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Hershey Foods Corporation - 2005

Hershey Foods Corporation - 2005

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Hershey Foods Corporation-2005
Fred R. David Francis Marion University

HSY
www.hersheys.com
Have you ever been to Hershey, Pennsylvania, the home of Hershey Foods Corporation? Known as Chocolate Town, USA, the air in this city actually smells like chocolate. There you can walk down Chocolate Avenue, see sidewalks lit with lights in the shape of Hershey's Kisses, visit Hershey's ZooAmerica, and see the chocolate kiss tower in HersheyPark. Hershey's Chocolate World is America's most popular corporate visitor's center. Hershey has grown from a one-product, one-plant operation in 1894 to a $4.4 billion company producing an array of quality chocolate, nonchocolate, and grocery products. The company markets confectionery and grocery products in over 60 countries worldwide, down from 90 countries a few years ago. Hershey's prominent products are chocolate and nonchocolate confectionery products consisting of bar goods, bagged items, and boxed items. Hershey grocery products include baking ingredients, peanut butter, chocolate drink mixes, dessert toppings, and beverages. Hershey markets these products under more than 50 different brands, such as Hershey's Milk Chocolate, Mr. Good bar, Reese's, KitKat, Kisses, and Mounds. Less than 1 percent of Hershey's sales are generated outside the United States. Hershey remains inexperienced, ineffective, and uncommitted in markets outside the United States, Mexico, and Canada, even though the candy industry has globalized. Mars, Borden, Nestle, and other competitors all have a growing and effective presence in international markets. Analysts question whether Hershey Foods can continue to survive as a domestic producer of candy while its competitors gain economies of scale and learning inworld markets. Shareholders are becoming concerned, too.

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History
Milton Hershey's love for candy making began with a childhood apprenticeship under candy maker Joe Royer of Lancaster, PennsylvaniaMr, Hershey was eager to own a candy-making business. After numerous attempts and even bankruptcy, he finally gained success in the caramel business. Upon seeing the first chocolate-making equipment at the Chicago Exhibition in 1893, Mr. Hershey envisioned endless opportunities for the chocolate industry, .,~ By 1901, the chocolate industry in America was growing rapidly. Hershey's sales reached $662,000 that year, creating the need for a new factory. Mr. Hershey moved his company to Derry Church, P;nnsylvania, a town that was renamed Hershey in 1906. The new Hershey factory provided a means of mass-producing a single chocolate product. In 1909, the Milton HersheySchool for Orphans was founded.' Mr. and Mrs. Hershey could not have children, so for years the Hershey

