MBC  618  Hershey  Homework  Assignment  –  Shuai  Wang  

1.  Conduct  a  STEEP  analysis  of  Hershey  using  just  the  10-­‐k  information.    You  may  do  

this  in  bullet  point  format,  or  table,  or  prose.  

STEEP  Analysis  is  the  scanning  of  Sociocultural,  Technological,  Economic,  Ecological  and  

Political-­‐legal  environmental  forces.    

 

Social  –  cultural  

-­‐ Lifestyle  Changes:  Hershey  Sales  are  typically  higher  during  the  3rd  and  4th  quarters  of  the  year,  representing  seasonal  and  holiday-­‐related  sales  patterns.  (10-­‐k  p4)  

-­‐ Customer  activism:  Hershey’s  customers  are  mainly  wholesale  distributors,  B2B  businesses.  McLane  Company,  Inc.  is  the  primary  distributor  to  Wal-­‐Mart  stores,  Inc.,  amounted  22.2%  of  Hershey’s  total  net  sales  in  2012.  (10-­‐k  p4)  

-­‐ Pension  plans:  Hershey  sponsors  a  number  of  defined  benefit  pension  plans.  In  addition  to  the  increase  in  net  periodic  pension  benefit  cost  in  2012,  the  level  of  lump  sum  withdrawals  during  2012  resulted  in  a  pension  settlement  loss  of  $19.7  million.    (10-­‐k  p41)  

-­‐ Consumers’  health  concerns  including  obesity  and  the  consumption  of  certain  ingredients  could  cause  a  decline  for  demand.  (10-­‐k  p10)  

 

Technological  

-­‐ Engage  a  variety  of  R&D  activities  in  a  number  of  countries,  including  the  Unites  States,  Mexico,  Brazil,  India  and  China.    (10-­‐k  p7)  

-­‐ Productivity  improvements  through  automation:    Hershey  empowers  the  World  Cocoa  Foundation,  International  Cocoa  Initiative,  and  CocoaLink,  by  a  first-­‐of-­‐its  kind  approach  that  uses  mobile  technology  to  deliver  practical  information  on  agricultural  and  social  programs  to  rural  cocoa  farmers.  (10-­‐k  p8)  

-­‐ Infrastructure  and  Computer  hacking  activity:  Invest  in  industry  standard  security  technology  to  protect  the  Company’s  data  and  business  process  against  risk  of  data  security  breach  and  cyber  attack.    

o Measure  data  security  effectiveness    o Maintain  routinely  test  backup  and  disaster  recovery  (10-­‐k  p12)  

 

Economic  

-­‐ Inflation:  Heavily  relies  on  Commodities  for  Production:  Cocoa,  Sugar  and  Fluid  diary  products,  etc.    

o 2012  Cocoa  prices  moderated  in  2012  after  trading  at  37-­‐year  highs  in  early  2011.  

o Hershey  tries  to  maintain  product  prices  not  fluctuated  much  because  of  their  forward  purchasing  and  hedging  practices.    “Except  for  the  dairy  futures  markets  are  not  as  developed  as  many  of  the  other  commodities  futures  markets  and,  therefore,  generally  it  is  difficult  to  hedge  our  costs  for  dairy  products  by  entering  into  futures  contracts.”  (10-­‐k  p6)    

-­‐ Global  market  competition:  Hershey  continues  expanding  globally,  especially  in  

Asia.    

o China  is  top  priority,  internationally.  By  end  of  2013,  agreement  to  acquire  80%  stake  of  iconic  Chinese  confectionery  firm  Shanghai  Golden  Monkey  Food  Company,  remaining  20%  in  2015.    

o Launches  Jolly  Rancher  brand  in  India  (first  country  out  of  North  America)  and  tailored  flavors  for  Indian  customers.    

o Biggest  single  investment  ever  in  Asia  with  $250  Million  Malaysia  plant.  (Source  from  www.confectionerynews.com/Big-­‐brands/hershey  )  

 Ecological  

-­‐ Due  to  Hershey’s  business  nature,  the  adverse  weather  (drought,  flood)  and  crop  disease  will  cause  a  decrease  on  the  harvest  amount  so  the  price  of  raw  materials  rises.  Hershey  is  attempting  to  minimize  the  environmental  impacts  of  its  operations.    

o The  historical  drought  in  the  US  caused  dairy  prices  to  rise  starting  in  July,  2012.    

o Ideal  weather  in  the  North  American  sugar-­‐growing  regions  caused  prices  to  trade  lower  in  the  fall  of  2012.  (10-­‐k  p5)      

-­‐ In  2012,  Hershey  is  one  of  only  seven  companies  in  the  Food  and  Beverage  super-­‐sector  that  were  recognized  in  the  DJSI  (Dow  Jones  Sustainability  Index)    

o Over  2008  baseline,  Hershey  decreased  waste  generation  by  23%,  water  usage  by  12%,  greenhouse  gas  emission  by  15%.  

