China weakness hits Hershey

China weakness hits Hershey

Hershey today (19 June) announced a "productivity initiative" that will result in the loss of around 300 jobs - as it again lowered its forecast for full-year sales.

The company said that it now expects net sales to grow by 2.5-3.5% this year. This is the second cut to Hershey's sales guidance in three months. The US chocolate maker lowered its sales guidance at the end of March to growth of 4.5-5.5%, down from its original forecast of 5.5-7.5%.

Hershey cited weakness in China, revealing its performance in the country over the past two months was "below expectations". The company said that it had fallen foul of weak macro-economic conditions and changing consumption patterns as shoppers switch to smaller formats and e-commerce.

"Macro-economic challenges and trends are affecting consumer shopping behaviour resulting in continued softness within the China modern trade, particularly the tier one hypermarkets where the company generates the majority of its chocolate sales. Additionally, increased chocolate category competitive activity and the accelerated momentum of e-commerce and online purchases are impacting results and prolonging trade inventory de-stocking," Hershey said.

The company is responding by focusing on core SKUs and brands that deliver higher returns. Hershey is working to secure distribution gains in smaller format stores, the company said. Hershey is also assessing its Chinese operations to determine "the optimal organisation structure to drive future growth".

Hershey also moderated its expectations for the recently-acquired Shanghai Golden Monkey (SGM) business. The economic slowdown and above optimal customer inventory levels meant that sales velocity was below initial expectations, Hershey revealed.

In response to the weaker-than-anticipated top line, Hershey said it is working to improve efficiency and lower its cost base by "simplifying its structure".

"Removing cost and complexity from our business will make us more flexible to quickly react to changing consumer and competitive marketplace trends," Hershey chairman, president and CEO J.P. Bilbrey explained.

The programme, which Hershey said will result in around 300 job losses, is expected to generate pre-tax savings of $65-75m, primarily in 2016. Hershey said cash would be reinvested in brand-building and global capabilities in order to deliver future growth.

Hershey said the productivity drive would result in charges of $0.29-0.35 per share. The group forecast full-year earnings of $4.10-4.18, an increase of 3-5% versus 2014.

As part of its drive to increase international returns, Hershey also revealed a number of senior leadership changes. The company said Steven Schiller, regional president for its combined operations in Asia, Europe, the Middle East and Africa, has been named president for China and Asia. "This new position elevates the company’s focus on its number one international growth priority, China," Hershey said.

The group also created the a new global leadership role to focus on emerging international markets including India and those in Latin and South America, the Middle East, Europe, and Africa. Hershey said a candidate search including both internal and external individuals is "in progress".

Elsewhere, CFO Patricia Little will assume responsibility for Hershey's acquisition strategy. "M&A will continue to be an important driver of Hershey’s future success," the company insisted.

Hershey shares dropped 2.32% in pre-market trading today and a further 0.23% in early trade, declining to $92.24.