Mauna Loa. Queen Anne chocolate-covered cherries. B. Reese Candy Company. which today produces. In 1927. The legendary Milton Hershey died in 1945. Its Pelon Pelo RIco brand is especially popular.. Hershey's sales reached $5 million in 1911. Cadbury Dairy Milk. has annual sales of about $80 billion. Luden's Mellomints. In the 1960s. 20 percent of Hershey's stock was sold to the public. This type of structure would be somewhat unusual for 'an organization of Hershey's size. Reese's Pieces. In 1968. Hershey also manufactures and/or markets grocery products in the baking. Marabou of Sweden.Chocolate Company operated mainly to provide funds for the orphanage. which is the leading processor and marketer of macadamia snacks. It also acquired the Canadian confectionery (chocolate and nonchocolate candy) and snack nut operations of Nabisco Brands Ltd. peanut butter. Hershey purchased the breath freshener mints and gum businesses of Nabisco to obtain such products as Ice Breakers. Mr. Hershey purchased Nacional de Dukes (NDD) and renamed this company Hershey Mexico.S. a manufacturer of licorice-type products. Bubble YUill. and Bassett's Allsorts. such as Mounds. Hershey acquired two firms: Grupo Lorena in Mexico and Mauna Loa Macadamia Nut Corporation. In the 1970s. the name "Hershey" became a household word. Cadbury Caramello. and Skinner Macaroni Company. Hershey acquired the H. aswell as the Dietrich Corporation. maker of Luden's Throat Drops. which makes Reese's Peanut Butter Cups. both pasta manufacturers. Hershey went through rapid growth. Between 1930 and 1960. a pasta company. since the more common design would be . Almond Joy. and Reese's Peanut Butter. In 1996. B. which gave them new products. Hershey purchased Procino-Rossi. Internal Affairs Mr. York Peppermint Pattie. the Hershey Chocolate Company was incorporated under the laws of the state of Delaware and listed on the New York Stock Exchange. candy operations. beverage. executives suggest that Hershey operates from a centralized. Between 1976 and 1984. and markets chocolate products for the Mexican market under the Hershey brand name. and Cadbury Creme Eggs.and Fruit Stripe gum . BreathSavers. The Mauna Loa brand name includes cookie and snack items. Hershey also acquired Peter Paul/Cadbury's U. Hershey Chocolate Corporation changed its name to Hershey Foods Corporation. Grupo Lorena is the leader in Mexico. Nibs. During the 1980s. William Dearden served as Hershey's chief executive officer. Hershey also acquired San Giorgio Macaroni and Delmonico Foods. H. functional structure with no divisional presidents. imports. and 5th Avenue candy bars. Hershey does not make public an organizational chart. Hershey acquired Y&S Candy Corporation. but titles of . Cadbury Fruit & Nut. Lenny was elected president and chief executive officer of Hershey Foods in 2001 after previously serving as a division president with Nabisco. in the spicy candy market and haS annual sales of over $30 million. Hershey has rights to market the Peter Paul products worldwide. In 2000. Hershey acquired A. An orphan who grew up in the Milton Hershey School for Orphans. In 2004. and toppings categories. That same year. such as Y&S Twizzlers. Hershey acquired Leaf North America to gain market-share leadership in North America in nonchocolate confectionery candies. and Re!se's Peanut Butter Chips. He is still CEO of Hershey. HERSHEY'S Cocoa. Its grocery products include such items as HERSHEY~S Syrup. R. Dearden diversified the company to reduce its dependence on fluctuating cocoa and sugar prices.

products. again implying centralized control and accountability. and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Ontario. Hershey is the sole sponsor of the Hershey National Track and Field Youth Program. Illinois Smith Falls. improve the quality of existing products. and boxed items. fairness. chain stores. The firm makes annual contributions of cash. Hershey also makes contributions to the Children's Miracle Network. Hershey's research and development expenditures have declined steadily from 1998's level of $28. Hershey engages in a variety of research activities to develop new products.decentralized in some manner. Hershey's stated objectives include increasing sales 3 t04 percent annuajly. a national program benefiting children's hospitals across the United States. Pennsylvania Oakdale. and 2002. Pennsylvania Robinson. These products are marketed under more than 50 brarid names and sold in over 2 million retail outlets in North America. vending companies. The Hershey School Trust owns over 75 percent of aU Hershey Food Corporation common stock. including grocery wholesalers. Research and Development . including all costs. In 2004. improve the quality of existing products. Mexico Denver. California Stuarts Draft. integrity. whose mission is to provide full-time care and education. mass merchandisers. of whom about 5. and $23. Canada Guadalajara. and food distributors. 2003. Virginia Lancaster. Social Responsibility Hershey Foods Corporation is committed to the values of its founder Milton S. improve and modernize production processes. wholesale clubs. increasing gross margin 70 to 80 basis points annually. and improve and modernize production processes. drug stores.100 are members of a union. . The school currently cares for over 1. and services to a variety of national and local charitable organizations. Colorado (sold in February 2005) Hershey's North American operations produce an extensive line of chocolate and nonchocolate products sold in the form of single bars. Hershey introduced the .000 boys and girls in grades kindergarten through 12. The corporation operates the Milton Hershey School. Another indication of the functional structure is that Hershey does not provide for its shareholders financial data by segment such as geographic region or product. Hershey. had operated with two divisions: Hershey North America and Hershey International. Hershey engages in research and development activities to develop new products. $24. mainly orphans. Hershey: the highest standard of quality. increasing earnings before interest and taxes 7 to 9 percent annually.700 full-time arid 2. in the late 1990s. and respect.. honesty.4 million respectively in 2004. Hershey has approximately 13.2.2. bagged goods.Recently.6 million to $23. to disadvantaged children.300 part-time employees. and increasing earnings per share 9 to 11 percent annually. Hershey's North American manufacturing operations are located in the following cities: Hershey. convenience stores.