o In  2012,  improved  company  wide  recycling  rate  to  80%,  Carbon  Disclosure  Score  by  20%  and  moved  up  172  spots  in  the  Newsweek  Green  Rankings.  (10-­‐k  p8)  

 

Political  

-­‐ Government  regulators  of  alleged  pricing  practices  o Food  Conservation  &  Energy  Act  of  2008  sets  price  support  level  for  

sugar,  corn,  peanuts  and  diary  products.    o Restrictions  on  Sugar  importations:  2012  sugar  supplies  are  negatively  

impacted.  (10-­‐k  p5)  -­‐ Political  unrest  in  raw  material  production  countries:  West  Africa  accounts  for  

70%  of  the  world’s  supply  of  cocoa  beans.  (10-­‐k  p5)  -­‐ Food  quality  and  safety  regulation:  Hershey’s  Product  Excellence  Program  

provides  an  effective  product  quality  and  safety  program  against  all  regulations  by  various  government  agencies.  (10-­‐k  p7)  

-­‐ Foreign  Trade  regulations:  unsolved  legal  proceedings  of  civil  lawsuits  o The  violations  of  Canadian  Competition  Act  in  the  sale  and  supply  of  

chocolate  products  sold  in  Canada.  (10-­‐k  p14)  -­‐ Tax  Laws:  Full  paid  in  of  $222,975  tax  penalty  in  2012  due  to  an  understatement  

of  a  reportable  transaction.  (10-­‐k  p14)    

2.  Based  solely  on  the  facts  provided  in  your  analysis,  describe  3  opportunities  and  3  

threats  that  Hershey  faces  from  the  external  environment.  

3  Threats:    

-­‐ Vulnerable  supply  chain  of  raw  materials  due  to  dependency  of  Environmental  

Factors:  adverse  weather,  crop  disease,  etc.  

-­‐ Decline  of  market  demand  due  to  Consumers’  Health  concerns  to  obesity  and  

consumption  of  certain  ingredients.  

-­‐ Intensely  competitive  confectionery  industry  and  global  competitors  may  

threat  Hershey’s  business.    

 

3  Opportunities:    

-­‐ Ensure  supply  of  raw  materials  and  Improve  productivity  through  technology  

innovation,  e.g  advanced  planting  and  farming  technics,  pesticides  etc.    

-­‐ Innovation  of  supplementary  nutritious  products,  e.g  low  calories  candy  bars  

or  fat  free  chocolate;  including  maintaining  a  strong  supply  of  these  new  

products.    

-­‐ Continuing  global  expansion  and  addressing  Asian  market  as  top  priority.  

 

3.  Conduct  an  industry  analysis  of  Hershey  (considering  Hershey  as  the  incumbent  

firm)  and  conclude  whether  or  not  you  think  Hershey  is  competing  in  an  attractive  

industry.      

Industry  Analysis  of  Hershey  Company  shall  includes  the  following  6  aspects:    

1)  the  bargaining  power  of  buyers  (who  are  they),    

Who  are  they:  Hershey’s  customers  are  mainly  the  wholesale  distributors,  chain  grocery  

stores,  mass  merchandisers,  chain  drug  stores,  vending  companies,  wholesale  clubs,  

convenience  stores,  dollar  stores,  concessionaries  and  department  stores.  These  

customers  then  resell  products  to  end-­‐customers  in  retail  outlets  worldwide.    (10-­‐k  p4)  

The  bargaining  power  of  buyers  could  be  high,  since  Hershey,  as  a  manufacturer,  is  

facing  wholesalers  mainly,  then  retailers  and  end  customers.  The  alliance  formed  by  

wholesalers  and  hypermarkets  will  put  pressure  on  the  Manufacture’s  margins  by  an  

aggressive  price-­‐cutting  strategy.  McLane  Company  accounts  for  the  22.2%  of  the  total  

net  sales  of  Hershey  in  2012.  The  distribution  channel  is  crucial  and  the  wholesalers  not  

Hershey  dominate  it.  Hershey  has  relatively  low  control  to  the  price  to  market.  To  meet  

the  end-­‐customers  directly  is  not  a  wise  business  recommendation,  because  customers’  

shopping  behavior  is  not  easily  changed  from  Supermarket,  drug  stores  to  Hershey  

owned  retail  stores.  The  Eight  Hershey  Chocolate  World  Factory  stores  worldwide  serve  

more  of  a  branding  function.    

   2)  the  bargaining  power  of  suppliers  (who  are  they),    

Who  are  they:  Hershey’s  most  significant  raw  materials  requirements  include  cocoa  

products,  sugar,  dairy  products,  peanuts  and  almonds.  Therefore,  the  suppliers  of  the  

raw  materials  are  mostly  in  the  developing  countries,  which  are  highly  depended  on  the  

export  of  those  materials.    

