case hershey

CASE STUDYHERSHEY FOODS CORPORATION

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HERSHEY FOODS CORPORATION-2005OBJECTIVE OF THE STUDY:To objective is to analyze the Hershey Food Corporation situation and suggest certain strategies department wise to overcome from the main threat i.e. competitor. Suggest the certain techniques and strategies to increase the market share and to compete globally.

ABOUT HERSHEY:Hershey Foods Corporation has grown from a one-product, one-plant operation in 1894 to a $ 4.4 billion company producing an array of quality chocolate, non-chocolate, and grocery products. The company markets confectionary and grocery products in over 60 countries worldwide, down from 90 countries a few years ago. Hershey market products under more than 50 different brands, such as Hershey’s milk chocolate, Mr. Good bar, Reese’s, kit Kat, kisses and mounds.

Less than 10 percent of Hershey’s sales are generated outside the United States. 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 in world markets.

HISTORY:

Milton Hershey’s love for candy making began with a Childhood apprenticeship under candy maker Joe Royer of Lancaster, Pennsylvania. Mr. Hershey was eager to own a candy-making business. After numerous attempts and even bankruptcy, he finally gained success in the caramel business. 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, Pennsylvania, a town that was renamed Hershey in 1906. In 1909, the Milton Hershey School for Orphans was founded. Mr. and Mrs. Hershey could not have children, so for years the Hershey Chocolate Company operated mainly to provide funds for the orphanages. In 1927, the Hershey Chocolate Company was incorporated under the laws of the state of Delaware and listed on the New York Stock Exchange. That same year, 20 percent of Hershey’s stock was sold to the public. Between 1930 and 1960, Hershey went through rapid growth; the name “Hershey” became a household word. The legendary Milton Hershey died in 1945.

CORPORATE EXPANSION:

In the year of 1901, the Hershey company sales were only $662,000 and within the span of 10 years the Hershey sales reached $ 5 million in 1911. Thereafter Hershey’s sales increased 4 to 5 percent annually. In 1968, the company was renamed as Hershey Foods Corporation. During this time, Hershey sought to expand its product line by partnering up with several related companies and even created different brands for their own products. Some famous partnerships include H.B.

KARACHI UNIVERSITY BUSINESS SCHOOL


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Reese Candy Company (1960), San Giorgio Macaroni Foods (1966), Y&S Candies, makers of Twizzlers liquorice(1977), Peter Paul/Cadbury’s U.S. Confectionery operations(1988) and Ronzoni Foods(1990), Hershey Mexico, Leaf North America(1996), Nabisco’s gum businesses(2000) and Grupo Lorena & Mauna Loa(2004) Hershey Foods Corporation became the industry leader by the end of the 20th century. The company continued diversifying and soon acquired Joseph Schmidt confections in 2005 and a year later, in 2006, acquired Dagoba Organic Chocolates. This maintains Hershey’s top position in the North American market

COMPANY OBJECTIVES:

Company’s stated objectives include:

Annual increase of 3 to 4% in sales Annual increase of 70 to 80 basis points in gross margin Annual increase of 7 to 9% in EBIT Annual increase of 9 to 11% in E.P.S (earning per share)

Hershey’s products are marketed under more than 50 brands names and sold in over 2 million retail outlets in North America, including grocery wholesalers, chain stores, mass merchandisers, drugstores and food distributors.

CURRENT STRATEGIES:

Hershey Foods Corporation has adopted the strategy of acquisition/mergers with the local firms that are operating in the same industry as theirs, thus expanding the business portfolio locally.

Hershey’s has incorporated the related diversification strategy by acquiring San Giorgio Macaroni Foods (1966), Delmonico Foods, both pasta manufacturers and A. B. Marabou of Sweden, as well as the Dietrich Corporation; maker of Luden's Throat Drops, Luden's Mellomints during 1980’s.

Hershey Foods Corporation is the sole producer of the products they sell. The firm makes annual contributions of cash, products, and services to a variety of

national and local charitable organizations. Hershey does not make public an organizational chart, but titles of executives suggest

that Hershey operates from a centralized, functional structure with no divisional presidents.