Ice Breakers Liquid Ice mints.. Breath-freshener candies . are selling well. and network and spot radio. as a percentage of sales. and $162. . due largely to the holiday seasons . People are eating more ethnic foods today than 10 years ago. marketing and administrative expenses in 2004 increased by $31. six-pack. such as Mars's Dove Promises. Note that Hershey's sales increased about 6 percent in 2004. Finance Hershey's 2004 financial statements are provided at the end of this case. Confectionery sales are generally lowest during the second quarter of the year and highest during the third and fourth quarters.9 million in 2004 compared to $457.32 per share. Hershey's Almond Joy. The media Hershey uses most for advertising are network television. Per capita candy sales in the United States have increased by7. In December 2004. Hershey changes the prices and weights of its products to accommodate changes in manufacturing costs. which means more garlic and flavor. followed by syndicated television.5 percent from 39.0 percent in 2003. However.6 million in 2003. York. and Reese's Big Cup. and 2002 respectively.4. Americans spend over $21 billion a year on sweets. Reese's Pieces candy with peanuts. 2003. spot television.$44. .1 percent from 19.1 percent over the . Hershey has developed a.9 million in 2004. or 4 percent. the competitive environment. Canada. distribution network from its manufacturing plants.6 percent in 2003. Hershey announced an increase in the wholesale prices of about half of its domestic confectionery line. Hershey has a $900 million revolving line of credit with a consortium of banks and has the option to borrow an additional $600 million if needed. product variety is crucial to success.5 million in 1998 to $137. Marketing issues relative to health. A weighted average increase of about 6 percent of Hershey's standard bar.9. drugstores. Hershey has steadily reduced its advertising expenses from $187. McLane is one of the largest wholesale distributors in the United States to convenience stores. king-size bar. these expenses decreased to 19.following new products: Hershey's Kisses filled with caramel milk chocolates. TakeS candy bars. and gross margin increased to 39. and profit objectives. Hershey's sales to McLane Company comprised about 25 percent of all cornpany sales.)8 million shares of its common stock from the Milton Hershey School Trust in July 2004 at a price of .. Hershey's Snack Barz rice and marshmallow bars. nutrition. and field warehouses strategically located throughout the United States. and Mexico. Hershey's selling. and mass merchandisers. Net income was $590. and weight consciousness are important. A weighted average price increase of about 4 percent on packaged candy was effective in February 2005. consequently. Marketing In 2004.are selling really well in response to this eating trend. and Reese's cookies. which is not good. Hershey purchased 11. Conventional wisdom in the candy industry is that a person rarely selects the same candy bar twice in a row. magazines. Hershey's SmartZone nutrition bars. $145.1 million. Hershey generates about 20 percent of annual sales during the second quarter and 30 percent of annual salesduring the fourth quarter of each year. and vending lines was effective in January 2005. wholesale dubs. distribution centers. Hershey has more than $463 million in goodwill on its balance sheet. last 5 years. Upscale candy items.

