The Hershey Company, Inc. 2018 Company Analysis
Executive Summary
The Hershey Company has been a respected brand for decades, now going on centuries. Their products bring with them the nostalgia of childhood memories and holidays spent with families. The company itself was built on a purpose bigger than just that of business or economic means encompassing compassion and giving back in its core values. Hershey is experiencing less than favorable revenue with average growth of about 1.3% since 2013. While the classic Hershey products will forever hold spots in the hearts of consumers, times are changing and to stay relevant Hershey needs to evolve to meet the demands of today’s consumers. After considering multiple alternatives, it has been determined that the best solution for Hershey Company is to develop higher quality products that meet the various health and diet issues that consumers face today. This would include the use of better-for-you ingredients in current product offerings as well as the development of new and healthier product lines. Incorporating higher quality ingredients and products into their offerings is estimated to increase revenue and brand reputation for Hershey. As a company built on the concept of doing good for their consumers, their employees, and the world, improving their ingredients and products out of concern for health of their consumers will lead to increased consumer respect and satisfaction with the brand, ultimately increasing sales, revenue, and annual revenue growth for the company.
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Situation Analysis
Background Information
Passion for Goodness. The Hershey Company’s mission statement is that simple. Founded is 1894 by Milton Hershey, this mission is based on the values of affordable chocolate, a fair workplace, and a dedication to helping kids in need (Hershey, n.d.). These values were important to Milton Hershey himself and are what he built his company around. Today, their vision statement encompasses the desire to share these values with the world by “Spreading goodness in all the right directions.” (Hershey, n.d.). To accomplish this goal, Hershey has built a vision for the future that includes initiatives for innovative, indulgent, and wholesome snacking, leaving the world a better place, and providing kids in need with basic nutrition and education. Hershey Company has always been innovative and ahead of its time, being founded on the values that most companies today incorporate into their business as part of their corporate responsibility programs.
Hershey is one of the most well-known and respected companies in the candy industry, if not the entire food industry. As such, they are consistently outperforming their competitors and control large market shares in most of the industries in which they operate. However, over the last few years, their revenue has struggled to meet the growth levels exhibited in the past. From 2012 to 2013, Hershey’s revenue increased by 7.6% and from 2013 to 2014, their revenue increased by 3.8% (Hershey, 2017). However, between 2014 and 2015 Hershey experienced a decrease in revenue and has seen annual growth of 1% or less since 2015. This results in an average of only 1.28% increase in revenue since 2013, from $7.15 billion to $7.52 billion (Hershey, 2018).
Regarding their international sales, Hershey has also seen a 3% decrease in sales revenue since 2015. The Hershey Company is struggling with a low liquidity position as well. Hershey’s debt to equity ratio is 4.96, or 496%, and their debt to assets ratio is .84 or 84%. These financial ratios are both quite high for large corporations and indicate a high amount of financing which create higher levels of risk for the company.
Competitive Overview
SWOT Analysis:
Hershey Company’s main weaknesses are the financial struggles they currently face. A third weakness, however, is their relatively small range of product offerings compared to that of their main competitors. Hershey has many strengths as well, though, including their brand reputation and history in the chocolate industry. They also have an extensive portfolio of brands, according to their 2017 10-K, which consists of more than 80 names including Reese’s, Kit Kat, Breath Savers, York, Jolly Rancher, and Twizzlers (Hershey, 2018). Their large market shares also give them a competitive advantage. They hold the largest share in the Chocolate Production, Candy Production, and Confectionery Wholesaling industries (Amir, 2018). Hershey’s commitment to corporate responsibility is another strength for the company. Their commitment is demonstrated through their mission and vision statement and includes initiatives regarding sustainable sourcing, international community development, combating deforestation, and providing education and nutrition to kids in need locally and abroad (Hershey, n.d.). These types of business practices are critical to consumers today and can have a high impact on which brands a customer chooses to buy. The programs Hershey has as part of their “Shared Goodness” purpose give them a competitive advantage over brands that haven’t expanded their CSR policies yet or that are too small to make the same impact that Hershey makes worldwide.