Hershey does not provide for its shareholders financial data by segment such as geographic region or product, implying centralized control and accountability.

The foundation of Hershey’s marketing strategy is their strong brand equities, product innovation, the consistently superior quality of products, manufacturing expertise and mass distribution capabilities.

Hershey’s distribution network provides for the efficient shipment of their products from manufacturing plants to distribution centers strategically located throughout the United States, Canada and Mexico. They primarily use common carriers to deliver products from these distribution points to the customers.

Full-time sales representatives and food brokers sell Hershey products to the customers. Hershey’s customers are mainly wholesale distributors, chain grocery stores, and Mass


Chairman of the Board President and CEO R.

H. Lenny

VP for Strategy and Innovation

Senior VP and General Counsel

Chief Marketing Officer

Senior VP and President Hershey International

Chief Accounting Officer

Chief Information Officer

Senior VP for Business Planning and Development

Chief Customer Officer

Chief People Officer

Chief Financial Officer


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merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, department stores and natural food stores. These customers then resell products to end-consumers.

Hershey has a variety of promotional programs for their customers as well as advertising and promotional programs for consumers of their products. Hershey uses its promotional programs to stimulate sales of certain products at various times throughout the year.

Hershey has steadily reduced its advertising expenses from $187.5million in1998 to $137.9, $145.4, and $162.9 million in 2004, 2003, and 2002 respectively. Hershey changes the prices and weights of its products to accommodate changes in manufacturing costs, the competitive environment, and profit objectives.

Hershey Foods Corporation devotes considerable resources to the identification, development, testing, manufacturing and marketing of new products.

INTERNAL AFFAIRS OF HERSHEY:

HERSHEY’S ORGANIZATIONAL CHART:



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SOCIAL RESPONSIBILITY:

Building on Milton Hershey's legacy of commitment to consumers, community and children, the firm makes an annual contribution of cash, products and services to various charitable organizations including Hershey National Track, Field Youth Program, Children’s miracle network. The firm operates Milton Hershey School where full-time care and education is provided to children mainly orphans. The Hershey School Trust owns over 75% of company’s stock

RESEARCH AND DEVELOPMENT:

Hershey performs various research and development activities to develop new products and improve and modernize existing products and production processes. Company’s R&D expenses have declined from the level of $28.6m (1998) to $23.2m (2004). In 2004; Hershey introduced the following new products:

“Hershey’s Kisses filled with caramel milk chocolates; Ice Breakers Liquid Ice mints; Hershey’s Snack Bars rice and marshmallow bars; Hershey’s Smart Zone nutrition bars; Take5 candy bars; Hershey’s Almond Joy, York, and Reese’s cookies; Reese’s Piece candy with peanuts; and Reese’s Big Cup.”

MARKETING:

Hershey has a well-established distribution network from its manufacturing plants, to distribution centers and to warehouses throughout the United States, Canada & Mexico. Hershey has steadily decreased its advertising expenses. In the year of 1998, Hershey invested$187.5 million on advertisements, but in 2004 Hershey invested only $ 137.9m on advertisements. Though the selling, marketing and administrative expenses increased by 4% in 2004, they decreased to 19.1% from 19.6% (in 2003) as a percentage of sales.

Hershey uses network television, syndicated television, spot television, magazines and spot radio as its advertising media. Hershey generates about 20% of annual sales during the 2nd quarter and 30% during the 4th quarter of each year due to holiday seasons.

FINANCE WITH FINANCIAL ANALYSIS:

FINANCIAL STATEMENT:

The sales of Hershey foods had been increasing since 2002 but it could not meet the targeted increase in sales. On the other hand, the expected growth of 0.70 to 0.80% in gross margin and in EBIT 7 to 9% increases had been beat by achieving 14% and 13.3% incline of EBIT and 4.39% and 7.45% increase in gross margin. These figures imply that the company managed to cut down its expenditures. The case informs us about the decline in marketing expenditure of Hershey foods when compared with sales. The company has got plenty of opportunities in the foreign market as opening new avenues internationally does not require huge commitment of new financial, physical resources and technology.