however. Since milk can be obtained in large volumes in many countries. while candy/confectionery is SIC 2064. and the various grades and varieties reflect the diverse agricultural practices and natural-conditions found in the many growing areas. and Taiwan. Germany. occupies more than 2 million square feet. The chocolate/cocoa products industry is SIC 2066.S. The most significant raw material used in the production of Hershey chocolate products is cocoa beans.7 cents per pound in 2004. In the Far East. Overall in the Far East. highly automated. Milk prices were especially high in 2004 and moderated down some in 2005.00 per pound during the second half of the year. and Saudi Arabia. chocolate producers have many options is . Cocoa beans are not uniform. and contains much heavy equipment. West Africa accounts for approximately 70 percent of the world's crop. Hershey is not planning sustained efforts due to perceived high political and economic risks coupled with the company's lack of experience. vats. Hershey also uses a large arnount of peanuts. the primary rawmaterials. Cocoa prices hit an I8-year high in February 2003 and since then have remained high. European unification extended grocery and department store channels of distribution. The confectionery industry is characterized by high. grocery chain. and Far Eastern equatorial regions. the Philippines. and containers. but Hershey has no plans to overtake or even threaten Nestle or Mars in Europe. Hershey has signed licensing agreements with Selecta Dairy Products to manufacture Hershey's ice cream products in the Philippines and with Kuang Chuan Dairy in Taiwan to manufacture Hershey's beverages. and dairy products. Hershey introduced its products into Russia.: As global channels of distribution become more available for chocolate manufacturers. . averaging 67. Hershey's competitors are taking advantage of this globalization trend. The average wholesale list price of refined sugar has remained in a range of 25 to 32 cents per pound for the past 10 years. or national.8 cents in 2003. The confectionery industry is also characterized by high transportation costs for moving milk and sugar. now operates stores in Canada. manufacturing economies of scale. Hershey's second most important commodity for its domestic chocolate and confectionery products is sugar. and department stores as well as vending machine operators. globally standardized products. to locate near their sources of supply. This fact motivates companies. down from 77. only a few are multinational. Hershey buys a mix of cocoa beans to meet its manufacturing requirements. Safeway. While chocolate producers have not yet developed globally uniform marketing programs. and globally centralized production. for example. Britain. This ~ommodity is imported principally from West African. the situation is changing. South American. regional. Hershey's main chocolate factory. Due to import quotas and duties imposed to support the price of-sugar.00 per pound during the first half of 2004 and rose to $3. drug.Global Issues Hershey exports confectionery and grocery products worldwide but not with vigor. Global cultural convergence is accelerating the need for more global marketing uniformity in the confectionery industry. global marketing uniformity will become more prevalent in the industry. such as Hershey. For example. Almost ill of these distributors are local. a U. almonds. High manufacturing costs in any industry encourage global market expansion. Europeans have the highest per-capita chocolate consumption rates in the world. sugar prices paid by United States users are currently substantially higher than prices on the world sugar market. Prices for almonds were $2. The main distribution channels for chocolate are grocery. It is the largest chocolate plant in the world.

Mars has historically relied upon extensive marketing and advertising expenditures to gain market share. New Iersey. Mars. In contrast. Hershey's two major candy competitors are Mars and Nestle. .least. there is a preference for types of sweets other than chocolate. is closely related to national income. including candy. Nestle clearly has an edge internationally. but that strategy is now being supplemented with extensive product development. not in your hands:' is used worldwide. Cadbury Schweppes obtains 50 percent from international sales. Northern Europeans consume almost twice as much chocolate per capita as Americans. and PB Max. Americans annually consume about 22 pounds of candy per person and Europeans consume about 27 pounds of candy per person . unlike Hershey. it has manufacturing plants . while Hershey has the least with 1o percent.$7 billion and $1 billion.M&M's. partly because of the high incidence of lactose intolerance (difficulty in digesting dairy products) . It also successfully developed and marketed frozen Snickers ice cream bars. while Finland. and Italy consume the. and LeafInc. Mars is controlled by the Mars family through two brothers. The Japanese also consume very little chocolate-about 1. Consumption of chocolate. Hershey's successful BarNone candy is named "Temptation" in Canada. Balisto. Asia. "It melts in your mouth. • Competitors The $10-billion U. Hershey's other competitors also do much of their business outside North America. For example. globally uses uniform marketing. originally a European candy. John and Forrest. Throughout Asia and Southern Europe. rather than on product innovation. Brach & Brock. Also. For example. Unlike Hershey. being the world leader in many food categories. nor does it require highly skilled labor. Milky Way.4 kilos per capita. Analysts estimate Mars worldwide sales and profits at over. from that plant it ships products worldwide. and the United Kingdom consume the m st chocolate. the company's M&M candies slogan. Yugoslavia. respectively. confectionery industry is composed of six major competitors who control nearly 70 percent of the market: Hershey. 'Based in Switzerland. The remaining 30 percent is divided among many local and regional candy manufacturers. Almost 98 percent of Nestle's revenues come from international sales. Mars has world-class production facilities in Hackettstown. RJR Nabisco. closely held companies. Candy consumption varies in the major markets of the developed nations. Mars Mars has a stronger presence than Hershey in Europe. a product that was so successful it dislodged Eskimo Pie and Original Klondike from the number-one ice cream snack slot without any assistance from promotional advertising. M&M Mars. Jr. Mars is one of the world's largest private. It is a secretive company. according to industry analysts.S. . Norway. and Mars 50 percent. . Switzerland. restyling. Mars was successful introducing its Bounty chocolate candy. In addition. Mexico. although the Far East is an exception to this rule. unwilling to divulge financial information and corporate strategies. Industry analysts expect the candy industry to continue to grow. NewMars products include Bounty. Among European countries. into the United States without prior test marketing. Mars has been repackaging. and reformulating its leading brands. and 3 Musketeers. Nestle of Switzerland. Mars gained 12 percent of the market in Mexico within one year of entering that market. and Japan. producing chocolate is not labor intensive.Chocolate accounts for about 54 percent of all candy consumed. including Snickers. .in locating plants.

