancer survivors and supporters (www.thehersheycompany.com). Minority based groups such as the NAACP, the Urban League and La Raza are also important factions that Hershey enjoys supporting (www.thehersheycompany.com). Environmental stewardship is also an area that Hershey supports. They describe their support as an array of practices from emphasizing, ³recycling to reducing emissions to working to protect tropical forests´ (www.thehersheycompany.com). Locally, Hershey recycles 90% of their waste and in turn uses recycled paper and cardboard in their packaging process. Both in their U.S. facilities and abroad the company uses efficient water systems and energy saving lighting and appliances in everyday operations. Lastly, Hershey is conscious of the practices of their suppliers and vendors and asks that they meet strict standards in order to do business with Hershey. The Hershey Family The Hershey family of employees has a work environment that is positive, where employees are consistently focused, passionate, and hard working. Hershey promotes high ethical standards and has an outstanding reputation for honesty, fairness, and for consistently doing the right thing. The Hershey Company has established itself as a diverse company that openly welcomes and embraces different viewpoints. The company has established a practice of promoting from within, which acknowledges the people who understand the business. For the Hershey business family, The Hershey Company tries to reward their common stockholders by offering annual dividends. In the last ten years, Hershey has been able to offer dividends ranging from $0.42 per share to $1.13 per share. Each year, the dividends have increased at least $0.04 per share (www.thehersheycompany.com). Weaknesses Although The Hershey Company is a strong company based on high standards of quality, diversity, and customer service, weaknesses do exist. With a company as old as Hershey, legacy procedures, processes, and culture can arise as weaknesses and need to be improved and/or changed. Also, time-tested thought processes and decisionmaking units can sometimes hinder companies into moving into the future. As time goes by, customer preferences change, partnerships develop and dissolve, and technology advances.
Borrowings Hershey recently entered into a credit agreement that will allow them to borrow up to $300 million. The company describes the agreement as a ³new short-term credit agreement to establish an unsecured revolving credit facility to borrow up to $300 million. This agreement will expire on August 22, 2008. Funds may be used for general corporate purposes,´ (www.thehersheycompany.com). In recent history, Hershey managed their long-term investments poorly. For instance, Hershey entered a long-term debt agreement in 1998 for the restructuring of their supply-chain technology. Sales were lost and profits dropped by a large percentage. Therefore, unless management practices have significantly changed, Hershey will repeat their past mistakes and lose money from their investment. Poor International Performance The world today is considered globally flattened. This is defined by borderless nations in which products are easily produced and distributed around the world and competition is not limited to local companies. As the largest North American producer of chocolate, Hershey performs poorly in the international community. Currently, the company¶s presence is limited to Brazil, Canada, Mexico, and the United States (www.investopedia.com). The Hershey Company¶s infrastructure has weakened considerably in the past decade. The company has experienced a weak connection between Mexican operations and U.S. operations. This is further fueled by the fact that Hershey has become increasingly dependent on Mexican production. This is primarily due to the increasing production costs associated with U.S. production. Decision Making The Hershey Company has relied on brand loyalty and has reduced advertising spending through the first part of the 21st century. As rising competition has put the once favorite chocolate company on the ropes for company survival, the cut back has proved to be a poor managerial decision. Further, through ineffective management and poor managerial decisions, The Hershey Company has been forced to close plants, implement layoffs, and forced to pay the severance packages of its long term employees. This has been fueled by the investment of nearly a half a billion dollars in new technologies to aid in supply chain management. In addition, outsourcing has also been an issue because of the increasing costs of dairy products (www.forbes.com). Company Control The Hershey Trust became the largest shareholder of Hershey after the company¶s founder gave his entire fortune to the Milton Hershey School in 1918. The Milton Hershey Trust owns approximately 33% of The Hershey Company¶s total equity. In addition, it has over 74% of the voting control (www.hersheytrust.com). Since so much of the voting power has been given to the Trust, there is concern that this power could promote unilateral decision-making and get in the way of good decision-making. MACROENVIRONMENT SOCIOCULTURAL/DEMOGRAPHIC SEGMENT Opportunities Consumers constantly change their preferences for products. It is no surprise that consumers¶ wants for chocolate products have changed to a desire for richer products, which has resulted in commercial bakeries using higher quality chocolate and cocoa product industry to produce its goods. Further, consumers also want a greater variety of chocolate products. This enables the industry to expand their product lines to meet the new needs of customers and provides an opportunity for greater sales of the new products. The chocolate and cocoa product industry has an opportunity to establish joint ventures with other retail companies in other industries. Examples of this are coffee and chocolate manufacturers partnering to produce new chocolate flavored coffee products and chocolate and food manufacturers partnering to enhance their products. For instance, consumers¶ consumption of coffee has increased in recent years resulting in a surge of flavored coffee products. This provides multiple opportunities to the chocolate and cocoa industry. First, they are able to market to new segments and participate in new trends through their partners. Second, they are able to gain added revenue and increase visibility of their products. It has been a trend in recent decades for consumers to desire healthy alternatives to traditional foods. In recent years, studies have shown that dark chocolate provides several health benefits. ³The latest research indicates that the flavonoid-rich substance could have a protective effect on the cardiovascular system, at least in the three hours immediately following consumption´ (Chocolate Trading Co., 2005). This recent revelation adds to studies that have noted dark chocolate can reduce an adult¶s chance of cancer. A team from Georgetown University recently revealed ³a compound in chocolate called pentameric procyanidin which is believed to activate a number of proteins responsible for the continual division of cancer cells, thereby thwarting the progression of breast cancer´ (Chocolate Trading Co., 2005). Further, decreases in blood pressure can also be obtained from dark chocolate because of increased glucose metabolism (Chocolate Trading Co., 2005). These new discoveries provide a great opportunity for the chocolate and cocoa industry to increase the sales of their dark chocolate segment. An increase in the importance of commercialized non-traditional holidays (e.g. sweetie days, grandparents day, boss¶s day) and traditional holidays (e.g. Christmas, Valentine¶s Day, Mother¶s Day, Halloween) presents an industry
opportunity to market specialized products tailored for the holidays. The commercialization of these holidays encourages consumers to purchase more chocolate products than they would in an average day. This provides an opportunity for specialized gift products to increase sales. Threats A growing number of peanut allergies can have a negative affect on the chocolate and cocoa product industry because most chocolate manufacturers produce chocolate products that include some form of peanut or peanut oil. Due to the health risks, individuals with peanut allergies are very sensitive to peanut products; and therefore, they cannot eat anything that could have potentially encountered peanuts or other assorted nut products. As more people develop these allergies, it will negatively impact sales of peanut products and therefore negatively affect chocolate products made with or made around chocolate products. The obesity epidemic has resulted in an increasing number of individuals becoming more health conscious and thus abstaining from high calorie and sugar products. This recent health food movement has adversely affected the chocolate and cocoa product industry by causing consumers to decrease their consumption of traditional high fat chocolate products. Further, consumers may search for healthier substitutes, such as fruits, health bars, and other health-conscious snacks. This potentially will lower sales of many product segments in the chocolate and cocoa industry. Greater concern for the environment has presented another threat to the chocolate and cocoa industry. Conservationists continue to support sustainable agriculture, which limits the industry¶s ability to grow cocoa plants in extreme conditions. These limitations prevent the plants from producing at their maximum yield (Whinney, 2007). POLITICAL/LEGAL SEGMENT Opportunities Chocolate producers from some areas of the world have been unable to distribute their goods to some industrialized countries because of controversial issues. One issue that has received a great deal of attention in the chocolate industry is the use of child labor to work on farms that produce cocoa. Currently, some countries do not allow cocoa to be traded from African countries because these countries believe children are being used for labor in an extremely unethical manner. Further, some industrialized countries who have not stopped buying the cocoa presently are threatening to reduce or eliminate purchases from these African countries. This has put the offending countries on the defensive because they believe their use of child labor is similar to the way children of American farmers are used on farms to help out a family. Western governments, however, believe that this is not true. Therefore, the Chocolate Manufacturers Association (CMA) and the World Cocoa Foundation (WCF) developed the Harkin-Engel Protocol, which is an agreement that addresses instances of abusive child labor practices on cocoa farms in West Africa and ways to eliminate the worst forms of child labor in the cocoa sector (U.S. Labor, 2006). The Harkin-Engel Protocol initiative has produced results that will have a positive effect on the cocoa and chocolate industries. One such result is the creation of the International Cocoa Initiative foundation partnered with non-governmental organizations (NGOs) to provide social protection programs in West Africa. This project, along with other small pilot projects yet to be implemented, will ultimately be used to develop a child labor monitoring system and mend fractured relationships between certain countries in the chocolate and cocoa industry. This will open new channels for distribution of cocoa to the international community who currently restrict or prohibit purchases of cocoa from African countries. Further, countries who are on the border of creating restrictions will ultimately reconsider if these proper labor monitoring practices are in place. Ultimately, the chocolate industry will see increased sales to new markets. State governments have been under pressure in recent years to provide tax breaks to favor the low-income brackets. This has led many states to approve a reduction or elimination of sales tax for many food items. In future years, many states will continue with this trend and many people hope for tax on all food products to be completely eliminated someday. As these tax reductions occur, the chocolate and cocoa industry will see an increase in sales to the lower income demographic. Threats In recent years, the industrialized world has begun to focus more heavily on healthy eating habits. This is a direct result to the increased instances of diseases linked to poor eating habits, such as cancer, diabetes, and heart disease. This poses a great threat to the chocolate and cocoa industry. This trend has caused recent laws to be passed by the Food and Drug Administration (FDA) that forces food manufacturers to post ingredient and health information for consumable items. These laws force food manufacturers to provide customers with previously unknown health information therefore discouraging sales of many unhealthy products, such as chocolate. Further, as new ingredients are found to be a health risk, the FDA will require food manufacturers to post the new information to the public. With these new laws in place, the manufacturer has two options. They either have to expand their product lines in order to recover some of their current sales numbers and offer new healthy alternatives, which increase many costs, or the manufacturer does not offer a healthier alternative and takes a greater loss in sales. Both of these alternatives negatively impact the manufacturer financially. This combined with some unrecoverable loss in sales from those who dismiss chocolate altogether poses a significant threat to the industry.
