The Hershey Company Analysis

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Table of Contents

Introduction
Financial Analysis
SWOT Analysis
Generic strategy
Resources and competences/VIRO
PESTEL
Porter’s 5 forces
Types of strategy – growth
References

Introduction

This case study focuses on The Hershey Company. It involves analysis of internal and external environments, financial statement, identification of the strategy currently used by the company and recommend future strategies. A number of theoretical concepts and models shall be applied in analyses, which would include SWOT, generic strategy VIRO/resources and competences, PESTEL, Porter’s five forces, portfolio analysis using the Boston Matrix (BCG), Ansoff matrix, the type of strategy, and feasibility of the recommendations.

The Hershey Company is the “largest manufacturer of quality chocolate in North America and a global leader in chocolate and sugar confectionery”. The company’s major products include “chocolate and sugar confectionery products; pantry items, such as baking ingredients, toppings and beverages; and gum and mint refreshment products”.

Financial Analysis

Table 1: Net Margins – source

Summary of Operations	2013	2012	2011	2010	2009	5-Year Compound Growth Rate
Net Sales	$ 7,146,079	$ 6,644,252	$ 6,080,788	$ 5,671,009	$ 5,298,668	6.8 %
Cost of Sales	$ 3,865,231	$ 3,784,370	$ 3,548,896	$ 3,255,801	$ 3,245,531	2.7 %
Net Income	$ 820,470	$ 660,931	$ 628,962	$ 509,799	$ 435,994	21.4 %

Over the last fiscal five years, the company’s net sales have increased from $ 5,298,668 to $ 7,146,079 between the year 2009 and 2013. Its five-year compound growth rate is 6.8 percent. In the fiscal year 2013, the company’s net sales increased by 7.6 percent relative to the previous financial year and 9.3 percent between the fiscal year 2012 and 2011. The increment was attributed to “increased sales volume of core brands and new products in the US and the international market”.

At the same time, the cost of sales rose to 2.1 percent in 2013 relative to 2012.

Net Profit Margin

= Net Income/Net Sales = _____

2009
- 435,994 /5,298,668 = 0.08 = 8.23 %
2010
- 435,994 / 5,298,668 = 0.0823 = 8.23 %
2011
- 628,962 / 6,080,788 = 0.1034= 10.34 %
2012
- 660,931 / 6,644,252 = 0.0995 = 10 %
2013
- 820,470 / 7,146,079 = 0.115 = 11.5 %

The profit margins show that the Hershey Company makes profits from its activities after deduction of all expenses.

SWOT Analysis

Strength

A strong global brand.
Diversified portfolio that includes gum and chocolate.
The company targets several segments, including resorts and restaurants.
A business model developed to ensure repeat success in the global market.
A matrix that ensures continued focus on North America and the global market.
Acquisition of other companies such as Shanghai Golden Monkey Food Joint Stock and Brookside Foods Ltd.
A wide variety of products.
Loyal customers.
Strong financial resources, management team and solid operating cash flow.

Weaknesses

Long-term debts.
Increase in operational costs.
Inability to identify potential international markets and strategic partners fast.

Opportunities

Changing consumer tastes and preferences.
New products for health conscious customers.
Emerging markets globally.
A large supply chain.
Working with the International Cocoa Initiative Foundation to eliminate child labour.
Improving the supply chain.
Financial leverage.
Use of various advertisement strategies and media.

Threats

Rising levels of competition from Kraft Foods, Mars Inc and Wrigley.
Changes in prices of raw materials.
Product sourcing from third parties.
Changes in prices of products.
Volatility in foreign exchange rates.
Increasing costs of doing business due to different laws and regulations across different countries.

Generic strategy

The company has adopted a consumer-driven approach for its core brand investment in both U.S. and key international markets to drive its low-cost provider strategy.

The company leadership and the Board of Directors have worked on a broad “five-year strategic plan for both domestic and international growth”. The Hershey company currently has a global outlook with the required resources and tools to support winning strategies and promote the five core brands, namely Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher and Ice Breakers. The company believes that its current strategies support the new long-term strategic objectives.

In 2010, many critics questioned the ability of the company to deliver long-term value to shareholders when it failed to bid for the UK Cadbury. The Hershey Company generates most of its revenues in the North America markets. Failure to bid for Cadbury was viewed as a poor strategic decision based on international expansion strategies, but the company defended itself by noting that Cadbury’s assets did not support its framework.

Resources and competences/VIRO

The company has continued to invest in tools and capabilities that support its major brand growth. These resources have focused on supporting “individual segments of chocolate, non-chocolate candy and refreshment in the U.S. and key international markets”.

The company has solid cash flow and a strong balance sheet. Hershey uses its financial resources for value enhancing strategic acquisitions. In addition, it has focused on creating a knowledge-driven company with insights from consumers and intellectual capital. Consequently, it has been able to create competitive advantage and differentiate itself from peers.

The Hershey Company believes in the potential and capabilities of its human resources, brands and processes. It has predicted that its net sales could reach $ 10 billion by the end of the fiscal year 2017 based on the solid organic growth witnessed in the past. The company has a strong strategic plan that would enable it succeed in any markets.

PESTEL

Political

Generally, the company’s major markets in North America are politically stable and therefore there are limited political risks. However, its international operations in the Middle East, Africa and China among other countries could be adversely affected because of political risks and regime changes.

