Hershey Company
Company Report I
Fawn Sprague
Gwynn Lemler
Kristin Baker
Jeremiah Donaldson
History
The name Hershey is synonymous with chocolate in American culture. Hershey
chocolate has existed for over one hundred years. The company first introduced the
delights of chocolate to the common man in 1903 by making and selling chocolate bars
for only 5 cents (Brenner 110). The Hershey Company has expanded a great deal in size
and products since its founding by Milton Hershey, but the reputation for sweet treats
remains.
In 1893 Mr. Hershey attended the World’s Columbian Exposition where he
purchased his first milk chocolate making machinery from a German company. Mr.
Hershey had the machinery shipped to his Lancaster, Pennsylvania caramel factory. He
started producing chocolate as a covering for the caramels. In 1900 he sold his caramel
company for one million dollars. Mr. Hershey used the money to build a new company
focused on chocolate, and called it the Hershey Chocolate Company (Company History Hershey).
Milton Hershey built his chocolate plant in Derry Township, Pennsylvania. The
original town and factory still exist today as the heart of the Hershey Company. Hershey
not only built a factory, he built an entire town to support the factory. He wanted his
town to be a utopia, the ultimate “employee benefit” (Brenner 114). In conjunction with
the town, Milton Hershey and his wife Kitty founded a school for orphans in 1909. After
his wife died in 1915, Hershey put his entire estate into a trust for the school, including
his stock in the company. This move of philanthropy made the school’s trust the largest
stockholder in the Hershey Company and affects business decisions for the company
even today (Brenner 136). The Hershey Company is a publicly traded company, but
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because of its major shareholder it maintains some of the privacy of a non-public
company.
From the very start, the company made every effort to have a nationwide market.
Hershey wanted his products sold from coast to coast. Multi-million dollar sales in the
early 1900’s suggest he was successful (Brenner 117). Although Hershey remains the
largest manufacturer of chocolates and confectionery products in North America today,
its presence outside the United States is limited (Confectionery Industry 17). The
strongest international markets for Hershey are Canada, Mexico, and Brazil. Hershey
built a factory in Ontario, Canada to expand its market to that country. Several missed
chances in 1945 and 1969 hurt Hershey’s opportunity to expand into global markets
(Brenner 294). The biggest loss was in 1945 after World War II.
Prior to World War II, the United States Army worked with the Hershey
Company to produce a ration bar for soldiers. The army wanted a bar that could
withstand high temperatures, be nutritional enough to sustain a soldier, and taste “just a
little better than a boiled potato.” During the war, Hershey produced over three billion
ration bars for soldiers fighting overseas (Ration ‘D’ Bar). Its efforts made the name
Hershey famous worldwide, but the company never capitalized on the potential overseas
markets that recognition gave it.
The key to Hershey’s success lies in its customers. There are two layers of
customers for Hershey. The first layer is the supermarkets, convenience stores, and
wholesalers that purchase Hershey products for resale. The second layer, and the more
important, is the consumer. Hershey’s customers are people. From the child begging
Mom for candy in the check out line at Safeway to the middle-aged woman indulging in
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“just a taste” of chocolate during her work break, Hershey’s customers span the whole
range of humankind. The saturation of Hershey’s products is phenomenal when one
considers its hundred-year history. It has a wide range of products to appeal to all tastes
and people.
Before the 1960’s, Hershey had one other layer of customers. When Hershey first
began producing chocolate in the United States, it sold chocolate to other confectionery
companies, also. These companies used Hershey’s chocolate as a coating for their own
products. Mars, Inc. bought chocolate from Hershey for many years to use as a coating
for its candy bars. The two companies even collaborated on the creation of M & M’s.
When Mars, Inc. decided to produce its own chocolate in 1965, Hershey lost a large
portion of its sales (Brenner 182). Much of the rivalry between the two companies stems
from this time period.
Besides the Hershey chocolate bar and Kisses, the company has carried several
brands of candy and snacks. Hershey’s most successful candy bars in the 1900’s were
the famous “Mr. Goodbar” and the “Krackel” bar. The “Mr. Goodbar” was a combination
of Hershey’s famous mild chocolate and peanuts melted into a candy bar. Mr. Hershey
named the candy bar himself when, after trying it, he said “Now that’s a good bar!”