Threats and opportunities are the forces outside of a company’s control that can affect their business. The current threats facing Hershey include the evolving tastes and increased health awareness of consumers, market penetration by private and premium labels, and a possible shortage of cocoa beans (Global Data, 2017). Consumers today are more focused on their health and are more aware of what is in the food they eat. There is a higher demand for healthier alternatives including all-natural ingredients, organic products, and locally grown goods as well as goods made sustainably and with ethical practices. While Hershey does have CSR programs in place to address many issues we face including sustainability, they are not as advanced in their actual product offerings. If the company does not adapt to this demand with better quality products, they could lose customers to new brands looking to fill this niche or established brands who are addressing these concerns. A second threat is the penetration of these new brands including private and premium labels. Private label brands offer products at a lower price, giving them a cost advantage over Hershey, and premium brands are looking to fill the niche of demand for high-quality chocolate products. Lastly, a SWOT analysis by Global Markets Direct notes that a cocoa bean shortage could threaten chocolate production if it is not addressed (2017). The possible shortage is primarily due to weather conditions in the regions and to the increased demand for dark chocolate which requires more cacao beans than milk chocolate.
While the increased health awareness threatens the Hershey brands very existence, the new product demands present an opportunity for Hershey to expand its product offerings and fill niches. These trends have shifted consumer tastes as shown by increased demand for dark chocolate products. Hershey has already made some recent acquisitions that provide expansion into new product dimensions and bring more opportunity to provide a more extensive variety of products. Globalization is also an opportunity for Hershey to grow their international business, which is suffering according to their 2017 sales (Hershey, 2018). With the world becoming more and more connected, the potential customer base is only growing.
Competitor Performance
Hershey is one of the major players in the chocolate industry. The other players that hold significant market share are Mars, Inc., Nestle S.A., and Lindt & Sprungli. Another competitor that Hershey faces in the snack industry is Frito-Lay. Mars, Inc. is a private company making it difficult to locate accurate financial information but, according to Gale Business Insights, their total revenue was $35 billion in 2017 and $33 billion in 2016 (Global Data, 2017). Their revenue in 2011 was $27.857 billion, but the information for 2012-2015 was missing. According to these numbers, they had a 23.5% increase in sales from 2011 to 2016 and a 6% increase in sales from 2016 to 2017. Nestle S.A., headquartered in Switzerland, is one of the largest food companies in the world (Nestle, n.d.). They generated over $92 billion in revenue last year and almost $88 billion in 2016. Between 2009 and 2017, however, their revenue has fluctuated with a high of $138 billion in 2009 and low of $88 billion seen in 2016 (Global Data, 2017). The US unit of Nestle was recently acquired by another company, Ferrero, in April 2018. Lindt & Sprungli International AG has smaller levels of revenue at $3.8 billion in 2016 but have seen increases of at least 4% since 2011 (Global Data, 2017).
Industry Performance
Operators in the chocolate confectionary industry are those that process cacao beans into chocolate and chocolate-based candy. The chocolate industry overall has continued to see growth year after year. Since 2012, industry sales have increased by 15% with a 3% increase in 2017 alone. While this is similar to the modest growth that Hershey has seen, it suggests that consumers continue to allow for indulgences even with their increased health awareness (Owen, 2018). This desire for healthier lifestyles and the volatility of cocoa prices have limited the industry growth while improved disposable incomes and increased demand for premium chocolate has benefited the industry (Amir, 2018). The segments in this industry are for box/bag/bars less than 3.5 oz. and greater than 3.5 oz., seasonal, gift box, snack size, and sugar-free. The box/bag/bars segments are the highest performing segments and seasonal goods is the fastest growing segment in this industry (Owen, 2018).
