Hershey Case Fred R. David 11th edition

KARACHI UNIVERSITY BUSINESS SCHOOL

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CLASS: B.S-VIII

GROUP NO. 01

CASE ANALYSIS

HERSHEY FOODS CORPORATION-2005

SUBMITTED TO: DR. ALI ASKARI

HERSHEY FOODS CORPORATION-2005CASE ANALYSIS

.

O BJECTIVE OF THE STUD Y

To Analysis 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.



I NTRODUCTIO N

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.

HERSHEY'S VISION

“Continuing Milton Hershey’s legacy of commitment to consumers, community and children, we

provide high-quality HERSHEY’S products while conducting our business in a socially responsible

and environmentally sustainable manner.”

Milton Hershey believed that, "workers who were treated fairly and who lived in a comfortable,

pleasant environment, would be better workers." He not only built a town for his employees

but also a school for orphans. These values are still alive at Hershey Company today. Hershey's

offers their employees many different developmental and education programs.

HERSHEY’S MISSION STATEMENT

“Our mission is to be focused food company in the 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 confectionary market, be the leader in U.S chocolate-related grocery

products, and to build leadership positions in selected international markets.”

This mission statement is further broken down in five categories to ensure leadership in the

market place:

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 people 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, Sustain a strong results orientation coupled with a prudent

approach to business.

OBJECTIVES

The company is committed to maintain the highest quality standards, honesty, fairness,

integrity and respect. 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



B ACKGROUN D

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.

Hershey has grown from a one-product, one

plant operation in 1894 to a $4.4. Billion

company producing as array of quality

chocolate, non chocolate, and grocery

products. The company markets confectionery

and grocery products in over 60 countries

worldwide, down from 90 countries a few

years ago.

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.



GROWTH

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 as we can see in the Figure .1.

GROWTH GLOBALLY



Premium chocolate represents a fast-growing and dynamic market in many parts of the world,

with global sales having risen by over 18% within the last year.

The global chocolate market is forecast to reach a value of US$12.9bn by 2011. This represents

an increase of more than 85% in value terms compared with present levels, and provides an

indication that the market in many parts of the world has only just started to develop towards

its potential.

P RODUCT S



Hershey’s North America operations produce an extensive line of chocolate and non chocolate

products sold in the form of single bars, bagged goods, and boxed items. These products are

marketed under more than 50 brands names and sold in over 2 million retail outlets in North

America.

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, etc.

P ARTNERSHIP S



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.

I NTERNAL AFFAIR S

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.

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.



HERSHEY’S ORGANIZATIONAL CHART

Hershey does not make public an organization chart, but titles of executives suggest

Hershey does not make public an organization chart, but titles of executives suggest that

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

type of structure would be somewhat unusual for an organization of Hershey’s size, since the

more common design would be decentralized in some manner.

RECOMMENDATIONS


CHAIRMAN OF THE BOARD AND CEO R.H LENNY

VP for strategy

and innovati

on

Senior VP for

Business Planning

& Develop

ment

SeniorVP and General Counsel

Chief Marketi

ng Officer

Chief Customer Officer

Senior VP

&President,

Hershey Internati

onal

Chief Accounti

ng Officer

Chief Informat

ion Officer

Chief People Officer

Chief Financial Officer


Here we are recommending the new organization structure to Hershey Food Corporation. In

this structure, we have included continental vise president, which will help to complete 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. For better utilization of resources

and to accelerate growth in key global markets, the company should implement a new

organizational structure.



S OCIAL RESPONSIBILIT Y

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.

R ESEARCH AND DEVELOPMEN T

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.



F INANC E

Figure No.3, is defining the income of Hershey’s food, the figure is clearly showing the growth

of Income in Hershey’s Food after 2001. Hershey’s net income was $590.9 million in 2004

compared to $457.6 million in 2003.



Now from the Figure No.4, we can easily identify the Nestle is leading with 75 percent of sales

from its competitors because it is the largest food company in the world. Nestle sells products

in over 360 countries on all seven continents.

But if we talk about Hershey Food Corporation, it has the minimum percentage of sales i.e. 3

percent which is very low comparatively other two competitors because it has only limited

branches worldwide, the company markets its products in over 60 countries worldwide and it

generates only 10 percent sales from outside the United states.

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.

RECOMMENDATIONS

To overcome from the 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.

M ARKETIN G

Hershey has a well-established distribution network from its manufacturing plants, to distribution

centers and to warehouses throughout the United States; Canada & México. Hershey has steadily

decreased its advertising expenses. Hershey uses network television, syndicated television, spot

television, magazines and spot radio as its advertising media.



This Figure is indicating the Expense of Hershey Food Corporation and Income also, by the help

of this figure we can identify that in which year Hershey invested more amount on

Advertisement and Other Expenses then we can relate with the Income and find out the

Expenses was worthwhile or not.

