Hershey: Healthy Growth
By: William Xu
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
A Confectionery History
The Hershey Company (Hershey) is an American multinational corporation selling Hershey’s, Reese’s, Twizzlers, Jolly Rancher, and many other household names. Milton S. Hershey, the company’s founder, worked as an apprentice under a master confectioner from the age of 14. In 1894, Milton started Hershey as a subsidiary of his first successful candy company, Lancaster Caramel Company. As of 2022, Hershey is the largest U.S. confectioner and second-largest U.S. snacking company. Headquartered in Hershey, Pennsylvania, the company operates state-of-the-art manufacturing facilities worldwide. The company also has a portfolio of attractions, including Hersheypark and Hershey’s Chocolate World. In total, the company employs over 20,000 full-time and part-time workers.
Valued at $40 billion, the company operates through three business segments:
North America Confectionery includes chocolate and non-chocolate confectionery products, Hershey’s Chocolate World store retail operations, and licensing fees. This segment’s revenue was $9.1 billion in 2023, a 6.9 percent increase from 2022.
North America Salty Snacks includes salty snacking products in the U.S. This segment’s revenue was $1.1 billion in 2023, a 6.1 percent increase from 2022.
International is responsible for distributing and selling products outside of North America. This segment’s revenue was $949 million in 2023, an 11.2 percent increase from 2022.
Despite the company’s storied history, Hershey’s stock price has dropped over 30 percent since reaching an all-time high in May 2023; this is attributable to a cocoa price shock and risks associated with new glucagon-like peptide-1 (GLP-1) drugs.
Cocoa Market Turmoil
Hershey’s production operations require various commodities, including cocoa, sugar, corn, dairy, wheat, peanuts, and almonds. Cocoa is a crucial ingredient for chocolate production, yet, according to the International Cocoa Organization, global cocoa supply is anticipated to decline by almost 11 percent to 4.45 million tonnes in 2024. Hershey partners with over 100 cocoa farmer groups, with 96 based in the West African nation of Ivory Coast, which has experienced unseasonal heavy rainfall and dry heat due to the El Niño climate event of 2023. As a result, Hershey forecasted that production would decrease by 20 percent in Ghana and Ivory Coast, leading to a shortage going into 2024.
One of the ways multinational corporations (MNCs) try to hedge this risk is by locking in cocoa prices by purchasing export contracts from supplier countries. These derivatives oblige MNCs to buy a set quantity for a specific price in the future. As inflation-adjusted cocoa futures are at a 45-year high, MNCs are hesitant to purchase contracts in case prices fall, in which case the contracts would lose value. Michele Buck, Hershey’s CEO, highlighted in a conference call that the company is offsetting raw material cost headwinds by price and productivity increases. However, price increases or product size decreases may result in declining sales volume and consumption. In the meantime, cocoa prices continue to surge and pressure the company’s margins, trading at over $9,000 per tonne as of March 22, 2024 – almost four times higher than in 2019.
Snacking Threats on the Horizon
The fast-paced growth of weight loss drugs, especially in the U.S., poses a risk to Hershey’s core confectionery business. “Consumer staples” stocks have been most affected, with Hershey receiving multiple stock downgrades citing concerns regarding GLP-1. As a result, the company now trades at around 20 times forward earnings, about a quarter below its three-year average. Medications like Ozempic and Wegovy have been approved for patients with type 2 diabetes, with many other medications progressing through different phases of clinical trials, vying to compete in the lucrative space.
Ozempic and Wegovy are GLP-1 agonists, medications that enhance insulin release, reduce sugar production, and suppress appetite. Research has shown that patients on these types of medication consume 8 percent less food, including snacks, soft drinks, and high-carb products, compared to the average consumer. However, weight loss drugs can’t single-handedly treat type 2 diabetes. The patient must also commit to improving their diet through healthier food and beverage choices.
Consequently, other initially confection-focused firms have shifted their focus to offer a broader product range promoting healthy alternatives. For example, Nestlé’s CEO, Ulf Mark Schneider, believes that his company can contribute to supporting an appropriate diet. After personally undergoing a weight loss regimen, he led Nestlé to develop products designed to ease a GLP-1 user’s recovery journey. Nestlé’s evolving goal is to apply its expertise in nutritional science to “address the risk of malnutrition and the loss of lean muscle mass while on the GLP-1 therapy and to avoid or limit weight rebound after the therapy.”
Hershey’s Road Ahead
These cocoa and GLP-1-attributed risks will continue to damage Hershey’s core confectionery business. Despite having held the largest share of the U.S. chocolate market in 2021 – possessing 34 percent, with Mars not far behind at 26 percent – Hershey’s multiple stock downgrades point to the risk of falling behind. Nestlé, a food and drink conglomerate valued at $305 billion, has since diversified product lineups to include many forms of vitamins and high-protein products through its Health Science division. This notably includes Boost, a high-protein meal-replacement drink.