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The goodwill account of the company showed a huge balance leaving a negative impact on the company side as it is actually having no direct impact on the performance and financial operations of the company but still expressing it strong enough to compete.

EQUITY OR DEBT FINANCIAL:

The company had better go for equity financing as it has already backed by around 71% of the external equity. If debt financing is considered as a viable option, the company’s risk and other rations would get affected.

GLOBAL ISSUES FOR HERSHEY:

Hershey exports its food products worldwide but not vigorously as it has no plans to overtake or threaten Nestle or Mars in Europe-where the per capita chocolate consumption is highest in the world.

Hershey has introduced its products into Russia, Philippines and Taiwan; however it has failed to tap the overall Far East market due to high political and economic risks coupled with company’s lack of experience.

The most significant raw material of Hershey’s chocolate is Cocoa bean, but cocoa prices are getting high. The prices hit an 18-year high in February 2003 and since then have remained high, averaging 67.7cents per pound in 2004.

The second most important commodity for Hershey’s chocolate and confectionery products is sugar. But due to import quotas and duties sugar prices are higher in United Sates than in world sugar market.

Almonds prices also rose from $2 per pound during 1st half of 2004 to $3 per pound during the 2nd half. Milk prices were also high in same year.

As global channels of distribution are available for chocolate manufacturers and global marketing uniformity will become more prevalent in the industry. Hershey’s competitors are taking advantage of this globalization trend.

The confectionery industry is characterized by high manufacturing economies of scale. Hershey has the largest and highly automated chocolate plant in the world as it occupies more than 2m square feet so its manufacturing costs are high which encourage global market expansion, globally standardized products and centralized production.

The confectionary industry is also characterized by high transportation costs for moving primary raw materials i.e., milk and sugar.

Moreover, candy industry is subjected to grow. Candy consumption varies in different markets of world. Northern Europeans consume twice as much chocolate per capita as Americans while Asians and South Europeans prefer types of sweets other than chocolates.

SWOT ANALYSIS WITH EFE AND IFE MATRIX:



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OPPORTUNITIES THREATS Potential to expand range of Dark/Sugar

free products for health benefits. The main competitors of Hershey

are Mars and Nestle. Mars is a threat for Hershey because it has a stronger presence in Europe, Asia, Mexico, and Japan.

Use partnership ventures to create chocolate flavored coffee products.

Unlike Hershey mars has historically relied on extensive marketing and advertising expenditure to gain market share rather than to product innovation.

Produce cocoa in new areas other than Africa. 2.5% of nestle revenues and profit comes from coffee and adverse economic occurrence in South America, nestle plans to continue its strength international markets outside the U.S to combat Hershey.

They can adopt “Global Channels of Distribution”.

Consumer demanding healthier substitute.

Develop environment friendly packaging, recycling and reducing industrial waste and establishing environmental audit process.

Steady rise in prices of cocoa, milk and sugar.

China, India and majority of Southeast Asia are untapped markets. Malaysia, Indonesia, Vietnam, and Thailand are also untapped so Hershey has an opportunity to gain a foothold in these countries.

Innovation in low fat and functional candy category.

Diversifies more in to non chocolate candies because that segment is growing most rapidly in foreign countries like U.S and U.K.

Hershey has an opportunity to take over nestle or mars in Europe by producing non chocolate products.

Hershey has an opportunity to expand in to the Far East as those countries grow rapidly.

EXTERNAL FACTOR EVALUTION MATRIX (EFE):



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KEY EXTERNAL FACTORS Weight Rating Weighted score

Opportunities

Potential to expand range of Dark/Sugar free products for health benefits.

0.10 4 0.4

Use partnership ventures to create chocolate flavored coffee products

0.07 2 0.14

They can adopt “Global Channels of Distribution”.

0.07 2 0.14

China, India and majority of Southeast Asia are untapped markets. Malaysia, Indonesia, Vietnam, and Thailand are also untapped so Hershey has an opportunity to gain a foothold in these countries.