(Company History – Hershey’s). Currently, Hershey’s products include candy, gum and
mints, and brand names like Reese’s, Kit Kat, Almond Joy, Mounds, Jolly Rancher,
Twizzlers, Ice Breakers, Mauna Loa, and Take 5. It also sells baking products, beverage
enhancers, and peanut butter (Confectionery Industry 17). Even with all the products and
markets that Hershey pursues in the present day, the company didn’t make any effort to
advertise until 1970 (Brenner 219).
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One of the biggest advertising campaigns that Hershey pursued was for Reese’s
Pieces in 1981 in conjunction with Steven Spielberg’s movie E.T. The partnership
between the movie and Hershey Company was a coup for Hershey, since its biggest
competitor, Mars, Inc., was asked first. The recognition and public relations that the
placement of Reese’s Pieces in the movie gave Hershey was worth fifteen times the
money put into it (Brenner 278). The placement also gave Reese’s Pieces a needed
boost, as sales had been lagging. In the 1990’s, Hershey spent over $200 million in
advertising its products (Brenner 219).
Internal Environment
The Hershey Company has one primary goal, as stated in the company mission
statement: “Bringing sweet moments of Hershey happiness to the world every day.”
Hershey attempts to achieve this by creating and selling more chocolate candies and
snacks than any other single business in the industry. They have done a pretty good job
of this; Datamonitor’s Industry Profile reports that Hershey holds the largest market share
in the United States. Hershey has been able to take such a strong hold in the market
because they have very recognizable brand names, thus giving them iconic brand power.
The Hershey Company owes its success mainly to the marketing and business
strategies it employs. Due to some disappointing profits in 2007 and the desire to remain
competitive, Hershey has been reorganizing its processing operations. This involved
closing several plants in the United States and Canada, and outsourcing production to
save on costs. In addition to this business strategy, Hershey has a rather aggressive
marketing campaign to promote its products. Hershey’s marketing strategy focuses on
the following key elements: reinforcing the brand name, emphasizing outstanding
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product quality, creating new products, and cashing in on years of experience in the
candy business (WashingtonIV). These target messages reach consumers through
various means of advertising.
Hershey also runs various promotional campaigns as part of their marketing
efforts. In the past few years, Hershey has run promotions for the holiday season
featuring special seasonal collections for gift giving, and “cash for gas” giveaways in
particular candy bar wrappings. Hershey hosted launch parties in April 2008 to promote
one of its newest lines of chocolate, Hershey’s Bliss. Several months later in 2008,
Hershey released special edition candies (Hershey’s Reese’s and Kit Kat) for the movie
premier of The Dark Knight (Press Release – The Hershey Company).
Another way Hershey promotes products, reinforces brand recognition and keeps
consumers interested is by introducing new variants of existing products. Hershey Kisses
were once simply chocolate. Kisses now come filled with almonds, caramel or cherries;
and Hug’s (white chocolate Kisses) were created as a compliment to the original Kiss.
The classic Hershey Kisses shape remains for each variety, again reinforcing the Hershey
brand name.
A second part of Hershey’s overall strategy lies in its research and development
(R&D). While adding new product lines falls under this section of strategy, the biggest
news for Hershey is the founding of the Hershey Center for Health and Nutrition in May
of 2006 (Press Release – The Hershey Company). The primary duty of this center is to
conduct scientific research regarding the health benefits of new products for consumers.
Healthy foods have become a major concern to U.S. consumers. Addressing this
concern adds value for the consumer. Hershey Company’s global strategy is designed to
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provide value to the customer in every aspect, from keeping costs down, to providing
more candy and snack choices, to offering special promotions on products.
