Case Study Hershey Food Corporation 3s1o54

STRATEGIC MANAGEMENT

CASE STUDY

COURSE INSTRUCTOR: PROF. ALI ASKARI DATE: 16TH AUGUST, 2011

GROUP 06: DANIA BAIG NIMRA JAWAID SYEDA FARYAL JAFRI UROOJ FATIMA

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EXECUTIVE SUMMARY Hershey, Pennsylvania the home of Hershey Foods Corporation known as Chocolate Town, USA, the air in this city actually smells like chocolate. Hershey has grown from a one product, one plant operation in 1894 to a $ 4.4 billion company producing as array of quality chocolate, nonchocolate and grocer y products. SWOT Analysis to define the Hershey Strengths, Weaknesses, Opportunities and Threats. Hershey market share is less than 10 percent, lowest among its competitor. So, Hershey should come up with new strategies in finance, marketing, production department and in organization structure to increase the market share and compete globally.

OBJECTIVE OF THE STUDY 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 t o compete globally.

1. INTRODUCTION The Hershey Company is famously known for being the biggest manufacturer of chocolates and confectionery products in USA, having hired over 12,000 employees worldwide and exporting their products to sixty different countries over the world. Brands: The Hershey Company offers such iconic brands as Hershey’s Chocolate Bar, Kit Kat, Hershey’s Kisses, Reese’s, Twizzlers, Ice breakers, York Peppermint Pattie, Rolo and Krackle Bar as well as the smooth, creamy indulgence of Hershey’s Bliss chocolates. With the help of these brands, Hershey gained success and popularity, making the company’s net worth over $4.4 billion dollars. Hershey’s principal product group includes: chocolates, confectionery products sold in the form of bar goods, bagged items and boxed items; grocery products in the form of baking ingredients, chocolate drink mixes, peanut butter, dessert toppings and beverages. The company lives by its mission statement, “Undisputed Marketplace Leadership”. Hershey continues to preserve a higher position by successfully converting consumer desires into reality.

2. BRAND RESEARCH 2.1 Detailed History Milton Hershey was fascinated with the process of making chocolate, and his interest began at an early age under candy maker Joe Royer of Lancaster, Pennsylvania. Milton was an entrepreneur who was keen to own a candy-making business. His first successful business was the Lancaster Caramel company and it was only in 1893 that Milton expressed interest in making Chocolates.

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Soon after, Milton began producing chocolate coated caramels that eventually led to the founding of Hershey Chocolate Company in 1894. After much experimentation, Milton discovered the famous Hershey’s Chocolate recipe and sold his caramel business in 1900 for the sum of $1 million. By 1901, Hershey’s sale reached $662,000 thus creating the need for a new factory. In 1903, Milton built his company at a place called Derry Township in Pennsylvania, which was later renamed Hershey, Pennsylvania in 1906. This was the first step towards the company’s expansion since this city had a large population, was easily accessible to ports that would supply sugar, cocoa beans etc, and had a vast amount of dairy farms. In 1927, the Hershey Chocolate Company was incorporated under the laws of the state of Delaware and listed on the New York Stock Exchange with 20%stock sold to public. Between 1930 & 1960 Hershey went through rapid growth. 2.2 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. 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.

3. INTERNAL AFFAIRS- ORGANIZATION STRUCTURE Hershey operates from a centralized, functional structure with no divisional presidents; a type of structure unusual for an organization of Hershey’s size, since the more common design would be decentralized. Mr. R.H. Lenny is serving as a CEO of Hershey. In late 1990s, Hershey had operated with two divisions: Hershey North America and Hershey International. Hershey has approximately 13,700 full-time and 2,300 part-time employees.

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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

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, drug stores and food distributors.

4. 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.

5. 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 Barz 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.

6. FINANCE There has been a vital growth in Income of Hershey’s Food after 2001. Hershey’s net income was $590. 9 million in 2004 compared to $457.6 million in 2003. Company’s sales increased about 6% and gross margin increased to 39.5% in 2004 from 39% in 2003. Company purchased 11.28m shares from Milton Hershey School Trust in 2004; currently it has a $900m revolving line of credit and has the option to borrow to an additional $600m if required.

7. MARKETING Hershey has a well-established distribution network from its manufacturing plants, to distribution centres 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 ments, but in 2004 Hershey invested only $ 137.9m on ments. Though the selling, marketing and istrative expenses increased by 4% in 2004, they decreased to 19.1% from 19.6% (in 2003) as a percentage of sales. Page | 4

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.