The  bargain  power  of  these  suppliers  is  relatively  low.  On  the  one  hand,  the  supplier  

industry  is  not  highly  dominated  by  a  few  organizations  or  companies.  For  most  of  the  

time,  the  exportations  of  the  commodities  are  the  backbones  of  these  developing  

countries.  So  the  possibility  of  monopoly  is  low.  On  the  other,  even  the  supplying  

countries  have  no  absolute  say  to  the  yield  of  these  commodities.  It’s  much  up  to  the  

environmental  factors  such  as  weather  or  political.  That’s  why  they  don’t  have  much  

bargaining  power.  

 

3)  the  threat  of  new  entrants,    

The  analysis  of  the  new  entrants  threat  will  be  two  parts:  a.  Market  Maturity;    

North  American  wide  and  European  the  confectionery  market  is  fully  matured  market;  

however  globally  speaking  there’re  still  huge  opportunities  in  emerging  markets  like  

China,  India,  Brazil  and  even  Australia.  Admittedly,  local  adaptation  to  these  new  

markets  would  be  another  challenge  for  the  new  entrants.    

b.  Entry  Threshold.  In  general,  the  entry  threshold  of  the  confectionery  is  high  

considering  the  requirement  of  raw  materials  for  production  as  well  as  an  established  

distribution  channel.  So  the  any  new  entrants  shall  build  up  their  own  supply  chain  

network  as  well  as  prepare  for  the  declined  market  demand  in  certain  matured  markets.    

(Source:  Global  Packaged  Confectionery  Trends  2011)  

4)  the  threat  of  substitute  products  (what  are  they),  

The  threat  is  low.  Possible  substitutes  could  be  artificial  or  natural  sweeter  and  additives,  

which  involved  highly  with  R&D  resources  and  man-­‐hours.  The  cost  to  switch  to  these  

substitutes  is  high;  much  more  costly  than  the  raw  materials  such  as  cocoa  or  sugarcane  

supplied  by  developing  countries.  

 

5)  the  intensity  of  rivalry,    

The  global  competition  is  fierce,  according  to  the  10-­‐k  report  information.  Some  of  the  

Hershey  competitors  are  much  larger  firms  that  have  greater  resources  and  more  

substantial  international  operations.    

 

Key  Competitors:  Mars,  Nestlé,  Mondelez  International,  Ferrero  are  all  strong  

competitors  worldwide.      

 

Presently,  Hershey  is  the  fifth  biggest  manufacturer  Worldwide.  Mars,  Nestlé,  and  

Cadbury  have  the  widest  exposure  in  key  worldwide  markets.  Ferrero  is  renowned  in  

Europe  and  now  is  aggressively  entering  the  developing  markets  to  leverage  substantial  

profits  from  the  rapid  rates  of  growth  experienced  by  these  economies.  Hershey  from  

this  table  is  falling  behind  in  global  expansion.  No  factories  Worldwide.  However  

learning  from  the  most  recent  industry  news,  Hershey  is  investing  $250  million  in  

Malaysia  for  a  new  factory,  in  order  to  access  25  markets  across  Asia.    

The Top 5 Global Confectionery Companies

Confectionary Company Net Sales 2011 Number of Employees Factories Worldwide

Kraft Foods Co. (Illinois USA)

$19.96 billion 98,000 1,683

Mars Inc. (Virginia USA)

$16.20 billion 65,000 1,353

Nestlé SA (Vevey, Switzerland)

$12.80 billion 283,000 4,563

Ferrero Group (Piedmont, Italy)

$9.61 billion 21,600 18

The Top 5 Global Confectionery Companies

Confectionary Company Net Sales 2011 Number of Employees Factories Worldwide

Hershey Foods Corp (Pennsylvania, USA)

$6.11 billion 14,400 N/A

(Sources: Candy Industry magazine January 2012, Top 5 research http://www.companiesandmarkets.com/MarketInsight/Food-and-Drink/Global-Confectionery-Market/NI8061 )

 

6)  and  the  availability  of  complementary  products.  

High.  Hershey  manufactures  and  sells  a  variety  of  confectionery  products.  The  

complementary  products  go  along  with  Hershey  candies  could  be  coffee,  diary  products  

and  bakeries,  which  are  daily  life  essentials.  The  supply  of  these  products  is  normally  

sufficient,  so  it’s  not  likely  that  Hershey’s  business  will  be  affected  directly.    

 

 4.  Based  solely  on  the  3  opportunities  and  3  threats  described  in  answer  2,  as  well  as  

your  industry  analysis  in  answer  3,  make  recommendations  for  Hershey  regarding  the  

products,  markets,  and  industries  in  which  is  should  consider  competing.  

Recommendations:    

-­‐ R&D  priorities:    

o Increase  funding  of  technology  R&D  focusing  on  the  agricultural  technics  

to  improve  the  yield  of  raw  materials  in  developing  countries    

o Invest  to  develop  healthy,  nutritious  new  products  to  cater  potential  new  

market  demand.    

-­‐ Asia  priorities:    

o Increasing  investment  in  Asia,  in  both  manufacturing/plant  and  

sales/marketing.    

o Achieve  market  share  by  strategically  local  acquisition.  

o Develop  new  products  with  locally  adapted  flavors  and  maintain  strong  

pipeline.