Problem Analysis & Discussion
Consumers are the ultimate power in deciding which brands succeed and which die. It is therefore of the utmost importance for a company to follow consumer trends and behaviors and to evolve accordingly. The trend most affecting consumer behavior related to chocolate purchases is that of increased health conscientiousness. This has affected industry growth and changed consumer tastes. While they are still buying chocolate, there has been an increased demand for dark chocolate. This is demonstrated by an increased market share in 2017 of smaller companies outside of the top three which offer premium quality chocolate products. While the top three companies either lost market share or stayed put in the bars/bags/boxes segment, the smaller companies collectively gained market share with a 1.8% increase in sales (Owen, 2018). The consumer report on Mintel also notes that chocolate purchases are highly impulse with 42% of consumers stating that chocolate is an impulse buy for them.
Hershey’s main competitors are very large companies which may or may not be considered a competitive advantage. In this case, however, Mars and Nestle bring in revenue much larger than that of Hershey. This could be due to their size and reach as international companies with products in several different industries. On of confectionery goods, Mars also sells products in food, drink, supplement, and pet care categories, and has several higher quality chocolate brands including their Goodness Knows and Ethel M. products (Mars, n.d.). Nestle is the largest food company in the world with products in confectionery goods, baby food, bottled water, coffee, food, dairy, drinks, health care, and pet care (Nestle, n.d.). The fact Hershey is even competing with companies of this scale is quite impressive and Hershey has already started to expand their product offerings to better compete with this food giants.
Due to these changes in consumer tastes and the competitive landscape in which they operate, the Hershey Company has had relatively flat revenue since 2013 as compared to that of its main competitors and the industry overall.
Solutions, Evaluation, & Recommendation
Solutions
Given the previous information and discussions, there are several possible solutions that Hershey could use to increase their annual revenue growth. The first solution is expansion. This would include the development of new product lines and expansion into new food categories. Since Hershey’s main competitors are large international companies with products in several different industries, this solution would bring Hershey to the same playing field as them. If they wish to see revenue at the levels of their biggest competitors, this solution would meet that need.
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The second solution for the Hershey Company is to increase the quality of their products. This would involve the use of higher quality ingredients and the development of healthier alternatives. Given the increasing health awareness of consumers, this solution aims to meet those needs and to evolve with the changing tastes of customers. This is important if Hershey wants to stay current and relevant.
The third option for Hershey is to purchase better product locations in stores. Since chocolate purchases are described as impulse buys, the location of products in stores is crucial to sales. Spots near check out lines or more product staging could help to increase sales for Hershey.
Evaluation & Recommendation
To evaluate each of these solutions, a weighted criteria decision matrix will be used to determine the best recommendation. The decision criteria used for this model will include research costs, product costs, expansion costs, time, and benefits to consumers. Each of these criteria will receive a weight based on the perceived importance in the decision. First, research costs will have a weight of 0.10. Research costs are inevitable in business and when considering new or multiple solutions to a problem. They are short-term costs in this case and are already a cost of doing business, therefore should not impact the decision too much. Product costs will be weighted at 0.20. These costs are also inevitable in business when selling goods but are long-term costs that the company must pay to produce their products repeatedly. Increases due to expansions or higher prices of parts (or ingredients) could impact the business and should have a higher weight in the decision-making process. Expansion costs will also be weighted at 0.20. These costs could be substantial and could have a negative impact on the business if the solution fails. Therefore, expansion costs should have a higher level of weight. Time will be weighted at 0.10. Solutions will always take some time to design and implement, so this criterion should not have a substantial effect on the decision. It is important to consider the time it will take to implement a decision and to see a result, in any case. The last criteria, benefits to customers, will be weighted at 0.30. Consumers are what keep a business going so making them happy should be a company’s priority.
The results from the matrix give the expansion solution the lowest total rating and the increased quality solution the highest total rating. Product location was a close second.