Recently, Hershey has envisioned becoming “a leading snacking powerhouse” by acquiring health-conscious salty snack products. Since 2017, the company has purchased the SkinnyPop, Paqui, Pirate Brands, One, and Dot’s Pretzels brands. Although these ventures demonstrate an openness to M&A, current diversification efforts are limited in effect; these recent acquisitions constitute only 9.8 percent of Hershey’s sales. Hence, Hershey should strategically acquire high-potential companies offering nutrient-dense products to mitigate risks and enter emerging segments.
Product Portfolio Expansion
Market research indicates that consumers, especially younger ones, strive to eat healthier. This bodes poorly for confectionery firms like Hershey, as studies link heavy consumption of chocolate, candy, and sugary beverages to type 2 diabetes and obesity. Also, between 2003 and 2006, the percentage of U.S. children and adults consuming sugary drinks declined by 73 percent and 31 percent respectively. The threat to sugary beverages is even more pronounced now due to weight loss drugs. Consumers are searching for nutritious food and drinks that can supplement a GLP-1 diet. This presents many opportunities for Hershey to expand into the plant-based beverage space, expected to be worth $72 billion by 2030 and to possess a CAGR of 13.6 percent in that period. Expansion into this product category addresses Hershey’s two key risks and capitalizes on the overall health-conscious trends.
Coconut Beverages
The first opportunity to expand into nutritious products is by acquiring The Vita Coco Company, valued at $1.4 billion. By acquiring Vita Coco, Hershey could become a market leader in the fast-growing coconut beverage space. Consumers view Vita Coco as a healthier, feel-good alternative to traditional high-sugar drinks that lack vitamins and minerals. The company’s core products include different flavours of their Vita Coco branded coconut water, juice, and milk. Vita Coco has the characteristics of an ideal acquisition candidate, given that the brand experiences high repeat purchases but low household penetration: in 2021, although 75 percent of coconut water growth came from existing category buyers, the company’s household penetration was merely 9.5 percent. The company also occupied 46 percent of the U.S. market in 2021 and had an impressive 37 percent profit margin in 2023. Vita Coco also noted that its household penetration in the Midwest was below the national average; by capitalizing on its distribution centers in Illinois and Indiana, Hershey can increase the coconut water’s Midwest penetration. Finally, the acquisition presents Hershey with future potential opportunities, such as using coconut water to expand into caffeinated sports drinks and target the market share held by unhealthy energy drinks, for example.
Pea Protein Beverages
The second opportunity to expand into plant-based beverages is acquiring Ripple Foods, a private company offering pea-protein dairy alternative products. Ripple offers plant-based milk and protein shakes from peas. Like other protein sources, pea protein is a complete protein, containing all nine essential amino acids. A common criticism of plant-based protein is that it has an earthy aftertaste. However, Ripple has innovated to remove the impurities that give plant-based beverages their plant-like flavour. The company calls its patented product, Ripptein, the “purest, cleanest tasting non-dairy milk anywhere in the world.” Ripple’s protein shakes come in three flavors – vanilla, chocolate, and coffee.
Hershey can use its expertise in creating superior-tasting products to launch additional flavours to enhance the variety of products offered. An acquisition of Ripple provides Hershey with a launch point to create nutritionally complete meal replacement drinks, as Ripple’s current beverages are high protein (20g) and pea-based. Hershey would obtain pea protein know-how to compete with nutritional beverage brands like Boost, Atkins Nutritionals, and Premier Protein, and the company would be able to develop low-sugar (1g), nutrient-rich alternatives. Hershey should market and sell its high protein, nutrient-dense products under the distinct Ripple label to avoid perceived brand misalignment with Hershey's core confectionery business. Applying its established distribution network and deep financial capabilities, Hershey would be primed to enter and gain territory in a rapidly emerging market.
Hershey’s New Face
Hershey’s current position is the product of several factors outside of the company’s control. Climate events in countries that grow the world’s cocoa supply have brought cocoa futures to all-time highs and increased raw material costs for the company. Although Hershey has passed costs on to the consumer through higher prices and smaller packages, continuing to do so may reduce consumer purchases. The fast-paced development and adoption of GLP-1 drugs emphasize the importance of entering market segments that will complement the trend toward health consciousness. The acquisition of either The Vita Coco Company or Ripple Foods will provide Hershey with a starting point to expand into nutritional beverages, like Nestlé and others have done. Hershey must act to ride the wave toward healthier alternatives or risk competitors supplanting the company.