While the Hershey Company appears to be doing quite well as a leader in the
industry, it does have some weaknesses. According to Datamonitor’s Company Profile
of Hershey, the three biggest concerns are customer concentration, product recall, and
high dependence on the U.S. market. Although end-user customers are varied and vast
throughout the world, the Hershey Company uses wholesale distributors to circulate its
products. Hershey relies very heavily on McLane, a wholesale distributor for mass
merchandisers like Wal-Mart (Datamonitor). This reliance on McLane for distribution is
not necessarily beneficial for Hershey as it gives McLane more power in bargaining and
negotiations. Also, as the largest distributor for Hershey, McLane’s revenues may affect
Hershey’s revenues.
In 2006, Hershey imposed voluntary product recalls due to suspected
contamination of ingredients from a supplier. This impacted customer perception of the
Hershey brands, and in turn negatively impacted 2006 profits. In the most recent peanut
butter and milk recalls, Hershey did not have to retract any products, but the potential is
always there as long as Hershey relies on external suppliers.
The third major weakness of the Hershey Company is its dependency on the U.S.
market. According to Datamonitor, over three-quarters of Hershey’s revenues are from
U.S. sales. Other competitors in the confectionery market have a larger global presence
than Hershey, and are therefore not as reliant on the success of the U.S. market alone.
The Hershey Company has plenty of opportunity to grow in the future. Hershey’s
ties to the growing restaurant industry give it an excellent outlet for gain. Another
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growing market is the organic and natural foods items. Increasingly, U.S. consumers
seek healthier choices. Hershey has stepped into this food market by acquiring a
company that produces organic chocolate goods. The Hershey Center for Health and
Nutrition (mentioned previously) promotes research into future healthy food products.
As a result of this research, Hershey has added a product line of nuts, and has expanded
other lines to include sugar-free alternatives.
With any business, the future holds risks. The Hershey Company is no different,
and needs to plan for these risks. Basic ingredients used in Hershey products are
commodities like cocoa, sugar and peanuts. The prices for these commodities are volatile
and subject to many uncontrollable variables that could increase costs. As the price for
these goods increase, Hershey’s costs will increase. It will be a challenge for Hershey to
offset these costs and keep prices at a value for customers.
Government regulation can also be a hindrance to business. The makers and
distributors of consumables like food are required to abide by numerous laws and
regulations enforced by the United States’ Food and Drug Administration (FDA). Any
company found to be in non-compliance with the regulations faces fines from the FDA,
and could lose the trust of consumers. Making changes to non-compliant processes, or
new regulations, will also cost the company money.
Although the Hershey Company is a publicly traded entity, it has remained very
private and guarded of its processes. Some of this privacy comes from the stiff
competition and rivalry in the confectionery industry. Hershey’s top competitor, Mars,
Inc., is a private company, and that privacy puts Hershey at a disadvantage. Many
confectionery companies require confidentiality agreements to prevent spying, which also
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limits available information (Brenner 61). In addition, the Hershey Company has not
implemented the use of a balanced scorecard as a means of tracking their success. The
need for privacy, and lack of scorecard, make it very difficult to find information on
Hershey employees or consumer statistics.
The Hershey Company currently employs over 13,000 workers worldwide. These
workers include factory workers in one of four U.S. plants or one of several international
plants. The company separates its activities by geographic location. These locations
correspond with its markets in North America, Brazil, Mexico, Japan, Korea, the
Philippines, India, and China (Hershey Company - Annual Report 1). The corporate
headquarters for Hershey remain in Hershey, PA.
External Environment
The Hershey Company, although primarily a part of the confectionery industry, is
considered to be in the food and beverage industry as a whole. It has a large number of
competitors in both markets. Any company that manufactures candy products, syrups,
baking goods, chocolate, and non-alcoholic beverages is considered a competitor of
Hershey.
Hershey’s main competitors are Cadbury, Mars Inc., and Nestle (Hoover).
However, according to the Hershey website, “In the domestic chocolate category, our
largest competitor is Mars, Inc. followed by Nestle, Russell Stover, and Palmer. In the
domestic non-chocolate category, our largest competitor is Kraft/Nabisco” (The Hershey
Company). Since Hershey, “holds a license to manufacture Cadbury chocolate products
in the United States” it does not consider Cadbury to be a competitor. Cadbury is,
however, an international competitor (The Hershey Company).