Given these results, the solution recommended for the Hershey Company is to revamp their current products and ingredients and to develop healthy or healthier products. This solution will meet the changing demands in the market to increase revenue for Hershey.
Cost/Benefit Analysis
The tangible costs associated with the recommendation include the research costs of developing healthier products or products that use better ingredients. This could also include the research involved in finding suppliers or sourcing for ingredients. Product and expansion costs would also be considered tangible costs. Product costs include any cost directly related to the product from start to finish including the price of all raw materials (ingredients or packaging) used in producing the goods and the costs of marketing and selling the goods. Here, the product costs could increase significantly if the higher quality ingredients required cost more than the ones currently being used. Marketing costs would also be high at first to promote the new healthier products and better ingredients in current products. However, marketing resources could be reallocated from some of the not-so-healthy products they are currently producing and promoting instead of increasing the overall amount spent on marketing. Expansion costs would include any costs related to the expansion of facilities and staff needed to implement the solution. Here, the solution does not necessarily require any expansion unless Hershey determines it is necessary to expand their operations instead of reallocating. One example would be if Hershey decided to produce healthier products that meet the needs of restrictive diets, like vegan or gluten. In this case, separate manufacturing plants would need to be built, acquired, or rented to accommodate these restrictions (if they do not already use or own plants that meet these needs).
The tangible benefits related to this solution would primarily include any increase in sales and revenue for Hershey. These would have to be estimated at first using pricing for the new products and sales estimates. Along with tangible costs and benefits, intangible costs and benefits must also be evaluated. Intangible costs for this recommendation could include a decrease in productivity during any reallocating of resources or expansion that takes place. This could also include the loss of customers who, for one reason or another, do not support the healthier alternatives being produced as well as the increase in competition Hershey may face in this niche. Intangible benefits resulting from the solution would primarily be those to the consumers. These would include the increased health benefits and decreased exposure to unhealthy ingredients that consumers would receive. There could also be increased consumer satisfaction with a well-known brand rising to meet the demand for better ingredients and healthier alternatives. Lastly, Hershey’s corporate and brand reputation could increase due to their commitment to providing consumers with healthier, less toxic treats.
Implementation & Success Metrics
After implementation, Hershey will need to use a set of metrics to measure the success of this solution in meeting its goal of increased revenue growth. Sales of the new products and resulting profit will, of course, be used to gauge the success of this goal. Another financial metric Hershey could use is the amount they can decrease their debt and equity ratios from the associated revenue. The number of customers gained or lost should be a metric used as well, along with customer satisfaction ratings. One last measure Hershey could use in tracking the success of their new products is the percentage of product defects or recalls compared to those previously. With these metrics Hershey will be able to measure the success of their solution to increase revenue levels by meeting the current demands of their consumers.
Works Cited
- Amir, A. (2018, July). Chocolate production in the US. IBISWorld. Available from http://clients1.ibisworld.com.proxy.lib.pdx.edu/reports/us/industry/default.aspx?entid=230
- Global Data. (2017, November 1). The Hershey Co – Financial and strategic analysis review. Business Insights: Global. Available from http://bi.galegroup.com.proxy.lib.pdx.edu/global/showpdf?pdfdocid=304282_GDCPG33563FSA
- Hershey Company, The. (2017). Annual report.
- Hershey Company, The. (2018). Annual report. Available from https://www.thehersheycompany.com/content/dam/corporate-us/documents/annual-reports/2018_The_Hershey_Company_10_K.pdf
- Hershey Company, The. (n.d.). Shared goodness. Available from https://www.thehersheycompany.com/en_us/shared-goodness.html
- Mars, Inc. (n.d.) Our brands. Available from https://www.mars.com/global/brands
- Owen, John. (2018, April). Chocolate confectionary – US – April 2018. Mintel. Available from http://academic.mintel.com.proxy.lib.pdx.edu/display/860367/
- Nestle. (n.d.). About Us. Available from https://www.nestle.com/aboutus
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