In many cases, legislation can be passed in order to protect working class personnel. This happens regularly in the farming industry where sale price floors are set on various crops that farmers sell. For instance, ³The Farm Security and Rural Investment Act of 2002, which is a six-year farm bill, impacts the prices of sugar, corn, peanuts and milk because it sets price support levels for these commodities´ (Hershey¶s 10-K, 2006). Sugar, which is one of the chocolate and cocoa industry¶s most important ingredients, can be priced adversely for the chocolate and cocoa industry in order to support this legislation. This act also poses ³import quotas and duties to support the price of sugar.´ This requires the United States to pay a higher price than other countries in the market. As a result, the chocolate and cocoa industry must pay elevated prices for their highly used resource. This either causes companies in the chocolate and cocoa industry to lower their prices and profit margin so that chocolate product sales will increase, or to increase their prices and potentially lose sales. TECHNOLOGICAL SEGMENT Opportunities The chocolate and cocoa industry relies heavily on milk for their products. The modern milking machine is a technology that is used to milk cows efficiently, safely, and satisfies all milk hygiene requirements. The main benefit for the chocolate and cocoa industry is the ability to reduce time spent on traditional milking routines, which in turn reduces labor costs. The expectation is that the chocolate and cocoa industry will reap financial benefits by reducing manufacturing costs through additional mechanical improvements and innovations. A large cost realized in many industries is distribution costs. Packing and shipping costs can be reduced through technological advancements that focus on less waste and more efficient distribution and logistic channels. For instance, programs such as Six Sigma, lean manufacturing, and 5s are constantly making improvements in these areas to increase efficiency. In many industries, these improvement programs have implemented technologies such as Radio Frequency Identification (RFID) to better track inventory and equipment. Similar technological advancements could improve efficiency of tracking and transfer operations for the chocolate and cocoa industry and reduce labor costs in these areas. Telecommunications innovations present an opportunity to the chocolate and cocoa industry. Recent advances in the telecommunication industry and the introduction of telecommunications technologies to less developed regions, such Ghana and the Ivory Coast, has allowed the cocoa industry to expand its distribution chain and customers outside of developed regions. For instance, the Internet has expanded a great deal in the past decades. As it continues to expand, more individuals will gain access to chocolate product advertising and be able to attain chocolate products without visiting retail stores. Threats The chocolate and cocoa industry lacks support of Non Governmental Organizations (NGO) and Local Government Support, which limits the farmers¶ access to business guidance, funding, and continuing education. Due to the lack of resources, support, and education opportunities, farmers are unable to learn how to use new technologies (Whinney, 2007). This results in the farmers being less efficient when collecting and distributing cocoa. This hinders the industry from attaining additional cocoa to create more chocolate. Manufacturing processes have changed immensely over the past several decades. As new technologies are introduced, their predecessors quickly become outdated and less efficient. In order to keep pace with these new innovations, companies within the chocolate and cocoa industry will have to invest significant capital in order to remain competitive. This can carry other cost burdens as well, such as training and installation costs. ECONOMIC SEGMENT Opportunities The chocolate and cocoa industry purchases a mix of cocoa beans and cocoa products, such as cocoa butter, cocoa liquor, and cocoa powder to meet their manufacturing requirements. Cocoa beans are grown principally in Far Eastern, West African, and South American equatorial regions. Civil unrest in the world¶s largest cocoa-producing country, the Ivory Coast, has resulted in volatile prices. Therefore, producing cocoa in other countries would provide the industry a great opportunity. For example, the Ministry of Agriculture in Jamaica has recently allocated millions of dollars to allow production of several Jamaican crops, including cocoa, to expand its production (www.laborrights.org). Cocoa is the most significant raw material used to produce chocolate. Further, most of the supply is currently provided by West African countries that are coping with civil unrest issues; therefore, the new development in Jamaica provides an opportunity to the industry by increasing supplier options. Another opportunity for the industry relates to the price decline of refined sugar. In 2006, sugar crops and sugar refineries recovered from the hurricane impact of 2005. As a result, refined sugar prices declined from $0.38 to $0.31 per pound (Hershey¶s 10-K, 2006). This trend is likely to continue in future years. This price decline gives the industry
an opportunity to cut costs and possibly redistribute the savings into other areas such as research and development, product development, and dividends to investors. Disposition of waste from any manufacturing process is always a significant cost to a company. This has been the case for the chocolate and cocoa industry like any other. However, recent developments in bio-fuel production have created a new opportunity for this industry. In most cases, bio-fuel uses the consumable bio-product (i.e. corn being used to create ethanol) to create fuel. Chocolate production, on the other hand, results in a by-product that, due to a new method of production, can be used to make bio-fuel (Lovell, 2007). This will reduce or eliminate disposition costs of this by-product since it now has value. Further, if the process is found to be lucrative and efficient, the chocolate and cocoa industry may see additional revenue from the future purchases of their by-product. Threats A recent area of debate in the U.S. has been the issue of minimum wage. In 2006, it was decided that minimum wage would increase three times in yearly increments starting in 2007. This increase will affect the chocolate and cocoa industry because a majority of employees working in chocolate manufacturing plants are at or near the minimum wage. Due to this increase, prices on chocolate goods will have to increase to sustain current profit levels, or the number of workers will have to be reduced accordingly. If prices increase, the industry stands to lose business. If manufacturing plants decide to reduce the number of workers, production will be affected and some plants may be ultimately forced to shut down. In recent months, one of chocolate¶s important ingredients, milk, has been on a steady price increase. ³Milk prices hit a record [in July] in the United States, where consumers paid an average $3.80 a gallon, compared with $3.29 in January, according to the U.S. Department of Agriculture´ (Vandore, 2007). This can be attributed to a steady increase in consumption by newly industrialized countries, such as China. ³The Dairy Association of China estimates consumption will rise by 15 percent to 20 percent annually in the coming years´ (Vandore, 2007). If the demand for milk increases worldwide and the number of cows remain constant, the price of milk will continue to increase. This will be a direct threat to the chocolate industry because manufacturers will either have to raise prices to offset the increased cost of milk, or reduce profit margin of chocolate by keeping pricing constant. Gasoline has been increasing at an astounding rate in the past few years. This trend is more than likely going to continue in the coming years for many reasons, such as civil unrest in the Middle East, natural disasters reducing supplies, and oil becoming a scarcer natural resource worldwide. This will affect the chocolate industry in multiple ways. First, production and transportation costs will increase as gasoline prices increase. Second, as gasoline prices rise, the demand for ethanol will also increase. Sugar is one primary ingredient for creation of ethanol. Therefore, as demand for ethanol increases, sugar demand increases. The added demand for sugar for other purposes either decreases the sugar supply to the chocolate industry or increases the price of the commodity. Both these effects create additional costs for the chocolate industry and will affect sales and/or profit margins. GLOBAL SEGMENT Opportunities Global trade has continued to break through a variety of barriers. Agreements such as the North American Free Trade Agreement (NAFTA) and organizations like the European Union (EU) have made trade between countries much easier. Many ingredients for chocolate are grown in very specific regions. For instance, cocoa can only be grown in locations generally no more than 10 degrees north or south of the Equator. Because of these barriers to growth, trade agreements and organizations that open the distribution channels for these ingredients are vital. The countries that have established agreements for chocolate ingredients could in turn potentially lower their transaction costs. Further, where agreements are not in place, new agreements and organizations can develop to help eliminate trade barriers. Thus, the chocolate and cocoa industry will be able to obtain their ingredients at cheaper prices and increase their overall profit margin. Many countries around the world are steadily becoming industrialized. As this occurs, new markets are created for all industries. As infrastructure develops and distribution channels become stronger, the transport and supply of chocolate and/or its ingredients can be achieved. For instance, countries such as China and India, who have recently become industrialized, have many areas where chocolate products are not offered. The chocolate and cocoa industry can now expand their business due to the recent development of their infrastructure and distribution channels. This provides a great opportunity for the chocolate and cocoa industry to expand their business to international markets and increase overall sales. In recent years, many industries located in industrialized countries have begun to outsource some of their basic labor operations. Countries such as China, India, and Mexico have minimum labor rates much lower than an average industrialized country with some areas paying below $1 an hour. This allows companies to get the same amount of work accomplished for a much lower labor cost. By paying some initial startup costs to build or buy a facility, a