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Only 5% of Hersheys’ revenues are generated by international sales (The Hershey
Company). Hershey misses out on considerable profit-making segments of the world
market because it has no foothold in Europe. Europe accounts for 45.1% of the global
confectionery market’s value, but the United States accounts for only 26.9%
(Datamonitor). Hershey’s international sales are focused more in North and South
America and Asia. The company has expanded its Hispanic markets by announcing in
2004, a “new line of Latin-inspired candies including those with chili-based flavors and
dulce de leche fillings, and by signing an endorsement deal with Latin singer Thalia”
(Hoover).
Hershey’s domestic market share numbers are more impressive. Sales of
chocolate account for 51.1% of the United States confectionery market’s value, and of
this market, the Hershey Company accounts for 27.7% (Hoover). Hershey’s history in the
chocolate business and well-established brand names explain these sales. However, these
numbers reflect only the chocolate sector of the confectionery market. Non-chocolate
candies, non-alcoholic beverages, syrups, and baking goods are also included in
Hershey’s product offerings. While Hershey may be the leader in the chocolate segment,
no evidence exists to declare it the leader in every market in which it participates.
Hershey has some advantages over other companies who are involved in the
confectionery industry. As noted previously, Hershey offers a decent mix of products. It
has more than 50 brand names, and markets these items to over 50 countries worldwide
(Hoover). Some of the more familiar products they offer are Kit Kat, Hershey’s Kisses,
Reese’s, Jolly Rancher and York Peppermint Patties. “Hershey also makes grocery
goods such as baking chocolate, ice-cream toppings, chocolate syrup, cocoa mix, cookies,
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snack nuts, hard candies, lollipops, and peanut butter” (Hoover). By offering a variety of
products to its customers, Hershey is not dependent on a single market or item. This
diversity strengthens Hershey’s ability to withstand market fluctuations.
Not only does Hershey offer a wide and expanding mix of products, it has begun
developing healthier versions of its old favorites. “The company is expanding its
products with new versions of old favorites, such as Jolly Rancher lollipops and bitesized bits of its popular chocolate bars,” as well as sugar-free chocolate items (Hoover).
Offering sugar free items increases its customer base to include people with diabetes and
people trying to lose weight.
Hershey executives seek ways to increase sales in the present economy by
“revamping its packaging to reflect a more updated look” (Hoover). The company has
participated in joint ventures and partnerships with other companies to expand its
operations. It has also purchased the rights to other companies’ products, such as
Nabisco Holdings’ breath freshener mints and gum in an effort to expand its sales
(Hoover).
The confectionery industry itself, analyzed by taking manufacturers as market
players and retailers as buyers, is stated as being “relatively fragmented” (Datamonitor).
Since this market has a substantial range of products, “there is a weakening buyer power
and an easing of rivalry, by increasing the loyalty of consumers to particular products.”
(Datamonitor). A lot of confectionery products are made with the same ingredients,
companies in this industry do have the ability to change or make new products fairly
easily. With this in mind, competitive rivalry is considered moderate to high, and
reporting by Datamonitor reaffirms this.
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As for buyer power, Datamonitor states:
Retailers need to respond to consumer demand, and the presence of strong
differentiation and brand loyalty among consumers leads to a weakening
of buyer power. However, most retailers in this market offer a wide
variety of foods. As confectionery is only a small part of their total
product range, buyer power relative to the manufacturers is increased.
Manufacturers and retailers generally exist in very different businesses
making overall buyer power moderate.
Supplier power is also considered to be moderate. Raw materials are purchased on
commodity markets and the suppliers have little control over prices (Datamonitor). One
way that Hershey has tried to control the price of commodities is to buy cocoa and sugar
plantations in other parts of the world. Over time the plantations have suffered losses due
to disease or natural disaster, so even owning plantations has not completely sheltered the
company from fluctuating prices.
The main barrier to entry into the confectionery industry is the amount of money
it takes to build a production facility for manufacturing confectionery products. There
are, however, many smaller companies that specialize in top-quality confectioneries
(Datamonitor). Another barrier to entry is the health standards that must be met in order
to produce edibles. There are plenty of codes, restrictions, and regulations regarding food
production facilities. All of these codes and regulations produce red tape that slow down
the entry of new companies to the industry.