As per the figure Hershey decreased its expenses, in the year of 1998, Hershey invested $ 187.5

million on Advertisements and $ 868.7 million in Selling, Marketing and other expenses, total $

1056.2 million in 1998. But in 2004, Hershey invested only $ 137.9 on Advertisements and $

847.5 million in Selling, Marketing and other expenses, total $ 985.4 million in 2002. But on the

other hand Income is increasing. In 1998, Hershey income was 410.2 million and it increased

about 44 percent in 2004. Hershey generates about 20% of annual sales during the 2nd quarter

and 30% during the 4th quarter of each year due to holiday seasons.

RECOMMENDATIONS 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.

Use Multinational channel to increase the sales.



P RODUCTIO N

RECOMMENDATIONS



Increase the production capacity of Chocolate and Candy.

Come up with different types of candies and chocolate because people rarely select the

same candy bar twice in a row; consequently, product variety is crucial to success.

Should increase the production of candies to be the market leader.

Company can come up with variety of Gum product to increase the market share.

G LOBAL ISSUE S

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 used in the production of Hershey Chocolate products is

cocoa beans, 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. Hershey’s second

most important commodity for 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 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 and according to analyst, consumption of chocolate is closely related

to national income. 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.

C OMPETITOR S

There are six major competitors in the $10-billion U.S. confectionery industry who contribute

70% of the market:

Hershey M&M Mars 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 Bar None 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 Ice cream bars. It has world-

class 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,

Fareast 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.

Nestlé’s popular brands are Callier, Crunch, Yes, Smarties and Butterfinger.

C OMPETITIVE PROFILE MATRI X



HERSHEY MARS NESTLECRITICAL SUCCESS FACTORS

WEIGHT RATING SCORE RATING SCORE RATING SCORE

Market share

0.22 2 0.44 3 0.66 4 0.88

Global Expansion

0.22 2 0.44 4 0.88 4 0.88

Advertising 0.08 2 0.16 4 0.32 3 0.24Sales

distribution0.24 1 0.24 3 0.72 4 0.96

R & D 0.08 3 0.24 3 0.24 3 0.24Production

capacity0.08 4 0.32 3 0.24 3 0.24

Innovation 0.08 3 0.24 3 0.24 2 0.16Total 1.00 2.08 3.30 3.60

S WOT ANALYSI S

STRENGTHS

The largest chocolate manufacturer in North America.

Hershey’s main chocolate factory occupies more than 2 million square feet, is

highly automated, and contains much heavy equipment, vats, and containers. It is

the largest chocolate plant in the world.

Huge man power approx. 13,700 full-time and 2,300 part-time employees.

Hershey sales have increased by about 6% in the year 2004.

H e r s h e y i s a n e x e m p l a r y o r g a n i z a t i o n i n t e r m s o f b u s i n e s s e t h i c s a n d

s o c i a l responsibility; a significant part of Hershey Food’s profits go toward

operating the Milton Hershey School for Orphaned Children.

Hershey Foods Corporation has strong relationship with McLane Company, one of the

largest wholesale distributors in United States.

Increasing sales 3 to 4 percent annually.



Marketed under more than 50 brand names.

WEAKNESSES

Hershey’s global market share in the chocolate confectionary industry is lowest among its

competitors.

Hershey has a centralized, functional structure with no divisional presidents.

Lack of experience of International Market.

OPPORTUNITIES

China and India are huge untapped markets. Malaysia, Indonesia, Vietnam, and Thailand

also are untapped, So, Hershey has the opportunity to gain a foothold in those Countries.

There is another opportunity for Hershey to develop environmentally safe products and

packages, reducing industrial waste, recycling, and establishing an environmental audit

process are strategies that could benefit Hershey.

Another opportunity is that Hershey diversifies more into non-chocolate candies in

Southern Europe and Asian markets.

Chocolate industry is not labor intensive and nor has any requirement of skilled labor;

therefore plants can be located at various places in the world.

Innovation in low fat and functional candy category

They can adopt “Global Channels of Distribution”.

THREATS

Coco Beans, the most significant raw material used in the production of Hershey Chocolate

Products suffers an increase in price.

Sugar is second most important commodity for Hershey’s domestic chocolate confectionary

production. Due to import quotas and duties imposed to support the price of sugar, sugar

prices paid by the users of United States are currently substantially higher that prices on the

world sugar market.



Hershey’s strongest competitors i.e. Mars & nestle have a strong international presence &

therefore taking advantage of global marketing uniformity. Hershey is more focused on just

local markets.

Change in Consumer’s life style towards low fat and healthy food.