company can see a great deal of savings in a short amount of time. Further, by locating manufacturing operations in other countries, lower production costs can be attained. For instance, locating manufacturing operations closer to or within a country where the product¶s ingredients are found can significantly reduce production costs. Therefore, the chocolate and cocoa manufacturing industry can attain the savings aforementioned if some of their manufacturing operations are outsourced. Threats Farming areas once used for many crops is continually being used to develop new residential, commercial, and industrial structures. The reduction in land in areas where chocolate ingredients are grown can potentially reduce the supply of cocoa and other chocolate ingredients and consequently cause prices for these goods to increase. As mentioned before, cocoa is grown in a very specific region, roughly 10 degrees on either side of the Equator. If urban sprawl pushes into these areas, the supply of chocolate can be greatly affected. As previously stated, one of the key ingredients used to manufacture chocolate is cocoa. This ingredient obtained in tropical areas from a bean called the cacao bean. ³Each year 20% of the cacao beans that are used to make chocolate are lost to plant diseases´ (Steigman, 2006). Although this is a troubling fact in itself, there is a potential for the percentage of cacao lost to increase. This potential arises from a chance that deadly diseases will spread to West Africa and destroy a large quantity of cacao. If diseases, such as frosty pod and witches¶ broom, spread to this region, these diseases ³could reduce yields by an additional one million or more metric tons per year´ (Steigman, 2006). If this was to occur, the chocolate and cocoa industry would be greatly impacted by shortages and increasing ingredient costs. ³West Africa accounts for approximately 70 percent of the world¶s crop of cocoa beans´ (Hershey¶s 10-K, 2006). Recently, this region has been experiencing civil unrest. If tensions escalate beyond government control, the chocolate and cocoa industry stands to temporarily loose access to their largest supply of cocoa. Although other countries could still supply the cocoa, prices would increase if trade of cocoa ceased in West Africa. Further, even if trade continued between West Africa and other countries, civil unrest causes the price of cocoa to fluctuate. This could potentially increase production costs of chocolate and negatively affect the chocolate and cocoa industry. Natural disasters happen each year around the world without warning. In tropical areas where a majority of cocoa is grown, hurricanes and typhoons among other natural disasters happen frequently. In the event that an area, such as West Africa, is hit by a devastating natural disaster, many cocoa farms could be destroyed and potentially disrupt the supply of cocoa for years. This would drive the supply of cocoa down and increase prices of the most valuable ingredient to chocolate. Exchange rates are constantly changing and can at times become very unstable. The chocolate and cocoa industry relies on trade of their end product and ingredients across borders in order to offer a wide variety to customers. If exchange rates change unfavorably, the market price of goods will increase. And since chocolate is not considered a necessary food, the increase in price may drive some consumers away. This is a potential threat to the chocolate and cocoa industry because companies are left with additional inventory that is either sold for a lower profit margin or a loss.
SWOT BULLET Strengths *The Hershey tradition *The chocolate manufacturing renaissance *Strong name and brand image *Diversified Products *Powerful partnerships *Strong customer relationships *Making a difference *The Hershey family Opportunities Socio-cultural/Demographic *Desire for richer products/changing tastes *Joint ventures (i.e. coffee) *Dark chocolate health benefits *Increased importance of holidays 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 *Decision making *Company control Threats Socio-cultural/Demographic *Peanut allergies *Increasing obesity *Greater environmental concern 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 ³keep 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 INDUSTRY ANALYSIS Introduction Porter¶s ³five 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 ³five forces´ model as an analytical tool to determine the competitive market. The five competitive forces used in the model are threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products, and intensity of rivalry among competitors (Dess, 56). Threat of New Entrants The threat of new entrants 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 (Dess, 57). Economies of scale reduce the per-unit cost of a product as the number of units being produced increases. The chocolate and cocoa industry does have a significant economy of scale entry barrier because large companies exist in the industry that has high production output, which reduces the cost to produce chocolate and cocoa. If a new competitor wanted to enter the market, the company would have to enter the market producing a large quantity at the same low price as competitors or the company would have to compete with a cost disadvantage. Because economies of scale exist in the industry, it deters smaller competitors from entering into the market and reduces the threat of entrants. In addition to economy of scale, product differentiation is another entry barrier in the chocolate and cocoa industry. There are many competitors in the industry that have remarkably identifiable brand names and customer loyalty. Some of the strongest competitors in the industry are Hershey Foods Corporation, Farley Candy Company, World¶s Finest Chocolate, Inc., Merckens Chocolate Company, and Ghirardelli Chocolate Company (www.answers.com). All of the companies have established brand names and customer loyalty, which creates a considerable entry barrier for new companies. Thus, the new company must increase spending to overcome the reputation and large customer base of the existing companies.
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. The large capital investment entails costs for items such as production equipment, labor, raw materials, and research and development. In addition to these costs, a new company would need to spend a large amount of money on advertising and marketing to overcome product differentiation. An example of the large capital requirement needed for production is Grace Cocoa¶s new production plant that cost $95 million dollars (www.answers.com). It would be difficult for a new company to enter the market because of this significant need for capital. Furthermore, 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. Additionally, the expense and network that must be present to obtain access to distribution channels is an entry barrier for new companies. A new company must acquire distribution channels for their chocolate and cocoa products. This requires the company to create a network of buyers, which is time and money intensive. Further, the new companies have to compete for shelf space in stores with the larger players in the industry that have existing distribution channels already established. Cost disadvantages independent of scale such as patents, favorable access to raw materials, government subsidies and polices create barriers of entry for new companies. Because the industry produces food for the end consumer, companies in the industry must meet several government standards. For these companies, the Food and Drug Administration is the government agency that sets the guidelines and regulations. These regulations increase barrier to entry for new companies in the chocolate and cocoa industry. There is a low threat of new entrants in the chocolate and cocoa product industry because the existence of economy of scale, the differences in products, the need for large capital requirements, the existence of switching costs, the lack of access to distribution channels, and the regulations that are in place for food manufacturers. 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 (Dess, 59). If a buyer represents a large percentage of the supplier¶s sales, the buyer has more bargaining power over the supplier. The chocolate and cocoa industry has several large volume retailers, like Wal-Mart, that have significant bargaining power. These large volume retailers can bargain for lower prices and reduce the industry¶s profits. 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 lack of switching costs also increases the power of buyers in a particular industry because the buyer can threaten to change suppliers if they are not getting an adequate price or service from the supplier. The buyer¶s switching costs in the chocolate and cocoa industry is moderate to high. Specifically, the industry¶s industrial-use buyers have significant switching costs because the supplier¶s product can change the flavor or texture of the buyers¶ product. If the buyer wanted to play competitors against each other, the buyer would have to extensively taste test different recipes for different products. In addition, the buyer¶s customers may react poorly to new flavors, forcing the buyer to switch back to the original supplier. The high switching costs decrease the power of buyers in the chocolate and cocoa industry. Furthermore, if the buyer earns low profits on products they sell, they are more price-sensitive. This causes buyers to shop around the industry and create more bargaining power. The chocolate and cocoa industry¶s buyers usually make low profits on the products they sell, forcing the buyer to lower purchasing costs. This gives the buyer more power in the industry. However, the buyer must be willing to accept taste changes in the product, which restricts their bargaining power. The buyer can gain power if they pose a threat of backward integration. If a buyer can successfully become his or her own supplier, the bargaining power of the buyer increases. Both retail buyers and industrial-use buyers are limited when posing a threat of backward integration because the ability to produce chocolate and cocoa products requires significant capital investment and other barriers to entry. This lack of threat reduces the buyer¶s bargaining power. Buyers are able to increase bargaining power if the quality of their product is not affected by the industry¶s product. When it is unimportant to the buyer¶s product, the buyer is able to be more price-conscious. The industrial-use buyer of the chocolate and cocoa industry relies heavily on the industry¶s input product. The input product directly affects the quality and taste of the buyer¶s end product. This dependency decreases the buyer¶s bargaining power. 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. However, the bargaining power of buyers is low to moderate because of the industry¶s differentiated products, the presence of switching costs, the lack of threat of backward integration and the reliance on the industry¶s product.