8. GLOBAL ISSUES 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. Cocoa beans are the most significant raw material of Hershey’s chocolate, 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. Sugar is the second most important commodity for Hershey’s chocolate and confectionery products. 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 on hype in same year. Today, global channels of distribution are available for chocolate manufacturers and global marketing uniformity is prevailing 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. High manufacturing costs encourage global market expansion, globally standardized products and centralized production. The industry is also characterized by high transportation costs for moving primary raw materials i.e, milk and sugar. Moreover, candy industry is subject 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.

9. COMPETITORS There are six major competitors in the $10-billion U.S. confectionery industry who contribute 70% of the market:  

Hershey M&M Mars

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   

Brack & Brock Nestle of Switzerland RJR Nabisco Leaf Inc.

Hershey’s two major competitors are Mars and Nestle.

MARS: Mars enjoys a stronger presence than Hershey in Europe, Asia, Mexico and Japan. While Mars obtains 50% from international sales, Hershey obtains the least with 10%. Worldwide sales and profits are estimated at over $7b and $1b respectively. Unlike Hershey, Mars globally uses uniform marketing. Its M&M candies slogan “It melts in your mouth, not in your hands”, is used worldwide. On contrary, Hershey’s BarNone candy is named “Temptation” in Canada. Unlike Hershey, Mars has also historically relied upon extensive marketing and advertising expenses to gain market share, rather than on product innovation. Mars has been repackaging, restyling and reformulating its leading brands: Snickers, Bounty, Balisto, Milkyway, M&M’s and 3 Musketeers. Mars also successfully developed and marketed frozen Snickers Icecream bars. It has worldclass production facilities in New Jersey and has manufacturing plants in several European locations.

NESTLE: Nestle is the largest food company in the world with annual sales of more than $9billion in U.S., having an edge internationally. Having corporate headquarters in several states, Nestle is a major competitor in Europe, Far East and South America. Nestle sells products in over 360 countries on all seven continents, mainly in Third World. Nestle is the world’s largest instant coffee manufacturer, with Nescafe the dominant product, and is the largest producer of milk powder and condensed milk. Also produces chocolates and malt drinks. Nestle manufactures chocolate in 23 countries particularly in Switzerland and Latin America. Each factory is highly automated, employing an average of 250 people. Nestle’s popular brands are Callier, Crunch, Yes, Smarties and Butterfinger. Page | 6

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S.W.O.T. Analysis for Hershey Food Corporation

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Strengths Hershey has grown from one product one plant to a $4 billion company with various quality chocolates. It’s a strong brand name and has a strong image. By 1996, Hershey was largest candy maker in U.S. with 30.7% market share It is also the largest pasta manufacturer in U.S. with 28.4% market share World’s largest chocolate plant in U.S., with more than 2 million sq. feet. Marketed under more than 50 brand names. Powerful partnerships (Starbucks, Kraft, Coca-Cola etc) Huge man power approx. 13,700 full-time and 2,300 part-time employees. Increasing sales 3 to 4 percent annually. Major profits go to Milton Hershey School for Orphans. Also donates to Red Cross, UNICEF, and Habitat for Humanity etc.

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Weaknesses Hershey’s Global market share is very low, around 10%. Hershey operates from a centralized, functional structure with no divisional president. Very few multinational distributors. Concern for natural environment needs to be expressed. Cocoa production rates are rising, and even a small price increase at retail level affects consumer buying. Unable to adopt “Global Channels of Distribution”. Poor decision making as company relies on brand loyalty and has reduced advertising expenditure. Lack of experience of International Market.

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Opportunities Potential to expand range of Dark/Sugar free products for health benefits. Use partnership ventures to create chocolate flavoured coffee products. Produce cocoa in new areas other than Africa. They can adopt “Global Channels of Distribution”. Develop environment friendly packaging, recycling industrial waste. China, India and majority of Southeast Asia are untapped markets.

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Threats Consumer demanding healthier substitutes. Steady rise in prices of cocoa, milk and sugar. Main competitors are Mars and Nestle. 25% of Nestle revenues profits come from coffee. Nestle plays its strengths in international markets. Hershey is more focused on just local markets. Mars uses extensive marketing and advertising expenditures to gain market share. Hershey just uses product innovations. Page | 7

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CONCLUSION AND RECOMMENDATIONS  To overcome from the problems 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 ment, 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 ment to promote the product and use Multinational channel to increase the sales.

 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.  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.

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BIBLOGRAPHY

Case: Hershey Foods Corporation – 2005 Fred R. David (Francis Marion University). Hershey Website – www.hersheys.com

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