0.10 4 0.4

Hershey has an opportunity to take over mars in Europe by producing non chocolate products

0.08 3 0.24

Innovation in low fat and functional candy category.

0.07 2 0.14

Develop environment friendly packaging, recycling and reducing industrial waste and establishing environmental audit process

0.10 04 0.4

ThreatsThe main competitors of Hershey are Mars and Nestle. Mars is a threat for Hershey because it has a stronger presence in Europe, Asia, Mexico, and Japan.

0.12 4 0.48

Unlike Hershey mars has historically relied on extensive marketing and advertising expenditure to gain market share rather than to product innovation

0.09 3 0.27

2.5% of nestle revenues and profit comes from coffee and adverse economic occurrence in south America, nestle plans to continue its strength international markets outside the U.S to combat Hershey.

0.08 3 0.24

Consumer demanding healthier substitute. 0.07 3 0.21Steady rise in prices of cocoa, milk and sugar. 0.05 2 0.1

Total 1.00 3.16

STRENGTHS WEAKNESSES



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Highest Market Share in North AmericaHershey entered 1996 as the largest candy maker in the US with 30.7 percent market share and also the largest pasta manufacturer with 28.4 percent market share.

Low Market Share in the WorldHershey’s global market share in the chocolate confectionary industry in only 10 percent, lowest among its competitors.

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

Centralized Organizational Structure Hershey operates from a centralized, functional structure with no divisional president.

Huge Man PowerHersey has huge man power approximately 13,700 full-time and 2,300 part-time employees.

Poor Decision MakingPoor decision making of Hershey as company relies on brand loyalty and has reduced advertising expenditure.

Ethically and Socially Responsible NameHershey is an exemplary organization in terms of business ethics and social responsibility; a significant part of Hershey Food’s profits go toward operating the Milton Hershey School for Orphaned Children. The firm makes annual distribution of cash, products, and services to a variety of national and local charitable organizations and for different youth programs. Hershey is very cooperative with students and professors; Hershey has a toll-free number (1-800-468-1714) that students or professors can call to obtain additional information about the company.

High Price of Raw Material Affects Consumer BuyingThe average price of Cocoa beans rose25.8 percent in 1995, following a 28.9 percent rise in 1994. This is a major problem of Hershey as Cocoa production rates are rising, and even a small price increase at retail level affects consumer buying.

Increasing SaleHershey has an increasing sale which is of 3 to 4 percent annually.

Concern for the Natural EnvironmentIt is an issue that Hershey should address before competitors seize the initiative.

Ability to Acquire DebtHersey has a $900 million revolving line of credit with consortium of banks and has the option to borrow an additional $600 million if needed.

Few Multinational Distributors.They are not able to adopt “Global Channels of Distribution.

Powerful PartnershipsHershey has Powerful partnerships with Starbucks, Kraft, Coca-Cola etc.

Ineffective Organizational DesignSome analysts contend that Hershey International as a separate division producing and selling diverse



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products is an ineffective organizational design.

Strong Name and Brand ImageHersey became a household word. It has more than 50 different brands prevailing in over 60 countries. Marketed under more than 50 brand names.

Inexperience in International MarketHershey has a Lack of experience of International Market.

Research and Development Hershey engages in a variety of research activities to develop new products, improve the existing products. In 2004 it introduced many products like Hershey’s kisses filled with caramel milk chocolates, ice breakers liquid ice mints, Hershey’s almond joy, York and Reese’s cookies, and Reese’s big cup etc.

