What could be more innocuous than making candy? You would think that the Hershey Company (NYSE: HSY), with an almost mythic simplicity, its wonderfully personable origins, and an equally redoubtable brand of chocolate, could be an unassailable business. The late Milton Hershey, who founded the company over 100 years ago and built “The Sweetest Place on Earth” – Hershey, Pennsylvania (the all-in-one company town, resort and fantasy place for chocoholics) – might be troubled at how making and selling chocolate confections has become such a troublesome business, with the sweetness mostly gone.
The largest chocolate maker in the U.S., maker of Hershey Bars, Reese’s Peanut Butter Cup, Hershey Kisses and much more, has fallen on difficult times. In 2007, its profits slipped to less than half of the previous year, as its net income was down to $214 million or 93 cents per share, off from its 2006 numbers of $5.59 million net income with EPS at $2.34. Sales in 2007 were $4.9 B, up marginally by only $2.5 million.
The company’s response was to promise a turnaround and let CEO Richard Lenny go, naming David West to take over. The Hershey Foundation, a trust that controls 30% of the stock and most of the voting rights, has been regarded as meddlesome and out of touch with the current business realities, not just by investment observers, but by many Hershey shareholders as well. How could such a wonderful, seemingly foolproof business get this way?
Hershey’s troubles appear to lie at the doorstep of its overly-narrow focus. It is candy and chocolates, and that’s it. Hershey’s competitors, such as Nestle SA (NQB: NSRGY) – the Swiss company which is now the largest food company in the world – rejected narrow focus and instead went for a bold strategy of widely expanding its food and beverage lines. Nestle now has a vast reach deep into many food categories, which is far from the solely candy company that it once was. Privately owned Mars is also a formidable competitor. Kraft (NYSE: KFT), with its line of sweet, chocolate foods like Oreos, is another diversified food company. England’s Cadbury Schweppes (NYSE: CSG) has extensive candies yet is also heavily into the beverage business. Other candy and confection makers are often smaller or premium, high-end companies, and they, too, are taking part of Hershey’s market share away.
Its critics maintain Hershey has only stamped its brand on candies that aren’t really new or unique or exciting, and simply expected these products to sell rather than concentrating on new product development. Even with a $6.5 billion market cap and a renowned brand name in an ever-growing competitive candy-selling climate, more of a responsive strategy is needed. Add to this the fact that the raw material, cacao (from which chocolate is made) has soared in price along with dairy price increases for the sweet milk chocolate makers require, and you have yet another difficulty thrown into the business recipe. Accusations of price fixing also loom. The stock, which has traded between $33 and $56 a share, had fallen to near a five-year low, recently traded in the $37 area.
As early as a year ago, even prior to the economic slowdown, Hershey was experiencing difficulty in a business that should be much more recessionary resistant. 2008 is projected to deliver more of the same poor results, with the promised turnaround not on the horizon. Recently, consensus earnings estimates for 2008 were lowered from approximately $1.85 a share to anywhere in the $1.35-$1.50 range, a downward trend that’s a concern to investors.
Prior to the changeover of CEOs, there had been talk—as there has been for years—that Hershey and Cadbury Schweppes, who have long done some joint ventures, were going to merge, after which Cadbury would sell off its beverage business. This would have created a giant candy conglomerate that would have put Hershey-Cadbury as the dominant–sized player, the largest in the world. Still, the Hershey board seemed to balk at this move – one felt necessary by the investment community to keep Hershey’s prospects growing. More forward-thinking management and some aggressive re-working of its marketing is needed. Of more concern is that Wall Street does not have much confidence in the Hershey trust or board of directors, and without having seen much of anything in the way of turnaround evidence, they aren’t expecting to see anything positive soon.
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