Bargaining Power of Suppliers 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. In many instances, the profitability is reduced such that the firm cannot recover from raw material expenses. 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 (Dess, 60). If the industry¶s suppliers are concentrated, then the supplier has more bargaining power over the industry. 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 (www.bpi.cam.ac.uk). In addition, civil unrest in areas that grow the cacao tree can have an adverse affect on the amount of suppliers to the industry. The bargaining power of the industry¶s suppliers is increased because of the limited number of these suppliers. In addition to concentrated suppliers, the supplier groups¶ bargaining power is increased if there are no substitute products that they must contend with in the market. Because the cocoa bean is a required ingredient in chocolate and cocoa industry, the suppliers do not have any substitute products for which they must compete. This lack of substitutes increases the bargaining power of the chocolate and cocoa industry¶s suppliers. The bargaining power of a supplier is increased if the industry is not an important customer of that supplier. 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. The bargaining power of a supplier group is increased if the product they supply is differentiated or has switching costs. If differentiation or switching costs exist, then the industry has limited ability to increase the competition among the suppliers. The chocolate and cocoa industry has moderate differentiation among their suppliers. It is important for the suppliers¶ product to be a certain quality or grade; however, if the product meets grade guidelines, it is relatively undifferentiated. This is true of all suppliers of the industry including cocoa bean, milk, and sugar suppliers. Additionally, the bargaining power of a supplier is increased if the supplier can threaten to forward integrate. If the supplier can become a producer of chocolate and cocoa products, then it can increase its bargaining power. Suppliers to the chocolate and cocoa industry do not pose a reasonable threat of forward integration. As previously stated, the threat of entrants into the industry is low. The suppliers would have to spend a significant amount of money in research and development, capital requirements, and obtaining customer contacts. They would also have to overcome strong industry leaders who have significant brand identification and customer loyalty. The lack of threat of forward integration decreases the bargaining power of suppliers. The bargaining power of suppliers is decreased because the industry is an important customer of the supplier group and the supplier does not pose a threat of forward integration. But the bargaining power of suppliers is moderate to high because the supplier group is concentrated; there are no substitute products, and the importance of the supplier¶s product to the industry. 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 price-performance ratio (Dess, 60). 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. Another significant category of substitutes is snacks. Many non-chocolate snacks are available, such as peanut butter, fruits, potato chips, ice cream, etc. There is no need to stick with a specific snack other than personal preference. Further, many consumers consider chocolate unhealthy and are willing to substitute it readily. 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 ³five 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. There are six circumstances that intensify rivalry: many balanced competitors, a slow growing industry, high fixed or storage costs, undifferentiated products or no switching costs, large increments of capacity, and high exit barriers (Dess, 61). 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. Because the market is growing slowly, companies in a slow industry must compete for market share in order to increase sales. 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. Lack of differentiation or switching costs is a circumstance that increases the intensity of competitor rivalry in an industry. If the industry¶s product is not differentiated, buyer¶s base their purchasing decision purely on price or quality of service. Likewise, if no switching costs are involved, buyers can play competitors against each other and obtain a lower price. The chocolate and cocoa industry does have many companies that offer iconic brands which are differentiated. The industry¶s buyers must sacrifice specific taste to switch products. In addition, the industry¶s industrial-use customers rely heavily on a certain brand of the industry¶s product to produce the customer¶s product which increases switching costs. The differentiated product and moderate switching costs reduce the intensity of rivalry among competitors in the chocolate and cocoa industry. The high exit barriers factor also determines the degree of rivalry among competitors in an industry. If an industry has particular assets, high fixed costs associated with exit, strategic relationships among the particular business unit and others within the same firm, emotional barriers, and other pressures from a social point or government aspect; then the firms in the industry may compete, despite low earnings. The chocolate and cocoa industry has high exit barriers that increase the intensity of rivalry among the industry¶s competitors. The industry requires specialized assets that would be difficult to recover upon exit. In addition to specialized assets, the chocolate and cocoa industry has several companies that may have social pressures not to exit the industry. These high exit barriers increase competitor rivalry. Although the chocolate and cocoa industry has partially differentiated products, the industry¶s intensity of rivalry among competitors is high. The industry has numerous, equally balanced competitors, is slow growing, has high storage and fixed costs, and has high exit barriers. All of these conditions create price wars, advertising battles, new product lines and higher quality of customer service in the chocolate and cocoa industry. STRATEGY The Hershey Company is America¶s largest chocolate company and has established itself as a cultural icon for brand innovation. Over the past century, Hershey¶s has designed and produced an ambiance that exudes quality and value for its customers. This ambiance is part of a strategy that has propelled Hershey¶s as an industry leader and has successfully ingrained the Hershey brand in the public¶s collective consciousness as America¶s premiere choice chocolate bar. CORPORATE LEVEL STRATEGY Hershey¶s corporate level strategy is focused intently on growth and capitalizing on the diversification of its brand in the global market. The Hershey Company may take pleasure in the branding of its headquarters as ³The sweetest place on earth,´ however over the past year, investors and management confidence has had a more bitter taste residing in their palate. Beginning over five years ago when The Hershey Company was on the verge of accepting a ³$12.5 billion cash-and-stock offer from the Wm. Wrigley Jr. Co.´, Hershey¶s has had a continuous problem with management and possible sale of the company to bigger industry rivals (www.nytimes.com). 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
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. 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. Announced in February 2007, the supply chain transformation will eliminate about 1,500 suppliers, Hershey president Richard Lenny said. ³This effort remains on track and is scheduled to deliver savings of about $15m by the end of the year with a significant step-up in 2008,´ he added. The $500 million-plus restructuring is designed to cut costs and excess production capacity (www.confectionerynews.com). Hershey had a massive failure with their investment in the restructuring of their supply chain technology this decade beginning in 1998. 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 (www.scdigest.com). The Hershey Company had the products ready to be shipped; however, glitches in the new technology prevented the products from being shipped to their designated customers. In the end over $150 million in order were lost and Hershey¶s quarterly profit dropped 19% in the third quarter of the year and took another financial blow in the proceeding 4th quarter (www.scdigest.com). Although The Hershey Company¶s strategy is solid internally, past experience may potentially nullify any benefits that will be gained upon implementation of their new supply chain technology. EXTERNAL GROWTH ³Throughout 2007, our top priority has been to restore momentum within the U.S.,´ Hershey president Richard Lenny stated. ³Product focus will be shifted more on Hershey¶s ³iconic´ 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´ (www.thehersheycompany.com). To achieve success, The Hershey Company will double ad spending and continue to utilize Wal-Mart TV. 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. This year alone, 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. The deal with Barry Callebaut, announced in May 2007, calls for the company to provide Hershey with 80,000 tones of chocolate per year. ³We look forward to working with to expand our growth in the global chocolate market,´ said Richard Lenny, chairman and president of Hershey (www.smartbrief.com). ³Barry Callebaut is a worldwide leader in premium chocolate and innovation, and this alliance provides Hershey with immediate access to these capabilities´ (www.smartbrief.com).The Hershey alliance with Barry Callebaut follows the strategy of outsourcing to promote efficiency and profitability. In order to target the lucrative potential of the burgeoning Chinese market, Hershey formed a partnership with Korean confectioners Lotte. Lotte will own a 51 percent stake in the joint venture, to be operated in Shanghai but headquartered in Hong Kong, according to the joint statement released by Lotte(www.iht.com). This brings Hershey¶s total investment in this venture to approximately $38 million (www.seekingalpha.com). The manufacturing joint venture in China is on track and producing products, specifically Hershey is manufacturing Kisses, Nuggets, and chocolate bars in anticipation of demand related to the holiday season. The Hershey Company has also begun discussions with Lotte about distribution and selling of Hershey products in South Korea and Japan. Hershey continued its push into Asia with a deal to buy 51 percent of Godrej Beverages & Foods in India (www.iht.com). Hershey is leveraging their R&D expertise and go-to-market capabilities as they focus on business growth and profitability. The Godrej-Hershey joint venture in India is progressing as planned. 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. The Godrej-Hershey venture will give Hershey access to India¶s fast-growing market for imported candies and snacks. Hershey¶s chairman, chief executive and president, Richard Lenny, said in a statement that the deal was a ³significant step in Hershey¶s global growth strategy´ (www.thehersheycompany.com). Hershey paid about $60 million for the controlling stake, which brings access to Godrej¶s two factories and to 1.6 million retail outlets (www.iht.com). These joint ventures with Lotte and Godrej may speed up the access and acceptance among the people in the emerging countries that these companies reside and operate in. These regional players could also help alleviate potential problems that arise with government policy and negotiations that would aid in Hershey establishing their brand. However, the local partner could, once he has absorbed the international knowhow from the foreign associates, decide to break the venture and apply the acquired knowledge in its own set-up. BUSINESS LEVEL STRATEGY 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. Although it has required an enormous