Environmentally responsible firms market themselves and their products as being "green-sensitive. More and more firms are becoming environmentally proactive in their manufacturing and service delivery processes. Another major product concentration for Nestle is frozen foods and other refrigerated products. After Eight.in those countries? .~. Through the RJR Nabisco acquisition. since economies of those countries are growing so rapidly. Perhaps Hershey should expand into the Far East. Nestle also manufactures a fast-developing range of fresh pasta and sauces in Europe and the United States under the name Contadina.could enhance Hershey's lackluster international operations? Should Hershey acquire firms in other foreign countries? Analysis is needed to identify and value specific acquisition candidates. and how to best expand geographically. and Thailand also are untapped. additional notable brands were added to the product line. Switzerland.. and South America. a U.in Mexico and in several European locations. Developing environmentally safe products and packages.S. reducing industrial waste. and Quality Street. Each factory is highly automated. Nestle sells products in over 360 countries on all seven continents. what recommendations would you present to CEO Kenneth Wolfe? Should Hershey diversify. Nestle manufactures chocolate in 23 countries. foothold. Nestle's U. . Conclusion Hershey's global market share in the chocolate confectionery industry is less than lO percent. including Callier. many in the Third World. Some analysts contend that Hershey's functional structure is an ineffective structural design. employing an average of 250 people . Malaysia. California. recycling. Would a divisional structure by product be more effective? The product divisions could be Chocolate. and Grocery. and Yes. The Perugina division produces Baci. Nestle is the largest food company in the world. It is the world's largest instant coffee manufacturer. Nestle acquired Curtiss Brand. and establishing an environmental audit process are strategies that could benefit Hershey. . Or would a divisional structure by geographic reason be moreeffectivei Can you recommend an improvedorganizational design that. Findus in Europe and Stouffer in the United States represent the bulk of the group's frozen food sales with well-known brands such as Lean Cuisine. Nestle alsd produces and markets chocolate and malt drinks and is the world's largest producer of milk powder and condensed milk. . . with Nescafe the dominant product. Nestle With annual sales exceeding $9 billion in the U." Concern for the natural environment is an issue Hershey should address before competitors seize the initiative. A major strategic issue facing Hershey today is where. lowest a~ong its competitors. confectionery producer with such products as Baby Ruth and Butterfinger. Nonchocolate. including Smarties. Indonesia. Nestle is a major competitor in Europe. China and India are huge untapped markets. operations are headquartered in Glendale. the Far East. particularly in Switzerland and Latin America.. With corporate headquarters in Vevey. Should Hershey wait for Mars and Nestle to gain a . Crunch. Nestle's chocolate and confectionery products carry some popular brand names. Vietnam.S. In developing an overall strategic plan. Mars entered Russia in 1992 and today virtually owns the chocolate market there. With the acquisition of Rowntree. when. more into nonchocolate candies since that segment is growing most rapidly? Should a new manufacturing plant be built in Asia orin Europe? .

