Hershey Case Fred R. David 11th edition

KARACHI UNIVERSITY BUSINESS SCHOOL

GROUP MEMBERS

Anum Khan

Roll No 05

Ayesha Iqbal

Roll No 10

Rahila Altaf

Roll No 39

Owais Naseem

Roll No 41

Sabra Shaikh

Roll No 42

CLASS: B.S-VIII

GROUP NO. 01

CASE ANALYSIS HERSHEY FOODS CORPORATION-2005

SUBMITTED TO:

DR. ALI ASKARI

HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS

.

OBJECTIVE OF THE STUDY  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.



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.

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. KARACHI UNIVERSITY BUSINESS SCHOOL

HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS  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



BACKGROUND 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.



PRODUCTS 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.



PARTNERSHIPS 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.

INTERNAL AFFAIRS 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 FOODS CORPORATION-2005 CASE ANALYSIS 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

CHAIRMAN OF THE BOARD AND CEO R.H LENNY

VP for strategy and innovation

Senior VP for Business Planning & Development

Senior VP and General Counsel

Chief Marketing Officer

Chief Customer Officer

Senior VP &President, Hershey International

Chief Accounti ng Officer

Chief Informati on Officer

Chief People Officer

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.


Chief Financial Officer


RECOMMENDATIONS 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.



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.

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.



FINANCE

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.


HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS  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.

MARKETING 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 2 nd 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.



PRODUCTION



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.

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. 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 KARACHI UNIVERSITY BUSINESS SCHOOL

HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS 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.

COMPETITORS 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.


HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS 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 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, 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.



COMPETITIVE PROFILE MATRIX HERSHEY CRITICAL SUCCESS FACTORS Market share Global Expansion Advertising Sales distribution R&D Production capacity Innovation Total

MARS

NESTLE

WEIGHT

RATING

SCORE

RATING

SCORE

RATING

SCORE

0.22

2

0.44

3

0.66

4

0.88

0.22

2

0.44

4

0.88

4

0.88

0.08 0.24

2 1

0.16 0.24

4 3

0.32 0.72

3 4

0.24 0.96

0.08 0.08

3 4

0.24 0.32

3 3

0.24 0.24

3 3

0.24 0.24

0.08 1.00

3

0.24 2.08

3

0.24 3.30

2

0.16 3.60

SWOT ANALYSIS 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.  Hershey is an exemplary organization in terms of business ethics a nd 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-2005 CASE ANALYSIS  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 KARACHI UNIVERSITY BUSINESS SCHOOL

HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS 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.

INTERNAL FACTOR EVALUATION MATRIX SERIAL NUMBER 1 2 3 4 5 6 7 1 2 3 4

STRENGHTS

WEIGHT

RATINGS

Huge market share in U.S, Canada and Mexico

0.1

4

WEIGHTED SCORE 0.4

Hershey markets its products in more than 50 brand names It highly engages in R&D activities and developing new products Employees a huge man power Increasing sales 3 to 4 percent annually Deeply following ethics and social responsibility

0.1

3

0.3

0.1

3

0.3

0.05 0.05 0.1

3 2 3

0.15 0.1 0.3

Huge credit extension WEAKNESSES Centralized functional structure with no divisional president Less than 10 percent sales are generated outside the United States and very few multinational distributors Hershey remains ineffective in global markets and lack of experience

0.1

3

0.3

0.1

4

0.4

0.1

4

0.4

0.1

4

0.4

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

0.1

4

0.4

1


3.45


EXTERNAL FACTOR EVALUATION MATRIX SERIAL NUMBER 1

WEIGHT

RATINGS

Increased demand from emerging market.

0.12

3

WEIGHTED SCORE 0.36

2

Ethical labor and environmental brand exposure.

0.07

2

0.14

3

0.1

3

0.3

0.09 0.12

3 3

0.27 0.36

1

New opportunities for marketing in a varied media environment. Diversity among consumer tastes spurring new product Increase in global market space for products THREATS 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 1

3

0.36 2.93

4 5

OPPORTUNITIES

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.



CONCLUSION AND SUGGESTIONS  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.


HERSHEY FOODS CORPORATION-2005 CASE ANALYSIS  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 nonchocolate 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.

RESULT OF THE STUDY 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.


Hershey Case Fred R. David 11th edition

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