amount of upfront capital, the successful implementation of the revolutionary supply chain technology should streamline operations on a global scale and cut costs in production through efficiency. 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 (www.foodproductiondaily-usa.com). To achieve that aim, Hershey said it will outsource operations and reduce its number of production lines by over a third (www.foodproductiondaily-usa.com). Production will be focused on a small number of factories rather than scattering manufacturing across North America. Hershey expects margins to swell significantly as a result of the restructuring, predicting savings of between $170 million to $190 million by 2010 (www.foodproductiondaily-usa.com). The plan aims to boost use of the company¶s production capacity to 85 percent by 2010 from the current 65 percent (www.foodproductiondaily-usa.com). With recent strategic alliances with Barry Callebaut, Hershey is starting to effectively manage relationships throughout the value chain and is intently focused on lowering costs in the entire chain. Hershey, which has been advancing into more trend-driven niches such as premium, dark and ethically-sourced chocolate, is set to benefit from Barry Callebaut¶s reputation as a responsible producer as well as their experience in the manufacture of luxury chocolate items (www.dairyreporter.com). Hershey president Richard H Lenny said: ³This partnership provides Hershey with immediate access to broad expertise in premium chocolate and builds on our strong research and development capabilities. We will work together on research involving unique cocoa flavors and formats to enable superior new product innovation (www.dairyreporter.com). This alliance will push for further reform in West Africa to monitor cocoa production and ensure efficiency standards and labor regulations are adhered to. Along with the recent Barry Callebaut alliance, Hershey has been strategic in the acquisitions of Scharffen Berger, Joseph Schmidt and Dagoba Chocolate in July of 2005, which helped establish the company as a significant player in the high growth premium chocolate segment. These alliances and acquisitions have helped differentiate Hershey in the prestigious gourmet chocolate market. 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. PRODUCTION The past few years for Hershey have been tumultuous. They have yet to recover from their stumble in the fall of 2006 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 (www.christopherspenn.com). 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 (www.reuters.com) . The largest U.S. chocolate maker also said they would outsource production of some products and would build a costefficient manufacturing plant in Monterrey, Mexico. ³From the union standpoint, we¶ll do whatever we think we can do to keep our union plants,´ said Dennis Bomberger, business manager for Chocolate Workers Local 464, which represents about 2,500 Hershey employees. But he said there might be little the union could do to protect the jobs (www.reuters.com). 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, 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 (www.confectionerynews.com). 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 (publications.mediapost.com). After a 10 percent drop in net income during the holidayheavy fourth quarter, executives said the company will double spending this year behind those products and with the flagship Hershey brand. CEO Richard Lenny said Hershey believes in the effectiveness of the Wal-Mart in-store network, which is in some 3,000 stores and operated by Premier Retail Networks (PRI) (publications.mediapost.com). A campaign last year for Hershey¶s Kisses produced a greater ROI than network TV, Lenny said. For 2007,
executives said the greater marketing outlay is part of their plan to increase net sales by 3 percent to 4 percent (publications.mediapost.com). 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 (www.thehersheycompany.com). The supply chain will create stronger margin structure, increase manufacturing utilization through consolidation, and improve asset utilization. When completed, manufacturing of approximately 80 percent of the company¶s production volume will take place in the U.S. and Canada. The company estimates the program will incur pre-tax charges and non-recurring project implementation costs of $525 million to $575 million over the next three years (www.thehersheycompany.com). This estimate includes $475 million to $525 million in pre-tax business realignment charges and approximately $50 million in project implementation costs (www.thehersheycompany.com). These charges will be incurred primarily in 2007 and 2008, with approximately $300 million expected in 2007. The cash portion of the total charge is estimated to be $275 million to $300 million (www.thehersheycompany.com). 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. ³Our 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,´ said Tom Hernquist, senior vice president, chief global growth officer (www. thehersheycompany.com). In May of 2006,as part of their increasing efforts in the area of healthier snacking, the Hershey Company announced the establishment of the Hershey Center for Health and Nutrition in Hershey, Pennsylvania. The center will direct cutting-edge scientific research to develop products and technologies that provide consumers with health benefits in the areas of heart health, weight management and mental and physical energy, as well as build upon the science, clinical studies and research work already underway at the company (www.thehersheycompany.com). The Hershey Center for Health and Nutrition is designed to be a significant source of new-product innovation as it draws upon clinical studies and scientific analysis of the health benefits of cocoa, nuts and other natural ingredients ( www.thehersheycompany.com.) . The center will utilize the company¶s internal scientific capabilities as well as partnerships formed with internationally known researchers and institutions. The Hershey Center for Health and Nutrition is designed to be a significant source of new-product innovation as it draws upon clinical studies and scientific analysis of the health benefits of cocoa, nuts and other natural ingredients. The center will utilize the company¶s internal scientific capabilities as well as partnerships formed with internationally known researchers and institutions. In addition to The Hershey Center for Health and Nutrition, The Hershey Company and Barry Callebaut are partnering to accelerate long-term growth in the global chocolate market. 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 (www.foodprocessing.com). 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 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 five operating segments comprised in geographic regions including the United States, Canada, Mexico, Brazil and other international locations, such as Japan, Korea, the Philippines and China (www.investor.reuters.com). 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. SOCIAL RESPONSIBILITY The ethical theory relating the responsibility of a society to a company, corporation, or business can be referred to as a company¶s social responsibility. A company may express a responsibility by pledging to act in a certain way. A company can also refrain from an action or activity to participate in social responsibility. A company who helps society is viewed in a positive light. However, a company who harms society will have a negative reputation. ³At The Hershey Company, we¶re committed to making a difference in the communities where we live, work and do business,´
(www.hersheys.com). This statement taken from Hershey¶s company website expresses their attitude toward social responsibility. Their efforts show that Hershey is a company who believes in helping people and the environment. The Milton Hershey School The Milton Hershey School was founded almost a century ago and the founding principles and ideals are still apparent today. The school focuses on the development of productive young lives filled with social and financial education. ³At Milton Hershey School, activities are more than an extra. Students here enjoy a variety of activities that help them explore their talents and interests, build leadership and character, and make friends.´ (www.mhs-pa.org). The school starts at pre-K and goes to the twelfth grade. This institution provides free education, housing, clothing, meals, career training, healthcare, and counseling (www.hersheys.com). These amenities are provided to nearly 1,400 boys and girls of the Commonwealth of Pennsylvania and across the United States. Catherine and Milton¶s vision still continues today. Giving Back to the Community Hershey is involved with various organizations within the community. Hershey not only gives financial assistance but also employees¶ time and talents. Hershey gives direct financial assistance to the following organizations: American Red Cross, YMCA, and the Partnership for a Drug-free America (www.hersheys.com). Hershey¶s annual involvement with the United Way Campaigns exemplifies their community work. For the past ten years, Hershey employees have raised money and devoted many hours with the Children¶s Miracle Network. This non-profit organization provides assistance to Children¶s Hospitals across the U.S. Hershey believes furthering education. ³The company has made a five year, $500,000 commitment to the , providing scholarships that help minority students in Central Pennsylvania achieve their career and educational goals´ (www.hersheys.com). Commitment to Children¶s Fitness The Hershey Company has sponsored Hershey¶s Track and Field Games for the past thirty years. During this time more than 3,000 communities and over 400,000 kids have been introduced to the fun and rewards of physical fitness (www.hersheys.com). Today, this program is the largest youth sports program of its kind. This program strengthens activities such as running, jumping, and throwing. Each year 500 qualifying children receive an all-expense-paid trip to the North American Finals. Recently, The Hershey Company has partnered with USA Track & Field to further promote and increase awareness of physical fitness for America¶s youth. The USA Track & Field professional athletes become spokespersons for the youth who attend the Track and Field Events. Environmental Awareness The Hershey Company pledges to protect Mother Earth. It is not only important to protect the environment, but also conserve natural resources. ³Our emphasis on the environment is part of an established commitment to sustainability across our business´ (www.hersheys.com). Hershey fulfills their commitment by participating in recycling and reducing their emissions. Hershey recycles 90 percent of their waste in their own recycling center. By using recycled paper, Hershey is able to save thousands of tons of paper and paper products (www.hersheys.com). ³The company has found their recycling efforts are saving close to a millions dollars annually´ (www.greenworks.tv). Hershey also continuously strives to improve their processes thereby reducing waste production across the entire business. They are able to save the amount of metal, paper, and plastic consumed. Hershey promotes recycling to the community