INTERNAL FACTOR EVALUTION MATRIX (IFE):KEY INTERNAL FACTORS Weight Rating Weighted

ScoreStrengthsHighest Market Share in North America 0.07 4 0.28Largest Production Plan 0.04 2 0.08Huge Man Power 0.04 2 0.08Ethically and Socially Responsible Name 0.07 4 0.28

Increasing Sale 0.07 3 0.21Ability to Acquire Debt 0.05 3 0.15Powerful Partnerships 0.07 3 0.21Strong Name and Brand Image 0.08 3 0.24Research and Development 0.08 2 0.16WeaknessesLow Market Share in the World 0.07 4 0.28Centralized Organizational Structure 0.05 2 0.10Poor Decision Making 0.05 3 0.15High Price of Raw Material Affects Consumer Buying 0.07 2 0.14Concern for the Natural Environment 0.04 2 0.08Few Multinational Distributors. 0.05 4 0.20Ineffective Organizational Design 0.04 2 0.08Inexperience in International Market 0.06 3 0.18Total 1.00 2.90



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COMPETITORS:The $10 billion confectionary industry composed of six major competitors who controls nearly 70% of the market named as; Hershey, M&M Mars, Brach & Brock, Nestle of Switzerland, RJR Nabisco and Leaf Inc. the two major competitors of Hershey are Mars and Nestle.

MARS:

Mars has a stronger presence in Europe, Asia, Mexico and Japan than Hershey. Mars gained 12% of the market share of the Mexico market within one year of entering there, proving itself a threat for the Hershey as Mexico is one of the few giant markets for Hershey Foods. Analysts estimate the worldwide sales and profit of Mars at over $7 billion and $1 billion respectively while the Hershey’s revenue is $4.4 billion with the margin of ------. The similarity between the Hershey and Mars is that both are secretive about their financial positions and corporate strategies.

Mars uses globally uniform marketing which provide it advantage of standardization, on the contrary, Hershey’s marketing campaign differs country to country even its 98% of the revenue comes from USA. Along with this, unlike Hershey, Mars has historically relied upon extensive marketing and advertising expenditures to gain market share and has been restyling, repackaging and reformulating its leading brands but now this strategy is supplemented with product development, while Hershey focused on product innovation. Mars was quite successful in its marketing campaign along with its strategies and has become a continuous threat for Hershey. If Hershey wants to continue its growth and keep itself a giant name in Chocolate, non chocolate and grocery items, it will have to take measures the sooner the better.

NESTLE:



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Nestle, a Switzerland based company, is the largest food company in the world with operation in the 360 countries of the world. The revenue of Nestle, only in USA ($9 billion), outclasses the revenue of Hershey with $4.4 billion as a whole. These figures vividly express Nestle as a massive competitor of Hershey Foods. Nestle has been a major competitor in Europe, the Far East and South America. Nestle manufactures chocolate in 23 countries of the world, particularly in Switzerland and Latin America. It is the world’s largest instant coffee (with Nescafe the dominant product), milk powder and condensed milk producer. It also produces frozen foods and other refrigerated products and sells in bulk with well known brands such as lean Cuisine. Nestle also manufactures fast growing range of fresh pasta, and sauces I Europe and US. Having seen a few of the product kinds of Nestle with eye opening outcomes, one can judge the severity of the competition. Despite nestle does not produces and sells chocolate mainly in US, Canada and Mexico; main market for Hershey, but its non chocolate confectionary and grocery products are under competitive environment. If Hershey continued to ignore Nestle as a competitor and did not take proper measures to maintain and increase the market share, Hershey would have to bear huge losses.

COMPETITIVE PROFILE MATRIX FOR DELL (CPM):

HERSHEY FOODS MARS NESTLE

Critical Success Factors

Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted Score

Market Share Locally

0.10 40.4

3 0.45 41.8

Global Expansion

0.25 10.25

4 0.16 40.64

Financial Position

0.08 30.24

3 0.4 30.9

Product Quality 0.10 4 0.4 4 0.32 4 0.96

Consumer Loyalty

0.12 40.48

4 0.06 30.48

Distribution 0.10 4 0.4 3 0.3 4 1.2

Marketing 0.12 2 0.24 4 0.3 3 0.6

Management Experience

0.03 30.09

3 0.03 40.16



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Organization Structure

0.05 20.1

2 0.15 30.45

Production Capacity

0.05 40.2

3 0.16 30.48

1.00 2.8 7.68 7.67

DECENTRALIZED ORGANIZATIONAL STRUCTURE

FOR HERSHEY’S FOOD LTD.:



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RECOMMENDED STRATEGIES:INCREASING GLOBAL CONNECTIONS

(Use market development and penetration)


Chairman of the Board

President in USA

President in Asia Pacific

President in Europe

President in Russia

VP for strategy and innovation

Senior VP for business planning

SENIOR VP FOR GENERAL

COUNSEL

CHIEF MARKETING OFFICER

CHIEF CUSTOMER OFFICER

CHIEF ACCOUNTING OFFICER

CHIEF INFORMATION OFFICER

CHIEF PEOPLE OFFICER

CHIEF FINANCIAL OFFICER

CHIEF PRODUCTION OFFICER


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1. Currently HERSHEY’S is catering China, Mexico, Brazil, Canada, India, Korea and Japan.

CURRENT NEWS

2. Hershey’s is not using market development, penetration and product development in order to gain more market share of the international market.

3. Going global and using strategies like market development is the need of the hour as Hershey’s has the resources to supply its products to the international market, it has :

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

“Hersey has huge man power approximately 13,700 full-time and 2,300 part-time employees.”

These resources and Hershey’s established corporate image can ease it in marketing its products globally and gaining high acceptance.

HERSHEY’S SHOULD GO FOR BACKWARD INTEGRATION

4. Hershey’s should ho for backward integration as the raw material prices are increasing steadily. If it invests in producing its own resources, the cost of production will decrease phenomenally.

INVEST ON GLOBAL ADVERTISEMENT

5. Hershey should start developing new advertisement programs for global marketing. To attract the people in the so far untapped markets.

6. This measure will lead to : build a brand while speaking with one voice develop economies of scale in the creative process maximize local effectiveness of ads, and increase the company’s speed of implementation.


HERSHEY, Pa., Sept. 7, 2012 —The Hershey Company (“Hershey”) (NYSE: HSY) today announced that it

has reached an agreement to acquire the 49 percent stake in Godrej Hershey Ltd. that it does not

own, primarily from Godrej Industries Ltd. (“Godrej”) and another minority shareholder. Including the

assumption of about $47.6 million in debt, which is already consolidated by Hershey as the majority

shareholder, the company will own the Maha Lacto and Nutrine candy brands and the Jumpin and

Sofit beverage brands as well as the related manufacturing facilities. The transaction is expected to

close by the end of the third quarter and the new entity will transition to use the name Hershey India

as it becomes a wholly owned subsidiary of The Hershey Company. As part of the transaction, the

minority shareholders will receive an undisclosed cash consideration.


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ADOPT NEW CHANNELS OF DISTRIBUTION

7. Hershey’s should identify new channels of distributions and go for multinational channels to increase the sales.

GO FOR PRODUCT DEVELOPMENT TO CATER HEALTH AND NUTRITION ISSUES

8. They have to come up with new candies like fat less candies because consumers are going to be health, nutrition and weight conscious.

DECENTRALIZE THE ORGANIZATIONAL STRUCTURE

9. It should go for decentralized functional structure as an organization of this size has to be decentralized to increase work efficiency.

10. I have suggested a decentralized functional structure with departmental presidents

CONCLUSION AND RECOMMENDATIONS:As Hershey has the lowest global market share among its competitors, to overcome from this problem means to increase the sales Hershey should adopt certain strategies like, Hershey should go globally. They have to take experience of outside market (untapped market). They have to come up with new candies like fat less candies because consumers are going to be health, nutrition and weight conscious. Hershey should adopt the “Global Channels of Distribution” to increase the sales worldwide. They have to invest in advertisement, if they have to have to maintain the market share/increase the market share.

They have to find out the new channels of distribution and adopt the new channels to increase the sales. Go international advertisement to promote the product and use Multinational channel to increase the sales. They must increase the production capacity of Chocolate and Candy. Come up with different types of candies and chocolate because people want variety in products which is crucial to success.

They should design new organization structure and go for decentralization. There must be continental presidents, who will help to compete globally or to increase the market share globally because they will have the experience of the particular continents and they will work according to market conditions.


case hershey

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