I NTERNAL FACTOR EVALUATION MATRI X

SERIAL NUMBER

STRENGHTS WEIGHT RATINGS WEIGHTED SCORE

1 Huge market share in U.S, Canada and Mexico 0.1 4 0.4

2 Hershey markets its products in more than 50 brand names

0.1 3 0.3

3 It highly engages in R&D activities and developing new products

0.1 3 0.3

4 Employees a huge man power 0.05 3 0.155 Increasing sales 3 to 4 percent annually 0.05 2 0.16 Deeply following ethics and social responsibility 0.1 3 0.3

7 Huge credit extension 0.1 3 0.3 WEAKNESSES 1 Centralized functional structure with no divisional

president0.1 4 0.4

2 Less than 10 percent sales are generated outside the United States and very few multinational distributors

0.1 4 0.4

3 Hershey remains ineffective in global markets and lack of experience

0.1 4 0.4

4 Mars, Borden and Nestle are big competitors with huge global shares

0.1 4 0.4

1 3.45

E XTERNAL FACTOR EVALUATION MATRI X



SERIAL NUMBER

OPPORTUNITIES WEIGHT RATINGS WEIGHTED SCORE

1 Increased demand from emerging market. 0.12 3 0.36

2 Ethical labor and environmental brand exposure. 0.07 2 0.14

3 New opportunities for marketing in a varied media environment.

0.1 3 0.3

4 Diversity among consumer tastes spurring new product 0.09 3 0.275 Increase in global market space for products 0.12 3 0.36 THREATS 1 Continue small economic growth 0.06 2 0.12

2 Increased price on main ingredients 0.13 4 0.52

3 An increase in health conscious consumer purchasing 0.12 3 0.36

4 Further fragmentation of the industry 0.07 2 0.14

5 Increase in conversion of sugar to ethanol 0.12 3 0.361 2.93

The average total weighted score is above average at 2.93. Hershey is well suited to maintain

profitability, increase sales and expand globally. They are selling a majority of their products at

mass merchant establishments as well as supermarkets. They are number two in America for

confectionery sales, number one for chocolate sales in the US, number two in non-chocolate

sales in the US and number one in the US for breath freshener sales. The only weak spot is in

gum sales controlling only 2.8 percent of the US market share and the continued increase in the

cost of the raw commodities they use to produce their products.

C ONCLUSION AND SUGGESTION S



Hershey Foods Corporation’s global market share in the chocolate confectionery industry is

less than 10 percent, lowest among its competitors. The two major competitors Mars &

Nestle have already entered & occupied many of the Far-Eastern markets, Canadian market,

European market, Mexican market & other growing markets of the world. Mars has a

stronger presence than Hershey in Europe, Asia, Mexico & Japan. Nestle is the largest food

company in the world. Nestle sells products in over 360 countries on all seven continents,

many in third world. Nestle manufactures chocolate in 23 countries, particularly in

Switzerland & Latin America

Countries like Canada, Mexico, Japan, India & China now have sizable middle class

communities with high growth & demand in chocolate confectionery industry. Although

these countries are already tapped by the competitors it is still not too late for Hershey to

enter these markets & capture most of the market share because economy in these

countries are growing rapidly.

By looking at above mentioned statistics of Mars & Nestle, the two major competitors of

Hershey Foods Corporation, it is clear that Hershey Foods Corporation has to make some

very critical decisions to expand globally without wasting even a single minute or else they

will be threatened by their competitors even in the markets they lead.

Here we are recommending the new organization structure to Hershey Food Corporation. In

this structure, we have included continental vise president, which will help to complete

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. For better

utilization of resources and to accelerate growth in key global markets, the company should

implement a new organizational structure.

To increase the sales Hershey should adopt certain strategies like, Hershey should go globally. They have to

take experience of outside market (untapped market). As global expansion & international

market’s experience is an important concern for Hershey; therefore they should acquire



firms in foreign countries & also introduce different product lines like entering into non-

chocolate candies category & built manufacturing plants in untapped markets of Asia or

Europe etc before the competitors take an initiative there, in this way Hershey will also gain

more market share.

Hershey should increase its marketing expenses internationally, it should invest globally in

untapped markets therefore increasing these expenses, developing a global distribution

system and diversification internationally in its products, and also it should increase its R&D

expenditure. All these will result in more expenditure and less income but for some time

and in long term it will help company to hold its footings strongly in international market.

Also it should rely less on credit increase its good will and operational assets performance.

R ESULT OF THE STUD Y

This study used Hershey Food Corporation as a case to demonstrate how to formulate global

product strategy to penetrate growing international markets.

The results from the SWOT analysis indicate that Hershey Foods Corporation has great

strengths and opportunities but also has significant weaknesses and faces potential threats.

This study focused on the formulation of global product strategies for Hershey’s future

expansion.


Documents

Hershey Case Fred R. David 11th edition