by hosting recycling programs and contests. Hershey also utilizes energy-saving technologies. Energy-saving lights and refrigeration systems are just a couple of examples of their technologies. Hershey also requires their vendors and suppliers to adhere to strict environmental standards set locally, statewide, and federally. Helping Abroad Hershey makes a difference locally and abroad. The Hershey Company supports organizations such as the World Cocoa Foundation, The International Cocoa Initiative, and the International Foundation for Education & Self-Help. These organizations provide teaching programs helping farmers to learn how to farm more profitably, ensure abusive child labor or force adult labor is not used in the cocoa facilities, and enhances teaching skills in the Ivory Coast and Ghana communities (www.hersheys.com). Helping the many communities in Africa helps the cocoa industry as a whole. ETHICS Ethics involves making decisions as to whether decisions are right or wrong. There are two main approaches to organizational ethics: integrity-based versus compliance-based. ³An integrity-based approach to ethics management combines a concern for law with an emphasis on managerial responsibility for ethical behavior. The compliancebased approaches are externally motivated ± that is, based on the fear of punishment for doing something unlawful (Dess, 422). Additionally, companies are classified as amoral (i.e., proactive to every situation), moral (i.e., reactive to problems), or immoral (i.e., defensive and deny problems) based on their managerial decisions. Hershey is most appropriately classified as a moral company that subscribes to the integrity-based approach. Hershey has promptly reactive to problems and issues the company has faced and has developed processes to reactive and prevent problems and issues from occurring in the future. Hershey¶s commitment to high ethical standards started under Milton Hershey. Hershey¶s commitment to sound high ethical behavior is expected from their directors, officers, and employees at every level of the organization. Hershey¶s dedication has resulted in a reputation of integrity, fairness, and ³doing what is right´.
Hershey¶s ³Statement of Corporate Philosophy´ addresses four fundamental principles stating that the corporation will: 1. ³Maintain and enforce high standards of ethical conduct´ - Relationships will be based on honesty, trust, fairness and respect - Operations will be conducted in accordance with legal and regulatory requirements and in an environmentally responsible manner - Community needs will be met proactively and responsibly 2. Maintain a strong ³people orientation´ and demonstrate care for every employee - Employees will be treated fairly and with respect - Employees will be offered competitive wages and benefits, good working conditions and rewards for success - Workplace diversity will be supported as a corporate priority - Communications with employees will be clear, direct and timely - Teamwork and collaboration, learning and personal growth will be encouraged - Promotion from within will be practiced whenever possible 3. Attract and retain consumers and customers with products and services of consistently superior quality and value - Consumer and customer needs will drive our efforts to win in the marketplace with superior brands and a competitively-advantaged business system 4. Maintain a prudent, results-oriented approach to business that builds superior shareholder value over the long-term - Discipline, focus, personal accountability and a passion for winning will be encouraged and rewarded - Challenging business objectives will be set to ensure a steady rate of real growth, while maintaining the financial strength of the corporation - Profitable growth will be pursued while maintaining excellence in our existing business - Growth opportunities will be sought actively within and outside the corporation in areas which capitalize on Hershey¶s immense strengths - Positions of market leadership will be pursued´ (The Hershey Company Code of Ethical Business Conduct) The Hershey¶s ³Code of Ethical Business Conduct´ establishes their expectations for managers¶, employees¶, and other stakeholders¶ behavior. The plan describes the general principles for the every Hershey¶s director, officer, and employee as it relates to the following: compliance with laws, use of corporate funds and resources, political activities and contributions, payment to government officials, financial accounting and reporting, conflict of interest, antitrust and competition laws, trading in the Hershey Company and other related securities, relations with employees, commitment to consumers, environmental protection, protection of information, and fair dealing. Although the Code covers a wide range of topics the Code includes a disclosure declaration stating that, ³the Code is not a substitute for good judgment, nor does it cover every situation you may encounter during your professional career. The basic principles and standards are here [within the Code]; you [officers, directors, and employees] must understand and apply them in your [officers, directors, and employees] work´ (The Hershey Company Code of Ethical Business Conduct). As a proactive measure to ensure ethical behavior, Hershey created the ³Ethical 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. In addition to the Ethical Business Practices Committee, Hershey¶s officers, directors, and employees have access to the a toll-free Concern Line and electronic resources that allow them to anonymously report concerns in good faith without retaliation.
CULTURE The development of The Hershey Company¶s culture started with the founder, Milton S. Hershey. Milton believed that ³workers who were treated fairly and who lived in a comfortable pleasant environment would be better workers´ (www.hersheys.com). With this philosophy, he developed a town that would provide for the employees¶ welfare. He developed a town that was unlike many other company towns, which often took advantage of workers. The town he developed included housing, schools, churches, parks, a convention hall, department stores, an amusement park, swimming pools and a trolley system. Milton recognized the importance of community and his employees¶ well-being, as evident by his development of Hershey Park in 1910. Initially the park was developed as picnic grounds but was expanded to include a playground, a band shell, swimming pool, a zoo and a bowling alley. In addition to building a town for the company¶s workers, Milton and his wife created the Hershey Industrial School in 1909 for orphans. This school ensured orphans primary needs: food, clothing and lodging. These were met along with other needs such as physical training and education. Milton gave his entire fortune to the school which included the ownership of the Hershey Company. Milton is known as a humanitarian whose deeds are still benefiting thousands of people today. His value system is demonstrated by the following quote: ³He measured success, not in dollars, but in terms of a good product to pass on to the public, and still more in the usefulness of those dollars for the benefit of his fellow men´ (www.hersheys.com). Milton¶s dedication to his employees and education is present in the Hershey Company today. The Hershey Company offers their employees many different developmental and education programs including training workshops, educational assistance programs which include full tuition refunds, management training, cross-functional job assignments, and membership in professional organizations. Further, the company offers programs to enhance the quality of work-life. These programs help employees balance work demands and family or outside obligations. Examples of these initiatives are flexible work times, discounted childcare, on-site fitness centers, sabbaticals for education, volunteer recognition programs and employee counseling (company.monster.com/hershey/). These programs are symbols that show the company is committed to their employees¶ lives at work and at home. In addition to being committed to education and employees¶ work-life balance, the Hershey Company is also committed to diversity. The company has many groups that support the different demographics at the Hershey Company. These groups include a new hire support team, a corporate and sales diversity council, affinity groups for both minorities and women in sales, an African American group, and a Hispanic group (www.diversitycareers.com). The Hershey Company and their employees, like the founder Milton Hershey, follow the values of community and volunteerism. The company and employees support organizations such as the American Red Cross, YMCA, the Partnership for a Drug-Free America, Children¶s Miracle Network, United Negro College Fund, Boys and Girls Club, the National AIDS Fund, Habitat for Humanity and the Juvenile Diabetes Research Foundation. The company is also committed to Fitness and health. This is seen in the on-site fitness centers at The Hershey Company and the sponsorship of the Hershey¶s Track and Field Games, which is a youth sports program (www.hershey.com). The Hershey Company¶s culture is one that focuses on people. The rich history of charity and compassion that Milton Hershey provided his company is still prevalent today. The culture is demonstrated by the company¶s internal programs, organizations, and groups and the company¶s external good deeds and support of their community. The following quote expresses how employees and others view the Hershey Company: ³It¶s nice to come to work for a company that when you say the name, people smile´ (www.diversitycareers.com). LEADERSHIP The Hershey Company Executive Team Richard H. Lenny, Chairman of the Board, President and Chief Executive Officer Mr. Lenny was elected Chairman of the Board, President and Chief Executive Officer of The Hershey Company effective January 1, 2002. From March 2001 to December 2001, he was President and Chief Executive Officer of the Company. Before coming to Hershey, Mr. Lenny worked for Kraft Foods, Inc., the largest packaged food company in the United States, where he served as Group Vice President of Kraft Foods, Inc. and President of its Nabisco Biscuit and Snack business. He is also a director of the McDonald¶s Corporation. (www.forbes.com) Mr. Lenny received his Bachelor¶s in Business Administration (BBA) from Georgia State University in 1974 and his Master¶s in Business Administration (MBA) from Northwestern University in 1977. Lenny¶s memberships include Hershey Board (chairman), Hershey Trust, McDonalds Board, Sunoco Board, Georgia State University Foundation (trustee), Grocery Manufacturers of America (chairman) and Pennsylvania Business Roundtable (www.nndb.com). Richard Lenny is considered to be a transactional leader. A transactional leader is a leader that focuses on policy and structure. Transactional leaders are said to use management by exception, where they adopt the old adage ³if it is not broken then it need not be fixed.´ Transactional leaders also have a clear routine (www.changingminds.org). Richard Lenny¶s leadership style is specifically evident in an interview with James Owens from the Marshall School of Business at University of Southern California, Lenny stated that his motivators in this business are ³energetic and engaged people who are committed to delivering superior performance across three dimensions: financial, strategic and organizational.´ He also spoke of the legacy that he wanted to leave at Hershey. That legacy, he states should be ³a system that¶s both self-sustaining and self-perpetuating´ (http://www.marshall.usc.edu).
