Hershey is anticipating volumes to be hit initially after it increased prices by 8%

Hershey is anticipating volumes to be hit initially after it increased prices by 8%

Hershey has expressed confidence its planned innovation pipeline will deliver growth in the longer term, even if its latest price increase may hit volumes initially.

Last week the US confectioner announced an 8% hike in the price of its ranges, effective 15 July, as a result of rising commodity prices in the areas of nuts, cocoa and dairy.

In a conference call with investors yesterday (24 July) the firm, which posted a net profit increase to US$420.6m for the first half of 2014 compared with $401.4m for the same period a year earlier, said it expected to see volume reduction in the next two quarters of the current financial year and early into the next year.

"We expect initial price elasticity impact to result in lower volume over the remainder of the year, primarily in the fourth quarter and into 2015," CFO David Tacka said. 

He also noted international markets, namely Brazil, with a "soft economy" would feel the pressure of increased pricing.

This initial volume hit - and the increase in merchandising to support sales volumes - will "adversely impact gross margin, particularly in the third quarter", Tacka revealed.

However, Tacka insisted the price increase was necessary in order to offset higher commodity costs. "There's not a developed futures market for dairy, which significantly limits opportunities to hedge our requirements. While spot prices have declined slightly from year-to-date high, US market costs remained at elevated levels."

Hershey is not alone in passing these increased costs on to the consumer, a fact that may help shore up sales. Indeed, Mars Inc announced a similar increase in prices just days after Hershey.

While Hershey conceded that pricing would weigh somewhat on group volumes, CEO John Bilbrey said Hershey hoped purchase volumes would nevertheless remain relatively resilient. 

"The history of the category over many, many decades is it is a pretty inelastic category, and it cycles pricing really effectively, and that's exactly what I would hope this time," he said. 

"We do know in certain parts of classes of trade, there's a consumer that continues to be challenged. But we're also seeing in the snacking categories some items with some pretty significant pricing. They've been doing very, very well. So I think in the end, while there may be some people, unfortunately, who are really impacted, I think the real drivers will be around the things we know how to do best, and that's execution," Bilbrey added.

Hershey management added the product pipeline the group has planned for the second half of the year will win consumers over and help mitigate the impact of the price increase.

"Our innovation is much more significant in the second half. So we feel good about our stance," Bilbrey commented.

Athlos Research agreed: "We agree with the company that volume elasticity on non-seasonal price increases taking place in Q4 will be offset by new product shipments. Elasticity, based on innovation and product news should help the firm recover gross margin in 2015."

Hershey is also looking to offset any potential slowdown in established markets by leveraging expansion opportunities in the Chinese market, where Bilbrey said the firm "continues to be one of the fastest growing international chocolate companies". 

Hershey grew sales in China at a double digit rate in the period. At the start of the year, Hershey struck a deal to buy local candy manufacturer Shanghai Golden Monkey, a move which Athlos said "could yield numerous distribution opportunities and synergies, particularly in the traditional trade".

However based on greater commodity costs, Hershey has taken a cautious approach to its full-year sales and earnings expectations, lowering its guidance to the lower end of its long term targets of 5-7% and 9-11% growth respectively.