Economic

Fluctuating exchange rates affect the company’s earnings. Past economic recession and instability in the Euro zone have affected the company’s revenues. The growing US economy depicts favourable conditions in its major markets while emerging economies also offer better prospects.

Social

The changing tastes and preferences of consumers towards healthier diets will affect the company’s generic products. Conversely, such trends offer opportunities for the company to provide new products for different consumers.

Technological

The Hershey Company has a global supply chain. The company would benefit greatly by automating several elements of the supply chain. It is also imperative to use technology to create competitive advantage in the industry.

Environmental

Adverse weather conditions and crop diseases have affected cocoa production and cocoa quality. The company receives nearly 72% of its cocoa from West African states, which have poor records in environmental management.

Legal

The Hershey Company must observe food quality and safety regulations to avoid legal challenges. In addition, it must also abide by various laws and regulations globally.

Porter’s 5 forces

Buyer power

Buyer power is generally low in the industry. Many customers are end users, wholesalers, convenience stores and grocers. End users have low bargaining power while many customers are loyal to the brand. Price sensitivity is not a major concern among customers.

Intensity of Rivalry

The industry is highly competitive in both domestic and international markets, but barriers to entry, exit and consumer loyalty have protected well-established brands. The industry requires specialized equipment.

Threat of substitutes

Threats of substitutes are high for the company. Consumers may opt for other products such as snack food, other gift items like flowers or jewellery. There is no notable switching cost while recent price increase could favour substitutes.

Supplier power

This is low because the company manufacturers certain products or works with specific third parties to provide products. It has contracts with third parties with the aim of enhancing its strategic advantage and cost-effective production in product sourcing.

Threats of new entrants

Companies can only achieve economies of scale through mass production. High barriers to entry, particularly costs have created low threats from new entrants.

A portfolio analysis such as the Boston Matrix (BCG)/Industry Life cycle

Stars

These are the primary products of the company sold in the US and other markets. They include Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher and Ice Breakers.

Cash Cows

These products include a wide range of candy bars, chocolate, toffee bar, Soft Crèmes, snack nuts and peppermint pattie among others.

Dogs

Some chocolate, sweets and refreshment products sold in the international markets. The Hershey Company does concentrate much on these products.

Question marks

Now, the company does not seem to have any questionable products in its portfolio. Nevertheless, the Hershey Company must focus on research and development (R&D) to “develop new products, improve the quality of its current products, develop new products for health conscious consumers, improve production processes and find new ways of enhancing quality and value of its major products and proposed product lines”.

Ansoff matrix

The Hershey Company could protect its market shares and acquire new customers through special offers and price-cutting strategies on many of its candy and chocolate products.

The company has a potential to attract new customers for its existing product range. It can identify a new segment of customers who prefer healthier chocolate, candy and other products. The company may also focus on emerging markets in Asia, Africa, South America and the Middle East.

The Hershey Company will continue to rely on its R&D department to develop products that appeal to many consumers, particularly health conscious customers. The Hershey Company has focused on diversification through new markets in Asia, Africa and the Middle East (international markets). The horizontal integration has allowed the company to grow globally.

The company has not withdrawn any product from the market because of decline in life cycle. However, it may be forced to withdraw products due to low quality or decline in market shares. Hershey has aggressive marketing and promotional techniques to ensure brand success.

Types of strategy – growth

The company has focused on a growth strategy through various ways. First, it seeks to increase revenue and profits from its existing products. In the recent past, Hershey has noted an increase in the market share and revenues in the North America markets and international markets.

Second, the company has embarked on business takeovers to grow its international operations. For instance, in 2012 and 2013, Hershey acquired Brookside Foods Ltd and Shanghai Golden Monkey Food Joint Stock respectively.

Third, it has strategic alliances on long-term basis with several companies to manufacture, sell or distribute some specific products. Some of these companies include Cadbury Ireland and UK, Société des Produits Nestlé SA and Huhtamäki Oy affiliate. Strategic alliances also aim to control price risks associated with cocoa products, sugar, corn sweeteners, natural gas, fuel, oil and certain dairy products.

Finally, the horizontal integration has ensured that the company has increased product range in existing markets.

Suitability, Acceptability and Feasibility for any recommendations

The company has recorded excellent growth in its domestic markets. Hershey, therefore, should increase its international presence to create a global brand. Hershey requires state-of-the-art technologies to enhance its international operations. It would also be beneficial if the company establishes some cocoa processing factories near its major cocoa sources. This would reduce transportation costs significantly.

As consumer tastes and preference change, the company should focus on new products and collaborate with other outlets such as Starbucks for distribution. This strategy would introduce new products, new consumers and tap new markets. The R&D must continue to be innovative in product development.

Hershey must focus on improving customer experience throughout its outlets. The company must continue to maintain good relations with all its employees in different regions.

References

Hershey CEO defends company strategy. (2010). Australian Food News. Web.

Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring corporate strategy: Text & Cases (8th ed.). Harlow Essex: Financial Times Prentice Hall.

The Hershey Company. (2014). FORM 10-K: 2013 Annual Report. Web.

The Hershey Company. (2012). Hershey Details Strategy for Continued Growth and Announces New Long-Term Net Sales and Earnings Targets. Web.

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