As stated in Datamonitor’s Company Report:
There is a threat of entry of private labels, mainly from the large
supermarkets which use their current infrastructure and brand to provide a
similar, cheaper alternative to the existing brand names. However, these
products are limited to their own store chains, they lack innovation, and
have an absence of brand recognition. Many of the existing brands are
strong, and consumers may be unwilling to move away from their
favorites – this means that it may be difficult to persuade retail buyers to
add a new player’s products to their shelves.
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Thus, the threat of new entrants would be considered moderate, but Datamonitor points
out that in times of economic weakness, these off-brand products can flourish because of
their lower price.
In the long run, however, Hershey has the economies of scale in its favor. Each
year, the company purchases more of the smaller companies that used to compete against
it (Brenner 316). Hershey adds brand name products like Jolly Rancher and Milk Duds
to its repertoire, increasing its market share. Very small, localized candy companies may
be able to enter the market, but they will never compete with Hershey on a national level.
Hershey’s established history as a successful company guarantees its hold on the market
share.
The threat of substitute products is also considered moderate. Substitute products
would be any snack foods, such as fresh fruit and potato chips. There are some
disadvantages to these substitute products. For example, storage could be a problem, as
fresh fruit needs expensive chilled displays and potato chips require more shelf room
(Datamonitor). Another disadvantage is the sheer uniqueness of chocolate. While a
person might substitute one type of chocolate for another (milk or dark chocolate), it is
rare that something like potato chips will truly substitute for a desire for chocolate.
At present, there is no direct government supervision of the Hershey Company.
The government department responsible for oversight of the food industry is the Food
and Drug Administration in the Department of Health. The Food and Drug
Administration is in charge of administering product recalls as needed. The
Administration also regulates the type and amount of ingredients used in foodstuffs.
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In conclusion, the Hershey Company has a rich history of producing chocolate
and other confectionery products in the United States. It has expanded incredibly from a
single factory supplying the national chocolate needs of the United States to a global
company with offices in multiple countries. Hershey maintains a lead in chocolate sales
in the United States, but continues to fight its rivals for control of other markets. A
detailed analysis of Hershey’s annual report will follow.
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Works Cited
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New York: Random House, 1999.
"Confectionery Industry Profile: United States." Nov. 2008. Business Source Premier.
EbscoHost. Coe Library, Laramie. 19 Feb. 2009. Keyword: Hershey.
FAQ - The Hershey Company. 2 March 2009
<http://www.thehersheycompany.com/ir/faq.asp#48>.
The Hershey Company. 2008 Annual Report to Stockholders/Form 10-K. 31 Dec. 2008.
29 March 2009 <http://library.corporateir.net/library/11/115/115590/items/328854/D45A89C2-B130-4B31-A2B02AEB3BF43CBA_hsy_10K.pdf>.
The Hershey Company. Company History - Hershey's. 25 March 2009
<http://www.hersheys.com/discover/history/company.asp>.
The Hershey Company. Press Release – The Hershey Company. 9 May 2006 & 10 June
2008. 28 March 2009
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&<http://www.thehersheycompany.com/news/release.asp?releaseID=1164251>.
"The Hershey Company. Company Profile." 3 Oct. 2008. Business Source Premier.
EbscoHost. Coe Library, Laramie. 19 Feb. 2009. Keyword: Hershey.
The Hershey Company - Introducing the world of chocolate part 2. 22 May 2008. 25
March 2009 <http://www.washingtoniv.com/>.
Hershey Competitors - Hoover's. 2009. 2 March 2009
<http://www.hoovers.com//free/co/burn.xhtml?ID=10722&cm_ven=PAID&cm_cat=GG
L&cm_pla=CCM&cm_ite=hershey_competitors>.
Hoover. "Hoover's Company Records - In-depth Records, 2009, The Hershey Company."
2009
“Ration ‘D’ Bar.” Hershey Community Archives. 2004. 11 Mar. 2009
<http://www.hersheyarchives.org/Default.aspx?Page=RationDBar>.
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