David J. West, Current President and soon to be Chairman of the Board, Chief Executive Officer former Executive Vice President, Chief Operating Officer As Chief Operations Officer, Mr. West is responsible for day-to-day operations of the company including international operations. West was previously the Chief Financial Officer at Hershey. David West is a native of Pennsylvania. He received his Bachelor¶s in Business Administration from Bucknell University in Lewisburg, PA. He began his career with The Hershey Company in 2001 as the Vice President of Business Planning and Development. Before his tenure at Hershey, West was with the Kraft Company, Nabisco Division. He has also worked for Wearever Proctor-Silex and Unisys (www.thehersheycompany.com). In December 2007, when West assumes the position of Chief Executive Officer and Director of the Company, many are hope that he will be a transformational leader. A transformational leader is one which works predominately the vision of the company. They define the vision, excite and convert followers, sell the vision and map out the progress of the vision (www.changingminds.org). Mr. West needs this sort of mentality and leadership style in order to help them grow into new markets and to financially boost the value of The Hershey Company. Humberto P. Alfonso, Senior Vice President, Chief Financial Officer H.P. Alfonso, a native of Cuba, graduated from Rutgers University with a bachelor¶s degree in accounting. He holds an MBA in marketing from Rutgers and is a Certified Public Accountant. Alfonso joined Hershey in July 2006. Prior to Hershey he worked for Cadbury, Adams Division of Pfizer, Inc. and Warner Lambert (www.reuters.com). Marcella K. Arline, Senior Vice President, Chief People Officer As the Senior Vice President, Chief People Officer Arline is responsible for human resources, communications, corporate affairs, compensation, benefits, security, flight operations and facilities management for the corporation of the Hershey Company. Prior to become CPO, Arline has held numerous positions in the company; Senior Vice President, Human Resources and Corporate Affairs, Senior Vice President, Human Resources, Vice President, Human Resources, and Vice President, Quality and Regulatory Compliance (www.portfolio.com). Arline is a 1974 graduate of Virginia Tech where she studied Food Science and Technology. She is a native of Bedford, Virginia (www.vt.edu). John P. Bilbrey, Senior Vice President, President International Commercial Group As the Senior Vice President, President International Commercial Group, John Bilbrey is responsible for directing the company¶s international businesses and executing its global strategy. Bilbrey joins Hershey Foods from Mission Foods, Danone Waters of North America, Inc., and Procter & Gamble Company, where he spend over 20 years. (www.thehersheycompany.com) Bilbrey received his bachelor¶s degree in psychology from Kansas State University. He also serves on the Board of Directors of the McCormick Company (www.k-state.edu). George, F. Davis, Vice President, Chief Information Officer As Chief Information Officer, Mr. Davis responsible for the Corporation¶s Information Technology Integration group, the Enterprise Solutions Center, e-business/e-commerce, and EDI activities. Prior to coming to Hershey, Davis worked for Computer Sciences Corporation (CSC), Pratt & Whitney, Rocco, Inc., JP Foodservice, Inc., Black & Decker and Avon Products Inc. A native of Kittery, Maine, Davis holds a Bachelor¶s degree in Biochemistry from the University of Connecticut, and served four years as an Officer in the United States Air Force (www.thehersheycompany.com). Thomas K. Hernquist, Senior Vice President, Chief Growth Officer As Chief Growth Officer, Mr. Hernquist is responsible for the company¶s marketing of the U.S. confectionary business, global products and for the Hershey¶s Chocolate World visitors center. Prior to coming to Hershey Hernquist held positions at Fortune Brands, Vivendi Universal¶s Sierra Software unit, Nabisco Inc., Entenmann¶s, and Frito-Lay, Inc. Hernquist received his Bachelor of Arts degree from the University of Virginia, and his Master¶s of Business Administration from Dartmouth College (www.thehersheycompany.com). Burton H. Snyder, Senior Vice President, General Counsel and Secretary Burton H. Snyder is responsible for the company¶s legal, government relations and corporate communications functions, as General Counsel and Secretary. Snyder joined Hershey for a second time after becoming a partner with the law firm of McNees, Wallace & Nurick. He is a graduate of Lehigh University with a bachelor of arts degree in mathematics and received a J.D. from Harvard Law School (www.thehersheycompany.com). Executive Team Richard H. Lenny Outgoing Chairman and CEO of The Hershey Company David J. West President and Incumbent Chairman and CEO of The Hershey Company Humberto P. Alfonso Senior Vice President, Chief Financial Officer Marcella K. Arline Senior Vice President, Chief People Officer John P. Bilbrey Senior Vice President, President International Commercial Group George F. Davis Vice President, Chief Information Officer Thomas K. Hernquist Senior Vice President, Global Chief Growth Officer Burton H. Snyder Senior Vice President, General Counsel and Secretary The Hershey Company Board of Directors
The Board of Directors consists of eleven members, nine of which are independent directors. The chairman of the board is Richard Lenny the CEO. Also on the board from Hershey is David J. West, President and incumbent CEO. Board of Directors (as of November 11, 2007) Richard H. Lenny Outgoing Chairman and CEO of The Hershey Company David J. West Incumbent Chairman and CEO of The Hershey Company Robert F. Cavanaugh Managing Director of DLJ Real Estate Capital Partners Charles A. Davis Chairman and CEO of Stone Point Capital Edward J. Kelly Managing Director of The Carlyle Group Arnold G. Langbo Former Chairman and CEO of the Kellogg Company (retired) James E. Nevels Chairman of The Swathmore Group Thomas J. Ridge President and CEO of Ridge Global, LLC Charles B. Strauss Former Chairman and CEO of Unilever North America Kenneth L. Wolfe Former Chairman and CEO of The Hershey Company (retired) Leroy S. Zimmerman Senior Council of Eckert, Seamans, Cherin and Mellot, LLC and was Pennsylvania¶s first elected Attorney General The Hershey Company defines the role of the board of the directors in this manner: ³The role of the directors is to exercise their business judgment in the best interests of the Company. This role includes: review of the Company¶s performance, strategies and major decisions; oversight of the Company¶s compliance with legal and regulatory requirements and the integrity of its financial statements; oversight of management, including review of the CEO¶s performance and succession planning for key management roles; and oversight of compensation for the CEO, key executives and the Board, as well as oversight of compensation policies and programs for all employees´ (www.thehersheycompany.com). FINANCIAL ANALYSIS INTRODUCTION Today, with thousands of employees worldwide and $4.9 billion in revenues, Hershey is the leading maker in North America of ³quality chocolate and sugar confectionery products´ (www.hersheys.com). Some of their popular products include Hershey¶s milk, dark, and white chocolates, Hershey¶s Kisses, Kit Kat bars, Reese¶s peanut butter cups, Jolly Rancher¶s, Ice Breakers, and Hershey¶s Snack Barz. Hershey also provides vending services, gift services, food services, and even mulching service and product for landscaping. In the past fiscal year of 2006, Hershey increased their revenue by 2.5% to $4.94 billion and their net income by 12.6% to $559 million. Their net income per share increased almost 40 cents to $2.44 per share. With many changes in management and some large undertakings in debt for expansions, Hershey proved to have a successful year by showing increased dividends and profit. They continue to be a top company worldwide and are a noted Fortune 500 company. 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 and the DuPont model will be used to provide conclusions regarding Hershey¶s progress over the past two fiscal years. Finally, recent stock price information and analysis along with supporting documentation for calculations will be provided. 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. 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. These measures analyze relationships between assets, liabilities, operating cash flows, net income, and capital expenditures. In this section, we will analyze the current ratio, quick ratio, cash flow adequacy, reinvestment ratio, debt coverage ratio, operations index, and cash flow return on assets. 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. 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. Operations Index A company¶s operating index indicates how much (if any) of a company¶s net income is needed for other operating expenses. In short, it determines if other operations in the company are providing a loss. An operating index of 1 or higher is desired and indicates that no net income was needed to cover other operating expenses. It is calculated by dividing cash flows from operations by net income. Hershey¶s operations index improved from 0.945 in 2005 to 1.294
