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This year, Hershey’s quarterly financial updates have been a source of dread to investors, and acted as a cautionary tale to other manufacturers. The company is too focussed on just two countries – the US and China – and even then, 90% of sales stem from the US.
In addition, Hershey appears to be regretting getting into bed with Shanghai Golden Monkey, which has failed to deliver on the promise that the US confectioner saw in it. Yet beyond these mistakes, Hershey continues to pursue an interesting and innovative strategy.
Hershey has revised down its growth estimate for the year twice, from between 5-6% at the start of the year to between 1-2% in its latest quarterly update. One of the key reasons for this, as reported previously, has been the false dawn for Hershey in China. Most notably, this has stemmed from what appears to be a misreading of Shanghai Golden Monkey’s distribution and production capability. Specifically, the acquisition has not given Hershey the widespread distribution to secondary and tertiary cities that it believed it would bring. These distributional inefficiencies have prevented the company from achieving its aim of penetrating these cities.
However, the company still has an innovative strategy for growth in China. In particular, its focus on e-commerce appears more ambitious than that of its rivals. China’s e-commerce boom is generating headlines worldwide, with consumers purchasing a reputed US$14.2 billion on consumer goods during the invented “singles day” holiday, alone. The company has targeted gifting in particular, and has suitably tailored its portfolio to allow for personalisation of goods. Additionally, Hershey’s online presence is extensive, as it deals with the majority of large online retailers in the country. This puts the company in a good position against the likes of Mars and Mondelez, which have limited scope in the online sphere.
It should be noted that Hershey’s decision to prioritise gifting is not a failsafe strategy. Nestlé noted that the popularity of gift-giving may in decline amongst younger consumers, and attributes this decline to some of its shortcomings in China. In addition, Hershey’s strength in gift giving may come at the expense of everyday sales of chocolate as an impulse purchase. This is where it may lose out to Mars, despite its five percentage point market share growth since 2009.
Source: Euromonitor International
Hershey’s Chinese strategy provides indicators to the company’s future direction. This year, the company has announced that it will undergo a transition to using “simpler ingredients”, which essentially involves removing artificial flavourings and replacing them with ingredients consumers allegedly understand or can pronounce. New product launches in the US are beginning to bear witness to this shift, which to an extent can be interpreted as a move towards more premium products.
Indeed, Hershey has targeted premium consumers in China with both its sugar and chocolate confectionery products. Perhaps the most notable example is the Kisses Deluxe brand – a gold-wrapped, uniquely-shaped chocolate with hazelnut, available as a boxed assortment. The brand, which is expected to achieve sales of US$226 million in 2015, bears more than a passing resemblance to Ferrero Rocher, which will generate sales of over US$400 million. Both companies are targeting the same market – premium gifting – whereas before they had relatively little overlap.
Brazil, which is another key market for Ferrero, is one that Hershey is also turning its attention to. The latter recently announced that it aimed to make Hershey’s chocolate the third largest brand in the country – no mean feat, given the strength of Mondelez’s Lacta and Nestlé’s Garoto.
There is less overlap between the two companies in Brazil – Hershey is targeting the mid-priced snacking occasion; Ferrero the more expensive gift. However, with Hershey announcing that it will now launch Kisses Deluxe in its US heartland, the fact that Hershey is now rubbing elbows with Ferrero is broadly indicative of its slight strategic shift. Indeed, whilst Ferrero’s presence is small in North America, it is growing, as it achieved a value CAGR of 6% to produce sales of US$259 million with Ferrero Rocher. There is increased overlap between the two. By pursuing higher-income consumers via e-commerce in China, and more premium products in the US, Hershey could be in the process of solving some of its longer term problems.