330) 3.376.952 233.533 835. Marketing.429.644 244.679.287 63.765 590. 38.879 457. p. HERSHEY FOODS CORPORATlON-2M5 53 Design a global marketing strategy that could enable Hershey to boost exports of chocolate.578 7. of Accounting Change Cumulative Effect of Accounting Change.933 Tax Benefit Net Income Source: Hershey's Form 10K.55 2002 4.03 698.561.879 2.72 816.357 (8.552 3.368 590. except per share amount) FOR THE YEARS ENDED DECEMBER3l 2004 2003 4.31 Net Sales Costs and Expenses: Cost of Sales Selling.565 267.527. 4. Net Gain on Sale of Business Total Costs and Expenses Income Before Interest and Income Taxes Interest Expense.426 27.540 3.CASE 5 '.544.172.8Z7 60.584 403.422.529 732. Net of $4.24 2.356 2. 2004.177 66.53 847.19 796.987 403. and Administrative Business Realignment and Asset Impairments. Net Income Before Income Taxes Provision for Income Taxes Income Before Cumulative Effect .05 833.442 23.07 902. « EX H I BIT 1 Hershey's Income Statements (in $ thousands.578 '" .875 464.110. Should Hershey increase its debt further or dilute ownership of its stock further to raise the capital needed to implement your recommended strategies? Develop projected financial statements to fully assess and evaluate the impact of your proposed strategies.722 637.

302 3.EXHIBIT 2 Hershey's Balance Sheets (in $ thousands) December 31.569 1.889 2. 2003 Assets Current Assets: Cash and Cash Equivalents Accounts Receivable-Trade Inventories Deferred Income Taxes Prepaid Expenses and Other Total Current Assets Property. Plant. Net Goodwill Other Intangibles Other Assets Total Assets Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Accrued Liabilities Accrued Income Taxes Short-term Debt Current Portion of Long-term Debt TotalCurrent Liabilities Long-term Debt Other Long-term Liabilities Deferred Income Taxes Total Liabilities Stockholders' Equity: . 377.382 690.837 408.235 in 2004 and 149. 1.30 557.147.032 477 585.947 125.499 370.797.612 492.131. 148.580) 3.528.277 279. Shares Issued: None in 2004 .561 3.859 13.060.096 on a Pre-Split Basis in 2003 Additional Paid-In Capital Unearned ESOP Compensation Retained Earnings Treasury-Common Stock Shares.212 3.898 12.034 (9.661.422 4."and 2003 Common Stock.422. 39.8663. at Cost: 113.582.285.682. Preferred Stock.44) (11.233 343.279.589 2.180 46.708.531 114.686 472.169 30.960 38.263.762.797. 2004 December 31.139 on a Pre-Split Basis in 2003 Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Total Liabilities and Stockholders' Equity Source: Hershey's Fot71iIOK.182.776 on a Pre-Split Basisin 2003 Class B Common Stock.096 42.582.991 1.356 328.060 149.30) 309 ·1.509 in 2004 and 30.841.387) 3.602 403.827 in 2004 and 50.841 28. 2004.280 343.229 132.285 103.540 .313.089.540 .939 388.810 968.469. p.503 114. and Equipment.531 (2.020.085) 1.302.. Shares Issued: 60.698 463.614 (6.421.793 407.674 299.776 . 54.222 416.988 (2. Shares Issued: 299.043 1.528 60.181 24.441 1.511 361.9.

247 30.289.966 123.541 254.777 1.114. • EX HI BIT 4 Hershey's Organizational Chart Senior VPand President.572.830 446.036 1.866 378.158.694 1.342 303.582 0. 4. p. 2004.735. . 2004. Hershey International Source: Adapted from Hershey's Form 10K. Marketing. 2005 JULY 4.384 215.995 40.029 338.364 1. 76.836 413.530 334. and Administrative Total Income Before Interest and Taxes Interest Income Before Taxes Taxes Net Income EPS Cj 2.906.861 1. p. 49.00 Source: Hershey's Form 10K.EX HI BIT 3 Hershey's Income Statements (in $ thousands) FOR THE 6 MONTHS ENDING: JULY 3. 2004 Net Sales Costs and Expenses: Cost of Sales Selling.905.90 1.

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