in 2006. This is largely due to Hershey¶s decreased contributions to its pension plans and a smaller amount of accounts receivables trade. This improvement puts Hershey¶s into an ideal range for this index. 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 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. 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. Day¶s Sales in Inventory The day¶s sales 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 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. 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. 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. Activity analysis proved to have mixed results with slight improvements noted in inventory and asset turnover ratios. This indicates that Hershey¶s use of assets to create revenue has improved and inventory is moving quicker from the shelves to the consumer. Although Hershey achieved many improvements in their financial ratios, some deteriorations 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. What is most concerning is that all leverage ratios except for one deteriorated over this period. This indicates that Hershey is much riskier than the previous period. These ratios as well as the dividend payout ratio can be explained primarily by the large increase in long-term liabilities and significant decreases in assets and shareholders¶ equity. In simpler words, Hershey has taken on debt, sold some assets, and used shareholders¶ equity in order to make new investments. This proves to be a risky venture and could pay off greatly in the long term or end up costing the company millions. Overall, Hershey has been able to increase their revenues from their basic operations and has made a risky decision for some new long-term investments. If the trends in profitability and liquidity are indicative of future performance and the new investments prove to be profitable, then the added risk should merely act as a supplemental source to create additional capital and allow profitability and liquidity to increase at a faster rate. However, if Hershey loses significant money in their investments, profitability and liquidity will begin to deteriorate because revenue from operations will be needed to pay off the loss from investments. 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. 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. SUMMARY AND CONCLUSIONS
The DuPont model employs several different ratios. This model can be quickly analyzed by investors in order to compare companies from a wide aspect. It allows investors to analyze profitability, activity, and leverage of a company all in one glance. Hershey¶s statistics are as follows: Hershey¶s improved all ratios in the DuPont model 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 Hershey¶s. But, Hershey¶s has been improving its profitability and is performing well in many areas when compared to the industry. Further, as seen below in the table, 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. Although this model does give a good look at Hershey¶s financial improvements, there are a few things that should be noted. First, 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. Third, Hershey¶s has taken on a great deal of long term debt in 2006. While it can be deducted that Hershey¶s is investing intelligently because of increased returns from its past investments, a large sum of debt is always a risk. No one is able to predict the market. 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. RECENT STOCK PRICE Hershey Co is listed in the New York Stock Exchange (NYSE). Its symbol is HSY and recent stock price is $40.46. This is near the 52 week low of $40.20. It¶s earnings per share has also decreased from $2.44 at the end of 2006 to $1.33 currently. This would show many investors that it is a prime time to buy Hershey¶s stock. However, the recent retirement of the old CEO and appointment of a new CEO for Hershey¶s may signal some investors to put off an investment for a while. Further, the company¶s high leverage statistics shows a large amount of debt. This combined with the recent changes in management could prove to drive the stock price a little lower before it begins its upward battle in the stock market. VALUEPRO ANALYSIS During a recent analysis of Hershey¶s stock value, two factors were adjusted in order to investigate the changes in Hershey¶s intrinsic value: growth rate and beta. The growth rate of a stock is what analysts predict for the growth in revenue of a company. Beta, on the other hand, measures the riskiness of a company. For this analysis, adjustments made to the growth rate and beta was done equally to measure the affect on the intrinsic value of the stock. An increase in the value denotes a 33% increase and a decrease denotes a 33% decrease. Hershey¶s initial intrinsic value with no adjustments was $43.42, which is higher than the actual stock value of $41.73. Results from the analysis showed a strong inverse correlation between beta and growth rate. By solely increasing beta or solely decreasing the growth rate, the intrinsic value decreased by 10.5% and 12.3%, respectively. This yields an average intrinsic stock value of $38.72. This would cause Hershey¶s stock to be overvalued. Further, by doing the inverse of solely decreasing the beta or solely increasing the growth rate, the intrinsic value increased by 12.9% and 12.6%, respectively. This yields an average intrinsic value of $48.98. This is significantly higher than the actual stock value, which would indicate that Hershey would be a good buy and is currently undervalued. Additional analysis of changing both values yielded some interesting results. If both the beta and growth rate are increased of if both are decreased, the intrinsic values were $43.86 and 43.36, respectively. These small changes in the intrinsic value proved that these ratios work inversely with one another. After this analysis, the assumption was that an increase in growth rate and decrease in beta would be the optimal case whereas a decrease in growth rate with an increase in beta would be the least desired case. Experimental analysis proved this to be right. When testing the optimal case, an intrinsic value of $55.42 was achieved. This is a 27.6% increase. The inverse resulted in a 21.5% decrease of the intrinsic value to $34.54. These results prove that larger growth rates of revenue and lower risk factors will increase the intrinsic value of a stock and eventually result in an increased actual stock value. 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. 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. As mentioned before, 70 percent of cocoa is obtained from West Africa. 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 ³coffee 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, 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 their gifts using retail channels, Hershey has an opportunity to increase the sale of their specialized gift products. REFERENCES Alfonso, H.P. Profile, www.reuters.com, October 28, 2007. reuters.com/stocks/OfficersDirectorsDetails. asprpc=66&symbol=HSY&officerID=1007935> Answers.com website: www.answers.com ³Barry Callebaut and Hershey Complete Strategic Agreement.´ (www.smartbrief. com) id=4342A823-609F-404F-9F7E-F9904634C687> Belden, Tom & Brubaker, Harold. ³Hershey investors get a bitter report.´ (www. Philly.com) October 19, 2007. Bilbrey, John P. Profile, www.k-state.edu, October 28, 2007. Buffa, Andrea. ³Human 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. ³Chocolate and Child Slavery: Unfulfilled Promises of the Cocoa Industry International Labor Rights Fund.´ LaborRights.org. June 30th, 2004. October 31st, 2007. ³Chocolate and Cocoa Products (SIC 2066).´ Gale Encyclopedia of American Industries. The Gale Group, Inc, 2005. Answers.com. September 29th 2007. November 13th, 2007. products> ³Chocolate Is Good For You.´ Chocolate Trading Co. July 13th, 2005. November 1st, 2007. section=3&id=56)> ³Chocolate Stops Cancer Cells.´ Chocolate Trading Co. March 5th, 2005. November 1st, 2007. section=3&id=57> D¶Antonio, Michael, HERSHEY, Milton S. Hershey¶s Extraordinary Life of Wealth, Empire and Utopian Dreams, (2006), New York, New York, Simon & Schuster Dess, Gregory G., G.T. Lumpkin, and Marilyn L. Taylor. 2005. Strategic Management, 2nd ed. New York, NY.:McGraw-Hill. Dickson, Susan K., ³Marcella K. Arline receives Alumni Distinguished Service Award´ www.vt.edu , May 19, 2005; October 28, 2007. vt.edu/story.php?itemno=795> Dorfman, Brad. ³Hershey to cut 1,500 jobs.´ (www.reuters.com) February 15, 2007.
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The Hershey Company Introducing the World of Chocolate