In the spotlight: Hershey's international ambition
By Dean Best | 29 June 2012
Some on Wall Street estimate that around 90% of Hershey's sales (and even more of its profits) are made at home
Hershey this week outlined what some saw as its clearest vision for international markets. The US confectioner still generates the bulk of its sales and profits overseas but wants to expand abroad. Can it succeed? Dean Best reports.
Those in the confectionery sector know Hershey is a company that, despite the buoyant growth in some overseas markets, has the bulk of its business in the US.
Some on Wall Street estimate that around 90% of the US confectioner sales (and even more of its profits) are made at home. Hershey has long faced questions about its overseas ambitions and, although the company has slowly built positions in markets like Mexico and China, some industry watchers believe it has been too cautious in expanding its presence overseas, with rivals Kraft, Nestle and Mars having more international confectionery businesses.
However, at the start of last year, previous president and CEO Dave West had set out plans for Hershey's sales outside the US to reach US$1bn by 2015. In 2010, sales from foreign markets were $862m. Critics might have argued Hershey needed to be more bold to keep pace with its competitors overseas but the statement of a target was a start.
When current president and CEO J.P. Bilbrey took the top job at the Reese's manufacturer last June, he almost immediately went of his way to demonstrate he was serious about Hershey becoming more international. Bilbrey had already worked for Hershey overseas and, three months later, he named his "global leadership team", a set of executives he believed would drive growth at home and abroad. By the end of 2011, international sales made up over 15% of Hershey's revenue, up from 9.8% in 2004.
Wall Street analysts wanted more and, this week, almost a year since he took the top job, Bilbrey and other senior executives at Hershey lifted the lid on the company's international plans.
At an investor day, Hershey noted the "big opportunity" for confectionery in emerging markets, pointing to the growth in markets and regions like China, India, Eastern Europe and Latin America.
Hershey said it would accelerate growth through M&A, which it would make a priority. That in itself was a notable statement for a company that has been conservative in recent years when others had been taking part in the deals of the confectionery sector.
However, Hershey argued the global confectionery industry remains fragmented and said its deals would have "an emphasis" on markets including Mexico, South America, China and India.
"Our focus is on developing markets where the conditions are ripe for strong category growth," Hershey's chief growth officer Michele Buck said. "Some of the most highly attractive markets to us are China, India, Asia and Indonesia, the Middle East and Brazil."
International expansion is one way in which Hershey aims to increase sales and earnings in the years ahead and the company also announced new long-term targets for sales and earnings growth.
Stifel Nicolaus analyst Chris Growe says the US is "integral" to Hershey meeting these targets but also said the company was right to spend time at the investor conference focusing on its international plans.
Growe says Hershey is looking to take its international sales to $1.5-2bn by 2017 and for low-to-mid-teen profit margins from its business outside the US. The analyst said moving from what Hershey called "build out/investment mode" in overseas markets to those kind of margins would involve success in China, where it will open an R&D centre this year.
"We would characterise this growth as contingent on a big bet the company is placing on its business in China (alongside Mexico to a lesser extent). It is clear the CMG opportunity in China is robust and as a result Hershey is warranted in our view in making the infrastructure/scale investments it is currently making to support the opportunity," Growe said.
However, Growe had a note of caution. "We have seen other more multinational CPG companies encounter difficulties in the market and hardly consider success over the next five years as a foregone conclusion despite recent strong results off of an admittedly modest base."
Hershey's international record is mixed, predominantly due to the speculation over its venture in India. Reports in the country claimed last week Hershey was close to ending its venture with local conglomerate Godrej and setting up its own local arm. Speculation over the future of Godrej Hershey has swirled for a year and it seems likely Hershey will go it alone in a market that has potential for confectioners but where Kraft Foods dominates and the likes of Ferrero and Perfetti van Melle have built a significant presence.
What does Wall Street make of Hershey's ambitions for international acquisitions? Barclays Capital analyst Andrew Lazar said investors may question whether Hershey, a company that has rarely entered the M&A fray.
"On the deal front, HSY pointed out that it sees a pipeline of more than $10bn in potential acquisitions, a figure that is actually closer to $30bn when you include category adjacencies, but also noted that multiples for these businesses remain high. As such, we suspect investors may be a bit reluctant to give the company credit for these opportunities, at least until a deal or two are completed," Lazar said.
"Management has been looking to expand in emerging markets for some time, yet has been unable or unwilling to pull the trigger. We would like to think this is partly due to management being disciplined around potential acquisitions, but we also question why with so much opportunity (per the $10bn estimate) more hasn’t been done already. To this end, management made a strong case that several years ago, the company wasn't serious enough about emerging markets, and it now has the organisational talent, infrastructure, and processes, to make a more legitimate run in these geographies."
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In the spotlight: Hershey's international ambition